Woodward, Inc. - Quarter Report: 2023 June (Form 10-Q)

10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2023

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

For the transition period from _____ to _____

Commission file number 000-08408

WOODWARD, INC.

(Exact name of registrant as specified in its charter)


Delaware		36-1984010
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1081 Woodward Way, Fort Collins, Colorado		80524
(Address of principal executive offices)		(Zip Code)

(970) 482-5811

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered

Common Stock, par value $0.001455 per share	WWD	NASDAQ Global Select Market

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 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of August 3, 2023, 60,417,600 shares of the registrant’s common stock with a par value of $0.001455 per share were outstanding.

TABLE OF CONTENTS


		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Consolidated Statements of Earnings	1
	Condensed Consolidated Statements of Comprehensive Earnings	2
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Cash Flows	4
	Condensed Consolidated Statements of Stockholders’ Equity	5
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
	Forward Looking Statements	29
	Overview	30
	Results of Operations	31
	Liquidity and Capital Resources	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	41
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 5.	Other Information	43
Item 6.	Exhibits	43
	Signatures	44

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2023			2022			2023			2022
Net sales	$	800,663		$	614,332		$	2,137,496		$	1,742,757
Costs and expenses:
Cost of goods sold		596,251			480,403			1,649,473			1,352,979
Selling, general and administrative expenses		64,983			46,490			203,748			152,920
Research and development costs		35,033			32,224			100,034			90,000
Restructuring charges		—			—			5,172			—
Interest expense		12,175			8,533			36,162			25,036
Interest income		(516	)		(353	)		(1,390	)		(1,494	)
Other (income) expense, net		(13,001	)		(3,252	)		(33,431	)		(18,813	)
Total costs and expenses		694,925			564,045			1,959,768			1,600,628
Earnings before income taxes		105,738			50,287			177,728			142,129
Income tax expense		21,139			10,841			28,012			24,472
Net earnings	$	84,599		$	39,446		$	149,716		$	117,657

Earnings per share:
Basic earnings per share	$	1.41		$	0.65		$	2.50		$	1.90
Diluted earnings per share	$	1.37		$	0.64		$	2.44		$	1.84

Weighted Average Common Shares Outstanding:
Basic		60,056			60,506			59,843			62,052
Diluted		61,591			62,088			61,250			63,937

See accompanying Notes to Condensed Consolidated Financial Statements

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(In thousands)

(Unaudited)


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2023			2022			2023			2022
Net earnings	$	84,599		$	39,446		$	149,716		$	117,657

Other comprehensive earnings:
Foreign currency translation adjustments		(5,654	)		(27,648	)		33,068			(34,707	)
Net gain (loss) on foreign currency transactions designated as hedges of net investments in foreign subsidiaries		139			2,887			(4,293	)		4,631
Taxes on changes in foreign currency translation adjustments		(353	)		(2,424	)		1,919			(3,873	)
Foreign currency translation and transactions adjustments, net of tax		(5,868	)		(27,185	)		30,694			(33,949	)

Unrealized (loss) gain on fair value adjustment of derivative instruments		(9,389	)		34,207			(44,073	)		58,987
Reclassification of net realized loss (gain) on derivatives to earnings		(1,429	)		(26,968	)		44,377			(43,299	)
Taxes on changes in derivative transactions		433			(254	)		99			(549	)
Derivative adjustments, net of tax		(10,385	)		6,985			403			15,139

Amortization of pension and other postretirement plan:
Net prior service cost		179			252			539			754
Net (gain) loss		(212	)		177			(615	)		551
Foreign currency exchange rate changes on pension and other postretirement benefit plan liabilities		(116	)		1,834			395			2,456
Taxes on changes in pension and other postretirement benefit plan liability adjustments, net of foreign currency exchange rate changes		92			(668	)		219			(1,074	)
Pension and other postretirement benefit plan adjustments, net of tax		(57	)		1,595			538			2,687
Total comprehensive earnings	$	68,289		$	20,841		$	181,351		$	101,534

See accompanying Notes to Condensed Consolidated Financial Statements

WOODWARD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)


	June 30,			September 30,
	2023			2022
ASSETS
Current assets:
Cash and cash equivalents	$	114,107		$	107,844
Accounts receivable, less allowance for uncollectible amounts of $8,700 and $3,922, respectively		732,805			609,964
Inventories		531,834			514,287
Income taxes receivable		37,973			5,179
Other current assets		73,758			74,695
Total current assets		1,490,477			1,311,969
Property, plant and equipment, net		910,544			910,472
Goodwill		798,575			772,559
Intangible assets, net		472,894			460,580
Deferred income tax assets		25,133			23,447
Other assets		311,940			327,419
Total assets	$	4,009,563		$	3,806,446
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt	$	23,500		$	66,800
Current portion of long-term debt		75,914			856
Accounts payable		223,091			230,519
Income taxes payable		43,220			34,655
Accrued liabilities		220,934			206,283
Total current liabilities		586,659			539,113
Long-term debt, less current portion		651,443			709,760
Deferred income tax liabilities		138,180			127,195
Other liabilities		547,491			529,256
Total liabilities		1,923,773			1,905,324
Commitments and contingencies (Note 22)
Stockholders' equity:
Preferred stock, par value $0.003 per share, 10,000 shares authorized, no shares issued		—			—
Common stock, par value $0.001455 per share, 150,000 shares authorized, 72,960 shares issued		106			106
Additional paid-in capital		326,712			293,540
Accumulated other comprehensive losses		(60,928	)		(92,563	)
Deferred compensation		2,817			6,781
Retained earnings		2,839,187			2,727,233
		3,107,894			2,935,097
Treasury stock at cost, 12,754 shares and 13,207 shares, respectively		(1,019,287	)		(1,027,194	)
Treasury stock held for deferred compensation, at cost, 56 shares and, 139 shares, respectively		(2,817	)		(6,781	)
Total stockholders' equity		2,085,790			1,901,122
Total liabilities and stockholders' equity	$	4,009,563		$	3,806,446

See accompanying Notes to Condensed Consolidated Financial Statements

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended June 30,
	2023			2022
Cash flows from operating activities:
Net earnings	$	149,716		$	117,657
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		89,301			91,258
Net loss (gain) on sales of assets and businesses		672			(1,545	)
Stock-based compensation		19,369			17,136
Deferred income taxes		545			(56	)
Changes in operating assets and liabilities:
Trade accounts receivable		(69,628	)		(6,745	)
Unbilled receivables (contract assets)		(49,890	)		(64,892	)
Costs to fulfill a contract		(9,279	)		(13,541	)
Inventories		(7,443	)		(93,818	)
Accounts payable and accrued liabilities		23,303			36,117
Contract liabilities		15,229			8,420
Income taxes		(29,635	)		5,277
Retirement benefit obligations		(779	)		(3,442	)
Other		24,149			(5,810	)
Net cash provided by operating activities		155,630			86,016

Cash flows from investing activities:
Payments for purchase of property, plant, and equipment		(57,142	)		(37,105	)
Proceeds from sale of assets		477			4
Proceeds from sale of the renewable power systems business and other related business		—			6,000
Business acquisition, net of cash acquired		878			—
Payments for short-term investments		(6,109	)		(9,619	)
Proceeds from sales of short-term investments		7,692			11,305
Net cash (used in) investing activities		(54,204	)		(29,415	)

Cash flows from financing activities:
Cash dividends paid		(37,762	)		(33,572	)
Proceeds from sales of treasury stock		26,888			20,283
Payments for repurchases of common stock		(26,369	)		(440,233	)
Borrowings on revolving lines of credit and short-term borrowings		1,538,900			477,400
Payments on revolving lines of credit and short-term borrowings		(1,582,200	)		(428,200	)
Payments of debt financing costs		(2,236	)		—
Payments of long-term debt and finance lease obligations		(536	)		(644	)
Net cash (used in) financing activities		(83,315	)		(404,966	)
Effect of exchange rate changes on cash and cash equivalents		(11,848	)		(396	)
Net change in cash and cash equivalents		6,263			(348,761	)
Cash and cash equivalents, including restricted cash, at beginning of year		107,844			448,462
Cash and cash equivalents, including restricted cash, at end of period	$	114,107		$	99,701

See accompanying Notes to Condensed Consolidated Financial Statements

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


	Number of shares								Stockholders' equity
														Accumulated other comprehensive (loss) earnings
	Common stock		Treasury stock			Treasury stock held for deferred compensation			Common stock		Additional paid-in capital			Foreign currency translation adjustments			Unrealized derivative gains (losses)			Minimum retirement benefit liability adjustments			Total accumulated other comprehensive (loss) earnings			Deferred compensation			Retained earnings			Treasury stock at cost			Treasury stock held for deferred compensation			Total stockholders' equity
Balances as of April 1, 2022		72,960		(11,427	)		(140	)	$	106	$	287,766		$	(39,668	)	$	(17,443	)	$	(6,026	)	$	(63,137	)	$	6,678		$	2,656,590		$	(829,446	)	$	(6,678	)	$	2,051,879
Net earnings		—		—			—			—		—			—			—			—			—			—			39,446			—			—			39,446
Other comprehensive earnings (loss), net of tax		—		—			—			—		—			(27,185	)		6,985			1,595			(18,605	)		—			—			—			—			(18,605	)
Cash dividends paid ($0.1900 per share)		—		—			—			—		—			—			—			—			—			—			(11,438	)		—			—			(11,438	)
Sales of treasury stock		—		18			—			—		(45	)		—			—			—			—			—			—			815			—			770
Purchase of treasury stock		—		(1,394	)		—			—		—			—			—			—			—			—			—			(155,618	)		—			(155,618	)
Stock-based compensation		—		—			—			—		3,179			—			—			—			—			—			—			—			—			3,179
Purchases/transfers of stock by/to deferred compensation		—		—			(1	)		—		—			—			—			—			—			68			—			—			(68	)		—
Distribution of stock from deferred compensation plan		—		—			1			—		—			—			—			—			—			15			—			—			(15	)		—
Balances as of June 30, 2022		72,960		(12,803	)		(140	)	$	106	$	290,900		$	(66,853	)	$	(10,458	)	$	(4,431	)	$	(81,742	)	$	6,761		$	2,684,598		$	(984,249	)	$	(6,761	)	$	1,909,613

Balances as of April 1, 2023		72,960		(13,022	)		(67	)	$	106	$	321,441		$	(49,932	)	$	4,573		$	741		$	(44,618	)	$	3,319		$	2,767,813		$	(1,032,688	)	$	(3,319	)	$	2,012,054
Net earnings		—		—			—			—		—			—			—			—			—			—			84,599			—			—			84,599
Other comprehensive earnings (loss), net of tax		—		—			—			—		—			(5,868	)		(10,385	)		(57	)		(16,310	)		—			—			—			—			(16,310	)
Cash dividends paid ($0.2200 per share)		—		—			—			—		—			—			—			—			—			—			(13,225	)		—			—			(13,225	)
Sales of treasury stock		—		268			—			—		1,440			—			—			—			—			—			—			13,401			—			14,841
Stock-based compensation		—		—			—			—		3,831			—			—			—			—			—			—			—			—			3,831
Purchases/transfers of stock by/to deferred compensation		—		—			—			—		—			—			—			—			—			34			—			—			(34	)		—
Distribution of stock from deferred compensation plan		—		—			11			—		—			—			—			—			—			(536	)		—			—			536			—
Balances as of June 30, 2023		72,960		(12,754	)		(56	)	$	106	$	326,712		$	(55,800	)	$	(5,812	)	$	684		$	(60,928	)	$	2,817		$	2,839,187		$	(1,019,287	)	$	(2,817	)	$	2,085,790

See accompanying Notes to Condensed Consolidated Financial Statements

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)


	Number of shares								Stockholders' equity
													Accumulated other comprehensive (loss) earnings
	Common stock		Treasury stock			Treasury stock held for deferred compensation			Common stock		Additional paid-in capital		Foreign currency translation adjustments			Unrealized derivative gains (losses)			Minimum retirement benefit liability adjustments			Total accumulated other comprehensive (loss) earnings			Deferred compensation			Retained earnings			Treasury stock at cost			Treasury stock held for deferred compensation			Total stockholders' equity

Balances as of September 30, 2021		72,960		(9,702	)		(167	)	$	106	$	261,735	$	(32,904	)	$	(25,597	)	$	(7,118	)		(65,619	)	$	7,949		$	2,600,513		$	(581,954	)	$	(7,949	)	$	2,214,781
Net earnings		—		—			—			—		—		—			—			—			—			—			117,657			—			—			117,657
Other comprehensive earnings (loss), net of tax		—		—			—			—		—		(33,949	)		15,139			2,687			(16,123	)		—			—			—			—			(16,123	)
Cash dividends paid ($0.5425 per share)		—		—			—			—		—		—			—			—			—			—			(33,572	)		—			—			(33,572	)
Sales of treasury stock		—		423			—			—		1,428		—			—			—			—			—			—			18,855			—			20,283
Common shares issued for benefit plans		—		150			—			—		10,601		—			—			—			—			—			—			6,567			—			17,168
Purchase of treasury stock		—		(3,674	)		—			—		—		—			—			—			—			—			—			(427,717	)		—			(427,717	)
Stock-based compensation		—		—			—			—		17,136		—			—			—			—			—			—			—			—			17,136
Purchases/transfers of stock by/to deferred compensation		—		—			(2	)		—		—		—			—			—			—			183			—			—			(183	)		—
Distribution of stock from deferred compensation plan		—		—			29			—		—		—			—			—			—			(1,371	)		—			—			1,371			—
Balances as of June 30, 2022		72,960		(12,803	)		(140	)	$	106	$	290,900	$	(66,853	)	$	(10,458	)	$	(4,431	)	$	(81,742	)	$	6,761		$	2,684,598		$	(984,249	)	$	(6,761	)	$	1,909,613

Balances as of September 30, 2022		72,960		(13,207	)		(139	)	$	106	$	293,540	$	(86,494	)	$	(6,215	)	$	146		$	(92,563	)	$	6,781		$	2,727,233		$	(1,027,194	)	$	(6,781	)	$	1,901,122
Net earnings		—		—			—			—		—		—			—			—			—			—			149,716			—			—			149,716
Other comprehensive earnings (loss), net of tax		—		—			—			—		—		30,694			403			538			31,635			—			—			—			—			31,635
Cash dividends paid ($0.6300 per share)		—		—			—			—		—		—			—			—			—			—			(37,762	)		—			—			(37,762	)
Sales of treasury stock		—		538			—			—		2,860		—			—			—			—			—			—			25,752			—			28,612
Common shares issued for benefit plans		—		189			—			—		10,943		—			—			—			—			—			—			8,524			—			19,467
Purchase of treasury stock		—		(274	)		—			—		—		—			—			—			—			—			—			(26,369	)		—			(26,369	)
Stock-based compensation		—		—			—			—		19,369		—			—			—			—			—			—			—			—			19,369
Purchases/transfers of stock by/to deferred compensation		—		—			(1	)		—		—		—			—			—			—			146			—			—			(146	)		—
Distribution of stock from deferred compensation plan		—		—			84			—		—		—			—			—			—			(4,110	)		—			—			4,110			—
Balances as of June 30, 2023		72,960		(12,754	)		(56	)	$	106	$	326,712	$	(55,800	)	$	(5,812	)	$	684		$	(60,928	)	$	2,817		$	2,839,187		$	(1,019,287	)	$	(2,817	)	$	2,085,790

See accompanying Notes to Condensed Consolidated Financial Statements

WOODWARD, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 1. Basis of presentation

The Condensed Consolidated Financial Statements of Woodward, Inc. (“Woodward” or the “Company”) as of June 30, 2023 and for the three and nine months ended June 30, 2023 and 2022, included herein, have not been audited by an independent registered public accounting firm. These unaudited Condensed Consolidated Financial Statements reflect all normal recurring adjustments that, in the opinion of management, are necessary to present fairly Woodward’s financial position as of June 30, 2023, and the statements of earnings, comprehensive earnings, cash flows, and changes in stockholders’ equity for the periods presented herein. The results of operations for the three and nine months ended June 30, 2023 and 2022 are not necessarily indicative of the operating results to be expected for other interim periods or for the full fiscal year. Dollar and share amounts contained in these unaudited Condensed Consolidated Financial Statements are in thousands, except per share amounts, unless otherwise noted.

The unaudited Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. Accordingly, these unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in Woodward’s most recent Annual Report on Form 10-K filed with the SEC and other financial information filed with the SEC.

Management is required to use estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported revenues and expenses recognized during the reporting period, and certain financial statement disclosures, in the preparation of the unaudited Condensed Consolidated Financial Statements included herein. Significant estimates in these unaudited Condensed Consolidated Financial Statements include allowances for credit losses; net realizable value of inventories; variable consideration including customer rebates earned and payable and early payment discounts; warranty reserves; useful lives of property and identifiable intangible assets; the evaluation of impairments of property, intangible assets, and goodwill; the provision for income tax and related valuation reserves; the valuation of derivative instruments; assumptions used in the determination of the funded status and annual expense of pension and postretirement employee benefit plans; the valuation of stock compensation instruments granted to employees, board members and any other eligible recipients; estimates of incremental borrowing rates used when estimating the present value of future lease payments; assumptions used when including renewal options or non-exercise of termination options in lease terms; estimates of total lifetime sales used in the recognition of revenue of deferred material rights and balance sheet classification of the related contract liability; estimates of total sales contract costs when recognizing revenue under the cost-to-cost method; and contingencies. Actual results could vary from Woodward’s estimates.

Note 2. New accounting standards

From time to time, the Financial Accounting Standards Board (“FASB”) or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an Accounting Standards Update (“ASU”).

In the time since the Company filed its most recent Annual Report on Form 10-K for the fiscal year ended September 30, 2022, no new accounting standards have been issued, or are pending issuance, that are expected to have a material impact on the Condensed Consolidated Financial Statements upon adoption.

Note 3. Revenue

The amount of revenue recognized as point in time or over time follows:


	Three Months Ended June 30, 2023						Three Months Ended June 30, 2022
	Aerospace		Industrial		Consolidated		Aerospace		Industrial		Consolidated
Point in time	$	194,807	$	208,597	$	403,404	$	154,323	$	119,808	$	274,131
Over time		285,724		111,535		397,259		247,389		92,812		340,201
Total net sales	$	480,531	$	320,132	$	800,663	$	401,712	$	212,620	$	614,332


	Nine Months Ended June 30, 2023						Nine Months Ended June 30, 2022
	Aerospace		Industrial		Consolidated		Aerospace		Industrial		Consolidated
Point in time	$	552,895	$	526,096	$	1,078,991	$	428,212	$	367,019	$	795,231
Over time		760,338		298,167		1,058,505		682,692		264,834		947,526
Total net sales	$	1,313,233	$	824,263	$	2,137,496	$	1,110,904	$	631,853	$	1,742,757

Accounts Receivable

Accounts receivable consisted of the following:


	June 30, 2023			September 30, 2022
Billed receivables
Trade accounts receivable	$	408,601		$	359,364
Other (Chinese financial institutions)		38,098			9,405
Total billed receivables		446,699			368,769
Current unbilled receivables (contract assets)		294,806			245,117
Total accounts receivable		741,505			613,886
Less: Allowance for uncollectible amounts		(8,700	)		(3,922	)
Total accounts receivable, net	$	732,805		$	609,964

As of June 30, 2023, “Other assets” on the Condensed Consolidated Balance Sheets includes $10,099 of unbilled receivables not expected to be invoiced and collected within a period of twelve months, compared to $6,649 as of September 30, 2022.

Accounts receivable in Woodward’s Condensed Consolidated Financial Statements represent the net amount expected to be collected, and an allowance for uncollectible amounts related to credit losses is established based on expected losses. Expected losses are estimated by reviewing specific customer accounts, taking into consideration accounts receivable aging, credit risk of the customers, and historical payment history, as well as current and forecasted economic conditions and other relevant factors.

The allowance for uncollectible amounts and change in expected credit losses for trade accounts receivable and unbilled receivables (contract assets) consisted of the following:


	Three Months Ended June 30,						Nine Months Ended June 30,
	2023			2022			2023			2022
Balance, beginning	$	9,949		$	3,141		$	3,922		$	3,664
Changes in estimates		77			356			6,463			783
Write-offs		(1,271	)		—			(1,601	)		(43	)
Other1		(55	)		(454	)		(84	)		(1,361	)
Balance, ending	$	8,700		$	3,043		$	8,700		$	3,043

(1)

Includes effects of foreign exchange rate changes during the period.

Contract liabilities

Contract liabilities consisted of the following:


	June 30, 2023				September 30, 2022
	Current		Noncurrent		Current		Noncurrent
Deferred revenue from material rights from GE joint venture formation	$	6,049	$	235,686	$	5,754	$	234,516
Deferred revenue from advanced invoicing and/or prepayments from customers		4,771		3,277		4,120		38
Liability related to customer supplied inventory		12,841		—		12,442		—
Deferred revenue from material rights related to engineering and development funding		7,906		173,645		8,347		161,791
Net contract liabilities	$	31,567	$	412,608	$	30,663	$	396,345

Woodward recognized revenue of $4,645 in the three months and $18,829 in the nine months ended June 30, 2023 from contract liabilities balances recorded as of October 1, 2022, compared to $5,140 in the three months ended and $18,359 in the nine months ended June 30, 2022 from contract liabilities balances recorded as of October 1, 2021.

Remaining performance obligations

Remaining performance obligations related 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 as of June 30, 2023 was $2,120,096, compared to $1,558,588 as of September 30, 2022, the majority of which relates to Woodward’s Aerospace segment in both periods. Woodward expects to recognize almost all of these remaining performance obligations within two years after June 30, 2023.

Remaining performance obligations related to material rights that have not yet been recognized in revenue as of June 30, 2023 was $481,417, compared to $448,370 as of September 30, 2022, of which $4,594 is expected to be recognized in the remainder of fiscal year 2023, $15,510 is expected to be recognized in fiscal year 2024, and the remaining balance is expected to be recognized thereafter. Woodward expects to recognize revenue from performance obligations related to material rights over the life of the underlying programs, which may be as long as forty years.

Disaggregation of Revenue

Woodward designs, produces, and services reliable, efficient, low-emission, and high-performance energy control products for diverse applications in markets throughout the world. Woodward reports financial results for each of its Aerospace and Industrial reportable segments. Woodward further disaggregates its revenue from contracts with customers by primary market as Woodward believes this best depicts how the nature, amount, timing, and uncertainty of its revenue and cash flows are affected by economic factors.

Revenue by primary market for the Aerospace reportable segment was as follows:


	Three Months Ended June 30,				Nine Months Ended June 30,
	2023		2022		2023		2022
Commercial OEM	$	186,173	$	131,968	$	484,319	$	359,683
Commercial aftermarket		139,518		108,695		405,606		303,335
Defense OEM		101,008		115,205		278,577		318,392
Defense aftermarket		53,832		45,844		144,731		129,494
Total Aerospace segment net sales	$	480,531	$	401,712	$	1,313,233	$	1,110,904

Revenue by primary market for the Industrial reportable segment was as follows:


	Three Months Ended June 30,				Nine Months Ended June 30,
	2023		2022		2023		2022
Reciprocating engines	$	242,040	$	154,090	$	612,655	$	469,087
Industrial turbines		78,092		58,530		211,608		162,766
Total Industrial segment net sales	$	320,132	$	212,620	$	824,263	$	631,853

The customers who each account for approximately 10% or more of net sales of each of Woodward’s reportable segments are as follows:


	Three Months Ended June 30, 2023	Three Months Ended June 30, 2022
Aerospace	Raytheon Technologies, General Electric Company, The Boeing Company	The Boeing Company, Raytheon Technologies, General Electric Company
Industrial	Weichai Westport, Rolls-Royce PLC, Caterpillar, Inc.	Rolls-Royce PLC, Wartsila, Caterpillar, Inc.


	Nine Months Ended June 30, 2023	Nine Months Ended June 30, 2022
Aerospace	Raytheon Technologies, General Electric Company, The Boeing Company	Raytheon Technologies, The Boeing Company, General Electric Company
Industrial	Rolls-Royce PLC, Caterpillar, Inc.	Rolls-Royce PLC, Wartsila, Caterpillar, Inc.

Note 4. Earnings per share

Basic earnings per share is computed by dividing net earnings available to common stockholders by the weighted-average number of shares of common stock outstanding for the period.

Diluted earnings per share reflects the weighted-average number of shares outstanding after consideration of the dilutive effect of stock options and restricted stock.

The following is a reconciliation of net earnings to basic earnings per share and diluted earnings per share:


	Three Months Ended June 30,				Nine Months Ended June 30,
	2023		2022		2023		2022
Numerator:
Net earnings	$	84,599	$	39,446	$	149,716	$	117,657
Denominator:
Basic shares outstanding		60,056		60,506		59,843		62,052
Dilutive effect of stock options and restricted stock		1,535		1,582		1,407		1,885
Diluted shares outstanding		61,591		62,088		61,250		63,937
Income per common share:
Basic earnings per share	$	1.41	$	0.65	$	2.50	$	1.90
Diluted earnings per share	$	1.37	$	0.64	$	2.44	$	1.84

The following stock option grants were outstanding but were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive:


	Three Months Ended June 30,				Nine Months Ended June 30,
	2023		2022		2023		2022
Options		564		1,048		1,554		479
Weighted-average option price	$	114.70	$	110.49	$	102.06	$	117.45

The weighted-average shares of common stock outstanding for basic and diluted earnings per share included the weighted-average treasury stock shares held for deferred compensation obligations of the following:


	Three Months Ended June 30,				Nine Months Ended June 30,
	2023		2022		2023		2022
Weighted-average treasury stock shares held for deferred compensation obligations		62		140		96		154

Note 5. Leases

Lessee arrangements

Woodward has entered into operating leases for certain facilities and equipment with terms in excess of one year under agreements that expire at various dates. Some leases require the payment of property taxes, insurance, maintenance costs, or other similar costs in addition to rental payments. Woodward has also entered into finance leases for equipment with terms in excess of one year under agreements that expire at various dates.

Lease-related assets and liabilities were as follows:


	Classification on the Condensed Consolidated Balance Sheets	June 30, 2023		September 30, 2022
Assets:
Operating lease	Other assets	$	25,100	$	25,144
Finance lease	Property, plant and equipment, net		4,396		5,474
Total lease assets		$	29,496	$	30,618

Current liabilities:
Operating lease	Accrued liabilities	$	4,764	$	4,587
Finance lease	Current portion of long-term debt		914		856
Noncurrent liabilities:
Operating lease	Other liabilities		20,924		21,443
Finance lease	Long-term debt, less current portion		3,770		4,405
Total lease liabilities		$	30,372	$	31,291

Lease-related expenses were as follows:


	Three Months Ended June 30,				Nine Months Ended June 30,
	2023		2022		2023		2022
Operating lease expense	$	1,563	$	1,549	$	4,636	$	4,809
Amortization of finance lease assets		251		116		663		290
Interest on finance lease liabilities		43		14		117		30
Variable lease expense		225		226		680		832
Short-term lease expense		44		44		152		134
Sublease (income)1		—		—		—		(192	)
Total lease expense	$	2,126	$	1,949	$	6,248	$	5,903

(1)

Relates to two separate subleases Woodward entered into for a leased manufacturing building in Niles, Illinois, each of which expired during fiscal year 2022.

Lease-related supplemental cash flow information was as follows:


	Nine Months Ended June 30,
	2023		2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	3,879	$	4,136
Operating cash flows for finance leases		117		30
Financing cash flows for finance leases		535		690
Right-of-use assets obtained in exchange for recorded lease obligations:
Operating leases		1,841		9,997
Finance leases		48		1,260

Lessor arrangements

Woodward has assessed its manufacturing contracts and concluded that certain of the contracts for the manufacture of customer products met the criteria to be considered a leasing arrangement (“embedded leases”) with Woodward as the lessor. The specific manufacturing contracts that met the criteria were those that utilized Woodward property, plant, and equipment and which are substantially (more than 90%) dedicated to the manufacturing of the product(s) for a single customer. Woodward has dedicated manufacturing lines with four of its customers representing embedded leases, all of which qualified as operating leases with undefined quantities of future customer purchase commitments.

Although Woodward expects to allocate some portion of future net sales to these customers to embedded lessor arrangements, it cannot provide expected future undiscounted lease payments from property, plant, and equipment leased to customers as of June 30, 2023. If, in the future, customers reduce purchases of related products from Woodward, the Company believes it will derive additional value from the underlying equipment by repurposing its use to support other customer arrangements.

Revenue from contracts with customers that included embedded operating leases, which is included in “Net sales” in the Condensed Consolidated Statements of Earnings, was $1,466 for the three months and $4,252 for the nine months ended June 30, 2023, compared to $1,303 for the three months and $3,969 for the nine months ended June 30, 2022.

The carrying amount of property, plant, and equipment leased to others through embedded leasing arrangements, included in “Property, plant, and equipment, net” on the Condensed Consolidated Balance Sheets, follows:


	June 30, 2023			September 30, 2022
Property, plant and equipment leased through embedded leasing arrangements	$	46,916		$	44,912
Less accumulated depreciation		(28,249	)		(25,508	)
Property, plant and equipment leased through embedded leasing arrangements, net	$	18,667		$	19,404

Note 6. Joint venture

In fiscal year 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”) to develop, manufacture, and support fuel systems for specified existing and all future GE commercial aircraft engines that produce thrust in excess of fifty thousand pounds.

Unamortized deferred revenue from material rights in connection with the JV formation included:


	June 30, 2023		September 30, 2022
Accrued liabilities	$	6,049	$	5,754
Other liabilities		235,686		234,516

Amortization of the deferred revenue (material right) recognized as an increase to sales was $1,395 for the three months and $3,429 for the nine months ended June 30, 2023, and $905 for the three months and $2,632 for the nine months ended June 30, 2022.

As part of the JV formation, GE pays contingent consideration to Woodward consisting of fifteen annual payments of $4,894 per year, which began in the third quarter of fiscal year 2017, subject to certain claw-back conditions. Woodward received its annual payments of $4,894 during the three months ended March 31, 2023 and 2022, which were recorded as deferred income and included in “Net cash provided by operating activities” on the Condensed Consolidated Statements of Cash Flows.

Other income related to Woodward’s equity interest in the earnings of the JV was as follows:


	Three Months Ended June 30,				Nine Months Ended June 30,
	2023		2022		2023		2022
Other income	$	8,836	$	3,860	$	21,877	$	12,675

Cash distributions to Woodward from the JV, recognized in “Other, net” in “Net cash provided by operating activities” on the Condensed Consolidated Statements of Cash Flows, were as follows:


	Three Months Ended June 30,				Nine Months Ended June 30,
	2023		2022		2023		2022
Cash distributions	$	9,000	$	4,000	$	19,000	$	13,000

Net sales to the JV were as follows:


	Three Months Ended June 30,				Nine Months Ended June 30,
	2023		2022		2023		2022
Net sales1	$	11,568	$	6,698	$	25,365	$	19,245

(1)

Net sales included a reduction of $14,396 for the three months and $34,854 for the nine months ended June 30, 2023 related to royalties owed to the JV by Woodward on sales by Woodward directly to third party aftermarket customers, compared to a reduction to sales of $7,912 for the three months and $21,058 for the nine months ended June 30, 2022.

The Condensed Consolidated Balance Sheets include “Accounts receivable” related to amounts the JV owed Woodward, “Accounts payable” related to amounts Woodward owed the JV, and “Other assets” related to Woodward’s net investment in the JV, as follows:


	June 30, 2023		September 30, 2022
Accounts receivable	$	6,756	$	4,172
Accounts payable		5,092		4,069
Other assets		11,059		8,181

Note 7. Financial instruments and fair value measurements

The table below presents information about Woodward’s financial assets that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques Woodward utilized to determine such fair value as defined by the U.S. GAAP fair value hierarchy.


	At June 30, 2023								At September 30, 2022
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial assets:
Investments in term deposits with foreign banks	$	28,313	$	—	$	—	$	28,313	$	37,605	$	—	$	—	$	37,605
Equity securities		26,549		—		—		26,549		22,800		—		—		22,800
Cross-currency interest rate swaps		—		—		—		—		—		38,168		—		38,168
Total financial assets	$	54,862	$	—	$	—	$	54,862	$	60,405	$	38,168	$	—	$	98,573

Financial liabilities:
Cross-currency interest rate swaps	$	—	$	1,987	$	—	$	1,987	$	—	$	—	$	—	$	—
Total financial liabilities	$	—	$	1,987	$	—	$	1,987	$	—	$	—	$	—	$	—

Investments in term deposits with foreign banks: Woodward’s foreign subsidiaries sometimes invest excess cash in various highly liquid financial instruments that Woodward believes are with creditworthy financial institutions. Such investments are reported in “Cash and cash equivalents” at fair value, with realized gains from interest income recognized in earnings. The carrying value of Woodward’s investments in term deposits with foreign banks are considered equal to the fair value given the highly liquid nature of the investments.

Equity securities: Woodward holds marketable equity securities, through investments in various mutual funds, related to its deferred compensation program. Based on Woodward’s intentions regarding these instruments, marketable equity securities are classified as trading securities. The trading securities are reported at fair value, with realized gains and losses recognized in “Other (income) expense, net” on the Condensed Consolidated Statements of Earnings. The trading securities are included in “Other assets” in the Condensed Consolidated Balance Sheets. The fair values of Woodward’s trading securities are based on the quoted market prices for the net asset value of the various mutual funds.

Cross-currency interest rate swaps: Woodward holds cross-currency interest rate swaps, which are accounted for at fair value. The swaps in an asset position are included in “Other current assets” and “Other assets,” and swaps in a liability position are included in “Accrued liabilities” and “Other liabilities” in the Condensed Consolidated Balance Sheets. The fair values of Woodward’s cross-currency interest rate swaps are determined using a market approach that is based on observable inputs other than quoted market prices, including contract terms, interest rates, currency rates, and other market factors.

Cash, trade accounts receivable, accounts payable, and short-term borrowings are not remeasured to fair value, as the carrying cost of each approximates its respective fair value.

The estimated fair values and carrying costs of other financial instruments that are not required to be remeasured at fair value in the Condensed Consolidated Balance Sheets were as follows:


		At June 30, 2023				At September 30, 2022
	Fair Value Hierarchy Level	Estimated Fair Value		Carrying Cost		Estimated Fair Value		Carrying Cost
Assets:
Notes receivable from municipalities	2	$	8,974	$	8,794	$	9,010	$	8,992
Investments in short-term time deposits	2		6,159		6,189		8,026		7,893
Liabilities:
Long-term debt	2		674,844		728,590		646,696		712,054

In connection with certain economic incentives related to Woodward’s development of a second campus in the greater-Rockford, Illinois area for its Aerospace segment and Woodward’s development of a new campus at its corporate headquarters in Fort Collins, Colorado, Woodward received long-term notes from municipalities within the states of Illinois and Colorado. The fair value of the long-term notes was estimated based on a model that discounted future principal and interest payments received at an interest rate available to Woodward at the end of the period for similarly rated municipal notes of similar maturity, which is a level 2 input as defined by the U.S. GAAP fair value hierarchy. The interest rates used to estimate the fair value of the long-term notes were 2.7% at June 30, 2023 and 3.5% at September 30, 2022.

From time to time, certain of Woodward’s foreign subsidiaries will invest excess cash in short-term time deposits with a fixed maturity date of longer than three months but less than one year from the date of the deposit. Woodward believes that the investments are with creditworthy financial institutions. The fair value of the investments in short-term time deposits was estimated based on a model that discounted future principal and interest payments to be received at an interest rate available to the foreign subsidiary entering into the investment for similar short-term time deposits of similar maturity. This was determined to be a level 2 input as defined by the U.S. GAAP fair value hierarchy. The interest rates used to estimate the fair value of the short-term time deposits were 7.0% at June 30, 2023 and 6.1% at September 30, 2022.

The fair value of long-term debt was estimated based on the prices of debt of comparable type and maturity available to Woodward at the end of the period, which is a level 2 input as defined by the U.S. GAAP fair value hierarchy. The weighted-average interest rates used to estimate the fair value of long-term debt were 5.6% at June 30, 2023 and September 30, 2022.

Woodward does not have expected credit losses related to any financial assets that are not required to be remeasured at fair value.

Note 8. Derivative instruments and hedging activities

Derivative instruments not designated or qualifying as hedging instruments

In May 2020, Woodward entered into a floating-rate cross-currency interest rate swap (the “2020 Floating-Rate Cross-Currency Swap”), with a notional value of $45,000, and five fixed-rate cross-currency interest rate swap agreements (the “2020 Fixed-Rate Cross-Currency Swaps”), with an aggregate notional value of $400,000, which effectively reduced the interest rates on the underlying fixed and floating-rate debt, respectively, under the 2018 Notes (as defined in Note 15, Credit Facilities, short-term borrowings and long-term debt, in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of Woodward’s most recently filed Form 10-K) and Woodward’s then existing revolving credit agreement.

The net interest income of the cross-currency interest rate swaps is recorded as a reduction to “Interest expense” in Woodward’s Condensed Consolidated Statements of Earnings. The 2020 Floating-Rate Cross-Currency Swap expired on May 31, 2023 and, as such, is no longer recorded on the Condensed Consolidated Balance Sheets. During the nine months ended June 30, 2023, $63 was reclassified from Accumulated other comprehensive losses to interest expense on the Condensed Consolidated Statement of Earnings. As of June 30, 2023, the total notional value of the 2020 Fixed-Rate Cross-Currency Swaps was $400,000. See Note 7, Financial Instruments and fair value measurements for the related fair value of the derivative instruments as of June 30, 2023.

Derivatives instruments in fair value hedging relationships

In May 2020, Woodward entered into a US dollar denominated intercompany loan payable with identical terms and notional value as the 2020 Floating-Rate Cross-Currency Swap, together with a reciprocal intercompany floating-rate cross-currency interest rate swap. The agreements were entered into by Woodward Barbados Euro Financing SRL (“Euro Barbados”), a wholly owned subsidiary of Woodward. The US dollar denominated intercompany loan and reciprocal

intercompany floating-rate cross-currency interest rate swap are designated as a fair value hedge under the criteria prescribed in ASC 815. The objective of the derivative instrument is to hedge against the foreign currency exchange risk attributable to the spot remeasurement of the US dollar denominated intercompany loan, as Euro Barbados maintains a Euro functional currency.

For each floating-rate intercompany cross-currency interest rate swap, only the change in the fair value related to the cross-currency basis spread, or excluded component, of the derivative instrument is recognized in accumulated other comprehensive income (“OCI”). The remaining change in the fair value of the derivative instrument is recognized in foreign currency transaction gain or loss included in “Selling, general and administrative costs” in Woodward’s Condensed Consolidated Statements of Earnings. The change in the fair value of the derivative instrument in foreign currency transaction gain or loss offsets the change in the spot remeasurement of the intercompany Euro and US dollar denominated loans. Hedge effectiveness is assessed based on the fair value changes of the derivative instrument, after excluding any fair value changes related to the cross-currency basis spread. The initial cost of the cross-currency basis spread is recorded in earnings each period through the swap accrual process. There are no credit-risk-related contingent features associated with the intercompany floating-rate cross-currency interest rate swap.

Derivative instruments in cash flow hedging relationships

In May 2020, Woodward entered into five US dollar intercompany loans payable, with identical terms and notional values of each tranche of the 2020 Fixed-Rate Cross-Currency Swaps, together with reciprocal fixed-rate intercompany cross-currency interest rate swaps. The agreements were entered into by Euro Barbados and are designated as cash flow hedges under the criteria prescribed in ASC 815. The objective of these derivative instruments is to hedge the risk of variability in cash flows attributable to the foreign currency exchange risk of cash flows for future principal and interest payments associated with the US dollar denominated intercompany loans over a thirteen-year period, as Euro Barbados maintains a Euro functional currency.

For each of the fixed-rate intercompany cross-currency interest rate swaps, changes in the fair values of the derivative instruments are recognized in accumulated OCI and reclassified to foreign currency transaction gain or loss included in “Selling, general and administrative costs” in Woodward’s Condensed Consolidated Statements of Earnings. Reclassifications out of accumulated OCI of the change in fair value occur each reporting period based upon changes in the spot rate remeasurement of the Euro and US dollar denominated intercompany loans, including associated interest. Hedge effectiveness is assessed based on the fair value changes of the derivative instruments and such hedges are deemed to be highly effective in offsetting exposure to variability in foreign exchange rates. There are no credit-risk-related contingent features associated with these fixed-rate cross-currency interest rate swaps.

Derivatives instruments in net investment hedging relationships

On September 23, 2016, Woodward and Woodward International Holding B.V., a wholly owned subsidiary of Woodward organized under the laws of The Netherlands (the “BV Subsidiary”), each entered into a note purchase agreement (the “2016 Note Purchase Agreement”) relating to the sale by Woodward and the BV Subsidiary of an aggregate principal amount of €160,000 of senior unsecured notes in a series of private placement transactions. Woodward issued €40,000 aggregate principal amount of Woodward’s Series M Senior Notes due September 23, 2026 (the “Series M Notes”). Woodward designated the Series M Notes as a hedge of a foreign currency exposure of Woodward’s net investment in its Euro denominated functional currency subsidiaries. Related to the Series M Notes, included in foreign currency translation adjustments within total comprehensive (losses) earnings are net foreign exchange gains of $139 for the three months and net foreign exchange losses of $4,293 for the nine months ended June 30, 2023, compared to net foreign exchange gains of $2,887 for the three months and $4,631 for the nine months ended June 30, 2022.

Impact of derivative instruments designated as qualifying hedging instruments

The following table discloses the amount of (income) expense recognized in earnings on derivative instruments designated as qualifying hedging instruments:


		Three months ended June 30,						Nine months ended June 30,
Derivatives in:	Location	2023			2022			2023		2022
Cross-currency interest rate swap agreement designated as fair value hedges	Selling, general and administrative expenses	$	2		$	(1,087	)	$	939	$	(2,006	)
Cross-currency interest rate swap agreements designated as cash flow hedges	Selling, general and administrative expenses		(1,431	)		(25,881	)		43,438		(41,293	)
		$	(1,429	)	$	(26,968	)	$	44,377	$	(43,299	)

The following table discloses the amount of (gain) loss recognized in accumulated OCI on derivative instruments designated as qualifying hedging instruments:


		Three months ended June 30,						Nine months ended June 30,
Derivatives in:	Location	2023			2022			2023		2022
Cross-currency interest rate swap agreement designated as fair value hedges	Selling, general and administrative expenses	$	(42	)	$	(903	)	$	875	$	(1,960	)
Cross-currency interest rate swap agreements designated as cash flow hedges	Selling, general and administrative expenses		9,431			(33,304	)		43,198		(57,027	)
		$	9,389		$	(34,207	)	$	44,073	$	(58,987	)

The following table discloses the amount of (gain) loss reclassified from accumulated OCI into earnings on derivative instruments designated as qualifying hedging instruments:


		Three months ended June 30,						Nine months ended June 30,
Derivatives in:	Location	2023			2022			2023		2022
Cross-currency interest rate swap agreement designated as fair value hedges	Selling, general and administrative expenses	$	2		$	(1,087	)	$	939	$	(2,006	)
Cross-currency interest rate swap agreements designated as cash flow hedges	Selling, general and administrative expenses		(1,431	)		(25,881	)		43,438		(41,293	)
		$	(1,429	)	$	(26,968	)	$	44,377	$	(43,299	)

The remaining unrecognized gains and losses in Woodward’s Condensed Consolidated Balance Sheets associated with derivative instruments that were previously entered into by Woodward, which are classified in accumulated OCI, were net losses of $6,034 as of June 30, 2023 and $6,338 as of September 30, 2022.

Note 9. Supplemental statement of cash flows information


	Nine Months Ended June 30,
	2023		2022
Interest paid, net of amounts capitalized	$	31,116	$	23,509
Income taxes paid		60,334		25,625
Income tax refunds received		1,459		7,240
Non-cash activities:
Purchases of property, plant and equipment on account		2,612		4,386
Common shares issued from treasury to settle benefit obligations		19,467		17,168

Note 10. Acquisitions

On August 2, 2022, we entered into a series of Purchase Agreements with one of our Asia pacific channel partners, PM Control PLC (the “PM Agreements”). Pursuant to the PM Agreements, we agreed to acquire business assets and shares of stock of PM Control PLC and its affiliates (collectively, “PM Control”), for a total consideration (net of a working capital adjustment, excluding cash acquired from the acquisition, and including the settlement of pre‐existing relationships) of

$21,421 (the “PM Acquisition”). The PM Acquisition closed on August 31, 2022 (the “PM Closing”), and PM Control PLC became a wholly owned subsidiary of the Company at that time.

ASC Topic 805, “Business Combinations” (“ASC 805”), provides a framework to account for acquisition transactions under U.S. GAAP. The purchase price of PM Control, prepared consistent with the required ASC 805 framework, is allocated as follows:


Cash paid to Sellers	$	22,890
Working capital adjustment		(878	)
Less acquired cash and restricted cash		(1,341	)
Plus settlement of pre-existing relationships		750
Total purchase price	$	21,421

The allocation of the purchase price to the assets acquired and liabilities assumed was finalized as of June 30, 2023 using the purchase method of accounting in accordance with ASC 805. Assets acquired and liabilities assumed in the transaction were recorded at their acquisition date fair values, while transaction costs associated with the acquisition were expensed as incurred. Woodward’s allocation was based on an evaluation of the appropriate fair values and represents management’s best estimate.

The following table summarizes, which is final as of June 30, 2023, the estimated fair values of the assets acquired and liabilities assumed at the PM Closing:


Accounts receivable	$	4,334
Inventories		2,464
Other current assets		386
Property, plant, and equipment		2,488
Goodwill		8,705
Intangible assets		8,874
Total assets acquired		27,251
Other current liabilities		(2,703	)
Deferred income tax liabilities		(1,842	)
Other noncurrent liabilities		(1,285	)
Total liabilities assumed		(5,830	)
Net assets acquired	$	21,421

During the first quarter of fiscal year 2023, we made certain measurement period adjustments to the acquired assets and the assumed liabilities due to clarification of information utilized to determine fair value during the measurement period. The measurement period adjustment was related to the PM Control trade name. Management determined that the PM Control trade name would no longer be used after calendar year 2023, thus resulting in a measurement period adjustment of $1,042, which reduced intangible assets and increased goodwill. Additionally, in the first quarter of 2023, a working capital adjustment was made that resulted in a reduction of goodwill of $863.

The final purchase price allocation resulted in the recognition of $8,705 of goodwill, which is expected to be non‐deductible for tax purposes. The Company has included all the goodwill in its Industrial segment. The goodwill represents the estimated value of potential expansion with new customers, the opportunity to further develop sales opportunities with new customers, and other synergies expected to be achieved through the integration of PM Control with Woodward’s Industrial segment.

A summary of the intangible assets acquired, weighted‐average useful lives, and amortization methods follows:


	Estimated Amounts		Weighted- Average Useful Life	Amortization Method
Intangible assets with finite lives:
Customer relationships and contracts	$	8,332	11 years	Straight-line
Trade name		542	15 months	Straight-line
Total	$	8,874

Future amortization expense associated with the acquired intangibles for the fiscal year ended September 30, 2023, is expected to be $1,191, $865 for the fiscal year ended September 30, 2024, and $757 for the next three fiscal years ended September 30, 2025, 2026, and 2027.

We have not presented pro forma results because the PM Acquisition was not deemed significant at the date of PM Closing.

Note 11. Inventories


	June 30, 2023			September 30, 2022
Raw materials	$	145,513		$	126,264
Work in progress		129,080			123,005
Component parts(1)		337,004			329,962
Finished goods		80,194			70,019
Customer supplied inventory		12,841			12,442
On-hand inventory for which control has transferred to the customer		(172,798	)		(147,405	)
	$	531,834		$	514,287

(1)

Component parts include items that can be sold separately as finished goods or included in the manufacture of other products.

Note 12. Property, plant, and equipment


	June 30, 2023			September 30, 2022
Land and land improvements	$	86,213		$	84,057
Buildings and building improvements		588,298			555,387
Leasehold improvements		20,488			19,392
Machinery and production equipment		802,907			779,514
Computer equipment and software		119,484			122,670
Office furniture and equipment		41,838			39,749
Other		20,125			20,162
Construction in progress		53,741			58,789
		1,733,094			1,679,720
Less accumulated depreciation		(822,550	)		(769,248	)
Property, plant, and equipment, net	$	910,544		$	910,472

Woodward had depreciation expense as follows:


	Three Months Ended June 30,				Nine Months Ended June 30,
	2023		2022		2023		2022
Depreciation expense	$	20,551	$	20,618	$	61,212	$	62,674

Note 13. Goodwill


	September 30, 2022		Additions		Effects of Foreign Currency Translation		June 30, 2023
Aerospace	$	455,423	$	—	$	—	$	455,423
Industrial		317,136		180		25,836		343,152
Consolidated	$	772,559	$	180	$	25,836	$	798,575

Woodward tests goodwill for impairment during the fourth quarter of each fiscal year and at any time there is an indication that goodwill is more-likely-than-not impaired (commonly referred to as a triggering event). Woodward’s goodwill impairment test in the fourth quarter of fiscal year 2022 resulted in no impairment.

Note 14. Intangible assets, net


	June 30, 2023							September 30, 2022
	Gross Carrying Value		Accumulated Amortization			Net Carrying Amount		Gross Carrying Value		Accumulated Amortization			Net Carrying Amount
Intangible assets with finite lives:
Customer relationships and contracts:
Aerospace	$	281,683	$	(233,002	)	$	48,681	$	281,683	$	(223,565	)	$	58,118
Industrial		388,771		(87,293	)		301,478		352,917		(66,812	)		286,105
Total	$	670,454	$	(320,295	)	$	350,159	$	634,600	$	(290,377	)	$	344,223
Intellectual property:
Aerospace	$	—	$	—		$	—	$	—	$	—		$	—
Industrial		11,794		(11,794	)		—		12,361		(12,361	)		—
Total	$	11,794	$	(11,794	)	$	—	$	12,361	$	(12,361	)	$	—
Process technology:
Aerospace	$	76,370	$	(70,880	)	$	5,490	$	76,370	$	(69,471	)	$	6,899
Industrial		85,370		(31,335	)		54,035		78,524		(27,464	)		51,060
Total	$	161,740	$	(102,215	)	$	59,525	$	154,894	$	(96,935	)	$	57,959
Other intangibles:
Aerospace	$	—	$	—		$	—	$	—	$	—		$	—
Industrial		561		(392	)		169		1,560		—			1,560
Total	$	561	$	(392	)	$	169	$	1,560	$	—		$	1,560
Intangible asset with indefinite life:
Trade name:
Aerospace	$	—	$	—		$	—	$	—	$	—		$	—
Industrial		63,041		—			63,041		56,838		—			56,838
Total	$	63,041	$	—		$	63,041	$	56,838	$	—		$	56,838
Total intangibles:
Aerospace	$	358,053	$	(303,882	)	$	54,171	$	358,053	$	(293,036	)	$	65,017
Industrial		549,537		(130,814	)		418,723		502,200		(106,637	)		395,563
Consolidated Total	$	907,590	$	(434,696	)	$	472,894	$	860,253	$	(399,673	)	$	460,580

Woodward tests the indefinite lived trade name intangible asset for impairment during the fourth quarter of each fiscal year and at any time there is an indication the indefinite lived trade name intangible asset is more-likely-than-not impaired (commonly referred to as a triggering event). Woodward’s impairment test for the indefinite lived trade name intangible asset in the fourth quarter of fiscal year 2022 resulted in no impairment.

Woodward recorded amortization expense associated with intangibles of the following:


	Three Months Ended June 30,				Nine Months Ended June 30,
	2023		2022		2023		2022
Amortization expense	$	9,493	$	9,309	$	28,089	$	28,584

Future amortization expense associated with intangibles is expected to be:


Year Ending September 30:
2023 (remaining)	$	10,019
2024		32,919
2025		27,806
2026		27,745
2027		27,670
Thereafter		283,694
	$	409,853

Note 15. Credit facilities, short-term borrowings and long-term debt

Revolving credit facility

Woodward maintains a $1,000,000 revolving credit facility established under a revolving credit agreement among Woodward, a syndicate of lenders and Wells Fargo Bank, National Association, as administrative agent, which provides for

the option to increase available borrowings up to $1,500,000, subject to lenders’ participation (as amended in November 2021, the “Amended and Restated Revolving Credit Agreement”). On October 21, 2022, Woodward amended the Amended and Restated Revolving Credit Agreement (the “Second Amended and Restated Revolving Credit Agreement”) to, among other things, (i) extend the termination date of the revolving loan commitments of all the lenders from June 19, 2024 to October 21, 2027, (ii) remove the covenants restricting investments, acquisitions, dividends, and distributions, and (iii) subject to removal from the Company’s existing note purchase agreements or the termination or maturation of such note purchase agreements, remove the minimum consolidated net worth covenant. Borrowings under the Second Amended and Restated Revolving Credit Agreement can be made by Woodward and certain of its foreign subsidiaries in U.S. dollars or in foreign currencies other than the U.S. dollar and generally bear interest at the Euro Interbank Offered Rate (“Euribor”), Sterling Overnight Index Average (“SONIA”), Tokyo Interbank Offered Rate (“TIBOR”), and Secured Overnight Financing Rate (“SOFR”) base rates plus 0.875% to 1.75%.

Under the Second Amended and Restated Revolving Credit Agreement, there were $23,500 in principal amount of borrowings outstanding as of June 30, 2023 at an effective interest rate of 6.33%. As of June 30, 2023, all of the borrowings outstanding were classified as short-term borrowings based on Woodward's intent and ability to pay this amount in the next twelve months. As of September 30, 2022, there were $66,800 in principal amount of borrowings outstanding under the Amended and Restated Revolving Credit Agreement at an effective interest rate of 4.24%.

Short-term borrowings

Woodward has other foreign lines of credit and foreign overdraft facilities at various financial institutions, which are generally reviewed annually for renewal and are subject to the usual terms and conditions applied by the financial institutions. Pursuant to the terms of the related facility agreements, Woodward’s foreign performance guarantee facilities are limited in use to providing performance guarantees to third parties. There were no borrowings outstanding on Woodward’s foreign lines of credit and foreign overdraft facilities as of June 30, 2023 and September 30, 2022.

Debt issuance costs

In connection with the Second Amended and Restated Revolving Credit Agreement, Woodward incurred $2,236 in debt issuance costs, which are deferred and are being amortized using the straight-line method over the life of the agreement. As of June 30, 2023, Woodward also had $1,046 of deferred debt issuance costs remaining that were incurred in connection with the Amended and Restated Credit Agreement, which have been combined with the deferred debt issuance costs associated with the Second Amended and Restated Revolving Credit Agreement and are being amortized using the straight-line method over the life of the Second Amended and Restated Revolving Credit Agreement. Unamortized debt issuance costs of $1,233 associated with these revolving credit agreements as of June 30, 2023 and $1,046 as of September 30, 2022 were recorded as “Other current assets” and “Other assets” in the Condensed Consolidated Balance Sheets. Amortization of debt issuance costs is included in operating activities in the Condensed Consolidated Statements of Cash Flows.

Note 16. Accrued liabilities


	June 30, 2023		September 30, 2022
Salaries and other member benefits	$	95,752	$	75,665
Product warranties and related liabilities(1)		39,424		40,042
Interest payable		4,955		13,481
Accrued retirement benefits		2,886		2,779
Net current contract liabilities		31,567		30,663
Current portion of restructuring charges		1,566		1,083
Taxes, other than income		17,913		21,159
Other		26,871		21,411
	$	220,934	$	206,283

(1)

Product warranties and related liabilities includes estimates related to product liabilities expected to be fully recoverable from insurance.

Product warranties and related liabilities

Provisions of Woodward’s sales agreements include product warranties customary to these types of agreements. Accruals are established for specifically identified warranty issues and related liabilities for which are probable to result in future costs. Warranty costs are accrued as revenue is recognized on a non-specific basis whenever past experience indicates a normal and predictable pattern exists.

Changes in accrued product warranties and related liabilities were as follows:


	Three Months Ended June 30,						Nine Months Ended June 30,
	2023			2022			2023			2022
Beginning of period	$	46,492		$	12,984		$	40,042		$	17,481
Additions, net of recoveries		2,424			3,021			22,847			3,243
Reductions for settlement		(9,433	)		(1,239	)		(23,636	)		(5,908	)
Foreign currency exchange rate changes		(59	)		(121	)		171			(171	)
End of period	$	39,424		$	14,645		$	39,424		$	14,645

Restructuring charges

During the second quarter of fiscal year 2023, the Company committed to a cost reduction plan ("Cost Reduction Plan") to better align the cost structure, and recorded $5,172 of restructuring charges. The charges recognized under the Cost Reduction Plan consist of workforce management costs primarily related to aligning the cost structure of the Company’s Industrial segment with the current market conditions. All of the restructuring charges were recorded as nonsegment expenses and are expected to be paid within twelve months.

In fiscal year 2022, the Company determined to implement a streamlined Aerospace and Industrial organizational and leadership structure designed to enhance the sales experience for customers, simplify operations, and increase profitability through improved execution. In connection with leadership changes arising from such reorganization, we recorded $1,083 of restructuring charges as nonsegment expenses, which were paid as of December 31, 2022.

In fiscal year 2021, the Company recorded aggregate restructuring charges totaling $5,008 as nonsegment expenses for two separate workforce management actions, one in our hydraulics systems business and one in our engine systems business. In fiscal year 2022, we experienced a challenging operating environment that included the ongoing impact of global supply chain and labor disruptions, along with high inflation, which resulted in changed business conditions compared to when we initially recorded the restructuring charges in fiscal year 2021. We adapted to the changed business conditions by, among other initiatives, (i) developing and implementing plans to insource select machined components, (ii) redeploying talent and adding indirect resources to our factories to stabilize the production environment, and (iii) determining to retain employees who otherwise would have been impacted by the planned restructuring activities to support a stable workforce and effectively manage through attrition. As such, the previously remaining unpaid accrued restructuring charges, which amounted to $4,503, were no longer needed and were reversed in fiscal year 2022.

The summary of activity in accrued restructuring charges are as follows:


			Period Activity
	Balances as of September 30, 2022		Charges		Payments			Non-cash activity			Balances as of June 30, 2023
Workforce management costs associated with:
Cost reduction plan	$	—	$	5,172	$	(3,594	)	$	(12	)	$	1,566
Aerospace		139		—		(139	)		—			—
Industrial		944		—		(944	)		—			—
Total	$	1,083	$	5,172	$	(4,677	)	$	(12	)	$	1,566


			Period Activity
	Balances as of September 30, 2021		Charges		Payments			Non-cash activity		Balances as of June 30, 2022
Workforce management costs associated with:
Hydraulics Systems Realignment	$	3,758	$	—	$	(505	)	$	—	$	3,253
Engine Systems Realignment		1,250		—		—			—		1,250
Total	$	5,008	$	—	$	(505	)	$	—	$	4,503

Note 17. Other liabilities


	June 30, 2023		September 30, 2022
Net accrued retirement benefits, less amounts recognized within accrued liabilities	$	76,839	$	70,168
Total unrecognized tax benefits		8,156		9,757
Noncurrent income taxes payable		10,714		14,329
Deferred economic incentives (1)		6,100		7,029
Noncurrent operating lease liabilities		20,924		21,443
Net noncurrent contract liabilities		412,608		396,345
Other		12,150		10,185
	$	547,491	$	529,256

(1)

Woodward receives certain economic incentives from various state and local authorities related to capital expansion projects. Such amounts are initially recorded as deferred credits and are being recognized as a reduction to pre-tax expense over the economic lives of the related capital expansion projects.

Note 18. Other (income) expense, net


	Three Months Ended June 30,						Nine Months Ended June 30,
	2023			2022			2023			2022
Equity interest in the earnings of the JV	$	(8,836	)	$	(3,860	)	$	(21,877	)	$	(12,675	)
Net (gain) loss on sales of assets and businesses		(218	)		(4	)		672			(1,545	)
Rent income		(92	)		(168	)		(273	)		(580	)
Net (gain) loss on investments in deferred compensation program		(1,257	)		3,840			(4,127	)		5,216
Other components of net periodic pension and other postretirement benefit, excluding service cost and interest expense		(2,521	)		(2,884	)		(7,681	)		(8,720	)
Other		(77	)		(176	)		(145	)		(509	)
	$	(13,001	)	$	(3,252	)	$	(33,431	)	$	(18,813	)

Note 19. Income taxes

The determination of the estimated annual effective tax rate is based upon a number of significant estimates and judgments. In addition, as a global commercial enterprise, Woodward’s tax expense can be impacted by changes in tax

rates or laws, the finalization of tax audits and reviews, changes in the estimate of the amount of undistributed foreign earnings that Woodward considers indefinitely reinvested, issuance of future guidance, interpretation, and rule-making, and other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.

The following table sets forth the tax expense and the effective tax rate for Woodward’s earnings before income taxes:


	Three Months Ended June 30,						Nine Months Ended June 30,
	2023			2022			2023			2022
Earnings before income taxes	$	105,738		$	50,287		$	177,728		$	142,129
Income tax expense		21,139			10,841			28,012			24,472
Effective tax rate		20.0	%		21.6	%		15.8	%		17.2	%

The decrease in the effective tax rate for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 is primarily attributable to a larger stock-based compensation tax benefit in the quarter and larger state income tax credits.

The decrease in the effective tax rate for the nine months ended June 30, 2023 compared to the nine months ended June 30, 2022 is primarily attributable to the release of uncertain tax positions and larger state income tax credits, partially offset by a smaller year-to-date stock-based compensation tax benefit.

Gross unrecognized tax benefits were $10,533 as of June 30, 2023, and $11,938 as of September 30, 2022. At June 30, 2023, the amount of the liability for unrecognized tax benefits that, if recognized, would impact Woodward’s effective tax rate was $6,781. At this time, Woodward believes it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $2,522 in the next twelve months due to the completion of review by tax authorities, lapses of statutes, and the settlement of tax positions. Woodward’s tax expense includes accruals for potential interest and penalties related to unrecognized tax benefits and all other interest and penalties related to tax payments.

Woodward’s tax returns are subject to audits by U.S. federal, state, and foreign tax authorities, and these audits are at various stages of completion at any given time. Reviews of tax matters by authorities and lapses of the applicable statutes of limitation may result in changes to tax expense. Generally, Woodward’s fiscal years remaining open to examination for U.S. Federal income taxes include fiscal years 2019 and thereafter. Woodward’s fiscal years remaining open to examination for significant U.S. state income tax jurisdictions include fiscal years 2018 and thereafter. Woodward’s fiscal years remaining open to examination in significant foreign jurisdictions include 2017 and thereafter.

Note 20. Retirement benefits

Woodward provides various retirement benefits to eligible members of the Company, including contributions to various defined contribution plans, pension benefits associated with defined benefit plans, postretirement medical benefits, and postretirement life insurance benefits. Eligibility requirements and benefit levels vary depending on employee location.

Defined contribution plans

Most of the Company’s U.S. employees are eligible to participate in the U.S. defined contribution plan. The U.S. defined contribution plan allows employees to defer part of their annual income for income tax purposes into their personal 401(k) accounts. The Company makes matching contributions to eligible employee accounts, which are also deferred for employee personal income tax purposes. Certain non-U.S. employees are also eligible to participate in similar non-U.S. plans.

Woodward’s U.S. employees receive an annual contribution of Woodward stock, equal to 5% of their eligible prior year wages, to their personal Woodward Retirement Savings Plan accounts. Woodward fulfilled its annual Woodward stock contribution obligation using shares held in treasury stock by issuing a total of 187 shares of common stock for a value of $19,307 in the second quarter of fiscal year 2023, compared to a total of 150 shares of common stock for a value of $17,168 in the second quarter of fiscal year 2022.

The amount of expense associated with defined contribution plans was as follows:


	Three Months Ended June 30,				Nine Months Ended June 30,
	2023		2022		2023		2022
Company costs	$	11,602	$	10,132	$	33,542	$	30,582

Defined benefit plans

Woodward has defined benefit plans that provide pension benefits for certain retired employees in the United States, the United Kingdom, Japan, and Germany. Woodward also provides other postretirement benefits to its employees including postretirement medical benefits and life insurance benefits. Postretirement medical benefits are provided to certain current and retired employees, their covered dependents, and beneficiaries in the United States. Life insurance benefits are provided to certain retirees in the United States under frozen plans, which are no longer available to current employees. A September 30 measurement date is utilized to value plan assets and obligations for all of Woodward’s defined benefit pension and other postretirement benefit plans.

U.S. GAAP requires that, for obligations outstanding as of September 30, 2022, the funded status reported in interim periods shall be the same asset or liability recognized in the previous year end statement of financial position adjusted for (a) subsequent accruals of net periodic benefit cost that exclude the amortization of amounts previously recognized in other comprehensive income (for example, subsequent accruals of service cost, interest cost, and return on plan assets) and (b) contributions to a funded plan or benefit payments.

The components of the net periodic retirement pension costs recognized are as follows:


	Three Months Ended June 30,
	United States						Other Countries						Total
	2023			2022			2023			2022			2023			2022
Service cost	$	223		$	389		$	344		$	573		$	567		$	962
Interest cost		1,824			1,320			805			395			2,629			1,715
Expected return on plan assets		(2,074	)		(2,713	)		(586	)		(596	)		(2,660	)		(3,309	)
Amortization of:
Net actuarial loss (gain)		73			65			(161	)		136			(88	)		201
Prior service cost		174			246			5			6			179			252
Net periodic retirement pension cost (benefit)	$	220		$	(693	)	$	407		$	514		$	627		$	(179	)
Contributions paid	$	—		$	—		$	470		$	434		$	470		$	434

	Nine Months Ended June 30,
	United States						Other Countries						Total
	2023			2022			2023			2022			2023			2022
Service cost	$	670		$	1,166		$	996		$	1,803		$	1,666		$	2,969
Interest cost		5,473			3,961			2,333			1,243			7,806			5,204
Expected return on plan assets		(6,223	)		(8,140	)		(1,710	)		(1,881	)		(7,933	)		(10,021	)
Amortization of:
Net actuarial loss (gain)		219			194			(462	)		428			(243	)		622
Prior service cost		523			736			16			18			539			754
Net periodic retirement pension cost (benefit)	$	662		$	(2,083	)	$	1,173		$	1,611		$	1,835		$	(472	)
Contributions paid	$	—		$	—		$	1,763		$	1,933		$	1,763		$	1,933

The components of net periodic retirement pension costs other than the service cost and interest cost components are included in the line item “Other (income) expense, net”, and the interest component is included in the line item “Interest expense” in the Condensed Consolidated Statements of Earnings.

The components of the net periodic other postretirement benefit costs recognized are as follows:


	Three Months Ended June 30,						Nine Months Ended June 30,
	2023			2022			2023			2022
Service cost	$	1		$	1		$	1		$	1
Interest cost		226			144			678			433
Amortization of:
Net actuarial gain		(124	)		(24	)		(372	)		(71	)
Prior service cost		—			—			—			—
Net periodic other postretirement cost	$	103		$	121		$	307		$	363
Contributions paid	$	415		$	451		$	1,300		$	1,379

The components of net periodic other postretirement benefit costs other than the service cost and interest cost components are included in the line item “Other (income) expense, net”, and the interest cost component is included in the line item “Interest expense” in the Condensed Consolidated Statements of Earnings.

The amount of cash contributions made to these plans in any year is dependent upon a number of factors, including minimum funding requirements in the jurisdictions in which Woodward operates and arrangements made with trustees of certain foreign plans. As a result, the actual funding in fiscal year 2023 may differ from the current estimate. Woodward estimates its remaining cash contributions in fiscal year 2023 will be as follows:


Retirement pension benefits:
United States	$	—
United Kingdom		186
Japan		—
Germany		226
Other postretirement benefits		1,516

Note 21. Stockholders’ equity

Stock repurchase program

In November 2019, the Woodward board of directors (the “Board”) had authorized a program for the repurchase of up to $500,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a three-year period that was scheduled to expire in November 2022 (the “2019 Authorization”). During the first nine months of fiscal year 2022, Woodward repurchased 233 shares of its common stock for $26,742 under the 2019 Authorization.

In January 2022, the Board terminated the 2019 Authorization and concurrently authorized a new program for the repurchase of up to $800,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a two-year period ending in January 2024 (the “2022 Authorization”). During the first nine months of fiscal year 2023, Woodward repurchased 274 shares of its common stock for $26,369 under the 2022 Authorization, compared to 3,441 shares of its common stock for $400,975 during the first nine months of fiscal year 2022.

Stock-based compensation

Provisions governing outstanding stock option awards are included in the 2017 Omnibus Incentive Plan, as amended from time to time (the “2017 Plan”) and the 2006 Omnibus Incentive Plan (the “2006 Plan”), as applicable.

The 2017 Plan was first approved by Woodward’s stockholders in January 2017 and is the successor plan to the 2006 Plan. As of September 14, 2016, the effective date of the 2017 Plan, the Board delegated authority to administer the 2017 Plan to the Compensation Committee of the Board, including, but not limited to, the power to determine the recipients of awards and the terms of those awards. On January 26, 2022 and January 25, 2023, Woodward’s stockholders approved an additional 800 and 500 shares, respectively, of Woodward’s common stock to be made available for future grants. Under the 2017 Plan, there were approximately 2,711 shares of Woodward’s common stock available for future grants as of June 30, 2023 and 2,938 shares as of September 30, 2022.

Stock options

Woodward believes that stock options align the interests of its employees and directors with the interests of its stockholders. Stock option awards are granted with an exercise price equal to the market price of Woodward’s stock at the date the grants are awarded, a ten-year term, and generally have a four-year vesting schedule at a rate of 25% per year.

The fair value of options granted is estimated as of the grant date using the Black-Scholes-Merton option-valuation model. Woodward calculates the expected term, which represents the average period of time that stock options granted are expected to be outstanding, based upon historical experience of plan participants. Expected volatility is based on historical volatility using daily stock price observations. The estimated dividend yield is based upon Woodward’s historical dividend practice and the market value of its common stock. The risk-free rate is based on the U.S. treasury yield curve, for periods within the contractual life of the stock option, at the time of grant.

The following is a summary of the activity for stock option awards:


	Three Months Ended June 30, 2023					Nine Months Ended June 30, 2023
	Number of options			Weighted-Average Exercise Price per Share		Number of options			Weighted-Average Exercise Price per Share
Beginning balance		5,574		$	76.35		5,339		$	74.40
Granted		4			102.36		526			83.88
Exercised		(268	)		55.43		(538	)		53.27
Forfeited		(8	)		97.69		(25	)		93.60
Ending balance		5,302		$	77.39		5,302		$	77.39

Changes in non-vested stock options were as follows:


	Three Months Ended June 30, 2023					Nine Months Ended June 30, 2023
	Number of options			Weighted-Average Grant Date Fair Value per Share		Number of options			Weighted-Average Grant Date Fair Value Per Share
Beginning balance		1,675		$	31.39		1,812		$	30.03
Granted		4			42.82		526			33.74
Exercised		(282	)		19.77		(925	)		26.23
Forfeited		(6	)		34.92		(22	)		33.69
Ending balance		1,391		$	33.76		1,391		$	33.76

Information about stock options that have vested, or are expected to vest, and are exercisable at June 30, 2023 was as follows:


	Number of options		Weighted-Average Exercise Price		Weighted-Average Remaining Life in Years		Aggregate Intrinsic Value
Options outstanding		5,302	$	77.39		5.5	$	220,265
Options vested and exercisable		3,911		71.50		4.6		185,525
Options vested and expected to vest		5,250		77.25		5.5		218,835

Restricted stock

The Company has granted restricted stock units (“RSUs”) to certain employees under its form attraction and retention RSU agreement (the “Form Attraction and Retention RSU Agreement”), which is generally used for new hires and specific retention purposes, and under its form RSU agreement (the “Standard Form RSU Agreement”), which is generally used for annual grants and promotional awards. The RSUs granted under the Form Attraction and Retention Agreement are generally scheduled to fully vest on the third or fourth anniversary of the respective grant dates, and in each case, subject to continued employment. The RSUs granted under the Standard Form RSU Agreement generally have a four-year vesting schedule at a rate of 25% per year, generally subject to continued employment.

A summary of the activity for restricted stock units:


	Three Months Ended June 30, 2023					Nine Months Ended June 30, 2023
	Number of units			Weighted-Average Grant Date Fair Value		Number of units			Weighted-Average Grant Date Fair Value
Beginning balance		171		$	92.19		59		$	98.29
Granted		2			94.42		115			89.00
Forfeited		(1	)		83.24		(2	)		83.24
Ending balance		172		$	92.26		172		$	92.26

Stock-based compensation expense

Woodward recognizes stock-based compensation expense on a straight-line basis over the requisite service period. Pursuant to form stock option agreements and form RSU agreements used by the Company, with terms approved by the administrator of the applicable plan, the requisite service period can be less than the four-year vesting period based on grantee’s retirement eligibility. As such, the recognition of stock-based compensation expense associated with some stock option grants and RSU grants can be accelerated to a period of less than four years, including immediate recognition of stock-based compensation expense on the date of grant.

In connection with an executive separation and release agreement entered into by the Company, Woodward recognized an additional $1,265 of stock-based compensation expense, before tax, during the nine months ended June 30, 2023.

At June 30, 2023, there was approximately $23,418 of total unrecognized compensation expense related to non-vested stock-based compensation arrangements, including both stock options and RSUs. The pre-vesting forfeiture rates for purposes of determining stock-based compensation expense recognized were estimated to be 0.0% for members of the Board and 7.3% for all others. The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 1.9 years.

Note 22. Commitments and contingencies

Woodward is currently involved in claims, pending or threatened litigation or other legal proceedings, investigations 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. Legal costs are expensed as incurred and are classified in “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Earnings.

Woodward is partially self-insured in the United States for healthcare and worker’s compensation up to predetermined amounts, above which third party insurance applies. Management regularly reviews the probable outcome of related claims and proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage, and the established accruals for liabilities.

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.

Under the Company’s severance and change in control agreements with its current corporate officers, Woodward would be required to pay termination benefits to any such officer if such officer’s employment is terminated without Cause (as defined therein). The amount of such benefits would vary depending on whether such termination occurs during a specified period within a change of control.

Note 23. Segment information

Woodward serves the aerospace and industrial markets through its two reportable segments – Aerospace and Industrial. When appropriate, Woodward’s reportable segments are aggregations of Woodward’s operating segments. Woodward uses operating segment information internally to manage its business, including the assessment of operating segment performance and decisions for the allocation of resources between operating segments.

The accounting policies of the reportable segments are the same as those of the Company. Woodward evaluates segment profit or loss based on internal performance measures for each segment in a given period. In connection with that assessment, Woodward generally excludes matters such as certain charges for restructuring, interest income and expense, certain gains and losses from asset dispositions, or other non-recurring and/or non-operationally related expenses.

A summary of consolidated net sales and earnings by segment follows:


	Three Months Ended June 30,						Nine Months Ended June 30,
	2023			2022			2023			2022
Segment external net sales:
Aerospace	$	480,531		$	401,712		$	1,313,233		$	1,110,904
Industrial		320,132			212,620			824,263			631,853
Total consolidated net sales	$	800,663		$	614,332		$	2,137,496		$	1,742,757
Segment earnings:
Aerospace	$	83,075		$	56,566		$	211,823		$	167,458
Industrial		58,197			21,102			107,170			62,029
Nonsegment expenses		(23,875	)		(19,201	)		(106,493	)		(63,816	)
Interest expense, net		(11,659	)		(8,180	)		(34,772	)		(23,542	)
Consolidated earnings before income taxes	$	105,738		$	50,287		$	177,728		$	142,129

Segment assets consist of accounts receivable; inventories; property, plant, and equipment, net; goodwill; and other intangibles, net. A summary of consolidated total assets by segment follows:


	June 30, 2023		September 30, 2022
Segment assets:
Aerospace	$	1,819,068	$	1,773,854
Industrial		1,523,239		1,380,446
Unallocated corporate property, plant and equipment, net		104,417		111,760
Other unallocated assets		562,839		540,386
Consolidated total assets	$	4,009,563	$	3,806,446

Note 24. Subsequent events

On July 26, 2023, the Board approved a cash dividend of $0.22 per share for the quarter, payable on August 28,2023, for stockholders of record as of August 14, 2023.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This Quarterly Report on Form 10-Q, 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:

•

the impacts on our business relating to the ongoing global supply chain disruptions, rising labor costs, and material inflation;

•

future sales, earnings, cash flow, uses of cash, and other measures of financial performance, including our ability to accurately forecast such performance;

•

trends in our business and the markets in which we operate, including expectations in those markets in future periods;

•

our expected expenses in future periods and trends in such expenses over time;

•

descriptions of our plans and expectations for future operations;

•

plans and expectations relating to the performance of our joint venture with General Electric Company;

•

the expected levels of activity in particular industries or markets and the effects of changes in those levels;

•

the scope, nature, or impact of acquisition activity and integration of such acquisition into our business;

•

the research, development, production, and support of new products and services;

•

restructuring and alignment costs and savings;

•

our plans, objectives, expectations and intentions with respect to business opportunities that may be available to us;

•

our liquidity, including our ability to meet capital spending requirements and operations;

•

future repurchases of common stock;

•

future levels of indebtedness and capital spending;

•

the stability of financial institutions, including those lending to us;

•

pension and other postretirement plan assumptions and future contributions; and

•

our tax rate and other effects of changes in applicable tax laws.

These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Factors that could cause actual results and the timing of certain events to differ materially from the forward-looking statements include, but are not limited to, risk factors described in Woodward's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended September 30, 2022, which was filed on November 18, 2022, and other risks described in Woodward’s filings with the Securities and Exchange Commission.

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-Q 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-Q are in thousands, except per share amounts.

OVERVIEW

Global Business Conditions

We continue to monitor a variety of external macroeconomic factors impacting our business, including the ongoing global supply chain disruptions, rising labor costs, and material inflation which together have resulted in a challenging operating environment.

During the first nine months of fiscal year 2023, we experienced continued strong end market demand for our products and services across aerospace and industrial markets; however, our financial performance continued to be adversely affected by macroeconomic issues. We remain intent on actively implementing strategic initiatives focused on enhancing the customer experience, simplifying operations, and increasing profitability through improved execution. Our output is increasing, and we are seeing efficiency gains as our new employees gain additional experience and become more proficient in their jobs. We have seen improvement in our supply chain performance; however, the environment remains challenging and we continue to actively manage and problem solve with our suppliers. We also continue to assess the environment and are taking appropriate price actions in response to rising costs. We are executing multiple work streams to capture prices that better reflect the value we deliver.

We are unable to predict the full extent to which macroeconomic challenges will continue to adversely impact our business, including our operational performance, results of operations, cash flows, financial position, and the achievement of our strategic objectives. Such uncertainty may affect our ability to accurately predict our future performance and forecast our financial results.

Operational Highlights

Quarter and Year to Date Highlights


	Three Months Ended June 30,						Nine Months Ended June 30,
	2023			2022			2023			2022
Net sales:
Aerospace segment	$	480,531		$	401,712		$	1,313,233		$	1,110,904
Industrial segment		320,132			212,620			824,263			631,853
Consolidated net sales	$	800,663		$	614,332		$	2,137,496		$	1,742,757

Earnings:
Aerospace segment	$	83,075		$	56,566		$	211,823		$	167,458
Segment earnings as a percent of segment net sales		17.3	%		14.1	%		16.1	%		15.1	%
Industrial segment	$	58,197		$	21,102		$	107,170		$	62,029
Segment earnings as a percent of segment net sales		18.2	%		9.9	%		13.0	%		9.8	%
Consolidated net earnings	$	84,599		$	39,446		$	149,716		$	117,657
Adjusted net earnings	$	84,599		$	39,446		$	175,924		$	122,347

Effective tax rate		20.0	%		21.6	%		15.8	%		17.2	%
Adjusted effective tax rate		20.0	%		21.6	%		17.3	%		17.6	%
Consolidated diluted earnings per share	$	1.37		$	0.64		$	2.44		$	1.84
Consolidated adjusted diluted earnings per share	$	1.37		$	0.64		$	2.87		$	1.91

Earnings before interest and taxes ("EBIT")	$	117,397		$	58,467		$	212,500		$	165,671
Adjusted EBIT	$	117,397		$	58,467		$	247,376		$	171,925
Earnings before interest, taxes, depreciation, and amortization ("EBITDA")	$	147,441		$	88,394		$	301,801		$	256,929
Adjusted EBITDA	$	147,441		$	88,394		$	336,677		$	263,183

Adjusted net earnings, adjusted earnings per share, adjusted effective tax rate, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA 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 most directly comparable U.S. GAAP financial measures can be found under the caption “Non-U.S. GAAP Financial Measures” in this Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Liquidity Highlights

Net cash provided by operating activities for the first nine months of fiscal year 2023 was $155,630, compared to $86,016 for the first nine months of fiscal year 2022. The increase in net cash provided by operating activities in the first nine months of fiscal year 2023 compared to the first nine months of the prior fiscal year is primarily attributable to increased earnings, partially offset by working capital increases and the timing of certain tax payments.

For the first nine months of fiscal year 2023, free cash flow was $98,488, compared to $48,911 for the first nine months of fiscal year 2022. We define free cash flow as net cash flow from operating activities less payments for property, plant and equipment. Adjusted free cash flow, which we define as free cash flow plus cash payments for costs related to business development activities, restructuring charges, and certain non-restructuring separation costs was $103,059 for the first nine months of fiscal year 2023, compared to $52,398 for the first nine months of fiscal year 2022. The increase in free cash flow and adjusted free cash flow for the first nine months of fiscal year 2023 as compared to the same period of the prior fiscal year was primarily due to increased earnings, partially offset by higher capital expenditures. 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 most directly comparable U.S. GAAP financial measures can be found under the caption “Non-U.S. GAAP Financial Measures” in this Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

At June 30, 2023, we held $114,107 in cash and cash equivalents and had total outstanding debt of $750,857. We have additional borrowing availability of $967,678, net of outstanding letters of credit, under our revolving credit agreement. At June 30, 2023, we also had additional borrowing capacity of $27,181 under various foreign lines of credit and foreign overdraft facilities.

RESULTS OF OPERATIONS

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


	Three Months Ended												Nine Months Ended
	June 30, 2023			% of Net Sales			June 30, 2022			% of Net Sales			June 30, 2023			% of Net Sales			June 30, 2022			% of Net Sales
Net sales	$	800,663			100	%	$	614,332			100	%	$	2,137,496			100	%	$	1,742,757			100	%
Costs and expenses:
Cost of goods sold		596,251			74.5	%		480,403			78.2	%		1,649,473			77.2	%		1,352,979			77.6	%
Selling, general, and administrative expenses		64,983			8.1	%		46,490			7.6	%		203,748			9.5	%		152,920			8.8	%
Research and development costs		35,033			4.4	%		32,224			5.2	%		100,034			4.7	%		90,000			5.2	%
Restructuring charges		—			0.0	%		—			0.0	%		5,172			0.2	%		—			0.0	%
Interest expense		12,175			1.5	%		8,533			1.4	%		36,162			1.7	%		25,036			1.4	%
Interest income		(516	)		(0.1	)%		(353	)		(0.1	)%		(1,390	)		(0.1	)%		(1,494	)		(0.1	)%
Other (income) expense, net		(13,001	)		(1.6	)%		(3,252	)		(0.5	)%		(33,431	)		(1.6	)%		(18,813	)		(1.1	)%
Total costs and expenses		694,925			86.8	%		564,045			91.8	%		1,959,768			91.7	%		1,600,628			91.8	%
Earnings before income taxes		105,738			13.2	%		50,287			8.2	%		177,728			8.3	%		142,129			8.2	%
Income tax expense		21,139			2.6	%		10,841			1.8	%		28,012			1.3	%		24,472			1.4	%
Net earnings	$	84,599			10.6	%	$	39,446			6.4	%	$	149,716			7.0	%	$	117,657			6.8	%

Other select financial data:


	June 30, 2023		September 30, 2022
Working capital	$	903,818	$	772,856
Total debt		750,857		777,416
Total stockholders' equity		2,085,790		1,901,122

Net Sales

Consolidated net sales for the third quarter of fiscal year 2023 increased by $186,331, or 30.3%, compared to the same period of fiscal year 2022. Consolidated net sales for the first nine months of fiscal year 2023 increased by $394,739, or 22.7%, compared to the same period of fiscal year 2022.

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


	Three-Month Period			Nine-Month Period
Consolidated net sales for the period ended June 30, 2022	$	614,332		$	1,742,757
Aerospace volume		52,689			131,416
Industrial volume		90,547			187,300
Noncash consideration		(4,550	)		(8,907	)
Effects of changes in price		50,683			120,827
Effects of changes in foreign currency rates		(3,038	)		(35,897	)
Consolidated net sales for the period ended June 30, 2023	$	800,663		$	2,137,496

In the Aerospace segment, the increase in net sales for the third quarter and first nine months of fiscal year 2023 as compared to the same periods of the prior fiscal year is primarily attributable to an increase in commercial OEM and aftermarket sales driven by higher OEM production rates, continued recovery in passenger traffic, increasing aircraft utilization, and price realization, partially offset by lower defense OEM sales primarily driven by reduced demand for guided weapons.

In the Industrial segment, the increase in net sales for the third quarter and first nine months of fiscal year 2023 as compared to the same periods of the prior fiscal year is primarily attributable to volume increases across all markets and price realization. Industrial sales benefited from significantly increased on-highway natural gas truck production in China, although future demand beyond the fourth quarter of fiscal year 2023 remains uncertain.

Costs and Expenses

Cost of goods sold increased by $115,848 to $596,251, for the third quarter of fiscal year 2023, from $480,403 for the third quarter of fiscal year 2022. As a percentage of net sales, cost of goods sold decreased to 74.5% for the third quarter of fiscal year 2023, compared to 78.2% in the prior year period.

Cost of goods sold increased by $296,494 to $1,649,473 for the first nine months of fiscal year 2023, from $1,352,979, for the first nine months of fiscal year 2022. As a percentage of net sales, costs of goods sold decreased to 77.2% for the first nine months of fiscal year 2023, compared to 77.6% for the prior year period. The increase in cost of goods sold on an absolute basis in the third quarter and first nine months of fiscal year 2023 compared to the same periods of the prior fiscal year was primarily due to higher sales volume and net inflationary impacts on material and labor costs.

Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 25.5% for the third quarter of fiscal year 2023 and 22.8% for the first nine months of fiscal year 2023, compared to 21.8% for the third quarter of fiscal year 2022 and 22.4% for the first nine months of fiscal year 2022. The increase in gross margin for the first nine months of fiscal year 2023 as compared to the same periods of the prior fiscal year is primarily attributable to higher sales volume, partially offset by net inflationary impacts on material and labor costs, as well as non-recurring, specific charges for excess and obsolete inventory and product rationalization.

Selling, general and administrative expenses increased by $18,493, or 39.8%, to $64,983 for the third quarter of fiscal year 2023, compared to $46,490 for the third quarter of fiscal year 2022. Selling, general, and administrative expenses as a percentage of net sales increased to 8.1% for the third quarter of fiscal year 2023, compared to 7.6% for the third quarter of fiscal year 2022. The increase in selling, general and administrative expenses for the third quarter as compared to the same periods of the prior fiscal year is primarily due to increased annual variable incentive compensation costs and increased expenses relating to inflation, increased headcount, and expenses relating to our deferred compensation program.

Selling, general, and administrative expenses increased by $50,828, or 33.2%, to $203,748 for the first nine months of fiscal year 2023, compared to $152,920 for the first nine months of fiscal year 2022. Selling, general, and administrative expenses as a percentage of net sales increased to 9.5% for the first nine months of fiscal year 2023, compared to 8.8% for the first nine months of fiscal year 2022. The increase in selling, general and administrative expenses for the first nine months of fiscal year 2023 as compared to the same periods of the prior fiscal year is primarily due to increased annual variable incentive compensation costs, increased expenses relating to inflation, increased headcount, and expenses relating to our deferred compensation program, as well as a non-recurring charge related to customer collections, and a product rationalization charge related to the write-off of assets, whereas such charges did not occur in the prior fiscal periods.

Research and development costs increased by $2,809, or 8.7%, to $35,033 for the third quarter of fiscal year 2023, as compared to $32,224 for the third quarter of fiscal year 2022. The increase in research and development costs for the third quarter of fiscal year 2023 as compared to the same period of the prior fiscal year is primarily due to variability in the timing of projects and expenses. As a percentage of net sales, research and development costs decreased to 4.4% for the third quarter of fiscal year 2023, as compared to 5.2% for the same period of the prior fiscal year.

Research and development costs increased by $10,034, or 11.1%, to $100,034 for the first nine months of fiscal year 2023, as compared to $90,000 for the first nine months of fiscal year 2022. The increase in research and development costs for the first nine months of fiscal year 2023 as compared to the same period of the prior fiscal year is primarily due to variability in the timing of projects and expenses. As a percentage of net sales, research and development costs decreased to 4.7% for the first nine months of fiscal year 2023, as compared to 5.2% for the first nine months of fiscal year 2022.

Our research and development activities extend across almost all of our customer base, and we anticipate ongoing variability in research and development costs due to the timing of customer business needs on current and future programs.

Restructuring charges of $5,172 were recognized in the nine months of fiscal year 2023 primarily related to workforce management to implement a streamlined Aerospace and Industrial organizational and leadership structure designed to enhance the sales experience for customers, simplify operations, and increase profitability through improved execution. All of the restructuring charges recorded in fiscal year 2023 were recorded as nonsegment expenses. There were no such restructuring charges recorded in the third quarter of fiscal 2023 or the first nine months of fiscal year 2022.

Interest expense increased by $3,642, or 42.7%, to $12,175 for the third quarter of fiscal year 2023, compared to $8,533 for the third quarter of fiscal year 2022. Interest expense as a percentage of net sales was 1.5% for the third quarter of fiscal year 2023, compared to 1.4% for the third quarter of fiscal year 2022. Interest expense increased by $11,126, or 44.4%, to $36,162 for the first nine months of fiscal year 2023, compared to $25,036 for the first nine months of fiscal year 2022. Interest expense as a percentage of net sales was 1.7% for the first nine months of fiscal year 2023, compared to 1.4% for the first nine months of fiscal year 2022. The increase in interest expense for the third quarter and first nine months of fiscal year 2023 as compared to the same periods of the prior fiscal year is primarily attributable to increased borrowings and interest rates on the revolving credit facility during the third quarter and first nine months of fiscal year 2023.

Other income increased by $9,749 to $13,001 for the third quarter of fiscal year 2023, compared to $3,252 for the third quarter of fiscal year 2022. Other income increased by $14,618 to $33,431 for the first nine months of fiscal year 2023, compared to $18,813 for the first nine months of fiscal year 2022. The increase in other income for the third quarter and first nine months of fiscal year 2023 as compared to the same periods of the prior fiscal year is primarily attributable to increased earnings in the joint venture and a gain on investments in our deferred compensation program, whereas a loss on such investments was recognized in the prior fiscal year.

Income taxes were provided at an effective rate on earnings before income taxes of 20.0% for the third quarter and 15.8% for the first nine months of fiscal year 2023, and 21.6% for the third quarter and 17.2% for the first nine months of fiscal year 2022. The decrease in the effective tax rate for the third quarter compared to the same period of the prior year is primarily attributable to a larger stock-based compensation tax benefit in the quarter and larger state income tax credits. The decrease in the effective tax rate for the first nine months of fiscal year 2023 compared to the same period of the prior year is primarily attributable to the release of uncertain tax positions and larger state income tax credits, partially offset by a smaller year-to-date stock-based compensation tax benefit.

Segment Results

The following table presents sales by segment:


	Three Months Ended June 30,								Nine Months Ended June 30,
	2023				2022				2023				2022
Net sales:
Aerospace	$	480,531	60.0	%	$	401,712	65.4	%	$	1,313,233	61.4	%	$	1,110,904	63.7	%
Industrial		320,132	40.0	%		212,620	34.6	%		824,263	38.6	%		631,853	36.3	%
Consolidated net sales	$	800,663	100	%	$	614,332	100	%	$	2,137,496	100	%	$	1,742,757	100	%

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


	Three Months Ended June 30,						Nine Months Ended June 30,
	2023			2022			2023			2022
Aerospace	$	83,075		$	56,566		$	211,823		$	167,458
Industrial		58,197			21,102			107,170			62,029
Nonsegment expenses		(23,875	)		(19,201	)		(106,493	)		(63,816	)
Interest expense, net		(11,659	)		(8,180	)		(34,772	)		(23,542	)
Consolidated earnings before income taxes		105,738			50,287			177,728			142,129
Income tax expense		(21,139	)		(10,841	)		(28,012	)		(24,472	)
Consolidated net earnings	$	84,599		$	39,446		$	149,716		$	117,657

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


	Three Months Ended June 30,						Nine Months Ended June 30,
	2023			2022			2023			2022
Aerospace		17.3	%		14.1	%		16.1	%		15.1	%
Industrial		18.2	%		9.9	%		13.0	%		9.8	%

Aerospace

Aerospace segment net sales increased by $78,819, or 19.6%, to $480,531 for the third quarter of fiscal year 2023, compared to $401,712 for the third quarter of fiscal year 2022. Aerospace segment net sales increased by $202,329, or 18.2%, to $1,313,233 for the first nine months of fiscal year 2023, compared to $1,110,904 for the first nine months of fiscal year 2022. The increase in Aerospace segment net sales in the third quarter and first nine months of fiscal year 2023 as compared to the same periods of the prior fiscal year is primarily due to higher commercial OEM and aftermarket sales as well as price realization, partially offset by the reduced demand for guided weapons.

Defense OEM sales decreased in the third quarter and first nine months of fiscal year 2023 as compared to the same periods of the prior fiscal year, primarily driven by the reduced demand for guided weapons. However, with the exception of guided weapons, defense OEM demand remained stable at elevated levels. Our defense aftermarket sales increased in the third quarter and first nine months of fiscal year 2023 compared to the same periods of the prior fiscal year, primarily driven by increased defense budgets resulting in operations and maintenance upgrades.

Aerospace segment earnings increased by $26,509, or 46.9%, to $83,075 for the third quarter of fiscal year 2023, compared to $56,566 for the third quarter of fiscal year 2022. Aerospace segment earnings increased by $44,365, or 26.5%, to $211,823 for the first nine months of fiscal year 2023, compared to $167,458 for the first nine months of fiscal year 2022.

The increase in Aerospace segment earnings for the third quarter and first nine months of fiscal year 2023 as compared to the same periods of the prior fiscal year was due to the following:


	Three-Month Period			Nine-Month Period
Earnings for the period ended June 30, 2022	$	56,566		$	167,458
Sales volume		23,508			57,780
Price, sales mix, inflation and productivity		19,297			33,108
Manufacturing costs related to hiring and training		(5,458	)		(16,472	)
Annual variable incentive compensation costs		(12,246	)		(24,498	)
Other, net		1,408			(5,553	)
Earnings for the period ended June 30, 2023	$	83,075		$	211,823

Aerospace segment earnings as a percentage of segment net sales were 17.3% for the third quarter and 16.1% for the first nine months of fiscal year 2023, compared to 14.1% for the third quarter and 15.1% for the first nine months of fiscal year 2022.

Industrial

Industrial segment net sales increased by $107,512, or 50.6%, to $320,132 for the third quarter of fiscal year 2023, compared to $212,620 for the third quarter of fiscal year 2022. Industrial segment net sales increased by $192,410, or 30.5%, to $824,263 for the first nine months of fiscal year 2023, compared to $631,853 for the first nine months of fiscal year 2022. The increase in Industrial segment net sales in the third quarter and first nine months of fiscal year 2023 as compared to the same periods of the prior fiscal year was primarily attributable to volume increases across all markets, including significantly increased on-highway natural gas truck production in China, partially offset by unfavorable foreign currency impacts of $3,030 in the third quarter and $31,121 in the first nine months of fiscal year 2023. Future demand for on-highway natural gas trucks in China beyond the fourth quarter of fiscal year 2023 remains uncertain.

Industrial segment earnings increased by $37,095, or 175.8%, to $58,197 for the third quarter of fiscal year 2023, compared to $21,102 for the third quarter of fiscal year 2022. Segment earnings increased by $45,141, or 72.8%, to $107,170 for the first nine months of fiscal year 2023, compared to $62,029 for the first nine months of fiscal year 2022.

The increase in Industrial segment earnings for the third quarter and first nine months of fiscal year 2023 compared to the same periods of the prior fiscal year was due to the following:


	Three-Month Period			Nine-Month Period
Earnings for the period ended June 30, 2022	$	21,102		$	62,029
Sales volume		41,115			83,854
Price, sales mix, inflation and productivity		14,165			10,319
Manufacturing costs related to hiring and training		(4,600	)		(14,793	)
Effects of changes in foreign currency rates		(1,507	)		(9,463	)
Annual variable incentive compensation costs		(8,807	)		(16,458	)
Other, net		(3,271	)		(8,318	)
Earnings for the period ended June 30, 2023	$	58,197		$	107,170

Industrial segment earnings as a percentage of segment net sales were 18.2% for the third quarter and 13.0% for the first nine months of fiscal year 2023, compared to 9.9% for the third quarter and 9.8% for the first nine months of fiscal year 2022.

Industrial segment earnings in the third quarter of fiscal year 2023 and the first nine months of fiscal year 2023 as compared to the same periods of the prior fiscal year benefited from significantly increased on-highway natural gas truck production in China, although future demand beyond the fourth quarter of fiscal year 2023 remains uncertain.

Nonsegment

Nonsegment expenses increased by $4,674 to $23,875 for the third quarter of fiscal year 2023, compared to $19,201 for the third quarter of fiscal year 2022. Nonsegment expenses increased by $42,677 to $106,493 for the first nine months of fiscal year 2023, compared to $63,816 for the first nine months of fiscal year 2022. Nonsegment expenses for the first nine months of fiscal year 2023 included a specific charge for excess and obsolete inventory of $11,995, a product rationalization charge of $10,504, a restructuring charge of $5,172, a non-recurring charge related to customer collections of $4,997, and certain non-restructuring separation costs of $2,208. Excluding these charges from 2023, nonsegment expenses increased by $7,801 in the first nine months of fiscal year 2023 compared to same period of the prior fiscal year.

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. From time to time, we have also issued debt to supplement our cash needs, repay our other indebtedness, or finance our acquisitions. We continue to 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 for the foreseeable future.

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 Condensed Consolidated Financial Statements included in Part I, Item I of this Form 10-Q.

At June 30, 2023, we had total outstanding debt of $750,857 consisting of various series of unsecured notes due between 2023 and 2033 and obligations under our finance leases.

At June 30, 2023, we had $23,500 outstanding on our revolving credit facility, all of which is classified as short-term borrowings based on our intent and ability to repay this amount in the next twelve months. Revolving credit facility and short-term borrowing activity during the nine months ended June 30, 2023 were as follows:


Maximum daily balance during the period	$	317,800
Average daily balance during the period	$	229,267
Weighted average interest rate on average daily balance		5.65	%

At June 30, 2023, we had additional borrowing availability of $967,678 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $27,181 under various foreign credit facilities.

To our knowledge, we were in compliance with all our debt covenants as of June 30, 2023. See Note 15, Credit facilities, short-term borrowings and long-term debt in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of our most recently filed Form 10-K, 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, strategic acquisitions, and other potential uses of cash.

From time to time, the Company enters into various factoring agreements with third-party financial institutions to sell certain of its receivables. Factoring activity resulted in an increase of approximately $18,096 in cash provided by operating activities during the nine months ended June 30, 2023, compared to an increase in cash provided by operating activities of approximately $25,975 during the nine months ended June 30, 2022.

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.

In November 2019, the Board had authorized a program for the repurchase of up to $500,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a three-year period that was scheduled to expire in November 2022 (the “2019 Authorization”). During the first nine months of fiscal year 2022, we repurchased 233 shares of our common stock for $26,742 under the 2019 Authorization. We repurchased no shares under the 2019 Authorization during the first nine months of fiscal year 2023.

In January 2022, the Board terminated the 2019 Authorization and concurrently authorized a program for the repurchase of up to $800,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a two-year period ending in January 2024 (the “2022 Authorization”). During the first nine months of fiscal year 2023, we repurchased 274 shares of our common stock for $26,369 under the 2022 Authorization, as compared to 3,441 shares of our common stock for $400,975 under the 2022 Authorization during the first nine months of fiscal year 2022.

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 supporting our capital requirements.

Cash Flows


	Nine Months Ended June 30,
	2023			2022
Net cash provided by operating activities	$	155,630		$	86,016
Net cash (used in) investing activities		(54,204	)		(29,415	)
Net cash (used in) financing activities		(83,315	)		(404,966	)
Effect of exchange rate changes on cash and cash equivalents		(11,848	)		(396	)
Net change in cash and cash equivalents		6,263			(348,761	)
Cash and cash equivalents, including restricted cash, at beginning of year		107,844			448,462
Cash and cash equivalents, including restricted cash, at end of period	$	114,107		$	99,701

Net cash flows provided by operating activities for the first nine months of fiscal year 2023 was $155,630, compared to $86,016 for the same period of fiscal year 2022. The increase in net cash provided by operating activities in the first nine months of fiscal year 2023 as compared to the first nine months of the prior fiscal year is primarily attributable to increased earnings, partially offset by the working capital increases and timing of tax payments.

Net cash flows used in investing activities for the first nine months of fiscal year 2023 was $54,204, compared to $29,415 for the same period of fiscal year 2022. The increase in cash flows used in investing activities in the first nine months of fiscal year 2023 as compared to the first nine months of the prior fiscal year is primarily due to increased payments for property, plant and equipment.

Net cash flows used in financing activities for the first nine months of fiscal year 2023 was $83,315, compared to net cash flows used in financing activities of $404,966 for the same period of fiscal year 2022. The decrease in net cash flows used in financing activities in the first nine months of fiscal year 2023 as compared to the first nine months of the prior fiscal year is primarily attributable to the decrease in repurchases of common stock and a change in net debt payments as compared to borrowings. During the first nine months of fiscal year 2023, we had net debt payments in the amount of $43,836, while we had net debt borrowings of $48,556 in the first nine months of fiscal year 2022. During the first nine months of fiscal year 2023, we made $26,369 of cash repurchases of common stock, as compared to $440,233 of cash repurchases of common stock during the first nine months of fiscal year 2022.

Non-U.S. GAAP Financial Measures

Adjusted net earnings, adjusted earnings per share, adjusted effective tax rate, 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.

Earnings based non‐U.S. GAAP financial measures

Adjusted net earnings is defined by the Company as net earnings excluding, as applicable, (i) a specific charge for excess and obsolete inventory, (ii) product rationalization, (iii) a restructuring charge, (iv) a non-recurring charge related to customer collections, (v) certain non-restructuring separation costs, (vi) a charge in connection with a non-recurring matter unrelated to the ongoing operations of the business, and a partial reversal of such charge in a subsequent period, and (vii) costs related to business development activities. The product rationalization adjustment pertains to a non-recurring write-off of inventory and assets related to the elimination of certain product lines. The specific charge for excess and obsolete inventory pertains to a non-recurring process change that resulted in the identification and write down of certain excess inventory unrelated to product rationalization. The non-recurring charge related to customer collections pertains to a discrete process issue that was identified and corrected. 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.

The reconciliation of net earnings and earnings per share to adjusted net earnings and adjusted earnings per share, respectively, is shown in the tables below:


	Three Months Ended June 30,
	2023				2022
	Net Earnings		Earnings Per Share		Net Earnings		Earnings Per Share
Net earnings (U.S. GAAP)	$	84,599	$	1.37	$	39,446	$	0.64
Non-U.S. GAAP adjustments, net of tax:
Specific charge for excess and obsolete inventory		—		—		—		—
Product rationalization		—		—		—		—
Restructuring charge		—		—		—		—
Non-recurring charge related to customer collections		—		—		—		—
Certain non-restructuring separation costs		—		—		—		—
Non-recurring matter unrelated to the ongoing operations of the business		—		—		—		—
Business development activities		—		—		—		—
Non-U.S. GAAP adjustments		—		—		—		—
Adjusted net earnings (Non-U.S. GAAP)	$	84,599	$	1.37	$	39,446	$	0.64


	Nine Months Ended June 30,
	2023				2022
	Net Earnings		Earnings Per Share		Net Earnings		Earnings Per Share
Earnings per share (U.S. GAAP)	$	149,716	$	2.44	$	117,657	$	1.84
Non-U.S. GAAP adjustments, net of tax:
Specific charge for excess and obsolete inventory1		9,016		0.15		—		—
Product rationalization2		7,896		0.13		—		—
Restructuring charge		3,874		0.06		—		—
Non-recurring charge related to customer collections3		3,761		0.06		—		—
Certain non-restructuring separation costs3		1,661		0.03		—		—
Non-recurring matter unrelated to the ongoing operations of the business3		—		—		2,454		0.04
Business development activities3		—		—		2,236		0.03
Total non-U.S. GAAP adjustments		26,208		0.43		4,690		0.07
Adjusted earnings per share (Non-U.S. GAAP)	$	175,924	$	2.87	$	122,347	$	1.91

(1)

Presented in the line item "Cost of goods sold" in Woodward's Condensed Consolidated Statement of Earnings.

(2)

$4,374 is presented in the line item "Cost of goods sold" and $3,522 is presented in the line item " Selling, general and administrative" expenses in Woodward's Condensed Consolidated Statement of Earnings.

(3)

Presented in the line item "Selling, general and administrative" expenses in Woodward's Condensed Consolidated Statement of Earnings.

Management uses EBIT to evaluate Woodward’s performance without financing and tax related considerations, as these elements do 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 the Company’s 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) a specific charge for excess and obsolete inventory, (ii) product rationalization, (iii) a restructuring charge, (iv) a non-recurring charge related to customer collections, (v) certain non-restructuring separation costs, (vi) a charge in connection with a non-recurring matter unrelated to the ongoing operations of the business, and a partial reversal of such charge in a subsequent period, and (vii) costs related to business development activities. The product rationalization adjustment pertains to a non-recurring write-off of inventory and assets related to the elimination of certain product lines. The specific charge for excess and obsolete inventory pertains to a non-recurring process change that resulted in the identification and write down of certain excess inventory unrelated to product rationalization. The non-recurring charge related to customer collections pertains to a discrete process issue that was identified and corrected. As these charges are infrequent or unusual items that can be variable from period to period and do not fluctuate with operating results, management believes removing these gains and charges from EBIT and EBITDA 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:


	Three Months Ended June 30,						Nine Months Ended June 30,
	2023			2022			2023			2022
Net earnings (U.S. GAAP)	$	84,599		$	39,446		$	149,716		$	117,657
Income tax expense		21,139			10,841			28,012			24,472
Interest expense		12,175			8,533			36,162			25,036
Interest income		(516	)		(353	)		(1,390	)		(1,494	)
EBIT (Non-U.S. GAAP)		117,397			58,467			212,500			165,671
Non-U.S. GAAP adjustments:
Specific charge for excess and obsolete inventory1		—			—			11,995			—
Product rationalization2		—			—			10,504			—
Restructuring charge		—			—			5,172			—
Non-recurring charge related to customer collections3		—			—			4,997			—
Certain non-restructuring separation costs3		—			—			2,208			—
Non-recurring matter unrelated to the ongoing operations of the business3		—			—			—			3,272
Business development activities3		—			—			—			2,982
Total non-U.S. GAAP adjustments		—			—			34,876			6,254
Adjusted EBIT (Non-U.S. GAAP)	$	117,397		$	58,467		$	247,376		$	171,925

(1)

Presented in the line item "Cost of goods sold" in Woodward's Condensed Consolidated Statement of Earnings.

(2)

$5,822 is presented in the line item "Cost of goods sold" and $4,682 is presented in the line item " Selling, general and administrative" expenses in Woodward's Condensed Consolidated Statement of Earnings.

(3)

Presented in the line item "Selling, general and administrative" expenses in Woodward's Condensed Consolidated Statement of Earnings.

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


	Three Months Ended June 30,						Nine Months Ended June 30,
	2023			2022			2023			2022
Net earnings (U.S. GAAP)	$	84,599		$	39,446		$	149,716		$	117,657
Income tax expense		21,139			10,841			28,012			24,472
Interest expense		12,175			8,533			36,162			25,036
Interest income		(516	)		(353	)		(1,390	)		(1,494	)
Amortization of intangible assets		9,493			9,309			28,089			28,584
Depreciation expense		20,551			20,618			61,212			62,674
EBITDA (Non-U.S. GAAP)		147,441			88,394			301,801			256,929
Non-U.S. GAAP adjustments:
Specific charge for excess and obsolete inventory1		—			—			11,995			—
Product rationalization2		—			—			10,504			—
Restructuring charge		—			—			5,172			—
Non-recurring charge related to customer collections3		—			—			4,997			—
Certain non-restructuring separation costs3		—			—			2,208			—
Non-recurring matter unrelated to the ongoing operations of the business3		—			—			—			3,272
Business development activities3		—			—			—			2,982
Total non-U.S. GAAP adjustments		—			—			34,876			6,254
Adjusted EBITDA (Non-U.S. GAAP)	$	147,441		$	88,394		$	336,677		$	263,183

(1)

Presented in the line item "Cost of goods sold" in Woodward's Condensed Consolidated Statement of Earnings.

(2)

(3)

Presented in the line item "Selling, general and administrative" expenses in Woodward's Condensed Consolidated Statement of Earnings.

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, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA exclude certain financial information compared with net earnings, the most directly 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, adjusted effective tax rate, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA may differ from similarly titled measures used by other companies, limiting their usefulness as comparative measures.

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, purchasing our common stock, paying dividends, and investing in additional research and development. In addition, securities analysts, investors, and others frequently use free cash flow in their evaluation of companies. Adjusted free cash flow represents a further non-U.S. GAAP adjustment to free cash flow to exclude the effect of cash paid for business development activities, restructuring activities, and certain non-restructuring separation costs. Management believes that excluding these infrequent or unusual items from free cash flow better portrays our ability to generate cash, as such items 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 comparative measures.

Free cash flow and adjusted free cash flow reconciled to net cash provided by operating activities were as follows:


	Nine Months Ended June 30,
	2023			2022
Net cash provided by operating activities (U.S. GAAP)	$	155,630		$	86,016
Payments for property, plant and equipment		(57,142	)		(37,105	)
Free cash flow (Non-U.S. GAAP)		98,488			48,911
Cash paid for business development activities		—			2,982
Cash paid for restructuring charges		3,594			505
Cash paid for certain non-restructuring separation costs		977			—
Adjusted free cash flow (Non-U.S. GAAP)	$	103,059		$	52,398

CRITICAL ACCOUNTING 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 Condensed Consolidated Financial Statements and accompanying notes. Note 1, Operations and summary of significant accounting policies in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of our most recently filed Form 10-K, describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Our critical accounting estimates, identified in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recently filed Form 10-K, include the discussion of estimates used for revenue recognition, inventory valuation, reviews for impairment of goodwill and other indefinitely lived intangible assets, and our provision for income taxes. Such accounting estimates require significant judgments and assumptions to be used in the preparation of the Condensed Consolidated Financial Statements included in this Form 10-Q, and actual results could differ materially from the amounts reported.

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 Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. 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 Condensed Consolidated Financial Statements upon adoption.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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. We are also exposed to various market risks that arise from transactions entered into in the normal course of business related to items such as the cost of raw materials and changes in inflation. Certain contractual relationships with customers and vendors mitigate risks from changes in raw material costs and foreign currency exchange rate changes that arise from normal purchasing and normal sales activities.

These market risks are discussed more fully in “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our most recent Form 10-K. These market risks have not materially changed since the date our most recent Form 10-K was filed with the SEC.

Item 4. Controls and Procedures

We have established disclosure controls and procedures, which are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Act is accumulated and communicated to management,

including our Principal Executive Officer (Charles (“Chip”) P. Blankenship, Jr., Chairman of the Board, Chief Executive Officer and President) and Principal Financial and Accounting Officer (William F. Lacey, Chief Financial Officer), as appropriate, to allow timely decisions regarding required disclosures.

Chip P. Blankenship, Jr. and William F. Lacey evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15 under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on their evaluations, they concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2023.

There have not been any changes in our internal controls over financial reporting during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Woodward is currently involved in claims, pending or threatened litigation or other legal proceedings, investigations, 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.

Item 1A. Risk Factors

Investment in our securities involves risk. An investor or potential investor should consider the risks summarized under the caption “Risk Factors” in Part I, Item 1A of our most recent Form 10-K when making investment decisions regarding our securities. The risk factors that were disclosed in our most recent Form 10-K have not materially changed since the date our most recent Form 10-K was filed with the SEC.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Sales of Unregistered Securities

None.


Issuer Purchases of Equity Securities (In thousands, except for shares and per share amounts)	Total Number of Shares Purchased		Weighted Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased under the Plans or Programs at Period End (1)
April 1, 2023 through April 30, 2023 (2)		203	$	96.02		—	$	327,590
May 1, 2023 through May 31, 2023 (2)		138		105.41		—		327,590
June 1, 2023 through June 30, 2023 (2)		—		—		—		327,590

(1)

(2)

Under a trust established for the purposes of administering the Woodward Executive Benefit Plan, 203 shares of common stock were acquired in April 2023, no shares of common stock were acquired in May 2023, and no shares of common stock were acquired in June 2023 on the open market related to the deferral of compensation by certain eligible members of Woodward’s management who irrevocably elected to invest some or all of their deferred compensation in Woodward common stock. In addition, 138 shares of common stock were acquired in May 2023 on the open market related to the reinvestment of dividends for shares of treasury stock held for deferred compensation. Shares owned by the trust, which is a separate legal entity, are included in "Treasury stock held for deferred compensation" in the Condensed Consolidated Balance Sheets.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

Exhibits filed as part of this Report are listed in the Exhibit Index.

WOODWARD, INC.

EXHIBIT INDEX


	Exhibit Number	Description
*	10.1	Separation Agreement dated April 5, 2023 by and between Woodward, Inc. and Mark D. Hartman
*	10.2	William F. Lacey Offer Letter, dated March 30, 2023
*	31.1	Rule 13a-14(a)/15d-14(a) certification of Charles P. Blankenship, Jr.
*	31.2	Rule 13a-14(a)/15d-14(a) certification of William F. Lacey
*	32.1	Section 1350 certifications
*	101	The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Earnings, (iii) Condensed Consolidated Statements of Comprehensive Earnings, (iv) Condensed Consolidated Statements of Cash Flows, (v) Condensed Consolidated Statements of Stockholders’ Equity, and (vi) Notes to Condensed Consolidated Financial Statements.
*	104	Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed as an exhibit to this Report

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		WOODWARD, INC.
Date: August 4, 2023		/s/ Charles P. Blankenship, Jr.
		Charles P. Blankenship, Jr.
		Chairman of the Board, Chief Executive Officer, and President (on behalf of the registrant and as the registrant’s Principal Executive Officer)

Date: August 4, 2023		/s/ William F. Lacey
		William F. Lacey
		Chief Financial Officer (on behalf of the registrant and as the registrant’s Principal Financial and Accounting Officer)