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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 December 31, 2020

or

☐ 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 February 2, 2021, 63,044,002 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 |  | 6
Item 2. |  | Management’s Discussion and Analysis of Financial Condition and Results of Operations |  | 29
|  | Forward Looking Statements |  | 29
|  | Overview |  | 30
|  | Results of Operations |  | 32
|  | Liquidity and Capital Resources |  | 36
Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk |  | 42
Item 4. |  | Controls and Procedures |  | 42
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 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 |
|  | December 31, |
|  | 2020 |  |  | 2019 |
Net sales |  | $ | 537,619 |  |  | $ | 720,355 |
Costs and expenses: |  |  |  |  |  |  |  |
Cost of goods sold |  |  | 401,640 |  |  |  | 534,917 |
Selling, general and administrative expenses |  |  | 56,111 |  |  |  | 62,045 |
Research and development costs |  |  | 31,996 |  |  |  | 36,846 |
Impairment of assets sold |  |  | — |  |  |  | 37,902 |
Interest expense |  |  | 8,906 |  |  |  | 9,009 |
Interest income |  |  | (495 | ) |  |  | (487 | )
Other (income) expense, net |  |  | (8,123 | ) |  |  | (21,425 | )
Total costs and expenses |  |  | 490,035 |  |  |  | 658,807 |
Earnings before income taxes |  |  | 47,584 |  |  |  | 61,548 |
Income tax expense |  |  | 6,014 |  |  |  | 8,175 |
Net earnings |  | $ | 41,570 |  |  | $ | 53,373 |
Earnings per share: |  |  |  |  |  |  |  |
Basic earnings per share |  | $ | 0.66 |  |  | $ | 0.86 |
Diluted earnings per share |  | $ | 0.64 |  |  | $ | 0.83 |
Weighted Average Common Shares Outstanding: |  |  |  |  |  |  |  |
Basic |  |  | 62,812 |  |  |  | 61,991 |
Diluted |  |  | 64,892 |  |  |  | 64,673 |

See accompanying Notes to Condensed Consolidated Financial Statements

1

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(In thousands)

(Unaudited)

|  | Three-Months Ended |
|  | December 31, |
|  | 2020 |  |  | 2019 |
Net earnings |  | $ | 41,570 |  |  | $ | 53,373 |
Other comprehensive earnings: |  |  |  |  |  |  |  |
Foreign currency translation adjustments |  |  | 21,782 |  |  |  | 11,153 |
Net loss on foreign currency transactions designated as hedges of net investments in foreign subsidiaries |  |  | (2,227 | ) |  |  | (1,045 | )
Taxes on changes in foreign currency translation adjustments |  |  | 1,684 |  |  |  | (340 | )
Foreign currency translation and transactions adjustments, net of tax |  |  | 21,239 |  |  |  | 9,768 |
Unrealized loss on fair value adjustment of derivative instruments |  |  | (30,658 | ) |  |  | (11,294 | )
Reclassification of net realized loss on derivatives to earnings |  |  | 20,960 |  |  |  | 11,656 |
Taxes on changes in derivative transactions |  |  | (1,340 | ) |  |  | 18 |
Derivative adjustments, net of tax |  |  | (11,038 | ) |  |  | 380 |
Amortization of pension and other postretirement plan: |  |  |  |  |  |  |  |
Net prior service cost |  |  | 248 |  |  |  | 241 |
Net loss |  |  | 370 |  |  |  | 631 |
Foreign currency exchange rate changes on pension and other postretirement benefit plan liabilities |  |  | (1,697 | ) |  |  | (1,502 | )
Taxes on changes in pension and other postretirement benefit plan liability adjustments, net of foreign currency exchange rate changes |  |  | 356 |  |  |  | 240 |
Pension and other postretirement benefit plan adjustments, net of tax |  |  | (723 | ) |  |  | (390 | )
Total comprehensive earnings |  | $ | 51,048 |  |  | $ | 63,131 |

See accompanying Notes to Condensed Consolidated Financial Statements

2

WOODWARD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

|  | December 31, |  |  | September 30, |
|  | 2020 |  |  | 2020 |
ASSETS |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |
Cash and cash equivalents, including restricted cash of $1,908 and $3,497, respectively |  | $ | 201,881 |  |  | $ | 153,270 |
Accounts receivable, less allowance for uncollectible amounts of $7,499 and $8,359, respectively |  |  | 509,721 |  |  |  | 537,987 |
Inventories |  |  | 445,463 |  |  |  | 437,943 |
Income taxes receivable |  |  | 34,092 |  |  |  | 28,879 |
Other current assets |  |  | 55,397 |  |  |  | 52,786 |
Total current assets |  |  | 1,246,554 |  |  |  | 1,210,865 |
Property, plant and equipment, net |  |  | 986,030 |  |  |  | 997,415 |
Goodwill |  |  | 821,609 |  |  |  | 808,252 |
Intangible assets, net |  |  | 619,721 |  |  |  | 606,711 |
Deferred income tax assets |  |  | 13,970 |  |  |  | 14,658 |
Other assets |  |  | 271,621 |  |  |  | 265,435 |
Total assets |  | $ | 3,959,505 |  |  | $ | 3,903,336 |
LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |
Current portion of long-term debt |  | $ | 1,623 |  |  | $ | 101,634 |
Accounts payable |  |  | 158,568 |  |  |  | 134,242 |
Income taxes payable |  |  | 11,987 |  |  |  | 4,662 |
Accrued liabilities |  |  | 155,932 |  |  |  | 151,794 |
Total current liabilities |  |  | 328,110 |  |  |  | 392,332 |
Long-term debt, less current portion |  |  | 745,464 |  |  |  | 736,849 |
Deferred income tax liabilities |  |  | 168,181 |  |  |  | 163,573 |
Other liabilities |  |  | 654,288 |  |  |  | 617,905 |
Total liabilities |  |  | 1,896,043 |  |  |  | 1,910,659 |
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 |  |  | 244,394 |  |  |  | 231,936 |
Accumulated other comprehensive losses |  |  | (80,316 | ) |  |  | (89,794 | )
Deferred compensation |  |  | 9,485 |  |  |  | 9,222 |
Retained earnings |  |  | 2,464,373 |  |  |  | 2,427,905 |
|  |  | 2,638,042 |  |  |  | 2,579,375 |
Treasury stock at cost, 9,992 shares and 10,277 shares, respectively |  |  | (565,095 | ) |  |  | (577,476 | )
Treasury stock held for deferred compensation, at cost, 201 shares and 199 shares, respectively |  |  | (9,485 | ) |  |  | (9,222 | )
Total stockholders' equity |  |  | 2,063,462 |  |  |  | 1,992,677 |
Total liabilities and stockholders' equity |  | $ | 3,959,505 |  |  | $ | 3,903,336 |

See accompanying Notes to Condensed Consolidated Financial Statements

3

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

|  | Three-Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Cash flows from operating activities: |  |  |  |  |  |  |  |
Net earnings |  | $ | 41,570 |  |  | $ | 53,373 |
Adjustments to reconcile net earnings to net cash provided by operating activities: |  |  |  |  |  |  |  |
Depreciation and amortization |  |  | 33,077 |  |  |  | 32,451 |
Impairment of assets sold |  |  | — |  |  |  | 37,902 |
Net gain on sales of assets and businesses |  |  | (588 | ) |  |  | (13,547 | )
Stock-based compensation |  |  | 13,469 |  |  |  | 10,982 |
Deferred income taxes |  |  | 1,332 |  |  |  | (47 | )
Changes in operating assets and liabilities: |  |  |  |  |  |  |  |
Trade accounts receivable |  |  | 57,001 |  |  |  | 37,652 |
Unbilled receivables (contract assets) |  |  | (17,468 | ) |  |  | (33,150 | )
Costs to fulfill a contract |  |  | (5,321 | ) |  |  | (6,401 | )
Inventories |  |  | (2,528 | ) |  |  | (17,065 | )
Accounts payable and accrued liabilities |  |  | 22,725 |  |  |  | (79,535 | )
Contract liabilities |  |  | 8,509 |  |  |  | (144 | )
Income taxes |  |  | 1,795 |  |  |  | 1,001 |
Retirement benefit obligations |  |  | (1,317 | ) |  |  | (1,490 | )
Other |  |  | (5,531 | ) |  |  | 5,463 |
Net cash provided by operating activities |  |  | 146,725 |  |  |  | 27,445 |
Cash flows from investing activities: |  |  |  |  |  |  |  |
Payments for purchase of property, plant, and equipment |  |  | (7,263 | ) |  |  | (17,232 | )
Proceeds from sale of assets |  |  | 48 |  |  |  | 18,809 |
Payments for purchases of short-term investments |  |  | (2,740 | ) |  |  | (2 | )
Net cash (used in) provided by investing activities |  |  | (9,955 | ) |  |  | 1,575 |
Cash flows from financing activities: |  |  |  |  |  |  |  |
Cash dividends paid |  |  | (5,102 | ) |  |  | (10,064 | )
Proceeds from sales of treasury stock |  |  | 10,855 |  |  |  | 7,558 |
Borrowings on revolving lines of credit and short-term borrowings |  |  | 74,400 |  |  |  | 461,633 |
Payments on revolving lines of credit and short-term borrowings |  |  | (74,400 | ) |  |  | (441,500 | )
Payments of long-term debt and finance lease obligations |  |  | (100,395 | ) |  |  | (439 | )
Net cash (used in) provided by financing activities |  |  | (94,642 | ) |  |  | 17,188 |
Effect of exchange rate changes on cash and cash equivalents |  |  | 6,483 |  |  |  | 2,727 |
Net change in cash and cash equivalents |  |  | 48,611 |  |  |  | 48,935 |
Cash and cash equivalents, including restricted cash, at beginning of year |  |  | 153,270 |  |  |  | 99,073 |
Cash and cash equivalents, including restricted cash, at end of period |  | $ | 201,881 |  |  | $ | 148,008 |

See accompanying Notes to Condensed Consolidated Financial Statements

4

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, 2019 |  |  | 72,960 |  |  |  | (11,040 | ) |  |  | (211 | ) |  | $ | 106 |  |  | $ | 207,120 |  |  | $ | (53,235 | ) |  | $ | (4,955 | ) |  | $ | (45,116 | ) |  | $ | (103,306 | ) |  | $ | 9,382 |  |  | $ | 2,224,919 |  |  | $ | (602,098 | ) |  | $ | (9,382 | ) |  | $ | 1,726,741 |
Cumulative effect from adoption of ASC 842 |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 255 |  |  |  | — |  |  |  | — |  |  |  | 255 |
Net earnings |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 53,373 |  |  |  | — |  |  |  | — |  |  |  | 53,373 |
Other comprehensive earnings (loss), net of tax |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 9,768 |  |  |  | 380 |  |  |  | (390 | ) |  |  | 9,758 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 9,758 |
Cash dividends paid ($0.1625 per share) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (10,064 | ) |  |  | — |  |  |  | — |  |  |  | (10,064 | )
Sales of treasury stock |  |  | — |  |  |  | 226 |  |  |  | — |  |  |  | — |  |  |  | (1,944 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 9,502 |  |  |  | — |  |  |  | 7,558 |
Stock-based compensation |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 10,982 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 10,982 |
Purchases/transfers of stock by/to deferred compensation plan |  |  | — |  |  |  | — |  |  |  | (5 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 543 |  |  |  | — |  |  |  | — |  |  |  | (543 | ) |  |  | — |
Distribution of stock from deferred compensation plan |  |  | — |  |  |  | — |  |  |  | 1 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (14 | ) |  |  | — |  |  |  | — |  |  |  | 14 |  |  |  | — |
Balances as of December 31, 2019 |  |  | 72,960 |  |  |  | (10,814 | ) |  |  | (215 | ) |  | $ | 106 |  |  | $ | 216,158 |  |  | $ | (43,467 | ) |  | $ | (4,575 | ) |  | $ | (45,506 | ) |  | $ | (93,548 | ) |  | $ | 9,911 |  |  | $ | 2,268,483 |  |  | $ | (592,596 | ) |  | $ | (9,911 | ) |  | $ | 1,798,603 |
Balances as of September 30, 2020 |  |  | 72,960 |  |  |  | (10,277 | ) |  |  | (199 | ) |  | $ | 106 |  |  | $ | 231,936 |  |  | $ | (40,691 | ) |  | $ | (20,457 | ) |  | $ | (28,646 | ) |  | $ | (89,794 | ) |  | $ | 9,222 |  |  | $ | 2,427,905 |  |  | $ | (577,476 | ) |  | $ | (9,222 | ) |  | $ | 1,992,677 |
Net earnings |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 41,570 |  |  |  | — |  |  |  | — |  |  |  | 41,570 |
Other comprehensive earnings (loss), net of tax |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 21,239 |  |  |  | (11,038 | ) |  |  | (723 | ) |  |  | 9,478 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 9,478 |
Cash dividends paid ($0.08125 per share) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (5,102 | ) |  |  | — |  |  |  | — |  |  |  | (5,102 | )
Sales of treasury stock |  |  | — |  |  |  | 285 |  |  |  | — |  |  |  | — |  |  |  | (1,011 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 12,381 |  |  |  | — |  |  |  | 11,370 |
Stock-based compensation |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 13,469 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 13,469 |
Purchases/transfers of stock by/to deferred compensation plan |  |  | — |  |  |  | — |  |  |  | (3 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 276 |  |  |  | — |  |  |  | — |  |  |  | (276 | ) |  |  | — |
Distribution of stock from deferred compensation plan |  |  | — |  |  |  | — |  |  |  | 1 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (13 | ) |  |  | — |  |  |  | — |  |  |  | 13 |  |  |  | — |
Balances as of December 31, 2020 |  |  | 72,960 |  |  |  | (9,992 | ) |  |  | (201 | ) |  | $ | 106 |  |  | $ | 244,394 |  |  | $ | (19,452 | ) |  | $ | (31,495 | ) |  | $ | (29,369 | ) |  | $ | (80,316 | ) |  | $ | 9,485 |  |  | $ | 2,464,373 |  |  | $ | (565,095 | ) |  | $ | (9,485 | ) |  | $ | 2,063,462 |

See accompanying Notes to Condensed Consolidated Financial Statements

5

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 December 31, 2020 and for the three-months ended December 31, 2020 and 2019, 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 December 31, 2020, 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-months ended December 31, 2020 and 2019 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 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.

In March 2020, the World Health Organization (“WHO”) declared the novel coronavirus ("COVID-19") outbreak a global pandemic. When combined with the various measures enacted by governments and private organizations to contain COVID-19 or slow its spread, the pandemic has adversely impacted global activity and contributed to significant declines and volatility in financial markets; and the Company has likewise been significantly impacted by the global COVID-19 pandemic. The COVID-19 pandemic could continue to have a material adverse impact on economic and market conditions and presents uncertainty and risk with respect to the Company and its performance and financial results, including estimates and assumptions used by management for the reported amount of assets and liabilities.

6

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 March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The purpose of ASU 2020-04 is to provide optional guidance for a limited time to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. In response to concerns about structural risks of interbank offered rates, and, in particular, the risk of cessation of the London Interbank Offered Rate (LIBOR), reference rate reform refers to a global initiative to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments in ASU 2020-04 for contract modifications by topic or industry subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. Once elected for a topic or an industry subtopic, the amendments in ASU 2020-04 must be applied prospectively for all eligible contract modifications for that topic or industry subtopic.

Woodward is currently assessing the accounting and financial impact of reference rate reform, particularly the impact it may have on its hedging relationships, and will consider applying the optional guidance of ASU 2020-04 accordingly.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 amends ASC 740 to simplify the accounting for income taxes by removing certain exceptions for investments, intraperiod allocations and interim calculations, and adding guidance to reduce complexity in the accounting standard under the FASB’s simplification initiative. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020 (fiscal year 2022 for Woodward). Upon adoption, the amendments in ASU 2019-12 should be applied on a prospective basis to all periods presented. Early adoption is permitted. Woodward is currently assessing the impact of the adoption of the new guidance and expects to adopt the new guidance under ASU 2019-12 in fiscal year 2022.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 adds a current expected credit loss (“CECL”) impairment model to U.S. GAAP that is based on expected losses rather than incurred losses. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 (fiscal year 2021 for Woodward), including interim periods within the year of adoption.

Woodward adopted ASU 2016-13, and all applicable amendments, on October 1, 2020 using the modified retrospective adoption method. Based on the nature of the Company’s financial instruments included within the scope of this standard, the adoption did not have a material effect on the Condensed Consolidated Financial Statements. As a result of the adoption of ASU 2016-13, Woodward will utilize current and historical collection data, and will continue to monitor economic conditions in order to assess and determine expected credit losses on a prospective basis.

See details of the Company’s allowance for uncollectible amounts and change in expected credit losses for billed receivables and unbilled receivables (contract assets) at Note 3, Revenue.

Note 3. Revenue

Sales of Products

Revenue from manufactured products; maintenance, repair and overhaul (“MRO”); and services represented 87%, 12%, and 1%, respectively, of Woodward’s net sales for the three-months ended December 31, 2020, and for the three-months ended December 31, 2019.

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

|  | Three-Months Ended December 31, 2020 |  |  | Three-Months Ended December 31, 2019 |
|  | Aerospace |  |  | Industrial |  |  | Consolidated |  |  | Aerospace |  |  | Industrial |  |  | Consolidated |
Point in time |  | $ | 106,967 |  |  | $ | 154,195 |  |  | $ | 261,162 |  |  | $ | 187,515 |  |  | $ | 167,942 |  |  | $ | 355,457 |
Over time |  |  | 214,700 |  |  |  | 61,757 |  |  |  | 276,457 |  |  |  | 286,410 |  |  |  | 78,488 |  |  |  | 364,898 |
Total net sales |  | $ | 321,667 |  |  | $ | 215,952 |  |  | $ | 537,619 |  |  | $ | 473,925 |  |  | $ | 246,430 |  |  | $ | 720,355 |

7

Accounts Receivable

Accounts receivable consisted of the following:

|  | December 31, 2020 |  |  | September 30, 2020 |
Billed receivables |  |  |  |  |  |  |  |
Trade accounts receivable |  | $ | 265,732 |  |  | $ | 307,914 |
Other (Chinese financial institutions) |  |  | 46,896 |  |  |  | 56,640 |
Total billed receivables |  |  | 312,628 |  |  |  | 364,554 |
Current unbilled receivables (contract assets) |  |  | 204,592 |  |  |  | 181,792 |
Less: Allowance for uncollectible amounts |  |  | (7,499 | ) |  |  | (8,359 | )
Total accounts receivable, net |  | $ | 509,721 |  |  | $ | 537,987 |

As of December 31, 2020, “Other assets” on the Condensed Consolidated Balance Sheets includes $12,053 of unbilled receivables not expected to be invoiced and collected within a period of twelve months, compared to $16,751 as of September 30, 2020. Unbilled receivables not expected to be invoiced and collected within a period of twelve months are primarily attributable to customer delays for deliveries on firm orders in the Aerospace segment due to the impacts of the COVID-19 pandemic.

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 in accordance with FASB ASC Topic 326, “Financial Instruments – Credit Losses”. Expected losses are estimated by reviewing specific customer accounts, taking into consideration 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 |
|  | December 31, 2020 |
Balance, beginning |  | $ | 8,359 |
Charged to costs and expenses |  |  | 88 |
Deductions |  |  | (1,171 | )
Other additions1 |  |  | 223 |
Balance, ending |  | $ | 7,499 |

| (1) | Includes effects of foreign exchange rate changes during the period.

Contract liabilities

Contract liabilities consisted of the following:

|  | December 31, 2020 |  |  | September 30, 2020 |
|  | Current |  |  | Noncurrent |  |  | Current |  |  | Noncurrent |
Deferred revenue from material rights from GE joint venture formation |  | $ | 4,242 |  |  | $ | 232,882 |  |  | $ | 4,066 |  |  | $ | 234,240 |
Deferred revenue from advanced invoicing and/or prepayments from customers |  |  | 4,182 |  |  |  | 1,338 |  |  |  | 3,239 |  |  |  | 85 |
Liability related to customer supplied inventory |  |  | 16,885 |  |  |  | — |  |  |  | 14,955 |  |  |  | — |
Deferred revenue from material rights related to engineering and development funding |  |  | 4,076 |  |  |  | 136,804 |  |  |  | 2,360 |  |  |  | 132,317 |
Net contract liabilities |  | $ | 29,385 |  |  | $ | 371,024 |  |  | $ | 24,620 |  |  | $ | 366,642 |

Woodward recognized revenue of $6,528 in the three-months ended December 31, 2020 from contract liabilities balances recorded as of October 1, 2020, compared to $3,970 in the three-months ended December 31, 2019 from contract liabilities balances recorded as of October 1, 2019.

8

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 December 31, 2020 was $1,274,218, compared to $1,454,406 as of September 30, 2020, the majority of which relate in both periods relate to Woodward’s Aerospace segment. Woodward expects to recognize almost all of these remaining performance obligations within two years after December 31, 2020.

Remaining performance obligations related to material rights that have not yet been recognized in revenue as of December 31, 2020 was $464,296, compared to $465,668 as of September 30, 2020, of which $8,952 is expected to be recognized in the remainder of fiscal year 2021, $10,625 is expected to be recognized in fiscal year 2022, and the 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 and by geographical area 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 December 31, |
|  | 2020 |  |  | 2019 |
Commercial OEM |  | $ | 76,081 |  |  | $ | 158,666 |
Commercial aftermarket |  |  | 65,515 |  |  |  | 125,928 |
Defense OEM |  |  | 131,263 |  |  |  | 140,926 |
Defense aftermarket |  |  | 48,808 |  |  |  | 48,405 |
Total Aerospace segment net sales |  | $ | 321,667 |  |  | $ | 473,925 |

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

|  | Three-Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Reciprocating engines |  | $ | 164,922 |  |  | $ | 174,653 |
Industrial turbines |  |  | 51,030 |  |  |  | 51,500 |
Renewables1 |  |  | — |  |  |  | 20,277 |
Total Industrial segment net sales |  | $ | 215,952 |  |  | $ | 246,430 |

| (1) | Sales in the renewables market were discontinued as of May 1, 2020 following the closing of the divestiture of the renewable power systems business and other related businesses (as described more fully in Note 10, Sale of businesses, and defined therein as the “disposal group”).

The customers who account for approximately 10% or more of net sales of each of Woodward’s reportable segments for the three-months ended December 31, 2020 are as follows:

|  | Customer
Aerospace |  | The Boeing Company, General Electric Company, Raytheon Technologies
Industrial |  | Rolls-Royce PLC, Weichai Westport, General Electric Company

9

Net sales by geographic area, as determined based on the location of the customer, were as follows:

|  | Three-Months Ended December 31, 2020 |  |  | Three-Months Ended December 31, 2019 |
|  | Aerospace |  |  | Industrial |  |  | Consolidated |  |  | Aerospace |  |  | Industrial |  |  | Consolidated |
United States |  | $ | 257,546 |  |  | $ | 43,153 |  |  | $ | 300,699 |  |  | $ | 363,912 |  |  | $ | 51,092 |  |  | $ | 415,004 |
Germany |  |  | 7,506 |  |  |  | 29,642 |  |  |  | 37,148 |  |  |  | 17,278 |  |  |  | 51,438 |  |  |  | 68,716 |
Europe, excluding Germany |  |  | 20,940 |  |  |  | 43,068 |  |  |  | 64,008 |  |  |  | 38,987 |  |  |  | 50,501 |  |  |  | 89,488 |
China |  |  | 8,964 |  |  |  | 65,983 |  |  |  | 74,947 |  |  |  | 10,212 |  |  |  | 53,876 |  |  |  | 64,088 |
Asia, excluding China |  |  | 4,480 |  |  |  | 28,635 |  |  |  | 33,115 |  |  |  | 6,981 |  |  |  | 31,912 |  |  |  | 38,893 |
Other countries |  |  | 22,231 |  |  |  | 5,471 |  |  |  | 27,702 |  |  |  | 36,555 |  |  |  | 7,611 |  |  |  | 44,166 |
Total net sales |  | $ | 321,667 |  |  | $ | 215,952 |  |  | $ | 537,619 |  |  | $ | 473,925 |  |  | $ | 246,430 |  |  | $ | 720,355 |

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 December 31, |
|  | 2020 |  |  | 2019 |
Numerator: |  |  |  |  |  |  |  |
Net earnings |  | $ | 41,570 |  |  | $ | 53,373 |
Denominator: |  |  |  |  |  |  |  |
Basic shares outstanding |  |  | 62,812 |  |  |  | 61,991 |
Dilutive effect of stock options and restricted stock |  |  | 2,080 |  |  |  | 2,682 |
Diluted shares outstanding |  |  | 64,892 |  |  |  | 64,673 |
Income per common share: |  |  |  |  |  |  |  |
Basic earnings per share |  | $ | 0.66 |  |  | $ | 0.86 |
Diluted earnings per share |  | $ | 0.64 |  |  | $ | 0.83 |

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 December 31, |
|  | 2020 |  |  | 2019 |
Options |  |  | 587 |  |  |  | 653 |
Weighted-average option price |  | $ | 104.99 |  |  | $ | 104.40 |

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 December 31, |
|  | 2020 |  |  | 2019 |
Weighted-average treasury stock shares held for deferred compensation obligations |  |  | 200 |  |  |  | 213 |

10

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 follows:

|  | Classification on the Condensed Consolidated Balance Sheets |  | December 31, 2020 |  |  | September 30, 2020 |
Assets: |  |  |  |  |  |  |  |  |  |
Operating lease assets |  | Other assets |  | $ | 20,061 |  |  | $ | 18,918 |
Finance lease assets |  | Property, plant and equipment, net |  |  | 1,094 |  |  |  | 1,201 |
Total lease assets |  |  |  |  | 21,155 |  |  |  | 20,119 |
Current liabilities: |  |  |  |  |  |  |  |  |  |
Operating lease liabilities |  | Accrued liabilities |  |  | 4,950 |  |  |  | 4,925 |
Finance lease liabilities |  | Current portion of long-term debt |  |  | 1,623 |  |  |  | 1,634 |
Noncurrent liabilities: |  |  |  |  |  |  |  |  |  |
Operating lease liabilities |  | Other liabilities |  |  | 15,683 |  |  |  | 14,569 |
Finance lease liabilities |  | Long-term debt, less current portion |  |  | 802 |  |  |  | 1,173 |
Total lease liabilities |  |  |  | $ | 23,058 |  |  | $ | 22,301 |

During the three-months ended December 31, 2019, Woodward determined that the approved plan to divest of the renewable power systems business and other related businesses (as described more fully in Note 10, Sale of businesses, and defined therein as the “disposal group”) represented a triggering event requiring that the long-lived assets attributable to the disposal group be assessed for impairment. Given the facts and circumstances at that time, Woodward determined that the remaining value of the right-of-use assets of the disposal group were not recoverable and a $639 non-cash impairment charge was recorded during fiscal year 2020.

Lease-related expenses were as follows:

|  | Three-Months Ended |  |  | Three-Months Ended |
|  | December 31, 2020 |  |  | December 31, 2019 |
Operating lease expense |  | $ | 1,553 |  |  | $ | 1,519 |
Amortization of finance lease assets |  |  | 126 |  |  |  | 147 |
Interest on finance lease liabilities |  |  | 18 |  |  |  | 20 |
Variable lease expense |  |  | 322 |  |  |  | 307 |
Short-term lease expense |  |  | 82 |  |  |  | 175 |
Sublease income1 |  |  | (168 | ) |  |  | (125 | )
Total lease expense |  | $ | 1,933 |  |  | $ | 2,043 |

| (1) | Relates to two separate subleases Woodward has entered into for a leased manufacturing building in Niles, Illinois.

Lease-related supplemental cash flow information was as follows:

|  | Three-Months Ended December 31, 2020 |  |  | Three-Months Ended December 31, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: |  |  |  |  |  |  |  |
Operating cash flows for operating leases |  | $ | 1,151 |  |  | $ | 1,254 |
Operating cash flows for finance leases |  |  | 18 |  |  |  | 20 |
Financing cash flows for finance leases |  |  | 396 |  |  |  | 439 |
Right-of-use assets obtained in exchange for recorded lease obligations: |  |  |  |  |  |  |  |
Operating leases |  |  | 1,130 |  |  |  | 3,540 |
Finance leases |  |  | 12 |  |  |  | 1,211 |

11

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 is substantially (more than 90%) dedicated to the manufacturing of the product(s) for a single customer.

Woodward has dedicated manufacturing lines with three 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 December 31, 2020. 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” at the Condensed Consolidated Statements of Earnings, was $1,798 for the three-months ended December 31, 2020 and $1,564 for the three-months ended December 31, 2019.

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

|  | December 31, 2020 |  |  | September 30, 2020 |
Property, plant and equipment leased to others through embedded leasing arrangements |  | $ | 78,176 |  |  | $ | 76,655 |
Less accumulated depreciation |  |  | (31,714 | ) |  |  | (29,819 | )
Property, plant and equipment leased to others through embedded leasing arrangements, net |  | $ | 46,462 |  |  | $ | 46,836 |

Note 6. Joint venture

On January 4, 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:

|  | December 31, 2020 |  |  | September 30, 2020 |
Accrued liabilities |  | $ | 4,242 |  |  | $ | 4,066 |
Other liabilities |  |  | 232,882 |  |  |  | 234,240 |

Amortization of the deferred revenue (material right) recognized as an increase to sales was $1,182 for the three-months ended December 31, 2020, and $1,708 for the three-months ended December 31, 2019.

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

|  | Three-Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Other income |  | $ | 2,386 |  |  | $ | 3,212 |

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

|  | Three-Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Cash distributions |  | $ | 3,500 |  |  | $ | 3,000 |

12

Net sales to the JV were as follows:

|  | Three-Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Net sales1 |  | $ | 10,059 |  |  | $ | 14,878 |

| (1) | Net sales included a reduction of $4,420 for the three-months ended December 31, 2020 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 $7,234 for the three-months ended December 31, 2019.

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:

|  | December 31, 2020 |  |  | September 30, 2020 |
Accounts receivable |  | $ | 2,892 |  |  | $ | 3,062 |
Accounts payable |  |  | 1,478 |  |  |  | 1,502 |
Other assets |  |  | 8,009 |  |  |  | 9,123 |

Woodward records in “Other liabilities” amounts invoiced to the JV for support of the JV’s engineering and development projects as an increase to contract liabilities, and records in “Other assets” related incurred expenditures as costs to fulfill a contract. Woodward’s contract liabilities classified as “Other liabilities” included amounts invoiced to the JV as of December 31, 2020 of $70,697 compared to $70,618 as of fiscal year ended September 30, 2020. Woodward’s costs to fulfill a contract included in “Other assets” related to JV activities were $70,697 as of December 31, 2020 and $70,618 as of fiscal year ended September 30, 2020.

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 December 31, 2020 |  |  | At September 30, 2020 |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |  |  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Total |
Financial assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash |  | $ | 188,104 |  |  | $ | — |  |  | $ | — |  |  | $ | 188,104 |  |  | $ | 112,817 |  |  | $ | — |  |  | $ | — |  |  | $ | 112,817 |
Investments in term deposits with foreign banks |  |  | 13,777 |  |  |  | — |  |  |  | — |  |  |  | 13,777 |  |  |  | 40,453 |  |  |  | — |  |  |  | — |  |  |  | 40,453 |
Equity securities |  |  | 28,526 |  |  |  | — |  |  |  | — |  |  |  | 28,526 |  |  |  | 25,381 |  |  |  | — |  |  |  | — |  |  |  | 25,381 |
Total financial assets |  | $ | 230,407 |  |  | $ | — |  |  | $ | — |  |  | $ | 230,407 |  |  | $ | 178,651 |  |  | $ | — |  |  | $ | — |  |  | $ | 178,651 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cross-currency interest rate swaps |  | $ | — |  |  | $ | 83,137 |  |  | $ | — |  |  | $ | 83,137 |  |  | $ | — |  |  | $ | 51,387 |  |  | $ | — |  |  | $ | 51,387 |
Total financial liabilities |  | $ | — |  |  | $ | 83,137 |  |  | $ | — |  |  | $ | 83,137 |  |  | $ | — |  |  | $ | 51,387 |  |  | $ | — |  |  | $ | 51,387 |

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.

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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. In the Condensed Consolidated Balance Sheets, the swaps in an asset position are included in “Other assets,” and swaps in a liability position are included in “Other liabilities”. 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.

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 December 31, 2020 |  |  | At September 30, 2020 |
|  | Fair Value Hierarchy Level |  | Estimated Fair Value |  |  | Carrying Cost |  |  | Estimated Fair Value |  |  | Carrying Cost |
Assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Notes receivable from municipalities |  | 2 |  | $ | 13,579 |  |  | $ | 10,941 |  |  | $ | 13,413 |  |  | $ | 11,846 |
Note receivable from sale of disposal group |  | 2 |  |  | 6,341 |  |  |  | 6,111 |  |  |  | 6,341 |  |  |  | 6,061 |
Investments in short-term time deposits |  | 2 |  |  | 16,537 |  |  |  | 16,521 |  |  |  | 13,678 |  |  |  | 13,671 |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Long-term debt |  | 2 |  | $ | 853,830 |  |  | $ | 749,172 |  |  | $ | 935,610 |  |  | $ | 840,654 |

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 1.0% at December 31, 2020 and 1.2% at September 30, 2020.

In connection with the sale of the renewable power systems business and other related businesses (as described more fully in Note 10, Sale of businesses, and defined therein as the “disposal group”), Woodward received a long-term promissory note from the buyer for deferral of a portion of the purchase price. The fair value of the long-term note 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 promissory notes of similar maturity, which is a level 2 input as defined by the U.S. GAAP fair value hierarchy. The interest rate used to estimate the fair value of the long-term note was 2.3% at both December 31, 2020 and September 30, 2020.

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 3.9% at December 31, 2020 and 4.4% at September 30, 2020.

The fair value of long-term debt was estimated based on a model that discounted future principal and interest payments at interest rates available to the Woodward at the end of the period for similar debt of the same maturity, which is a level 2 input as defined by the U.S. GAAP fair value hierarchy. The weighted-average interest rate used to estimate the fair value of long-term debt was 1.3% at December 31, 2020 and 1.5% at September 30, 2020.

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

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Note 8. Derivative instruments and hedging activities

Derivative instruments not designated or qualifying as hedging instruments

In May 2018, Woodward entered into cross-currency interest rate swap agreements that synthetically converted $167,420 of floating-rate debt under Woodward’s then existing revolving credit agreement to Euro denominated floating-rate debt in conjunction with the L’Orange acquisition (the “Floating-Rate Cross-Currency Swap”). Also in May 2018, Woodward entered into cross-currency interest rate swap agreements that synthetically converted an aggregate principal amount of $400,000 of fixed-rate debt associated with the 2018 Note Purchase Agreement (as defined in Note 16, Credit Facilities, short-term borrowings and long-term debt, in Woodward’s most recently filed Form 10-K) to Euro denominated fixed-rate debt (the “Fixed-Rate Cross-Currency Swaps”). The cross-currency interest rate swaps, which effectively reduce the interest rate on the underlying fixed and floating-rate debt under the 2018 Notes (as defined in Note 16, Credit Facilities, short-term borrowings and long-term debt, in Woodward’s most recently filed Form 10-K) and Woodward’s then existing revolving credit agreement, respectively, is recorded as a reduction to “Interest expense” in Woodward’s Condensed Consolidated Statements of Earnings.

In May 2020, Woodward terminated and settled its Floating-Rate Cross-Currency Swap and Fixed-Rate Cross-Currency Swaps and entered into a new 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 and Woodward’s 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. As of December 31, 2020, the total notional value of the 2020 Floating-Rate Cross-Currency Swap and 2020 Fixed-Rate Cross-Currency Swaps was $37,500 and $400,000, respectively. See Note 7, Financial Instruments and fair value measurements, for the related fair value of the derivative instruments as of December 31, 2020.

Derivatives instruments in fair value hedging relationships

Concurrent with the entry into the Floating-Rate Cross-Currency Swap, a corresponding Euro denominated intercompany loan receivable with identical terms and notional amount as the underlying Euro denominated floating-rate debt, with a reciprocal cross-currency interest rate swap, was entered into by Woodward Barbados Financing SRL (“Barbados”), a wholly owned subsidiary of Woodward, and is designated as a fair value hedge under the criteria prescribed in ASC Topic 815, “Derivatives and Hedging” (“ASC 815”). The objective of the derivative instrument is to hedge against the foreign currency exchange risk attributable to the spot remeasurement of the Euro denominated intercompany loan.

In May 2020, Woodward settled the Euro denominated intercompany loan receivable with identical terms and notional value to the Floating-Rate Cross-Currency Swap and reciprocal intercompany cross-currency interest rate swap. The fair value hedge designated on these instruments was discontinued at the date of settlement. Concurrent with settlement of the Floating-Rate Cross-Currency Swap and discontinuation of the previous fair value hedging relationship, 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, was 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 is 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.

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Derivative instruments in cash flow hedging relationships

In conjunction with the entry into the Fixed-Rate Cross-Currency Swaps, five corresponding intercompany loans receivable, with identical terms and amounts of each tranche of the underlying aggregate principal amount of $400,000 of fixed-rate debt, and reciprocal cross-currency interest rate swaps were entered into by Barbados, which 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 Euro denominated intercompany loans over a fifteen-year period.

In May 2020, Woodward settled the Euro denominated intercompany loans receivable with identical terms and notional value to the Fixed-Rate Cross-Currency Swaps and reciprocal cross-currency interest rate swaps. The cash flow hedges designated on these instruments were discontinued at the date of settlement. Concurrent with settlement of the Fixed-Rate Cross-Currency Swaps and the discontinuation of the previous cash flow hedging relationships, five corresponding 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 were entered into by Euro Barbados, which 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 losses of $2,227 for the three-months ended December 31, 2020, compared to net foreign exchange losses of $1,045 for the three-months ended December 31, 2019.

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Impact of derivative instruments designated as qualifying hedging instruments

The following table discloses the impact of derivative instruments designated as qualifying hedging instruments on Woodward’s Condensed Consolidated Statements of Earnings:

|  |  |  | Three-Months Ended |
|  |  |  | December 31, 2020 |
Derivatives in: |  | Location |  | Amount of (Income) Expense Recognized in Earnings on Derivative |  |  | Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative |  |  | Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings |
Cross currency interest rate swap agreement designated as fair value hedges |  | Selling, general and administrative expenses |  | $ | 1,850 |  |  | $ | 1,663 |  |  | $ | 1,850 |
Cross currency interest rate swap agreements designated as cash flow hedges |  | Selling, general and administrative expenses |  |  | 19,110 |  |  |  | 28,995 |  |  |  | 19,110 |
|  |  |  | $ | 20,960 |  |  | $ | 30,658 |  |  | $ | 20,960 |

|  |  |  | Three-Months Ended |
|  |  |  | December 31, 2019 |
Derivatives in: |  | Location |  | Amount of (Income) Expense Recognized in Earnings on Derivative |  |  | Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative |  |  | Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings |
Cross currency interest rate swap agreement designated as fair value hedges |  | Selling, general and administrative expenses |  | $ | 2,276 |  |  | $ | 3,598 |  |  | $ | 2,683 |
Cross currency interest rate swap agreements designated as cash flow hedges |  | Selling, general and administrative expenses |  |  | 8,991 |  |  |  | 7,696 |  |  |  | 8,991 |
Treasury lock agreement designated as cash flow hedge |  | Interest expense |  |  | (18 | ) |  |  | — |  |  |  | (18 | )
|  |  |  | $ | 11,249 |  |  | $ | 11,294 |  |  | $ | 11,656 |

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 $30,830 as of December 31, 2020 and $21,132 as of September 30, 2020.

Note 9. Supplemental statement of cash flows information

|  | Three-Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Interest paid, net of amounts capitalized |  | $ | 12,280 |  |  | $ | 10,749 |
Income taxes paid |  |  | 4,002 |  |  |  | 7,086 |
Income tax refunds received |  |  | — |  |  |  | 12 |
Non-cash activities: |  |  |  |  |  |  |  |
Purchases of property, plant and equipment on account |  |  | 1,699 |  |  |  | 2,551 |
Impact of the adoption of ASC 842 |  |  | — |  |  |  | 255 |

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Note 10. Sale of businesses

In fiscal year 2020, Woodward’s board of directors (“the Board”) approved a plan to divest Woodward’s renewable power systems business, protective relays business, and other businesses within the Company’s Industrial segment (collectively, the “disposal group”).

Woodward determined that the approved plan to divest the disposal group represented a triggering event requiring (i) the net assets of the disposal group to be classified as held for sale and (ii) the long-lived assets attributable to the disposal group be assessed for impairment. Given the facts and circumstances at that time, Woodward determined that the value of the long-lived assets of the disposal group, including goodwill, intangible assets, ROU assets and property, plant, and equipment, were not recoverable and a $22,900 non-cash impairment charge was recorded during fiscal year 2020. The non-cash impairment charge removed all the goodwill, intangible assets, ROU assets and property, plant, and equipment associated with the disposal group from the Condensed Consolidated Balance Sheets as of December 31, 2019.

Further, on the approval of the divestiture plan and subsequent marketing of the disposal group, Woodward determined that based on the current market conditions, the carrying value of the disposal group’s remaining held for sale net assets exceeded the fair value. As a result, Woodward recorded a valuation allowance to reduce the carrying value of the net assets of the disposal group to their fair value. The non-cash impairment charge associated with the long-lived assets, and related valuation allowance for the other remaining net assets attributable to the disposal group, resulted in a total impairment charge of $37,902.

Note 11. Inventories

|  | December 31, |  |  | September 30, |
|  | 2020 |  |  | 2020 |
Raw materials |  | $ | 124,900 |  |  | $ | 123,626 |
Work in progress |  |  | 93,652 |  |  |  | 92,934 |
Component parts(1) |  |  | 266,018 |  |  |  | 255,980 |
Finished goods |  |  | 66,712 |  |  |  | 66,889 |
Customer supplied inventory |  |  | 16,885 |  |  |  | 14,955 |
On-hand inventory for which control has transferred to the customer |  |  | (122,704 | ) |  |  | (116,441 | )
|  | $ | 445,463 |  |  | $ | 437,943 |

| (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

|  | December 31, |  |  | September 30, |
|  | 2020 |  |  | 2020 |
Land and land improvements |  | $ | 83,606 |  |  | $ | 83,095 |
Buildings and building improvements |  |  | 553,274 |  |  |  | 551,540 |
Leasehold improvements |  |  | 19,577 |  |  |  | 18,610 |
Machinery and production equipment |  |  | 786,343 |  |  |  | 776,884 |
Computer equipment and software |  |  | 124,290 |  |  |  | 123,903 |
Office furniture and equipment |  |  | 41,825 |  |  |  | 41,177 |
Other |  |  | 19,849 |  |  |  | 19,814 |
Construction in progress |  |  | 36,034 |  |  |  | 36,367 |
|  |  | 1,664,798 |  |  |  | 1,651,390 |
Less accumulated depreciation |  |  | (678,768 | ) |  |  | (653,975 | )
Property, plant, and equipment, net |  | $ | 986,030 |  |  | $ | 997,415 |

During the three-months ended December 31, 2019, the Company closed on the sale of one of two parcels of real property at Woodward’s former Duarte operations and recorded a pre-tax gain on sale of assets of $13,522.

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During the three-months ended December 31, 2019, Woodward determined that the approved plan to divest of the disposal group represented a triggering event requiring the long-lived assets attributable to the disposal group be assessed for impairment. Given the facts and circumstances at that time, Woodward determined that the remaining value of the plant, property and equipment of the disposal group was not recoverable and a $13,421 non-cash impairment charge was recorded during fiscal year 2020.

For the three-months ended December 31, 2020 and 2019, Woodward had depreciation expense as follows:

|  | Three-Months Ended |
|  | December 31, |
|  | 2020 |  |  | 2019 |
Depreciation expense |  | $ | 22,608 |  |  | $ | 22,546 |

Note 13. Goodwill

|  | September 30, 2020 |  |  | Effects of Foreign Currency Translation |  |  | December 31, 2020 |
Aerospace |  | $ | 455,423 |  |  | $ | — |  |  | $ | 455,423 |
Industrial |  |  | 352,829 |  |  |  | 13,357 |  |  |  | 366,186 |
Consolidated |  | $ | 808,252 |  |  | $ | 13,357 |  |  | $ | 821,609 |

Woodward tests goodwill for impairment during the fourth quarter of each fiscal year, and at any time there is an indication goodwill is more-likely-than-not impaired, commonly referred to as triggering events. Woodward’s fourth quarter of fiscal year 2020 impairment test resulted in no impairment.

During the three-months ended December 31, 2019, Woodward determined that the approved plan to divest of the disposal group represented a triggering event requiring the long-lived assets attributable to the disposal group be assessed for impairment. Given the facts and circumstances at the time, Woodward determined that the remaining value of the goodwill of the disposal group was not recoverable, and an $8,640 non-cash impairment charge was recorded during fiscal year 2020.

During the three-months ended December 31, 2020, Woodward determined the economic uncertainty and global disruption caused by the COVID-19 pandemic significantly impacted sales of all business units. Management concluded the overall economic disruption triggered by the COVID-19 pandemic generated a series of factors to consider relative to possible triggering events. However, management further concluded these factors do not individually or collectively represent triggering events that would indicate it was more likely than not that the fair value of a reporting unit is below its carrying amount as of December 31, 2020. Woodward will continue to monitor the impacts of the COVID-19 pandemic on earnings that may impact the carrying value of goodwill and long-lived assets in future periods.

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Note 14. Intangible assets, net

|  | December 31, 2020 |  |  | September 30, 2020 |
|  | 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 |  |  | $ | (199,985 | ) |  | $ | 81,698 |  |  | $ | 281,683 |  |  | $ | (196,520 | ) |  | $ | 85,163 |
Industrial |  |  | 447,664 |  |  |  | (63,492 | ) |  |  | 384,172 |  |  |  | 429,249 |  |  |  | (57,045 | ) |  |  | 372,204 |
Total |  | $ | 729,347 |  |  | $ | (263,477 | ) |  | $ | 465,870 |  |  | $ | 710,932 |  |  | $ | (253,565 | ) |  | $ | 457,367 |
Intellectual property: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Aerospace |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Industrial |  |  | 15,816 |  |  |  | (15,724 | ) |  |  | 92 |  |  |  | 15,778 |  |  |  | (15,640 | ) |  |  | 138 |
Total |  | $ | 15,816 |  |  | $ | (15,724 | ) |  | $ | 92 |  |  | $ | 15,778 |  |  | $ | (15,640 | ) |  | $ | 138 |
Process technology: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Aerospace |  | $ | 76,370 |  |  | $ | (64,760 | ) |  | $ | 11,610 |  |  | $ | 76,371 |  |  | $ | (63,956 | ) |  | $ | 12,415 |
Industrial |  |  | 94,506 |  |  |  | (23,711 | ) |  |  | 70,795 |  |  |  | 90,945 |  |  |  | (22,300 | ) |  |  | 68,645 |
Total |  | $ | 170,876 |  |  | $ | (88,471 | ) |  | $ | 82,405 |  |  | $ | 167,316 |  |  | $ | (86,256 | ) |  | $ | 81,060 |
Other intangibles: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Aerospace |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Industrial |  |  | 245 |  |  |  | (212 | ) |  |  | 33 |  |  |  | 235 |  |  |  | (183 | ) |  |  | 52 |
Total |  | $ | 245 |  |  | $ | (212 | ) |  | $ | 33 |  |  | $ | 235 |  |  | $ | (183 | ) |  | $ | 52 |
Intangible asset with indefinite life: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Tradename: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Aerospace |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Industrial |  |  | 71,321 |  |  |  | — |  |  |  | 71,321 |  |  |  | 68,094 |  |  |  | — |  |  |  | 68,094 |
Total |  | $ | 71,321 |  |  | $ | — |  |  | $ | 71,321 |  |  | $ | 68,094 |  |  | $ | — |  |  | $ | 68,094 |
Total intangibles: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Aerospace |  | $ | 358,053 |  |  | $ | (264,745 | ) |  | $ | 93,308 |  |  | $ | 358,054 |  |  | $ | (260,476 | ) |  | $ | 97,578 |
Industrial |  |  | 629,552 |  |  |  | (103,139 | ) |  |  | 526,413 |  |  |  | 647,738 |  |  |  | (138,605 | ) |  |  | 509,133 |
Consolidated Total |  | $ | 987,605 |  |  | $ | (367,884 | ) |  | $ | 619,721 |  |  | $ | 1,005,792 |  |  | $ | (399,081 | ) |  | $ | 606,711 |

Woodward tests the indefinite lived tradename intangible asset for impairment during the fourth quarter of each fiscal year, or at any time there is an indication the indefinite lived tradename intangible asset is more-likely-than-not impaired commonly referred to as triggering events. Woodward’s fourth quarter of fiscal year 2020 impairment test resulted in no impairment.

During the three-months ended December 31, 2019, Woodward determined that the approved plan to divest of the disposal group represented a triggering event requiring the long-lived assets attributable to the disposal group be assessed for impairment. Given the facts and circumstances at that time, Woodward determined that the remaining value of the intangible assets of the disposal group was not recoverable, and a $200 non-cash impairment charge was recorded during fiscal year 2020.

For the three-months ended December 31, 2020 and 2019, Woodward recorded amortization expense associated with intangibles of the following:

|  | Three-Months Ended |
|  | December 31, |
|  | 2020 |  |  | 2019 |
Amortization expense |  | $ | 10,469 |  |  | $ | 9,905 |

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Future amortization expense associated with intangibles is expected to be:

Year Ending September 30: |  |  |  |
2021 (remaining) |  | $ | 31,888 |
2022 |  |  | 39,683 |
2023 |  |  | 38,632 |
2024 |  |  | 34,880 |
2025 |  |  | 29,665 |
Thereafter |  |  | 373,652 |
|  | $ | 548,400 |

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 (the “Revolving Credit Agreement”). The Revolving Credit Agreement provides for the option to increase available borrowings up to $1,500,000, subject to lenders’ participation. Borrowings under the 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 LIBOR plus 0.875% to 1.75%. The Revolving Credit Agreement matures on June 19, 2024. Under the Revolving Credit Agreement, there were no borrowings outstanding as of December 31, 2020 and September 30, 2020.

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 December 31, 2020 and September 30, 2020.

Long-term debt

On November 15, 2020, Woodward paid the entire principal balance of $100,000 on its Series G and J Notes using cash on hand and proceeds from borrowings under its existing revolving credit facility.

Note 16. Accrued liabilities

|  | December 31, |  |  | September 30, |
|  | 2020 |  |  | 2020 |
Salaries and other member benefits |  | $ | 40,392 |  |  | $ | 50,850 |
Warranties |  |  | 21,079 |  |  |  | 18,972 |
Interest payable |  |  | 5,501 |  |  |  | 15,281 |
Accrued retirement benefits |  |  | 3,063 |  |  |  | 3,051 |
Restructuring charges |  |  | 1,596 |  |  |  | 3,395 |
Taxes, other than income |  |  | 26,432 |  |  |  | 13,925 |
Net current contract liabilities (Note 3) |  |  | 29,385 |  |  |  | 24,620 |
Other |  |  | 28,484 |  |  |  | 21,700 |
|  | $ | 155,932 |  |  | $ | 151,794 |

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Warranties

Provisions of Woodward’s sales agreements include product warranties customary to these types of agreements. Accruals are established for specifically identified warranty issues that 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 were as follows:

|  | Three-Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Warranties, beginning of period |  | $ | 18,972 |  |  | $ | 27,309 |
Expense, net of recoveries |  |  | 1,389 |  |  |  | (4,333 | )
Reductions for settlement of previous warranty liabilities |  |  | 392 |  |  |  | (4,277 | )
Foreign currency exchange rate changes |  |  | 326 |  |  |  | 228 |
Warranties, end of period |  | $ | 21,079 |  |  | $ | 18,927 |

Restructuring charges

During the third quarter of fiscal year 2020, the Company committed to a plan of termination (the “Termination Plan”) in response to the ongoing global economic challenges resulting from the COVID-19 pandemic and its impact on the Company’s business. The Termination Plan involved the termination and/or furlough of employees and contractors at certain of the Company’s operating facilities, primarily in the United States. As a result of the Termination Plan, the Company incurred $23,673 of restructuring charges related to employee severance and benefits costs as of September 30, 2020. All of the restructuring charges recorded during the fiscal year ended September 30, 2020 were recorded as nonsegment expenses.

The summary of activity in accrued restructuring charges during the three-months ended December 31, 2020 and December 31, 2019 are as follows:

|  |  |  |  |  | Period Activity |  |  |  |  |
|  | Balances as of September 30, 2020 |  |  | Charges (reductions) |  |  | Cash receipts (payments) |  |  | Foreign currency exchange rate changes |  |  | Non-cash activity |  |  | Balances as of December 31, 2020 |
Workforce management costs associated with: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
COVID-19 pandemic |  | $ | 3,395 |  |  | $ | — |  |  | $ | (1,742 | ) |  | $ | 45 |  |  | $ | (102 | ) |  | $ | 1,596 |
Total |  | $ | 3,395 |  |  | $ | — |  |  | $ | (1,742 | ) |  | $ | 45 |  |  | $ | (102 | ) |  | $ | 1,596 |

|  |  |  |  |  | Period Activity |  |  |  |  |
|  | Balances as of September 30, 2019 |  |  | Charges (reductions) |  |  | Cash receipts (payments) |  |  | Foreign currency exchange rate changes |  |  | Non-cash activity |  |  | Balances as of December 31, 2019 |
Workforce management costs associated with: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Duarte plant relocation |  | $ | 440 |  |  | $ | — |  |  | $ | (228 | ) |  | $ | — |  |  | $ | — |  |  | $ | 212 |
Industrial turbomachinery business realignment |  |  | 67 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (24 | ) |  |  | 43 |
Total |  | $ | 507 |  |  | $ | — |  |  | $ | (228 | ) |  | $ | — |  |  | $ | (24 | ) |  | $ | 255 |

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Note 17. Other liabilities

|  | December 31, |  |  | September 30, |
|  | 2020 |  |  | 2020 |
Net accrued retirement benefits, less amounts recognized within accrued liabilities |  | $ | 120,313 |  |  | $ | 114,013 |
Total unrecognized tax benefits |  |  | 10,602 |  |  |  | 10,230 |
Noncurrent income taxes payable |  |  | 18,322 |  |  |  | 18,322 |
Deferred economic incentives (1) |  |  | 8,852 |  |  |  | 9,105 |
Cross-currency swap derivative liability |  |  | 83,137 |  |  |  | 51,387 |
Noncurrent operating lease liabilities |  |  | 15,683 |  |  |  | 14,569 |
Net noncurrent contract liabilities |  |  | 371,024 |  |  |  | 366,642 |
Other |  |  | 26,355 |  |  |  | 33,637 |
|  | $ | 654,288 |  |  | $ | 617,905 |

| (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 |
|  | December 31, |
|  | 2020 |  |  | 2019 |
Equity interest in the earnings of the JV (Note 6) |  | $ | (2,386 | ) |  | $ | (3,212 | )
Net gain on sales of assets and businesses(1) |  |  | (588 | ) |  |  | (13,547 | )
Rent income |  |  | (350 | ) |  |  | (251 | )
Net gain on investments in deferred compensation program |  |  | (983 | ) |  |  | (1,244 | )
Other components of net periodic pension and other postretirement benefit, excluding service cost and interest expense |  |  | (3,650 | ) |  |  | (3,047 | )
Other |  |  | (166 | ) |  |  | (124 | )
|  | $ | (8,123 | ) |  | $ | (21,425 | )

| (1) | Included in net gain on sale of assets and businesses for the three-months ended December 31, 2019 was the pre-tax gain on sale of Duarte real property in the amount of $13,522.

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 |
|  | December 31, |
|  | 2020 |  |  | 2019 |
Earnings before income taxes |  | $ | 47,584 |  |  | $ | 61,548 |
Income tax expense |  |  | 6,014 |  |  |  | 8,175 |
Effective tax rate |  |  | 12.6 | % |  |  | 13.3 | %

The decrease in the effective tax rate for the three-months ended December 31, 2020 compared to the three-months ended December 31, 2019 is primarily attributable to the impact of decreased projected full-year earnings for fiscal year 2021 relative to the expected tax benefits from the research credit, net excess income tax benefit from stock-based compensation, and various state income tax credits. This decrease was partially offset by the tax benefit associated with the impairment of assets held for sale in the first quarter of fiscal year 2020 that did not repeat in the current quarter and increased taxes on combined foreign earnings.

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Gross unrecognized tax benefits were $10,194 as of December 31, 2020, and $9,851 as of September 30, 2020. At December 31, 2020, the amount of the liability for unrecognized tax benefits that, if recognized, would impact Woodward’s effective tax rate was $4,948. At this time, Woodward believes it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $1,884 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 accru al s 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. Woodward’s fiscal years remaining open to examination for U.S. Federal income taxes include fiscal years 2018 and thereafter. Woodward’s fiscal years remaining open to examination for significant U.S. state income tax jurisdictions include fiscal years 2016 and thereafter. Woodward’s fiscal years remaining open to examination in significant foreign jurisdictions include 2016 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.

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

|  | Three-Months Ended |
|  | December 31, |
|  | 2020 |  |  | 2019 |
Company costs |  | $ | 8,036 |  |  | $ | 8,704 |

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 and their covered dependents and beneficiaries in the United States and the United Kingdom. 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, 2020, 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.

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

|  | Three-Months Ended December 31, |
|  | United States |  |  | Other Countries |  |  | Total |
|  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |  |  | 2020 |  |  | 2019 |
Service cost |  | $ | 432 |  |  | $ | 415 |  |  | $ | 729 |  |  | $ | 710 |  |  | $ | 1,161 |  |  | $ | 1,125 |
Interest cost |  |  | 1,239 |  |  |  | 1,398 |  |  |  | 333 |  |  |  | 321 |  |  |  | 1,572 |  |  |  | 1,719 |
Expected return on plan assets |  |  | (3,536 | ) |  |  | (3,087 | ) |  |  | (602 | ) |  |  | (832 | ) |  |  | (4,138 | ) |  |  | (3,919 | )
Amortization of: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net actuarial loss |  |  | 135 |  |  |  | 358 |  |  |  | 228 |  |  |  | 261 |  |  |  | 363 |  |  |  | 619 |
Prior service cost |  |  | 242 |  |  |  | 234 |  |  |  | 6 |  |  |  | 6 |  |  |  | 248 |  |  |  | 240 |
Net periodic retirement pension (benefit) cost |  | $ | (1,488 | ) |  | $ | (682 | ) |  | $ | 694 |  |  | $ | 466 |  |  | $ | (794 | ) |  | $ | (216 | )
Contributions paid |  | $ | — |  |  | $ | — |  |  | $ | 543 |  |  | $ | 1,131 |  |  | $ | 543 |  |  | $ | 1,131 |

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” in the Condensed Consolidated Statements of Earnings. The interest cost 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 |
|  | December 31, |
|  | 2020 |  |  | 2019 |
Service cost |  | $ | — |  |  | $ | 1 |
Interest cost |  |  | 150 |  |  |  | 195 |
Amortization of: |  |  |  |  |  |  |  |
Net actuarial loss |  |  | 7 |  |  |  | 12 |
Prior service cost (benefit) |  |  | — |  |  |  | 1 |
Net periodic other postretirement cost |  | $ | 157 |  |  | $ | 209 |
Contributions paid |  | $ | 38 |  |  | $ | 345 |

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” in the Condensed Consolidated Statements of Earnings. 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 2021 may differ from the current estimate. Woodward estimates its remaining cash contributions in fiscal year 2021 will be as follows:

Retirement pension benefits: |  |  |  |
United States |  | $ | — |
United Kingdom |  |  | 512 |
Japan |  |  | — |
Germany |  |  | 868 |
Other postretirement benefits |  |  | 3,075 |

Multiemployer defined benefit plans

Woodward operates multiemployer defined benefit plans for certain employees in both the Netherlands and Japan. The amounts of contributions associated with the multiemployer defined benefit plans were as follows:

|  | Three-Months Ended |
|  | December 31, |
|  | 2020 |  |  | 2019 |
Company contributions |  | $ | 68 |  |  | $ | 70 |

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Note 21. Stockholders’ equity

Stock repurchase program

In the first quarter of fiscal year 2017, the Board terminated the Company’s prior stock repurchase program and replaced it with a new 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 ended in November 2019 (the “2017 Authorization”). Effective upon the expiration of the 2017 Authorization in November 2019, Woodward’s board of directors approved a new 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 will end in 2022 (the “2019 Authorization”).

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 approved by Woodward’s stockholders in January 2017 and is a 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 (the “Committee”), including, but not limited to, the power to determine the recipients of awards and the terms of those awards. On January 29, 2020, Woodward’s stockholders approved an additional 1,000 shares of Woodward’s common stock to be made available for future grants. Under the 2017 Plan, there were approximately 1,228 shares of Woodward’s common stock available for future grants as of December 31, 2020 and 1,972 shares as of September 30, 2020.

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 using the assumptions in the following table. 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.

|  |  | Three-Months Ended |
|  |  | December 31, |
|  |  | 2020 |  |  | 2019 |
Weighted-average exercise price per share |  | $ | 81.06 |  |  | $ | 104.82 |
Weighted-average grant date market value of Woodward stock |  | $ | 81.06 |  |  | $ | 104.82 |
Expected term (years) |  |  |  | 6.5 |  | - |  | 8.7 |  |  |  | 6.4 |  | - | 8.7 |
Estimated volatility |  |  | 33.3% |  | - | 36.1% |  |  |  | 25.7% |  | - | 30.1% |
Estimated dividend yield |  |  | 0.3% |  | - | 0.4% |  |  | 0.6% |
Risk-free interest rate |  |  | 0.4% |  | - | 0.6% |  |  |  | 1.6% |  | - | 1.7% |

The following is a summary of the activity for stock option awards during the three-months ended December 31, 2020:

|  | Three-Months Ended |
|  | December 31, 2020 |
|  | Number of options |  |  | Weighted-Average Exercise Price per Share |
Options, beginning balance |  |  | 5,443 |  |  | $ | 62.00 |
Options granted |  |  | 747 |  |  |  | 81.06 |
Options exercised |  |  | (286 | ) |  |  | 39.82 |
Options forfeited |  |  | (3 | ) |  |  | 87.38 |
Options, ending balance |  |  | 5,901 |  |  |  | 65.47 |

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Changes in non-vested stock options during the three-months ended December 31, 2020 were as follows:

|  | Three-Months Ended |
|  | December 31, 2020 |
|  | Number of options |  |  | Weighted-Average Grant Date Fair Value per Share |
Non-vested options outstanding, beginning balance |  |  | 2,078 |  |  | $ | 24.69 |
Options granted |  |  | 747 |  |  |  | 27.73 |
Options vested |  |  | (652 | ) |  |  | 25.81 |
Options forfeited |  |  | (3 | ) |  |  | 25.18 |
Non-vested options outstanding, ending balance |  |  | 2,170 |  |  |  | 25.40 |

Information about stock options that have vested, or are expected to vest, and are exercisable at December 31, 2020 was as follows:

|  | Number |  |  | Weighted-Average Exercise Price |  |  | Weighted-Average Remaining Life in Years |  |  | Aggregate Intrinsic Value |
Options outstanding |  |  | 5,901 |  |  | $ | 65.47 |  |  |  | 6.4 |  |  | $ | 330,818 |
Options vested and exercisable |  |  | 3,731 |  |  |  | 55.73 |  |  |  | 5.0 |  |  |  | 245,492 |
Options vested and expected to vest |  |  | 5,797 |  |  |  | 65.20 |  |  |  | 6.3 |  |  |  | 326,577 |

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 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 can be accelerated to a period of less than four years, including immediate recognition of stock-based compensation expense on the date of grant.

At December 31, 2020, there was approximately $16,759 of total unrecognized compensation expense related to non-vested stock-based compensation arrangements, including both stock options and restricted stock awards. The pre-vesting forfeiture rates for purposes of determining stock-based compensation expense recognized were estimated to be 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 2.3 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.

In the event of a change in control of Woodward, as defined in change-in-control agreements with its current corporate officers, Woodward may be required to pay termination benefits to such officers.

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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 |
|  | December 31, |
|  | 2020 |  |  | 2019 |
Segment external net sales: |  |  |  |  |  |  |  |
Aerospace |  | $ | 321,667 |  |  | $ | 473,925 |
Industrial |  |  | 215,952 |  |  |  | 246,430 |
Total consolidated net sales |  | $ | 537,619 |  |  | $ | 720,355 |
Segment earnings: |  |  |  |  |  |  |  |
Aerospace |  | $ | 46,466 |  |  | $ | 92,911 |
Industrial |  |  | 32,888 |  |  |  | 28,230 |
Nonsegment expenses |  |  | (23,359 | ) |  |  | (51,071 | )
Interest expense, net |  |  | (8,411 | ) |  |  | (8,522 | )
Consolidated earnings before income taxes |  | $ | 47,584 |  |  | $ | 61,548 |

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:

|  | December 31, 2020 |  |  | September 30, 2020 |
Segment assets: |  |  |  |  |  |  |  |
Aerospace |  | $ | 1,717,820 |  |  | $ | 1,752,516 |
Industrial |  |  | 1,560,889 |  |  |  | 1,529,411 |
Unallocated corporate property, plant and equipment, net |  |  | 103,830 |  |  |  | 106,380 |
Other unallocated assets |  |  | 576,966 |  |  |  | 515,029 |
Consolidated total assets |  | $ | 3,959,505 |  |  | $ | 3,903,336 |

Note 24. Subsequent events

On January 27, 2021, the Board approved a cash dividend of $0.1625 per share for the quarter, payable on March 8, 2021, for stockholders of record as of February 22, 2021.

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

(Amounts in thousands, except per share amounts)

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 global COVID-19 pandemic, including the impacts thereof to supply and demand, and measures taken by governments and private industry in response;

| • | future sales, earnings, cash flow, uses of cash, and other measures of financial 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;

| • | our expectations with regard to the status of the Boeing 737 MAX aircraft, the related impact on our original equipment manufacturer and initial provision sales, and the aircraft’s return to service;

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

| • | investments in new campuses, business sites and related business developments;

| • | the effect of economic trends or growth;

| • | 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;

| • | new business opportunities;

| • | 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 tax law.

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.

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OVERV IEW

COVID-19 Pandemic

In March 2020, the World Health Organization (“WHO”) declared the COVID-19 outbreak a pandemic. In an effort to contain COVID-19 or slow its spread, governments and private industry around the world have enacted various measures, including orders to temporarily close businesses not deemed “essential,” isolate residents to their homes or places of residence, and mandate social distancing. We have generally been deemed an essential business and therefore have continued to operate during the pandemic.

As a result of the global health crisis caused by COVID-19 and the related responses of governments and private industry, we have experienced declining demand, and both our aerospace and industrial markets have been significantly impacted economically. Outbreaks in various regions have also resulted in the extended shutdown of certain businesses in those regions, which has resulted in disruptions or delays to our supply chain. In an effort to protect the health and safety of our employees, we have implemented enhanced cleaning protocols and adopted social distancing policies at all of our locations, including working from home, reducing the number of people working in locations at any one time, and generally suspending employee travel. We have also taken steps to align our business with the unfavorable economic conditions, including the implementation of enhanced measures through our global supply chain and business unit management teams to ensure we are efficiently utilizing inventory on hand. We have increased focus on reducing working capital and have limited capital expenditures to business-critical items. In addition, we have taken specific actions to reduce all non-essential costs and we have implemented workforce management actions through a hiring freeze, staff reductions, reduction in employee hours and/or salaries, furloughs, temporary layoffs, wage freezes, or a combination of these actions, at many of our locations.

Although we have experienced certain impacts from the global emergence of the COVID-19 pandemic, the full extent it will have on our business is currently unknown. When COVID-19 is demonstrably contained, we anticipate an improvement in economic activity; however, the timing and degree of such improvement will depend on the rate and pace of recovery, and the effectiveness of the containment efforts deployed by various national, state, and local governments. We will continue to actively monitor the situation and may take further actions potentially altering our business operations that we determine are in the best interests of our employees, customers, communities, business partners, suppliers, and shareholders, or as required by federal, state, or local authorities. It is not clear what the potential effects any such alterations or modifications may have on our business in future periods, including the effects on the Company's customers, employees, and prospects, or on our financial results.

Divestiture of the Renewables business and related businesses

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

Financial information for the disposal group is reflected in our financial statements prior to the date of Closing.

Operational Highlights

Quarter to Date Highlights

Net sales for the first quarter of fiscal year 2021 were $537,619, a decrease of 25.4% from $720,355 for the first quarter of the prior fiscal year. Foreign currency exchange rates had a favorable impact on net sales of $9,478 for the first quarter of fiscal year 2021 as compared to the same period of the prior year. There were no sales for the disposal group for the first quarter of fiscal year 2021, as the disposal group was divested on April 30, 2020. Net sales excluding the disposal group for the first quarter of fiscal year 2020 were $691,789. Aerospace segment net sales for the first quarter of fiscal year 2021 were down 32.1% to $321,667, compared to $473,925 for the first quarter of the prior fiscal year. Industrial segment net sales for the first quarter of fiscal year 2021 were $215,952, down 12.4%, compared to $246,430 for the first quarter of fiscal year 2020. Foreign currency exchange rates had a favorable impact on Industrial segment net sales of $9,287 for the first quarter of fiscal year 2021 as compared to the same period of the prior year. Industrial segment net sales excluding the disposal group were $217,864 for the first quarter of fiscal year 2020.

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Net earnings and adjusted net earnings for the first quarter of fiscal year 2021 were both $41,570, or $0.64 per diluted share. Net earnings for the first quarter of fiscal year 2020 were $53,373, or $0.83 per diluted share, and adjusted net earnings for the first quarter of fiscal year 2020 were $71,214, or $1.10 per diluted share. Net earnings excluding the disposal group were $51,126 for the first quarter of fiscal year 2020.

The effective tax rate and adjusted effective tax rate in the first quarter of fiscal year 2021 was 12.6%. The effective tax rate in the first quarter of fiscal year 2020 was 13.3%, and the adjusted effective tax rate in the first quarter of fiscal year 2020 was 17.1%.

Earnings before interest and taxes (“EBIT”) for the first quarter of fiscal year 2021 was $55,995, down 20.1% from $70,070 in the same period of fiscal year 2020. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the first quarter of fiscal year 2021 was $89,072, down 13.1% from $102,521 for the same period of fiscal year 2020. No adjustments were made to EBIT or EBITDA for the first quarter of fiscal year 2021. Adjusted EBIT and adjusted EBITDA for the first quarter of fiscal year 2020 were $94,450 and $126,901, respectively.

Aerospace segment earnings as a percent of segment net sales were 14.4% in the first quarter of fiscal year 2021, compared to 19.6% in the first quarter of the prior fiscal year. Industrial segment earnings as a percent of segment net sales in the first quarter of fiscal year 2021 were 15.2%, compared to 11.5% in the first quarter of the prior fiscal year. Industrial segment earnings excluding the disposal group were 11.9% of Industrial segment net sales excluding the disposal group for the first quarter of fiscal year 2020.

Sales excluding the disposal group, adjusted net earnings, earnings excluding the disposal group, adjusted earnings per share, 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 closest U.S. GAAP financial measures can be found under the caption “Non-U.S. GAAP Measures” in this Item 2 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

Liquidity Highlights

Net cash provided by operating activities for the first quarter of fiscal year 2021 was $146,725, compared to $27,445 for the first quarter of fiscal year 2020. The increase in net cash provided by operating activities in the first quarter of fiscal year 2021 compared to the first quarter of the prior fiscal year is primarily attributable to the timing of cash received from customers and cash payments for annual bonuses, which were paid in the first quarter of fiscal year 2020, while no such payments were made in the first quarter of fiscal year 2021.

For the first quarter of fiscal year 2021, free cash flow, which we define as net cash flows from operating activities less payments for property, plant and equipment, was $139,462, compared to $10,213 for the first quarter of fiscal year 2020. Adjusted free cash flow, which we define as free cash flow, plus the proceeds from the sale of real property at our former Duarte, California operations was $28,980 for the first quarter of fiscal year 2020. No adjustments were made to free cash flow for the first quarter of fiscal year 2021. Free cash flow and adjusted free cash flow are non-U.S. GAAP financial measures. A description of these measures as well as a reconciliation of these non-U.S. GAAP financial measures to the closest U.S. GAAP financial measures can be found under the caption “Non-U.S. GAAP Measures” in this Item 2 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

At December 31, 2020, we held $201,881 in cash and cash equivalents, and had total outstanding debt of $747,087. We have additional borrowing availability of $988,367, net of outstanding letters of credit, under our revolving credit agreement. At December 31, 2020, we also had additional borrowing capacity of $7,648 under various foreign lines of credit and foreign overdraft facilities.

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RESULTS OF OPERATIONS

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

|  | Three-Months Ended |
|  | December 31, 2020 |  |  | % of Net Sales |  |  | December 31, 2019 |  |  | % of Net Sales |
Net sales |  | $ | 537,619 |  |  |  | 100 | % |  | $ | 720,355 |  |  |  | 100 | %
Costs and expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cost of goods sold |  |  | 401,640 |  |  |  | 74.7 | % |  |  | 534,917 |  |  |  | 74.3 | %
Selling, general, and administrative expenses |  |  | 56,111 |  |  |  | 10.4 | % |  |  | 62,045 |  |  |  | 8.6 | %
Research and development costs |  |  | 31,996 |  |  |  | 6.0 | % |  |  | 36,846 |  |  |  | 5.1 | %
Impairment of assets sold |  |  | — |  |  |  | 0.0 | % |  |  | 37,902 |  |  |  | 5.3 | %
Interest expense |  |  | 8,906 |  |  |  | 1.7 | % |  |  | 9,009 |  |  |  | 1.3 | %
Interest income |  |  | (495 | ) |  |  | (0.1 | )% |  |  | (487 | ) |  |  | (0.1 | )%
Other (income) expense, net |  |  | (8,123 | ) |  |  | (1.5 | )% |  |  | (21,425 | ) |  |  | (3.0 | )%
Total costs and expenses |  |  | 490,035 |  |  |  | 91.1 | % |  |  | 658,807 |  |  |  | 91.5 | %
Earnings before income taxes |  |  | 47,584 |  |  |  | 8.9 | % |  |  | 61,548 |  |  |  | 8.5 | %
Income tax expense |  |  | 6,014 |  |  |  | 1.1 | % |  |  | 8,175 |  |  |  | 1.1 | %
Net earnings |  | $ | 41,570 |  |  |  | 7.7 | % |  | $ | 53,373 |  |  |  | 7.4 | %

Other select financial data:

|  | December 31, |  |  | September 30, |
|  | 2020 |  |  | 2020 |
Working capital |  | $ | 918,444 |  |  | $ | 818,533 |
Current portion of long-term debt |  |  | 1,623 |  |  |  | 101,634 |
Total debt |  |  | 747,087 |  |  |  | 838,483 |
Total stockholders’ equity |  |  | 2,063,462 |  |  |  | 1,992,677 |

Net Sales

Consolidated net sales for the first quarter of fiscal year 2021 decreased by $182,736, or 25.4%, compared to the same period of fiscal year 2020.

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

|  | Three-Month Period |
Consolidated net sales for the period ended December 31, 2019 |  | $ | 720,355 |
Aerospace volume |  |  | (150,037 | )
Industrial volume |  |  | (11,415 | )
Disposals group divestiture impact |  |  | (28,566 | )
Noncash consideration |  |  | (6,318 | )
Effects of changes in price and sales mix |  |  | 4,122 |
Effects of changes in foreign currency rates |  |  | 9,478 |
Consolidated net sales for the period ended December 31, 2020 |  | $ | 537,619 |

The decrease in consolidated net sales for the first quarter of fiscal year 2021 is primarily attributable to the decline in sales volume related to the ongoing impact of the COVID-19 pandemic. In the Aerospace segment, the decrease in net sales volumes is primarily attributable to lower commercial sales as a result of the secular decline in global passenger traffic and original equipment manufacturer (“OEM”) production rates, plant closures and furloughs, all as a result of the global COVID-19 pandemic. In the Industrial segment, the decrease in net sales volumes is primarily attributable to the divestiture of the disposal group, continued weakness in the oil and gas market and the associated aftermarket, and the ongoing impact of the COVID-19 pandemic, partially offset by favorable effects of foreign currency exchange rates.

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Costs and Expenses

Cost of goods sold decreased by $133,277 to $401,640, or 74.7% of net sales, for the first quarter of fiscal year 2021, from $534,917, or 74.3% of net sales, for the first quarter of fiscal year 2020. Cost of goods sold decreased in the first quarter of fiscal year 2021 primarily due to lower sales volume as a result of global disruption from the COVID-19 pandemic and the elimination of annual bonus for fiscal year 2021.

Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 25.3% for the first quarter of fiscal year 2021, compared to 25.7% for the first quarter of fiscal year 2020. Gross margin decreased for the first quarter of fiscal year 2021 compared to the same period of the prior year primarily due to lower Aerospace OEM and aftermarket sales volume as a result of global disruption from the COVID-19 pandemic.

Selling, general and administrative expenses decreased by $5,934, or 9.6%, to $56,111 for the first quarter of fiscal year 2021, compared to $62,045 for the first quarter of fiscal year 2020. Selling, general, and administrative expenses as a percentage of net sales increased to 10.4% for the first quarter of fiscal year 2021, compared to 8.6% for the first quarter of fiscal year 2020. The decrease in selling, general and administrative expenses for the first quarter of fiscal year 2021 compared to same period of the prior year primarily due to savings from cost reduction initiatives.

Research and development costs decreased by $4,850, or 13.2%, to $31,996 for the first quarter of fiscal year 2021, as compared to $36,846 for the first quarter of fiscal year 2020. Research and development costs as a percentage of net sales increased to 6.0% for the first quarter of fiscal year 2021, as compared to 5.1% for the first quarter of fiscal year 2020. Research and development costs decreased primarily due to savings from cost reduction initiatives. Our research and development activities extend across almost all of our customer base, and we anticipate ongoing variability in research and development due to the timing of customer business needs on current and future programs.

Impairment of assets sold was comprised entirely of a charge of $37,902 recognized in the first quarter of fiscal year 2020. Woodward’s board of directors approved a plan to divest the disposal group, which resulted in the recognition of the associated assets and liabilities as held for sale at that time. Concurrently, Woodward determined that the assets held for sale, net of any liabilities held for sale, were impaired and recognized a non-cash impairment charge of $37,902, representing the write down of the associated net assets held for sale to their fair market value as of December 31, 2019.

Interest expense decreased by $103, or 1.1%, to $8,906 for the first quarter of fiscal year 2021, compared to $9,009 for the first quarter of fiscal year 2020. Interest expense increased as a percentage of net sales to 1.7% for the first quarter of fiscal year 2021, as compared to 1.3% for the first quarter of fiscal year 2020. In the first quarter of fiscal year 2021, we have paid the entire balance of two series of private placement notes totaling $100,000 primarily using free cash flow and proceeds from our revolving credit facility. The revolving credit facility bears interest at a substantially lower rate than the private placement notes that were paid.

Other income decreased by $13,302 to $8,123 for the first quarter of fiscal year 2021, compared to $21,425 for the first quarter of fiscal year 2020. Other income decreased in the first quarter of fiscal year 2021 compared to the first quarter of fiscal year 2020 primarily due to a gain on the sale of a portion of our property in Duarte, California in the amount of $13,552, which was recognized in the first quarter of fiscal year 2020.

Income taxes were provided at an effective rate on earnings before income taxes of 12.6% for the first quarter of fiscal year 2021 and 13.3% for the first quarter of fiscal year 2020.

The decrease in the effective tax rate for the first quarter of fiscal year 2021 compared to the same period of the prior year is primarily attributable to the impact of decreased projected full-year earnings for fiscal year 2021 relative to the expected tax benefits from the research credit, net excess income tax benefit from stock-based compensation, and various state income tax credits. This decrease was partially offset by the tax benefit associated with the impairment of assets held for sale in the first quarter of fiscal year 2020 that did not repeat in the current quarter and increased taxes on combined foreign earnings.

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Segment Results

The following table presents sales by segment:

|  | Three-Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Net sales: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Aerospace |  | $ | 321,667 |  |  |  | 59.8 | % |  | $ | 473,925 |  |  |  | 65.8 | %
Industrial |  |  | 215,952 |  |  |  | 40.2 | % |  |  | 246,430 |  |  |  | 34.2 | %
Consolidated net sales |  | $ | 537,619 |  |  |  | 100 | % |  | $ | 720,355 |  |  |  | 100 | %

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

|  | Three-Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Aerospace |  | $ | 46,466 |  |  | $ | 92,911 |
Industrial |  |  | 32,888 |  |  |  | 28,230 |
Nonsegment expenses |  |  | (23,359 | ) |  |  | (51,071 | )
Interest expense, net |  |  | (8,411 | ) |  |  | (8,522 | )
Consolidated earnings before income taxes |  |  | 47,584 |  |  |  | 61,548 |
Income tax expense |  |  | (6,014 | ) |  |  | (8,175 | )
Consolidated net earnings |  | $ | 41,570 |  |  | $ | 53,373 |

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

|  | Three-Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Aerospace |  |  | 14.4 | % |  |  | 19.6 | %
Industrial |  |  | 15.2 | % |  |  | 11.5 | %

Aerospace

Aerospace segment net sales decreased by $152,258, or 32.1%, to $321,667 for the first quarter of fiscal year 2021, compared to $473,925 for the first quarter of fiscal year 2020. Segment net sales decreased, primarily driven by lower commercial sales due to the decline in global passenger traffic and OEM production rates, plant closures and furloughs, all as a result of the global COVID-19 pandemic.

Defense OEM sales decreased in the first quarter of fiscal year 2021 compared to the first quarter of fiscal year 2020, primarily driven by lower sales for guided weapons and fixed wing aircraft primarily due to absenteeism and supply chain disruptions as a result of the global COVID-19 pandemic, as well as a very strong quarter in the same period of the prior fiscal year. Our defense aftermarket declined slightly in the first quarter of fiscal year 2021, compared to the first quarter of fiscal year 2020, but remains strong as the U.S. Government has prioritized the combat readiness of existing military programs on which we have content.

Aerospace segment earnings decreased by $46,445, or 50.0%, to $46,466 for the first quarter of fiscal year 2021, compared to $92,911 for the first quarter of fiscal year 2020.

Aerospace segment earnings decreased for the first quarter of fiscal year 2021 due to the following:

|  | Three-Month Period |
Earnings for the period ended December 31, 2019 |  | $ | 92,911 |
Sales volume |  |  | (72,829 | )
Price, sales mix and productivity |  |  | 4,137 |
Savings from cost reduction initiatives |  |  | 12,022 |
Other, net |  |  | 10,225 |
Earnings for the period ended December 31, 2020 |  | $ | 46,466 |

Aerospace segment earnings as a percentage of segment net sales were 14.4% for the first quarter of fiscal year 2021, compared to 19.6% for the first quarter and of fiscal year 2020. Aerospace segment earnings in the first quarter of fiscal year 2021 decreased primarily due to lower volume caused by the global COVID-19 pandemic, partially offset by savings from cost reduction initiatives.

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Industrial

Industrial segment net sales decreased by $30,478, or 12.4%, to $215,952 for the first quarter of fiscal year 2021, compared to $246,430 for the first quarter of fiscal year 2020. Industrial segment net sales for the first quarter of fiscal year 2021 decreased by $1,912, or 0.9%, compared to Industrial segment net sales excluding the disposal group of $217,864 for the first quarter of fiscal year 2020. Foreign currency exchange rates had a favorable impact on segment net sales of $9,287 for the first quarter of fiscal year 2021.

Industrial segment net sales decreased in the first quarter of fiscal year 2021 primarily due to the divestiture of the disposal group, lower sales volumes as a result of the weak oil and gas market and the ongoing impact of the global COVID-19 pandemic, partially offset by strong demand for natural gas powered trucks in Asia.

Sales of fuel systems for natural gas powered trucks in Asia were up in the first quarter of fiscal year 2021, although we anticipate seasonal pressure due to high demand for natural gas during winter months. We foresee continued growth in global energy demand moving forward, with the bulk of this expansion coming from developing economies in Asia, as increased emissions regulations continue to drive the shift to natural gas powered and cleaner burning diesel engines. The industrial gas turbine market remained stable during the first quarter of fiscal year 2021 and we do not expect this market to be as negatively impacted by the global COVID-19 pandemic due to low inventory levels and pent up demand for repair and overhaul.

Industrial segment earnings increased by $4,658, or 16.5%, to $32,888 for the first quarter of fiscal year 2021, compared to $28,230 for the first quarter of fiscal year 2020. There were no earnings for the disposal group in the first quarter of fiscal year 2021 because the divestiture preceded the period. Industrial segment earnings excluding the disposal group for the first quarter of fiscal year 2020 were $25,983.

Industrial segment earnings increased for the first quarter of fiscal year 2021 due to the following:

|  | Three-Month Period |
Earnings for the period ended December 31, 2019 |  | $ | 28,230 |
Sales volume |  |  | (5,365 | )
Price, sales mix and productivity |  |  | (385 | )
Effects of changes in foreign currency rates |  |  | 1,699 |
Savings from cost reduction initiatives |  |  | 6,573 |
Other, net |  |  | 2,136 |
Earnings for the period ended December 31, 2020 |  | $ | 32,888 |

Industrial segment earnings as a percentage of segment net sales were 15.2% for the first quarter of fiscal year 2021, compared to 11.5% for the first quarter of fiscal year 2020. Industrial segment earnings excluding the disposal group were 11.9% of Industrial segment net sales excluding the disposal group for the first quarter of fiscal year 2020. Industrial segment earnings increased in the first quarter of fiscal year 2021 primarily due to savings from cost reduction initiatives and favorable effects from changes in foreign currency rates, partially offset by lower sales volume.

Nonsegment

Nonsegment expenses decreased to $23,359 for the first quarter of fiscal year 2021, compared to $51,071 for the first quarter of fiscal year 2020. Included in nonsegment expenses for the first quarter of fiscal year 2020 was an impairment charge on assets held for sale associated with the divestiture of our disposal group in the amount of $37,902, partially offset by a gain on the sale of a portion of our property in Duarte, California in the amount of $13,552. Considering these items, nonsegment expenses decreased in the first quarter of fiscal year 2021 compared to the first quarter of fiscal year 2020 primarily due to savings from cost reduction initiatives.

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LIQUIDITY AND CA PITAL 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. Historically, 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.

Our aggregate cash and cash equivalents were $201,881 at December 31, 2020 and $153,270 at September 30, 2020, and our working capital was $918,444 at December 31, 2020 and $818,533 at September 30, 2020. Of the cash and cash equivalents held at December 31, 2020, $188,307 was held by our foreign locations and $1,908 is restricted cash held in escrow related to the sale of property in Duarte, California. We are not presently aware of any significant restrictions on the repatriation of funds held by our foreign locations, although a portion is considered indefinitely reinvested in these foreign subsidiaries. If these funds were needed to fund our operations or satisfy obligations in the United States, then they could be repatriated. The repatriation of these funds into the United States may cause us to incur additional U.S. income taxes or foreign withholding taxes, but any additional U.S. taxes could be offset, in part or in whole, by foreign tax credits. The amount of such taxes and application of tax credits would be dependent on the income tax laws and other circumstances at the time these amounts are repatriated. Based on these variables, it is impractical to determine the income tax liability that might be incurred if these funds were to be repatriated.

Consistent with common business practice in China, our Chinese subsidiaries accept bankers’ acceptance notes from Chinese customers, in settlement of certain customer accounts receivable. Bankers’ acceptance notes are financial instruments issued by Chinese financial institutions as part of financing arrangements between the financial institution and a customer of the financial institution. Bankers’ acceptance notes represent a commitment by the issuing financial institution to pay a certain amount of money at a specified future maturity date to the legal owner of the bankers’ acceptance note as of the maturity date. The maturity date of bankers’ acceptance notes varies, but it is our policy to only accept bankers’ acceptance notes with maturity dates no more than 180 days from the date of our receipt of such draft. The issuing financial institution is the obligor, not our customers. Upon our acceptance of a bankers’ acceptance note from a customer, such customer has no further obligation to pay us for the related accounts receivable balance. We had bankers’ acceptance notes of $46,896 at December 31, 2020 and $56,640 at September 30, 2020 recorded as non-customer accounts receivable in our Condensed Consolidated Balance Sheets. We only accept bankers’ acceptance notes issued by banks that are believed to be creditworthy and to which the credit risks associated with the bankers’ acceptance notes are believed to be low.

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 in Part I, Item I of this Form 10-Q.

At December 31, 2020, we had total outstanding debt of $747,087 consisting of various series of unsecured notes due between 2023 and 2033 and obligations under our finance leases. At December 31, 2020, we had additional borrowing availability of $988,367 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $7,648 under various foreign credit facilities.

At December 31, 2020, we had no borrowings outstanding under our revolving credit facility. Revolving credit facility and short-term borrowing activity during the three-months ended December 31, 2020 were as follows:

Maximum daily balance during the period |  | $ | 20,100 |
Average daily balance during the period |  | $ | 2,840 |
Weighted average interest rate on average daily balance |  |  | 1.30 | %

We believe we were in compliance with all our debt covenants as of December 31, 2020. Additionally, we do not believe the current known impacts of the COVID-19 pandemic will affect our ability to remain in compliance with our debt covenants. See Note 15, Credit facilities, short-term borrowings and long-term debt in the Notes to the Consolidated Financial Statements in Part II, Item 8 of our most recent Form 10-K, for more information about our covenants.

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

Our ability to service our long-term debt, to remain in compliance with the various restrictions and covenants contained in our debt agreements, and to fund working capital, capital expenditures and product development efforts will depend on our ability to generate cash from operating activities, which in turn is subject to, among other things, future operating performance as well as general economic, financial, competitive, legislative, regulatory, and other conditions, some of which may be beyond our control. We do not believe the current known impacts of the COVID-19 pandemic will impact our ability to satisfy our long-term debt obligations.

In November 2019, our board of directors terminated our prior stock repurchase program and replaced it with a new 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 ending in in 2022 (the “2019 Authorization). We repurchased no common stock under the 2019 Authorization during the first quarter of both fiscal year 2021 and 2020.

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 as a result of the COVID-19 pandemic.

Cash Flows

|  | Three-Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Net cash provided by operating activities |  | $ | 146,725 |  |  | $ | 27,445 |
Net cash (used in) provided by investing activities |  |  | (9,955 | ) |  |  | 1,575 |
Net cash (used in) provided by financing activities |  |  | (94,642 | ) |  |  | 17,188 |
Effect of exchange rate changes on cash and cash equivalents |  |  | 6,483 |  |  |  | 2,727 |
Net change in cash and cash equivalents |  |  | 48,611 |  |  |  | 48,935 |
Cash and cash equivalents, including restricted cash, at beginning of year |  |  | 153,270 |  |  |  | 99,073 |
Cash and cash equivalents, including restricted cash, at end of period |  | $ | 201,881 |  |  | $ | 148,008 |

Net cash flows provided by operating activities for the first quarter of fiscal year 2021 was $146,725, compared to $27,445 for the same period of fiscal year 2020. The increase in net cash provided by operating activities in the first quarter of fiscal year 2021 compared to the first quarter of the prior fiscal year is primarily attributable to the timing of cash received from customers and the elimination of cash payments for annual bonuses. Annual bonus payments were paid in the first quarter of fiscal year 2020, but no such payments were made in the first quarter of fiscal year 2021.

Net cash flows used in investing activities for the first quarter of fiscal year 2021 was $9,955, compared to net cash flows provided by investing activities of $1,575 in the first quarter of fiscal year 2020. The increase in cash flows used in investing activities in the first quarter of fiscal year 2021 compared to the first quarter of the prior fiscal year is primarily due to proceeds in the amount of $18,767 from the sale of a parcel of our Duarte real property recognized in the first quarter of fiscal year 2020, while no such proceeds were received in same period of fiscal year 2021, partially offset by lower payments for property, plant and equipment.

Net cash flows used in financing activities for the first quarter of fiscal year 2021 was $94,642, compared to net cash flows provided by financing activities of $17,188 in the first three-months of fiscal year 2020. During the first quarter of fiscal year 2021, we had net debt payments in the amount of $100,395, compared to net borrowings in the amount of $19,694 in the first quarter of fiscal year 2020.

Contractual Obligations

We have various contractual obligations, including obligations related to long-term debt, operating and finance leases, purchases, retirement pension benefit plans, and other postretirement benefit plans. These contractual obligations are summarized and discussed more fully in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recent Form 10-K.

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Non-U.S. GAAP Financial Measures

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

Industrial segment net sales excluding the disposal group

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

The reconciliation of Industrial segment net sales to Industrial segment net sales excluding the disposal group for the three-months ended December 31, 2020 and December 30, 2019 is shown in the table below:

|  | Three-Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Industrial segment sales (U.S. GAAP) |  | $ | 215,952 |  |  | $ | 246,430 |
Disposal group sales |  |  | — |  |  |  | 28,566 |
Industrial segment sales excluding disposal group (Non-U.S. GAAP) |  | $ | 215,952 |  |  | $ | 217,864 |

Earnings based non-U.S. GAAP financial measures

Adjusted net earnings is defined by the Company as net earnings excluding, as applicable, (i) the gain on sale of assets associated with the sale of the Company’s Duarte real property and (ii) the charge from the impairment of assets held for sale, and the losses from assets sold, associated with the Company’s divestiture of its disposal group. 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, for the three-months ended December 31, 2020 and 2019 is shown in the tables below.

|  | Three-Months Ended December 31, |
|  | 2020 |  |  | 2019 |
|  | Net Earnings |  |  | Earnings Per Share |  |  | Net Earnings |  |  | Earnings Per Share |
Net earnings (U.S. GAAP) |  | $ | 41,570 |  |  | $ | 0.64 |  |  | $ | 53,373 |  |  | $ | 0.83 |
Non-U.S. GAAP adjustments: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gain on sale of Duarte property, net of tax |  |  | — |  |  |  | — |  |  |  | (10,175 | ) |  |  | (0.16 | )
Impairment from assets sold, net of tax |  |  | — |  |  |  | — |  |  |  | 28,016 |  |  |  | 0.43 |
Non-U.S. GAAP adjustments |  |  | — |  |  |  | — |  |  |  | 17,841 |  |  |  | 0.27 |
Adjusted net earnings (Non-U.S. GAAP) |  | $ | 41,570 |  |  | $ | 0.64 |  |  | $ | 71,214 |  |  | $ | 1.10 |

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Industrial segment earnings excluding the disposal group is defined by the Company as Industrial segment earnings excluding the earnings or losses related to businesses included in the disposal group. The Company believes that these earnings or losses are no longer related to the ongoing operations of the Industrial segment business and therefore, the exclusion of these earnings illustrates more clearly how the underlying business of Woodward’s Industrial segment is performing. Industrial segment earnings excluding the disposal group as a percentage of Industrial segment net sales is defined by management as the percentage of segment net sales related to segment earnings excluding the earnings or losses related to businesses included in the disposal group.

The reconciliation of Industrial segment earnings to Industrial segment earnings excluding the disposal group for the three-months ended December 31, 2020 and December 31, 2019 is shown in the table below.

|  | Three-Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Industrial segment earnings (U.S. GAAP) |  | $ | 32,888 |  |  | $ | 28,230 |
Disposal group earnings |  |  | — |  |  |  | 2,247 |
Industrial segment earnings excluding disposal group (Non-U.S. GAAP) |  | $ | 32,888 |  |  | $ | 25,983 |

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) the gain on sale of assets associated will the sale of the Company’s Duarte real property, and (ii) the charge from the impairment of assets held for sale, and the losses from assets sold, associated with the Company’s divestiture of its disposal group. As these gains and charges are infrequent or unusual items that can be variable from period to period and do not fluctuate with operating results, management believes that by removing these gains and charges from EBIT and EBITDA it improves comparability of past, present and future operating results and provides consistency when comparing EBIT and EBITDA between periods.

EBIT and adjusted EBIT reconciled to net earnings for the three-months ended December 31, 2020 and 2019 were as follows:

|  | Three-Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Net earnings (U.S. GAAP) |  | $ | 41,570 |  |  | $ | 53,373 |
Income tax expense |  |  | 6,014 |  |  |  | 8,175 |
Interest expense |  |  | 8,906 |  |  |  | 9,009 |
Interest income |  |  | (495 | ) |  |  | (487 | )
EBIT (Non-U.S. GAAP) |  |  | 55,995 |  |  |  | 70,070 |
Non-U.S. GAAP adjustments: |  |  |  |  |  |  |  |
Gain on sale of Duarte property |  |  | — |  |  |  | (13,522 | )
Impairment from assets sold |  |  | — |  |  |  | 37,902 |
Total non-U.S. GAAP adjustments |  |  | — |  |  |  | 24,380 |
Adjusted EBIT (Non-U.S. GAAP) |  | $ | 55,995 |  |  | $ | 94,450 |

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EBITDA and adjusted EBITDA reconciled to net earnings for the three-months ended December 31, 2020 and 2019 were as follows:

|  | Three-Months Ended December 31, |
|  | 2020 |  |  | 2019 |
Net earnings (U.S. GAAP) |  | $ | 41,570 |  |  | $ | 53,373 |
Income tax expense |  |  | 6,014 |  |  |  | 8,175 |
Interest expense |  |  | 8,906 |  |  |  | 9,009 |
Interest income |  |  | (495 | ) |  |  | (487 | )
Amortization of intangible assets |  |  | 10,469 |  |  |  | 9,905 |
Depreciation expense |  |  | 22,608 |  |  |  | 22,546 |
EBITDA (Non-U.S. GAAP) |  |  | 89,072 |  |  |  | 102,521 |
Non-U.S. GAAP adjustments: |  |  |  |  |  |  |  |
Gain on sale of Duarte property |  |  | — |  |  |  | (13,522 | )
Impairment from assets sold |  |  | — |  |  |  | 37,902 |
Total non-U.S. GAAP adjustments |  |  | — |  |  |  | 24,380 |
Adjusted EBITDA (Non-U.S. GAAP) |  | $ | 89,072 |  |  | $ | 126,901 |

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, Industrial segment earnings excluding the disposal group, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA exclude certain financial information compared with net earnings, the most comparable U.S. GAAP financial measure, users of this financial information should consider the information that is excluded. Our calculations of adjusted net earnings, adjusted net earnings per share, Industrial segment earnings excluding the disposal group, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA may differ from similarly titled measures used by other companies, limiting their usefulness as comparative measures.

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

Management uses free cash flow, which is defined by the Company as net cash flows provided by operating activities less payments for property, plant and equipment, in reviewing the financial performance of and cash generation by Woodward’s various business groups and evaluating cash levels. We believe free cash flow is a useful measure for investors because it portrays our ability to grow organically and generate cash from our businesses for purposes such as paying interest on our indebtedness, repaying maturing debt, funding business acquisitions, investing in research and development, purchasing our common stock, and paying dividends. In addition, securities analysts, investors, and others frequently use free cash flow in their evaluation of companies. Adjusted free cash flow represents a further non-U.S. GAAP adjustment to free cash flow to include cash proceeds from the sale of real property located at our former operations in Duarte, California. Management believes that by including these proceeds in free cash flow it better portrays the cash impact from our fiscal year 2018 decision to relocate our Duarte, California operations to the renovated Drake Campus in Fort Collins, Colorado.

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 is not necessarily a measure of our ability to fund our cash needs. Our calculation of free cash flow and adjusted free cash flow may differ from similarly titled measures used by other companies, limiting their usefulness as a comparative measure.

Free cash flow and adjusted free cash flow reconciled to net cash provided by operating activities for the three-months ended December 31, 2020 and 2019 were as follows:

|  | Three-Months Ended |
|  | 2020 |  |  | 2019 |
Net cash provided by operating activities (U.S. GAAP) |  | $ | 146,725 |  |  | $ | 27,445 |
Payments for property, plant and equipment |  |  | (7,263 | ) |  |  | (17,232 | )
Free cash flow (Non-U.S. GAAP) |  |  | 139,462 |  |  |  | 10,213 |
Cash proceeds from the sale of the Duarte facility |  |  | — |  |  |  | 18,767 |
Adjusted free cash flow (Non-U.S. GAAP) |  | $ | 139,462 |  |  | $ | 28,980 |

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Note 1, Operations and summary of significant accounting policies, to the Consolidated Financial Statements in our most recent 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 recent Form 10-K, include the discussion of estimates used for revenue recognition, inventory valuation, reviews for impairment of goodwill and other long-lived assets, postretirement benefit obligations, and our provision for income taxes. Such accounting policies and 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.

Off-Balance Sheet Arrangements

As of December 31, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or capital resources, that are material to investors.

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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 (Thomas A. Gendron, Chairman of the Board, Chief Executive Officer and President) and Principal Financial and Accounting Officer (Robert F. Weber, Jr., Vice Chairman and Chief Financial Officer), as appropriate, to allow timely decisions regarding required disclosures.

Thomas A. Gendron and Robert F. Weber, Jr., evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) 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 December 31, 2020.

There have not been any significant changes in our internal controls over financial reporting during the quarter ended December 31, 2020 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.

Ite m 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.

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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) |
October 1, 2020 through October 31, 2020 |  |  | 48 |  |  | $ | 79.55 |  |  |  | — |  |  | $ | 486,654 |
November 1, 2020 through November 30, 2020 (2) |  |  | 2,383 |  |  |  | 111.83 |  |  |  | — |  |  |  | 486,654 |
December 1, 2020 through December 31, 2020 (2) |  |  | 50 |  |  |  | 121.53 |  |  |  | — |  |  |  | 486,654 |

| (1) | In November 2019, our board of directors approved a stock repurchase 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 will end in November 2022.

| (2) | Under a trust established for the purposes of administering the Woodward Executive Benefit Plan, 48 shares of common stock were acquired in October 2020, 2,239 shares of common stock were acquired in November 2020, and 50 shares of common stock were acquired in December 2020 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, 144 shares of common stock were acquired in November 2020 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 6. | Exhibits

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

WOODWARD, INC.

EXHIBIT INDEX

| Exhibit Number | Description
* | 31.1 | Rule 13a-14(a)/15d-14(a) certification of Thomas A. Gendron
* | 31.2 | Rule 13a-14(a)/15d-14(a) certification of Robert F. Weber, Jr.
* | 32.1 | Section 1350 certifications
* | 101 | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2020, 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

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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: February 4, 2021 |  | /s/ Thomas A. Gendron
|  | Thomas A. Gendron
|  | Chairman of the Board, Chief Executive Officer, and President (on behalf of the registrant and as the registrant’s Principal Executive Officer)
Date: February 4, 2021 |  | /s/ Robert F. Weber, Jr.
|  | Robert F. Weber, Jr.
|  | Vice Chairman and Chief Financial Officer (on behalf of the registrant and as the registrant’s Principal Financial and Accounting Officer)

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