Woodward, Inc. - Annual Report: 2021 (Form 10-K)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2021

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and such files).  Yes☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☒    Accelerated Filer ☐    Non-accelerated Filer ☐    Smaller Reporting Company ☐

Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☒

Aggregate market value of registrant’s common stock held by non-affiliates of the registrant, based upon the closing price of a share of the registrant’s common stock on March 31, 2021 as reported on The NASDAQ Global Select Market on that date:  $5,345,433,011.  For purposes of this calculation, shares of common stock held by (i) persons holding more than 5% of the outstanding shares of stock, (ii) officers and directors of the registrant, and (iii) the Woodward Governor Company Profit Sharing Trust, Woodward Governor Company Deferred Shares Trust, or the Woodward Charitable Trust, as of March 31, 2021, are excluded in that such persons may be deemed to be affiliates.  This determination is not necessarily conclusive of affiliate status.  

As of November 17, 2021, 63,069,870 shares of the registrant’s common stock with a par value of $0.001455 per share were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our proxy statement for the Annual Meeting of Stockholders to be held virtually on January 22, 2022, are incorporated by reference into Parts II and III of this Form 10-K, to the extent indicated.

Forward Looking Statements

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements other than statements of historical fact are statements that are deemed forward-looking statements.  These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of management.  Words such as “anticipate,” “believe,” “estimate,” “seek,” “goal,” “expect,” “forecast,” “intend,” “continue,” “outlook,” “plan,” “project,” “target,” “strive,” “can,” “could,” “may,” “should,” “will,” “would,” variations of such words, and similar expressions are intended to identify such forward-looking statements.  In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characteristics of future events or circumstances are forward-looking statements.  Forward-looking statements may include, among others, statements relating to:

All these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.  Factors that could cause actual results and the timing of certain events to differ materially from the forward-looking statements include the factors described in Item 1A, Risk Factors.  We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by applicable law.

Unless we have indicated otherwise or the context otherwise requires, references in this Form 10-K to “Woodward,” “the Company,” “we,” “us,” and “our” refer to Woodward, Inc. and its consolidated subsidiaries.  

Except where we have otherwise indicated or the context otherwise requires, amounts presented in this Form 10-K are in thousands, except per share amounts.

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General

We are an independent designer, manufacturer, and service provider of control solutions for the aerospace and industrial markets.  Our innovative fluid energy, combustion control, electrical energy, and motion control systems help customers offer cleaner, more reliable, and more efficient equipment.  Our customers include leading original equipment manufacturers and end users of their products.  We have production and assembly facilities primarily in the United States, Europe and Asia, and promote our products and services through our worldwide locations.  

Our strategic focus is providing energy control and optimization solutions for the aerospace and industrial markets.  The precise and efficient control of energy, including motion, fluid, combustion and electrical energy, is a growing requirement in the markets we serve.  Our customers look to us to optimize the efficiency, emissions and operation of power equipment in both commercial and defense operations.  Our core technologies leverage well across our markets and customer applications, enabling us to develop and integrate cost-effective and state-of-the-art fuel, combustion, fluid, actuation and electronic systems.  We focus primarily on serving original equipment manufacturers (“OEMs”) and equipment packagers, partnering with them to bring superior component and system solutions to their demanding applications.  We also provide aftermarket repair, maintenance, replacement and other service support for our installed products.

Woodward was established in 1870, incorporated in 1902, and is headquartered in Fort Collins, Colorado.  The mailing address of our world headquarters is 1081 Woodward Way, Fort Collins, Colorado 80524.  Our telephone number at that location is (970) 482-5811, and our website is www.woodward.com.  None of the information contained on our website is incorporated into this document by reference.

Markets and Principal Lines of Business

We serve the aerospace and industrial markets through our two reportable segments – Aerospace and Industrial.  Our customers require technological solutions to meet their needs for performance, efficiency, and reliability, and reduce cost of operation.

Within the aerospace market, we provide systems, components and solutions for both commercial and defense applications.  Our aerospace systems and components optimize the performance of fixed wing and rotorcraft platforms in commercial, business and military aircraft, missiles and weapons, ground vehicles and other equipment.  Our key focus areas within this market are propulsion and combustion control solutions for turbine powered aircraft; and fluid and motion control solutions for critical aerospace and defense applications.

Within the industrial market, our key focus areas are applications and control solutions for machines that produce electricity utilizing conventional or alternative energy resources; and fluid, motion, and combustion control solutions for complex oil and gas, industrial, power generation and transportation applications.

Products, Services and Applications

Aerospace

Our Aerospace segment designs, manufactures, and services systems and products for the management of fuel, air, and combustion and motion control.  These products include fuel pumps, metering units, actuators, air valves, specialty valves, fuel nozzles, and thrust reverser actuation systems for turbine engines and nacelles, as well as flight deck controls, actuators, servocontrols, motors and sensors for aircraft.  These products are used on commercial and private aircraft and rotorcraft, as well as on military fixed-wing aircraft and rotorcraft, guided weapons, and other defense systems. 

We have significant content on a wide variety of commercial aircraft, rotorcraft and business jet platforms, such as the Airbus A320neo, Boeing 737 MAX and 787, Bell 429 and Gulfstream G650.  We also have significant content on defense applications such as Blackhawk and Apache helicopters, F/A-18 and F-35 fighter jets, and guided tactical weapons (for example, the Joint Direct Attack Munition (“JDAM”)).  

Revenues from the Aerospace segment are generated by sales to OEMs, tier-one suppliers, and prime contractors, and through aftermarket sales of components, such as provisioning spares or replacements, and spare parts.  We also provide aftermarket maintenance, repair and overhaul, as well as other services to commercial airlines, repair facilities, military depots, third party repair shops, and other end users.  

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Industrial

Our Industrial segment designs, produces, and services systems and products for the management of fuel, air, fluids, gases, motion, combustion and electricity.  These products include actuators, valves, pumps, fuel injection systems, solenoids, ignition systems, speed controls, electronics and software, and sensors.  Our products are used on industrial gas turbines (including heavy frame, aeroderivative and small industrial gas turbines), steam turbines, compressors, and reciprocating engines (including low speed, medium speed and high-speed engines, that operate on various fuels, including natural gas, diesel, heavy fuel oil and dual-fuel).  The equipment on which our products are found is used to generate power; to extract and distribute fossil fuels; in the mining of other commodities; and to convert fuel to work in transportation and freight (both marine and locomotives), mobile, and industrial equipment applications.  

Revenues from our Industrial segment are generated primarily by sales to OEMs and by providing aftermarket products and other related services to our OEM customers.  Our Industrial segment also sells products through an independent network of distributors and, in some cases, directly to end users.

Customers

Sales to our five largest customers represented approximately 45% of our consolidated net sales for the fiscal years ended September 30, 2021 and September 30, 2020.

Sales to our largest customer in fiscal year ended September 30, 2021, The Boeing Company, accounted for approximately 13% of our consolidated net sales, and 14% in the fiscal year ended September 30, 2020.  Accounts receivable from The Boeing Company represented approximately 14% of accounts receivable at September 30, 2021 and 13% at September 30, 2020.  Sales to our second largest customer, General Electric Company, accounted for approximately 11% of our consolidated net sales in the fiscal years ended September 30, 2021 and September 30, 2020.  Accounts receivable from General Electric Company totaled approximately 10% of accounts receivable at September 30, 2021, and 9% at September 30, 2020.  We believe The Boeing Company, General Electric Company, and our other significant customers are creditworthy and will be able to satisfy their credit obligations to us.

The following customers account for approximately 10% or more of net sales to each of our reportable segments for the fiscal years ended September 30, 2021 and September 30, 2020.

Competitive Environment

Our products and product support services are sold worldwide into a variety of markets.  In all markets, we compete on the basis of differentiated technology and design, product performance and conformity with customer specifications.  Additional factors are customer service and support, including on-time delivery and customer partnering, product quality, price, reputation and local presence.  Both of our segments operate in uniquely competitive environments.

We believe that new competitors face significant barriers to entry into many of our markets, including various government mandated certification requirements to compete in the aerospace and industrial markets in which we participate.

Aerospace

Aerospace has significant product certification requirements to meet safety regulations, which form a basis for competition as well as a barrier to entry.  Technological innovation and design, product performance including increased efficiency and thrust, conformity with customer specifications, and product quality and reliability are of utmost importance in the aerospace and defense industry.  In addition, on-time delivery, pricing, and joint development capabilities with customers are points of competition within this market.

We compete with numerous companies around the world that specialize in fuel and air management, combustion, electronic control, aircraft motion control, flight deck control, and thrust reverser products.  Our competitors in aerospace include divisions of Eaton, Honeywell, Moog, Parker Hannifin, and Raytheon Technologies.  In addition, some of our OEM customers are capable of developing and manufacturing similar products internally.  Several competitors are also customers for our products, such as Honeywell, Parker Hannifin, and Raytheon Technologies.

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Some of our customers are affiliated with our competitors through ownership or joint venture agreements.  For example, Pratt & Whitney, one of our customers, is affiliated with Raytheon Technologies, one of our competitors.  Similarly, GE Aviation has a joint venture with Parker Hannifin for the supply of fuel nozzles.  We also have partnered with our customers in the past, such as our strategic joint venture (“JV”) with one of our largest customers, General Electric Company (“GE”), acting through its GE Aviation business unit.  

We believe our products offer high levels of field reliability, which provides end users with an advantage in life-cycle cost.  We address competition in aftermarket service through responsiveness to our customers’ needs, providing short turnaround times, greater performance such as longer time between repairs, and maintaining a global presence. We also compete in part by establishing relationships with our customers’ engineering organizations, and by offering innovative technical and commercial solutions to meet their market requirements.  Our ability to design, develop and test an integrated system with a customer is a competitive differentiator, offering the customer savings in both resources and time.

Industrial

Industrial operates in the global markets for industrial turbines and reciprocating engines, which are used in power generation systems, transportation, and oil and gas markets.  Many of these markets are subject to regulatory product and performance certifications to meet emissions and safety requirements, which form a basis for competition as well as a barrier to entry.  

We compete with numerous companies that specialize in various engine, turbine, and power management products, and our OEM customers are often capable of developing and manufacturing similar products internally.  Many of our customers are large global OEMs that require suppliers to support them around the world and to meet increasingly higher requirements in terms of safety, quality, delivery, reliability and cost. Competitors include Emerson, EControls, Heinzmann GmbH & Co., Hoerbiger, Meggitt, Robert Bosch AG, and Triconix.  OEM customers with internal capabilities for similar products include Caterpillar, Cummins, General Electric, Rolls-Royce Power Systems, Wärtsilä, and Weichai.  

We believe we are a market leader in providing our customers advanced technology and superior product performance at a competitive price.  We focus on developing and maintaining close relationships with our OEM customers’ engineering teams.  Competitive success is based on the development of innovative components and systems that are aligned with the OEMs’ technology roadmaps to achieve future reliability, emission, efficiency, and fuel flexibility targets.  

For additional information about our markets and trends in our markets, please see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Government Contracts and Regulation

Portions of our business, particularly in our Aerospace segment, are heavily regulated.  We contract with numerous U.S. Government agencies and entities, including all of the branches of the U.S. military, the National Aeronautics and Space Administration (“NASA”), and the Departments of Defense, Homeland Security, and Transportation.  We also contract with similar government authorities outside the United States, subject in all cases to applicable law.

We must comply with, and are affected by, laws and regulations relating to the formation, administration and performance of U.S. Government contracts.  These laws and regulations, among other things:

Sales made directly to U.S. Government agencies and entities, or indirectly through third party manufacturers utilizing Woodward parts and subassemblies, collectively represented 29% of our sales for fiscal year 2021 and 28% of our sales for fiscal year 2020.

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Seasonality

We believe our sales, in total or in either reportable segment, are not subject to significant seasonal variation.  However, our sales have generally been lower in the first quarter of our fiscal year as compared to the immediately preceding quarter due to fewer working days resulting from the observance of various holidays and scheduled plant shutdowns for annual maintenance.

Sales Order Backlog

Beginning in fiscal year 2019, for each of our reportable segments, we have elected to quantify backlog in a manner consistent with the definition of remaining performance obligations.  Our remaining performance obligations by segment, excluding material rights, as of October 31, 2021 and 2020 is shown in the table below.  

Our remaining performance obligations relate to the aggregate amount of the total contract transaction price of firm orders for which the performance obligation has not yet been recognized in revenue.  

Manufacturing

We operate manufacturing and assembly plants primarily in the United States, Europe and Asia.  Our products consist of mechanical, electronic and electromechanical systems and components.

Aluminum, iron and steel are primary raw materials used to produce our mechanical components.  Other commodities, such as gold, copper and nickel, are also used in the manufacture of our products, although in much smaller quantities.  We purchase various goods, including component parts and services used in production, logistics and product development processes from third parties.  Generally, there are numerous sources for the raw materials and components used in our products, which we believe are sufficiently available to meet current requirements.

We maintain global strategic sourcing models to meet our global facilities' production needs while building long-term supplier relationships and efficiently managing our overall supply costs.  We expect our suppliers to maintain adequate levels of quality raw materials and component parts, and to deliver such parts on a timely basis to support production of our various products.  We use a variety of agreements with suppliers intended to protect our intellectual property and processes and to monitor and mitigate risks of disruption in our supply base that could cause a business disruption to our production schedules or to our customers.  The risks monitored include supplier financial viability, business continuity, quality, delivery and protection of our intellectual property and processes.

Our customers expect us to maintain adequate levels of certain finished goods and certain component parts to support our warranty commitments and sales to our aftermarket customers, and to deliver such parts on a timely basis to support our customers’ standard and customary needs.  We carry certain finished goods and component parts in inventory to meet these rapid delivery requirements of our customers.

Research and Development

We finance our research and development activities primarily with our own funds.  Our research and development costs include basic research, applied research, component and systems development, and concept formulation studies.  

We collaborate closely with our customers as they develop their technology plans, which leads to new product concepts.  We believe this collaboration allows us to develop technology, new systems, and products that are aligned with our customers’ needs and future performance, which increases the likelihood that our systems and components will be selected for inclusion in the platforms developed by our customers.  Further, we believe our close collaboration with our customers during preliminary design stages allows us to provide products that deliver the component and system performance necessary to bring greater value to our customers.  This preliminary work may include opportunities to test new products in order to validate concepts and demonstrate performance in challenging environments.  We strive to stay ahead of the competition through our modeling, prototyping, and state of the art test capabilities.  

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Aerospace is focused on developing systems and components that we believe will be instrumental in helping our customers achieve their objectives of lower fuel consumption, lighter weight, more efficient performance, reduced emissions, and improved operating economics.  We support our engine and airframe customers as they develop next generation designs across the commercial aviation, general aviation, civil private and military markets.  Our development efforts support technology for a wide range of:

Most technology development programs begin years before an expected entry to service, such as those for the next generation of commercial aircraft.  Other development programs result in nearer-term product launches associated with new OEM offerings, product upgrades, or product replacements on existing programs.  

We developed the fuel system, air management system, and actuation hardware for CFM International’s LEAP engine program.  We also developed the actuation system, combustion system and oil system components for Pratt & Whitney’s Geared Turbo Fan (“GTF” or “PurePower”) engine program.  These programs target applications in the single aisle and regional aircraft markets with entry into service in the 2016 to 2022 timeframe.  Both the LEAP engine and the PurePower engine have been selected by Airbus as options to power its A320neo aircraft.  In addition, the LEAP engine was selected by Boeing exclusively for its 737 MAX aircraft.

Industrial is focused on developing innovative technologies, including integrated control systems and system components, that enable our customers to cost-effectively meet mandated emissions regulations and fuel efficiency demands, allow for usage of a wider range of fuel sources, increase reliability (particularly in harsh environments), and reduce total cost of ownership.  Our development efforts support technology for a wide range of:

Human Capital

We consider our employees (whom we call “members”) to be the most valuable resource for current and future success and we seek to provide a work environment that fosters growth, encourages self-development, and provides meaningful work.  We make significant investments in training and professional development, and provide competitive pay, benefits, and other incentives.  Notable programs we offer to our full-time members include:

In addition to our comprehensive investment in our members’ success, we strive to maintain an inclusive environment that values and leverages the uniqueness of each member to the benefit of all our stakeholders.  We view the combination of diverse perspectives and backgrounds as a powerful force for innovation.  To promote diversity and our core principles, we emphasize dignity, value, and equality of all members, regardless of race, color, religion, age, gender or sexual orientation, through our actions and the workplace training programs we provide.  We continually strive to harness the diversity of our global workforce by cultivating a climate that permits all our members to bring their authentic selves to work.

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The health and safety of our members is also a top priority.  We have implemented appropriate procedures and precautions to ensure the continued safety and well-being of members is a dedicated concern.  We not only strive to comply with all federal and local workplace laws and regulations where we do business, but continue to look for ways to exceed compliance standards by utilizing continuous improvement discipline to proactively eliminate risks to our members.

The global economic effects associated with the COVID-19 pandemic have been unprecedented in their scope and depth. We have been and will continue to be following recommendations of the U.S. Center for Disease Control and other applicable agencies to maximize the safety and well-being of our members. We have implemented measures to mitigate exposure risks and support operations.  Throughout this crisis, our unwavering focus has been on keeping our workplace as safe as possible, while ensuring we stabilize our business and position ourselves well for the future.  

As of October 31, 2021, we employed approximately 7,200 full-time members of which approximately 2,000 were located outside of the United States, with the majority of such members located in Germany, Poland and China.  Approximately 56% of our full-time members support our Aerospace segment and 38% support our Industrial segment, while we have 6% of our full-time workforce included in our Corporate support function.  We believe that our relationships with our members are good.

Approximately 15% of our total full-time workforce were union members as of October 31, 2021, all of whom work for our Aerospace segment and are located in the United States.  The collective bargaining agreements with our union members are generally renewed through contract renegotiation near the contract expiration dates.  The MPC Employees Representative Union contract, which covered 567 members as of October 31, 2021, expired October 1, 2021, and is currently under negotiations for extension. The Local Lodge 727-N International Association of Machinists and Aerospace Workers agreement, which covers 452 members as of October 31, 2021, expires April 23, 2024.  We believe that our relationships with our union members and the representative unions are good.

Almost all of our other members in the United States were at-will members as of October 31, 2021, and therefore, not subject to any type of employment contract or agreement.  Our executive officers each have change-in-control agreements which have been filed with the SEC.

Outside of the United States, we enter into employment contracts and agreements in those countries in which such relationships are mandatory or customary, including coordination through local works’ councils.  The provisions of these agreements correspond in each case with the required or customary terms in the subject jurisdiction.

Patents, Intellectual Property, and Licensing

We own numerous patents and other intellectual property, and have licenses for the use of patents and other intellectual property owned by others, which relate to our products and their manufacture.  In addition to owning a large portfolio of intellectual property, we also license intellectual property to and from third parties.  For example, the U.S. Government has certain rights in our patents and other intellectual property developed in performance of certain government contracts, and it may use or authorize others to use the inventions covered by such patents for government purposes as allowed by law.  

Intellectual property not covered by patents (or patent applications) includes trade secrets and other technological know-how that is not patentable or for which we have elected not to seek patent protection, including intellectual property relating to our manufacturing processes and engineering designs.  Such unpatented technology, including research, development and engineering technical skills and know-how, as well as unpatented software, is important to our overall business and to the operations of each of our segments.  

While our intellectual property assets taken together are important, we do not believe our business or either of our segments would be materially affected by the expiration of any particular intellectual property right or termination of any particular intellectual property patent license agreement.

As of September 30, 2021, our Consolidated Balance Sheets includes $559,289 of net intangible assets.  This value represents the carrying values, net of amortization, of certain assets acquired in various business acquisitions and does not purport to represent the fair value of our acquired intellectual property as of September 30, 2021.

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Environmental Matters and Climate Change

The Company is regulated by federal, state and international environmental laws governing our use, transport and disposal of substances and control of emissions.  Compliance with these existing laws has not had a material impact on our capital expenditures, earnings or global competitive position.

We use hazardous materials and/or regulated materials in our manufacturing operations.  We also own, operate, have acquired, and may in the future acquire facilities that were formerly owned and operated by others that used such materials.  We believe the risk that a significant release of regulated materials has occurred in the past or will occur in the future cannot be completely eliminated or prevented.  From time to time, we engage in environmental remediation activities, generally in coordination with other companies, pursuant to federal and state laws.  In addition, we may be exposed to other environmental costs including participation in superfund sites or other similar jurisdictional initiatives.  When it is reasonably probable that we will incur remediation costs at a site, and those costs can be reasonably estimated, we accrue a liability for such future costs with a related charge against our earnings.  In formulating that estimate and recognizing those costs, we do not consider amounts expected to be recovered from insurance companies, or others, until such recovery is assured.  Currently, we have no sites undergoing remediation.  

Our manufacturing facilities generally do not produce volumes or quantities of byproducts, including greenhouse gases, that would be considered hazardous waste or otherwise harmful to the environment.  We do not expect legislation currently pending or expected in the next several years to have a significant negative impact on our operations in any of our segments.

Domestic and foreign legislative initiatives on emissions control, renewable energy, and climate change tend to favorably impact the sale of our energy control products.  For example, our Industrial segment produces energy control products that help our customers maximize engine efficiency and minimize wasteful emissions, including greenhouse gases.

Available Information

Through a link on the Investor Information section of our website, www.woodward.com, we make available, free of charge, the following filings as soon as reasonably practicable after they are electronically filed or furnished to the SEC: our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as well as Section 16 reports of our officers and directors.  The Securities and Exchange Commission (the “SEC”) also maintains a website that contains our SEC filings.  The address of the site is www.sec.gov.  We provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press and earnings releases as part of our investor relations website.  We have used, and intend to continue to use, our investor relations website, as well as the following as of the date of this filing, as means of disclosing material non-public information and for complying with the disclosure obligations under Regulation FD:

None of the information contained on our website, or the above-mentioned social media sites, is incorporated into this document by reference.

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The following summarizes important factors that could individually, or together with one or more other factors, affect our business, results of operations, financial condition, and/or cash flows:

COVID-19 Pandemic Risks

The global COVID-19 pandemic (COVID-19) has led to significant volatility in virtually all product, service and economic markets, including financial markets, commodities (including oil and gas) and other industries (including the aviation industry), thereby impacting our business, financial results and the achievement of our strategic objectives.  The extent to which the pandemic and measures taken in response to the pandemic could materially and adversely impact our business, financial condition, liquidity, capital and results of operations will depend on future developments, which are highly uncertain and are difficult to predict.

Global health concerns pertaining to COVID-19 and related government actions taken to reduce the spread of the virus have impacted the economic environment, significantly increased economic uncertainty and reduced economic activity.  The pandemic has also caused governmental authorities to implement numerous measures to try to contain the virus, including ongoing travel bans and restrictions, quarantines, and business limitations and shutdowns. These measures have negatively impacted and may further negatively impact consumer and business ordering and payment patterns.

COVID-19 has adversely impacted, and will continue to adversely impact, our business, operations, financial condition, capital and results of operations. The extent of these impacts depends on future developments, which are highly uncertain and difficult to predict, including, but not limited to, (i) the duration and magnitude of the pandemic, (ii) the actions taken to contain the virus or treat its impact, (iii) the effectiveness of economic stimulus measures, and (iv) the extent to which economic and operating conditions and consumer and business spending can return to their pre-pandemic levels.

The spread of COVID-19 has caused us to modify our business practices and operations, and to align our business with the unfavorable economic conditions, including enhancing our operations management teams and global supply chain to ensure the Company is efficiently utilizing inventory on hand, as well as increasing our internal processing capabilities.  We may take further actions as required by government authorities or that we otherwise determine are in the best interests of our customers, employees and business partners.  Moreover, we expect that the effects of the COVID-19 pandemic will heighten many of the other risks described herein.

Industry Risks

We operate in highly competitive industries and, if we are unable to compete effectively in one or more of our markets, our business, financial condition and results of operations will be adversely affected.

We face intense competition from a number of established competitors in the United States and abroad, some of which are larger in size or are divisions of large, diversified companies with substantially greater financial resources. In addition, global competition continues to increase. Changes in competitive conditions, including the availability of new technologies, products and services, the introduction of new channels of distribution, changes in OEM and aftermarket pricing, and further consolidation of companies in our industries, could impact our relationships with our customers and may adversely affect future sales and margins, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Further, the markets in which we operate experience rapidly changing technologies and frequent introductions of new products and services. The technological expertise we have developed and maintained could become less valuable if a competitor were to develop a breakthrough technology that would allow it to match or exceed the performance of existing technologies at a lower cost. If we are unable to develop competitive technologies, future sales or earnings could be lower than expected, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

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A significant portion of our revenue is concentrated among a relatively small number of customers, which makes our business more vulnerable to fluctuations in sales to these customers and changes in their financial condition.

A significant portion of our revenue is concentrated among a relatively small number of customers. We have fewer customers than many companies with similar sales volumes. For the fiscal year ended September 30, 2021, sales to our largest 5 customers represented approximately 45% of our consolidated net sales and approximately 39% of our accounts receivable. If any of our significant customers were to change suppliers, in-source production, institute significant restructuring or cost-cutting measures, or experience financial distress, these significant customers may substantially reduce, or otherwise be unable to pay for, purchases from us. Accordingly, our consolidated net sales could decrease significantly, or we may experience difficulty collecting, or be unable to collect, amounts due and payable, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

In October 2018 and March 2019, two commercial aircraft accidents led to the grounding by the Federal Aviation Administration (“FAA”) and other regulators of the Boeing 737 MAX aircraft, on which we have significant content. The grounding of the Boeing 737 MAX aircraft by the FAA and other regulators, which started in March of 2019 and continued through November 2020, caused deliveries of that aircraft to be zero in fiscal year 2020. As the aircraft return to service progresses, which includes the pending recertification of the aircraft in various international jurisdictions, we anticipate a large majority of the deliveries missed in fiscal years 2019, 2020, and 2021 will be fulfilled in future periods, although at a slower rate than previously estimated. Although we anticipate a slow recovery of the OEM and a slightly better recovery of the initial provisioning sales as the aircraft’s return to service progresses, the previous grounding of the Boeing 737 MAX could further decrease our OEM and initial provisioning sales for the 737 MAX and CFM LEAP engines in the near term, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

The long sales cycle, customer evaluation process, and implementation period of our products and services may increase the costs of obtaining orders and reduce the predictability of sales cycles and our inventory requirements.

Our products and services are technologically complex and require significant capital commitments.  Prospective customers generally must commit significant resources to test and evaluate our products and to install and integrate them into larger systems.   Accordingly, customers often require a significant number of product presentations and demonstrations before reaching a sufficient level of confidence in the product’s performance and compatibility.  In addition, orders expected in one quarter may shift to another quarter or be cancelled with little advance notice as a result of customers’ budgetary constraints, internal acceptance reviews, and other factors affecting the timing of customers’ purchase decisions. The difficulty in forecasting demand increases the challenge in anticipating sales cycles and our inventory requirements, which may cause us to over-produce finished goods and could result in inventory write-offs, or could cause us to under-produce finished goods.  Any such over-production or under-production could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Our participation in a strategic joint venture with GE may make it more difficult to secure long-term sales in certain aerospace markets.

In January 2016, Woodward and General Electric Company (“GE”), acting through its GE Aviation business unit, consummated the formation of a strategic joint venture between Woodward and GE (the “JV”).  The JV agreement does not restrict Woodward from entering into any market; however, consolidation in the aircraft engine market is increasingly prevalent, resulting in fewer engine manufacturers, and thus it may become more difficult for Woodward to secure new business with GE competitors on similar product applications both within and outside the specific JV market space.  Additionally, if GE fails to win new content in the market space covered by the JV, Woodward may be prevented from expanding content on future commercial aircraft engines in those markets.  

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General Commercial, Financial, and Regulatory Risks

Suppliers may be unable to provide us with materials of sufficient quality or quantity to meet our production needs at favorable prices or at all which may adversely affect our revenue and margins.

We are dependent upon suppliers for parts and raw materials used in the manufacture of products that we sell to our customers, and our raw material costs are subject to commodity market fluctuations. We may experience a shortage of parts or raw materials for various reasons, such as the loss of a significant supplier, high overall demand creating shortages in parts and supplies we use, financial distress, work stoppages, natural disasters, fluctuations in commodity prices, the imposition of tariffs or other duties, or production or distribution difficulties that may affect one or more of our suppliers. In some instances, we depend upon a single source of supply, manufacturing, or logistics support or participate in commodity markets that may be subject to allocations of limited supplies by suppliers. If one or more of our suppliers experiences financial difficulties, delivery delays or other performance problems, we may be unable to meet commitments to our customers or incur additional costs. Our customers rely on us to provide on-time delivery and have certain rights if our delivery standards are not maintained. A significant increase in our supply costs, including for raw materials that are subject to commodity price fluctuations and/or the imposition of tariffs, or a protracted interruption of supplies for any reason, could result in the delay of one or more of our customer contracts, increase our costs, result in lost revenue or could damage our reputation and relationships with customers. In addition, quality and sourcing issues that our suppliers may experience can also adversely affect the quality and effectiveness of our products and services and may result in liability or reputational harm to us. Any of these events could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Our profitability may suffer if we are unable to manage our expenses in connection with sales increases, sales decreases, or if we experience change in product mix.

Some of our expenses are relatively fixed in relation to changes in sales volume and are difficult to adjust in the short term. Expenses driven by business activity other than sales level and other long-term expenditures, such as fixed manufacturing costs, capital expenditures and research and development expenses may be difficult to reduce in a timely manner in response to a reduction in sales.  In periods of rapid sales increases it may be difficult to quickly increase our production of finished goods because of our long manufacturing lead times.  If a sudden, unanticipated need for raw materials, components and labor arises, we could experience difficulties in sourcing these items at a favorable cost, in sufficient quantities or at all. These factors could result in delays in fulfilling customer sales contracts, lost revenue, damage to our reputation and relationships with our customers, and an inability to meet market demand, which in turn could prevent us from taking advantage of business opportunities or responding to competitive pressures and could result in an increase in costs leading to a decrease in net earnings or even net losses. In addition, we sell products that have varying profit margins, and fluctuations in the mix of sales of our various products may affect our overall profitability.

Reductions, delays or changes in U.S. Government spending could adversely affect our business.

Sales made directly to U.S. Government agencies and entities, or indirectly through third party manufacturers, such as tier-one prime contractors, utilizing Woodward parts and subassemblies, accounted for approximately 29% of total sales in fiscal year 2021 and 28% in fiscal year 2020.  

The U.S. Government participates in a wide variety of operations, including homeland defense, counterinsurgency, counterterrorism, and other defense-related operations that employ our products and services.  U.S. defense spending has historically been cyclical in nature and is subject to periodic congressional authorization and appropriation actions.  The level of U.S. defense spending may be impacted by numerous factors outside of our control such as changes in the perceived threat environment, U.S. foreign policy, changes in security, defense, and intelligence priorities, shifts in domestic and international spending and tax policy, budget deficits and competing budget priorities, and the overall economic and political environment.

Defense budgets tend to rise when perceived threats to national security increase the level of concern over the country’s safety, but we can provide no assurance that an increase in defense spending will be allocated to programs that would benefit our business.  Decreases in U.S. Government defense spending, changes in the spending allocation, phase-outs or terminations of certain aerospace and defense programs on which we have content could have a material adverse effect on our sales unless they are offset by other aerospace and defense programs and opportunities.  If the priorities of the U.S. Government change and/or defense spending is reduced, this may adversely affect our business, financial condition, results of operations, and cash flows.

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Our business may be adversely affected by risks unique to government contracting.

Our contracts with the U.S. Government are subject to certain unique risks, including the risks set forth below, some of which are beyond our control, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.  

Our debt obligations and the restrictive covenants in the agreements governing our debt could limit our ability to operate our business or pursue our business strategies, could adversely affect our business, financial condition, results of operations, and cash flows, and could significantly reduce stockholder benefits from a change of control event.

As of September 30, 2021, our total debt was $734,850, including $550,000 in unsecured notes denominated in U.S. dollars issued in private placements and $185,503 of unsecured notes denominated in Euros issued in private placements.  We are obligated to make interest and scheduled principal payments under the agreements governing our long-term debt, which requires us to dedicate a portion of our cash flow from operations to payments on our indebtedness, and which may reduce the availability of our cash flow for other purposes, including business development efforts and mergers and acquisitions.  These debt obligations could make us more vulnerable to general adverse economic and industry conditions and could limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate, thereby placing us at a disadvantage to our competitors that have less indebtedness. Further, we may require additional capital to repay our debt obligations when they mature, and such capital may not be available on terms acceptable to us or at all.

Our existing revolving credit facility and note purchase agreements impose financial covenants on us and our subsidiaries that require us to maintain certain leverage ratios and minimum levels of consolidated net worth.  Certain of these agreements require us to repay outstanding borrowings with portions of the proceeds we receive from certain sales of property or assets and specified future debt offerings.

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These financial covenants place certain restrictions on our business that may affect our ability to execute our business strategy successfully or take other actions that we believe would be in the best interests of our Company.  These covenants include limitations or restrictions, among other things, on our ability and the ability of our subsidiaries to:

These agreements contain certain customary events of default, including certain cross-default provisions related to other outstanding debt arrangements.  Any breach of the covenants under these agreements or other event of default could cause a default under these agreements and/or a cross-default under our other debt arrangements, which could restrict our ability to borrow under our revolving credit facility.  If there were an event of default under certain provisions of our debt arrangements that was not cured or waived, the holders of the defaulted debt may be able to cause all amounts outstanding with respect to the debt instrument, plus any required settlement costs, to be due and payable immediately.  Our assets and available cash balances may not be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default.  If we are unable to repay, refinance, or restructure our indebtedness as required, or amend the covenants contained in these agreements, the lenders or note holders may be entitled to obtain a lien or institute foreclosure proceedings against our assets.  Any of these events could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Additional tax expense or additional tax exposures could impact our future profitability.

We are subject to income taxes in both the United States and jurisdictions outside of the United States.  Our tax liabilities are dependent upon the distribution mix of operating income among these different jurisdictions.  Our tax expense includes estimates of additional tax that may be incurred and reflects various estimates, projections, and assumptions that could impact the valuation of our deferred tax assets and liabilities.  Our future operating results could be adversely affected by changes in the effective tax rate, which could be caused by, among other things:

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We derive a significant amount of revenue and obtain components from outside of the United States; accordingly, we are subject to the risks inherent in doing business in other countries.

In fiscal year 2021, approximately 43% of our total sales were made to customers in jurisdictions outside of the United States (including products manufactured in the United States and sold outside the United States as well as products manufactured in international locations). We also purchase raw materials and components from suppliers outside the United States.  Accordingly, our business and results of operations are subject to risks associated with doing business internationally, including:

The implementation of tariffs (such as those implemented by the United States and China in recent years) could increase the cost of certain commodities and/or limit their supply. Over the longer term, tariffs could significantly increase our costs and our ability to pass such increased costs along to our customers may be limited, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We are subject to and must comply with U.S. laws restricting or otherwise prohibiting companies from doing business in certain countries, including those on exports imposed under the U.S. Export Control Laws and Sanctions Programs.  These laws and regulations change from time to time and may restrict sales to other countries or parties.

We are subject to the U.S. Foreign Corrupt Practices Act (“FCPA”) and similar anti-bribery and anti-corruption laws and regulations in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business or securing an improper business advantage.  We operate in many parts of the world and sell to industries that have experienced corruption to some degree.  If we are found to be liable for FCPA or other similar anti-bribery law or regulatory violations, we could be subject to civil and criminal penalties or other sanctions that could have a material adverse impact on our business, financial condition, results of operations and cash flows.

Also, a material disruption to the financial institutions with whom we transact business could have a material adverse effect on our international operations or on our business, financial condition, results of operations, and cash flows.

Changes in the estimates of fair value of reporting units or of long-lived assets, particularly goodwill, may result in future impairment charges, which could have a material adverse effect on our business, financial condition, and results of operation.

Over time, the fair values of long-lived assets change. At September 30, 2021, we had $805,333 of goodwill, representing 20% of our total assets.  We test goodwill for impairment at the reporting unit level on at least an annual basis or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Future goodwill impairment charges may occur if estimates of fair values decrease, which would reduce future earnings. Future asset impairment charges may occur if asset utilization declines, if customer demand decreases, or for a number of other reasons, which would reduce future earnings. Any such impairment charges could have a material adverse effect on our business, financial condition and results of operations.

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There can be no assurance that our estimates and assumptions of the fair value of our reporting units, the current economic environment, or the other inputs used in forecasting the present value of forecasted cash flows used to estimate the fair value of our reporting units will prove to be accurate projections of future performance, and any material error in our estimates and assumptions, could result in us needing to take a material impairment charge, which would have the effects discussed above.

Our financial and operating performance depends on continued access to a stable workforce and on favorable labor relations with our employees.

Due to the specialized nature of our business, competition for technical personnel is intense and our future performance is highly dependent on our ability to hire, train, assimilate, and retain a qualified workforce.  Additionally, it is important we hire and retain personnel with relevant experience in local laws, regulations, customs, traditions and business practices to support our international operations.  There is no assurance that we will continue to be successful in recruiting qualified employees in the future.  Further, approximately 15% of our workforce in the United States is unionized, and certain of our operations in the United States and internationally involve different employee/employer relationships and the existence of works’ councils.  We periodically need to renegotiate our collective bargaining agreements, and any failure to negotiate new agreements or extensions in a timely manner could result in work stoppages or slowdowns.  Any significant increases in labor costs, deterioration of employee relations, including any conflicts with works’ councils or unions, or slowdowns or work stoppages at any of our locations, whether due to employee turnover, changes in availability of qualified technical personnel, or otherwise, could have a material adverse effect on our business, our relationships with customers, and our financial condition, results of operations, and cash flows.

Our operations and suppliers may be subject to physical and other risks that could disrupt our operations.

Our operations and sources of supply could be disrupted by unforeseen events, including fires, tornadoes, tsunamis, hurricanes, earthquakes, floods and other forms of severe weather in countries in which we operate or in which our suppliers are located, any of which could adversely affect our operations and financial performance. Natural disasters, public health concerns, war, political unrest, terrorist activity, equipment failures, power outages, or other unforeseen events could result in physical damage to or other disruption of, and complete or partial closure of, one or more of our manufacturing facilities, or could cause temporary or long-term disruption in the supply of component products from some local and international suppliers, disruption in the transport of our products and significant delays in the shipment of products and the provision of services, which could in turn cause the loss of sales and customers. Existing insurance arrangements may not provide protection for all the costs that may arise from such events. Accordingly, disruption of our operations or the operations of a significant supplier could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Our intellectual property rights may not be sufficient to protect all our products or technologies and we may, regardless of intent, infringe on the intellectual property rights of others.

Our success depends in part on our ability to obtain patents or rights to patents, protect trade secrets and know-how, and prevent others from infringing on our patents, trademarks, and other intellectual property rights.  We cannot be certain that our pending patent applications will result in the issuance of patents to us, that patents issued to or licensed by us in the past or in the future will not be challenged or circumvented by competitors, or that these patents will be found to be valid or sufficiently broad to preclude our competitors from introducing technologies similar to those covered by our patents and patent applications.  Some of our intellectual property is not covered by patents (or patent applications) and includes trade secrets and other know-how that is not patentable or for which we have elected not to seek patent protection, including intellectual property relating to our manufacturing processes and engineering designs.  We will be able to protect our intellectual property from unauthorized use by third parties only to the extent that it is covered by valid and enforceable patents, trademarks, licenses or other valid intellectual property rights.  Patent protection generally involves complex legal and factual questions and, therefore, enforceability of patent rights cannot be predicted with certainty; thus, any patents that we own or license from others may not provide us with adequate protection against competitors.  Moreover, the laws of certain foreign jurisdictions do not recognize intellectual property rights or protect them to the same extent as do the laws of the United States.  

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Additionally, our current or future technologies may, regardless of our intent, infringe upon the patents or violate other proprietary rights of third parties.  In the event of such infringement or violation, we may face expensive litigation or indemnification obligations and may be prevented from selling existing products and pursuing product development or commercialization.  If we are unable to sufficiently protect our patent and other proprietary rights or if we infringe on the patent or proprietary rights of others, our business, financial condition, results of operations, and cash flows could be materially adversely affected.

Amounts accrued for contingencies may be inadequate to cover the amount of loss when the matters are ultimately resolved.

We are currently involved or may become involved in legal, regulatory and other proceedings arising in the ordinary course of business. These proceedings may include, without limitation, product liability matters, intellectual property matters, contract disputes or claims, pending or threatened litigation, governmental investigations, as well as employment, tax, environmental, or other matters.  There is no certainty that the results of these matters will be favorable to the Company.  We accrue for known individual matters if we believe it is probable that the matter will result in a loss when ultimately resolved using estimates of the most likely amount of loss.  There may be additional losses that have not been accrued, or liabilities may exceed our estimates, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Our business and operations may be adversely affected by cybersecurity breaches or other information technology system or network interruptions or intrusions.

We depend heavily on information technology (“IT”) and computerized systems to communicate and operate effectively. We store sensitive data including proprietary business information, intellectual property, classified information, customer information, supplier information, and confidential employee or other personal data on our servers and databases. The COVID-19 pandemic caused a shift in our business practices which required many of our employees to work remotely.  This increase in remote work presents increased security risks to our systems, networks, and data, and has resulted in an increased dependence on the security, reliability and adequacy of our IT systems.

From time to time, we have experienced cyberattacks on our IT infrastructure and systems. We may become the target of cyber-attacks by third parties seeking unauthorized access to our data or our customers’ data or to disrupt our operations or our ability to provide services. There is also a danger of loss, misuse, theft, unavailability, or unauthorized disclosure or other processing of information or assets (including source code), or damage to or other compromise of systems, components and other IT assets, including the introduction of malicious code or other vulnerabilities by people who obtain unauthorized access to our facilities, systems or information. There are many different techniques used to obtain unauthorized access to systems and data, and such techniques continue to evolve and become more sophisticated, and the adversaries are becoming more advanced, including nation states and actors sponsored by or affiliated with nation states, which target us and other defense contractors because we protect national security information, and other actors with substantial financial and technological resources.  These techniques include, but are not limited to, the use of malicious software, destructive malware, ransomware, denial of service attacks, phishing and other means of social engineering, and other means of causing system or network disruptions, obtaining unauthorized access to data or systems, or causing other cybersecurity breaches and incidents.  Additionally, system and service disruptions, and cybersecurity breaches or incidents, may result from employee or contractor error, negligence, or malfeasance. Due to the rapidly evolving threat environment and other factors, we may not be successful in defending against all such attacks.  Further, due to the evolving nature of these security threats and the national security aspects of much of the data we protect, the full impact of any future security breach or incident cannot be predicted.  We employ a number of measures, including technical security controls, employee training, comprehensive monitoring of our networks and systems, and maintenance of backup and protective systems.  However, our IT infrastructure, systems, networks, products, solutions and services remain potentially vulnerable to numerous additional known or unknown threats.  Additionally, there have been and may continue to be significant cyberattacks on, and other attempts to compromise the security of, the supply chain.  We may experience security breaches or incidents resulting from tools, services, or other third-party components and security vulnerabilities within, or introduced by, such tools, services, or components.

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If any of our IT infrastructure or systems are damaged, disrupted, or experience are impacted by security breaches or incidents, whether from cybersecurity attacks or other causes, or if we suffer any security breach or incident involving unauthorized access to, misuse, acquisition, disclosure, loss, alteration, or destruction of our data or other data we maintain or otherwise process, we could experience significant operational stoppages, disruptions, delays, and/or other detrimental impacts on our operations, and may face increased costs, including increased costs of implementing new data protection and security measures, policies, and procedures, and costs associated with remediating and otherwise responding to the security breach or incident.  Any such security breach or incident or the perception that it has occurred, also may result in diminished competitive advantages through reputational damage and increased operational costs, regulatory investigations, proceedings, and orders, litigation or other demands, indemnity obligations, damages for contract breach, fines or penalties relating to actual or alleged violation of applicable laws, regulations, or contractual obligations, incentives offered to customers or other business partners in an effort to maintain business relationships, and other costs and liabilities.  Such events could result in fines, penalties, litigation or governmental investigations and proceedings, diminished competitive advantages through reputational damages and increased operational costs, any of which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.  Further, any unauthorized disclosure or use or acquisition of our intellectual property and/or confidential business information could harm our competitive position, result in a loss of intellectual property protection, and otherwise reduce the value of our investment in research and development and other strategic initiatives or otherwise adversely affect our business.

Our insurance coverage may not be sufficient to compensate for all liability relating to any actual or potential disruption or other security breach or incident.  We cannot be certain that our coverage will be adequate for liabilities actually incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim.  The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could have a material adverse effect on our business, including our financial condition, operating results, and reputation.  

Increasing emission standards that drive certain product sales may be eased or delayed, which could reduce our competitive advantage.

We sell components and systems that have been designed to meet strict emission standards, including standards that have not yet been implemented but are expected to be implemented soon.  If these emission standards are eased, developed products may become unnecessary and/or our future sales could be lower as potential customers select alternative products or delay adoption of our products, which would have a material adverse effect on our business, financial condition, results of operations, and cash flows.  

Prices for fossil fuels may increase significantly and disproportionately to other sources of fuels used for power generation, which could reduce our sales and adversely affect our business, financial condition, results of operations, and cash flows.

Commercial producers of electricity use many of our components and systems, most predominately in their power plants that use natural gas as their fuel source.  Commercial producers of electricity are often in a position to manage the use of different power plant facilities and make decisions based on operating costs.  Compared to other sources of fuels used for power generation, natural gas prices have increased slower than fuel oil, but about the same as coal.  This increase in natural gas prices and any future increases, whether in absolute dollars or relative to other fuel costs such as oil, could impact the sales mix of our components and systems, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.  

Long-term reduced commodity prices for oil, natural gas, and other minerals may depress the markets for certain of our products and services, particularly those from our Industrial segment.

Many of our Industrial segment OEM and aftermarket customers and our Aerospace segment rotorcraft product lines’ customers provide goods and services that support various industrial extraction activities, including mining, oil and gas exploration and extraction, and transportation of raw materials from extraction sites to refineries and/or processing facilities.  Long-term lower prices for commodities such as oil, natural gas, gold, tin, and various other minerals could reduce exploration activities and place downward pressure on demand for our goods and services that support exploration and extraction activities.

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Business Risks

Our product development activities may not be successful, may be more costly than currently anticipated, or we may not be able to produce newly developed products at a cost that meets the anticipated product cost structure.

Our business involves a significant level of product development activities, generally in connection with our customers’ development activities.  Industry standards, customer expectations, or other products may emerge that could render one or more of our products or services less desirable or obsolete.  Additionally, our competitors may develop new technology, or more efficient ways to produce their existing products that could cause our existing products or services to become less desirable or obsolete.  Maintaining our market position requires continued investment in research and development.  During an economic downturn or a subsequent recovery, we may need to maintain our investment in research and development, which may limit our ability to reduce these expenses in proportion to a sales shortfall.  

In addition, increased investments in research and development may divert resources from other potential investments in our business, such as acquisitions or investments in our facilities, processes and operations.  If these activities are not as successful as currently anticipated, are not completed on a timely basis, or are more costly than currently anticipated, or if we are not able to produce newly developed products at a cost that meets the anticipated product cost structure, then our future sales, margins and/or earnings could be lower than expected, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Product liability claims, product recalls or other liabilities associated with the products and services we provide may force us to pay substantial damage awards and other expenses that could exceed our accruals and insurance coverage.

The manufacture and sale of our products and the services we provide expose us to risks of product and other tort claims, and any resulting liability.  We currently have and have had in the past product liability claims relating to our products, and we will likely be subject to additional product liability claims in the future for past, current and future products.  Some of these claims may have a material adverse effect on our business, financial condition, results of operations and cash flows.  We also provide certain services to our customers and are subject to claims with respect to the services provided.  In providing such services, we may rely on subcontractors to perform all or a portion of the contracted services.  It is possible that we could be liable to our customers for work performed by a subcontractor.  

Regardless of the outcome, product liability claims can be expensive to defend, can divert the attention of management and other personnel for significant periods of time, and can cause reputational damage.  While we believe that we have appropriate insurance coverage available to us related to any such claims, our insurance may not cover all liabilities or be available in the future at a cost acceptable to us.  An unsuccessful result in connection with a product liability claim, where the liabilities are not covered by insurance or for which indemnification or other recovery is not available, could have a material adverse effect on our business, financial condition, results of operations, and cash flows.  

We may be unable to successfully execute or effectively integrate acquisitions, and divestitures may not occur as planned.

As part of our business strategy, we have pursued, and expect to pursue acquisitions of other companies and assets.  The success of these transactions depends on, among other things, our ability to integrate these businesses into our operations and realize the planned synergies.  Integration of acquired operations may take longer, or be more costly or disruptive to our business, than originally anticipated. The integration of these acquisitions may require significant attention from our management, and the diversion of management’s attention and resources could have a material adverse effect on our ability to manage our business.  We may also incur costs and divert management attention to acquisitions that are never consummated.

Difficulties in the integration of the acquired business may include consolidating the operations, processes and systems of the acquired business, retaining and motivating key management and employees, and integrating existing business relationships with suppliers and customers.  Even if integration is successful, the financial and operational results may differ materially from our assumptions and forecasts due to unforeseen expenses, delays, conditions and liabilities.  Evolving regulations such as changes in tax, trade, environmental, labor, safety, payroll or pension policies could increase the expected costs of acquisitions, and fluctuations in foreign currency exchange rates may impact the agreed upon purchase price. In addition, we may incur unanticipated costs or expenses following an acquisition, including post-closing asset impairment charges, expenses associated with eliminating duplicate facilities, and other liabilities.

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Many of these factors are outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues, and diversion of management’s time and attention.  Failure to successfully implement our acquisition strategy, including successfully integrating acquired businesses, could have a material adverse effect on our business, financial condition, results of operations, and cash flows.  

We also may make strategic divestitures from time to time, such as the divestiture of our renewable power systems business and related businesses.  These transactions may result in continued financial involvement in the divested businesses, such as through guarantees or other financial arrangements, following the transaction.  Nonperformance by those divested businesses could affect our future financial results through additional payment obligations, higher costs or asset write-downs, any of which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.  

Our restructuring activities may increase our expenses and reduce our profitability, and may not have the intended effects.

From time to time, we have implemented restructuring and other actions designed to reduce structural costs, improve operational efficiency and position the Company for long-term profitable growth. Historically, our restructuring activities have included workforce management and other restructuring charges related to acquired businesses.  Due to cost reduction measures or changes in the industries and markets in which we compete, we may decide to implement restructuring or alignment activities in the future, such as closing plants, moving production lines, or making additions, reductions or other changes to our management or workforce.  These restructuring and/or alignment activities generally result in charges and expenditures that may adversely affect our financial results for one or more periods.

Restructuring and/or alignment activities can also create unanticipated consequences, such as instability or distraction among our workforce, and we cannot be sure that any restructuring or alignment efforts that we undertake will be successful.  A variety of risks could cause us not to realize expected cost savings, including, among others, higher than expected severance costs related to staff reductions, higher than expected costs of closing plants, higher costs to hire new employees or delays or difficulty hiring the employees needed, higher than expected operating costs associated with moving production lines, delays in the anticipated timing of activities related to our cost-saving plan, and other unexpected costs associated with operating the business.

If we are unable to structure our operations in the light of evolving market conditions, it could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Our manufacturing activities may result in future environmental costs or liabilities.

We use hazardous materials and/or regulated materials in our manufacturing operations.  We also own, operate, have acquired, and may in the future acquire facilities that were formerly owned and operated by others that used such materials.  The risk that a significant release of regulated materials has occurred in the past or will occur in the future cannot be completely eliminated or prevented.  As a result, we are subject to a substantial number of costly regulations and we must conform our operations to applicable regulatory requirements in all countries in which we operate.  To the best of our knowledge, we have been and will be at all times, in complete compliance with all environmental requirements, or that we will not incur additional material costs or liabilities in connection with these requirements.  

In addition, we may be subject to other environmental remediation costs such as participation in superfund sites or other similar jurisdictional initiatives.  As a result, we may incur material costs or liabilities or be required to undertake future environmental remediation activities that could damage our reputation and have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Failure of our production lines, or those of our subcontractors, to meet required certification standards could disrupt production.

Our existing production lines, as well as the production lines of our subcontractors, are sometimes required to pass varying levels of qualification with certain of our customers.  Some of our customers require that our production lines pass their specific qualification standards and that we, and any subcontractors that we may use, be registered under or certified to certain U.S. or international quality standards.  We may be unable to obtain, maintain, or we may experience delays in obtaining, a certification or registration to a required quality standard.  A delay in obtaining, or the failure to obtain a necessary quality certification or registration could result in significant out-of-sequence work and increased production costs, as well as delayed deliveries to customers, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

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None.

The following is a summary of our principal facilities as of September 30, 2021:

In addition to the principal plants listed above, we own or lease other facilities used primarily for sales, service activities, assembly, and/or engineering activities in Brazil, Bulgaria, China, India, Japan, the Netherlands, the Republic of Korea, Saudi Arabia, the United Kingdom, Germany, and the United States.

Our principal plants are suitable and adequate for the manufacturing and other activities performed at those plants, and we believe our utilization levels are generally high.

Woodward is currently involved in pending or threatened litigation or other legal proceedings, investigations, claims and/or regulatory proceedings arising in the normal course of business, including, among others, those relating to product liability claims, employment matters, worker’s compensation claims, contractual disputes, product warranty claims and alleged violations of various laws and regulations.  Woodward accrues for known individual matters using estimates of the most likely amount of loss where it believes that it is probable the matter will result in a loss when ultimately resolved and such loss is reasonably estimable.  

While the outcome of pending claims, legal and regulatory proceedings, and investigations cannot be predicted with certainty, management believes that any liabilities that may result from these claims, proceedings and investigations will not have a material effect on Woodward's liquidity, financial condition, or results of operations.

Not applicable.

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PART II

Our common stock is listed on The NASDAQ Global Select Market and is traded under the symbol “WWD.”  At November 16, 2021, there were approximately 800 holders of record.  

Performance Graph

The following graph compares the cumulative 10-year total return to stockholders on our common stock relative to the cumulative total returns of the S&P Midcap 400 index and the S&P Industrials index.  The graph shows total stockholder return assuming an investment of $100 (with reinvestment of all dividends) was made on September 30, 2011 in our common stock and in each of the two indexes and tracks relative performance through September 30, 2021.  We have used a period of 10 years as we believe that our stock performance should be reviewed over a period that is reflective of our long-term business cycle.

The stock price performance included in this graph is not necessarily indicative of future stock price performance

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Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

(In thousands, except per share amounts)

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OVERVIEW

Woodward enhances the global quality of life and sustainability by optimizing energy use through improved efficiency and lower emissions.  We are an independent designer, manufacturer, and service provider of control solutions for the aerospace and industrial markets.  We design, produce and service reliable, efficient, low-emission, and high-performance energy control products for diverse applications in challenging environments.  We have production and assembly facilities primarily in the United States, Europe and Asia, and promote our products and services through our worldwide locations.  

Our strategic focus is providing energy control and optimization solutions for the aerospace and industrial markets.  The precise and efficient control of energy, including motion, fluid, combustion and electrical energy, is a growing requirement in the markets we serve, and we have developed and are executing on strategies to leverage the macro trends of eliminating greenhouse gases, commercializing space, and accelerating the digital age. To facilitate a cleaner, decarbonized world, we are partnering with our customers to enable their equipment to be more efficient, capable of utilizing clean burning fuels, advancing fuel cells, and the integration of renewable power in both commercial and defense operations. Our core technologies leverage well across our markets and customer applications, enabling us to develop and integrate cost-effective and state-of-the-art fuel, combustion, fluid, actuation and electronic systems.  We focus primarily on serving OEMs and equipment packagers, partnering with them to bring superior component and system solutions to their demanding applications.  We also provide aftermarket repair, maintenance, replacement and other service support for our installed products.  

Our components and integrated systems optimize performance of commercial aircraft, defense aircraft, military ground vehicles and other equipment, gas and steam turbines, industrial diesel, gas, bio-diesel and dual-fuel reciprocating engines, and electrical power systems.  Our innovative motion, fluid, combustion and electrical energy control systems help our customers offer more cost-effective, cleaner, and more reliable equipment.  

Management’s discussion and analysis should be read together with the Consolidated Financial Statements and Notes included in this report.  Dollar and number of share amounts contained in this discussion and elsewhere in this Annual Report on Form 10-K are in thousands, except per share amounts.

COVID-19 Pandemic

In March 2020, the World Health Organization declared COVID-19 to be a global pandemic. The pandemic has led to

significant volatility in financial markets, commodities (including oil and gas) and other markets and industries (including the aviation industry) and has negatively affected the business and results of operations of the Company. As the COVID-19 pandemic progressed, we reacted quickly to navigate the uncertain market environment, reduce our cost structure, increase our focus on operational excellence, and prioritize diligent cash management. The aggressive actions we implemented continue to drive strong cash flow, improve our liquidity and overall financial position, and enable greater investment to organically and inorganically grow our business.

The ongoing rollout of vaccines across many countries is driving optimism for economic recovery, but the enduring turbulence caused by the COVID-19 pandemic, including significantly reduced global passenger travel and new viral variants continue to cloud near-term forecasts. We are unable to predict the extent to which the pandemic and related impacts will continue to adversely affect our business, including our operational performance, results of operations, financial position, and the achievement of our strategic objectives.

We will continue to actively monitor the situation and may potentially take further actions to alter our business operations if we determine such actions are in the best interests of our shareholders, employees, customers, communities, business partners, and suppliers, or as required by federal, state, or local authorities. It is not clear what the potential effects any such alterations or modifications may have on our business in future periods, including the effects on the Company's customers, employees, and prospects, or on our financial results.

Divestiture of the Renewables business and related businesses

In fiscal year 2020, Woodward’s board of directors (the “Board”) approved a plan to divest our renewable power systems business, protective relay business, and other businesses within the Industrial segment (collectively, the “disposal group”). The assets of the disposal group were primarily located in Germany, Poland and Bulgaria, and the transactions consummating the sale of the disposal group were completed on April 30, 2020 (the “Closing”). Financial information for the disposal group is reflected in our financial statements prior to the date of Closing.

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BUSINESS ENVIRONMENT AND TRENDS

We serve the aerospace and industrial markets.  

Aerospace Markets

Our aerospace products and systems are primarily used to provide propulsion, actuation and motion control in both commercial and defense fixed-wing aircraft, rotorcraft, guided weapons, and other defense systems.

Commercial and Civil Aircraft – In the commercial aerospace markets, the global COVID-19 pandemic and associated mitigation efforts had a significant impact on global air traffic in fiscal year 2021, reducing total global passenger air miles flown to nearly one-half of 2019 (pre-COVID) levels.  Commercial aircraft production, which was reduced in fiscal year 2020 in response to the significant decrease in demand from airlines and aircraft manufacturers, stabilized in fiscal year 2021 and has begun to slowly increase.  Reductions in build rates ranging from twenty-five to forty percent of pre-COVID levels were seen in most aircraft models at all aircraft OEMs.  As a result of the decline in demand, governments offered various financial support and stimulus to airlines and aircraft manufactures that, in some cases, incentivized the production of more fuel efficient and lower emission aircraft.  The trend toward the newer generation of aircraft that have recently entered service or are scheduled to go into production over the next several years favors our product offerings because we have more content on those more fuel efficient and lower emission aircraft.  While production levels remain lower than pre-COVID levels, order backlogs have begun to grow with increased new orders and fewer cancellations and deferrals.  We expect production levels to remain stable in the short-term and ramp up over the next few years to reach pre-pandemic levels in fiscal year 2023 due to solid order backlogs for the new aircraft models.  

The business and general aviation market demand was also impacted in fiscal year 2021 as business jet deliveries were down as a result of the COVID-19 pandemic and increased availability of used aircraft, which was partially offset by the ramp of some newer models.  Turboprop and helicopter deliveries weakened again in fiscal year 2021.  We expect business jet, turboprop and helicopter deliveries to improve when economic stability returns and aircraft flight operations recover.

We have content on the Airbus A220, A320neo, A330neo, and A380, Bell 429, Boeing 737 MAX, 777, 787, and 747-8.  We have been awarded content on the 777X, Comac C919, Irkut MS-21 and a variety of business jet platforms, among others.  We continue to explore opportunities on new engine and aircraft programs that are under consideration or have been recently announced.

The grounding of the Boeing 737 MAX was lifted by the FAA and other regulators beginning in November 2020, which allowed deliveries of that aircraft to resume in fiscal year 2021.  Customer orders resumed as demand for the aircraft began to return during fiscal year 2021.  As the aircraft’s return to service progresses, we anticipate a large majority of the deliveries missed in fiscal year 2019 and 2020 will be fulfilled in future periods, although at a slower rate than previously estimated.  In fiscal year 2021, the return to service of the 737 MAX aircraft in many jurisdictions contributed to positive impacts on OEM sales, while there was continuing unfavorable impact on initial provisioning sales related to the 737 MAX aircraft and CFM LEAP engine.  We anticipate a slow recovery of the OEM sales and a slightly better recovery of the initial provisioning sales in fiscal year 2022.  However, build rates are expected to improve further in fiscal year 2022 based on announced increased and the anticipated certification of the 737 Max in China.

Defense – In recent years, the defense industry has been strong as budgetary allocations have generally increased since 2016.  The National Defense Authorization Act for Fiscal Year 2019, which was signed into law in August 2018, resulted in slightly higher levels of funding for both procurement and research and development, and we believe budget increases in recent years will support modest growth in fiscal year 2022, with the exception of our guided tactical weapons programs.  Our involvement with a wide variety of defense programs in fixed-wing aircraft, rotorcraft and weapons systems has provided relative stability for our defense market sales, as some newer programs increase (e.g., F-35 Lightning II, KC-46A Tanker, and T-7A Trainer) while some legacy programs are reduced (e.g., F/A-18 E/F Super Hornet and V-22 Osprey).  Other programs are relatively steady (e.g., UH-60 Black Hawk and A-64 Apache helicopter programs) and some legacy programs, such as the F-15, will maintain or potentially increase production.  Weapons programs for which we have significant sales include the Joint Direct Attack Munition (“JDAM”), Small Diameter Bomb (“SDB”) and AIM-9X guided tactical weapon systems.  We expect overall production rates to remain flat or decrease for some of these weapons programs due to anticipated decline in demand, compared to the very strong production rates in recent years.

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Aftermarket – The substantial reduction in global air passenger traffic due to the COVID-19 pandemic, with corresponding reduction in required airliner capacity, significantly impacted our commercial aftermarket business in fiscal year 2021, as airlines continued to park approximately 25% of the active fleet.  Although improving, airliner capacity is anticipated to remain below 2019 levels until approximately 2023 or later, with single aisle aircraft and domestic flights expected to return to normal volumes sooner than twin aisle and international flights.  As airline revenues and profitability continue to be impacted, operators may elect to defer maintenance where possible, which will continue to pressure our aftermarket sales even as capacity recovers.  

We anticipate newer aerospace platforms, which include cleaner and more reliable systems, and contain more of our products, will be preferred as aircrafts return to service.  With the entry into service of the new single aisle aircraft (Boeing 737 MAX and Airbus A320neo), we have seen a significant increase in initial provisioning sales to the operators of these new aircraft.  Initial provisioning sales have slowed significantly, however, as airline profitability suffered during the COVID-19 pandemic, although they are anticipated to return as the industry continues to recover.  Among legacy aircraft, the A320 family and 737NG will continue to be in demand in current operating fleets, which will support demand for repairs and spare parts for older engine programs remaining in service.  

Our defense aftermarket was flat during fiscal year 2021 as the combat readiness of existing military programs on which we have content continues to be prioritized by the U.S. Government, even amid troop withdrawals in foreign combat zones.  Global conflicts and growing international demand for various other military programs continue to drive demand for operations of defense aircraft, including fighter jets, transports and both utility and attack rotorcraft, supported by our products and systems.  Although we expect variability, which is generally attributable to the cycling of various maintenance and upgrade programs, as well as actual usage, our outlook for defense aftermarket is strong.  This is due primarily to the service lives of existing military programs being extended and increased demand for repairs and spare parts for older military aircraft programs remaining in service.

Industrial Markets

Our industrial products are used worldwide in various types of turbine and reciprocating engine-powered equipment, including electric power generation and distribution systems, ships, locomotives, compressors, pumps, and other mobile and industrial machines.

Industrial Turbines – The demand for industrial gas turbines for power generation, which consists mainly of heavy frames, aero derivatives and steam, declined slightly in fiscal year 2021 due to the ongoing effects of the COVID-19 pandemic on the global economy.  Start reliability, fuel flexibility, safety, and part-load efficiency are all key drivers of the turbine market as the conversion from coal to natural gas usage continues, and we believe Woodward continues to be well positioned to meet these market needs on the existing and next generation turbines.  We project continued growth as demand for electricity is met through a balance of renewable power sources and newer industrial gas turbines for which Woodward has been awarded increased content.

Reciprocating Engines – Woodward’s key markets for engine control technologies are power generation, transportation (including compressed natural gas (“CNG”) and liquified natural gas (“LNG”) trucks in Asia, mining, and marine shipping), and oil and gas.  We continue to expect the market demand for natural gas trucks to remain favorable over the long-term as the Chinese government continues to implement more stringent emissions standards and encourage natural gas usage under its initiative on air quality improvement.  The demand for large reciprocating engines used in marine, oil and gas, and prime power generation applications was impacted by the COVID-19 pandemic and the drop in oil prices during fiscal year 2021.  The demand from internet traffic and data storage is driving demand for data center power generation.  We anticipate some continued softening and stabilization of the large reciprocating engine market in fiscal year 2022 due to a more stable market environment.  Government emissions requirements across many regions and new engine applications are driving demand for more sophisticated control systems, as is customer demand for improved engine efficiencies and increased reliability.  We expect market share gains by our customers and increased scope on the latest generation reciprocating engines as energy policies in some countries encourage the use of CNG, LNG, and other alternative fuels over carbon-rich petroleum fuels, which we expect will drive increased demand for our alternative fuel clean engine control technologies.

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RESULTS OF OPERATIONS

Financial Highlights

Net sales for fiscal year 2021 were $2,245,832, a decrease of $249,833, or 10.0%, from $2,495,665 for the prior fiscal year.  Foreign currency exchange rates had a favorable impact on net sales of $36,641 for fiscal year 2021, as compared to the same period of the prior year.  There were no sales for the disposal group for fiscal year 2021 as compared to $67,663 for the prior fiscal year, as the disposal group was divested on April 30, 2020.  Net sales excluding the disposal group for fiscal year 2020 were $2,428,002.  Aerospace segment net sales for the fiscal year 2021 were down 11.7% to $1,404,117, compared to $1,590,963 for the prior fiscal year.  Industrial segment net sales for fiscal year 2021 were down 7.0% to $841,715, compared to $904,702 for the prior fiscal year.  Industrial segment net sales excluding the disposal group for fiscal year 2020 were $837,040. Foreign currency exchange rates had a favorable impact of $32,734 on Industrial segment net sales for fiscal year 2021 as compared to the prior fiscal year.

Net earnings for the fiscal year 2021 were $208,649, or $3.18 per diluted share, compared to $240,395, or $3.74 per diluted share for the prior fiscal year.  Adjusted net earnings for the fiscal year 2021 were $212,385 or $3.24, per diluted share and $254,037, or $3.96, per diluted share, for the prior fiscal year.  Net earnings excluding the disposal group for fiscal year 2020 were not materially different from reported net earnings for the same period.

The effective tax rate in fiscal year 2021 was 15.1%, compared to 14.7% in the prior fiscal year. The adjusted effective tax rate was 15.3%, compared to 17.8% in the prior fiscal year.

Earnings before interest and taxes (“EBIT”) for the fiscal year 2021 were $278,586, a decrease of 11.8% from $315,928 in the prior fiscal year.  Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the fiscal year 2021 were $408,110, down 8.7% from $447,086 for the prior fiscal year.  Adjusted EBIT and adjusted EBITDA for fiscal year 2021 were $283,594 and $413,118, respectively, compared to $343,158 and $474,316, respectively, for the prior fiscal year.  

Aerospace segment earnings as a percent of segment net sales were 16.7% in fiscal year 2021, compared to 19.5% in the prior fiscal year.  Industrial segment earnings as a percent of segment net sales were 12.9% in the fiscal year 2021, compared to 11.1% in the prior fiscal year.  Industrial segment earnings excluding the disposal group were 11.6% of Industrial segment net sales for fiscal year 2020.

Net sales excluding the disposal group, adjusted net earnings, adjusted earnings per share, EBIT, adjusted EBIT, EBITDA, adjusted EBITDA, Industrial segment sales excluding the disposal group, and Industrial segment earnings excluding the disposal group are non-U.S. GAAP financial measures.  A description of these measures as well as a reconciliation of these non-U.S. GAAP financial measures to the closest U.S. GAAP financial measures can be found under the caption “Non-U.S. GAAP Measures” in this Item 7 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

Liquidity Highlights

Net cash provided by operating activities for fiscal year 2021 was $464,669, compared to $349,491 for fiscal year 2020.  The increase in net cash provided by operating activities in fiscal year 2021 compared to fiscal year 2020 is primarily attributable to the timing of cash payments to suppliers and certain tax payments, as well as improved working capital utilization.  This increase was partially offset by the net impact of cash payments for annual bonuses and proceeds from settlement of cross-currency interest rate swaps, each of which occurred in fiscal year 2020, while no such activity occurred in fiscal year 2021.

For fiscal year 2021, free cash flow, which we define as net cash flows from operating activities less payments for property, plant and equipment, was $426,980, compared to $302,404 for the fiscal year 2020.  The increase in free cash flow for fiscal year 2021 as compared to prior fiscal year is primarily due to effective working capital management and lower payments for property, plant and equipment, partially offset by lower net earnings.  Adjusted free cash flow, which we define as free cash flow, plus the proceeds from the sale of real property at our former Duarte, California operations and excluding cash paid for merger and divestiture transaction costs, cash paid for restructuring charges, and net cash proceeds received from settlement of our cross-currency interest rate swaps, was $315,220 for fiscal year 2020. No adjustments were made to free cash flow for fiscal year 2021.  Free cash flow and adjusted free cash flow are non-U.S. GAAP financial measures.  A description of these measures as well as a reconciliation of these non-U.S. GAAP financial measures to the closest U.S. GAAP financial measures can be found under the caption “Non-U.S. GAAP Measures” in this Item 2 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

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At September 30, 2021, we held $448,462 in cash and cash equivalents, including restricted cash of $1,907, and had total outstanding debt of $734,850 with additional borrowing availability of $989,039, net of outstanding letters of credit, under our revolving credit agreement.  At September 30, 2021, we also had additional borrowing capacity of $7,413 under various foreign lines of credit and foreign overdraft facilities.

Consolidated Statements of Earnings and Other Selected Financial Data

The following table sets forth consolidated statements of earnings data as a percentage of net sales for each period indicated:

Other select financial data:

2021 RESULTS OF OPERATIONS

2021 Net Sales Compared to 2020

Consolidated net sales for fiscal year 2021 decreased by $249,833, or 10.0%, compared to fiscal year 2020.

Details of the changes in consolidated net sales are as follows:

In the Aerospace segment, the decrease in net sales for fiscal year 2021 as compared to fiscal year 2020 is primarily attributable to a decrease in commercial sales resulting from the secular decline in global passenger traffic and OEM production rates as a result of the global COVID-19 pandemic.  In the Industrial segment, the decrease in net sales for fiscal year 2021 as compared to fiscal year 2020 is primarily attributable to the divestiture of the disposal group, and continued weakness in the oil and gas market and the associated aftermarket due to the ongoing impact of the COVID-19 pandemic, partially offset by favorable effects of foreign currency exchange rates.

During fiscal year 2021, consolidated net sales were negatively impacted by approximately $32,000 due to global supply chain disruptions, which delayed delivery of orders scheduled for shipment during the fiscal year.

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2021 Costs and Expenses Compared to 2020

Cost of goods sold decreased by $160,648 to $1,694,774, or 75.5% of net sales, for fiscal year 2021, from $1,855,422, or 74.3% of net sales, for fiscal year 2020.  The decrease in cost of goods sold in fiscal year 2021, as compared to the same period of the prior year, is primarily attributable to lower sales aerospace volume as a result of continued global disruption from the COVID-19 pandemic.

Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 24.5% for fiscal year 2021, compared to 25.7% for fiscal year 2020.  The decrease in gross margin for fiscal year 2021 is primarily attributable to lower aerospace sales volume as a result of global disruption caused by the COVID-19 pandemic.

Selling, general and administrative expenses decreased by $30,844, or 14.2%, to $186,866 for fiscal year 2021, compared to $217,710 for fiscal year 2020.  Selling, general, and administrative expenses as a percentage of net sales decreased to 8.3% for fiscal year 2021, compared to 8.7% for fiscal year 2020.  The decrease in selling, general and administrative expenses, both in dollars and as a percentage of sales, for fiscal year 2021 compared to the same period of the prior year is primarily due to a decrease in certain expenses related to merger and divestiture activities, fees incurred on termination of the cross-currency interest rate swaps and acceleration of stock compensation expense related to restructuring activities, none of which repeated in the current fiscal year.

Research and development costs decreased by $16,043, or 12.1%, to $117,091 for fiscal year 2021, as compared to $133,134 for fiscal year 2020.  Research and development costs as a percentage of net sales decreased to 5.2% for fiscal year 2021, as compared to 5.3% for fiscal year 2020.  The decrease in research and development costs, both in dollars and as a percentage of net sales, for fiscal year 2021 as compared to the same periods of the prior year is primarily due to savings from cost reduction initiatives.  Our research and development activities extend across almost all of our customer base, and we anticipate ongoing variability in research and development due to the timing of customer business needs on current and future programs.

Impairment of assets sold of $37,902 recognized in fiscal year 2020 related to a non-cash impairment charge for the net assets sold of the disposal group, representing the write down of the associated net assets held for sale to their fair market value as of December 31, 2019. No non-cash impairment charges were recognized during fiscal year 2021.  Refer to Note 10, Sale of businesses in the Notes to the Consolidated Financial Statements in “Item 8 – Financial Statements and Supplementary Data” for further details.

Restructuring charges decreased by $17,208, or 77.5%, to $5,008 for fiscal year 2021, compared to $22,216 for fiscal year 2020.  Charges for fiscal year 2021 related primarily to workforce management costs associated with business realignments in the Aerospace and Industrial segments to support growth opportunities, while charges recorded in fiscal year 2020 primarily related to workforce management actions as a result of volume and demand declines due to the global COVID-19 pandemic.  All of the restructuring charges in fiscal years 2021 and 2020 were recorded as nonsegment expenses.

Gain on cross-currency interest rate swaps, net of $30,481 recognized in fiscal year 2020 related to settlement and termination of our cross-currency interest rate swaps designated in foreign currency hedging relationships.  In the third quarter of fiscal year 2020, as a result of the COVID-19 pandemic and future cash flow uncertainties, we elected to terminate and settle our existing cross-currency interest rate swap derivative instruments.  No gains on cross-currency interest rate swaps were recognized during fiscal year 2021.  Refer to Note 8, Derivative instruments and hedging activities, in the Notes to the Consolidated Financial Statements in “Item 8 – Financial Statements and Supplementary Data” for further details.

Interest expense decreased by $1,529, or 4.3%, to $34,282, for fiscal year 2021, compared to $35,811 for fiscal year 2020.  Interest expense increased as a percentage of net sales to 1.5% for fiscal year 2021, as compared to 1.4% for fiscal year 2020.  During fiscal year 2021, we paid the entire balance of two series of private placement notes totaling $100,000 primarily using free cash flow and proceeds from our revolving credit facility. We did not borrow from the revolving credit facility during the second, third, or fourth quarters of fiscal year 2021.

Other income, net was $36,493 for fiscal year 2021, compared to $56,166 for fiscal year 2020.  The decrease in other income in fiscal year 2021 compared to fiscal year 2020 was primarily due to a gain on the sale of a portion of our property in Duarte, California in the amount of $22,323 and a gain on the sale of our property in Loveland, Colorado in the amount of $2,330 that were each recognized in fiscal year 2020 and did not repeat again in the current fiscal year.

Income taxes were provided at an effective rate on earnings before income taxes of 15.1% for fiscal year 2021, compared to 14.7% for fiscal year 2020.  

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The increase in the effective tax rate for fiscal year 2021 compared to fiscal year 2020 is primarily attributable to (i) decreased current fiscal year foreign earnings in lower tax jurisdictions when compared to the prior fiscal year, and (ii) decreased Research and Development Credit in the current fiscal year when compared to the prior fiscal year. This increase is partially offset by (i) a larger favorable net excess income tax benefit from stock-based compensation, (ii) a favorable U.S. current fiscal year state earnings mix when compared to the prior fiscal year, and (iii) a smaller detrimental adjustment to prior period tax items when compared to the prior fiscal year.

Segment Results

The following table presents sales by segment:

The following table presents earnings by segment and reconciles segment earnings to consolidated net earnings:

The following table presents segment earnings as a percent of segment net sales:

2021 Segment Results Compared to 2020

Aerospace

Aerospace segment net sales decreased by $186,846, or 11.7% to $1,404,117 for fiscal year 2021, compared to $1,590,963 for fiscal year 2020.  The decrease in segment net sales for fiscal year 2021 as compared to fiscal year 2020 was primarily driven by lower commercial sales due to the substantial reduction in global passenger traffic, reduction in required airliner capacity, and OEM production rates, all as a result of the global COVID-19 pandemic.

Defense OEM sales decreased in fiscal year 2021 compared to fiscal year 2020, driven primarily by lower sales for guided weapons and ground transportation. Our defense aftermarket sales decreased in fiscal year 2021 compared to fiscal year 2020 primarily due to the timing of U.S. government spending for maintenance needs and upgrade programs on which we have content.  Although we expect some ongoing variability in defense aftermarket sales due to the global COVID-19 pandemic and the timing of continued maintenance needs and upgrade programs, we expect U.S. government funding for defense platforms on which we have content to remain stable under the current defense budget.

During fiscal year 2021, Aerospace segment net sales were negatively impacted by approximately $16,000 due to global supply chain disruptions, which delayed delivery of orders scheduled for shipment during the fiscal year.

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Aerospace segment earnings decreased by $75,781, or 24.4%, to $234,356 for fiscal year 2021, compared to $310,137 for fiscal year 2020.

The net decrease in Aerospace segment earnings for fiscal year 2021 was due to the following:

Aerospace segment earnings as a percentage of segment net sales were 16.7% for fiscal year 2021 and 19.5% fiscal year 2020.  Aerospace segment earnings in fiscal year 2021 decreased primarily due to lower sales volume, including a significant decline in commercial aftermarket, as a result of the COVID-19 pandemic, partially offset by savings from cost reduction initiatives.

Industrial

Industrial segment net sales decreased by $62,987, or 7.0%, to $841,715 for fiscal year 2021, compared to $904,702 for fiscal year 2020.  Industrial segment net sales for fiscal year 2021 were relatively flat compared to Industrial segment net sales excluding the disposal group of $837,039 for fiscal year 2020.  There were no sales for the disposal group in fiscal year 2021 because the divestiture of the disposal group preceded the period.  Foreign currency exchange rates had a favorable impact on segment net sales of $32,734 for fiscal year 2021.  

The decrease in Industrial segment net sales in fiscal year 2021 was primarily attributable to the divestiture of the disposal group, and lower sales volumes as a result the ongoing impacts of the global COVID-19 pandemic, partially offset by favorable effects of foreign currency exchange rates.

The demand for diesel fuel systems was negatively impacted by a softening of the oil and gas market amid a recovering global economy, pricing volatility and decreased capital investments related to reduced drilling activity, particularly within the North American fracking market.

Although there was a slight decline in industrial gas turbine sales in fiscal year 2021 as a result of the ongoing COVID-19 pandemic, the market is anticipated to stabilize during fiscal year 2022 as global power demand increases and domestic upgrade initiatives transition from planning to execution. We expect Industrial gas turbine sales to benefit from the depletion of inventory in the market and increased Woodward content on certain newer industrial gas turbines.

During fiscal year 2021, Industrial segment net sales were negatively impacted by approximately $16,000 due to global supply chain disruptions, which delayed delivery of orders scheduled for shipment during the fiscal year.

Industrial segment earnings increased by $8,351, or 8.3%, to $108,672 for fiscal year 2021, compared to $100,321 for fiscal year 2020.  There were no earnings for the disposal group in fiscal year 2021 because the divestiture of the disposal group preceded the period.  Industrial segment earnings excluding the disposal group for fiscal year 2020 were $96,719.  

The net increase in Industrial segment earnings for fiscal year 2021 was due to the following:

Industrial segment earnings as a percentage of segment net sales were 12.9% for fiscal year 2021, compared to 11.1% for fiscal year 2020.  Industrial segment earnings as a percentage of segment net sales, excluding the disposal group, were 11.6% for fiscal year 2020.  The increase in Industrial segment earnings for fiscal year 2021 was primarily due to savings from cost reduction initiatives, favorable effects from changes in foreign currency rates, and lower research and development costs, partially offset by lower sales volume.

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Nonsegment

Nonsegment expenses decreased to $64,442 for fiscal year 2021, compared to $94,530 for fiscal year 2020. Included in nonsegment expenses for fiscal year 2021 was a restructuring charge of $5,008. Included in nonsegment expenses for fiscal year 2020 were the impairment charge on assets held for sale associated with the divestiture of the disposal group in the amount of $37,902, restructuring charges of $22,216, and merger and divestiture transaction costs of $16,355, partially offset by the net gain on settlement of our cross-currency interest rate swaps of $27,481, and a gain on the sale of a portion of our property in Duarte, California in the amount of $22,323. Excluding all of these charges and gains from each of fiscal year 2021 and fiscal year 2020, nonsegment expenses decreased in fiscal year 2021 compared to fiscal year 2020 primarily due to savings from cost reduction initiatives.

For a discussion of the 2020 Results of Operations, including a discussion of the financial results for the fiscal year ended September 30, 2020 compared to the fiscal year ended September 30, 2019, refer to Part I, Item 7 of our Form 10-K filed with the SEC on November 20, 2020.

LIQUIDITY AND CAPITAL RESOURCES

Historically, we have satisfied our working capital needs, as well as capital expenditures, product development and other liquidity requirements associated with our operations, with cash flow provided by operating activities and borrowings under our credit facilities.  We have also issued debt to supplement our cash needs, repay our other indebtedness, or finance our acquisitions.  We expect that cash generated from our operating activities, together with borrowings under our revolving credit facility and other borrowing capacity, will be sufficient to fund our continuing operating needs, including capital expansion funding for the next 12 months and the foreseeable future.  

Our aggregate cash and cash equivalents were $448,462 at September 30, 2021 and $153,270 at September 30, 2020, and our working capital was $1,098,466 at September 30, 2021 and $818,533 at September 30, 2020.  Of the cash and cash equivalents held at September 30, 2021, $172,761 was held by our foreign locations.  We are not presently aware of any significant restrictions on the repatriation of these funds, although a portion is considered indefinitely reinvested in these foreign subsidiaries.  If these funds were needed to fund our operations or satisfy obligations in the United States, then they could be repatriated and their repatriation into the United States may cause us to incur additional U.S. income taxes or foreign withholding taxes.  Any additional U.S. taxes could be offset, in part or in whole, by foreign tax credits.  The amount of such taxes and application of tax credits would be dependent on the income tax laws and other circumstances at the time these amounts are repatriated.  Based on these variables, it is impractical to determine the income tax liability that might be incurred if these funds were to be repatriated.  

Our revolving credit facility, as amended, provides a borrowing capacity of up to $1,000,000 with the option to increase total available borrowings to up to $1,500,000, subject to lenders’ participation.  We can borrow against our revolving credit facility as long as we are in compliance with all of our debt covenants.  Borrowings under the revolving credit facility can be made in U.S. dollars or in foreign currencies other than the U.S. dollar provided that the U.S. dollar equivalent of any foreign currency borrowings and U.S. dollar borrowings does not, in total, exceed the borrowing capacity of the revolving credit facility.  Historically, we have used borrowings under our revolving credit facilities to meet certain short-term working capital needs, as well as for strategic uses, including repurchases of our common stock, payments of dividends, acquisitions, and facility expansions.

In addition to our revolving credit facility, we have various foreign credit facilities, some of which are tied to net amounts on deposit at certain foreign financial institutions.  These foreign credit facilities are reviewed annually for renewal.  We use borrowings under these foreign credit facilities to finance certain local operations on a periodic basis.  For further discussion of our revolving credit facility and our other credit facilities, see Note 15, Credit facilities, short-term borrowings and long-term debt in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Form 10-K.

At September 30, 2021, we had total outstanding debt of $734,850 consisting of various series of unsecured notes due between 2023 and 2033, and amounts borrowed under our revolving credit facility, and our finance leases.  On November 15, 2020, we paid the entire principal balance of $100,000 on our Series G and J Notes using primarily free cash flow and proceeds from borrowings under our existing revolving credit facility.  At September 30, 2021, we had additional borrowing availability of $989,039 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $7,413 under various foreign credit facilities.

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At September 30, 2021, we had no borrowings outstanding under our revolving credit facility.  Revolving credit facility and short-term borrowing activity during the fiscal year ended September 30, 2021 were as follows:

We believe we were in compliance with all our debt covenants as of September 30, 2021.  Additionally, we believe the current known impacts of the COVID-19 pandemic will not affect our ability to remain in compliance with our debt covenants.  See Note 15, Credit facilities, short-term borrowings and long-term debt in the Notes to the Consolidated Financial Statements in “Item 8 – Financial Statements and Supplemental Data,” for more information about our covenants.

In addition to utilizing our cash resources to fund the working capital needs of our business, we evaluate additional strategic uses of our funds, including the repurchase of our common stock, payment of dividends, significant capital expenditures, consideration of strategic acquisitions and other potential uses of cash.  

Our ability to service our long-term debt, to remain in compliance with the various restrictions and covenants contained in our debt agreements, and to fund working capital, capital expenditures and product development efforts will depend on our ability to generate cash from operating activities, which in turn is subject to, among other things, future operating performance as well as general economic, financial, competitive, legislative, regulatory, and other conditions, some of which may be beyond our control.  

We believe that cash flows from operations, along with our contractually committed borrowings and other borrowing capability, will continue to be sufficient to fund anticipated capital spending requirements and our operations for the foreseeable future.  However, we could be adversely affected if the financial institutions providing our capital requirements refuse to honor their contractual commitments, cease lending, or declare bankruptcy.  We believe the lending institutions participating in our credit arrangements are financially stable and do not currently foresee adverse impacts to financial institutions providing our capital requirements as a result of the COVID-19 pandemic.

Cash Flows

2021 Cash Flows Compared to 2020

Net cash flows provided by operating activities for fiscal year 2021 was $464,669, compared to $349,491 for fiscal year 2020.  The increase in net cash provided by operating activities in fiscal year 2021 compared to fiscal year 2020 is primarily attributable to the timing of certain cash payments to suppliers and certain tax payments, as well as cash payments for annual bonuses and proceeds from settlement of cross-currency interest rate swaps, which occurred in fiscal year 2020, while no such activity occurred in fiscal year 2021.

Net cash flows used in investing activities for fiscal year 2021 was $35,297, compared to $6,880 in fiscal year 2020.  The increase in cash used in investing activities in fiscal year 2021 compared to fiscal year 2020 is primarily due to proceeds in the amount of $30,089 from the sale of a parcel of our Duarte, California real property and proceeds in the amount of $10,443 from divestiture of the disposal group, each of which were recognized in fiscal year 2020, while no such proceeds were received in fiscal year 2021, partially offset by lower payments for property, plant, and equipment.

Net cash flows used in financing activities for fiscal year 2021 was $136,318, compared to net cash flows used in financing activities of $290,242 in fiscal year 2020.  During fiscal year 2021, we had net debt payments in the amount of $101,639, compared to net debt payments in the amount of $264,201 in fiscal year 2020.  This was partially offset by an increase in share repurchases in fiscal year 2021, in which we repurchased 294 shares of our common stock in cash for $33,344, compared to fiscal year 2020, in which we repurchased 124 shares of our common stock for $13,346.

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New Accounting Standards

From time to time, the FASB or other standards-setting bodies issue new accounting pronouncements.  Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update.  

To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2, New accounting standards, in the Notes to the Consolidated Financial Statements included in “Item 8 – Financial Statements and Supplementary Data.  Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Consolidated Financial Statements upon adoption.

Non-U.S. GAAP Financial Measures

Adjusted net earnings, adjusted earnings per share, adjusted effective tax rate, Industrial segment net sales excluding the disposal group, Industrial segment earnings excluding the disposal group, EBIT, adjusted EBIT, EBITDA, adjusted EBITDA, free cash flow, and adjusted free cash flow are financial measures not prepared and presented in accordance with U.S. GAAP.  However, we believe these non-U.S. GAAP financial measures provide additional information that enables readers to evaluate our business from the perspective of management.

Industrial segment net sales excluding the disposal group

The Company presents certain sales measures excluding the disposal group net sales, which it refers to as “excluding the disposal group” to show the changes to Woodward’s historical business without the businesses included in the disposal group, which occurred in April 2020. The Company calculates Industrial segment net sales excluding net sales attributable to the disposal group by removing the net sales of its disposal group from the net sales of its Industrial segment.  The Company believes that the exclusion of the disposal group net sales for the prior fiscal year illustrates more clearly how the underlying business of its Industrial segment is performing in the current fiscal year, as the disposal group sales are no longer related to the ongoing operations of the Industrial segment business.  The Company’s calculation of Industrial segment earnings and Industrial segment earnings excluding the disposal group is discussed below.

The reconciliation of Industrial segment net sales to Industrial segment net sales excluding the disposal group is shown in the table below:

Earnings based non-U.S. GAAP financial measures

Adjusted net earnings is defined by the Company as net earnings excluding, as applicable, (i) the gain on sale of assets associated with the sale of the Company’s real property, (ii) the charge from the impairment of assets held for sale, and the losses from assets sold, associated with the Company’s divestiture of the disposal group, (iii) costs associated with the now-terminated merger agreement with Hexcel, (iv) transaction costs associated with the divestiture of the disposal group, (v) restructuring charges, (vi) acceleration of stock compensation expense related to restructuring activities, and (vii) the net gain on settlement of cross-currency interest rate swaps.  

The Company believes that these excluded items are short-term in nature, not directly related to the ongoing operations of the business and therefore, the exclusion of them illustrates more clearly how the underlying business of Woodward is performing.  Management uses adjusted net earnings to evaluate the Company’s performance excluding these infrequent or unusual period expenses that are not necessarily indicative of the Company’s operating performance for the period.  Management defines adjusted earnings per share as adjusted net earnings, as defined above, divided by the weighted-average number of diluted shares of common stock outstanding for the period.  Management uses both adjusted net earnings and adjusted earnings per share when comparing operating performance to other periods which may not have similar infrequent or unusual charges.

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The reconciliation of net earnings and earnings per share to adjusted net earnings and adjusted earnings per share, respectively, for the fiscal years ended and are shown in the tables below.  

Industrial segment earnings excluding the disposal group

The Company also presents certain earnings measures excluding the disposal group for the prior year period to more clearly show how the underlying business of its Industrial segment is performing in the current period. Industrial segment earnings excluding the disposal group is defined by the Company as Industrial segment earnings excluding the earnings or losses related to businesses included in the disposal group. The Company believes that these earnings or losses are no longer related to the ongoing operations of the Industrial segment business and therefore, the exclusion of these earnings illustrates more clearly how the underlying business of Woodward’s Industrial segment is performing. Industrial segment earnings excluding the disposal group as a percentage of Industrial segment net sales excluding the disposal group is defined by management as the percentage of segment earnings compared to segment net sales excluding the earnings (or losses) and net sales related to businesses included in the disposal group.

The reconciliation of Industrial segment earnings to Industrial segment earnings excluding the disposal group is shown in the table below.

Management uses EBIT to evaluate Woodward’s performance without financing and tax related considerations, as these elements may not fluctuate with operating results.  Management uses EBITDA in evaluating Woodward’s operating performance, making business decisions, including developing budgets, managing expenditures, forecasting future periods, and evaluating capital structure impacts of various strategic scenarios.  Securities analysts, investors and others frequently use EBIT and EBITDA in their evaluation of companies, particularly those with significant property, plant, and equipment, and intangible assets subject to amortization.  The Company believes that EBIT and EBITDA are useful measures to the investor when measuring operating performance as they eliminate the impact of financing and tax expenses, which are non-operating expenses and may be driven by factors outside of our operations, such as changes in tax laws or regulations, and, in the case of EBITDA, the noncash charges associated with depreciation and amortization.  Further, as interest from financing, income taxes, depreciation and amortization can vary dramatically between companies and between periods, management believes that the removal of these items can improve comparability.

Adjusted EBIT and adjusted EBITDA represent further non-U.S. GAAP adjustments to EBIT and EBITDA, in each case adjusted to exclude, as applicable, (i) the gain on sale of assets associated with the sale of the Company’s real property, (ii) the charge from the impairment of assets held for sale, and the losses from assets sold, associated with the Company’s divestiture of the disposal group, (iii) costs associated with the now-terminated merger agreement with Hexcel, (iv) transaction costs associated with the divestiture of the disposal group, (v) restructuring charges related to the COVID-19 pandemic, (vi) acceleration of stock compensation expense related to restructuring activities, and (vii) the net gain on settlement of cross-currency interest rate swaps.  

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As these gains and charges are infrequent or unusual items that can be variable from period to period and do not fluctuate with operating results, management believes that by removing these gains and charges from EBIT and EBITDA it improves comparability of past, present and future operating results and provides consistency when comparing EBIT and EBITDA between periods.

EBIT and adjusted EBIT reconciled to net earnings were as follows:

EBITDA and adjusted EBITDA reconciled to net earnings were as follows:

The use of these non-U.S. GAAP financial measures is not intended to be considered in isolation of, or as a substitute for, the financial information prepared and presented in accordance with U.S. GAAP.  As adjusted net earnings, adjusted net earnings per share, adjusted effective tax rate, Industrial segment sales excluding the disposal group, Industrial segment earnings excluding the disposal group, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA exclude certain financial information compared with net earnings, the most comparable U.S. GAAP financial measure, users of this financial information should consider the information that is excluded.  Our calculations of adjusted net earnings, adjusted net earnings per share, Industrial segment sales excluding the disposal group, Industrial segment earnings excluding the disposal group, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA may differ from similarly titled measures used by other companies, limiting their usefulness as comparative measures.

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Cash flow-based non-U.S. GAAP financial measures  

Management uses free cash flow, which is defined by the Company as net cash flows provided by operating activities less payments for property, plant and equipment, in reviewing the financial performance of and cash generation by Woodward’s various business groups and evaluating cash levels.  We believe free cash flow is a useful measure for investors because it portrays our ability to grow organically and generate cash from our businesses for purposes such as paying interest on our indebtedness, repaying maturing debt, funding business acquisitions, investing in research and development, purchasing our common stock, and paying dividends.  In addition, securities analysts, investors, and others frequently use free cash flow in their evaluation of companies.  

Adjusted free cash flow includes additional non-U.S. GAAP adjustments to free cash flow in the prior fiscal year to include cash proceeds from the sale of real property located at our former operations in Duarte, California, and exclude cash paid for merger and divestiture related transaction costs, cash paid for restructuring charges, and cash proceeds received on settlement of our cross-currency interest rate swaps. Management believes that by including or excluding these items, as applicable, in free cash flow it better portrays the cash impact of our fiscal year 2018 decision to relocate our Duarte, California operations to the renovated Drake Campus in Fort Collins, Colorado and excludes the infrequent or unusual cash payments for merger and divestiture transaction costs, restructuring charges, and proceeds from settlement of derivative instruments, which are not indicative of the Company’s operating performance for the period.  

The use of these non-U.S. GAAP financial measures is not intended to be considered in isolation of, or as substitutes for, the financial information prepared and presented in accordance with U.S. GAAP.  Free cash flow and adjusted free cash flow do not necessarily represent funds available for discretionary use and are not necessarily a measure of our ability to fund our cash needs.  Our calculation of free cash flow and adjusted free cash flow may differ from similarly titled measures used by other companies, limiting their usefulness as a comparative measure.

Free cash flow and adjusted free cash flow were as follows:

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes.  Note 1, Operations and summary of significant accounting policies, to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements.  The estimates and assumptions described below are those that we consider to be most critical to an understanding of our financial statements because they involve significant judgments and uncertainties.  All of these estimates reflect our best judgment about current, and for some estimates, future economic and market conditions and their effects based on information available as of the date of these financial statements.  As estimates are updated or actual amounts are known, our critical accounting estimates are revised, and operating results may be affected by the revised estimates.  Actual results may differ from these estimates under different assumptions or conditions.  

Our management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed our disclosures in this Management’s Discussion and Analysis.

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Revenue recognition

Revenue is recognized on contracts with customers for arrangements in which quantities and pricing are fixed and/or determinable and are generally based on customer purchase orders, often within the framework of a long-term supply arrangement with the customer.  We recognize revenue for performance obligations within a customer contract when control of the associated product or service is transferred to the customer.  Some of our contracts with customers contain a single performance obligation, while other contracts contain multiple performance obligations.  Each product within a contract generally represents a separate performance obligation as we do not provide significant installation and integration services, the products do not customize each other, and the products can function independently of each other.

A contract's transaction price is allocated to each performance obligation and recognized as revenue when, or as, the customer obtains control of the associated product or service.  When there are multiple performance obligations within a contract, we generally use the observable standalone sales price for each distinct product or service within the contract to allocate the transaction price to the distinct products or services.  In instances when a standalone sales price for each product or service is not observable within the contract, we allocate the transaction price to each performance obligation using an estimate of the standalone selling price for each product or service, which is generally based on incurred costs plus a reasonable margin, for each distinct product or service in the contract.

When determining the transaction price of each contract, we consider contractual consideration payable by the customer and variable consideration that may affect the total transaction price.  Variable consideration, consisting of early payment discounts, rebates and other sources of price variability, are included in the estimated transaction price based on both customer-specific information as well as historical experience.  We regularly review our estimates of variable consideration on the transaction price and recognize changes in estimates on a cumulative catch-up basis as if the most current estimate of the transaction price adjusted for variable consideration had been known as of the inception of the contract.

Point in time and over time revenue recognition

Control of the products generally transfers to the customer at a point in time, as the customer does not control the products as they are produced.  We exercise judgment and consider the timing of right of payment, transfer of the risk and rewards, transfers of title, transfer of physical possession, and customer acceptance when determining when control of the product transfers to the customer, generally upon shipment of products.  Performance obligations are satisfied and revenue is recognized over time if: (i) the customer receives the benefits as we perform work, if the customer controls the asset as it is being enhanced, or if the product being produced for the customer has no alternative use to us; and (ii) we have an enforceable right to payment with a profit.  When services are provided, revenue from those services is recognized over time because control is transferred continuously to customers as we perform the work.  

For services that are not short-term in nature, manufacturing, repair and overhaul (“MRO”), and sales of products that have no alternative use to us and an enforceable right to payment with a profit, we use an actual cost input measure to determine the extent of progress towards completion of the performance obligation. For these revenue streams, revenue is recognized over time as work is performed based on the relationship between actual costs incurred to-date for each contract and the total estimated costs for such contract at completion of the performance obligation (the cost-to-cost method). We have concluded that this measure of progress best depicts the transfer of assets to the customer, because incurred costs are integral to our completion of the performance obligation under the specific customer contract and correlate directly to the transfer of control to the customer.  Contract costs include labor, material and overhead.  Contract cost estimates are based on various assumptions to project the outcome of future events.  These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer.  Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred.

Inventory

Inventories are valued at the lower of cost or net realizable value.  Inventory cost is determined using methods that approximate the first-in, first-out basis.  We include product costs, labor and related fixed and variable overhead in the cost of inventories.  Inventory net realizable values are determined by giving substantial consideration to the expected product selling price.  We estimate expected selling prices based on our historical recovery rates, general economic and market conditions, the expected channel of disposition, and current customer contracts and preferences.  Actual results may differ from our estimates due to changes in resale or market value and the mix of these factors.  

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We monitor inventory for events or circumstances, such as negative margins, recent sales history suggesting lower sales value, or changes in customer preferences, which would indicate the net realizable value of inventory is less than the carrying value of inventory, and management records adjustments as necessary.  When inventory is written down below cost, such reduced amount is considered the cost for subsequent accounting purposes.  Our recording of inventory at the lower of cost or net realizable value has not historically required material adjustments once initially established.

The carrying value of inventory was $419,971 at September 30, 2021 and $437,943 at September 30, 2020.  If economic conditions, customer product requirements, or other factors significantly reduce future customer demand for our products from forecast levels, then future adjustments to the carrying value of inventory may become necessary.  We attempt to maintain inventory quantities at levels considered necessary to fill firm and expected orders in a reasonable time frame, which we believe mitigates our exposure to future inventory carrying cost adjustments.

Reviews for impairment of goodwill and other indefinitely lived intangible assets

Goodwill

At September 30, 2021, we had $805,333 of goodwill representing 20% of our total assets.  Goodwill is tested for impairment at the reporting unit level on an annual basis and more often if an event occurs or circumstances change that indicate the fair value of a reporting unit may be below its carrying amount.  

The identification of reporting units and consideration of the aggregation of components into a single reporting unit under U.S. GAAP requires management judgment.  The impairment test consists of comparing the fair value of reporting units, determined using discounted cash flows, with their carrying amount including goodwill.  If the carrying amount of the reporting unit exceeds its fair value, we compare the implied fair value of goodwill with its carrying amount.  If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss would be recognized to reduce the carrying amount to its implied fair value.  

During the fourth quarter, we completed our annual goodwill impairment test as of July 31, 2021 for the fiscal year ended September 30, 2021. The results of our annual goodwill impairment test performed as of July 31, 2021, indicated the estimated fair value of each reporting unit was in excess of its carrying value, and accordingly, no impairment existed.  

Indefinitely lived intangible asset

We have one indefinitely lived intangible asset consisting of the Woodward L’Orange trade name.  At September 30, 2021, the carrying value of the Woodward L’Orange trade name intangible asset was $67,245, representing 2% of our total assets.  The Woodward L’Orange trade name intangible asset is tested for impairment on an annual basis and more often if an event occurs or circumstances change that indicate the fair value of the Woodward L’Orange intangible asset may be below its carrying amount.  The impairment test consists of comparing the fair value of the Woodward L’Orange trade name intangible asset, determined using discounted cash flows based on the relief from royalty method under the income approach, with its carrying amount.  If the carrying amount of the Woodward L’Orange trade name intangible asset exceeds its fair value, an impairment loss would be recognized to reduce the carrying amount to its fair value.  Woodward has not recorded any impairment charges associated with the indefinitely lived intangible asset.

During the fourth quarter, we completed the annual impairment test, for the fiscal year ended September 30, 2021, of the Woodward L’Orange trade name intangible asset as of July 31, 2021.  The results of the annual impairment test performed as of July 31, 2021 indicated the estimated fair value of the Woodward L’Orange trade name intangible asset was in excess of its carrying value, and accordingly, no impairment existed.    

As part of our ongoing monitoring efforts to assess goodwill and the Woodward L’Orange trade name indefinite lived asset for possible indications of impairment, we will continue to consider a wide variety of factors, including but not limited to the global economic environment and its potential impact on our business.  There can be no assurance that our estimates and assumptions regarding forecasted cash flows of certain reporting units or the Woodward L’Orange business, the current economic environment, or the other inputs used in forecasting the present value of forecasted cash flows will prove to be accurate projections of future performance.

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Income taxes

We are subject to income taxes in the United States and numerous foreign jurisdictions.  Significant judgment is required in evaluating our tax positions and determining our provision for income taxes.

During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain.  We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due.  The reserves are established when we believe that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities.  We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate.  Although we believe our reserves are reasonable, no assurance can be given that the final outcome of these matters will be consistent with what is reflected in our historical income tax provisions and accruals.  To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will impact the current provision for income taxes.  

Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets.  The determination of the amount of valuation allowance to be provided on recorded deferred tax assets involves estimates regarding the timing and amount of the reversal of taxable temporary differences, expected future taxable income, and the impact of tax planning strategies.  A valuation allowance is established to offset any deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax asset will not be realized.  In assessing the need for a valuation allowance, we consider all available evidence including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies.  Changes in the relevant facts can significantly impact the judgment or need for valuation allowances.  In the event we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.  

Our provision for income taxes is subject to volatility and could be affected by earnings that are different than those anticipated in countries which have lower or higher tax rates; by transfer pricing adjustments; and/or changes in tax laws, regulations, and accounting principles, including accounting for uncertain tax positions, or interpretations thereof.  There can be no assurance that these items will remain stable over time.  Additionally, Woodward records through income tax expense all future excess tax benefits and tax deficiencies from stock options exercised.  This creates unpredictable volatility in the effective tax rate because the additional expense or benefit recognized each quarter is based on the timing of the employee’s election to exercise any vested stock options outstanding, which is outside Woodward’s control, and the market price of Woodward’s shares at the time of exercise, which is subject to market volatility.

Our effective tax rates differ from the U.S. statutory rate primarily due to the tax impact of foreign operations, adjustments of valuation allowances, research tax credits, state taxes, and tax audit settlements.  In addition to potential local country tax law and policy changes that could impact the provision for income taxes, management’s judgment about and intentions concerning the repatriation of foreign earnings could also significantly impact the provision for income taxes.  Management reassesses its judgment regularly, taking into consideration the potential tax impacts of these judgments and intentions.

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In the normal course of business, we have exposures to interest rate risk from our long-term and short-term debt, and our postretirement benefit plans, and foreign currency exchange rate risk related to our foreign operations and foreign currency transactions.  

Foreign Currency Exchange Rate Risk, Interest Rate Risk, and Related Hedging Activities

We are impacted by changes in foreign currency exchange rates when we sell product in currencies different from the currency in which product and manufacturing costs were incurred.  The functional currencies and our purchasing and sales activities primarily include USD, EUR, RMB, JPY and GBP.  We may also be impacted by changes in the relative buying power of our customers, which may impact sales volumes either positively or negatively.  As these currencies fluctuate against each other, and other currencies, we are exposed to foreign currency exchange rate risk on sales, purchasing transactions, and labor.  Foreign currency exchange rate risk is reduced through the maintenance of local production facilities in the markets we serve, which we believe creates a natural hedge to our foreign currency exchange rate exposure.  

The percentages of our net sales denominated in a currency other than the USD were as follows:

Currency exchange rates vary daily and often one currency strengthens against the USD while another currency weakens.  Because of the complex interrelationship of our worldwide supply chains and distribution channels, it is difficult to quantify the impact of a particular change in exchange rates.

We use derivative instruments as risk management tools that involve complexity and are not used for trading or speculative purposes. From time to time, we will enter into a foreign currency exchange rate contract to hedge against changes in foreign currency exchange rates on liabilities expected to be settled at a future date.  Market risk arises from the potential adverse effects on the value of derivative instruments that result from a change in foreign currency exchange rates.  We minimize this market risk by establishing and monitoring parameters that limit the types of, and degree to which we enter into, derivative instruments.  We enter into derivative instruments for risk management purposes only.  We do not enter into or issue derivatives for trading or speculative purposes.  As of September 30, 2021 and 2020, we had no open foreign currency exchange rate contracts and all previous exchange rate derivative instruments were settled or terminated.  

For more information on derivative instruments, see Note 8, Derivative instruments and hedging activities, in the Notes to the Consolidated Financial Statements in “Item 8 – Financial Statements and Supplementary Data.”

Our reported financial results of operations, including the reported value of our assets and liabilities, are also impacted by changes in foreign currency exchange rates.  The assets and liabilities of substantially all of our subsidiaries outside the United States are translated at period end rates of exchange for each reporting period.  Earnings and cash flow statements are translated at weighted-average rates of exchange.  Although these translation changes have no immediate cash impact, the translation changes may impact future borrowing capacity, debt covenants, and the overall value of our net assets.  In addition, we also have assets and liabilities, specifically accounts receivable, accounts payable and current inter-company receivables and payables, whose carrying amounts approximate their fair value, which are denominated in currencies other than their relevant functional currencies.  Foreign currency exchange rate risk is mitigated through several means, including the invoicing of customers in the same currency as the source of the products, and the prompt settlement of inter-company balances utilizing a global netting system.  

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Woodward, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Woodward, Inc. and subsidiaries (the "Company") as of September 30, 2021 and 2020, the related consolidated statements of earnings, comprehensive earnings, shareholders' equity, and cash flows, for each of the three years in the period ended September 30, 2021, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2021, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Intangible Assets, net – Trade name — Refer to Notes 1 and 14 to the financial statements

Critical Audit Matter Description

The Company has one indefinitely lived intangible asset consisting of the Woodward L’Orange trade name (“trade name”).  As of September 30, 2021, the carrying value of the trade name is $67.2 million. The trade name is tested for impairment on an annual basis and more often if an event occurs or circumstances change that indicate the fair value of the trade name may be below its carrying amount. The Company completed its annual impairment test of the trade name as of July 31, 2021. The results of impairment test indicated the estimated fair value of the trade name was in excess of its carrying value and, accordingly, no impairment existed.

The fair value of the trade name was determined using discounted cash flows based on the relief from royalty method under the income approach.  This method incorporates various estimates and assumptions, the most significant being projected revenue growth rates, royalty rates and the present value of the forecasted cash flows based on the discount rate and terminal growth rate. The Company projects revenue growth rates and cash flows based on Woodward L’Orange’s current operational results, expected performance and operational strategies over a five-year period.  These projections are adjusted to reflect current economic conditions and demand for certain products and require considerable management judgment. Changes in these estimates and assumptions can have a significant impact on the fair value.

We identified the fair value of the trade name as a critical audit matter because of the significant judgments and assumptions management makes related to the projection of revenue growth rates and the selection of the discount rate, terminal growth rate and royalty rate. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s projection of revenue growth rates and selection of the discount rate, terminal growth rate and royalty rate.

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How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the projection of revenue growth rates and selection of the discount rate, terminal growth rate, and royalty rate used in determining the fair value of the trade name included the following, among others:

/s/ DELOITTE & TOUCHE LLP

Denver, Colorado

November 19, 2021

We have served as the Company's auditor since 2008.

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WOODWARD, INC.

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)

See accompanying Notes to Consolidated Financial Statements

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WOODWARD, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(In thousands)