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 ~~March~~December 31, 2016

☐ 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.)
~~1000 East Drake Road,~~1081 Woodward Way, Fort Collins, Colorado	~~80525~~80524
(Address of principal executive offices)	(Zip Code)
(970) 482-5811
(Registrant’s telephone number, including area code)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes☒ No ☐

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

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐

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 ~~April 18, 2016, 61,103,960~~January 23, 2017, 61,439,846 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	2
	Condensed Consolidated Statements of Earnings	2
	Condensed Consolidated Statements of Comprehensive Earnings	3
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Cash Flows	5
	Condensed Consolidated Statements of Stockholders’ Equity	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2826
	Forward Looking Statements	2826
	Overview	3128
	Results of Operations	3329
	Liquidity and Capital Resources	3832
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4136
Item 4.	Controls and Procedures	4136
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	4236
Item 1A.	Risk Factors	4237
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4237
Item 5.	Other Information	37
Item 6.	Exhibits	4338
	Signatures	4439

PART I – FINANCIAL INFORMATION

Item 1.~~Financial~~Financial Statements

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)

(Unaudited)



	Three-Months Ended				Six-Months Ended				Three-Months Ended
	March 31,				March 31,				December 31,
	2016		2015		2016		2015		2016		2015

Net sales	$	479,382	$	493,222	$	924,492	$	980,868	$	442,894	$	445,110
Costs and expenses:
Cost of goods sold		346,139		355,602		679,516		699,362		327,194		333,377
Selling, general and administrative expenses		36,823		38,450		77,605		78,293		33,796		40,782
Research and development costs		31,762		30,328		63,359		64,357		26,540		31,597
Amortization of intangible assets		6,926		7,227		13,872		14,802		6,458		6,946
Interest expense		6,234		5,329		13,142		11,278		6,840		6,908
Interest income		(441)		(221)		(888)		(348)		(405)		(447)
Other (income) expense, net (Note 15)		(2,427)		(1,084)		(4,436)		(1,539)		(4,588)		(2,009)
Total costs and expenses		425,016		435,631		842,170		866,205		395,835		417,154
Earnings before income taxes		54,366		57,591		82,322		114,663		47,059		27,956
Income tax expense		13,542		13,736		15,678		27,024		511		2,136
Net earnings	$	40,824	$	43,855	$	66,644	$	87,639	$	46,548	$	25,820

Earnings per share (Note 3):
Basic earnings per share	$	0.66	$	0.67	$	1.07	$	1.34	$	0.76	$	0.41
Diluted earnings per share	$	0.65	$	0.66	$	1.05	$	1.32	$	0.73	$	0.40

Weighted Average Common Shares Outstanding (Note 3):
Basic		61,639		65,159		62,351		65,242		61,559		63,054
Diluted		63,064		66,540		63,768		66,641		63,671		64,452
Cash dividends per share paid to Woodward common stockholders	$	0.11	$	0.10	$	0.21	$	0.18	$	0.11	$	0.10

See accompanying Notes to Condensed Consolidated Financial Statements

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(In thousands)

(Unaudited)



	Three-Months Ended				Six-Months Ended				Three-Months Ended
	March 31,				March 31,				December 31,
	2016		2015		2016		2015		2016		2015

Net earnings	$	40,824	$	43,855	$	66,644	$	87,639	$	46,548	$	25,820

Other comprehensive earnings:
Foreign currency translation adjustments		10,125		(22,012)		(129)		(34,945)		(18,635)		(10,254)
Unrealized gain (loss) on foreign currency transaction designated as a hedge of a net investment in a foreign subsidiary (Note 6)		(345)		-		517		-
Gain on foreign currency transactions designated as hedges of net investments in foreign subsidiaries (Note 6)										3,830		862
Taxes on changes in foreign currency translation adjustments		(601)		411		(295)		1,260		(306)		306
Foreign currency translation and transactions adjustments, net of tax										(15,111)		(9,086)
		9,179		(21,601)		93		(33,685)
Reclassification of net realized losses on derivatives to earnings (Note 6)		28		24		57		49
Reclassification of net realized (gains) losses on derivatives to earnings (Note 6)										(18)		29
Taxes on changes in derivative transactions		(10)		(8)		(21)		(18)		7		(11)
Derivative adjustments, net of tax										(11)		18
		18		16		36		31
Minimum retirement benefit liability adjustments (Note 17)
Amortization of:
Net prior service cost (benefit)		57		57		113		113
Net prior service cost										56		56
Net loss		425		127		852		257		641		427
Foreign currency exchange rate changes on minimum retirement benefit liabilities		287		518		571		1,058		1,255		284
Taxes on changes in minimum retirement liability adjustments, net of foreign currency exchange rate changes		(290)		(252)		(576)		(509)		(693)		(286)
		479		450		960		919
Pension and other postretirement benefit plan adjustments, net of tax										1,259		481
Total comprehensive earnings	$	50,500	$	22,720	$	67,733	$	54,904	$	32,685	$	17,233

See accompanying Notes to Condensed Consolidated Financial Statements

WOODWARD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)



	March 31,		September 30,		December 31,		September 30,
	2016		2015		2016		2016
ASSETS				(a)
Current assets:
Cash and cash equivalents	$	84,745	$	82,202	$	80,885	$	81,090
Accounts receivable, less allowance for uncollectible amounts of $2,759 and $3,841, respectively		276,848		322,215
Accounts receivable, less allowance for uncollectible amounts of $2,641 and $2,540, respectively						252,761		343,768
Inventories		492,660		447,664		493,764		461,683
Income taxes receivable		1,687		21,838		23,129		20,358
Other current assets		36,281		43,791		34,257		37,525
Total current assets		892,221		917,710		884,796		944,424
Property, plant and equipment, net		825,972		756,100		877,077		876,350
Goodwill		556,720		556,977		553,300		555,684
Intangible assets, net		211,289		225,138		190,933		197,650
Deferred income tax assets		38,311		13,105		18,963		20,194
Other assets		44,903		44,886		51,146		48,060
Total assets	$	2,569,416	$	2,513,916	$	2,576,215	$	2,642,362
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt	$	100,000	$	2,430	$	150,000	$	150,000
Accounts payable		177,423		173,287		149,280		169,439
Income taxes payable		78,430		6,555		1,374		4,547
Accrued liabilities		123,397		155,936		115,823		156,627
Total current liabilities		479,250		338,208		416,477		480,613
Long-term debt, less current portion		617,000		850,000		569,878		577,153
Deferred income tax liabilities		936		56,414		9,063		3,777
Other liabilities		353,269		116,190		358,429		368,224
Total liabilities		1,450,455		1,360,812		1,353,847		1,429,767
Commitments and contingencies (Note 19)
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		106		106
Additional paid-in capital		145,606		131,231		142,664		141,570
Accumulated other comprehensive losses		(50,369)		(51,458)		(79,568)		(65,705)
Deferred compensation		5,219		4,322		6,889		5,089
Retained earnings		1,548,832		1,495,274		1,689,275		1,649,506
		1,649,394		1,579,475		1,759,366		1,730,566
Treasury stock at cost, 11,735 shares and 9,763 shares, respectively		(525,214)		(422,049)
Treasury stock held for deferred compensation, at cost, 174 shares and 173 shares, respectively		(5,219)		(4,322)
Treasury stock at cost, 11,559 shares and 11,374 shares, respectively						(530,109)		(512,882)
Treasury stock held for deferred compensation, at cost, 183 shares and 157 shares, respectively						(6,889)		(5,089)
Total stockholders' equity		1,118,961		1,153,104		1,222,368		1,212,595
Total liabilities and stockholders' equity	$	2,569,416	$	2,513,916	$	2,576,215	$	2,642,362

(a) Retrospectively adjusted as discussed in Note 2, Recent accounting pronouncements

See accompanying Notes to Condensed Consolidated Financial Statements.

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Six-Months Ended March 31,				Three-Months Ended December 31,
	2016		2015		2016		2015
Cash flows from operating activities:				(a)
Net earnings	$	66,644	$	87,639	$	46,548	$	25,820
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		32,621		37,249		18,913		17,062
Net gain on sales of assets		(1,601)		(718)		(3,699)		(1,602)
Stock-based compensation		11,422		7,890		1,261		8,451
Deferred income taxes		(81,496)		3,628		4,777		9,768
Loss on derivatives reclassified from accumulated comprehensive earnings into earnings		57		49
Proceeds from formation of joint venture (Note 4)		250,000		-
(Gain) loss on derivatives reclassified from accumulated comprehensive earnings into earnings						(18)		29
Changes in operating assets and liabilities:
Accounts receivable		53,666		26,417		87,615		74,717
Inventories		(45,918)		(36,085)		(37,632)		(25,091)
Accounts payable and accrued liabilities		(10,734)		6,231		(54,563)		(56,816)
Current income taxes		91,800		(9,173)		(5,731)		(10,517)
Retirement benefit obligations		(1,969)		(2,490)		(897)		(874)
Other		(2,810)		2,639		(4,223)		(3,587)
Net cash provided by operating activities		361,682		123,276		52,351		37,360
Cash flows from investing activities:
Payments for purchase of property, plant, and equipment		(99,316)		(109,402)		(21,058)		(33,131)
Proceeds from sale of assets		2,112		2,345
Net proceeds from sale of assets						3,682		1,852
Proceeds from sales of short-term investments						758		-
Net cash used in investing activities		(97,204)		(107,057)		(16,618)		(31,279)
Cash flows from financing activities:
Cash dividends paid		(13,086)		(11,752)		(6,779)		(6,321)
Proceeds from sales of treasury stock		5,288		2,460		4,843		1,252
Payments for repurchases of common stock		(117,820)		(32,118)		(24,004)		(30,712)
Borrowings on revolving lines of credit and short-term borrowings		300,000		255,000		316,650		220,000
Payments on revolving lines of credit and short-term borrowings		(385,596)		(252,000)		(312,800)		(135,598)
Payments of long-term debt and capital lease obligations		(50,075)		-		(102)		(50,000)
Net cash used in financing activities		(261,289)		(38,410)		(22,192)		(1,379)
Effect of exchange rate changes on cash and cash equivalents		(646)		(12,335)		(13,746)		(2,482)
Net change in cash and cash equivalents		2,543		(34,526)		(205)		2,220
Cash and cash equivalents at beginning of period		82,202		115,287
Cash and cash equivalents at beginning of year						81,090		82,202
Cash and cash equivalents at end of period	$	84,745	$	80,761	$	80,885	$	84,422

(a) Retrospectively adjusted as discussed in Note 2, Recent accounting pronouncements

See accompanying No

See accompanying Notes to Condensed Consolidated Financial Statements.

WOODWARD, INC.

CONDENSED CONSOLIDATED ~~STATEMENTS~~STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)



	Number of shares				Stockholders' equity																						Number of shares				Stockholders' equity
									Accumulated other comprehensive (loss) earnings																										Accumulated other comprehensive (loss) earnings
	Preferred stock	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		Preferred stock	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 October 1, 2014	-	72,960	(7,397)	(198)	$	106	$	112,491	$	10,819	$	105	$	(14,457)	$	(3,533)	$	3,915	$	1,338,468	$	(286,588)	$	(3,915)	$	1,160,944
Balances as of October 1, 2015																											-	72,960	(9,763)	(173)	$	106	$	131,231	$	(21,610)	$	166	$	(30,014)	$	(51,458)	$	4,322	$	1,495,274	$	(422,049)	$	(4,322)	$	1,153,104
Net earnings	-	-	-	-		-		-		-		-		-		-		-		87,639		-		-		87,639	-	-	-	-		-		-		-		-		-		-		-		25,820		-		-		25,820
Other comprehensive income (loss), net of tax	-	-	-	-		-		-		(33,685)		31		919		(32,735)		-		-		-		-		(32,735)	-	-	-	-		-		-		(9,086)		18		481		(8,587)		-		-		-		-		(8,587)
Cash dividends paid	-	-	-	-		-		-		-		-		-		-		-		(11,752)		-		-		(11,752)
Cash dividends paid ($0.10 per share)																											-	-	-	-		-		-		-		-		-		-		-		(6,321)		-		-		(6,321)
Purchases of treasury stock	-	-	(622)	-		-		-		-		-		-		-		-		-		(32,118)		-		(32,118)	-	-	(624)	-		-		-		-		-		-		-		-		-		(30,712)		-		(30,712)
Sales of treasury stock	-	-	107	-		-		(846)		-		-		-		-		-		-		3,306		-		2,460	-	-	49	-		-		(406)		-		-		-		-		-		-		1,658		-		1,252
Common shares issued from treasury stock for benefit plans	-	-	259	-		-		4,490		-		-		-		-		-		-		8,084		-		12,574
Tax benefit attributable to stock-based compensation	-	-	-	-		-		687		-		-		-		-		-		-		-		-		687
Stock-based compensation	-	-	-	-		-		7,890		-		-		-		-		-		-		-		-		7,890	-	-	-	-		-		8,451		-		-		-		-		-		-		-		-		8,451
Purchases of stock by deferred compensation plan	-	-	-	(17)		-		-		-		-		-		-		859		-		-		(859)		-	-	-	-	(21)		-		-		-		-		-		-		1,027		-		-		(1,027)		-
Distribution of stock from deferred compensation plan	-	-	-	24		-		-		-		-		-		-		(289)		-		-		289		-	-	-	-	(1)		-		-		-		-		-		-		(4)		-		-		4		-
Balances as of March 31, 2015	-	72,960	(7,653)	(191)	$	106	$	124,712	$	(22,866)	$	136	$	(13,538)	$	(36,268)	$	4,485	$	1,414,355	$	(307,316)	$	(4,485)	$	1,195,589
Balances as of December 31, 2015																											-	72,960	(10,338)	(195)	$	106	$	139,276	$	(30,696)	$	184	$	(29,533)	$	(60,045)	$	5,345	$	1,514,773	$	(451,103)	$	(5,345)	$	1,143,007

Balances as of October 1, 2015	-	72,960	(9,763)	(173)	$	106	$	131,231	$	(21,610)	$	166	$	(30,014)	$	(51,458)	$	4,322	$	1,495,274	$	(422,049)	$	(4,322)	$	1,153,104
Balances as of October 1, 2016																											-	72,960	(11,374)	(157)	$	106	$	141,570	$	(25,971)	$	179	$	(39,913)	$	(65,705)	$	5,089	$	1,649,506	$	(512,882)	$	(5,089)	$	1,212,595
Net earnings	-	-	-	-		-		-		-		-		-		-		-		66,644		-		-		66,644	-	-	-	-		-		-		-		-		-		-		-		46,548		-		-		46,548
Other comprehensive income (loss), net of tax	-	-	-	-		-		-		93		36		960		1,089		-		-		-		-		1,089	-	-	-	-		-		-		(15,111)		(11)		1,259		(13,863)		-		-		-		-		(13,863)
Cash dividends paid	-	-	-	-		-		-		-		-		-		-		-		(13,086)		-		-		(13,086)
Cash dividends paid ($0.11 per share)																											-	-	-	-		-		-		-		-		-		-		-		(6,779)		-		-		(6,779)
Purchases of treasury stock	-	-	(2,543)	-		-		-		-		-		-		-		-		-		(120,119)		-		(120,119)	-	-	(350)	-		-		-		-		-		-		-		-		-		(24,004)		-		(24,004)
Sales of treasury stock	-	-	254	-		-		(2,366)		-		-		-		-		-		-		8,274		-		5,908	-	-	139	-		-		(907)		-		-		-		-		-		-		5,750		-		4,843
Common shares issued from treasury stock for benefit plans	-	-	317	-		-		5,319		-		-		-		-		-		-		8,680		-		13,999
Common shares issued from treasury stock to settle employee liabilities																											-	-	26	(26)		-		740		-		-		-		-		1,767		-		1,027		(1,767)		1,767
Stock-based compensation	-	-	-	-		-		11,422		-		-		-		-		-		-		-		-		11,422	-	-	-	-		-		1,261		-		-		-		-		-		-		-		-		1,261
Purchases of stock by deferred compensation plan	-	-	-	(24)		-		-		-		-		-		-		1,195		-		-		(1,195)		-
Purchases and transfers of stock by/to deferred compensation plan																											-	-	-	-		-		-		-		-		-		-		37		-		-		(37)		-
Distribution of stock from deferred compensation plan	-	-	-	23		-		-		-		-		-		-		(298)		-		-		298		-	-	-	-	-		-		-		-		-		-		-		(4)		-		-		4		-
Balances as of March 31, 2016	-	72,960	(11,735)	(174)	$	106	$	145,606	$	(21,517)	$	202	$	(29,054)	$	(50,369)	$	5,219	$	1,548,832	$	(525,214)	$	(5,219)	$	1,118,961
Balances as of December 31, 2016																											-	72,960	(11,559)	(183)	$	106	$	142,664	$	(41,082)	$	168	$	(38,654)	$	(79,568)	$	6,889	$	1,689,275	$	(530,109)	$	(6,889)	$	1,222,368

See accompanying Notes to Condensed Consolidated Financial Statements

WOODWARD, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 1. Basis of ~~Presentation~~presentation

The Condensed Consolidated Financial Statements of Woodward, Inc. (“Woodward” or the “Company”) as of ~~March~~December 31, 2016 and for the ~~three and six-months~~three-months ended ~~March~~December 31, 2016 and ~~March~~December 31, 2015, included herein, have not been audited by an independent registered public accounting firm. These 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 ~~March~~December 31, 2016, and the statements of earnings, comprehensive earnings, cash flows, and changes in stockholders’ equity for the periods presented herein. The results of operations for the ~~three and six-months~~three-months ended ~~March~~December 31, 2016 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.

The Condensed Consolidated Balance Sheet as of September 30, 2015 was derived from Woodward’s Annual Report on Form 10-K for the fiscal year then ended. During the three-months ended March 31, 2016, Woodward adopted Accounting Standards Update (“ASU”) 2015-17, “Balance Sheet Classification of Deferred Taxes,” and retrospectively applied the guidance to its deferred tax assets and liabilities as of September 30, 2015. For further discussion of the impact of adopting this new accounting guidance, see Note 2, ~~Recent accounting pronouncements.~~

The 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.

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 Condensed Consolidated Financial Statements included herein. Significant estimates in these Condensed Consolidated Financial Statements include allowances for uncollectible amounts, net realizable value of inventories, customer rebates earned and payable, warranty reserves, useful lives of property and identifiable intangible assets, ~~estimates to support unit-of-production depreciation,~~ the evaluation of impairments of property, ~~valuation of identifiable intangible assets and goodwill,~~ the provision for income tax and related valuation reserves, ~~the valuation of assets and liabilities acquired in business combinations,~~ 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 and board members, and contingencies. Actual results could vary ~~materially~~ from Woodward’s estimates.

Woodward has changed the name of its Energy segment to Industrial. The term “energy” is largely viewed as “oil and gas” and therefore was not representative of the broader markets Woodward serves in this segment.

Note 2. ~~Recent~~New accounting ~~pronouncements~~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~~October 2016, the FASB issued ASU ~~2016-09, “Improvements~~2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.” ASU 2016-16 eliminates the current U.S. GAAP exception deferring the tax effects of intercompany asset transfers (other than inventory) until the transferred asset is sold to ~~Employee Share-Based Payment Accounting,” to simplify financial reporting~~a third party or otherwise recovered through use. After adoption of ASU 2016-16, Woodward will recognize the ~~income~~ tax ~~impacts~~consequences of ~~share-based compensation arrangements. As early~~intercompany asset transfers in the buyer’s and seller’s tax jurisdictions when the transfer occurs, even though the pre-tax effects of these transactions are eliminated in consolidation. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017 (fiscal year 2019 for Woodward), including interim periods within the year of adoption. Early adoption is allowed ~~Woodward adopted ASU 2016-09 during~~only in the ~~second~~first quarter of fiscal year ~~2016. Under~~2017 or the first quarter of fiscal year 2018. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. Woodward is currently assessing the impact this guidance may have on its Condensed Consolidated Financial Statements.

In June 2016, the FASB issued ASU ~~2016-09 Woodward classifies the excess income tax benefits from stock-based compensation arrangements as~~2016-13, “Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 adds a ~~discrete item within income tax expense,~~current expected credit loss (“CECL”) impairment model to U.S. GAAP that is based on expected losses rather than ~~recognizing such excess income tax benefits~~incurred losses. 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. Early adoption is permitted for fiscal years beginning after December 15, 2018 (fiscal year 2020 for Woodward), including interim periods within those fiscal years. Woodward has not determined in ~~additional paid-in capital. As required by ASU 2016-09, Woodward applied this classification~~which period it will adopt the new guidance ~~effective as of October 1, 2015.~~

Under ASU 2016-09, excess income tax benefits from stock-based compensation arrangements are classified as cash flow from operations, rather than as cash flow from financing activities. In addition, when Woodward withholds shares from an employee’s exercise of stock options to fund payment by Woodwardbut does not expect the application of the ~~employee’s taxes, the payment is classified as~~CECL impairment model to have a significant impact on Woodward’s allowance for uncollectible amounts for accounts receivable and notes receivable from municipalities.

~~a financing activity. Woodward has elected to apply the cash flow classification guidance of ASU 2016-09 retrospectively to any prior periods presented.~~

~~Woodward has elected to continue to estimate the number of stock-based awards expected to vest, as permitted by ASU 2016-09, rather than electing to account for forfeitures as they occur.~~

The following table shows the impact of retrospectively applying this guidance to the Condensed Consolidated Statement of Earnings and Condensed Consolidated Statement of Cash Flows for the three-months ended December 31, 2015.

Three-Months Ended December 31, 2015

As previously reported

Adjustment

As recast
Statement of Earnings:

Earnings before income taxes
$
27,956

$
-

$
27,956
Income tax expense

2,345

(209)

2,136
Net earnings
$
25,611

$
209

$
25,820

Earnings per share:

Basic earnings per share
$
0.41

$
-

$
0.41
Diluted earnings per share
$
0.40

$
-

$
0.40

Weighted average common shares outstanding:

Basic

63,054

-

63,054
Diluted

64,373

79

64,452

Statement of Cash Flows:

Net cash provided by operating activities
$
37,112

$
248

$
37,360
Net cash used in investing activities

(31,279)

-

(31,279)
Net cash used in financing activities

(1,131)

(248)

(1,379)
Effect of exchange rate changes on cash and cash equivalents

(2,482)

-

(2,482)
Net change in cash and cash equivalents
$
2,220

$
-

$
2,220

~~The following table shows the impact of retrospectively applying this guidance to the Condensed Consolidated Statement of Cash Flows for the six-months ended March 31, 2015.~~

Six-Months Ended March 31, 2015

As previously reported

Adjustment

As recast
Statement of Cash Flows:

Net cash provided by operating activities
$
122,540

$
736

$
123,276
Net cash used in investing activities

(107,057)

-

(107,057)
Net cash used in financing activities

(37,674)

(736)

(38,410)
Effect of exchange rate changes on cash and cash equivalents

(12,335)

-

(12,335)
Net change in cash and cash equivalents
$
(34,526)

$
-

$
(34,526)

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” The purpose of ASU 2016-02 is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (fiscal year 2020 for Woodward), including interim periods within the year of adoption. In transition, Woodward will be required to recognize and measure leases beginning in the earliest period presented using a modified retrospective approach; therefore, Woodward anticipates restating its Consolidated Financial Statements for the two fiscal years prior to the year of adoption. Early adoption is permitted. Woodward has not determined in which period it will adopt the new

guidance and is currently assessing the impact this guidance may have on its Consolidated Financial Statements, including which of its existing operating leases will be impacted by the new guidance. Rent expense for all operating leases in fiscal year ~~2015,~~2016, none of which was recognized on the balance sheet, was ~~$7,299.~~$7,359. As of September 30, ~~2015,~~2016, future minimum rental payments required under operating leases, none of which were recognized on the balance sheet, were ~~$19,546.~~

In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” to simplify financial reporting and more closely conform U.S. GAAP with International Financial Reporting Standards (“IFRS”). Under ASU 2015-17, Woodward will classify all deferred tax assets and liabilities by taxing jurisdiction, along with any related valuation allowances, as either a single non-current asset or liability on the balance sheet. ASU 2015-17 is effective for fiscal years − and interim periods within those fiscal years − beginning after December 15, 2016 (fiscal year 2018 for Woodward). As early adoption is allowed, Woodward adopted ASU 2015-17 during its second quarter of fiscal year 2016, and retrospectively applied the guidance to its deferred tax assets and liabilities as of September 30, 2015. The following table shows the impact of retrospectively applying this guidance to the Condensed Consolidated Balance Sheet deferred tax assets and liabilities as of September 30, 2015.

September 30, 2015

As previously reported

Adjustment

As recast
Current deferred income tax assets
$
29,766

$
(29,766)

$
-
Total current assets

947,476

(29,766)

917,710
Noncurrent deferred income tax assets

9,388

3,717

13,105
Total assets

2,539,965

(26,049)

2,513,916

Current deferred income tax liabilities

14

(14)

-
Total current liabilities

338,222

(14)

338,208
Noncurrent deferred income tax liabilities

82,449

(26,035)

56,414
Total liabilities

1,386,861

(26,049)

1,360,812
Total liabilities and stockholders' equity

2,539,965

(26,049)

2,513,916

Net deferred tax liabilities

43,309

-

43,309

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” Under ASU 2015-03, Woodward will present debt issuance costs in the balance sheet as a reduction from the related debt liability rather than as an asset. Amortization of such costs will continue to be reported as interest expense. ASU 2015-03 is effective for fiscal years − and interim periods within those fiscal years − beginning after December 15, 2015 (fiscal year 2017 for Woodward). Early adoption is allowed. In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.” ASU 2015-15 supplements the requirements of ASU 2015-03 by allowing an entity to defer and present debt issuance costs related to a line of credit arrangement as an asset and subsequently amortize the deferred costs ratably over the term of the line of credit arrangement. Woodward has not determined in which period it will adopt the new guidance. Retrospective adoption is required. Woodward had unamortized debt issuance costs of $4,921 as of March 31, 2016 and $5,521 as of September 30, 2015. Long-term debt issuance costs will be reclassified from other assets to long-term debt upon adoption.

In April 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” in response to stakeholders’ concerns about current accounting for consolidation of certain legal entities and changes the analysis that a reporting entity must perform to determine whether it should consolidate such legal entities. ASU 2015-02 is effective for public business entities for fiscal years − and interim periods within those fiscal years − beginning after December 15, 2015, but early adoption is allowed. Woodward adopted ASU 2015-02 on January 1, 2016, concurrent with the consummation of the joint venture formation described in Note 4, “~~Joint ventures.” The adoption of ASU 2015-02 had no impact on Woodward’s conclusion that the joint venture described in Note 4 should not be consolidated following the guidance of ASC 810,~~ ~~Consolidation~~. $15,612.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with ~~Customers.” The purpose of ASU 2014-09 is to clarify the principles for recognizing revenue~~Customers” and ~~to develop~~has subsequently issued several supplemental and/or clarifying ASUs (collectively “ASC 606”). ASC 606 prescribes a single common revenue standard ~~for~~that replaces most existing U.S. GAAP ~~and IFRS. The amendments (i) remove inconsistencies and weaknesses in revenue requirements, (ii) provide a more robust framework for addressing revenue issues, (iii) improve comparability of~~ revenue recognition ~~practices across entities, industries, jurisdictions, and capital markets, (iv)~~guidance. ASC 606 outlines a five-step model, under which Woodward will recognize revenue as performance obligations within a customer contract are satisfied. ASC 606 is intended to provide more ~~useful information~~consistent interpretation and application of the principles outlined in the standard across filers in multiple industries and within the same industries compared to ~~users~~current practices, which should improve comparability. Adoption of ~~financial statements through improved~~

disclosure requirements, and (v) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. In July 2015, the FASB delayed the effective date for the adoption of ASU 2014-09 by one year, and as a result, ASU 2014-09ASC 606 is ~~effective~~required for annual reporting periods beginning after December 15, 2017 (fiscal year 2019 for Woodward), including interim periods within the reporting period. ~~Early adoption~~Woodward may elect to adopt ASC 606 in fiscal year 2018, ~~is permitted for Woodward. An entity should~~but does not expect to do so. Upon adoption, Woodward must elect to adopt ~~the amendments using one of the following methods:~~either retrospectively to each prior reporting period presented or ~~retrospectively~~using the cumulative effect transition method with the cumulative effect of ~~initially applying ASU 2014-09~~initial adoption recognized at the date of initial application. Woodward has not determined what transition method it will use. In March and April 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” which provide supplemental adoption guidance and clarification to ASC 2014-09. ASU 2016-08 and ASU 2016-10 must be adopted concurrently with the adoption of ASU 2014-09.

Woodward is currently assessing the impact that the future adoption of ~~these guidances~~ASC 606 may have on its ~~Condensed~~ Consolidated Financial ~~Statements.~~Statements by analyzing its current portfolio of customer contracts, including a review of historical accounting policies and practices to identify potential differences in applying the guidance of ASC 606. Based on Woodward’s preliminary review of its customer contracts, Woodward expects that revenue on the majority of its customer contracts will continue to be recognized at a point in time, generally upon shipment of products, consistent with Woodward’s current revenue recognition model. Upon adoption of ASC 606, however, Woodward also believes some of its revenues from sales of products and services to customers will be recognized over time, rather than at a point in time, due to the terms of certain customer contracts. Related to recognizing some revenue over time, inventory levels and accounts receivable balances will be impacted. As such, Woodward believes the adoption of ASC 606 may have an impact on both the timing of revenue recognition and various line items within the Consolidated Balance Sheet.

Note 3. 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				Six-Months Ended				Three-Months Ended
	March 31,				March 31,				December 31,
	2016		2015		2016		2015		2016		2015
Numerator:
Net earnings	$	40,824	$	43,855	$	66,644	$	87,639	$	46,548	$	25,820
Denominator:
Basic shares outstanding		61,639		65,159		62,351		65,242		61,559		63,054
Dilutive effect of stock options and restricted stock		1,425		1,381		1,417		1,399		2,112		1,398
Diluted shares outstanding		63,064		66,540		63,768		66,641		63,671		64,452
Income per common share:
Basic earnings per share	$	0.66	$	0.67	$	1.07	$	1.34	$	0.76	$	0.41
Diluted earnings per share	$	0.65	$	0.66	$	1.05	$	1.32	$	0.73	$	0.40

~~The following~~There were no stock option grants ~~were~~ outstanding during the ~~three and six-months~~three-months ended ~~March~~December 31, 2016 ~~and~~or 2015 ~~but~~that were excluded from the computation of diluted earnings per share because their inclusion would have been ~~anti-dilutive:~~anti-dilutive.

Three-Months Ended

Six-Months Ended

March 31,

March 31,

2016

2015

2016

2015
Options

731

698

734

701
Weighted-average option price

$
46.55

$
46.55

$
46.55

$
46.54

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

Six-Months Ended

March 31,

March 31,

2016

2015

2016

2015
Weighted-average treasury stock shares held for deferred compensation obligations

185

202

181

201

Note 4. Joint ~~ventures~~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”). The JV designs, develops and sources the fuel system for specified existing and all future GE commercial aircraft engines that produce thrust in excess of fifty thousand pounds.

As part of the JV formation, Woodward contributed to the JV certain contractual rights and intellectual property applicable to the existing GE commercial aircraft engine programs within the scope of the JV. Woodward has no initial cost basis in the JV because Woodward had no cost basis in the contractual rights and intellectual property contributed to the JV. GE purchased from Woodward a 50% ownership interest in the JV for a $250,000 cash payment to Woodward. In addition, GE will pay contingent consideration to Woodward consisting of fifteen annual payments of $4,894 ~~each~~ per year beginning January 4, 2017 subject to certain claw-back conditions. Neither Woodward nor GE contributed any tangible assets to the JV.

Woodward determined that the JV formation was not the culmination of an earnings event because Woodward has significant performance obligations to support the future operations of the JV. Therefore, Woodward recorded the $250,000 consideration received from GE, in January of 2016, for its purchase of a 50% equity interest in the JV as deferred income. The $250,000 deferred income will be recognized as an increase to net sales in proportion to revenue realized on sales of applicable fuel systems within the scope of the JV in a particular period as a percentage of total revenue expected to be realized by Woodward over the estimated remaining lives of the underlying commercial aircraft engine programs assigned to the JV. ~~As of March 31, 2016, accrued liabilities include $6,109 and other liabilities include $241,929 of unamortized~~Unamortized deferred income realized upon the JV ~~formation.~~formation included accrued liabilities of $6,452 as of December 31, 2016 and $6,552 as of September 30, 2016, and other liabilities of $236,791 as of December 31, 2016 and $238,187 as of September 30, 2016. Amortization of the deferred income recognized as an increase to sales was ~~$1,962~~$1,496 for the three-months ended ~~March~~December 31, ~~2016.~~

The $250,000 cash consideration received from GE on January 4, 2016 is taxable upon receipt for income tax purposes but not currently recognized in earnings for book purposes. Therefore, during the three month period ended March 31, 2016, Woodward recorded estimated incremental current income taxes payable of $94,125 and a related noncurrent deferred tax asset of $94,125. As of March 31, 2016, current income taxes payable includes $94,125 related to the receipt of $250,000 from GE on January 4, 2016.

Woodward and GE jointly manage the JV and any significant decisions and/or actions of the JV require the mutual consent of both parties. Neither Woodward nor GE has a controlling financial interest in the JV, but both Woodward ~~does~~and GE do have the ability to significantly influence the operating and financial decisions of the JV. Therefore, Woodward is accounting for its 50% ownership interest in the JV using the equity method of accounting. The JV is a related party to

Woodward. Other income includes ~~$2,158~~$684 for the three-months ended December 31, 2016 related to Woodward’s equity interest in the earnings of the ~~JV for the three-months ended March 31, 2016.~~JV. During the three-months ended ~~March~~December 31, 2016, Woodward received no cash distributions from the ~~JV and therefore,~~JV. Woodward’s net investment in the JV, which is included in other assets, was ~~$2,158~~$6,888 as of ~~March~~December 31, 2016.

During the three-months ended ~~March~~December 31, 2016, ~~Woodward~~Woodward’s net sales include ~~$15,015~~$15,302 of sales to the JV and a reduction to sales of ~~$7,016~~$5,403 related to royalties paid to the JV by Woodward on sales by Woodward directly to third party aftermarket customers. ~~At March~~The Condensed Consolidated Balance Sheets, included “Accounts receivable” of $5,145 at December 31, 2016 and $5,326 at September 30, 2016 related to amounts the JV owed Woodward, ~~$4,902~~ and included “Accounts payable” of $5,012 at December 31, 2016 and $3,926 at September 30, 2016 related to amounts Woodward owed the ~~JV $3,288.~~ JV.

Note 5. Financial instruments and fair value measurements

Financial assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheets are categorized based upon a fair value hierarchy established by U.S. GAAP, which prioritizes the inputs used to measure fair value into the following levels:

Level 1: Inputs based on quoted market prices in active markets for identical assets or liabilities at the measurement date.

Level 2: Quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable and can be corroborated by observable market data.

Level 3: Inputs that reflect management’s best estimates and assumptions of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments.

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.

Woodward had no financial liabilities required to be measured at fair value on a recurring basis as of ~~March~~December 31, 2016 or September 30, ~~2015.~~2016.



	At March 31, 2016								At September 30, 2015								At December 31, 2016								At September 30, 2016
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial assets:
Cash	$	83,582	$	-	$	-	$	83,582	$	79,517	$	-	$	-	$	79,517	$	71,894	$	-	$	-	$	71,894	$	80,959	$	-	$	-	$	80,959
Investments in money market funds		33		-		-		33		20		-		-		20		-		-		-		-		48		-		-		48
Investments in reverse repurchase agreements		1,130		-		-		1,130		2,665		-		-		2,665		313		-		-		313		83		-		-		83
Investments in term deposits with foreign banks																		8,678		-		-		8,678		7,136		-		-		7,136
Equity securities		11,683		-		-		11,683		9,883		-		-		9,883		14,603		-		-		14,603		12,491		-		-		12,491
Total financial assets	$	96,428	$	-	$	-	$	96,428	$	92,085	$	-	$	-	$	92,085	$	95,488	$	-	$	-	$	95,488	$	100,717	$	-	$	-	$	100,717

Investments in money market funds: Woodward sometimes invests excess cash in money market funds not insured by the Federal Depository Insurance Corporation (“FDIC”). Woodward believes that the investments in money market funds are on deposit with creditworthy financial institutions and that the funds are highly liquid. The investments in money market funds are reported in “Cash and cash equivalents” at fair value, with realized gains from interest income ~~realized~~recognized in ~~earnings and are included in “Cash and cash equivalents.”~~earnings. The fair values of Woodward’s investments in money market funds are based on the quoted market prices for the net asset value of the various money market funds.

Investments in reverse repurchase agreements: Woodward sometimes invests excess cash in reverse repurchase agreements. Under the terms of Woodward’s reverse repurchase agreements, Woodward purchases an interest in a pool of securities and is granted a security interest in those securities by the counterparty to the reverse repurchase agreement. At an agreed upon date, generally the next business day, the counterparty repurchases Woodward’s interest in the pool of securities at a price equal to what Woodward paid to the counterparty plus a rate of return determined daily per the terms of the reverse repurchase agreement. Woodward believes that the investments in these reverse repurchase agreements are with creditworthy financial institutions and that the funds invested are highly liquid. The investments in reverse repurchase agreements are reported at fair value, with realized gains from interest income ~~realized~~recognized in earnings, and are included in “Cash and cash equivalents.” Since the investments are generally overnight, the carrying value is considered to be equal to the fair value as the amount is deemed to be a cash deposit with no risk of change in value as of the end of each fiscal quarter.

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

Equity securities: Woodward holds marketable equity securities, through investments in various mutual funds, related to its deferred compensation program. Based on Woodward’s intentions regarding these instruments, marketable equity securities are classified as trading securities. The trading securities are reported at fair value, with realized gains and losses recognized in “Other (income) expense, net.” The trading securities are included in “Other assets.” 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.

Accounts receivable, accounts payable, the current portion of long-term debt, and short-term debt 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 March 31, 2016				At September 30, 2015					At December 31, 2016				At September 30, 2016
	Fair Value Hierarchy Level	Estimated Fair Value		Carrying Cost		Estimated Fair Value		Carrying Cost		Fair Value Hierarchy Level	Estimated Fair Value		Carrying Cost		Estimated Fair Value		Carrying Cost
Assets:
Notes receivable from municipalities	2	$	16,988	$	16,025	$	16,112	$	15,638	2	$	16,201	$	15,229	$	17,501	$	15,849
Investments in short-term time deposits										2		4,065		4,084		4,882		4,918
Liabilities:
Short-term borrowings										2		(150,000)		(150,000)		(150,000)		(150,000)
Long-term debt, excluding current portion	2	$	(647,909)	$	(617,000)	$	(873,734)	$	(850,000)	2	$	(590,556)	$	(571,852)	$	(617,857)	$	(579,244)

In fiscal years 2014 and 2013, Woodward received long-term notes from ~~a municipality~~municipalities within the ~~state~~states of Illinois and Colorado 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. The fair value of the long-term notes was estimated based on a model that discounted future principal~~segment and interest payments received at an interest rate available to the Company at the end of the period for similarly rated municipal notes of similar maturity, which is a level 2 input as defined by the U.S. GAAP fair value

~~hierarchy. The interest rates used to estimate the fair value of the long-term notes were 2.4% at March 31, 2016 and 3.0% at September 30, 2015.~~

~~In fiscal year 2013, Woodward received a long-term note from a municipality within the state of Colorado in connection with certain economic incentives related to~~ Woodward’s development of a new campus at its corporate headquarters in Fort Collins, Colorado. The fair value of the long-term ~~note~~notes was estimated based on a model that discounted future principal and interest payments received at an interest rate available to the Company 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 ~~note~~notes were ~~2.4%~~2.9% at ~~March~~December 31, 2016 and ~~3.0%~~2.2% at September 30, ~~2015.~~2016.

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 is determined to be 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 short-term time deposits was 6.6% at December 31, 2016 and 6.9% at September 30, 2016.

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 Company 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 rates used to estimate the fair value of long-term debt were ~~2.6%~~2.4% at ~~March~~December 31, 2016 and ~~2.8%~~1.9% at September 30, ~~2015.~~2016.

Note 6. Derivative instruments and hedging activities

Woodward has exposures related to global market risks, including the effect of changes in interest rates, foreign currency exchange rates, changes in certain commodity prices and fluctuations in various producer indices. From time to time, Woodward enters into derivative instruments for risk management purposes only, including derivatives designated as accounting hedges and/or those utilized as economic hedges. Woodward uses interest rate related derivative instruments to manage its exposure to fluctuations of interest rates. Woodward does not enter into or issue derivatives for trading or speculative purposes.

By using derivative and/or hedging instruments to manage its risk exposure, Woodward is subject, from time to time, to credit risk and market risk on those derivative instruments. Credit risk arises from the potential failure of the counterparty to perform under the terms of the derivative and/or hedging instrument. When the fair value of a derivative contract is positive, the counterparty owes Woodward, which creates credit risk for Woodward. Woodward mitigates this credit risk by entering into transactions with only creditworthy counterparties. Market risk arises from the potential adverse effects on the value of derivative and/or hedging instruments that result from a change in interest rates, commodity prices, or foreign currency exchange rates. Woodward minimizes this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

Woodward did not enter into any derivatives or hedging transactions during ~~any of~~ the ~~three or six-months~~three-months ended ~~March~~December 31, ~~2016 or March 31, 2015.~~2016.

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 other comprehensive ~~losses~~(losses) earnings (“accumulated OCI”), were net gains of ~~$326~~$272 as of ~~March~~December 31, 2016 and ~~$269~~$290 as of September 30, ~~2015.~~2016.

The following table discloses the impact of derivative instruments in cash flow hedging relationships on Woodward’s Condensed Consolidated Statements of Earnings, recognized in interest expense:



	Three-Months Ended March 31,				Six-Months Ended March 31,				Three-Months Ended December 31,
	2016		2015		2016		2015		2016		2015
Amount of (income) expense recognized in earnings on derivative	$	28	$	24	$	57	$	49	$	(18)	$	29
Amount of (gain) loss recognized in accumulated OCI on derivative		-		-		-		-		-		-
Amount of (gain) loss reclassified from accumulated OCI into earnings		28		24		57		49		(18)		29

Based on the carrying value of the realized but unrecognized gains ~~and losses~~ on terminated derivative instruments designated as cash flow hedges as of ~~March~~December 31, 2016, Woodward expects to reclassify $72 of net unrecognized gains on terminated derivative instruments from accumulated other comprehensive (losses) earnings to earnings during the next twelve months.

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 Agreements”) 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. Woodward designated the €40,000 Series M Notes as a hedge of a foreign currency exposure of Woodward’s net investment in its Euro denominated functional currency subsidiaries. A foreign exchange gain on the Series M Notes of $2,814 for the three-months ended December 31, 2016 is included in foreign currency translation adjustments within total comprehensive (losses) earnings.

In June 2015, Woodward designated an intercompany loan of 160,000 Renminbi (“RMB”) between two wholly owned subsidiaries as a hedge of a foreign currency exposure of the net investment of the borrower in the lender. Unrealized foreign exchange gains on the loan of $862 is included in foreign currency translation adjustments within total comprehensive earnings for the three-months ended December 31, 2015. In June 2016, the intercompany loan was repaid.

In July 2016, Woodward designated a new intercompany loan of 160,000 RMB between two wholly owned subsidiaries as a hedge of a foreign currency exposure of the net investment of the borrower in the lender. ~~An unrealized~~Unrealized foreign exchange

~~gain~~ gains on the loan of ~~$517 is~~$1,016 for the three-months ended December 31, 2016 are included in foreign currency translation adjustments within total comprehensive ~~earnings for the six-months ended March 31, 2016.~~(losses) earnings.

Note 7. Supplemental statement of cash flows information



	Six-Months Ended March 31,				Three-Months Ended December 31,
	2016		2015		2016		2015
Interest paid, net of amounts capitalized	$	18,127	$	15,507	$	10,317	$	14,878
Income taxes paid		7,470		31,060		6,047		3,667
Income tax refunds received		1,361		387		59		913
Non-cash activities:
Purchases of property, plant and equipment on account		12,028		54,381		6,130		26,666
Property, plant and equipment acquired by capital lease		1,239		-
Common shares issued from treasury to settle benefit plan obligations (Note 17)		13,999		12,574
Purchases of treasury stock on account		1,745		-
Cashless exercise of stock options		555		-
Common shares issued from treasury to settle employee liabilities						1,767		-

Note 8. Inventories



	March 31,		September 30,		December 31,		September 30,
	2016		2015		2016		2016
Raw materials	$	60,508	$	63,896	$	58,064	$	54,246
Work in progress		111,213		91,501		111,908		109,756
Component parts (1)		265,445		248,047		269,456		249,307
Finished goods		55,494		44,220		54,336		48,374
	$	492,660	$	447,664	$	493,764	$	461,683

(1)

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

Note 9. Property, plant, and equipment



	March 31,		September 30,		December 31,		September 30,
	2016		2015		2016		2016
Land and land improvements	$	87,632	$	79,311	$	87,294	$	87,696
Buildings and building improvements		499,987		372,160		525,710		527,704
Leasehold improvements		12,797		16,907		14,662		15,213
Machinery and production equipment		381,243		365,040		481,041		484,315
Computer equipment and software		111,287		118,154		122,418		117,984
Office furniture and equipment		22,268		20,939		29,133		29,344
Other		18,360		18,325		19,121		18,969
Construction in progress		185,177		252,763		92,516		88,909
		1,318,751		1,243,599		1,371,895		1,370,134
Less accumulated depreciation		(492,779)		(487,499)		(494,818)		(493,784)
Property, plant and equipment, net	$	825,972	$	756,100
Property, plant, and equipment, net					$	877,077	$	876,350

Included in “Land and land improvements” and “Buildings and improvements” are assets held for sale of $686 at March 31, 2016 and $681 at September 30, 2015 related to Woodward’s Industrial segment. The entire change in value is due to

~~changes in foreign currency exchange rates between September 30, 2015 and March 31, 2016. The sale of these assets was completed on April 15, 2016.~~

Included in “Office furniture and equipment” and “Other” is ~~$1,239~~$1,653 at December 31, 2016 and September 30, 2016, of gross assets acquired on capital ~~leases.~~leases, and accumulated depreciation included $425 at December 31, 2016 and $322 at September 30, 2016 of amortization associated with the capital lease assets.

In fiscal year 2015, Woodward completed and placed into service a manufacturing and office building on a second campus in the greater-Rockford, Illinois area and has ~~begun occupying~~occupied the new facility in anticipation of beginning serial production of new narrow-body product lines beginning in fiscal year 2017 for its Aerospace segment. This campus is intended to support Woodward’s expected growth in its Aerospace segment over the next ten years and beyond, required as a result of Woodward being awarded a substantial number of new system platforms, particularly on narrow-body aircraft. Included in “Construction in progress” are costs of ~~$72,244~~$34,207 at ~~March~~December 31, 2016 and ~~$47,629~~$26,741 at September 30, ~~2015,~~2016 associated with new equipment purchases for the second ~~campus including capitalized interest of $1,369 at March~~campus.

For the three-months ended December 31, 2016 and ~~$499 at September 30, 2015.~~

Woodward is also developing a new campus at its corporate headquarters in Fort Collins, Colorado to support the continued growth of its Industrial segment by supplementing its existing Colorado manufacturing facilities and corporate headquarters. Included in “Construction in progress” are $48,606 at March 31, 2016 and $151,669 at September 30, 2015, associated with the construction of the new campus including capitalized interest of $934 at March 31, 2016 and $5,205 at September 30, 2015. Woodward began occupying the new campus during its second quarter of fiscal year 2016. Approximately $135,000 of assets were placed in service during the three-months ended March 31, 2016, and were recorded to “Buildings and building improvements.”

Concurrent with and in relation to Woodward’s significant investment in three new campuses and related equipment in the greater-Rockford, Illinois area, its corporate headquarters in Fort Collins, Colorado (discussed above), and a new campus in Niles, Illinois (that was completed in fiscal year 2015), Woodward initiated a comprehensive review of its depreciation lives as required by U.S. GAAP to evaluate the estimates of the useful lives of Woodward assets. This review resulted in estimates of the useful lives of both existing and new assets generally in excess of those utilized prior to fiscal year 2016. The revised estimates will be used in fiscal year 2016 and going forward and result in a downward adjustment of depreciation on existing assets of approximately $12,000 for fiscal year 2016.

~~For the three and six-months ended March 31, 2016 and March 31,~~ 2015, Woodward had depreciation expense as follows:

Three-Months Ended

Six-Months Ended

March 31,

March 31,

2016

2015

2016

2015
Depreciation expense

$
8,633

$
11,449

$
18,749

$
22,447

For the ~~three and six-months~~three-months ended ~~March~~December 31, 2016 and ~~March 31,~~ 2015, Woodward capitalized interest that would have otherwise been included in interest expense of the following:

Three-Months Ended

Six-Months Ended

March 31,

March 31,

2016

2015

2016

2015
Capitalized interest

$
2,267

$
2,801

$
4,140

$
4,766

Note 10. Goodwill



	September 30, 2015		Effects of Foreign Currency Translation		March 31, 2016		September 30, 2016		Effects of Foreign Currency Translation		December 31, 2016
Aerospace	$	455,423	$	-	$	455,423	$	455,423	$	-	$	455,423
Industrial		101,554		(257)		101,297		100,261		(2,384)		97,877
Consolidated	$	556,977	$	(257)	$	556,720	$	555,684	$	(2,384)	$	553,300

Woodward tests goodwill for impairment at the reporting unit level on an annual basis and more often if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Woodward completed its annual goodwill impairment test as of July 31, ~~2015~~2016 during the quarter ended September 30, ~~2015. At that date,~~2016. Woodward determined it was appropriate to aggregate certain components of the same operating segment into a

single reporting unit. The fair value of each of Woodward’s reporting units was determined using a discounted cash flow method. This method represents a level 3 input and incorporates various estimates and assumptions, the most significant being projected revenue growth rates, earnings margins, future tax rates, and the present value, based on an estimated weighted-average cost of capital (or the discount rate) and terminal growth rate, of forecasted cash flows. Management projects revenue growth rates, earnings margins and cash flows based on each reporting unit’s current operational results, expected performance and operational strategies over a ten-year period. These projections are adjusted to reflect current economic conditions and demand for certain products, and require considerable management judgment.

Forecasted cash flows used in the July 31, ~~2015~~2016 impairment test were discounted using weighted-average cost of capital assumptions ranging from ~~9.49%~~8.91% to ~~12.83%~~11.49%. The terminal values of the forecasted cash flows were calculated using the Gordon Growth Model and assumed an annual compound growth rate after ten years of ~~4.03%~~3.71%. These inputs, which are unobservable in the market, represent management’s best estimate of what market participants would use in determining the present value of the Company’s forecasted cash flows. Changes in these estimates and assumptions can have a significant impact on the fair value of forecasted cash flows. Woodward evaluated the reasonableness of the reporting units’ resulting fair values utilizing a market multiple method.

The results of Woodward’s goodwill impairment tests performed as of July 31, ~~2015~~2016 did not indicate impairment of any of Woodward’s reporting units.

Note 11. Intangible assets, net



	March 31, 2016						September 30, 2015						December 31, 2016						September 30, 2016
	Gross Carrying Value		Accumulated Amortization		Net Carrying Amount		Gross Carrying Value		Accumulated Amortization		Net Carrying Amount		Gross Carrying Value		Accumulated Amortization		Net Carrying Amount		Gross Carrying Value		Accumulated Amortization		Net Carrying Amount
Customer relationships and contracts:
Aerospace	$	282,225	$	(125,194)	$	157,031	$	282,225	$	(116,232)	$	165,993	$	282,225	$	(138,408)	$	143,817	$	282,225	$	(134,158)	$	148,067
Industrial		40,992		(32,996)		7,996		41,409		(32,891)		8,518		40,693		(33,530)		7,163		40,969		(33,509)		7,460
Total	$	323,217	$	(158,190)	$	165,027	$	323,634	$	(149,123)	$	174,511	$	322,918	$	(171,938)	$	150,980	$	323,194	$	(167,667)	$	155,527

Intellectual property:
Aerospace	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Industrial		19,431		(17,471)		1,960		19,445		(16,921)		2,524		19,156		(17,734)		1,422		19,435		(17,876)		1,559
Total	$	19,431	$	(17,471)	$	1,960	$	19,445	$	(16,921)	$	2,524	$	19,156	$	(17,734)	$	1,422	$	19,435	$	(17,876)	$	1,559

Process technology:
Aerospace	$	76,605	$	(40,321)	$	36,284	$	76,605	$	(37,411)	$	39,194	$	76,605	$	(44,703)	$	31,902	$	76,605	$	(43,229)	$	33,376
Industrial		22,977		(15,428)		7,549		22,924		(14,621)		8,303		22,596		(16,344)		6,252		22,965		(16,200)		6,765
Total	$	99,582	$	(55,749)	$	43,833	$	99,529	$	(52,032)	$	47,497	$	99,201	$	(61,047)	$	38,154	$	99,570	$	(59,429)	$	40,141

Other intangibles:
Aerospace	$	-	$	-	$	-	$	1,400	$	(1,300)	$	100	$	-	$	-	$	-	$	-	$	-	$	-
Industrial		1,259		(790)		469		1,248		(742)		506		1,168		(791)		377		1,246		(823)		423
Total	$	1,259	$	(790)	$	469	$	2,648	$	(2,042)	$	606	$	1,168	$	(791)	$	377	$	1,246	$	(823)	$	423

Total intangibles:
Aerospace	$	358,830	$	(165,515)	$	193,315	$	360,230	$	(154,943)	$	205,287	$	358,830	$	(183,111)	$	175,719	$	358,830	$	(177,387)	$	181,443
Industrial		84,659		(66,685)		17,974		85,026		(65,175)		19,851		83,613		(68,399)		15,214		84,615		(68,408)		16,207
Consolidated Total	$	443,489	$	(232,200)	$	211,289	$	445,256	$	(220,118)	$	225,138	$	442,443	$	(251,510)	$	190,933	$	443,445	$	(245,795)	$	197,650

For the ~~three and six-months~~three-months ended ~~March~~December 31, 2016 and ~~March 31,~~ 2015, Woodward recorded amortization expense associated with intangibles of the following:

Three-Months Ended

Six-Months Ended

March 31,

March 31,

2016

2015

2016

2015
Amortization expense
$
6,926

$
7,227

$
13,872

$
14,802



	Three-Months Ended
	December 31,
	2016		2015
Amortization expense	$	6,458	$	6,946

Future amortization expense associated with intangibles is expected to be:



Year Ending September 30:
2016 (remaining)	$	13,622
2017		25,812
2017 (remaining)			$	19,279
2018		24,989		24,907
2019		23,152		23,071
2020		20,362		20,332
2021				18,393
Thereafter		103,352		84,951
	$	211,289	$	190,933

Note 12. 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 to up to $1,200,000, subject to lenders’ participation. Borrowings under the Revolving Credit Agreement generally bear interest at LIBOR plus 0.85% to 1.65%. The Revolving Credit Agreement matures in April 2020. Under the Revolving Credit Agreement, there were $160,550 in principal amount of borrowings outstanding as of December 31, 2016, at an effective interest rate of 1.66% and $156,700 in principal amount of borrowings outstanding as of September 30, 2016, at an effective interest rate of 1.77%. As of December 31, 2016, $150,000 of the borrowings under the Revolving Credit Agreement were classified as short-term based on Woodward’s intent and ability to pay this amount in the next twelve months.

Short-term borrowings

AAs of December 31, 2016, a Chinese subsidiary of Woodward has a local uncommitted credit facility with the Hong Kong and Shanghai Banking Company under which it has the ability to borrow up to either $22,700, or the local currency equivalent of ~~$22,700. Any cash borrowings under~~$22,700, up to the ~~local Chinese credit facility are secured by~~amount of a parent guarantee from Woodward. The Chinese subsidiary may utilize the local facility for cash borrowings to support its operating cash needs. Local currency borrowings on the Chinese credit facility are charged interest at the prevailing interest rate offered by the People’s Bank of China on the date of borrowing, plus a margin equal to 15% of that prevailing rate. U.S. dollar borrowings on the credit facility are charged interest at the lender’s cost of borrowing rate at the date of borrowing, plus 3%. The ~~local credit facility expires in September 2016. The~~ Chinese subsidiary had no outstanding cash borrowings against the local credit facility at ~~March~~December 31, 2016 and September 30, ~~2015.~~2016.

AAs of December 31, 2016, the Brazilian subsidiary of Woodward ~~has~~had a local uncommitted credit facility with the Banco J.P. Morgan S.A. under which it ~~has~~had the ability to borrow up to 52,000 Brazilian Real. Any cash borrowings under the local Brazilian credit facility are secured by a parent guarantee from Woodward. The Brazilian subsidiary may utilize the local facility to support its operating cash needs. Local currency borrowings on the Brazilian credit facility are charged interest at the lender’s cost of borrowing rate at the date of borrowing, plus 1.75%. ~~The local~~On January 5, 2017, the Brazilian subsidiary of Woodward entered into an amendment to the original credit facility ~~expires on~~to extend the maturity date until July ~~26, 2016.~~14, 2017 and decrease the maximum borrowing capacity to 1,000 Brazilian Real. The Brazilian subsidiary had no outstanding cash borrowings ~~at March 31, 2016 and $2,430 of outstanding cash borrowings at September 30, 2015~~ against the local credit ~~facility.~~facility at December 31, 2016 and September 30, 2016.

Woodward also 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 as of ~~March~~December 31, 2016 and September 30, ~~2015~~2016 on Woodward’s other foreign lines of credit and foreign overdraft facilities.

1716

Long-term debt



	March 31,		September 30,		December 31,		September 30,
	2016		2015		2016		2016
Revolving credit facility - Floating rate (LIBOR plus 0.85% - 1.65%), due April 2020, unsecured	$	267,000	$	350,000	$	160,550	$	156,700
Series C notes – 5.92%, due October 2015; unsecured		-		50,000
Series D notes – 6.39%, due October 2018; unsecured		100,000		100,000		100,000		100,000
Series E notes – 7.81%, due April 2016; unsecured		57,000		57,000
Series F notes – 8.24%, due April 2019; unsecured		43,000		43,000		43,000		43,000
Series G notes – 3.42%, due November 2020; unsecured		50,000		50,000		50,000		50,000
Series H notes – 4.03%, due November 2023; unsecured		25,000		25,000		25,000		25,000
Series I notes – 4.18%, due November 2025; unsecured		25,000		25,000		25,000		25,000
Series J notes – Floating rate (LIBOR plus 1.25%), due November 2020; unsecured		50,000		50,000		50,000		50,000
Series K notes – 4.03%, due November 2023; unsecured		50,000		50,000		50,000		50,000
Series L notes – 4.18%, due November 2025; unsecured		50,000		50,000		50,000		50,000
Series M notes – 1.12% due September 2026; unsecured						42,076		44,886
Series N notes – 1.31% due September 2028; unsecured						80,995		86,406
Series O notes – 1.57% due September 2031; unsecured						45,231		48,252
Total debt		717,000		850,000		721,852		729,244
Less: short-term portion of long-term debt		(100,000)		-
Long-term debt, excluding short-term portion	$	617,000	$	850,000
Less: Current portion of long-term debt						(150,000)		(150,000)
Unamortized debt issuance costs						(1,974)		(2,091)
Long-term debt, less current portion					$	569,878	$	577,153

~~Revolving credit facility~~

Woodward maintains a $1,000,000 revolving credit facility established under a revolving credit agreement between Woodward and a syndicate of lenders led by Wells Fargo Bank, National Association, as administrative agent (the “Revolving Credit Agreement”). The Revolving Credit Agreement provides for the option to increase available borrowings to up to $1,200,000, subject to lenders’ participation. Borrowings under the Revolving Credit Agreement generally bear interest at LIBOR plus 0.85% to 1.65%. The Revolving Credit Agreement matures in April 2020. Under the Revolving Credit Agreement, there were $267,000 in principal amount of borrowings outstanding as of March 31, 2016, at an effective interest rate of 1.68%. Under the Revolving Credit Agreement, there were $350,000 in principal amount of borrowings outstanding as of September 30, 2015, at an effective interest rate of 1.44%. As of March 31, 2016, $100,000 of the $267,000 of borrowings under the Revolving Credit Agreement were classified as short-term based on Woodward’s intent and ability to pay this amount in the next twelve months. As of September 30, 2015, the entire outstanding balance on the Revolving Credit Agreement was classified as long-term debt.

The Notes

In October 2008, Woodward entered into a note purchase agreement ~~(the “2008 Note Purchase Agreement”)~~ relating to the Series ~~B, C, and~~ D Notes (the “2008 Notes”). In April 2009, Woodward entered into a note purchase agreement ~~(the “2009 Note Purchase Agreement”)~~ relating to the Series ~~E and~~ F Notes (the “2009 Notes”).

On October 1, 2013, Woodward entered into a note purchase agreement ~~(the “2013 Note Purchase Agreement” and, together with the 2008 Note Purchase Agreement and the 2009 Note Purchase Agreement, the “Note Purchase Agreements”)~~ relating to the sale by Woodward of an aggregate principal amount of $250,000 of its senior unsecured notes in a series of private placement transactions.

Woodward issued the Series G, H and I Notes (the “First Closing Notes”) on October 1, 2013. Woodward issued the Series J, K and L Notes (the “Second Closing Notes”, and together with the 2008 Notes, 2009 Notes and the First Closing Notes, the ~~“Notes”~~“USD Notes”) on November 15, 2013.

On September 23, 2016, Woodward and the BV Subsidiary each entered into note purchase agreements 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 (the “Series M Notes”). The BV Subsidiary issued (a) €77,000 aggregate principal amount of the BV Subsidiary’s Series N Senior Notes (the “Series N Notes”) and (b) €43,000 aggregate principal amount of the BV Subsidiary’s Series O Senior Notes (the “Series O Notes” and together with the Series M Notes and the Series N Notes, the “2016 Notes”, and together with the USD Notes, collectively, the “Notes”).

Interest on the 2008 Notes, the First Closing Notes, and the Series K and L Notes is payable semi-annually on April 1 and October 1 of each year until all principal is paid. Interest on the 2009 Notes is payable semi-annually on April 15 and October 15 of each year until all principal is paid. Interest on the 2016 Notes will be payable semi-annually on March 23 and September 23 of each year, commencing on March 23, 2017, until all principal is paid. Interest on the Series J Notes is payable quarterly on January 1, April 1, July 1 and October 1 of each year until all principal is paid. As of ~~March~~December 31, 2016, the Series J Notes bore interest at an effective rate of ~~1.87%~~2.16%.

~~On October 1, 2015, Woodward paid~~Debt Issuance Costs

Unamortized debt issuance costs associated with the ~~entire principal balance~~Notes of ~~$50,000 on~~$1,974 as of December 31, 2016 and $2,091 as of September 30, 2016 were recorded as a reduction in “Long-term debt, less current portion” in the ~~Series C notes using borrowings under~~Condensed Consolidated Balance Sheets. Unamortized debt issuance costs of $2,915 associated with the Revolving Credit ~~Agreement. On April 4,~~Agreement as of December 31, 2016 ~~Woodward paid~~and $3,134 as of September 30, 2016 were recorded as “Other assets” in the ~~entire principal balance~~Condensed Consolidated Balance Sheets. Amortization of ~~$57,000 on~~debt issuance costs is included in operating activities in the ~~Series E notes using borrowings under the Revolving Credit Agreement.~~Condensed Consolidated Statements of Cash Flows.

1817

Note 13. Accrued liabilities



	March 31,		September 30,		December 31,		September 30,
	2016		2015		2016		2016
Salaries and other member benefits	$	53,808	$	90,472	$	47,677	$	87,197
Warranties		15,553		13,741		15,528		15,993
Interest payable		11,025		12,526		5,789		9,071
Current portion of acquired performance obligations and unfavorable contracts (1)		4,663		6,651		2,910		2,910
Accrued retirement benefits		2,479		2,481		2,503		2,505
Current portion of loss reserve on contractual lease commitments		1,840		-		1,840		1,840
Current portion of deferred income from JV formation (Note 4)		6,109		-		6,452		6,552
Deferred revenues		7,688		10,004		7,577		5,779
Taxes, other than income		8,709		8,723		9,289		14,580
Other		11,523		11,338		16,258		10,200
	$	123,397	$	155,936	$	115,823	$	156,627

(1)

In connection with Woodward’s acquisition of GE Aviation Systems LLC’s (the “Seller”) thrust reverser actuation systems business located in Duarte, California (the “Duarte Acquisition”) in fiscal year 2013, Woodward assumed current and long-term performance obligations for contractual commitments that are expected to result in future economic losses. In addition, Woodward assumed current and long-term performance obligations for services to be provided to the Seller and others, partially offset by current and long-term assets related to contractual payments due from the Seller. The current portion of both obligations is included in Accrued liabilities.

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 on a non-specific basis whenever past experience indicates a normal and predictable pattern exists. Changes in accrued product warranties were as follows:



	Six-Months Ended March 31,				Three-Months Ended December 31,
		2016		2015		2016		2015
Warranties, beginning of period	$	13,741	$	16,916	$	15,993	$	13,741
Expense		6,411		3,922
Expense, net of recoveries						1,923		3,236
Reductions for settling warranties		(4,743)		(5,965)		(2,032)		(3,469)
Foreign currency exchange rate changes		144		(866)		(356)		(138)
Warranties, end of period	$	15,553	$	14,007	$	15,528	$	13,370

Loss reserve on contractual lease commitments

In connection with the construction of a new production facility in Niles, Illinois, Woodward vacated a leased facility in Skokie, Illinois. During the first quarter of fiscal year 2016 Woodward fully vacated the Skokie facility and therefore recorded a charge of $8,165 to recognize a loss reserve against the estimated remaining contractual lease commitments, less anticipated sublease income.

The summary for the activity in the loss reserve during the ~~three and six-months~~three-months ended ~~March~~December 31, 2016 is as follows:

Three-Months Ended

Six-Months Ended

March 31, 2016

March 31, 2016
Loss reserve on contractual lease commitments, beginning of period
$
10,629

$
2,464
Additions

-

8,165
Reductions

(857)

(857)
Loss reserve on contractual lease commitments, end of period
$
9,772

$
9,772



	Three-Months Ended December 31,
		2016		2015
Loss reserve on contractual lease commitments, beginning of period	$	9,242	$	2,464
Additions		-		8,165
Payments		(402)		-
Loss reserve on contractual lease commitments, end of period	$	8,840	$	10,629

Other liabilities included ~~$7,932~~$7,000 of accrued loss reserve on contractual lease commitments that are not expected to be settled or paid within twelve months as of ~~March~~December 31, 2016.

Note 14. Other liabilities



	March 31,		September 30,		December 31,		September 30,
	2016		2015		2016		2016
Net accrued retirement benefits, less amounts recognized within accrued liabilities	$	54,224	$	55,259	$	70,549	$	70,479
Noncurrent portion of deferred income from JV formation (1)		241,929		-		236,791		238,187
Total unrecognized tax benefits, net of offsetting adjustments		15,234		15,394
Total unrecognized tax benefits, net of offsetting adjustments (Note 16)						12,541		17,239
Acquired unfavorable contracts (2)		3,553		4,656		2,859		3,148
Deferred economic incentives (3)		18,424		19,163		15,685		16,196
Loss reserve on contractual lease commitments (4)		7,932		2,464		7,000		7,402
Other		11,973		19,254		13,004		15,573
	$	353,269	$	116,190	$	358,429	$	368,224

(1)

See Note 4, Joint venture for more information on the deferred income from JV formation.

(2)

In connection with the Duarte business acquisition in fiscal year 2013, Woodward assumed current and long-term performance obligations for contractual commitments that are expected to result in future economic losses. The long-term portion of the acquired unfavorable contracts is included in Other liabilities.

(3)

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 ~~will be~~are being recognized as a reduction to ~~non-income tax~~pre-tax expense over the economic lives of the related capital expansion projects.

(4)

See Note 13, Accrued ~~liabilites~~liabilities for more information on the loss reserve on contractual lease commitments.

Note 15. Other (income) expense, net



	Three-Months Ended				Six-Months Ended				Three-Months Ended
	March 31,				March 31,				December 31,
	2016		2015		2016		2015		2016		2015
Equity interest in the earnings of the JV (Note 4)	$	(2,158)	$	-	$	(2,158)	$	-	$	(684)	$	-
Net gain on sales of assets		1		(658)		(1,601)		(718)		(3,699)		(1,602)
Rent income		(83)		(135)		(184)		(260)		(73)		(101)
Net gain on investments in deferred compensation program		(130)		(256)		(434)		(490)
Net gains on investments in deferred compensation program										(24)		(304)
Other		(57)		(35)		(59)		(71)		(108)		(2)
	$	(2,427)	$	(1,084)	$	(4,436)	$	(1,539)	$	(4,588)	$	(2,009)

Note 16. Income taxes

U.S. GAAP requires that the interim period tax provision be determined as follows:

At the end of each quarter, Woodward estimates the tax that will be provided for the current fiscal year stated as a percentage of estimated “ordinary income.” The term ordinary income refers to earnings from continuing operations before income taxes, excluding significant unusual or infrequently occurring items.

The estimated annual effective rate is applied to the year-to-date ordinary income at the end of each quarter to compute the estimated year-to-date tax applicable to ordinary income. The tax expense or benefit related to ordinary

income in each quarter is the difference between the most recent year-to-date and the prior quarter year-to-date computations.

The tax effects of significant unusual or infrequently occurring items are recognized as discrete items in the interim period in which the events occur. The impact of changes in tax laws or rates on deferred tax amounts, the effects of changes in judgment about beginning of the year valuation allowances, and changes in tax reserves resulting from the finalization of tax audits or reviews are examples of significant unusual or infrequently occurring items that are recognized as discrete items in the interim period in which the event occurs.

The determination of the annual effective tax rate is based upon a number of significant estimates and judgments, including the estimated annual pretax income of Woodward in each tax jurisdiction in which it operates, and the development of tax planning strategies during the year. 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, and other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.

On December 7, 2016, the U.S. Treasury issued regulations under Internal Revenue Code Section 987 (“Section 987 Regulations”) which clarify how companies calculate foreign currency translation gains and losses for income tax purposes for branches whose accounting records are kept in a currency other than the currency of the company. The issuance of these Section 987 Regulations had no significant impact on Woodward’s Condensed Consolidated Financial Statements for the three months ended December 31, 2016.

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



	Three-Months Ended				Six-Months Ended				Three-Months Ended
	March 31,				March 31,				December 31,
	2016		2015		2016		2015		2016		2015
Earnings before income taxes	$	54,366	$	57,591	$	82,322	$	114,663	$	47,059	$	27,956
Income tax expense		13,542		13,736		15,678		27,024		511		2,136
Effective tax rate		24.9%		23.9%		19.0%		23.6%		1.1%		7.6%

The increase in the year-over-year effective tax rate for the second quarter of fiscal year 2016, is primarily attributable to a smaller favorable release of foreign valuation allowances in the second quarter of fiscal year 2016 as compared to the same period last year. This increase was partially offset by the permanent extension, in the first quarter of fiscal year 2016, of the U.S. research and experimentation credit (“R&E Credit”) and the adoption of ASU 2016-09 that resulted in a favorable adjustment for the net excess income tax benefits from stock compensation in the second quarter of fiscal year 2016.

The decrease in the year-over-year effective tax rate for the ~~six-months~~three-months ended ~~March~~December 31, 2016 is primarily attributable to the ~~permanent extension~~impact in the quarter of the ~~R&E Credit~~repatriation to the U.S. of certain net foreign profits and ~~favorable adjustment for~~losses. The U.S. foreign tax credits available as a result of the repatriation of the foreign net earnings is greater than the U.S. taxes payable on these net foreign earnings. The excess ~~income~~U.S. foreign tax ~~benefits from stock compensation~~credits are expected to be used to offset U.S. taxes on other foreign source income.

The decrease in the ~~current fiscal year,~~year-over-year effective tax rate caused by the repatriated earnings was partially offset by ~~a smaller favorable release of foreign valuation allowances in~~ the ~~current fiscal year. The~~ retroactive ~~portion~~benefit of the U.S. research and experimentation credit (“R&E ~~Credit related~~credit”) pursuant to the ~~nine-months ended September 30,~~December 18, 2015 ~~was $5,197 and~~enactment of the Protecting Americans from Tax Hikes (PATH) Act of 2015, which was included in the ~~results of~~effective tax rate for the first quarter of fiscal year ~~2016.~~2016 but did not repeat in the first quarter of fiscal year 2017.

Gross unrecognized tax benefits were ~~$20,827~~$18,579 as of ~~March~~December 31, 2016, and ~~$21,469~~$23,526 as of September 30, ~~2015.~~2016. Included in the balance of unrecognized tax benefits were ~~$9,780~~$11,460 as of ~~March~~December 31, 2016 and ~~$10,494~~$11,426 as of September 30, ~~2015,~~2016 of tax benefits that, if recognized, would affect the effective tax rate. At this time, Woodward estimates that it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as ~~$3,385~~$3,373 in the next twelve months due to the completion of reviews by tax authorities, lapses of statutes, and the settlement of tax positions. Woodward accrues for potential interest and penalties related to unrecognized tax benefits and all other interest and penalties related to tax payments in tax expense. Woodward had accrued gross interest and penalties of ~~$896~~$1,460 as of ~~March~~December 31, 2016 and ~~$859~~$1,273 as of September 30, ~~2015.~~2016.

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 limitations may result in changes to tax expense. Fiscal years remaining open to examination in significant foreign jurisdictions include 2008 and ~~forward.~~thereafter. Woodward’s fiscal years remaining open to examination in the United States include fiscal years 2013 and thereafter. Woodward is currently under examination by the Internal Revenue Service for fiscal year 2014. Woodward has concluded U.S. federal income tax examinations through fiscal year 2012. Woodward is generally subject to U.S. state income tax examinations for fiscal years 2012 and ~~forward.~~the periods thereafter.

Note 17. 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 foreign employees are also eligible to participate in foreign plans.

Most of Woodward’s U.S. employees with at least two years of service receive an annual contribution of Woodward stock, equal to 5% of their eligible prior year wages, to their personal Woodward Retirement Savings Plan accounts. In the second quarter of fiscal years 2016 and 2015, Woodward fulfilled its annual Woodward stock contribution obligation using shares held in treasury stock by issuing 317 shares or common stock for a total value of $13,999 in fiscal year 2016 and 259 shares of common stock for a total value of $12,574 in fiscal year 2015. The increase in the annual 5% stock contribution is primarily related to a specified group of additional employees becoming eligible for the 5% stock contribution on January 1, 2015 in exchange for freezing one of Woodward’s defined benefit pension plans for that group.

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

Three-Months Ended

Six-Months Ended

March 31,

March 31,

2016

2015

2016

2015
Company costs

$
7,478

$
6,841

$
15,482

$
13,019

Defined benefit plans

Woodward has defined benefit plans that provide pension benefits for certain retired employees in the United States, the United Kingdom, and Japan. 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, ~~2015,~~2016, 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.

~~Effective June 30, 2015,~~During the ~~Company terminated the~~third quarter of fiscal year 2016, Woodward opened a lump-sum buy-out window for certain former U.S. employees and/or their dependents eligible to receive postretirement defined benefit pension payments for past employment services to the Company. Eligible pension plan ~~for employees at its Duarte, California manufacturing facility. The~~participants may elect to receive a one-time lump-sum payment or an immediate annuity in lieu of future pension benefit payments. Pension benefit payments paid from available pension plan ~~which was established in~~assets under the lump-sum buy-out options were $670 during the first quarter of fiscal year ~~2013 in connection with the December 2012 acquisition of the Duarte business, was amended in fiscal year 2013~~2017. Woodward expects to ~~cease all future~~make no further pension benefit ~~accruals~~payments under the plan and was at that time closed to new entrants. Cash payout of benefits will occur after regulatory approval of the plan termination. In exchange for the freeze and termination of the plan, which were agreed upon through negotiations with the applicable employee union, the employees were provided replacement benefits through full participation in the Woodward U.S. defined contribution plan. Woodward does not expect future cash payouts to the beneficiaries of the terminated plan to be significantly different from the approximately $221 liability reflected in Woodward’s statement of financial position as of March 31, 2016. lump-sum buy-out options.

2221

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



	Three-Months Ended March 31,												Three-Months Ended December 31,
	United States				Other Countries				Total				United States				Other Countries				Total
	2016		2015		2016		2015		2016		2015		2016		2015		2016		2015		2016		2015
Service cost	$	424	$	505	$	185	$	195	$	609	$	700	$	419	$	674	$	192	$	186	$	611	$	860
Interest cost		1,309		1,489		411		522		1,720		2,011		1,439		1,317		296		435		1,735		1,752
Expected return on plan assets		(2,535)		(2,662)		(666)		(745)		(3,201)		(3,407)		(2,632)		(2,542)		(641)		(697)		(3,273)		(3,239)
Amortization of:
Net actuarial (gain) loss		323		99		63		46		386		145
Prior service cost (benefit)		96		96		-		-		96		96
Net periodic retirement pension (benefit) cost	$	(383)	$	(473)	$	(7)	$	18	$	(390)	$	(455)
Net actuarial loss														464		323		127		65		591		388
Prior service cost														96		96		-		-		96		96
Net periodic retirement pension benefit													$	(214)	$	(132)	$	(26)	$	(11)	$	(240)	$	(143)
Contributions paid	$	-	$	-	$	139	$	121	$	139	$	121	$	-	$	-	$	365	$	389	$	365	$	389


	Six-Months Ended March 31,
	United States				Other Countries				Total
	2016		2015		2016		2015		2016		2015
Service cost	$	1,098	$	1,009	$	371	$	397	$	1,469	$	1,406
Interest cost		2,626		2,986		846		1,068		3,472		4,054
Expected return on plan assets		(5,077)		(5,332)		(1,363)		(1,523)		(6,440)		(6,855)
Amortization of:
Net actuarial (gain) loss		646		198		128		95		774		293
Prior service cost (benefit)		192		192		-		-		192		192
Net periodic retirement pension (benefit) cost	$	(515)	$	(947)	$	(18)	$	37	$	(533)	$	(910)
Contributions paid	$	-	$	-	$	528	$	1,222	$	528	$	1,222

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



	Three-Months Ended				Six-Months Ended				Three-Months Ended
	March 31,				March 31,				December 31,
	2016		2015		2016		2015		2016		2015
Service cost	$	6	$	8	$	11	$	15	$	4	$	5
Interest cost		262		309		524		617		311		262
Amortization of:
Net actuarial (gain) loss		39		(18)		78		(36)
Prior service cost (benefit)		(39)		(39)		(79)		(79)
Net periodic other postretirement (benefit) cost	$	268	$	260	$	534	$	517
Net actuarial loss										50		39
Prior service benefit										(40)		(40)
Net periodic other postretirement cost									$	325	$	266
Contributions paid	$	840	$	575	$	1,221	$	901	$	615	$	381

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 ~~2016~~2017 may differ from the current estimate. Woodward estimates its remaining cash contributions in fiscal year ~~2016~~2017 will be as follows:



Retirement pension benefits:
United States	$	24 -
United Kingdom		~~279~~323
Japan		-
Other postretirement benefits		~~2,882~~3,424

Multiemployer defined benefit plans

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

Three-Months Ended

Six-Months Ended

March 31,

March 31,

2016

2015

2016

2015
Company contributions

$
157

$
143

$
287

$
310

Note 18. Stockholders’ equity

Stock repurchase program

In the ~~second~~first quarter of fiscal year ~~2015,~~2017, Woodward’s Board of Directors terminated ~~Woodward’s~~the Company’s prior stock repurchase program and replaced it with a new program for the repurchase of up to ~~$300,000~~$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 ~~2018~~2019 (the ~~“2015~~“2016 Authorization”).

InUnder the ~~third~~2016 Authorization, in the first quarter of fiscal year ~~2015,~~2017, Woodward ~~entered into an accelerated share repurchase agreement (the “ASR Agreement”) with Goldman, Sachs & Co. (“Goldman”) under which Woodward repurchased~~purchased 350 shares of its common stock for ~~an aggregate purchase price of $125,000. A total of 2,506 shares of common stock were repurchased under the ASR Agreement under the 2015 Authorization.~~$24,004 pursuant to a 10b5-1 plan.

In the first quarter of fiscal year 2016, Woodward executed a 10b5-1 plan ~~which is cancellable,~~ to repurchase up to $125,000 of its common stock for a period that ~~will end~~ended on April 20, 2016. During the first ~~half~~quarter of fiscal year 2016, Woodward purchased ~~2,523~~624 shares of its common stock for ~~$119,119 under~~$30,712 pursuant to the 10b5-1 plan under the ~~2015 Authorization.~~prior stock repurchase program, which was terminated in November 2016.

~~Stock options~~Stock-based compensation

~~Woodward has reserved a total of 7,410 shares of Woodward’s common~~Provisions governing outstanding stock ~~for issuance under~~option awards are included in the 2006 Omnibus Incentive Plan (the “2006 Plan”), and the 2002 Stock Option Plan (the “2002 Plan”). The 2002 Plan provided that no further grants would be made after December 31, 2006. The 2006 Plan, which ~~has been~~was approved by Woodward’s stockholders and became effective January 25, 2006, expired in fiscal year 2016. No further grants will be made under either the 2002 Plan or the 2006 Plan.

Woodward’s stockholders approved a successor plan to the 2006 Plan (the “2017 Plan”) at the January 25, 2017 Annual Stockholder Meeting. As of September 14, 2016, the effective date of the 2017 Plan, Board of Directors 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. The Committee approved issuance of options under the 2017 Plan, with an award date of October 3, 2016 conditional and subject to approval of the 2017 Plan by the stockholders. ~~Equity~~The stock options conditionally awarded under the 2017 Plan were not granted or outstanding for accounting purposes prior to stockholder approval of the 2017 Plan, and as such no stock based compensation expense was recognized on these stock options during the three months ended December 31, 2016. As of December 31, 2016, 773 stock options awards were approved but not granted.

Stock options

Woodward granted no stock options in the first quarter of fiscal year 2017. Previous stock options granted under the 2006 Plan include grants of stock options to its employees and directors. Woodward believes that these stock options align the interests of its employees and directors with those of its stockholders. Stock option awards arewere granted with an exercise price equal to the market price of Woodward’s stock at the date of grant, a ten-year term, and generally a four-year vesting schedule at a rate of 25% per year.

The fair value of options granted was estimated on the date of grant using the Black-Scholes-Merton option-valuation model using the assumptions in the following table. Woodward calculates the expected term, which represents the 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

Six-Months Ended

March 31,

March 31,

2016

2015

2016

2015
Expected term (years)

n/a

n/a

6.3
-
8.7

6.2
-
8.8

Estimated volatility

n/a

n/a

34.5%
-
35.1%

36.5%

Estimated dividend yield

n/a

n/a

1.0%

0.7%

Risk-free interest rate

n/a

n/a

1.7%
-
2.0%

2.0%
-
2.3%

The following is a summary of the activity for stock option awards during the ~~three and six-months~~three-months ended ~~March~~December 31, 2016:

Three-Months Ended

Six-Months Ended

March 31, 2016

March 31, 2016

Number of options

Weighted-Average Exercise Price per Share

Number of options

Weighted-Average Exercise Price per Share
Options, beginning balance

5,636

$
33.81

4,641

$
32.28
Options granted

-

n/a

1,055

40.26
Options exercised

(205)

22.69

(254)

23.29
Options forfeited

(2)

40.26

(13)

42.97
Options, ending balance

5,429

34.22

5,429

34.22



	Three-Months Ended
	December 31, 2016
	Number of options		Weighted-Average Exercise Price per Share
Options, beginning balance		4,944	$	35.35
Options granted		-		n/a
Options exercised		(139)		34.83
Options forfeited		(13)		42.19
Options, ending balance		4,792		35.35

Changes in non-vested stock options during the ~~three and six-months~~three-months ended ~~March~~December 31, 2016 were as follows:



	Three-Months Ended
	December 31, 2016
	Number of options		Weighted-Average Grant Date Fair Value Per Share
Options outstanding, beginning balance		2,075	$	14.90
Options granted		-		n/a
Options vested		(758)		15.24
Options forfeited		(13)		14.47
Options outstanding, ending balance		1,304		14.70

Three-Months Ended

Six-Months Ended

March 31, 2016

March 31, 2016

Number of options

Weighted-Average Exercise Price per Share

Number of options

Weighted-Average Exercise Price per Share
Options outstanding, beginning balance

2,094

$
41.54

1,724

$
40.54
Options granted

-

n/a

1,055

40.26
Options vested

(6)

41.74

(680)

36.97
Options forfeited

(2)

40.26

(13)

43.00
Options outstanding, ending balance

2,086

41.54

2,086

41.54

Information about stock options that have vested, or are expected to vest, and are exercisable at ~~March~~December 31, 2016 was as follows:

Number

Weighted- Average Exercise Price

Weighted- Average Remaining Life in Years

Aggregate Intrinsic Value
Options outstanding

5,429

$
34.22

6.2

$
96,625
Options vested and exercisable

3,343

29.66

4.6

74,770
Options vested and expected to vest

5,296

34.03

6.1

95,257



	Number		Weighted- Average Exercise Price		Weighted- Average Remaining Life in Years		Aggregate Intrinsic Value
Options outstanding		4,792	$	35.35		5.9	$	161,511
Options vested and exercisable		3,488		32.83		5.0		126,348
Options vested and expected to vest		4,719		35.25	��	5.8		159,525

Restricted Stock

In the first quarter of fiscal year 2014, Woodward granted an award of 24 shares of restricted stock to its Chief Executive Officer and President, Thomas A. Gendron. Subject to Mr. Gendron’s continued employment by the Company, 100% of these shares of restricted stock will vest ~~100%~~ following the end of the Company’s fiscal year 2017 if a specified cumulative earnings per share (“EPS”) target is met or exceeded for fiscal years 2014 through 2017. If this EPS target is not met, all shares of restricted stock will be forfeited by Mr. Gendron. The shares of restricted stock were awarded to Mr. Gendron pursuant to a form restricted stock agreement approved by Woodward’s Compensation Committee of the Board of Directors.

A summary of the activity for restricted stock awards in the ~~three and six-months~~three-months ended ~~March~~December 31, 2016 follows:

Three-Months Ended

Six-Months Ended

March 31, 2016

March 31, 2016

Number

Fair Value per Share

Number

Fair Value per Share
Beginning balance

24

$
39.43

24

$
39.43
Shares granted

-

n/a

-

n/a
Shares vested

-

n/a

-

n/a
Shares forfeited

-

n/a

-

n/a
Ending balance

24

39.43

24

39.43



	Three-Months Ended
	December 31, 2016
		Number		Fair Value per Share
Beginning balance		24	$	39.43
Shares granted		-		n/a
Shares vested		-		n/a
Shares forfeited		-		n/a
Ending balance		24		39.43

Stock-based compensation cost

Woodward recognizes stock compensation expense on a straight-line basis over the requisite service period. Pursuant to form stock option agreements used by the Company, 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 on the date of grant.

At ~~March~~December 31, 2016, there was approximately ~~$11,239~~$6,820 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements, both stock options and restricted stock awards, granted under the 2002 Plan and the 2006 Plan (for which no further grants will be ~~made) and the 2006 Plan.~~made under either plan). The pre-vesting forfeiture rates for purposes of determining stock-based compensation cost recognized were estimated to be 0% for members of Woodward’s board of directors and 9% for all others. The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately ~~2.4~~2.1 years.

Note 19. 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 where it believes that it is probable the matter will result in a loss when ultimately resolved using estimates of the most likely amount of loss.

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 these 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.

Note 20. Segment information

Woodward serves the aerospace, industrial and energy 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 costs, 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

Six-Months Ended

March 31,

March 31,

2016

2015

2016

2015
Segment external net sales:

Aerospace

$
290,690

$
281,426

$
559,289

$
537,196
Industrial

188,692

211,796

365,203

443,672
Total consolidated net sales

$
479,382

$
493,222

$
924,492

$
980,868
Segment earnings:

Aerospace

$
50,578

$
45,628

$
94,064

$
81,421
Industrial

19,469

27,224

41,020

66,492
Total segment earnings

70,047

72,852

135,084

147,913
Nonsegment expenses

(9,888)

(10,153)

(40,508)

(22,320)
Interest expense, net

(5,793)

(5,108)

(12,254)

(10,930)
Consolidated earnings before income taxes

$
54,366

$
57,591

$
82,322

$
114,663



	Three-Months Ended
	December 31,
	2016		2015
Segment external net sales:
Aerospace	$	266,680	$	268,599
Industrial		176,214		176,511
Total consolidated net sales	$	442,894	$	445,110
Segment earnings:
Aerospace	$	46,877	$	43,486
Industrial		17,998		21,551
Total segment earnings		64,875		65,037
Nonsegment expenses		(11,381)		(30,620)
Interest expense, net		(6,435)		(6,461)
Consolidated earnings before income taxes	$	47,059	$	27,956

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

March 31, 2016

September 30, 2015
Segment assets:

Aerospace

$
1,585,195

$
1,566,421
Industrial

681,721

653,848
Total segment assets

2,266,916

2,220,269
Unallocated corporate property, plant and equipment, net

91,904

85,834
Other unallocated assets

210,596

207,813
Consolidated total assets

$
2,569,416

$
2,513,916



	December 31, 2016		September 30, 2016
Segment assets:
Aerospace	$	1,611,306	$	1,637,522
Industrial		663,886		705,169
Total segment assets		2,275,192		2,342,691
Unallocated corporate property, plant and equipment, net		89,990		89,988
Other unallocated assets		211,033		209,683
Consolidated total assets	$	2,576,215	$	2,642,362

2725

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:

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

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

descriptions of our plans and expectations for future operations;

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

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

the effect of economic trends or growth;

the ~~effect of changes in the~~expected level of activity in particular industries or ~~markets;~~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; and

pension and other postretirement plan assumptions and future contributions.

Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including:

a decline in business with, or financial distress of, our significant customers;

global economic uncertainty and instability in the financial markets;

our ability to manage product liability claims, product recalls or other liabilities associated with the products and services that we provide;

our ability to obtain financing, on acceptable terms or at all, to implement our business plans, complete acquisitions, or otherwise take advantage of business opportunities or respond to business pressures;

the long sales cycle, customer evaluation process, and implementation period of some of our products and services;

our ability to implement and realize the intended effects of any restructuring and alignment efforts;

our ability to successfully manage competitive factors, including prices, promotional incentives, competitor product development, industry consolidation, and commodity and other input cost increases;

our ability to manage our expenses and product mix while responding to sales increases or decreases;

the ability of our subcontractors to perform contractual obligations and our suppliers to provide us with materials of sufficient quality or quantity required to meet our production needs at favorable prices or at all;

our ability to monitor our technological expertise and the success of, and/or costs associated with, our product development activities;

consolidation in the aerospace market and our participation in a strategic joint venture with General Electric Company may make it more difficult to secure long-term sales in certain aerospace markets;

~~our ability to integrate acquisitions and manage costs related thereto;~~

our debt obligations, our debt service requirements, and our ability to operate our business, pursue business strategies and incur additional debt in light of covenants contained in our outstanding debt agreements;

our ability to manage additional tax expense and exposures;

2826

risks related to our U.S. Government contracting activities, including liabilities resulting from legal and regulatory proceedings, inquiries, or investigations related to such activities;

the potential of a significant reduction in defense sales due to decreases in the amount of U.S. Federal defense spending or other specific budget cuts impacting defense programs in which we participate;

changes in government spending patterns, priorities, subsidy programs and/or regulatory requirements;

future impairment charges resulting from changes in the estimates of fair value of reporting units or of long-lived assets;

future results of our subsidiaries;

environmental liabilities related to manufacturing activities and/or real estate acquisitions;

our continued access to a stable workforce and favorable labor relations with our employees;

physical and other risks related to our operations and suppliers, including natural disasters, which could disrupt production;

our ability to successfully manage regulatory, tax, and legal matters (including the adequacy of amounts accrued for contingencies, the U.S. Foreign Corrupt Practices Act, and product liability, patent, and intellectual property matters);

risks related to our common stock, including changes in prices and trading volumes;

risks from operating internationally, including the impact on reported earnings from fluctuations in foreign currency exchange rates, and compliance with and changes in the legal and regulatory environments of the United States and the countries in which we operate;

risks associated with global political and economic uncertainty in the European Union and elsewhere;

fair value of defined benefit plan assets and assumptions used in determining our retirement pension and other postretirement benefit obligations and related expenses including, among others, discount rates and investment return on pension assets;

industry risks, including changes in commodity prices for oil, natural gas, and other minerals, unforeseen events that may reduce commercial aviation, and changing emissions standards;

our operations may be adversely affected by information systems interruptions or intrusions; and

certain provisions of our charter documents and Delaware law that could discourage or prevent others from acquiring our company.

These factors are representative of the risks, uncertainties, and assumptions that could cause actual outcomes and results to differ materially from what is expressed or forecast in our forward-looking statements. Other factors are discussed under the caption “Risk Factors” in Part I, Item 1A in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) (our “Form 10-K”), as updated from time to time in our subsequent SEC filings. We undertake no obligation to revise or update any forward-looking statements for any reason.

Unless we have indicated otherwise or the context otherwise requires, references in this Quarterly Report on Form 10-Q (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.

This discussion should be read together with Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recent Form 10-K and the Condensed Consolidated Financial Statements and Notes included therein and in this report.

2927

~~Non-U.S. GAAP Financial Measures~~

Earnings before interest and taxes (“EBIT”), earnings before interest, taxes, depreciation and amortization (“EBITDA”), and free cash flow are financial measures not prepared and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). However, we believe these non-U.S. GAAP financial measures provide additional information that enables readers to evaluate our business from the perspective of management.

~~Earnings based non-U.S. GAAP financial measures~~

Management uses EBIT to evaluate Woodward’s performance without financing and tax related considerations, as these elements may not fluctuate with operating results. Management uses EBITDA in evaluating Woodward’s operating performance, making business decisions, including developing budgets, managing expenditures, forecasting future periods, and evaluating capital structure impacts of various strategic scenarios. Securities analysts, investors and others frequently use EBIT and EBITDA in their evaluation of companies, particularly those with significant property, plant, and equipment, and intangible assets subject to amortization.

~~EBIT and EBITDA for the three and six-months ended March 31, 2016 and March 31, 2015 were as follows:~~

Three-Months Ended March 31,

Six-Months Ended March 31,

2016

2015

2016

2015
Net earnings

$
40,824

$
43,855

$
66,644

$
87,639
Income taxes

13,542

13,736

15,678

27,024
Interest expense

6,234

5,329

13,142

11,278
Interest income

(441)

(221)

(888)

(348)
EBIT

60,159

62,699

94,576

125,593
Amortization of intangible assets

6,926

7,227

13,872

14,802
Depreciation expense

8,633

11,449

18,749

22,447
EBITDA

$
75,718

$
81,375

$
127,197

$
162,842

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 EBIT and 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 EBIT and 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 as net cash flows provided by operating activities less payments for property, plant and equipment, in reviewing the financial performance of Woodward’s various business groups and evaluating cash levels. Securities analysts, investors, and others frequently use free cash flow in their evaluation of companies. The use of this non-U.S. GAAP financial measure 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. Free cash flow does 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 may differ from similarly titled measures used by other companies, limiting its usefulness as a comparative measure.

~~Free cash flow for the three and six-months ended March 31, 2016 and March 31, 2015 were as follows:~~

Six-Months Ended March 31,

2016

2015
Net cash provided by operating activities
$
361,682

$
123,276
Payments for property, plant and equipment

(99,316)

(109,402)
Free cash flow
$
262,366

$
13,874

~~OVER~~OVERV~~VIEW~~IEW

~~Joint Venture~~

As part of the JV formation, Woodward contributed to the JV certain contractual rights and intellectual property applicable to the existing GE commercial aircraft engine programs within the scope of the JV. Woodward has no initial cost basis in the JV because Woodward had no cost basis in the contractual rights and intellectual property contributed to the JV. GE purchased from Woodward a 50% ownership interest in the JV for a $250,000 cash payment to Woodward. In addition, GE will pay contingent consideration to Woodward consisting of fifteen annual payments of $4,894 each per year beginning January 4, 2017 subject to certain claw-back conditions. Neither Woodward nor GE contributed any tangible assets to the JV.

Woodward and GE jointly manage the JV, and any significant decisions and/or actions of the JV require the mutual consent of both Woodward and GE. Neither Woodward nor GE has a controlling financial interest in the JV, but Woodward does have the ability to significantly influence the operating and financial decisions of the JV. Therefore, Woodward is accounting for its remaining 50% ownership interest in the JV using the equity method of accounting. Other income includes $2,158 related to Woodward’s equity interest in the earnings of the JV for the three-months ended March 31, 2016. During the three-months ended March 31, 2016, Woodward net sales include $15,015 of sales to the JV and a reduction to sales of $7,016 related to royalties paid to the JV by Woodward on sales by Woodward directly to third party aftermarket customers.

~~Segment name change~~

We changed the name of our Energy segment to Industrial. The term “energy” is largely viewed as “oil and gas” and therefore was not representative of the broader markets we serve in this segment.

Operational ~~Highlights~~

~~Second Quarter~~ Highlights

Net sales for the ~~second~~first quarter of fiscal year ~~2016~~2017 were ~~$479,382,~~$442,894, a decrease of ~~$13,840, or 2.8%, compared to $493,222~~0.5% from $445,110 for the ~~second quarter of the~~ prior ~~fiscal year. Net sales for the second quarter of fiscal~~ year ~~2016 were negatively impacted by $4,317 related to unfavorable changes in foreign currency exchange rates compared to the same period of fiscal year 2015.~~first quarter. Aerospace segment sales for the ~~second~~first quarter of fiscal year ~~2016~~2017 were ~~up 3.3%~~down 0.7% to ~~$290,690,~~$266,680, compared to ~~$281,426~~$268,599 for the ~~second~~first quarter of the prior fiscal year. Industrial segment sales for the ~~second~~first quarter of fiscal year ~~2016~~2017 were down ~~10.9%~~0.2% to ~~$188,692,~~$176,214, compared to ~~$211,796~~$176,511 for the ~~second~~first quarter of the prior fiscal year.

Net earnings for the second quarter of fiscal year 2016 were $40,824, a decrease of $3,031, or 6.9%, compared to $43,855 for the second quarter of fiscal year 2015. Net earnings per diluted share was $0.65 for the second quarter of fiscal year 2016 compared to $0.66 for the second quarter of fiscal year 2015. The effective tax rate in the second quarter of fiscal year 2016 was 24.9%, compared to 23.9% for the second quarter of the prior fiscal year.

EBIT for the second quarter of fiscal year 2016 was $60,159, a decrease of 4.1% from $62,699 for the second quarter of fiscal year 2015. EBITDA for the second quarter of fiscal year 2016 was $75,718, a decrease of 7.0% from $81,375 for the second quarter of fiscal year 2015.

Aerospace segment earnings as a percent of segment net sales increased to 17.4% in the second quarter of fiscal year 2016 from 16.2% in the prior fiscal year. Industrial segment earnings as a percent of segment net sales decreased to 10.3% in the second quarter of fiscal year 2016 from 12.9% in the prior fiscal year

~~Year to Date Highlights~~

Net sales for the first half of fiscal year 2016 were $924,492, a decrease of 5.7% from $980,868 for the first half of the prior fiscal year. Net sales for the first half of fiscal year 2016 were negatively impacted by $17,198 related to unfavorable

changes in foreign currency exchange rates compared to the same period of fiscal year 2015. Aerospace segment sales for the first half of fiscal year 2016 were up 4.1% to $559,289, compared to $537,196 for the first half of the prior fiscal year. Industrial segment sales for the first half of fiscal year 2016 were down 17.7% to $365,203, compared to $443,672 for the first half of the prior fiscal year.

Net earnings for the first ~~half~~quarter of fiscal year ~~2016~~2017 were ~~$66,644,~~$46,548, or ~~$1.05~~$0.73 per diluted share, ~~a decrease of $20,995, or 24.0%,~~ compared to ~~$87,639,~~$25,820, or ~~$1.32~~$0.40 per diluted share, for the first ~~half~~quarter of fiscal year ~~2015.~~2016. Net earnings for the first ~~half~~quarter of fiscal year 2016 included approximately $16,100 ~~$9,900 net of tax or $0.16 per diluted share,~~ of special charges related to our efforts to consolidate facilities, reduce costs and address current market ~~conditions. Net earnings for the first half of fiscal year 2016 were also negatively impacted by~~conditions, which was equal to approximately ~~$3,000,~~$9,900 net of ~~tax, related to unfavorable changes in foreign currency exchange rates compared to the same period of fiscal year 2015.~~

tax. The effective tax rate in the first ~~six months~~quarter of fiscal year ~~2016~~2017 was ~~19.0%,~~1.1% compared to ~~23.6%~~7.6% for the first ~~half~~quarter of the prior fiscal year.

~~EBIT~~Earnings before interest and taxes (“EBIT”) for the first ~~half~~quarter of fiscal year ~~2016~~2017 was ~~$94,576, down 24.7%~~$53,494, up 55.4% from ~~$125,593~~$34,417 in the ~~same period~~first quarter of fiscal year ~~2015. EBIT~~2016. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the first ~~half~~quarter of fiscal year ~~2016~~2017 was ~~negatively impacted by approximately $4,400 related to unfavorable changes in foreign currency exchange rates compared to~~$72,407, up 40.7% from $51,479 for the ~~same period~~first quarter of fiscal year ~~2015. EBITDA for the first half of fiscal year 2016 was $127,197, down 21.9% from $162,842 for the same period of fiscal year 2015.~~2016. EBIT and EBITDA for the first ~~half~~quarter of fiscal year 2016 ~~include~~included the special charges of approximately $16,100 discussed above.

Aerospace segment earnings as a percent of segment net sales increased to ~~16.8%~~17.6% in the first ~~half~~quarter of fiscal year ~~2016~~2017 from ~~15.2%~~16.2% in the first quarter of the prior fiscal year. Industrial segment earnings as a percent of segment net sales decreased to ~~11.2%~~10.2% in the first ~~half~~quarter of fiscal year ~~2016~~2017 from ~~15.0%~~12.2% in the first quarter of the prior fiscal year.

Liquidity Highlights

Net cash provided by operating activities for the first ~~half~~quarter of fiscal year ~~2016~~2017 was ~~$361,682,~~$52,351, compared to ~~$123,276~~$37,360 for the first ~~half~~quarter of fiscal year ~~2015.~~2016. The increase in net cash provided by operating activities is primarily attributable to higher earnings.

For the ~~$250,000 received related to the formation~~first quarter of ~~the JV between Woodward and GE.~~

~~Free~~fiscal year 2017, free cash flow, which we define as net cash flows provided by operating activities less payments for property, plant and equipment, was $31,293, compared to $4,229 for the first ~~half~~quarter of fiscal year ~~2016 was $262,366, compared~~2016. The increase is primarily attributable to ~~$13,874~~higher earnings and lower payments for property, plant and equipment in the first ~~half~~quarter of fiscal year ~~2015, attributable~~2017 as compared to the ~~$250,000 received related to the formation~~first quarter of ~~the JV between Woodward and GE.~~fiscal year 2016.

At ~~March~~December 31, 2016, we held ~~$84,745~~$80,885 in cash and cash equivalents, and had total outstanding debt of ~~$717,000~~$721,852 with additional borrowing availability of ~~$724,215,~~$830,589, net of outstanding letters of credit, under our revolving credit agreement. ~~There was~~At December 31, 2016, we had additional borrowing capacity of ~~$42,102~~$43,505 under various foreign lines of credit and foreign overdraft facilities.

RESULTS OF ~~OPERATIONS~~OPERATIONS

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



	Three-Months Ended								Six-Months Ended								Three-Months Ended
	March 31, 2016		% of Net Sales		March 31, 2015		% of Net Sales		March 31, 2016		% of Net Sales		March 31, 2015		% of Net Sales		December 31, 2016		% of Net Sales		December 31, 2015		% of Net Sales
Net sales	$	479,382	100	%	$	493,222	100	%	$	924,492	100	%	$	980,868	100	%	$	442,894	100	%	$	445,110	100	%
Costs and expenses:
Cost of goods sold		346,139	72.2			355,602	72.1			679,516	73.5			699,362	71.3			327,194	73.9			333,377	74.9
Selling, general, and administrative expenses		36,823	7.7			38,450	7.8			77,605	8.4			78,293	8.0			33,796	7.6			40,782	9.2
Research and development costs		31,762	6.6			30,328	6.1			63,359	6.9			64,357	6.6			26,540	6.0			31,597	7.1
Amortization of intangible assets		6,926	1.4			7,227	1.5			13,872	1.5			14,802	1.5			6,458	1.5			6,946	1.6
Interest expense		6,234	1.3			5,329	1.1			13,142	1.4			11,278	1.1			6,840	1.5			6,908	1.6
Interest income		(441)	(0.1)			(221)	(0.0)			(888)	(0.1)			(348)	(0.0)			(405)	(0.1)			(447)	(0.1)
Other (income) expense, net		(2,427)	(0.5)			(1,084)	(0.2)			(4,436)	(0.5)			(1,539)	(0.2)			(4,588)	(1.0)			(2,009)	(0.5)
Total costs and expenses		425,016	88.7			435,631	88.3			842,170	91.1			866,205	88.3			395,835	89.4			417,154	93.7
Earnings before income taxes		54,366	11.3			57,591	11.7			82,322	8.9			114,663	11.7			47,059	10.6			27,956	6.3
Income tax expense		13,542	2.8			13,736	2.8			15,678	1.7			27,024	2.8			511	0.1			2,136	0.5
Net earnings	$	40,824	8.5		$	43,855	8.9		$	66,644	7.2		$	87,639	8.9		$	46,548	10.5		$	25,820	5.8

Other select financial data:



	March 31,		September 30,		December 31,		September 30,
	2016		2015		2016		2016
Working capital	$	412,971	$	579,502	$	468,319	$	463,811
Short-term borrowings and current portion of long-term debt		100,000		2,430		150,000		150,000
Total debt		717,000		852,430
Total debt, net of unamortized debt issuance costs						719,878		727,153
Total stockholders' equity		1,118,961		1,153,104		1,222,368		1,212,595

Net Sales

Consolidated net sales for the ~~second~~first quarter of fiscal year ~~2016~~2017 decreased by ~~$13,840,~~$2,216, or ~~2.8%~~0.5%, compared to the same period of fiscal year ~~2015. Consolidated net sales for the first half of fiscal year 2016 decreased by $56,376, or 5.7%, compared to the same period of fiscal year 2015.~~2016. Details of the changes in consolidated net sales are as follows:

Three-Month Period

Six-Month Period
Consolidated net sales for the period ended March 31, 2015

$
493,222

$
980,868
Aerospace volume

6,282

16,055
Industrial volume

(17,229)

(59,466)
Effects of changes in price and sales mix

1,424

4,233
Effects of changes in foreign currency rates

(4,317)

(17,198)
Consolidated net sales for the period ended March 31, 2016

$
479,382

$
924,492

33

Consolidated net sales for the period ended December 31, 2015	$	445,110
Aerospace volume		(4,337)
Industrial volume		2,183
Effects of changes in price and sales mix		109
Effects of changes in foreign currency rates		(171)
Consolidated net sales for the period ended December 31, 2016	$	442,894

The decrease in net sales for the ~~second~~first quarter ~~and first half~~ of fiscal year ~~2016~~2017 was primarily attributable to ~~continued weakness across nearly all our Industrial~~commercial aftermarket being down relative to strong comparable commercial aftermarket sales in the prior year’s first quarter in the Aerospace segment, ~~markets,~~which was partially offset by increased ~~commercial~~heavy frame gas turbine aftermarket ~~and defense~~ sales in the ~~Aerospace~~Industrial segment ~~markets.~~

~~Our net sales were negatively impacted by $4,317 in the second quarter and $17,198 in~~during the first ~~half~~quarter of fiscal year ~~2016 due to unfavorable impacts of fluctuations in foreign currency exchange rates~~2017 as compared to the ~~same periods~~first quarter of fiscal year ~~2015. Nearly all of the negative foreign currency impact to our net sales was realized through our Industrial segment, primarily due to changes in the European Union countries’ Euro (“EUR”).~~

Our worldwide sales activities are primarily denominated in U.S. dollars (“USD”), EUR, Great Britain Pounds (“GBP”), Japanese Yen (“JPY”), Brazilian Real (“BRL”), and Chinese Renminbi (“RMB”). As the USD, EUR, GBP, JPY, BRL and RMB fluctuate against each other and other currencies, we are exposed to gains or losses on sales transactions. For additional information on foreign currency exchange rate risk, please refer to the risk factor titled “We derive a significant portion of our revenues from non-U.S. sales and are subject to the risks inherent in doing business in other countries” set forth under the caption “Risk Factors” in Part I, Item 1A of our most recent Form 10-K.2016.

Costs and Expenses

Costs and expenses for the first ~~half~~quarter of fiscal year 2016 ~~include~~included special charges totaling approximately $16,100 ($13,300 included in cost of goods sold, $1,700 included in selling, general and administrative expenses, and $1,100 included

in research and development costs) related to our efforts to consolidate facilities, reduce costs and address current market ~~conditions.~~ conditions in fiscal year 2016. There were no comparable costs and expenses recorded in the first quarter of fiscal year 2017.

Cost of goods sold ~~decreased~~decreased by ~~$9,463~~$6,183 to ~~$346,139,~~$327,194, or ~~72.2%~~73.9% of net sales, for the ~~second~~first quarter of fiscal year 2017 from $333,377, or 74.9% of net sales, for the first quarter of fiscal year 2016. The decrease in cost of goods sold is primarily attributable to the inclusion in the first quarter of fiscal year 2016 ~~from $355,602, or 72.1%~~ of net sales, for the second quarter of fiscal year 2015. Cost of goods sold for the first half of fiscal year 2016 decreased by $19,846 to $679,516, or 73.5% of net sales, from $699,362, or 71.3% of net sales from the first half of fiscal year 2015. The decrease in costs of goods sold for the three and six-month periods is attributable to lower sales volume in our Industrial segment, partially offset by planned new facility start-up expenses for our new Rockford-area facility. Cost of goods sold for the first half of fiscal year 2016 also included approximately $13,300 of special charges, as described above. This decrease was partially offset by increased cost of goods sold due to planned facility ramp-up costs in our Aerospace segment and planned new facility expenses for our new Colorado facilities.

~~Gross~~Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was ~~27.8%~~26.1% for the ~~second~~first quarter of fiscal year ~~2016, consistent with 27.9% for the same period of the prior fiscal year. Gross margin was 26.5%~~2017, compared to 25.1% for the first ~~half~~quarter of fiscal year ~~2016, compared to 28.7% for the same period of the prior fiscal year.~~2016. Gross margin for the first ~~half~~quarter of fiscal year ~~2016~~2017 was ~~lower~~higher compared to the ~~same period~~first quarter of fiscal year ~~2015,~~2016, primarily related to the inclusion in cost of goods sold of approximately $13,300 of special charges in the first quarter of fiscal year 2016, ~~as well as~~partially offset by planned ~~new~~ facility ~~start-up expenses for~~ramp-up costs in both our ~~new Rockford-area facility.~~Aerospace and Industrial segments.

Selling, general, and administrative expenses decreased by ~~$1,627,~~$6,986, or ~~4.2%~~17.1%, to ~~$36,823~~$33,796 for the ~~second~~first quarter of fiscal year ~~2016,~~2017 as compared to ~~$38,450~~$40,782 for the ~~same period~~first quarter of fiscal year ~~2015.~~2016. Selling, general, and administrative expenses as a percentage of net sales was ~~7.7%~~7.6% for the ~~second~~first quarter of fiscal year ~~2016, consistent with 7.8%~~2017 as compared to 9.2% for the ~~same period~~first quarter of fiscal year ~~2015. Selling, general, and administrative expenses decreased by $688, or 0.9%, to $77,605 for the first half of fiscal year 2016 as compared to $78,293 for the same period of fiscal year 2015.~~ 2016. The decrease in selling, general and administrative expenses for the first ~~half~~quarter of fiscal year 2017 was primarily due to the timing of certain expenses. In addition, the first quarter of fiscal year 2016 ~~was due~~included special charges of approximately $1,700 described above.

Research and development costs decreased by $5,057, or 16.0%, to $26,540 for the ~~inclusion~~first quarter of fiscal year 2017, as compared to $31,597 for the first quarter of fiscal year 2016. Research and development costs decreased as a percentage of net sales to 6.0% for the first quarter of fiscal year 2017 as compared to 7.1% for the first quarter of fiscal year 2016. Research and development costs in the first quarter of fiscal year ~~2015 of approximately $2,000 of expenses associated with our negotiations~~2017 were lower due to enter into the JV agreement with GE for which there is no equivalent expense in fiscal year 2016 partially offset by the special charges of $1,700, described above, in fiscal year 2016 and normal variability in costs. Selling, general and administrative expensesless spent on Aerospace programs as ~~a percentage of net sales were 8.4% for the first half of fiscal year 2016,~~well as ~~compared to 8.0% for the same period of fiscal year 2015.~~

~~Research and development costs~~ increased by $1,434, or 4.7%, to $31,762 for the second quarter of fiscal year 2016, as compared to $30,328 for the same period of fiscal year 2015. Research and development costs for the second quarter of fiscal year 2016 increased as a percentage of net sales to 6.6% as compared to 6.1% for the same period of fiscal year 2015. Research and development costs decreased by $998, or 1.6%, to $63,359 for the first half of fiscal year 2016 as compared to $64,357 for the same period of fiscal year 2015. Research and development costs for the first half of fiscal year 2016 increased as a percentage of net sales to 6.9% as compared to 6.6% for the same period of fiscal year 2015. Research and development costs in both the second quarter and first half of fiscal year 2016 were impacted by variability in the timing of projects and expenses. In addition, the first ~~half~~quarter of fiscal year 2016 ~~includes~~included the special charges of approximately $1,100 described above. 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

Amortization of intangible assets decreased to ~~$6,926 for the second quarter and $13,872~~$6,458 for the first ~~half~~quarter of fiscal year ~~2016,~~2017, compared to ~~$7,227 for the second quarter and $14,802~~$6,946 for the first ~~half~~quarter of fiscal year ~~2015.~~2016. As a percentage of net

sales, amortization of intangible assets ~~was 1.4% for the second quarter and~~were 1.5% for the first ~~half~~quarter of fiscal year ~~2016, comparable~~2017 as compared to ~~1.5%~~1.6% for ~~both~~ the ~~second~~first quarter ~~and first half~~ of fiscal year ~~2015.~~2016. The decrease in amortization expense was primarily related to certain intangible assets becoming fully amortized during fiscal year ~~2015.~~2016.

Interest expense ~~increased to $6,234 for the second quarter and $13,142~~was$6,840, or 1.5% of net sales, for the first ~~half~~quarter of fiscal year ~~2016, compared~~2017, comparable to ~~$5,329 for the second quarter and $11,278~~$6,908, or 1.6% of net sales, for the first ~~half~~quarter of fiscal year ~~2015. As a percentage of net sales, interest~~2016. Interest expense was ~~1.3% for~~down slightly primarily attributable to a decrease in higher interest debt due to the ~~second quarter and 1.4% for the first half~~retirement of $57,000 of 7.81% Series E notes in fiscal year 2016, as compared to 1.1% for both the second quarter and first half of fiscal year 2015. The increase in interest expense was primarily attributable to additional interest expense on higher levels of debt in first half of fiscal year 2016 as compared to the same period of the prior year, as well aspartially offset by lower amounts of capitalized interest in the ~~current~~first quarter of fiscal year 2017 as compared to the first quarter of fiscal year 2016, as capital projects have been completed.

Income taxes were provided at an effective rate on earnings before income taxes of ~~24.9% for the second quarter and 19.0%~~1.1% for the first ~~half~~quarter of fiscal year ~~2016,~~2017, compared to ~~23.9% for the second quarter and 23.6%~~7.6% for the first ~~half~~quarter of fiscal year ~~2015.~~2016. The changes in components of our effective tax rate (as a percentage of earnings before income taxes) were attributable to the following:

Three-Month

Six-Month

Period

Period

Effective tax rate for the period ended March 31, 2015

23.9
%

23.6
%
Research and experimentation credit

(2.6)

(4.5)

State and local taxes

0.7

0.1

Adjustment of prior period tax items

-

(1.5)

Taxes on international activities

4.9

2.5

Net excess income tax benefit from stock-based compensation

(2.6)

(2.0)

Other

0.6

0.8

Effective tax rate for the period ended March 31, 2016

24.9
%

19.0
%



	Three-Month
	Period
Effective tax rate for the period ended December 31, 2015	7.6	%
Retroactive benefit of research and experimentation credit	20.7
State and local taxes	(0.1)
Adjustment of prior period tax items	0.2
Taxes on international activities	(26.5)
Net excess income tax benefit from stock-based compensation	(1.1)
Other	0.3
Effective tax rate for the period ended December 31, 2016	1.1	%

The increase in the year-over-year effective tax rate for the second quarter of fiscal year 2016, is primarily attributable to a smaller favorable release of foreign valuation allowances in the second quarter of fiscal year 2016 as compared to the same period last year. This increase was partially offset by the permanent extension, in the first quarter of fiscal year 2016, of the U.S. research and experimentation credit (“R&E Credit”) and the adoption of ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting,” that resulted in a favorable adjustment for the net excess income tax benefits from stock-based compensation in the second quarter of fiscal year 2016.

these net foreign earnings. The excess ~~income~~U.S. foreign tax ~~benefits from stock-based compensation~~credits are expected to be used to offset U.S. taxes on other foreign source income.

Segment Results

The following table presents sales by segment:

Three-Months Ended March 31,

Six-Months Ended March 31,

2016

2015

2016

2015
Net sales:

Aerospace

$
290,690

60.6
%

$
281,426

57.1
%

$
559,289

60.5
%

$
537,196

54.8
%
Industrial

188,692

39.4

211,796

42.9

365,203

39.5

443,672

45.2

Consolidated net sales

$
479,382

100.0
%

$
493,222

100.0
%

$
924,492

100.0
%

$
980,868

100.0
%



	Three-Months Ended December 31,
	2016				2015
Net sales:
Aerospace	$	266,680	60.2	%	$	268,599	60.3	%
Industrial		176,214	39.8			176,511	39.7
Consolidated net sales	$	442,894	100.0	%	$	445,110	100.0	%

The following table presents earnings by segment:



	Three-Months Ended March 31,				Six-Months Ended March 31,				Three-Months Ended December 31,
	2016		2015		2016		2015		2016		2015
Aerospace	$	50,578	$	45,628	$	94,064	$	81,421	$	46,877	$	43,486
Industrial		19,469		27,224		41,020		66,492		17,998		21,551
Total segment earnings		70,047		72,852		135,084		147,913		64,875		65,037
Nonsegment expenses		(9,888)		(10,153)		(40,508)		(22,320)		(11,381)		(30,620)
Interest expense, net		(5,793)		(5,108)		(12,254)		(10,930)		(6,435)		(6,461)
Consolidated earnings before income taxes		54,366		57,591		82,322		114,663		47,059		27,956
Income tax expense		(13,542)		(13,736)		(15,678)		(27,024)		(511)		(2,136)
Consolidated net earnings	$	40,824	$	43,855	$	66,644	$	87,639	$	46,548	$	25,820

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



	Three-Months Ended March 31,			Six-Months Ended March 31,			Three-Months Ended December 31,
		2016	2015		2016	2015		2016	2015
Aerospace		17.4%	16.2%		16.8%	15.2%		17.6%	16.2%
Industrial		10.3%	12.9%		11.2%	15.0%		10.2%	12.2%

Aerospace

Aerospace segment net sales were ~~$290,690~~$266,680 for the ~~second~~first quarter of fiscal year ~~2016,~~2017, down 0.7% compared to ~~$281,426~~$268,599 for the ~~same period~~first quarter of fiscal year ~~2015. Segment net sales were $559,289 for the first half of fiscal year 2016, compared to $537,196 for the same period of fiscal year 2015.~~2016. The ~~increase~~decrease in segment net sales for the ~~second~~first quarter ~~and~~of fiscal year 2017 as compared to the first ~~half~~quarter of fiscal year 2016 ~~as compared to the same period of fiscal year 2015~~ was driven primarily by ~~increased~~decreased commercial aftermarket sales ~~and~~in the first quarter of fiscal year 2017 relative to strong commercial aftermarket sales in the prior fiscal year first quarter, partially offset by increased defense sales for ~~orginal~~aftermarket and original equipment manufacturer (“OEM”), and ~~aftermarket, partially offset by weaker~~slightly increased commercial OEM ~~sales.~~

~~Commercial~~sales in the current period. However, commercial aftermarket sales ~~were up~~ in the ~~second~~first quarter ~~and first half~~ of fiscal year ~~2016 compared to~~2017 did benefit from both the ~~same periods~~initial provisioning for new platforms and increased utilization of ~~prior fiscal year, as global passenger traffic growth continues to drive aircraft utilization and our market share continues to grow.~~ existing fleets.

U.S. government funds continue to be prioritized tofor defense ~~aircraft~~ platforms on which we have ~~content and continue to see significant utilization for military operations.~~content. Defense sales, for both aftermarket and OEM, continued to increase in the ~~second~~first quarter ~~and first half~~ of fiscal year ~~2016, primarily related to conflicts in the Middle East.~~2017. Sales of smart weapons ~~was particularly~~remain strong ~~as end-customers replenish their stock.~~on increased customer demand in the first quarter of fiscal year 2017.

Commercial OEM sales were down due to lower rotorcraft OEM sales, which were impacted by depressed oil prices, as well as variability in business jet demand. These decreases were partially offset by increases in large transport OEM sales as aircraft deliveries of narrow-body and wide-body aircraft have continued to increase based on steady airline demand and new product introductions.

~~Aerospace segment earnings~~ ~~increased by $4,950, or 10.8%, to $50,578~~up slightly for the ~~second~~first quarter of fiscal year 2017 as compared to the first quarter of fiscal year 2016 ~~compared~~due to ~~$45,628~~next generation aircraft programs driving strong commercial OEM sales, partially offset by continuing weakness in business jets and rotorcraft.

Aerospace segment earnings increased by $3,391, or 7.8%, to $46,877 for the ~~same period~~first quarter of fiscal year ~~2015. Segment earnings increased by $12,643, or 15.5%,~~2017, compared to ~~$94,064~~

$43,486 for the first ~~half~~quarter of fiscal year ~~2016, compared to $81,421 for the same period of fiscal year 2015.~~2016. The net ~~increases~~increase in Aerospace segment earnings for the ~~second~~first quarter ~~and first half~~ of fiscal year ~~2016 were~~2017 was due to the following:

Three-Month

Six-Month

Period

Period
Earnings for the period ended March 31, 2015

$
45,628

$
81,421
Sales volume

2,969

6,836
Price, sales mix and productivity

4,946

7,426
Increase in research and development expenses

(3,428)

(2,742)
Joint venture earnings

2,158

2,158
Other, net

(1,695)

(1,035)
Earnings for the period ended March 31, 2016

$
50,578

$
94,064



	Three-Month
	Period
Earnings for the period ended December 31, 2015	$	43,486
Sales volume		(2,128)
Price, sales mix and productivity		793
Decrease in research and development expenses		3,496
Other, net		1,230
Earnings for the period ended December 31, 2016	$	46,877

Aerospace segment earnings as a percentage of ~~segment net~~ sales were ~~17.4% for the second quarter and 16.8%~~17.6% for the first ~~half~~quarter of fiscal year ~~2016,~~2017, compared to 16.2% for the ~~second~~first quarter ~~and 15.2% for the first half~~ of fiscal year ~~2015.~~2016. The increase was primarily attributable to ~~higher sales volume and higher aftermarket sales, partially offset by increases in~~decreased research and development ~~expenses due to normal variability~~ ~~in the timing of projects and expenses~~.expenses.

Industrial

Industrial segment net sales ~~were $188,692~~decreased by 0.2% to $176,214 for the second quarter of fiscal year 2016, compared to $211,796 for the same period of fiscal year 2015. Segment net sales were $356,203 for the first half of fiscal year 2016, compared to $443,672 for the same period of fiscal year 2015. The decrease in segment net sales for the second quarter and first half of fiscal year 2016, as compared to the same periods of fiscal year 2015 was driven by weakness across nearly all our Industrial segment markets. This weakness was primarily due to delayed maintenance and capital infrastructure investments due to slowing economic growth in China and other global markets, as well as continued depressed oil and gas pricing. Second quarter sales in fiscal year 2016 to the natural gas truck market in Asia were comparable to the second quarter of the prior fiscal year as this market remains depressed. In addition, the first quarter of fiscal year ~~2015 had unusually strong sales in the natural gas truck market in Asia, which was not repeated in fiscal year 2016.~~

~~The weakness across nearly all our Industrial segment markets was partially offset by strength in the industrial turbomachinery aftermarket.~~

~~Foreign currency exchange rates had an unfavorable impact on sales of approximately $3,600 for the second quarter and $16,200~~2017, compared to $176,511 for the first ~~half~~quarter of fiscal year ~~2016 compared~~2016. Industrial sales continued to stabilize in the ~~same periods of the prior fiscal year.~~ quarter. Increased heavy frame gas turbine sales for aftermarket programs were offset predominantly by lower wind turbine converter sales.

Industrial segment earnings decreased by ~~$7,755,~~$3,553, or ~~28.5%~~16.5%, to ~~$19,469~~$17,998 for the ~~second~~first quarter of fiscal year ~~2016,~~2017, compared to ~~$27,224~~$21,551 for the ~~same period~~first quarter of fiscal year ~~2015. Segment earnings decreased by $25,472, or 38.3%, to $41,020 for the first half of fiscal year 2016 compared to $66,492 for the same period of fiscal year 2015.~~2016. The net ~~changes~~decrease in Industrial segment earnings for the ~~second~~first quarter ~~and first half~~ of fiscal year ~~2016 were~~2017 was due to the following:

Three-Month

Six-Month

Period

Period
Earnings for the period ended March 31, 2015

$
27,224

$
66,492
Sales volume

(8,400)

(28,306)
Price, sales mix and productivity

(818)

845
Decrease in research and development expenses

1,895

4,255
Effects of changes in foreign currency rates

(446)

(3,738)
Other, net

14

1,472
Earnings for the period ended March 31, 2016

$
19,469

$
41,020



	Three-Month
	Period
Earnings for the period ended December 31, 2015	$	21,551
Sales volume		631
Price, sales mix and productivity		(3,981)
Savings from fiscal year 2016 reorganization		2,862
New facility costs		(2,395)
Other, net		(670)
Earnings for the period ended December 31, 2016	$	17,998

Industrial segment earnings as a percentage of ~~segment net~~ sales were ~~10.3% for the second quarter and 11.2%~~10.2% for the first ~~half~~quarter of fiscal year ~~2016,~~2017, compared to ~~12.9% for the second quarter and 15.0%~~12.2% for the first ~~half~~quarter of fiscal year ~~2015.~~2016. The decrease in segment earnings for the ~~second~~first quarter ~~and~~of fiscal year 2017 as compared to the first ~~half~~quarter of fiscal year 2016 ~~as compared to the same periods of fiscal year 2015~~ was driven ~~primarily~~ by the impact of ~~lower sales volume partially~~unfavorable product mix. Savings from prior year cost reductions initiatives were offset by ~~cost reduction measures. In~~

~~addition, foreign currency exchange rates had an unfavorable impact of $446 for the second quarter and $3,738 for the first half of fiscal year 2016 compared to the same periods of fiscal year 2015.~~costs associated with our new facility in Colorado.

Nonsegment expenses

Nonsegment expenses ~~were $9,888~~decreased to $11,381 for the ~~second~~first quarter of fiscal year ~~2016, relatively consistent with~~2017, compared to $30,620 for the ~~second~~first quarter of fiscal year ~~2015 expenses of $10,153.~~2016. As a percent of ~~consolidated net~~ sales, nonsegment expenses ~~were 2.1%~~decreased to 2.6% of net sales for the ~~second~~first quarter of fiscal year ~~2016, consistent with the second quarter of fiscal year 2015.~~

~~Nonsegment expenses increased to $40,508 for the first half of fiscal year 2016,~~2017, compared to ~~$22,320 for the first half~~6.9% of ~~fiscal year 2015. As a percent of consolidated net sales, nonsegment expenses were 4.4% of consolidated~~ net sales for the first ~~half~~quarter of fiscal year ~~2016, compared to 2.3% of consolidated net sales for the first half of fiscal year 2015.~~ 2016. The ~~increase~~decrease in nonsegment expenses in the first ~~half~~quarter of fiscal year ~~2016~~2017 as compared to the first ~~half~~quarter of fiscal year ~~2015~~2016 is ~~primarily~~ due to special charges taken in the first quarter of fiscal year 2016 totaling approximately $16,100 related to our efforts to consolidate facilities, reduce costs and address ~~current~~ market ~~conditions.~~conditions, which did not recur in the first quarter of fiscal year 2017, and timing differences in the recognition of certain expenses.

LIQUIDI~~LIQUIDITY~~TY AND CAPITAL RESOURCES

Historically, we have satisfied our working capital needs, as well as capital expenditures, product development and other liquidity requirements associated with our operations, with cash flow provided by operating activities and borrowings under our credit facilities. Historically, we have also issued debt to supplement our cash needs or repay our other indebtedness.

We expect that cash generated from our operating activities, together with borrowings under our revolving credit facility, will be sufficient to fund our continuing operating needs, including capital expansion funding for the foreseeable future.

Our aggregate cash and cash equivalents were ~~$84,745~~$80,885 at ~~March~~December 31, 2016 and ~~$82,202~~$81,090 at September 30, ~~2015,~~2016, and our working capital was ~~$412,971~~$468,319 at ~~March~~December 31, 2016 and ~~$579,502~~$463,811 at September 30, ~~2015.~~2016. Of the ~~$84,745~~$80,885 of cash and cash equivalents held at ~~March~~December 31, 2016, ~~$84,557~~$80,671 was held by our foreign locations. We are not presently aware of any significant restrictions on the repatriation of these funds, although a portion is considered indefinitely reinvested in these foreign subsidiaries. If these funds were needed to fund our operations or satisfy obligations in the United States, then they could be repatriated and their repatriation into the ~~U.S.~~United States may cause us to incur additional U.S. income taxes or foreign withholding taxes. Any additional U.S. taxes could be offset, in part or in whole, by foreign tax credits. The amount of such taxes and application of tax credits would be dependent on the income tax laws and other circumstances at the time these amounts are repatriated. Based on these variables, it is impractical to determine the income tax liability that might be incurred if these funds were to be repatriated.

Our revolving credit facility matures in April 2020 and provides a borrowing capacity of up to $1,000,000 with the option to increase total available borrowings to up to $1,200,000, subject to lenders’ participation. We can borrow against our $1,000,000 revolving credit facility as long as we are in compliance with all of our debt covenants. Historically, we have used borrowings under our revolving credit facilities to meet certain short-term working capital needs, as well as for strategic uses, including repurchases of our common stock, payments of dividends, acquisitions, and facilities expansions. In addition, 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 $1,000,000 revolving credit facility and our other credit facilities, see Note 12, 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.

Using borrowings on our revolving credit facility, on October 1, 2015, Woodward paid the entire principal balance of $50,000 on the Series C notes, and on April 4, 2016, Woodward paid the entire principal balance of $57,000 on the Series E notes.

At ~~March~~December 31, 2016, we had total outstanding debt of ~~$717,000,~~$721,852 consisting of amounts borrowed under our revolving credit facility and various series of unsecured notes due between 2018 and 2031, with additional borrowing availability of ~~$724,215~~$830,589 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of ~~$42,102~~$43,505 under various foreign credit facilities.

During January 2016, we amended a foreign credit facility to align with current business needs, which reduced our foreign borrowing capacity by approximately $16,000. For further discussion of our notes, see Note 12, 38Credit 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 ~~March~~December 31, 2016, we had ~~$267,000~~$160,550 of borrowings outstanding under our revolving credit facility, of which ~~$100,000~~$150,000 was classified as short-term and the remainder was classified as long-term. Revolving credit facility and short-term borrowing activity during the ~~six-months~~three-months ended ~~March~~December 31, 2016 were as follows:



Maximum daily balance during the period	$	~~555,000~~317,700
Average daily balance during the period	$	~~463,147~~270,098
Weighted average interest rate on average daily balance		~~1.56%~~1.73%

We believe we were in compliance with all our debt covenants ~~at March~~as of December 31, 2016. See Note 12, 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 10-K, for more information about our covenants.

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

On January 4, 2016, we consummated the formation of a strategic joint venture between Woodward and GE. GE purchased from Woodward a 50% ownership interest in the JV for a $250,000 cash payment to Woodward. In addition, GE will pay contingent consideration to Woodward consisting of fifteen annual payments of $4,894 each per year beginning January 4, 2017 subject to certain claw-back conditions. The $250,000 cash consideration received from GE on January 4, 2016 is taxable in the U.S. upon receipt. The taxes of approximately $94,125 associated with this cash consideration will be paid through estimated payments made during the remainder of calendar year 2016. These estimated payments will be made in the third and fourth quarters of fiscal year 2016 and the first quarter of fiscal year 2017.

As previously announced, we completed $125,000 of share repurchases through an accelerated stock repurchase program in second half of fiscal year 2015. This was part of a previously announced $250,000 stock repurchase initiative. In the first quarter of fiscal year ~~2016, we executed~~2017, Woodward’s Board of Directors terminated the Company’s prior stock repurchase program and replaced it with a ~~10b5-1 plan, which is cancellable, to~~new program for the repurchase of up to ~~$125,000~~$500,000 of ~~our~~Woodward’s outstanding shares of common stock ~~for~~on the open market or in privately negotiated transactions over a three-year period that will end ~~on April 20, 2016. During~~in 2019 (the “2016 Authorization”). In the first ~~half~~quarter of fiscal year ~~2016, we~~2017, Woodward purchased ~~2,523~~350 shares of ~~our~~its common stock for ~~$119,119~~$24,004 under the 2016 Authorization, including $23,997 under a 10b5-1 ~~plan, using a portion of the $250,000 received from GE.~~ plan.

For our Aerospace segment, in fiscal year 2015 we completed construction of a manufacturing and office building on a second campus in the greater-Rockford, Illinois ~~area and have begun occupying the new facility.~~area. This campus is intended to support the expected growth in our

Aerospace segment over the next ten years and beyond, ~~required~~ as a result of our being awarded a substantial number of new system platforms, particularly on narrow-body aircraft. We ~~continue to purchase~~have been purchasing production equipment for the second ~~campus.~~

~~We are currently developing a~~campus and anticipate continuing such purchases as new ~~campus at our corporate headquarters in Fort Collins, Colorado~~aircraft platforms ramp up to support the continued growth of our Industrial segment by supplementing our existing Colorado manufacturing facilities and corporate headquarters. We began occupying the new manufacturing facility during the second quarter of fiscal year 2016.

~~We anticipate spending approximately $100,000 in fiscal year 2016 related to our investments in these new facilities in Illinois and Colorado.~~full production volumes.

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.

Cash Flows


	Six-Months Ended				Three-Months Ended
	March 31,				December 31,
	2016		2015		2016		2015
Net cash provided by operating activities	$	361,682	$	123,276	$	52,351	$	37,360
Net cash used in investing activities		(97,204)		(107,057)		(16,618)		(31,279)
Net cash used in financing activities		(261,289)		(38,410)		(22,192)		(1,379)
Effect of exchange rate changes on cash and cash equivalents		(646)		(12,335)		(13,746)		(2,482)
Net change in cash and cash equivalents		2,543		(34,526)		(205)		2,220
Cash and cash equivalents at beginning of period		82,202		115,287
Cash and cash equivalents at beginning of year						81,090		82,202
Cash and cash equivalents at end of period	$	84,745	$	80,761	$	80,885	$	84,422

Net cash flows provided by operating activities for the first ~~half~~quarter of fiscal year ~~2016~~2017 was ~~$361,682,~~$52,351, compared to ~~$123,276 for~~$37,360 in the ~~same period~~first quarter of fiscal year ~~2015.~~2016. The increase in net cash provided by operating activities is primarily attributable to ~~the $250,000 received related to the formation of the JV between Woodward and GE.~~ increased net earnings.

Net cash flows used in investing activities for the first ~~half~~quarter of fiscal year ~~2016~~2017 was ~~$97,204,~~$16,618, compared to ~~$107,057~~$31,279 in the ~~same period~~first quarter of fiscal year ~~2015.~~2016. The decrease in cash used in investing activities compared to the same period of the ~~last~~prior fiscal year is due to decreased payments for capital expenditures. Payments for property, plant and equipment decreased by ~~$10,086~~$12,073 to ~~$99,316~~$21,058 in the first ~~half~~quarter of fiscal year 2017 as compared to $33,131 in the first quarter of fiscal year 2016 ~~as compared to $109,402 in the same period of fiscal year 2015,~~ related mainly to lower equipment purchases associated with the ~~development~~facilitization of ~~a second campus in the greater-Rockford, Illinois area, a new~~our aerospace segment facility ~~in Niles, Illinois, and a new campus at our headquarters in Fort Collins, Colorado. The manufacturing and office building~~ in the greater-Rockford, Illinois area and ~~the new~~completion of our industrial segment facility in ~~Niles, Illinois were both completed in fiscal year 2015.~~Fort Collins, Colorado.

Net cash flows used in financing activities for the first ~~half~~quarter of fiscal year ~~2016~~2017 was ~~$261,289,~~$22,192, compared to ~~$38,410 for~~$1,379 in the ~~same period~~first quarter of fiscal year ~~2015.~~2016. During the first ~~half~~quarter of fiscal year ~~2016,~~2017, we had net ~~short and long-term payments~~debt borrowings of ~~$135,596~~$3,748 compared to net ~~short and long-term~~debt borrowings of ~~$3,000~~$34,402 in the ~~same period~~first quarter of fiscal year ~~2015.~~2016. We utilized ~~$117,374~~$24,004 to repurchase ~~2,490~~350 shares of our common stock in the first ~~half~~quarter of fiscal year 2017 under the 2016 ~~under our existing stock repurchase program,~~Authorization, compared to ~~$32,118~~$30,712 to repurchase ~~622~~624 shares of our common stock, under the then existing stock repurchase program, in the ~~same period~~first quarter of fiscal year ~~2015.~~2016.

Contractual Obligations

We have various contractual obligations, including obligations related to long-term debt, operating and capital 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. There have been no material changes to our various contractual obligations during the first ~~half~~quarter of fiscal year ~~2016.~~2017.

~~Critical Accounting Policies~~

NON-GAAP MEASURES

EBIT, EBITDA, and ~~Estimates~~free cash flow are financial measures not prepared and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). However, we believe these non-U.S. GAAP financial measures provide additional information that enables readers to evaluate our business from the perspective of management.

Earnings based non-U.S. GAAP financial measures

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.

EBIT and EBITDA for the three-months ended December 31, 2016 and December 31, 2015 were as follows:



	Three-Months Ended December 31,
	2016		2015
Net earnings (U.S. GAAP)	$	46,548	$	25,820
Income tax expense		511		2,136
Interest expense		6,840		6,908
Interest income		(405)		(447)
EBIT (Non-U.S. GAAP)		53,494		34,417
Amortization of intangible assets		6,458		6,946
Depreciation expense		12,455		10,116
EBITDA (Non-U.S. GAAP)	$	72,407	$	51,479

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 Woodward’s various business groups and evaluating cash levels. In addition, securities analysts, investors, and others frequently use free cash flow in their evaluation of companies. The use of this non-U.S. GAAP financial measure 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 does 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 may differ from similarly titled measures used by other companies, limiting its usefulness as a comparative measure.

Free cash flow for the three-months ended December 31, 2016 and December 31, 2015 were as follows:



	Three-Months Ended December 31,
	2016		2015
Net cash provided by operating activities (U.S. GAAP)	$	52,351	$	37,360
Payments for property, plant and equipment		(21,058)		(33,131)
Free cash flow (Non-U.S. GAAP)	$	31,293	$	4,229

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, ~~purchase accounting,~~ inventory valuation, depreciation and amortization, ~~postretirement benefit obligations,~~ reviews for impairment of goodwill, 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.

In fiscal year 2015, for our Aerospace segment, we completed construction of a manufacturing and office building on a second campus in the greater-Rockford, Illinois area and began occupying the new facility. This campus is intended to support the expected growth in our Aerospace segment over the next ten years and beyond, required as a result of our being awarded a substantial number of new system platforms, particularly on narrow-body aircraft. In addition, in fiscal year 2015, we completed an addition to and renovation of a building in Niles, Illinois that we had acquired in September 2013. Most of our operations that formerly resided in nearby Skokie, Illinois, were relocated to this new facility in fiscal year 2015.

4035

We are currently developing a new campus at our corporate headquarters in Fort Collins, Colorado to support the continued growth of our Industrial segment by supplementing our existing Colorado manufacturing facilities and corporate headquarters. We began occupying the new campus in our second quarter of fiscal year 2016.

Concurrent with and in relation to our significant investment in three new campuses and related equipment totaling approximately $500,000 as described above, Woodward initiated a comprehensive review of its depreciation lives as required by U.S. GAAP to evaluate the estimates of the useful lives of Woodward assets. This review resulted in estimates of the useful lives of both existing and new assets generally in excess of those utilized prior to fiscal year 2016. The revised estimates will be used in fiscal year 2016 and going forward and result in a downward adjustment of depreciation on existing assets of approximately $12,000 for fiscal year 2016.

The resulting impact of the new additions related to the three new campuses and the extended useful lives on existing assets to fiscal year 2016 depreciation on property, plant and equipment for Woodward as a whole will largely offset each other and therefore depreciation expense for the full fiscal year 2016 will approximate fiscal year 2015. Segment earnings will not be significantly affected by these impacts and we believe the impact on any quarter within fiscal year 2016 is also not significant to Woodward earnings as a whole or to either of its reporting segments.

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 are communicated through issuance of an Accounting Standards Update. 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.

To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2, ~~Recent~~New accounting ~~pronouncements~~standards, in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Off-Balance Sheet Arrangements

As of ~~March~~December 31, 2016, 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.

Item 3.QuQuant~~antitative~~itative and ~~Qualitative~~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~~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, Chief Financial Officer and Treasurer), 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 of the end of the period covered by this Form 10-Q. Based on their evaluations, they concluded that our disclosure controls and procedures were effective as of ~~March~~December 31, 2016.

Furthermore, there have been no changes in our internal control over financial reporting during the fiscal quarter covered by this Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.Legal Pr~~oceedings~~ 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. We accrue for known individual matters where we believe that it is probable the matter will result in a loss when ultimately resolved using estimates of the most likely amount of loss.

Item 1A.Risk ~~Factors~~ Factors

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

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

Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities
(In thousands, except for shares and per share amounts)

Total Number of Shares Purchased

Weighted Average Price Paid Per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)

Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased under the Plans or Programs at Period End (1)
January 1, 2016 through January 31, 2016 (2), (3)

949,621

$
46.24

949,189

$
100,397
February 1, 2016 through February 29, 2016 (2)

657,948

45.13

657,948

70,704
March 1, 2016 through March 31, 2016 (2), (3)

294,763

50.79

291,921

55,881



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, 2016 through October 31, 2016 (2)	290	$	69.05	-	$	50,000
November 1, 2016 through November 30, 2016 (2)	127,862		68.07	109,000		492,599
December 1, 2016 through December 31, 2016 (2)	247,978		68.90	241,000		475,996

(1)

In ~~the second quarter of fiscal year 2015,~~November 2017, our Board of Directors ~~authorized~~terminated the Company’s prior stock repurchase program and replaced it with a new program for the repurchase of up to ~~$300,000~~$500,000 of ~~our~~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 ~~2018 (the “2015 Authorization”).~~2019.

(2)

~~In the first quarter of fiscal year 2016, Woodward executed a 10b5-1 plan, which is cancellable, to repurchase up to $125,000 of its common stock for a period that will end on April 20, 2016.~~

~~(3)~~

Under a trust established for the purposes of administering the Woodward Executive Benefit Plan, ~~432~~290 shares of common stock were acquired in ~~January~~October 2016, ~~and 2,481~~18,613 shares of common stock were acquired in ~~March~~November 2016 and 6,978 shares of common stock were acquired in December 2016, each 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, ~~361~~249 shares of common stock were acquired on the open market related to the reinvestment of dividends for shares of treasury stock held for deferred compensation in ~~March~~November 2016. 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.~~Sheets

Item

Item 5.Other Information

Item 5.02Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers

As described below, on January 25, 2017, the stockholders of Woodward, Inc. (the “Company”) approved the Company’s 2017 Omnibus Incentive 2017 Plan (the “2017 Plan”), which replaced the 2006 Omnibus Incentive Plan. The 2017 Plan permits the Company to grant various types of incentive awards, including: (1) stock options, (2) stock appreciation rights, (3) restricted stock, (4) performance units, (5) performance shares, (6) restricted stock units, (7) other stock-based awards, (8) annual incentive awards, and (9) cash-based awards (collectively, “awards”). A total of 2,000,000 shares of common stock of the Company are reserved for issuance under the 2017 Plan, but only 200,000 shares may be issued as “full value awards” (for example, restricted stock, performance shares and restricted stock units). Under the 2017

4237

Plan, employees, non-employee directors and consultants are eligible to be selected to receive awards, as determined by a committee of the Company’s board of directors.

As of September 14, 2016, the effective date of the 2017 Plan, the compensation committee of the board (the “Committee”) was delegated authority to administer the 2017 Plan, including but not limited to, the power to determine the recipients of awards and the terms of those awards. The Committee approved grants of options under the 2017 Plan, with an award date of October 3, 2016, to the Company’s officers, including but not limited to: Thomas A. Gendron, Chairman, Chief Executive Officer and President (who received 181,200 options); Robert F. Weber, Jr., Vice Chairman, Chief Financial Officer and Treasurer (37,700 options); Martin V. Glass, President, Airframe Systems (23,300 options); Sagar A. Patel, President, Aircraft Turbine Systems (25,400 options); and A. Christopher Fawzy, Corporate Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer (24,700 options). These same options also were described in the proxy statement for the Company’s 2016 Annual Meeting of Stockholders (the “2016 Annual Meeting”) held on January 25, 2017 and were subject to stockholder approval at the 2016 Annual Meeting. Had stockholders not approved the 2017 Plan, these options would have been cancelled. The options have an exercise price of $62.57 (which was the closing price of the Company’s shares on NASDAQ on the grant date) and a maximum term of 10 years, and are scheduled to vest over four years at the rate of 25% per year, subject to continued status as a service provider to the Company.

On November 15, 2016, the Committee granted cash-based target cash incentive opportunities under the 2017 Plan to these same officers as follows: Mr. Gendron ($925,000 under the Company’s Variable Incentive Plan (“WVIP”) and $462,500 under the Company’s Long-Term Incentive Plan (“LTIP”)); Mr. Weber ($378,750 under the WVIP and $202,000 under the LTIP); Mr. Glass ($284,050 under the WVIP and $152,950 under the LTIP); Mr. Patel ($305,500 under the WVIP and $164,500 under the LTIP); and Mr. Fawzy ($266,500 under the WVIP and $102,500 under the LTIP). These awards also were shown in the proxy statement for the 2016 Annual Meeting and would have been cancelled had the stockholders not approved the 2017 Plan. Payment of the WVIP and LTIP awards are not guaranteed, and the actual amount paid (if any) will depend on the achievement of performance goals previously set by the Committee. For the WVIP, the goals relate to net earnings of the Company, adjusted EPS, adjusted EBITDA margin, business group adjusted OEAB margin, and strategic performance measures. For the LTIP, the goals pertain to relative earnings per share and return on capital.

Item 6.~~Exhi~~Exhibits

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

4338

~~SIG~~SIGN~~NATURES~~ATURES

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: ~~April 19, 2016~~January 25, 2017			/s/ Thomas A. Gendron
			Thomas A. Gendron
			Chairman of the Board, Chief Executive Officer, and President (Principal Executive Officer)

Date: ~~April 19, 2016~~January 25, 2017			/s/ Robert F. Weber, Jr.
			Robert F. Weber, Jr.
			Vice Chairman, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

4439

WOODWARD, INC.

EXHIBIT INDEX


	Exhibit Number		Description
*	10.1		2017 Omnibus Incentive Plan
*	10.2		Form of Nonqualified Stock Option Agreement under the 2017 Omnibus Incentive Plan
*	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.INS		XBRL Instance Document.
*	101.SCH		XBRL Taxonomy Extension Schema Document
*	101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
*	101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
*	101.LAB		XBRL Taxonomy Extension Label Linkbase Document
*	101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

	Attached as Exhibit 101 to this report are the following materials from Woodward, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~March~~December 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Earnings, (ii) the Condensed Consolidated Statements of Comprehensive Earnings, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Condensed Consolidated Statements of Stockholders’ Equity, and (vi) the Notes to the Condensed Consolidated Financial Statements.


*		Filed as an exhibit to this Report

4540



	Three-Months Ended December 31, 2015
	As previously reported		Adjustment		As recast
Statement of Earnings:
Earnings before income taxes	$	27,956	$	-	$	27,956
Income tax expense		2,345		(209)		2,136
Net earnings	$	25,611	$	209	$	25,820

Earnings per share:
Basic earnings per share	$	0.41	$	-	$	0.41
Diluted earnings per share	$	0.40	$	-	$	0.40

Weighted average common shares outstanding:
Basic		63,054		-		63,054
Diluted		64,373		79		64,452

Statement of Cash Flows:
Net cash provided by operating activities	$	37,112	$	248	$	37,360
Net cash used in investing activities		(31,279)		-		(31,279)
Net cash used in financing activities		(1,131)		(248)		(1,379)
Effect of exchange rate changes on cash and cash equivalents		(2,482)		-		(2,482)
Net change in cash and cash equivalents	$	2,220	$	-	$	2,220



	Six-Months Ended March 31, 2015
	As previously reported		Adjustment		As recast
Statement of Cash Flows:
Net cash provided by operating activities	$	122,540	$	736	$	123,276
Net cash used in investing activities		(107,057)		-		(107,057)
Net cash used in financing activities		(37,674)		(736)		(38,410)
Effect of exchange rate changes on cash and cash equivalents		(12,335)		-		(12,335)
Net change in cash and cash equivalents	$	(34,526)	$	-	$	(34,526)



	Three-Month Period		Six-Month Period
Consolidated net sales for the period ended March 31, 2015	$	493,222	$	980,868
Aerospace volume		6,282		16,055
Industrial volume		(17,229)		(59,466)
Effects of changes in price and sales mix		1,424		4,233
Effects of changes in foreign currency rates		(4,317)		(17,198)
Consolidated net sales for the period ended March 31, 2016	$	479,382	$	924,492



	Three-Month		Six-Month
	Period		Period
Effective tax rate for the period ended March 31, 2015	23.9	%	23.6	%
Research and experimentation credit	(2.6)		(4.5)
State and local taxes	0.7		0.1
Adjustment of prior period tax items	-		(1.5)
Taxes on international activities	4.9		2.5
Net excess income tax benefit from stock-based compensation	(2.6)		(2.0)
Other	0.6		0.8
Effective tax rate for the period ended March 31, 2016	24.9	%	19.0	%

Three-Months Ended

December 31,

Weighted-average treasury stock shares held for deferred compensation obligations