TABLE OF CONTENTS

~~TABLE OF CONTENTS~~
		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	2	1
	Condensed Consolidated Statements of Earnings	2	1
	Condensed Consolidated Statements of Comprehensive Earnings	3	2
	Condensed Consolidated Balance Sheets	4	3
	Condensed Consolidated Statements of Cash Flows	5	4
	Condensed Consolidated Statements of Stockholders’ Equity	6	5
	Notes to Condensed Consolidated Financial Statements	7	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27	29
	Forward Looking Statements	27	29
	Overview	29	30
	Results of Operations	30	32
	Liquidity and Capital Resources	34	36
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37	42
Item 4.	Controls and Procedures	38	42
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	38	42
Item 1A.	Risk Factors	38	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39	43
Item 6.	Exhibits	39	43
	Signatures	41	44

PART I – FINANCIAL INFORMATION

~~Item 1.Financial Statements~~

Item 1.

Financial Statements

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)

(Unaudited)

Three-Months Ended

December 31,

2017

2016

Net sales
$
470,148

$
442,894
Costs and expenses:

    Cost of goods sold

346,784

329,148
    Selling, general and administrative expenses

46,276

38,300
    Research and development costs

34,786

26,540
    Interest expense

6,750

6,840
    Interest income

(363)

(405)
    Other (income) expense, net (Note 16)

(1,572)

(4,588)
Total costs and expenses

432,661

395,835
Earnings before income taxes

37,487

47,059
Income tax expense

19,227

511
Net earnings
$
18,260

$
46,548

Earnings per share (Note 3):

Basic earnings per share
$
0.30

$
0.76
Diluted earnings per share
$
0.29

$
0.73

Weighted Average Common Shares Outstanding (Note 3):

Basic

61,246

61,559
Diluted

63,709

63,671
Cash dividends per share paid to Woodward common stockholders
$
0.125

$
0.110

~~See accompanying Notes to Condensed Consolidated Financial Statements~~

~~WOODWARD, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS~~

~~(In thousands)~~

~~(Unaudited)~~

Three-Months Ended

December 31,

2017

2016

Net earnings
$
18,260

$
46,548

Other comprehensive earnings:

Foreign currency translation adjustments

5,103

(18,635)
Net (loss) gain on foreign currency transactions designated as hedges of net
investments in foreign subsidiaries (Note 6)

(743)

3,830
Taxes on changes in foreign currency translation adjustments

187

(306)
Foreign currency translation and transactions adjustments, net of tax

4,547

(15,111)

Reclassification of net realized gains on derivatives to earnings (Note 6)

(18)

(18)
Taxes on changes in derivative transactions

7

7
Derivative adjustments, net of tax

(11)

(11)

Curtailment of postretirement benefit plan arising during the period

59

-
Amortization of pension and other postretirement plan:

Net prior service cost

137

56
Net loss

246

641
Foreign currency exchange rate changes on pension and other postretirement
benefit plan liabilities

(99)

1,255
Taxes on changes in pension and other postretirement benefit plan liability
adjustments, net of foreign currency exchange rate changes

(132)

(693)
Pension and other postretirement benefit plan adjustments, net of tax

211

1,259
Total comprehensive earnings
$
23,007

$
32,685

	Three-Months Ended
	December 31,
	2020			2019
Net sales	$	537,619		$	720,355
Costs and expenses:
Cost of goods sold		401,640			534,917
Selling, general and administrative expenses		56,111			62,045
Research and development costs		31,996			36,846
Impairment of assets sold		—			37,902
Interest expense		8,906			9,009
Interest income		(495	)		(487	)
Other (income) expense, net		(8,123	)		(21,425	)
Total costs and expenses		490,035			658,807
Earnings before income taxes		47,584			61,548
Income tax expense		6,014			8,175
Net earnings	$	41,570		$	53,373

Earnings per share:
Basic earnings per share	$	0.66		$	0.86
Diluted earnings per share	$	0.64		$	0.83

Weighted Average Common Shares Outstanding:
Basic		62,812			61,991
Diluted		64,892			64,673

See accompanying Notes to Condensed Consolidated Financial Statements

WOODWARD, INC.

~~CONDENSED CONSOLIDATED BALANCE SHEETS~~

~~(In thousands, except per share amounts)~~

~~(Unaudited)~~

December 31,

September 30,

2017

2017
ASSETS

Current assets:

Cash and cash equivalents
$
85,779

$
87,552
Accounts receivable, less allowance for uncollectible amounts of $3,793 and $3,776, respectively

331,438

402,182
Inventories

503,523

473,505
Income taxes receivable

18,842

19,376
Other current assets

39,660

38,574
Total current assets

979,242

1,021,189
Property, plant and equipment, net

930,158

922,043
Goodwill

556,759

556,545
Intangible assets, net

165,633

171,882
Deferred income tax assets

20,473

19,950
Other assets

72,909

65,500
Total assets
$
2,725,174

$
2,757,109
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Short-term borrowings
$
66,300

$
32,600
Accounts payable

182,144

232,788
Income taxes payable

5,891

6,774
Accrued liabilities

98,785

155,072
Total current liabilities

353,120

427,234
Long-term debt, less current portion

583,339

580,286
Deferred income tax liabilities

21,901

33,408
Other liabilities

366,268

344,798
Total liabilities

1,324,628

1,385,726
Commitments and contingencies (Note 20)

Stockholders' equity:

Preferred stock, par value $0.003 per share, 10,000 shares authorized, no shares issued

-

-
Common stock, par value $0.001455 per share, 150,000 shares authorized, 72,960 shares issued

106

106
Additional paid-in capital

176,473

163,836
Accumulated other comprehensive losses

(48,439)

(53,186)
Deferred compensation

8,173

7,135
Retained earnings

1,830,872

1,820,268

1,967,185

1,938,159
Treasury stock at cost, 11,706 shares and 11,739 shares, respectively

(558,466)

(559,641)
Treasury stock held for deferred compensation, at cost, 200 shares and 186 shares, respectively

(8,173)

(7,135)
Total stockholders' equity

1,400,546

1,371,383
Total liabilities and stockholders' equity
$
2,725,174

$
2,757,109

~~See accompanying Notes to Condensed Consolidated Financial Statements.~~

~~WOODWARD, INC.~~

CONDENSED CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~COMPREHENSIVE EARNINGS

(In thousands)

(Unaudited)

Three-Months Ended December 31,

2017

2016
Cash flows from operating activities:

Net earnings
$
18,260

$
46,548
Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation and amortization

21,070

18,913��
Gain due to curtailment of postretirement plan

(330)

-
Net gain on sales of assets

(58)

(3,699)
Stock-based compensation

12,423

1,261
Deferred income taxes

(11,681)

4,777
Gain on derivatives reclassified from accumulated comprehensive earnings into earnings

(18)

(18)
Changes in operating assets and liabilities:

Accounts receivable

72,714

87,615
Inventories

(28,796)

(37,632)
Accounts payable and accrued liabilities

(104,150)

(54,563)
Income taxes

25,597

(5,731)
Retirement benefit obligations

(673)

(897)
Other

(6,891)

(4,223)
Net cash (used in) provided by operating activities

(2,533)

52,351
Cash flows from investing activities:

Payments for purchase of property, plant, and equipment

(28,450)

(21,058)
Proceeds from sale of assets

132

3,682
Proceeds from sales of short-term investments

-

758
Payments for purchases of short-term investments

(791)

-
Net cash used in investing activities

(29,109)

(16,618)
Cash flows from financing activities:

Cash dividends paid

(7,656)

(6,779)
Proceeds from sales of treasury stock

1,389

4,843
Payments for repurchases of common stock

-

(24,004)
Borrowings on revolving lines of credit and short-term borrowings

458,950

316,650
Payments on revolving lines of credit and short-term borrowings

(425,250)

(312,800)
Payments of long-term debt and capital lease obligations

(106)

(102)
Net cash provided by (used in) financing activities

27,327

(22,192)
Effect of exchange rate changes on cash and cash equivalents

2,542

(13,746)
Net change in cash and cash equivalents

(1,773)

(205)
Cash and cash equivalents at beginning of year

87,552

81,090
Cash and cash equivalents at end of period
$
85,779

$
80,885

	Three-Months Ended
	December 31,
	2020			2019
Net earnings	$	41,570		$	53,373

Other comprehensive earnings:
Foreign currency translation adjustments		21,782			11,153
Net loss on foreign currency transactions designated as hedges of net investments in foreign subsidiaries		(2,227	)		(1,045	)
Taxes on changes in foreign currency translation adjustments		1,684			(340	)
Foreign currency translation and transactions adjustments, net of tax		21,239			9,768

Unrealized loss on fair value adjustment of derivative instruments		(30,658	)		(11,294	)
Reclassification of net realized loss on derivatives to earnings		20,960			11,656
Taxes on changes in derivative transactions		(1,340	)		18
Derivative adjustments, net of tax		(11,038	)		380

Amortization of pension and other postretirement plan:
Net prior service cost		248			241
Net loss		370			631
Foreign currency exchange rate changes on pension and other postretirement benefit plan liabilities		(1,697	)		(1,502	)
Taxes on changes in pension and other postretirement benefit plan liability adjustments, net of foreign currency exchange rate changes		356			240
Pension and other postretirement benefit plan adjustments, net of tax		(723	)		(390	)
Total comprehensive earnings	$	51,048		$	63,131

See accompanying Notes to Condensed Consolidated Financial Statements

WOODWARD, INC.

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

(In ~~thousands)~~thousands, except per share amounts)

(Unaudited)

Number of shares

Stockholders' equity

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

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

-

-

-

-

-

-

-

-

-

-

-

46,548

-

-

46,548
Other comprehensive income (loss), net of tax

-

-

-

-

-

-

(15,111)

(11)

1,259

(13,863)

-

-

-

-

(13,863)
Cash dividends paid ($0.110 per share)

-

-

-

-

-

-

-

-

-

-

-

(6,779)

-

-

(6,779)
Purchases of treasury stock

-

-

(350)

-

-

-

-

-

-

-

-

-

(24,004)

-

(24,004)
Sales of treasury stock

-

-

139

-

-

(907)

-

-

-

-

-

-

5,750

-

4,843
Common shares issued from treasury stock to settle employee liabilities

-

-

26

(26)

-

740

-

-

-

-

1,767

-

1,027

(1,767)

1,767
Stock-based compensation

-

-

-

-

-

1,261

-

-

-

-

-

-

-

-

1,261
Purchases and transfers of stock by/to deferred compensation plan

-

-

-

-

-

-

-

-

-

-

37

-

-

(37)

-
Distribution of stock from deferred compensation plan

-

-

-

-

-

-

-

-

-

-

(4)

-

-

4

-
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

Balances as of October 1, 2017

-

72,960

(11,739)

(186)

$
106

$
163,836

$
(27,280)

$
135

$
(26,041)

$
(53,186)

$
7,135

$
1,820,268

$
(559,641)

$
(7,135)

$
1,371,383
Net earnings

-

-

-

-

-

-

-

-

-

-

-

18,260

-

-

18,260
Other comprehensive income (loss), net of tax

-

-

-

-

-

-

4,547

(11)

211

4,747

-

-

-

-

4,747
Cash dividends paid ($0.125 per share)

-

-

-

-

-

-

-

-

-

-

-

(7,656)

-

-

(7,656)
Sales of treasury stock

-

-

33

-

-

214

-

-

-

-

-

-

1,175

-

1,389
Stock-based compensation

-

-

-

-

-

12,423

-

-

-

-

-

-

-

-

12,423
Purchases and transfers of stock by/to deferred compensation plan

-

-

-

(14)

-

-

-

-

-

-

1,041

-

-

(1,041)

-
Distribution of stock from deferred compensation plan

-

-

-

-

-

-

-

-

-

-

(3)

-

-

3

-
Balances as of December 31, 2017

-

72,960

(11,706)

(200)

$
106

$
176,473

$
(22,733)

$
124

$
(25,830)

$
(48,439)

$
8,173

$
1,830,872

$
(558,466)

$
(8,173)

$
1,400,546

	December 31,			September 30,
	2020			2020
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash of $1,908 and $3,497, respectively	$	201,881		$	153,270
Accounts receivable, less allowance for uncollectible amounts of $7,499 and $8,359, respectively		509,721			537,987
Inventories		445,463			437,943
Income taxes receivable		34,092			28,879
Other current assets		55,397			52,786
Total current assets		1,246,554			1,210,865
Property, plant and equipment, net		986,030			997,415
Goodwill		821,609			808,252
Intangible assets, net		619,721			606,711
Deferred income tax assets		13,970			14,658
Other assets		271,621			265,435
Total assets	$	3,959,505		$	3,903,336
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt	$	1,623		$	101,634
Accounts payable		158,568			134,242
Income taxes payable		11,987			4,662
Accrued liabilities		155,932			151,794
Total current liabilities		328,110			392,332
Long-term debt, less current portion		745,464			736,849
Deferred income tax liabilities		168,181			163,573
Other liabilities		654,288			617,905
Total liabilities		1,896,043			1,910,659
Commitments and contingencies (Note 22)
Stockholders' equity:
Preferred stock, par value $0.003 per share, 10,000 shares authorized, 0 shares issued		—			—
Common stock, par value $0.001455 per share, 150,000 shares authorized, 72,960 shares issued		106			106
Additional paid-in capital		244,394			231,936
Accumulated other comprehensive losses		(80,316	)		(89,794	)
Deferred compensation		9,485			9,222
Retained earnings		2,464,373			2,427,905
		2,638,042			2,579,375
Treasury stock at cost, 9,992 shares and 10,277 shares, respectively		(565,095	)		(577,476	)
Treasury stock held for deferred compensation, at cost, 201 shares and 199 shares, respectively		(9,485	)		(9,222	)
Total stockholders' equity		2,063,462			1,992,677
Total liabilities and stockholders' equity	$	3,959,505		$	3,903,336

See accompanying Notes to Condensed Consolidated Financial Statements

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

6(In thousands)

(Unaudited)

	Three-Months Ended December 31,
	2020			2019
Cash flows from operating activities:
Net earnings	$	41,570		$	53,373
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		33,077			32,451
Impairment of assets sold		—			37,902
Net gain on sales of assets and businesses		(588	)		(13,547	)
Stock-based compensation		13,469			10,982
Deferred income taxes		1,332			(47	)
Changes in operating assets and liabilities:
Trade accounts receivable		57,001			37,652
Unbilled receivables (contract assets)		(17,468	)		(33,150	)
Costs to fulfill a contract		(5,321	)		(6,401	)
Inventories		(2,528	)		(17,065	)
Accounts payable and accrued liabilities		22,725			(79,535	)
Contract liabilities		8,509			(144	)
Income taxes		1,795			1,001
Retirement benefit obligations		(1,317	)		(1,490	)
Other		(5,531	)		5,463
Net cash provided by operating activities		146,725			27,445

Cash flows from investing activities:
Payments for purchase of property, plant, and equipment		(7,263	)		(17,232	)
Proceeds from sale of assets		48			18,809
Payments for purchases of short-term investments		(2,740	)		(2	)
Net cash (used in) provided by investing activities		(9,955	)		1,575

Cash flows from financing activities:
Cash dividends paid		(5,102	)		(10,064	)
Proceeds from sales of treasury stock		10,855			7,558
Borrowings on revolving lines of credit and short-term borrowings		74,400			461,633
Payments on revolving lines of credit and short-term borrowings		(74,400	)		(441,500	)
Payments of long-term debt and finance lease obligations		(100,395	)		(439	)
Net cash (used in) provided by financing activities		(94,642	)		17,188
Effect of exchange rate changes on cash and cash equivalents		6,483			2,727
Net change in cash and cash equivalents		48,611			48,935
Cash and cash equivalents, including restricted cash, at beginning of year		153,270			99,073
Cash and cash equivalents, including restricted cash, at end of period	$	201,881		$	148,008

See accompanying Notes to Condensed Consolidated Financial Statements

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

	Number of shares								Stockholders' equity
														Accumulated other comprehensive (loss) earnings
	Common stock		Treasury stock			Treasury stock held for deferred compensation			Common stock		Additional paid-in capital			Foreign currency translation adjustments			Unrealized derivative gains (losses)			Minimum retirement benefit liability adjustments			Total accumulated other comprehensive (loss) earnings			Deferred compensation			Retained earnings			Treasury stock at cost			Treasury stock held for deferred compensation			Total stockholders' equity
Balances as of September 30, 2019		72,960		(11,040	)		(211	)	$	106	$	207,120		$	(53,235	)	$	(4,955	)	$	(45,116	)	$	(103,306	)	$	9,382		$	2,224,919		$	(602,098	)	$	(9,382	)	$	1,726,741
Cumulative effect from adoption of ASC 842		—		—			—			—		—			—			—			—			—			—			255			—			—			255
Net earnings		—		—			—			—		—			—			—			—			—			—			53,373			—			—			53,373
Other comprehensive earnings (loss), net of tax		—		—			—			—		—			9,768			380			(390	)		9,758			—			—			—			—			9,758
Cash dividends paid ($0.1625 per share)		—		—			—			—		—			—			—			—			—			—			(10,064	)		—			—			(10,064	)
Sales of treasury stock		—		226			—			—		(1,944	)		—			—			—			—			—			—			9,502			—			7,558
Stock-based compensation		—		—			—			—		10,982			—			—			—			—			—			—			—			—			10,982
Purchases/transfers of stock by/to deferred compensation plan		—		—			(5	)		—		—			—			—			—			—			543			—			—			(543	)		—
Distribution of stock from deferred compensation plan		—		—			1			—		—			—			—			—			—			(14	)		—			—			14			—
Balances as of December 31, 2019		72,960		(10,814	)		(215	)	$	106	$	216,158		$	(43,467	)	$	(4,575	)	$	(45,506	)	$	(93,548	)	$	9,911		$	2,268,483		$	(592,596	)	$	(9,911	)	$	1,798,603

Balances as of September 30, 2020		72,960		(10,277	)		(199	)	$	106	$	231,936		$	(40,691	)	$	(20,457	)	$	(28,646	)	$	(89,794	)	$	9,222		$	2,427,905		$	(577,476	)	$	(9,222	)	$	1,992,677
Net earnings		—		—			—			—		—			—			—			—			—			—			41,570			—			—			41,570
Other comprehensive earnings (loss), net of tax		—		—			—			—		—			21,239			(11,038	)		(723	)		9,478			—			—			—			—			9,478
Cash dividends paid ($0.08125 per share)		—		—			—			—		—			—			—			—			—			—			(5,102	)		—			—			(5,102	)
Sales of treasury stock		—		285			—			—		(1,011	)		—			—			—			—			—			—			12,381			—			11,370
Stock-based compensation		—		—			—			—		13,469			—			—			—			—			—			—			—			—			13,469
Purchases/transfers of stock by/to deferred compensation plan		—		—			(3	)		—		—			—			—			—			—			276			—			—			(276	)		—
Distribution of stock from deferred compensation plan		—		—			1			—		—			—			—			—			—			(13	)		—			—			13			—
Balances as of December 31, 2020		72,960		(9,992	)		(201	)	$	106	$	244,394		$	(19,452	)	$	(31,495	)	$	(29,369	)	$	(80,316	)	$	9,485		$	2,464,373		$	(565,095	)	$	(9,485	)	$	2,063,462

See accompanying Notes to Condensed Consolidated Financial Statements

WOODWARD, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 1. Basis of presentation

The Condensed Consolidated Financial Statements of Woodward, Inc. (“Woodward” or the “Company”) as of December 31, ~~2017~~2020 and for the ~~three months~~three-months ended December 31, ~~2017~~2020 and ~~December 31, 2016,~~2019, included herein, have not been audited by an independent registered public accounting firm. These unaudited Condensed Consolidated Financial Statements reflect all normal recurring adjustments that, in the opinion of management, are necessary to present fairly Woodward’s financial position as of December 31, ~~2017,~~2020, and the statements of earnings, comprehensive earnings, cash flows, and changes in stockholders’ equity for the periods presented herein. The results of operations for the ~~three months~~three-months ended December 31, ~~2017~~2020 and 2019 are not necessarily indicative of the operating results to be expected for other interim periods or for the full fiscal year. Dollar and share amounts contained in these Condensed Consolidated Financial Statements are in thousands, except per share ~~amounts.~~amounts, unless otherwise noted.

The unaudited Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations.

~~These~~ Accordingly, these unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in Woodward’s most recent Annual Report on Form 10-K filed with the SEC and other financial information filed with the SEC.

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

~~As disclosed~~In March 2020, the World Health Organization (“WHO”) declared the novel coronavirus ("COVID-19") outbreak a global pandemic. When combined with the various measures enacted by governments and private organizations to contain COVID-19 or slow its spread, the pandemic has adversely impacted global activity and contributed to significant declines and volatility in ~~Note 1,~~ ~~Operations~~financial markets; and ~~summary of significant accounting policies~~ in the ~~Notes~~Company has likewise been significantly impacted by the global COVID-19 pandemic. The COVID-19 pandemic could continue to have a material adverse impact on economic and market conditions and presents uncertainty and risk with respect to the Consolidated Financial Statements in Part II, Item 8 of Woodward’s most recent Annual Report on Form 10-K, the amortization of intangible assets has been reclassified from a separate line in the condensed consolidated statement of earningsCompany and its performance and financial results, including estimates and assumptions used by management for the ~~three-months ended December 31, 2016 to an allocated expense/cost component~~reported amount of ~~cost of goods sold~~assets and ~~selling, general and administrative expenses based on the nature of the intangible asset that is being amortized. The reclassification of these amounts conforms to the current period presentation.~~liabilities.

Note 2. New accounting standards

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

In ~~August 2017,~~March 2020, the FASB issued ASU ~~2017-12, “Derivatives~~2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The purpose of ASU 2020-04 is to provide optional guidance for a limited time to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. In response to concerns about structural risks of interbank offered rates, and, ~~Hedging (Topic 815): Targeted Improvements~~in particular, the risk of cessation of the London Interbank Offered Rate (LIBOR), reference rate reform refers to ~~Accounting~~a global initiative to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. ASU 2020-04 is effective for ~~Hedging Activities.”~~all entities as of March 12, 2020 through December 31, 2022. An entity may elect to apply the amendments in ASU ~~2017-12~~2020-04 for contract modifications by topic or industry subtopic as of any date from the beginning of an interim period that includes or is ~~intended~~subsequent to ~~more closely align~~March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial ~~statement reporting~~statements are available to be issued. Once elected for a topic or an industry subtopic, the amendments in ASU 2020-04 must be applied prospectively for all eligible contract modifications for that topic or industry subtopic.

Woodward is currently assessing the accounting and financial impact of reference rate reform, particularly the impact it may have on its hedging relationships, ~~with~~and will consider applying the ~~economic results~~optional guidance of ~~an entity’s risk management activities and to make certain targeted improvements to simplify the application of hedge accounting guidance in current U.S. GAAP.~~ ASU 2017-12 is also intended to increase standardization of financial statement disclosures including requiring a tabular disclosure of the income statement effects of fair value and cash flow hedges. Woodward early adopted the new guidance in the first quarter of fiscal year 2018. The application of the new guidance did not have any impact on Woodward’s current hedging arrangements or on the disclosures related to such arrangements.2020-04 accordingly.

In ~~March 2017,~~December 2019, the FASB issued ASU ~~2017-07, “Compensation – Retirement Benefits~~2019-12, “Income Taxes (Topic ~~715)~~740): ~~Improving~~Simplifying the ~~Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.~~Accounting for Income Taxes.” ASU ~~2017-07 requires that~~2019-12 amends ASC 740 to simplify the ~~service cost component of net periodic benefit costs from defined benefit~~accounting for income taxes by removing certain exceptions for investments, intraperiod allocations and ~~other postretirement benefit plans be included~~

interim calculations, and adding guidance to reduce complexity in the ~~same statement of earnings captions as other compensation costs arising from services rendered by~~accounting standard under the ~~covered employees during the period. The other components of net benefit cost will be presented in the statement of earnings separately from service costs.~~FASB’s simplification initiative. ASU ~~2017-07~~2019-12 is effective for fiscal years beginning after December 31, 2017 (fiscal year 2019 for Woodward). Following adoption, only service costs will be eligible for capitalization into manufactured inventories, which should reduce diversity in practice. The amendments of ASU 2017-07 should be applied retrospectively for the presentation of the service cost component and the other components of net periodic benefit costs from defined benefit and other postretirement benefit plans in the statement of earnings and prospectively, on and after the effective date, for the capitalization of the service cost component into manufactured inventories. Early adoption is permitted as of the beginning of Woodward’s fiscal year 2018. Woodward will adopt the new guidance in fiscal year 2019, and expects changes to earnings before income taxes to be insignificant in the year of adoption.

In October 2016, the FASB issued ASU 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 a third party or otherwise recovered through use. After adoption of ASU 2016-16, Woodward will recognize the tax consequences of 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 effectivepublic entities for fiscal years beginning after December 15, ~~2017~~2020 (fiscal year ~~2019~~2022 for Woodward)~~, including interim~~. Upon adoption, the amendments in ASU 2019-12 should be applied on a prospective basis to all periods ~~within the year of adoption.~~presented. Early adoption is ~~permitted as~~permitted. Woodward is currently assessing the impact of the ~~beginning~~adoption of ~~Woodward’s fiscal year 2018. Woodward will~~the new guidance and expects to adopt the new guidance under ASU 2019-12 in fiscal year 2019. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. Woodward has not determined in which period it will adopt the new guidance. Woodward currently anticipates the adoption of ASU 2016-16 will result in balance sheet reclassifications, but based on Woodward’s current transactional activity, such adjustments are not expected to be significant.2022.

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

Woodward adopted ASU 2016-13, and all applicable amendments, on October 1, 2020 using the modified retrospective 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 which period it will adoptmethod. Based on the ~~new guidance but does not expect the application~~nature of the ~~CECL impairment model to~~Company’s financial instruments included within the scope of this standard, the adoption did not have a ~~significant impact~~material effect on ~~Woodward’s~~the Condensed Consolidated Financial Statements. As a result of the adoption of ASU 2016-13, Woodward will utilize current and historical collection data, and will continue to monitor economic conditions in order to assess and determine expected credit losses on a prospective basis.

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

Note 3. Revenue

Sales of Products

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

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

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

Accounts Receivable

Accounts receivable consisted of the following:

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

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

Accounts receivable in Woodward’s Condensed Consolidated Financial Statements represent the net amount expected to be collected, and an allowance for uncollectible amounts related to credit losses is established based on expected losses in accordance with FASB ASC Topic 326, “Financial Instruments – Credit Losses”. Expected losses are estimated by reviewing specific customer accounts, taking into consideration aging, credit risk of the customers, and historical payment history, as well as current and forecasted economic conditions, and other relevant factors.

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

	Three-Months Ended
	December 31, 2020
Balance, beginning	$	8,359
Charged to costs and expenses		88
Deductions		(1,171	)
Other additions¹		223
Balance, ending	$	7,499

(1)

Includes effects of foreign exchange rate changes during the period.

Contract liabilities

~~In February 2016,~~Contract liabilities consisted of the ~~FASB issued ASU 2016-02, “Leases (Topic 842).” The purpose~~following:

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

Woodward recognized revenue of 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. In addition, ASU 2016-02 modifies the definition of a lease to clarify that an arrangement contains a lease when such arrangement conveys the right to control the use of an identified asset. 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$6,528 in the ~~earliest period presented using a modified retrospective approach; therefore, Woodward anticipates restating its Consolidated Financial Statements for~~three-months ended December 31, 2020 from contract liabilities balances recorded as of October 1, 2020, compared to $3,970 in the ~~two fiscal years prior~~three-months ended December 31, 2019 from contract liabilities balances recorded as of October 1, 2019.

Remaining performance obligations

Remaining performance obligations related to the ~~year~~aggregate amount of ~~adoption. However, during~~the total contract transaction price of firm orders for which the performance obligation has not yet been recognized in revenue as of December ~~2017,~~31, 2020 was $1,274,218, compared to $1,454,406 as of September 30, 2020, the ~~FASB proposed amending ASU 2016-02 such that restatement~~majority of ~~fiscal years 2018 and 2019 would not be required upon adoption. Although early adoption is permitted,~~which relate in both periods relate to Woodward’s Aerospace segment. Woodward expects to ~~adopt~~recognize almost all of these remaining performance obligations within two years after December 31, 2020.

Remaining performance obligations related to material rights that have not yet been recognized in revenue as of December 31, 2020 was $464,296, compared to $465,668 as of September 30, 2020, of which $8,952 is expected to be recognized in the ~~new guidance~~remainder of fiscal year 2021, $10,625 is expected to be recognized in fiscal year ~~2020~~2022, and is currently assessing the impact this guidance may have on its Consolidated Financial Statements, including which of its existing lease arrangements will be impacted by the new guidance and whether other arrangements not currently classified as leases may become subject to the guidance of ASU 2016-02. Rent expense for all operating leases in fiscal year 2017, none of which was recognized on the balance ~~sheet, was $8,302. As of September 30, 2017, future minimum rental payments required under operating leases, none of which were recognized on the balance sheet, were $23,215.~~

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” and has subsequently issued several supplemental and/or clarifying ASUs (collectively “ASC 606”). ASC 606 prescribes a single common revenue standard that replaces most existing U.S. GAAP revenue recognition 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 consistent interpretation and application of the principles outlined in the standard across filers in multiple industries and within the same industries compared to current practices, which should improve comparability. Adoption of ASC 606 is required for annual reporting periods beginning after December 15, 2017 (fiscal year 2019 for Woodward), including interim periods within the reporting period. Woodward has determined it will elect to adopt using the cumulative effect transition method with the cumulative effect of initial adoption recognized at the date of initial application.

Further, under the cumulative effect transition method, Woodward will disclose the impact of changes to financial statement line items as a result of applying ASC 606 (rather than previous U.S. GAAP) and include an explanation of the reasons for significant changes.

Woodward is currently assessing the impact that the future adoption of ASC 606 may have on its Consolidated Financial 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. Woodward is also performing a comprehensive review of its current processes and systems to determine and implement changes required to support the adoption of ASC 606 on October 1, 2018, the first day of Woodward’s fiscal year 2019. As part of this review process, Woodward is implementing new software solutions to support revenue reporting after adoption.

~~Based on Woodward’s review of its customer contracts, Woodward has determined that revenue on the majority of its customer contracts will continue~~expected 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 primarily to the terms of certain customer contracts. As a result of recognizing some revenue over time, various balance sheet line items will be impacted. As such, Woodward believes the adoption of ASC 606 will have an impact on both the timing of revenue recognition and various line items within the Consolidated Balance Sheet.

Woodward generally expenses costs as incurred for the engineering and development of new products. Customer funding received for such engineering and development efforts is currently recognized as revenue when earned, with the corresponding costs recognized as cost of sales. ASC 606 requires customer funding of product engineering and development to be deferred and recognized as revenue as the related products are delivered to the customer. ASC 606 also requires product engineering and development costs to be capitalized as contract fulfillment costs, to the extent recoverable from the deferred customer funding, and subsequently amortized as the related products are delivered to the customer. Therefore, under ASC 606,thereafter. Woodward expects to ~~record both contract assets and contract liabilities~~recognize revenue from performance obligations related to ~~such funded engineering~~material rights over the life of the underlying programs, which may be as long as forty years.

Disaggregation of Revenue

Woodward designs, produces and ~~development efforts, which are expected to become material over time. Recognized revenues~~services reliable, efficient, low-emission, and ~~research~~high-performance energy control products for diverse applications in markets throughout the world. Woodward reports financial results for each of its Aerospace and development costs are both expected to decrease in the year of adoption and for at least several years thereafter, due to the recognition of these contract assets and liabilities. However, recognition of these contract assets and liabilities are expected to have an immaterial impact on pre-tax earnings in future periods.

~~In addition, ASC 606 will require more comprehensive disclosures about~~Industrial reportable segments. Woodward further disaggregates its revenue ~~streams and~~from contracts with customers ~~including significant judgments required.~~by primary market and by geographical area as Woodward ~~is currently implementing changes to~~believes this best depicts how the nature, amount, timing and uncertainty of its ~~processes~~revenue and cash flows are affected by economic factors.

Revenue by primary market for ~~preparing required disclosures and to information systems that support~~ the ~~financial reporting process.~~ Aerospace reportable segment was as follows:

~~Woodward is also evaluating implications to~~

	Three-Months Ended December 31,
	2020		2019
Commercial OEM	$	76,081	$	158,666
Commercial aftermarket		65,515		125,928
Defense OEM		131,263		140,926
Defense aftermarket		48,808		48,405
Total Aerospace segment net sales	$	321,667	$	473,925

Revenue by primary market for the ~~Company’s system~~Industrial reportable segment was as follows:

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

(1)

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

The customers who account for approximately 10% or more of ~~internal controls, relative to revenue recognition and~~net sales of each of Woodward’s reportable segments for the ~~related revenue disclosures, which~~three-months ended December 31, 2020 are as follows:

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

Net sales by geographic area, as determined based on the ~~criteria outlined in the Committee of Sponsoring Organizations~~location of the ~~Treadway Commission’s 2013 Internal Control – Integrated Framework.~~

9customer, were as follows:

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

Note 3.4. Earnings per share

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

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

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

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

Three-Months Ended

December 31,

2017

2016
Numerator:

Net earnings

$
18,260

$
46,548
Denominator:

Basic shares outstanding

61,246

61,559
Dilutive effect of stock options and restricted stock

2,463

2,112
Diluted shares outstanding

63,709

63,671
Income per common share:

Basic earnings per share

$
0.30

$
0.76
Diluted earnings per share

$
0.29

$
0.73

The following stock option grants were outstanding ~~during the three-months ended December 31, 2017 and 2016,~~ but were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.



	Three-Months Ended
	December 31,				Three-Months Ended December 31,
	2017		2016		2020		2019
Options		754		-		587		653
Weighted-average option price	$	78.75	$	n/a	$	104.99	$	104.40

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

Three-Months Ended

December 31,

2017

2016
Weighted-average treasury stock shares held for
deferred compensation obligations

193

170

Three-Months Ended

December 31,

2020

2019

Weighted-average treasury stock shares held for deferred compensation obligations

200

213

Note 4.5. Leases

Lessee arrangements

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

Lease-related assets and liabilities follows:

	Classification on the Condensed Consolidated Balance Sheets	December 31, 2020		September 30, 2020
Assets:
Operating lease assets	Other assets	$	20,061	$	18,918
Finance lease assets	Property, plant and equipment, net		1,094		1,201
Total lease assets			21,155		20,119

Current liabilities:
Operating lease liabilities	Accrued liabilities		4,950		4,925
Finance lease liabilities	Current portion of long-term debt		1,623		1,634
Noncurrent liabilities:
Operating lease liabilities	Other liabilities		15,683		14,569
Finance lease liabilities	Long-term debt, less current portion		802		1,173
Total lease liabilities		$	23,058	$	22,301

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

Lease-related expenses were as follows:

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

(1)

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

Lease-related supplemental cash flow information was as follows:

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

Lessor arrangements

Woodward has assessed its manufacturing contracts and concluded that certain of the contracts for the manufacture of customer products met the criteria to be considered a leasing arrangement (“embedded leases”) with Woodward as the lessor. The specific manufacturing contracts that met the criteria were those that utilized Woodward property, plant and equipment and which is substantially (more than 90%) dedicated to the manufacturing of the product(s) for a single customer.

Woodward has dedicated manufacturing lines with three of its customers representing embedded leases, all of which qualified as operating leases with undefined quantities of future customer purchase commitments. Although Woodward expects to allocate some portion of future net sales to these customers to embedded lessor arrangements, it cannot provide expected future undiscounted lease payments from property, plant and equipment leased to customers as of December 31, 2020. If in the future customers reduce purchases of related products from Woodward, the Company believes it will derive additional value from the underlying equipment by repurposing its use to support other customer arrangements.

Revenue from contracts with customers that included embedded operating leases, which is included in “Net sales” at the Condensed Consolidated Statements of Earnings, was $1,798 for the three-months ended December 31, 2020 and $1,564 for the three-months ended December 31, 2019.

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

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

Note 6. Joint venture

On January 4, 2016, Woodward and General Electric Company (“GE”), acting through its GE Aviation business unit, consummated the formation of a strategic joint venture between Woodward and GE (the “JV”) to ~~design,~~ develop, manufacture and ~~source~~support fuel systems 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 had 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 per year which began on January 4, 2017, subject to certain claw-back conditions. Woodward records annual payments received as deferred income and includes them in Net cash provided by operating activities under the caption “Other” on the Condensed Consolidated Statement of Cash Flows. 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. Unamortized deferred ~~income recorded~~revenue from material rights in connection with the JV formation ~~included accrued liabilities of $6,439 as of December 31, 2017 and $6,451 as of September 30, 2017, and other liabilities of $235,855 as of December 31, 2017 and $236,896 as of September 30, 2017.~~ included:

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

Amortization of the deferred ~~income~~revenue (material right) recognized as an increase to sales was ~~$1,053~~$1,182 for the three-months ended December 31, ~~2017,~~2020, and ~~$1,496~~$1,708 for the three-months ended December 31, ~~2016.~~2019.

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 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 income of $596 for the three-months ended December 31, 2017, and income of $684 for the three-months ended December 31, 2016~~ related to Woodward’s equity interest in the earnings of the ~~JV.~~JV was as follows:

Three-Months Ended

December 31,

2020

2019

Other income

2,386

3,212

Cash distributions to Woodward ~~received no cash distributions~~ from the JV, recognized in Net cash provided by operating activities on the ~~three-months ended December 31, 2017 or 2016. Woodward’s net investment in the JV, which is included in other assets, was $6,868~~Condensed Consolidated Statements of Cash Flows, were as ~~of December 31, 2017 and $6,272 as of September 30, 2017.~~ follows:

~~Woodward’s net sales include $12,975 for the three-months ended December 31, 2017 of~~

Three-Months Ended

December 31,

2020

2019

Cash distributions

3,500

3,000

Net sales to the JV compared to $15,302 for the three-months ended December 31, 2016. Woodward recorded a reduction to sales of $5,408 for the three-months ended December 31, 2017 related to royalties paid to the JV by Woodward on sales by Woodward directly to third party aftermarket customers, compared to $5,403 for the three-months ended December 31, 2016. were as follows:

Three-Months Ended

December 31,

2020

2019

Net sales¹

10,059

14,878

(1)

Net sales included a reduction of $4,420 for the three-months ended December 31, 2020 related to royalties owed to the JV by Woodward on sales by Woodward directly to third party aftermarket customers, compared to a reduction to sales of $7,234 for the three-months ended December 31, 2019.

The Condensed Consolidated Balance Sheets include “Accounts receivable” ~~of $6,728 at December 31, 2017, and $8,554 at September 30, 2017,~~ related to amounts the JV owed Woodward, ~~and include~~ “Accounts payable” ~~of $3,984 at December 31, 2017, and $6,741 at September 30, 2017,~~ related to amounts Woodward owed the ~~JV.~~JV, and “Other assets” related to Woodward’s net investment in the JV, as follows:

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

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

Note 5.7. 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~~value as defined by the U.S. GAAP fair value ~~on a recurring basis as of December 31, 2017 or September 30, 2017.~~

hierarchy.



	At December 31, 2017								At September 30, 2017								At December 31, 2020								At September 30, 2020
	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	$	77,411	$	-	$	-	$	77,411	$	79,822	$	-	$	-	$	79,822	$	188,104	$	—	$	—	$	188,104	$	112,817	$	—	$	—	$	112,817
Investments in reverse repurchase agreements		847		-		-		847		1		-		-		1
Investments in term deposits with foreign banks		7,521		-		-		7,521		7,729		-		-		7,729		13,777		—		—		13,777		40,453		—		—		40,453
Equity securities		19,133		-		-		19,133		16,600		-		-		16,600		28,526		—		—		28,526		25,381		—		—		25,381
Total financial assets	$	104,912	$	-	$	-	$	104,912	$	104,152	$	-	$	-	$	104,152	$	230,407	$	—	$	—	$	230,407	$	178,651	$	—	$	—	$	178,651

Financial liabilities:
Cross-currency interest rate swaps																	$	—	$	83,137	$	—	$	83,137	$	—	$	51,387	$	—	$	51,387
Total financial liabilities																	$	—	$	83,137	$	—	$	83,137	$	—	$	51,387	$	—	$	51,387

~~Investments in 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 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.”~~net” on the Condensed Consolidated Statements of Earnings. The trading securities are included in “Other ~~assets.”~~assets” in the Condensed Consolidated Balance Sheets. The fair values of Woodward’s trading securities are based on the quoted market prices for the net asset value of the various mutual funds.

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

Trade accounts receivable, accounts payable, and short-term borrowings are not remeasured to fair value, as the carrying cost of each approximates its respective fair value. The estimated fair values and carrying costs of other financial instruments that are not required to be remeasured at fair value in the Condensed Consolidated Balance Sheets were as follows:



		At December 31, 2017				At September 30, 2017					At December 31, 2020				At September 30, 2020
	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	$	14,771	$	14,217	$	15,848	$	14,507	2	$	13,579	$	10,941	$	13,413	$	11,846
Note receivable from sale of disposal group										2		6,341		6,111		6,341		6,061
Investments in short-term time deposits	2		9,191		9,219		8,227		8,223	2		16,537		16,521		13,678		13,671
Liabilities:
Long-term debt	2	$	(596,136)	$	(585,059)	$	(592,317)	$	(582,080)	2	$	853,830	$	749,172	$	935,610	$	840,654

In ~~fiscal years 2014 and 2013, Woodward received long-term notes from municipalities within the 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 and Woodward’s development of a new campus at its corporate headquarters in Fort Collins, Colorado, Woodward received long-term notes from municipalities within the states of Illinois and Colorado. The fair value of the long-term notes was estimated based on a model that discounted future principal and interest payments received at an interest rate available to ~~the Company~~Woodward at the end of the period for similarly rated municipal notes of similar maturity, which is a level 2 input as defined by the U.S. GAAP fair value hierarchy. The interest rates used to estimate the fair value of the long-term notes were ~~2.5%~~1.0% at December 31, ~~2017~~2020 and ~~2.6%~~1.2% at September 30, ~~2017.~~ 2020.

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

From time to time, certain of Woodward’s foreign subsidiaries will invest excess cash in short-term time deposits with a fixed maturity date of longer than three months but less than one year from the date of the deposit. Woodward believes that the investments are with creditworthy financial institutions. The fair value of the investments in short-term time deposits was estimated based on a model that discounted future principal and interest payments to be received at an interest rate available to the foreign subsidiary entering into the investment for similar short-term time deposits of similar maturity. This was determined to be a level 2 input as defined by the U.S. GAAP fair value hierarchy. The interest rates used to estimate the fair value of the short-term time deposits were ~~5.6%~~3.9% at December 31, ~~2017~~2020 and ~~5.3%~~4.4% at September 30, ~~2017.~~2020.

The fair value of long-term debt was estimated based on a model that discounted future principal and interest payments at interest rates available to the ~~Company~~Woodward at the end of the period for similar debt of the same maturity, which is a level 2 input as defined by the U.S. GAAP fair value hierarchy. The weighted-average interest ~~rates~~rate used to estimate the fair value of long-term debt ~~were 2.3%~~was 1.3% at December 31, ~~2017~~2020 and ~~2.4%~~1.5% at September 30, ~~2017.~~2020.

12Woodward does not have expected credit losses related to any financial assets that are not required to be remeasured at fair value.

Note 6.8. Derivative instruments and hedging activities

Derivative instruments not designated or qualifying as hedging instruments

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

In May 2020, Woodward terminated and settled its Floating-Rate Cross-Currency Swap and Fixed-Rate Cross-Currency Swaps and entered into a new floating-rate cross-currency interest rate swap (the “2020 Floating-Rate Cross-Currency Swap”), with a notional value of $45,000, and 5 fixed-rate cross-currency interest rate swap agreements (the “2020 Fixed-Rate Cross-Currency Swaps”), with an aggregate notional value of $400,000, which effectively reduced the interest rates on the underlying fixed and floating-rate debt, respectively under the 2018 Notes and Woodward’s existing revolving credit agreement. The net interest income of the cross-currency interest rate swaps is recorded as a reduction to “Interest expense” in Woodward’s Condensed Consolidated Statements of Earnings. As of December 31, 2020, the total notional value of the 2020 Floating-Rate Cross-Currency Swap and 2020 Fixed-Rate Cross-Currency Swaps was $37,500 and $400,000, respectively. See Note 7, Financial Instruments and fair value measurements, for the related fair value of the derivative instruments as of December 31, 2020.

Derivatives instruments in fair value hedging relationships

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

In May 2020, Woodward settled the Euro denominated intercompany loan receivable with identical terms and ~~fluctuations in various producer indices. From time~~notional value to ~~time,~~the Floating-Rate Cross-Currency Swap and reciprocal intercompany cross-currency interest rate swap. The fair value hedge designated on these instruments was discontinued at the date of settlement. Concurrent with settlement of the Floating-Rate Cross-Currency Swap and discontinuation of the previous fair value hedging relationship, a US dollar denominated intercompany loan payable with identical terms and notional value as the 2020 Floating-Rate Cross-Currency Swap, together with a reciprocal intercompany floating-rate cross-currency interest rate swap, was entered into by Woodward ~~enters into derivative instruments for risk management purposes only, including derivatives~~Barbados Euro Financing SRL (“Euro Barbados”), a wholly owned subsidiary of Woodward. The US dollar denominated intercompany loan and reciprocal intercompany floating-rate cross-currency interest rate swap is designated as 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 performa fair value hedge under the ~~terms~~criteria prescribed in ASC 815. The objective of the derivative ~~and/~~instrument is to hedge against the foreign currency exchange risk attributable to the spot remeasurement of the US dollar denominated intercompany loan, as Euro Barbados maintains a Euro functional currency.

For each floating-rate intercompany cross-currency interest rate swap, only the change in the fair value related to the cross-currency basis spread, or ~~hedging instrument. When~~excluded component, of the derivative instrument is recognized in accumulated other comprehensive income (“OCI”). The remaining change in the fair value of athe derivative ~~contract~~instrument is positive, the counterparty owes Woodward, which creates credit risk for Woodward. Woodward mitigates this credit risk by entering into transactions with only counterparties that are believed to be creditworthy. Market risk arises from the potential adverse effects on the value of derivative and/or hedging instruments that result from a changerecognized in ~~interest rates, commodity prices, or~~ foreign currency ~~exchange rates. Woodward minimizes this market risk by establishing~~transaction gain or loss included in “Selling, general 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 the three-months ended December 31, 2017 or 2016.~~

~~The remaining unrecognized gains and losses~~administrative costs” in Woodward’s Condensed Consolidated ~~Balance Sheets~~Statements of Earnings. The change in the fair value of the derivative instrument in foreign currency transaction gain or loss offsets the change in the spot remeasurement of the intercompany Euro and US dollar denominated loans. Hedge effectiveness is assessed based on the fair value changes of the derivative instrument, after excluding any fair value changes related to the cross-currency basis spread. The initial cost of the cross-currency basis spread is recorded in earnings each period through the swap accrual process. There are no credit-risk-related contingent features associated with derivative instruments that were previously entered into by Woodward, which are classified in accumulated other comprehensive (losses) earnings (“accumulated OCI”), were net gains of $200 as of December 31, 2017 and $218 as of September 30, 2017.

~~The following table discloses~~ the ~~impact of derivative~~intercompany floating-rate cross-currency interest rate swap.

Derivative instruments in cash flow hedging relationships

In conjunction with the entry into the Fixed-Rate Cross-Currency Swaps, 5 corresponding intercompany loans receivable, with identical terms and amounts of each tranche of the underlying aggregate principal amount of $400,000 of fixed-rate debt, and reciprocal cross-currency interest rate swaps were entered into by Barbados, which are designated as cash flow hedges under the criteria prescribed in ASC 815. The objective of these derivative instruments is to hedge the risk of variability in cash flows attributable to the foreign currency exchange risk of cash flows for future principal and interest payments associated with the Euro denominated intercompany loans over a fifteen-year period.

In May 2020, Woodward settled the Euro denominated intercompany loans receivable with identical terms and notional value to the Fixed-Rate Cross-Currency Swaps and reciprocal cross-currency interest rate swaps. The cash flow hedges designated on these instruments were discontinued at the date of settlement. Concurrent with settlement of the Fixed-Rate Cross-Currency Swaps and the discontinuation of the previous cash flow hedging relationships, 5 corresponding US dollar intercompany loans payable, with identical terms and notional values of each tranche of the 2020 Fixed-Rate Cross-Currency Swaps, together with reciprocal fixed-rate intercompany cross-currency interest rate swaps were entered into by Euro Barbados, which are designated as cash flow hedges under the criteria prescribed in ASC 815. The objective of these derivative instruments is to hedge the risk of variability in cash flows attributable to the foreign currency exchange risk of cash flows for future principal and interest payments associated with the US dollar denominated intercompany loans over a thirteen-year period, as Euro Barbados maintains a Euro functional currency.

For each of the fixed-rate intercompany cross-currency interest rate swaps, changes in the fair values of the derivative instruments are recognized in accumulated OCI and reclassified to foreign currency transaction gain or loss included in “Selling, general and administrative costs” in Woodward’s Condensed Consolidated Statements of ~~Earnings, recognized~~Earnings. Reclassifications out of accumulated OCI of the change in ~~interest expense:~~

Three-Months Ended December 31,

2017

2016
Amount of (income) expense recognized in earnings on derivative

$
(18)

$
(18)
Amount of (gain) loss recognized in accumulated OCI on derivative

-

-
Amount of (gain) loss reclassified from accumulated OCI into earnings

(18)

(18)

~~Based~~fair value occur each reporting period based upon changes in the spot rate remeasurement of the Euro and US dollar denominated intercompany loans, including associated interest. Hedge effectiveness is assessed based on the ~~carrying~~fair value changes of the ~~realized but unrecognized gains on terminated~~ derivative instruments ~~designated as cash flow~~and such hedges ~~as of December 31, 2017, Woodward expects~~are deemed to ~~reclassify $72 of~~be highly effective in offsetting exposure to variability in foreign exchange rates. There are no credit-risk-related contingent features associated with these fixed-rate cross-currency interest rate swaps.

Derivatives instruments in net ~~unrecognized gains on terminated derivative instruments from accumulated other comprehensive (losses) earnings to earnings during the next twelve months.~~investment hedging relationships

On September 23, 2016, Woodward and Woodward International Holding B.V., a wholly owned subsidiary of Woodward organized under the laws of The Netherlands (the “BV Subsidiary”), each entered into a note purchase agreement (the “2016 Note Purchase Agreement”) relating to the sale by Woodward and the BV Subsidiary of an aggregate principal amount of €160,000 of senior unsecured notes in a series of private placement transactions. Woodward issued €40,000 aggregate principal amount of Woodward’s Series M Senior Notes due September 23, ~~2026.~~2026 (the “Series M Notes”). 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. OnRelated to the Series M Notes, ~~a foreign exchange loss of $743 for the three-months ended December 31, 2017 and a foreign exchange gain of $2,814 for the three-months ended December 31, 2016 are~~ included in foreign currency translation adjustments within total comprehensive (losses) ~~earnings.~~

~~In July 2016, Woodward designated an intercompany loan of 160,000 renminbi between two wholly owned subsidiaries as a hedge of a foreign currency exposure of the~~earnings are net ~~investment of the borrower in the lender. Unrealized~~ foreign exchange ~~gains on the loan~~losses of ~~$1,016~~$2,227 for the three-months ended December 31, ~~2016 are included in~~2020, compared to net foreign ~~currency translation adjustments within total comprehensive (losses) earnings.~~ exchange losses of $1,045 for the three-months ended December 31, 2019.

Impact of derivative instruments designated as qualifying hedging instruments

The ~~intercompany loan was repaid in July 2017.~~

13following table discloses the impact of derivative instruments designated as qualifying hedging instruments on Woodward’s Condensed Consolidated Statements of Earnings:

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

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

The remaining unrecognized gains and losses in Woodward’s Condensed Consolidated Balance Sheets associated with derivative instruments that were previously entered into by Woodward, which are classified in accumulated OCI, were net losses of $30,830 as of December 31, 2020 and $21,132 as of September 30, 2020.

Note 7.9. Supplemental statement of cash flows information

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

Three-Months Ended December 31,

2017

2016
Interest paid, net of amounts capitalized

$
11,302

$
10,317
Income taxes paid

7,695

6,047
Income tax refunds received

1,772

59
Non-cash activities:

Purchases of property, plant and equipment on account

10,631

6,130
Common shares issued from treasury to settle employee liabilities

-

1,767

Note ~~8. Accounts receivable~~10. Sale of businesses

~~Almost all~~In fiscal year 2020, Woodward’s board of directors (“the Board”) approved a plan to divest Woodward’s ~~sales are made on credit~~renewable power systems business, protective relays business, and ~~result in accounts receivable, which are recorded at~~other businesses within the ~~amount invoiced~~Company’s Industrial segment (collectively, the “disposal group”).

Woodward determined that the approved plan to divest the disposal group represented a triggering event requiring (i) the net assets of the disposal group to be classified as held for sale and ~~are generally not collateralized. In~~(ii) the ~~normal course of business, not all accounts receivable are collected and, therefore, an allowance for uncollectible amounts is provided equal~~long-lived assets attributable to the ~~amount~~disposal group be assessed for impairment. Given the facts and circumstances at that time, Woodward ~~believes ultimately will not be collected. In establishing~~determined that the ~~amount~~value of the ~~allowance related to~~long-lived assets of the credit risk of accounts receivable, customer-specific information is considered related to delinquent accounts, past loss experience, bankruptcy filings, deterioration in the customer’s operating results or financial position,disposal group, including goodwill, intangible assets, ROU assets and ~~current economic conditions. Accounts receivable losses are deducted from the allowance,~~property, plant, and the related accounts receivable balances are written off when the receivables are deemed uncollectible. Recoveries of accounts receivable previously written off are recognized when received. In addition, an allowance associated with anticipated future sales returns is also established and is included in the allowance for uncollectible amounts.

Consistent with common business practice in China, Woodward’s Chinese subsidiary accepts from Chinese customers, in settlement of certain customer accounts receivable, bankers’ acceptance notes issued by Chinese banks that are believed to be creditworthy. Bankers’ acceptance notes are financial instruments issued by Chinese financial institutions as part of financing arrangements between the financial institutionequipment, were not recoverable and a ~~customer of~~$22,900 non-cash impairment charge was recorded during fiscal year 2020. The non-cash impairment charge removed all the financial institution. Bankers’ acceptance notes represent a commitment by the issuing financial institution to pay a certain amount of money at a specified future maturity date to the legal owner of the bankers’ acceptance note as of the maturity date. The maturity date of bankers’ acceptance notes varies, but it is Woodward’s policy to only accept bankers’ acceptance notes with maturity dates no more than 180 days from the date of Woodward’s receipt of such draft. The issuing financial institution is the obligor, not Woodward’s customers. Upon Woodward’s acceptance of a banker’s acceptance note from a customer, such customer has no further obligation to pay Woodward for the related accounts receivable balance. Woodward only accepts bankers’ acceptance notes issued by banks that are believed to be creditworthygoodwill, intangible assets, ROU assets and ~~to which the credit risks~~property, plant, and equipment associated with the ~~bankers’ acceptance notes are believed to be minimal.~~

~~The composition~~disposal group from the Condensed Consolidated Balance Sheets as of ~~Woodward’s accounts receivable at~~ December 31, ~~2017~~2019.

Further, on the approval of the divestiture plan and ~~September 30, 2017 follows:~~

December 31,

September 30,

2017

2017
Accounts receivable from:

Customers

$
275,433

$
367,715
Other (Chinese financial institutions)

59,798

38,243
Allowance for uncollectible customer amounts

(3,793)

(3,776)

$
331,438

$
402,182

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

Note 9.11. Inventories



	December 31,		September 30,		December 31,			September 30,
	2017		2017		2020			2020
Raw materials	$	60,355	$	59,034	$	124,900		$	123,626
Work in progress		106,065		103,790		93,652			92,934
Component parts (1)		285,674		262,755		266,018			255,980
Finished goods		51,429		47,926		66,712			66,889
Customer supplied inventory						16,885			14,955
On-hand inventory for which control has transferred to the customer						(122,704	)		(116,441	)
	$	503,523	$	473,505	$	445,463		$	437,943

(1)

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

Note ~~10.~~12. Property, plant, and equipment



	December 31,		September 30,		December 31,			September 30,
	2017		2017		2020			2020
Land and land improvements	$	88,536	$	88,326	$	83,606		$	83,095
Buildings and building improvements		515,338		514,453		553,274			551,540
Leasehold improvements		16,425		16,142		19,577			18,610
Machinery and production equipment		560,264		543,641		786,343			776,884
Computer equipment and software		125,628		124,723		124,290			123,903
Office furniture and equipment		24,455		24,308		41,825			41,177
Other		19,423		19,393		19,849			19,814
Construction in progress		117,085		111,910		36,034			36,367
		1,467,154		1,442,896		1,664,798			1,651,390
Less accumulated depreciation		(536,996)		(520,853)		(678,768	)		(653,975	)
Property, plant, and equipment, net	$	930,158	$	922,043	$	986,030		$	997,415

~~Included in “Office furniture and equipment” and “Other” is $1,653 at each of~~During the three-months ended December 31, ~~2017~~2019, the Company closed on the sale of one of two parcels of real property at Woodward’s former Duarte operations and ~~September 30, 2017,~~recorded a pre-tax gain on sale of ~~gross~~ assets ~~acquired on capital leases, and accumulated depreciation included $844 at~~of $13,522.

During the three-months ended December 31, ~~2017~~2019, Woodward determined that the approved plan to divest of the disposal group represented a triggering event requiring the long-lived assets attributable to the disposal group be assessed for impairment. Given the facts and ~~$739~~circumstances at ~~September 30, 2017~~that time, Woodward determined that the remaining value of ~~amortization associated with~~ the ~~capital lease assets.~~

Inplant, property and equipment of the disposal group was not recoverable and a $13,421 non-cash impairment charge was recorded during 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 occupied the new facility 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 $48,971 at December 31, 2017 and $49,347 at September 30, 2017 associated with new equipment purchases for the second campus.2020.

For the three-months ended December 31, ~~2017~~2020 and ~~2016,~~2019, Woodward had depreciation expense as follows:

Three-Months Ended

December 31,

2017

2016
Depreciation expense

$
14,827

$
12,455

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

~~For the three-months ended December 31, 2017 and 2016, Woodward capitalized interest that would have otherwise been included in interest expense of the following:~~

Three-Months Ended

December 31,

2017

2016
Capitalized interest

$
601

$
472

Note ~~11.~~13. Goodwill

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

September 30, 2017

Effects of Foreign Currency Translation

December 31, 2017
Aerospace

$
455,423

$
-

$
455,423
Industrial

101,122

214

101,336
Consolidated

$
556,545

$
214

$
556,759

Woodward tests goodwill for impairment during the fourth quarter of each fiscal year, orand at any time there is an indication goodwill is more-likely-than-not impaired, commonly referred to as triggering events. ~~There have been no such triggering events during any of the periods presented and~~ Woodward’s fourth quarter of fiscal year ~~2017~~2020 impairment test resulted in no impairment.

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

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

Note ~~12.~~14. Intangible assets, net

													December 31, 2020							September 30, 2020
													Gross Carrying Value		Accumulated Amortization			Net Carrying Amount		Gross Carrying Value		Accumulated Amortization			Net Carrying Amount
	December 31, 2017						September 30, 2017
	Gross Carrying Value		Accumulated Amortization		Net Carrying Amount		Gross Carrying Value		Accumulated Amortization		Net Carrying Amount
Intangible assets with finite lives:
Customer relationships and contracts:
Aerospace	$	282,225	$	(155,183)	$	127,042	$	282,225	$	(151,155)	$	131,070	$	281,683	$	(199,985	)	$	81,698	$	281,683	$	(196,520	)	$	85,163
Industrial		40,944		(34,615)		6,329		40,962		(34,407)		6,555		447,664		(63,492	)		384,172		429,249		(57,045	)		372,204
Total	$	323,169	$	(189,798)	$	133,371	$	323,187	$	(185,562)	$	137,625	$	729,347	$	(263,477	)	$	465,870	$	710,932	$	(253,565	)	$	457,367

Intellectual property:
Aerospace	$	-	$	-	$	-	$	-	$	-	$	-	$	—	$	—		$	—	$	—	$	—		$	—
Industrial		19,459		(18,315)		1,144		19,422		(18,196)		1,226		15,816		(15,724	)		92		15,778		(15,640	)		138
Total	$	19,459	$	(18,315)	$	1,144	$	19,422	$	(18,196)	$	1,226	$	15,816	$	(15,724	)	$	92	$	15,778	$	(15,640	)	$	138

Process technology:
Aerospace	$	76,605	$	(50,619)	$	25,986	$	76,605	$	(49,124)	$	27,481	$	76,370	$	(64,760	)	$	11,610	$	76,371	$	(63,956	)	$	12,415
Industrial		22,910		(18,118)		4,792		22,950		(17,756)		5,194		94,506		(23,711	)		70,795		90,945		(22,300	)		68,645
Total	$	99,515	$	(68,737)	$	30,778	$	99,555	$	(66,880)	$	32,675	$	170,876	$	(88,471	)	$	82,405	$	167,316	$	(86,256	)	$	81,060

Other intangibles:
Aerospace	$	-	$	-	$	-	$	-	$	-	$	-	$	—	$	—		$	—	$	—	$	—		$	—
Industrial		1,332		(992)		340		1,312		(956)		356		245		(212	)		33		235		(183	)		52
Total	$	1,332	$	(992)	$	340	$	1,312	$	(956)	$	356	$	245	$	(212	)	$	33	$	235	$	(183	)	$	52

Intangible asset with indefinite life:
Tradename:
Aerospace													$	—	$	—		$	—	$	—	$	—		$	—
Industrial														71,321		—			71,321		68,094		—			68,094
Total													$	71,321	$	—		$	71,321	$	68,094	$	—		$	68,094

Total intangibles:
Aerospace	$	358,830	$	(205,802)	$	153,028	$	358,830	$	(200,279)	$	158,551	$	358,053	$	(264,745	)	$	93,308	$	358,054	$	(260,476	)	$	97,578
Industrial		84,645		(72,040)		12,605		84,646		(71,315)		13,331		629,552		(103,139	)		526,413		647,738		(138,605	)		509,133
Consolidated Total	$	443,475	$	(277,842)	$	165,633	$	443,476	$	(271,594)	$	171,882	$	987,605	$	(367,884	)	$	619,721	$	1,005,792	$	(399,081	)	$	606,711

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

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

For the three-months ended December 31, ~~2017~~2020 and ~~2016,~~2019, Woodward recorded amortization expense associated with intangibles of the following:

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

Three-Months Ended

December 31,

2017

2016
Amortization expense
$
6,243

$
6,458

Future amortization expense associated with intangibles is expected to be:

Year Ending September 30:

2018 (remaining)

$
18,782
2019

23,156
2020

20,373
2021

18,404
2022

16,249
Thereafter

68,669

$
165,633

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

Note ~~13.~~15. Credit facilities, short-term borrowings and long-term debt

Revolving credit facility

Woodward maintains a $1,000,000 revolving credit facility established under a revolving credit agreement among Woodward, a syndicate of lenders and Wells Fargo Bank, National Association, as administrative agent (the “Revolving Credit Agreement”). The Revolving Credit Agreement provides for the option to increase available borrowings to up to ~~$1,200,000,~~$1,500,000, subject to lenders’ participation. Borrowings under the Revolving Credit Agreement can be made by Woodward and certain of its foreign subsidiaries in U.S. dollars or in foreign currencies other than the U.S. dollar and generally bear interest at LIBOR plus ~~0.85%~~0.875% to ~~1.65%~~1.75%. The Revolving Credit Agreement matures ~~in April 2020.~~on June 19, 2024. Under the Revolving Credit Agreement, there were ~~$66,300 in principal amount of~~0 borrowings outstanding as of December 31, ~~2017, at an effective interest rate of 2.52%, and $32,600 in principal amount of borrowings outstanding as of September 30, 2017, at an effective interest rate of 2.29%. As of December 31, 2017~~2020 and September 30, ~~2017, all 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.~~ 2020.

Short-term borrowings

Woodward has other foreign lines of credit and foreign overdraft facilities at various financial institutions, which are generally reviewed annually for renewal and are subject to the usual terms and conditions applied by the financial institutions. Pursuant to the terms of the related facility agreements, Woodward’s foreign performance guarantee facilities are limited in use to providing performance guarantees to third parties. There were no0 borrowings outstanding ~~as of December 31, 2017 and September 30, 2017~~ on Woodward’s foreign lines of credit and foreign overdraft ~~facilities.~~

~~Long-term debt~~

December 31,

September 30,

2017

2017
Series D notes – 6.39%, due October 2018; unsecured

$
100,000

$
100,000
Series F notes – 8.24%, due April 2019; unsecured

43,000

43,000
Series G notes – 3.42%, due November 2020; unsecured

50,000

50,000
Series H notes – 4.03%, due November 2023; unsecured

25,000

25,000
Series I notes – 4.18%, due November 2025; unsecured

25,000

25,000
Series J notes – Floating rate (LIBOR plus 1.25%), due November 2020; unsecured

50,000

50,000
Series K notes – 4.03%, due November 2023; unsecured

50,000

50,000
Series L notes – 4.18%, due November 2025; unsecured

50,000

50,000
Series M notes – 1.12% due September 2026; unsecured

48,015

47,270
Series N notes – 1.31% due September 2028; unsecured

92,428

90,995
Series O notes – 1.57% due September 2031; unsecured

51,616

50,815
Unamortized debt issuance costs

(1,720)

(1,794)
Total long-term debt

583,339

580,286
Less: Current portion of long-term debt

-

-
Long-term debt, less current portion

$
583,339

$
580,286

~~The Notes~~

~~In October 2008, Woodward entered into a note purchase agreement relating to the Series D Notes. The Series D Notes mature and are payable in October 2018. As~~facilities as of December 31, ~~2017,~~2020 and September 30, 2020.

Long-term debt

On November 15, 2020, Woodward paid the entire ~~amount~~principal balance of ~~debt under the~~$100,000 on its Series DG and J Notes ~~has~~

~~been classified as long-term based on Woodward’s intent and ability to refinance this debt~~ using cash on hand and proceeds from borrowings under its existing revolving credit ~~facility which, in turn, is expected to be repaid beyond the next twelve months. In April 2009, Woodward entered into a note purchase agreement relating to the Series F Notes.~~ facility.

On October 1, 2013, Woodward entered into a note purchase agreement 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 Series D Notes, the Series F Notes and the First Closing Notes, the “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 Series D 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 Series F Notes is payable semi-annually on April 15 and October 15 of each year until all principal is paid. Interest on the 2016 Notes is payable semi-annually on March 23 and September 23 of each year, 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 December 31, 2017, the Series J Notes bore interest at an effective rate of 2.69%.

~~Debt Issuance Costs~~

Unamortized debt issuance costs associated with the Notes of $1,720 as of December 31, 2017 and $1,794 as of September 30, 2017 were recorded as a reduction in “Long-term debt, less current portion” in the Condensed Consolidated Balance Sheets. Unamortized debt issuance costs of $2,041 associated with the Revolving Credit Agreement as of December 31, 2017 and $2,259 as of September 30, 2017 were recorded as “Other assets” in the Condensed Consolidated Balance Sheets. Amortization of debt issuance costs is included in operating activities in the Condensed Consolidated Statements of Cash Flows.

Note ~~14.~~16. Accrued liabilities



	December 31,		September 30,		December 31,		September 30,
	2017		2017		2020		2020
Salaries and other member benefits	$	43,844	$	91,285	$	40,392	$	50,850
Warranties		13,017		13,597		21,079		18,972
Interest payable		5,392		9,626		5,501		15,281
Current portion of acquired performance obligations and unfavorable contracts (1)		1,627		1,627
Accrued retirement benefits		2,379		2,413		3,063		3,051
Current portion of loss reserve on contractual lease commitments		1,244		1,343
Current portion of deferred income from JV formation (Note 4)		6,439		6,451
Deferred revenues		3,568		4,625
Restructuring charges						1,596		3,395
Taxes, other than income		10,934		14,401		26,432		13,925
Net current contract liabilities (Note 3)						29,385		24,620
Other		10,341		9,704		28,484		21,700
	$	98,785	$	155,072	$	155,932	$	151,794

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

~~Loss reserve~~During the third quarter of fiscal year 2020, the Company committed to a plan of termination (the “Termination Plan”) in response to the ongoing global economic challenges resulting from the COVID-19 pandemic and its impact on ~~contractual lease commitments~~

~~In connection with~~ the ~~construction~~Company’s business. The Termination Plan involved the termination and/or furlough of ~~a new production facility in Niles, Illinois, Woodward vacated a leased facility in Skokie, Illinois~~employees and ~~recognized a loss reserve against~~contractors at certain of the ~~estimated remaining contractual lease commitments, less anticipated sublease income. Changes~~Company’s operating facilities, primarily in the ~~loss reserve~~United States. As a result of the Termination Plan, the Company incurred $23,673 of restructuring charges related to employee severance and benefits costs as of September 30, 2020. All of the restructuring charges recorded during the fiscal year ended September 30, 2020 were recorded as nonsegment expenses.

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

Other liabilities included $3,473 and $3,927 of accrued loss reserve on contractual lease commitments as of December 31, 2017 and September 30, 2017, respectively, which are not expected to be settled or paid within twelve months of the respective balance sheet date.

On December 22, 2017, the United States (“U.S.”) enacted significant changes to the U.S. tax law following the passage and signing of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”). The Tax Act included significant changes to existing tax law, including a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, a one-time repatriation tax on deferred foreign income (“Transition Tax”), deductions, credits and business-related exclusions.

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

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 determination of the estimated 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.~~judgments. In addition, as a global commercial enterprise, Woodward’s tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, changes in the estimate of the amount of undistributed foreign earnings that Woodward considers indefinitely reinvested, issuance of future guidance, interpretation, and rule-making, and other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.

The permanent reduction to the U.S. federal corporate income tax rate from 35% to 21% is effective January 1, 2018 (the “Effective Date”). When a U.S. federal tax rate change occurs during a fiscal year, taxpayers are required to compute a weighted daily average rate for the fiscal year of enactment. As a result of the Tax Act, Woodward has calculated a U.S. federal statutory corporate income tax rate of 24.5% for the fiscal year ending September 30, 2018 and applied this rate in computing the first quarter of fiscal year 2018 income tax provision. The U.S. federal statutory corporate income tax rate of 24.5% is the weighted daily average rate between the pre-enactment U.S. federal statutory tax rate of 35% applicable to Woodward’s 2018 fiscal year prior to the Effective Date and the post-enactment U.S. federal statutory tax rate of 21% applicable to the 2018 fiscal year thereafter. Woodward expects the U.S. federal statutory rate to be 21% for fiscal years beginning after September 30, 2018.

On December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (“SAB 118”). SAB 118 expresses views of the SEC regarding ASC Topic 740, Income Taxes (“ASC 740”) in the reporting period that includes the enactment date of the

Tax Act. The SEC staff issuing SAB 118 (the “Staff”) recognized that a registrant’s review of certain income tax effects of the Tax Act may be incomplete at the time financial statements are issued for the reporting period that includes the enactment date, including interim periods therein. The Staff’s view of the enactment of the Tax Act has been developed considering the principles of ASC Topic 805, ~~Business Combinations~~, which addresses the accounting for certain items in a business combination for which the accounting is incomplete upon issuance of the financial statements that include the reporting period in which the business combination occurs. Specifically, the Staff provides that the accounting guidance in ASC Topic 805 may be analogized to the accounting for impacts of the Tax Act. If a company does not have the necessary information available, prepared or analyzed for certain income tax effects of the Tax Act, SAB 118 allows a company to report provisional numbers and adjust those amounts during the measurement period not to extend beyond one year. For the three-months ended December 31, 2017, Woodward has recorded all known and estimable impacts of the Tax Act that are effective for fiscal year 2018. Future adjustments to the provisional numbers will be recorded as discrete adjustments to income tax expense in the period in which those adjustments become estimable and/or are finalized.

Accordingly, Woodward’s income tax provision as of December 31, 2017 reflects (i) the current year impacts of the Tax Act on the estimated annual effective tax rate and (ii) the following discrete items resulting directly from the enactment of the Tax Act based on the information available, prepared, or analyzed (including computations) in reasonable detail.

Woodward determined that the Transition Tax is provisional because various components of the computation are unknown as of December 31, 2017, including the following significant items: the exchange rates for fiscal year 2018, the actual aggregate foreign cash position and the earnings and profits of the foreign entities as of September 30, 2018, the interpretation and identification of cash positions as of September 30, 2018, and incomplete computations of accumulated earnings and profits balances as of November 2, 2017 and December 31, 2017. Consistent with provisions allowed under the Tax Act, the $26,000 estimated Transition Tax liability will be paid over an eight year period beginning in fiscal year 2019. The entire amount of the estimated Transition Tax liability has been included in “Other liabilities” in the Condensed Consolidated Balance Sheets.

Woodward also determined that the impact of the U.S. federal corporate income tax rate change on the U.S. deferred tax assets and liabilities is provisional because the number cannot be calculated until the underlying timing differences are known rather than estimated.

Given the Tax Act’s significant changes and potential opportunities to repatriate cash tax free, Woodward is in the process of evaluating its current indefinite assertions. As a result of the Tax Act, Woodward now expects to repatriate certain earnings which will be subject to withholding taxes. These additional withholding taxes are being recorded as an additional deferred tax liability associated with the basis difference in such jurisdictions. The uncertainty related to the taxation of such withholding taxes on distributions under the Tax Act and finalization of the cash repatriation plan makes the deferred tax liability a provisional amount.

Woodward continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and base erosion anti-abuse tax (“BEAT”) on Woodward, which are not effective until fiscal year 2019. Woodward has not recorded any impact associated with either GILTI or BEAT in the tax rate for the first quarter of fiscal year 2018.

Within the calculation of Woodward’s annual effective tax rate Woodward has used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, and the FASB and/or various other taxing jurisdictions. For example, Woodward anticipates that the state jurisdictions will continue to determine and announce their conformity to the Tax Act which could have an impact on the annual effective tax rate.

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

The ~~increase~~decrease in the year-over-year effective tax rate for the three-months ended December 31, 2017 is primarily attributable to the $14,778 discrete net impact resulting from the enactment of the Tax Act partially offset by benefits of the current year effect of the U.S. federal corporate tax rate reduction resulting from the enactment of the Tax Act on the estimated annual effective tax rate. In addition, the effective tax rate for the three-months ended December 31, ~~2016 includes~~2020 compared to the three-months ended December 31, 2019 is primarily attributable to the impact of ~~the repatriation~~decreased projected full-year earnings for fiscal year 2021 relative to the ~~U.S.~~expected tax benefits from the research credit, net excess income tax benefit from stock-based compensation, and various state income tax credits. This decrease was partially offset by the tax benefit associated with the impairment of ~~certain net foreign profits and losses. The U.S. foreign tax credits available as a result of the repatriation of the foreign net earnings~~assets held for sale in the first quarter of ~~last~~fiscal year ~~were greater than~~2020 that did not repeat in the ~~U.S.~~current quarter and increased taxes ~~payable~~ on ~~these net~~combined foreign earnings.

Gross unrecognized tax benefits were ~~$18,997~~$10,194 as of December 31, ~~2017,~~2020, and ~~$20,132~~$9,851 as of September 30, ~~2017. Included in the balance of unrecognized tax benefits were $8,949 as of~~2020. At December 31, ~~2017 and $9,677 as~~2020, the amount of ~~September 30, 2017 of~~the liability for unrecognized tax benefits that, if recognized, would ~~affect the~~impact Woodward’s effective tax ~~rate.~~rate was $4,948. At this time, Woodward ~~estimates that~~believes it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as ~~$8,901~~$1,884 in the next twelve months due to the completion of ~~reviews~~review by tax authorities, lapses of statutes, and the settlement of tax positions. ~~Woodward accrues~~Woodward’s tax expense includes accruals for potential interest and penalties related to unrecognized tax benefits and all other interest and penalties related to tax ~~payments in tax expense. Woodward had accrued gross interest and penalties of $1,243 as of December 31, 2017 and $1,123 as of September 30, 2017.~~payments.

Woodward’s tax returns are subject to audits by U.S. federal, state, and foreign tax authorities, and these audits are at various stages of completion at any given time. Reviews of tax matters by authorities and lapses of the applicable statutes of ~~limitations~~limitation may result in changes to tax expense. ~~Fiscal~~Woodward’s fiscal years remaining open to examination for U.S. Federal income taxes include fiscal years 2018 and thereafter. Woodward’s fiscal years remaining open to examination for significant U.S. state income tax jurisdictions include fiscal years 2016 and thereafter. Woodward’s fiscal years remaining open to examination in significant foreign jurisdictions include ~~2008~~2016 and thereafter. Woodward’s fiscal years remaining open to examination in the United States include fiscal years 2014 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 the periods thereafter.

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.

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~~non-U.S. employees are also eligible to participate in similar ~~foreign~~non-U.S. plans.

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

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

U.S. GAAP requires that, for obligations outstanding as of September 30, ~~2017,~~2020, the funded status reported in interim periods shall be the same asset or liability recognized in the previous year end statement of financial position adjusted for (a) subsequent accruals of net periodic benefit cost that exclude the amortization of amounts previously recognized in other comprehensive income (for example, subsequent accruals of service cost, interest cost, and return on plan assets) and (b) contributions to a funded plan or benefit payments.

During the third quarter of fiscal year 2016, Woodward opened a lump-sum buy-out window, which closed in the fourth quarter of fiscal year 2016 and was fully settled during the first quarter of fiscal year 2017, 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 participants were provided the opportunity to 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 assets under the lump-sum buy-out options were $670 during the first quarter of fiscal year 2017. Woodward made no further pension benefit payments under the lump-sum buy-out options.

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

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

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

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

The amount of cash contributions made to these plans in any year is dependent upon a number of factors, including minimum funding requirements in the jurisdictions in which Woodward operates and arrangements made with trustees of certain foreign plans. As a result, the actual funding in fiscal year ~~2018~~2021 may differ from the current estimate. Woodward estimates its remaining cash contributions in fiscal year ~~2018~~2021 will be as follows:

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

In the first quarter of fiscal year 2017, ~~Woodward’s board of directors~~the Board terminated the Company’s prior stock repurchase program and replaced it with a new program for the repurchase of up to $500,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a ~~three-year~~three year period that ~~will end~~ended in November 2019 (the “2017 Authorization”). InEffective upon the ~~first quarter~~expiration of ~~fiscal year~~the 2017 ~~Woodward purchased 350~~Authorization in November 2019, Woodward’s board of directors approved a new program for the repurchase of up to $500,000 of Woodward’s outstanding shares of ~~its~~ common stock ~~for $24,004 pursuant to~~on the open market or in privately negotiated transactions over a ~~10b5-1 plan under the 2017 Authorization. Woodward repurchased no stock~~three year period that will end in ~~the first quarter of fiscal year 2018.~~2022 (the “2019 Authorization”).

Provisions governing outstanding stock option awards are included in the 2017 Omnibus Incentive Plan, as amended from time to time (the “2017 Plan”), and the 2006 Omnibus Incentive Plan (the “2006 Plan”) and the 2002 Stock Option Plan (the “2002 Plan”). The 2002 Plan provided that no further grants would be made after December 31, 2006. No further grants will be made under the 2006 Plan, which expired in fiscal year 2016. , as applicable.

~~Woodward has reserved a total of 2,000 shares of Woodward’s common stock for issuance under the~~The 2017 Plan ~~which~~ was approved by Woodward’s stockholders in January 2017 and is a successor plan to the 2006 Plan. As of September 14, 2016, the effective date of the 2017 Plan, the Board delegated authority to administer the 2017 Plan to the compensation committee of the Board (the “Committee”), including, but not limited to, the power to determine the recipients of awards and the terms of those awards. On January 29, 2020, Woodward’s stockholders approved an additional 1,000 shares of Woodward’s common stock to be made available for future grants. Under the 2017 Plan, there were approximately 1,228 shares of Woodward’s common stock available for future grants as of December 31, 2020 and 1,972 shares as of September 30, 2020.

~~To date, equity awards under the 2017 Plan have consisted of grants of stock options to Woodward’s employees and directors.~~ Woodward believes that ~~these~~ stock options align the interests of its employees and directors with the interests of its stockholders. Stock option awards are granted with an exercise price equal to the market price of Woodward’s stock at the date the grants are awarded, a ~~ten-year~~ten year term, and generally have a ~~four-year~~four year vesting schedule at a rate of 25% per year.

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

The following is a summary of the activity for stock option awards during the three-months ended December 31, ~~2017:~~

Information about stock options that have vested, or are expected to vest, and are exercisable at December 31, ~~2017~~2020 was as follows:

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

Upon approving the 2017 Plan, Woodward’s board of directors delegated authority to administer the 2017 Plan to the compensation committee of the board, including, but not limited to, the power to determine the recipients of awards and the terms of those awards. The compensation committee approved issuance of options in the first quarter of fiscal year 2017 under the 2017 Plan, with an award date of October 3, 2016 conditional upon and subject to approval of the 2017 Plan by the stockholders. 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 related to such awards was recognized on these stock options during the three-months ended December 31, 2016, but rather the expense was recognized in the three-months ended March 31, 2017. Options granted in the three-months ended December 31, 2017 were not conditionally granted and, therefore, stock-based compensation expense related to these awards was recognized during the three-months ended December 31, 2017. Total stock-based compensation expense was $12,423 for the three-months ended December 31, 2017 and $1,261 for the three-months ended December 31, 2016.

At December 31, ~~2017,~~2020, there was approximately ~~$14,234~~$16,759 of total unrecognized compensation expense related to non-vested stock-based compensation ~~arrangements.~~arrangements, including both stock options and restricted stock awards. The pre-vesting forfeiture rates for purposes of determining stock-based compensation expense recognized were estimated to be 0% for members of ~~Woodward’s board of directors~~the Board and 9%7.3% for all others. The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately ~~2.4~~2.3 years.

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

Legal costs are expensed as incurred and are classified in “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Earnings.

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

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

Woodward serves the aerospace and industrial markets through its ~~two~~2 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.

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:

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

Consolidated net sales for the first quarter of fiscal year ~~2018 increased~~2021 decreased by ~~$27,254,~~$182,736, or ~~6.2%~~25.4%, compared to the same period of fiscal year ~~2017.~~ 2020.

The ~~increase~~decrease in consolidated net sales for the first quarter of fiscal year ~~2018 was~~2021 is primarily attributable to ~~increased defense~~the decline in sales volume related to the ongoing impact of the COVID-19 pandemic. In the Aerospace segment, the decrease in net sales volumes is primarily attributable to lower commercial sales as a result of the secular decline in global passenger traffic and original equipment manufacturer (“OEM”) production rates, plant closures and furloughs, all as a result of the global COVID-19 pandemic. In the Industrial segment, the decrease in net sales ~~boosted by~~volumes is primarily attributable to the divestiture of the disposal group, continued ~~momentum~~weakness in ~~smart weapon sales~~the oil and ~~increased commercial~~gas market and the associated aftermarket, and ~~OEM sales in~~ the ~~Aerospace segment,~~ongoing impact of the COVID-19 pandemic, partially offset by ~~net sales declines in the Industrial segment. The Industrial segment experienced decreased industrial gas turbine sales and renewables sales, which were partially offset by increased sales~~favorable effects of ~~large gas engines and fuel systems for Compressed Natural Gas (“CNG”) trucks in Asia.~~foreign currency exchange rates.

Cost of goods sold ~~increased~~ decreased by ~~$17,636~~$133,277 to ~~$346,784,~~$401,640, or ~~73.8%~~74.7% of net sales, for the first quarter of fiscal year ~~2018~~2021, from ~~$329,148,~~$534,917, or 74.3% of net sales, for the first quarter of fiscal year ~~2017. The increase in cost~~2020. Cost of goods sold isdecreased in the first quarter of fiscal year 2021 primarily ~~attributable~~due to ~~higher~~lower sales volume as a result of global disruption from the COVID-19 pandemic and ~~planned production facility capacity expansion costs, partially offset by savings from cost reduction initiatives in our Industrial segment.~~ the elimination of annual bonus for fiscal year 2021.

Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was ~~26.2%~~25.3% for the first quarter of fiscal year ~~2018,~~2021, compared to 25.7% for the first quarter of fiscal year ~~2017.~~2020. Gross margin decreased for the first quarter of fiscal year

~~2018 was higher~~ 2021 compared to the ~~first quarter~~same period of ~~fiscal~~the prior year ~~2017,~~ primarily ~~related~~due to ~~increased~~lower Aerospace OEM and aftermarket sales volume ~~partially offset by planned production facility capacity expansion costs and unfavorable product mix.~~as a result of global disruption from the COVID-19 pandemic.

Selling, general and administrative expenses ~~increased~~ decreased by ~~$7,976,~~$5,934, or ~~20.8%~~9.6%, to ~~$46,276~~$56,111 for the first quarter of fiscal year ~~2018, as~~2021, compared to ~~$38,300~~$62,045 for the first quarter of fiscal year ~~2017.~~2020. Selling, general, and administrative expenses as a percentage of net sales ~~was 9.8%~~increased to 10.4% for the first quarter of fiscal year ~~2018 as~~2021, compared to 8.6% for the first quarter of fiscal year ~~2017.~~2020. The ~~increase~~decrease in selling, general and administrative expenses for the first quarter of fiscal year ~~2018 was~~2021 compared to same period of the prior year primarily due to the timing of the recognition of stock-based compensation expense. We recognized the majority of our annual stock-based compensation expense in the first quarter of fiscal year 2018, whereas in fiscal year 2017 the majority of this expense was recognized in the second quarter of the fiscal year.savings from cost reduction initiatives.

Research and development costs ~~increased~~ decreased by ~~$8,246,~~$4,850, or ~~31.1%~~13.2%, to ~~$34,786~~$31,996 for the first quarter of fiscal year ~~2018,~~2021, as compared to ~~$26,540~~$36,846 for the first quarter of fiscal year ~~2017.~~2020. Research and development costs as a percentage of net sales increased to ~~7.4% for the first quarter of fiscal year 2018 as compared to~~ 6.0% for the first quarter of fiscal year ~~2017. Research and development costs in~~2021, as compared to 5.1% for the first quarter of fiscal year ~~2018 were higher~~2020. Research and development costs decreased primarily due to ~~increased spending on new awards and opportunities being pursued within both of our business segments as well as variability in the timing of projects and expenses.~~savings from cost reduction initiatives. Our research and development activities extend across almost all of our customer base, and we anticipate ongoing variability in research and development due to the timing of customer business needs on current and future ~~programs~~programs.

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

Interest expense~~was$6,750,~~ decreased by $103, or ~~1.4% of net sales,~~1.1%, to $8,906 for the first quarter of fiscal year ~~2018,~~2021, compared to ~~$6,840, or 1.5% of net sales,~~$9,009 for the first quarter of fiscal year ~~2017. The slight decrease in interest~~2020. Interest expense ~~was~~increased as a percentage of net sales to 1.7% for the first quarter of fiscal year 2021, as compared to 1.3% for the first quarter of fiscal year 2020. In the first quarter of fiscal year 2021, we have paid the entire balance of two series of private placement notes totaling $100,000 primarily ~~attributable to lower average borrowings under~~using free cash flow and proceeds from our revolving credit facility. The revolving credit facility bears interest at a substantially lower rate than the private placement notes that were paid.

Other income decreased by $13,302 to $8,123 for the first quarter of fiscal year 2021, compared to $21,425 for the first quarter of fiscal year 2020. Other income decreased in the first quarter of fiscal year ~~2018~~2021 compared to the first quarter of fiscal year ~~2017.~~2020 primarily due to a gain on the sale of a portion of our property in Duarte, California in the amount of $13,552, which was recognized in the first quarter of fiscal year 2020.

Income taxes were provided at an effective rate on earnings before income taxes of ~~51.3%~~12.6% for the first quarter of fiscal year ~~2018, compared to 1.1%~~2021 and 13.3% for the first quarter of fiscal year ~~2017. The changes in components of our effective tax rate (as a percentage of earnings before income taxes) were attributable to the following:~~2020.

The ~~increase~~decrease in the year-over-year effective tax rate for the three-months ended December 31, 2017 is primarily attributable to the $14,778 discrete net impact resulting from the enactment of “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) partially offset by benefits of the current year effect of the U.S. federal corporate rate reduction resulting from the enactment of the Tax Act on the estimated annual effective tax rate. In addition, the effective tax rate for the ~~three-months ended December 31, 2016 includes~~first quarter of fiscal year 2021 compared to the same period of the prior year is primarily attributable to the impact of decreased projected full-year earnings for fiscal year 2021 relative to the ~~repatriation~~expected tax ~~on deferred foreign profits~~benefits from the research credit, net excess income tax benefit from stock-based compensation, and ~~losses. The U.S. foreign~~various state income tax ~~credits available as a result~~credits. This decrease was partially offset by the tax benefit associated with the impairment of ~~the repatriation of the foreign net earnings~~assets held for sale in the first quarter of ~~last year were greater than the U.S. taxes payable on these net foreign earnings.~~

~~As a result of the Tax Act, we have calculated a U.S. federal statutory corporate income tax rate of 24.5% for the~~ fiscal year ~~ending September 30, 2018 and we expect the U.S. federal statutory rate to be 21% for fiscal years beginning after September 30, 2018. Overall, we anticipate the decrease~~2020 that did not repeat in the ~~U.S. federal statutory rate resulting from the enactment of the Tax Act will have favorable impact~~current quarter and increased taxes on ~~our future U.S. tax expense and operating cash flows.~~

Within the calculation of our annual effective tax rate we have used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, the Financial

Accounting Standards Board (“FASB”) and/or various other taxing jurisdictions. The Tax Act contains many significant changes to the U.S. tax laws, the consequences of which have not yet been fully determined. Changes in corporate tax rates, the net deferred tax assets and/or liabilities relating to our U.S. operations, the taxation of foreign earnings, and the deductibility of expenses contained in the Tax Act or other future tax reform legislation could have a material impact on our future U.S. tax expense.

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

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

Aerospace segment net sales~~were $305,905~~ decreased by $152,258, or 32.1%, to $321,667 for the first quarter of fiscal year 2021, compared to $473,925 for the first quarter of fiscal year 2020. Segment net sales decreased, primarily driven by lower commercial sales due to the decline in global passenger traffic and OEM production rates, plant closures and furloughs, all as a result of the global COVID-19 pandemic.

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

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

Aerospace segment earnings decreased for the first quarter of fiscal year ~~2018, up 14.7% compared~~2021 due to ~~$266,680~~the following:

Aerospace segment earnings as a percentage of segment net sales were 14.4% for the first quarter of fiscal year ~~2017. The increase~~2021, compared to 19.6% for the first quarter and of fiscal year 2020. Aerospace segment earnings in the first quarter of fiscal year 2021 decreased primarily due to lower volume caused by the global COVID-19 pandemic, partially offset by savings from cost reduction initiatives.

Industrial segment net sales decreased by $30,478, or 12.4%, to $215,952 for the first quarter of fiscal year 2021, compared to $246,430 for the first quarter of fiscal year 2020. Industrial segment net sales for the first quarter of fiscal year ~~2018 as~~2021 decreased by $1,912, or 0.9%, compared to Industrial segment net sales excluding the ~~first quarter~~disposal group of fiscal year 2017 was driven primarily by increased commercial OEM and aftermarket sales and increased defense OEM sales in the first quarter of fiscal year 2018. Defense aftermarket sales were down in the first quarter of fiscal year 2018 as compared to the same period of fiscal year 2017.

~~Commercial OEM sales were up~~$217,864 for the first quarter of fiscal year ~~2018 as compared to the first quarter~~2020. Foreign currency exchange rates had a favorable impact on segment net sales of fiscal year 2017. The strong commercial OEM sales in the quarter benefitted from the accelerating deliveries of certain key next generation aircraft on which we have increased content, as well as some improvement in business jets as compared to a weak first quarter of fiscal year 2017.

Commercial aftermarket sales increased significantly in the first quarter of fiscal year 2018 as compared to the first quarter of fiscal year 2017, benefitting from both the initial provisioning for new platforms and increased utilization of existing fleets.

U.S. government funds continue to be prioritized for defense platforms on which we have content. Defense OEM sales increased in the first quarter of fiscal year 2018 compared to the first quarter of fiscal year 2017, driven primarily by continued strong demand for smart weapons, as well as growing international demand for various other military programs.

Defense aftermarket sales decreased in the first quarter of fiscal year 2018 as compared to the first quarter of fiscal year 2017, reflecting variability in the timing of continued maintenance needs and upgrade programs.

~~Aerospace segment earnings~~ ~~decreased by $3,324, or 7.1%, to $43,553~~$9,287 for the first quarter of fiscal year ~~2018, compared to $46,877 for~~2021.

Industrial segment net sales decreased in the first quarter of fiscal year ~~2017. The net decrease in Aerospace segment earnings for the first quarter of fiscal year 2018 was~~2021 primarily due to the ~~following:~~

~~Aerospace segment earnings~~divestiture of the disposal group, lower sales volumes as a ~~percentage~~result of ~~sales were 14.2% for~~ the ~~first quarter~~weak oil and gas market and the ongoing impact of ~~fiscal year 2018, compared to 17.6% for~~ the ~~first quarter of fiscal year 2017. Aerospace segment earnings benefitted from higher sales volume which was~~global COVID-19 pandemic, partially offset by unfavorable product sales mix and higher production capacity expansion costs to support new program awards. Aerospace segment earnings were also negatively impacted by increased investment in research and development for new program awards and opportunities being pursued.

~~Industrial segment net sales~~ decreased by 6.8% to $164,243 for the first quarter of fiscal year 2018, compared to $176,214 for the first quarter of fiscal year 2017 due primarily to declines in industrial gas turbine and renewables sales. The decline in industrial gas turbine sales was the result of increased efficiency leading to lower overallstrong demand for ~~electricity, the increased utilization of renewable power sources, and excess inventory~~natural gas powered trucks in ~~the channel. The sales decline in our renewables business was due to the short-term unfavorable impact of platform transitions by some of our customers.~~ Asia.

Sales of fuel systems for ~~CNG~~natural gas powered trucks in Asia increased in the first quarter of fiscal year 2018 as compared to the first quarter of fiscal year 2017 as the Chinese government continues to encourage natural gas usage. In addition, sales of reciprocating engines used in both power generation and oil and gas applications were up in the first quarter of fiscal year ~~2018~~2021, although we anticipate seasonal pressure due to high demand for natural gas during winter months. We foresee continued growth in global energy demand moving forward, with the bulk of this expansion coming from developing economies in Asia, as increased emissions regulations continue to drive the shift to natural gas powered and cleaner burning diesel engines. The industrial gas turbine market remained stable during the first quarter of fiscal year 2021 and we do not expect this market to be as negatively impacted by the global COVID-19 pandemic due to low inventory levels and pent up demand for repair and overhaul.

Industrial segment earnings increased by $4,658, or 16.5%, to $32,888 for the first quarter of fiscal year 2021, compared to $28,230 for the ~~same period~~first quarter of fiscal year 2020. There were no earnings for the ~~prior~~disposal group in the first quarter of fiscal ~~year.~~

year 2021 because the divestiture preceded the period. Industrial segment earnings ~~increased by $1,346, or 7.5%, to $19,344~~ excluding the disposal group for the first quarter of fiscal year ~~2018, compared to $17,998~~2020 were $25,983.

Industrial segment earnings increased for the first quarter of fiscal year ~~2017. The net increase in Industrial segment earnings for the first quarter of fiscal year 2018 was~~2021 due to the following:

Industrial segment earnings as a percentage of segment net sales were ~~11.8%~~15.2% for the first quarter of fiscal year 2021, compared to 11.5% for the first quarter of fiscal year 2020. Industrial segment earnings excluding the disposal group were 11.9% of Industrial segment net sales excluding the disposal group for the first quarter of fiscal year ~~2018,~~2020. Industrial segment earnings increased in the first quarter of fiscal year 2021 primarily due to savings from cost reduction initiatives and favorable effects from changes in foreign currency rates, partially offset by lower sales volume.

Nonsegment expenses decreased to $23,359 for the first quarter of fiscal year 2021, compared to ~~10.2%~~$51,071 for the first quarter of fiscal year 2020. Included in nonsegment expenses for the first quarter of fiscal year ~~2017. The increase~~2020 was an impairment charge on assets held for sale associated with the divestiture of our disposal group in ~~segment earnings for~~ the ~~first quarter~~amount of ~~fiscal year 2018 was largely driven~~$37,902, partially offset by ~~savings from prior year cost reduction initiatives.~~

~~Nonsegment expenses~~ ~~increased to $19,023 for~~a gain on the ~~first quarter~~sale of ~~fiscal year 2018, compared to $11,381 for~~a portion of our property in Duarte, California in the ~~first quarter~~amount of ~~fiscal year 2017. As a percent of sales,~~$13,552. Considering these items, nonsegment expenses ~~increased to 4.0% of net sales for the first quarter of fiscal year 2018, compared to 2.6% of net sales for the first quarter of fiscal year 2017. The increase in nonsegment expenses~~decreased in the first quarter of fiscal year ~~2018 as~~2021 compared to the first quarter of fiscal year ~~2017 is~~2020 primarily due to ~~the recognition of the~~

majority of our annual stock-based compensation expense in the first quarter of fiscal year 2018, whereas in fiscal year 2017 the majority of this expense was recognized in the second quarter of the fiscal year.

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.~~indebtedness, or finance our acquisitions. We continue to expect that cash generated from our operating activities, together with borrowings under our revolving credit facility and other borrowing capacity, will be sufficient to fund our continuing operating needs ~~including capital expansion funding~~ for the foreseeable future.

Our aggregate cash and cash equivalents were ~~$85,779~~$201,881 at December 31, ~~2017~~2020 and ~~87,552~~$153,270 at September 30, ~~2017,~~2020, and our working capital was ~~$626,122~~$918,444 at December 31, ~~2017~~2020 and ~~$593,955~~$818,533 at September 30, ~~2017.~~2020. Of the ~~$85,779 of~~ cash and cash equivalents held at December 31, ~~2017, $82,024~~2020, $188,307 was held by our foreign ~~locations.~~locations and $1,908 is restricted cash held in escrow related to the sale of property in Duarte, California. We are not presently aware of any significant restrictions on the repatriation of ~~these~~ funds held by our foreign locations, although a portion is considered indefinitely reinvested in these foreign subsidiaries. If these funds were needed to fund our operations or satisfy obligations in the United States, then they could be ~~repatriated and their~~repatriated. The repatriation of these funds into the United States may cause us to incur additional U.S. income taxes or foreign withholding ~~taxes. Any~~taxes, but any additional U.S. taxes could be offset, in part or in whole, by foreign tax credits. The amount of such taxes and application of tax credits would be dependent on the income tax laws and other circumstances at the time these amounts are repatriated. Based on these variables, it is impractical to determine the income tax liability that might be incurred if these funds were to be repatriated. ~~The additional uncertainty associated with the Tax Act increases the impracticality of determining this income tax liability.~~

~~We do not believe the Transition Tax, which is expected to be paid over and eight year period beginning in January 2019, will have a significant impact on our cash flows in any individual fiscal year.~~

Consistent with common business practice in China, our Chinese ~~subsidiary accepts~~subsidiaries accept bankers’ acceptance notes from Chinese customers, in settlement of certain customer accounts receivable. Bankers’ acceptance notes are financial instruments issued by Chinese financial institutions as part of financing arrangements between the financial institution and a customer of the financial institution. Bankers’ acceptance notes represent a commitment by the issuing financial institution to pay a certain amount of money at a specified future maturity date to the legal owner of the bankers’ acceptance note as of the maturity date. The maturity date of bankers’ acceptance notes varies, but it is our policy to only accept bankers’ acceptance notes with maturity dates no more than 180 days from the date of our receipt of such draft. The issuing financial institution is the obligor, not our customers. Upon our acceptance of a bankers’ acceptance note from a customer, such customer has no further obligation to pay us for the related accounts receivable balance. We had bankers’ acceptance notes of ~~$59,798~~$46,896 at December 31, ~~2017~~2020 and ~~$38,243~~$56,640 at September 30, ~~2017~~2020 recorded as non-customer accounts receivable onin our ~~condensed consolidated balance sheets. The increase in the amount of bankers’ acceptance notes is due to the higher sales of natural gas truck and bus systems in China.~~Condensed Consolidated Balance Sheets. We only accept bankers’ acceptance notes issued by banks that are believed to be creditworthy and to which the credit risks associated with the bankers’ acceptance notes are believed to be low.

~~Our~~In addition to 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 ~~13,~~ 15, Credit facilities, short-term borrowings and long-term debt in the Notes to the Condensed Consolidated Financial Statements in Part I, Item I of this Form 10-Q.

At December 31, ~~2017,~~2020, we had total outstanding debt of ~~$649,639~~$747,087 consisting of ~~amounts borrowed under our revolving credit facility and~~ various series of unsecured notes due between ~~2018~~2023 and ~~2031, with~~2033 and obligations under our finance leases. At December 31, 2020, we had additional borrowing availability of ~~$922,377~~$988,367 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of ~~$7,516~~$7,648 under various foreign credit facilities. As of December 31, 2017, the $100,000 in debt related to our Series D Notes, which mature and are payable in October 2018, has been classified as long-term based on our intent and ability to refinance this debt using cash proceeds from our existing revolving credit facility which, in turn, is expected to be repaid beyond the next twelve months. For further discussion of our notes, see Note 13, ~~Credit facilities, short-term borrowings and long-term debt~~ ~~in the Notes to the Condensed Consolidated Financial Statements in Part I, Item I of this Form 10-Q.~~

At December 31, ~~2017,~~2020, we had ~~$66,300 of~~no borrowings outstanding under our revolving credit ~~facility, all of which was classified as short-term.~~facility. Revolving credit facility and short-term borrowing activity during the three-months ended December 31, ~~2017~~2020 were as follows:

We believe we were in compliance with all our debt covenants as of December 31, ~~2017.~~2020. Additionally, we do not believe the current known impacts of the COVID-19 pandemic will affect our ability to remain in compliance with our debt covenants. See Note ~~12,~~ 15, Credit facilities, short-term borrowings and long-term debt in the Notes to the Consolidated Financial Statements in Part II, Item 8 of our most recent Form 10-K, for more information about our covenants.

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

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

In ~~the first quarter of fiscal year 2017,~~November 2019, our board of directors terminated ~~the Company’s~~our prior stock repurchase program and replaced it with a new program for the repurchase of up to $500,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a three-year period ~~that will end~~ending in ~~November 2019~~in 2022 (the ~~“2017 Authorization”)~~“2019 Authorization). ~~In the three-months ended December 31, 2016, we purchased 350 shares of our~~ We repurchased no common stock ~~for $24,004,~~ under the ~~2017~~2019 Authorization ~~pursuant to a 10b5-1 plan. We repurchased no stock in~~during the ~~three-months ended December 31, 2017.~~

~~For our Aerospace segment, we have been purchasing production equipment for our second campus in the greater-Rockford, Illinois area~~first quarter of both fiscal year 2021 and anticipate continuing such purchases as new aircraft platforms ramp up to full production volumes. The second campus, completed in 2015, was built to support the expected growth in our Aerospace segment over the next ten years and beyond, as a result of our being awarded a substantial number of new system platforms, particularly on narrow-body aircraft.2020.

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

Net cash flows ~~used in~~provided by operating activities for the first quarter of fiscal year ~~2018~~2021 was ~~$2,533,~~$146,725, compared to $27,445 for the same period of fiscal year 2020. The increase in net cash provided by operating activities in the first quarter of fiscal year 2021 compared to the first quarter of the prior fiscal year is primarily attributable to the timing of cash received from customers and the elimination of cash payments for annual bonuses. Annual bonus payments were paid in the first quarter of fiscal year 2020, but no such payments were made in the first quarter of fiscal year 2021.

Net cash flows used in investing activities for the first quarter of fiscal year 2021 was $9,955, compared to net cash flows provided by ~~operating~~investing activities of ~~$52,351~~$1,575 in the first quarter of fiscal year 2017. The change in cash flows from operating activities is primarily attributable to a decrease in net earnings in the first quarter of fiscal year 2018 compared to the prior fiscal year and working capital changes which had an increase in cash use in the first quarter of 2018 due mainly to increased payments of accounts payable and accrued liabilities compared to the first quarter of last year.

~~Net cash flows used in investing activities~~ ~~for the first quarter of fiscal year 2018 was $29,109, compared to $16,618 in the first quarter of fiscal year 2017.~~2020. The increase in cash flows used in investing activities in the first quarter of fiscal year ~~2018~~2021 compared to the first quarter of the prior fiscal year is primarily due to ~~increased payments for capital expenditures. Payments for~~proceeds in the amount of $18,767 from the sale of a parcel of our Duarte real property ~~plant and equipment increased by $7,392 from $21,058~~recognized in the first quarter of fiscal year ~~2017 to $28,450~~2020, while no such proceeds were received in ~~the first quarter of this year. In addition, the first quarter~~same period of fiscal year ~~2018 had~~2021, partially offset by lower ~~cash proceeds from the sale of assets compared to the first quarter of fiscal year 2017.~~payments for property, plant and equipment.

Net cash flows ~~provided by~~used in financing activities for the first quarter of fiscal year ~~2018~~2021 was ~~$27,327,~~$94,642, compared to net cash flows ~~used in~~provided by financing activities of ~~$22,192~~$17,188 in the first three-months of fiscal year 2020. During the first quarter of fiscal year 2021, we had net debt payments in the amount of $100,395, compared to net borrowings in the amount of $19,694 in the first quarter of fiscal year 2017. During the first quarter of fiscal year 2018, we had net debt borrowings of $33,594 compared to net debt borrowings of $3,748 in the first quarter of fiscal year 2017. We utilized $24,004 to repurchase 350 shares of our common stock in the first quarter of fiscal year 2017 under the 2017 Authorization. We made no stock repurchases in the first quarter of fiscal year 2018.2020.

We have various contractual obligations, including obligations related to long-term debt, operating and ~~capital~~finance leases, purchases, retirement pension benefit plans, and other postretirement benefit plans. These contractual obligations are summarized and discussed more fully in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recent Form 10-K. ~~There have been no material changes to our various contractual obligations during the three-months ended December 31, 2017.~~

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

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

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

Adjusted net earnings is defined by the Company as net earnings excluding, as applicable, (i) the gain on sale of assets associated with the sale of the Company’s Duarte real property and (ii) the charge from the impairment of assets held for sale, and the losses from assets sold, associated with the Company’s divestiture of its disposal group. The Company believes that these excluded items are short-term in nature, not directly related to the ongoing operations of the business and therefore, the exclusion of them illustrates more clearly how the underlying business of Woodward is performing. Management uses adjusted net earnings to evaluate the Company’s performance excluding these infrequent or unusual period expenses that are not necessarily indicative of the Company’s operating performance for the period. Management defines adjusted earnings per share as adjusted net earnings, as defined above, divided by the weighted-average number of diluted shares of common stock outstanding for the period. Management uses both adjusted net earnings and adjusted earnings per share when comparing operating performance to other periods which may not have similar, infrequent or unusual charges.

The reconciliation of net earnings and earnings per share to adjusted net earnings and adjusted earnings per share, respectively, for the three-months ended December 31, 2020 and 2019 is shown in the tables below.

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

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

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

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

EBIT and ~~EBITDA~~adjusted EBIT reconciled to net earnings for the three-months ended December 31, ~~2017~~2020 and ~~December 31, 2016~~2019 were as follows:

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

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

Management uses free cash flow, which is defined by the Company as net cash flows provided by operating activities less payments for property, plant and equipment, in reviewing the financial performance of and cash generation by Woodward’s various business groups and evaluating cash levels. We believe free cash flow is a useful measure for investors because it portrays our ability

to grow organically and generate cash from our businesses for purposes such as paying interest on our indebtedness, repaying maturing debt, funding business acquisitions, investing in research and development, purchasing our common stock, and paying dividends. In addition, securities analysts, investors, and others frequently use free cash flow in their evaluation of companies. Adjusted free cash flow represents a further non-U.S. GAAP adjustment to free cash flow to include cash proceeds from the sale of real property located at our former operations in Duarte, California. Management believes that by including these proceeds in free cash flow it better portrays the cash impact from our fiscal year 2018 decision to relocate our Duarte, California operations to the renovated Drake Campus in Fort Collins, Colorado.

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

Free cash flow and adjusted free cash flow reconciled to net cash provided by operating activities for the three-months ended December 31, ~~2017~~2020 and ~~December 31, 2016~~2019 were as follows:

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Note 1, Operations and summary of significant accounting policies, to the Consolidated Financial Statements in our most recent Form 10-K, describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Our critical accounting estimates, identified in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recent Form 10-K, include the discussion of estimates used for revenue recognition, inventory valuation, ~~depreciation and amortization,~~ reviews for impairment of goodwill and other long-lived assets, postretirement benefit obligations, and our provision for income taxes. Such accounting policies and estimates require significant judgments and assumptions to be used in the preparation of the Condensed Consolidated Financial Statements included in this Form 10-Q, and actual results could differ materially from the amounts reported.

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

To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2, New accounting standards, in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Condensed Consolidated Financial Statements upon adoption.

As of December 31, ~~2017,~~2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or capital resources, that are material to investors.

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.

We have established disclosure controls and procedures, which are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Act is accumulated and communicated to management, including our Principal Executive Officer (Thomas A. Gendron, Chairman of the Board, Chief Executive Officer and President) and Principal Financial and Accounting Officer (Robert F. Weber, Jr., Vice Chairman and Chief Financial ~~Officer and Treasurer)~~Officer), as appropriate, to allow timely decisions regarding required disclosures.

Thomas A. Gendron and Robert F. Weber, Jr., evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on their evaluations, they concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, ~~2017.~~2020.

~~Furthermore, there~~There have not been noany significant changes in our internal ~~control~~controls over financial reporting during the ~~fiscal~~ quarter ~~covered by this Form 10-Q~~ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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.

Investment in our securities involves risk. An investor or potential investor should consider the risks summarized under the caption “Risk ~~Factors”~~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.

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.

Delaware		36-1984010


~~Commission file number~~ ~~000-08408~~
~~WOODWARD, INC.~~
~~(Exact name of registrant as specified in its charter)~~
~~Delaware~~	~~36-1984010~~
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
	~~1081 Woodward Way, Fort Collins, Colorado~~
1081 Woodward Way, Fort Collins, Colorado		80524
(Address of principal executive offices)		(Zip Code)

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

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



	September 30, 2017		Effects of Foreign Currency Translation		December 31, 2017
Aerospace	$	455,423	$	-	$	455,423
Industrial		101,122		214		101,336
Consolidated	$	556,545	$	214	$	556,759



Year Ending September 30:
2018 (remaining)	$	18,782
2019		23,156
2020		20,373
2021		18,404
2022		16,249
Thereafter		68,669
	$	165,633

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



	~~Three-Months Ended~~
	~~December 31, 2017~~
~~Transition Tax (provisional)~~	$	~~26,000~~
~~Net impact on U.S. deferred tax assets and liabilities (provisional)~~		~~(16,260)~~
~~Net changes in deferred tax liability associated with anticipated repatriation taxes (provisional)~~		~~5,038~~
~~Net discrete impacts of the enactment of the Tax Act~~	$	~~14,778~~



Retirement pension benefits:
United States	$	-—
United Kingdom		~~297~~ 512
Japan		-—
Germany		868
Other postretirement benefits		~~3,645~~ 3,075

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



	Number		Weighted- Average Exercise Price		Weighted- Average Remaining Life in Years		Aggregate Intrinsic Value
Options outstanding		5,937	$	44.48		6.2	$	192,105
Options vested and exercisable		3,917		35.64		4.9		160,206
Options vested and expected to vest		5,823		44.07		6.1		190,725

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



	Three-Months Ended
	December 31, 2017		% of Net Sales		December 31, 2016		% of Net Sales
Net sales	$	470,148	100	%	$	442,894	100	%
Costs and expenses:
Cost of goods sold		346,784	73.8			329,148	74.3
Selling, general, and administrative expenses		46,276	9.8			38,300	8.6
Research and development costs		34,786	7.4			26,540	6.0
Interest expense		6,750	1.4			6,840	1.5
Interest income		(363)	(0.1)			(405)	(0.1)
Other (income) expense, net		(1,572)	(0.3)			(4,588)	(1.0)
Total costs and expenses		432,661	92.0			395,835	89.4
Earnings before income taxes		37,487	8.0			47,059	10.6
Income tax expense		19,227	4.1			511	0.1
Net earnings	$	18,260	3.9		$	46,548	10.5

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



	~~Three-Month Period~~
~~Consolidated net sales for the period ended December 31, 2016~~	$	~~442,894~~
~~Aerospace volume~~		~~36,317~~
~~Industrial volume~~		~~(15,615)~~
~~Effects of changes in price and sales mix~~		~~960~~
~~Effects of changes in foreign currency rates~~		~~5,592~~
~~Consolidated net sales for the period ended December 31, 2017~~	$	~~470,148~~



		~~Three-Month~~
		~~Period~~
~~Effective tax rate for the period ended December 31, 2016~~		~~1.1~~	%
~~Current year effect of U.S. federal corporate rate reduction~~		~~(9.3)~~
~~Discrete impact of the Tax Act:~~
~~Effect of U.S. federal corporate rate reduction on net U.S. deferred tax liability~~	~~(43.8)~~
~~Transition Tax~~	~~69.4~~
~~Increased deferred tax liability associated with anticipated repatriation taxes~~	~~13.0~~
~~Net discrete impact of enactment of the Tax Act~~		~~38.6~~
~~Taxes on international activities~~		~~22.9~~
~~Research and experimentation credit~~		~~(0.1)~~
~~State and local taxes~~		~~(0.1)~~
~~Adjustment of prior period tax items~~		~~(3.1)~~
~~Net excess income tax benefit from stock-based compensation~~		~~1.3~~
~~Effective tax rate for the period ended December 31, 2017~~		~~51.3~~	%

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



	~~Three-Month~~
	~~Period~~
~~Earnings for the period ended December 31, 2016~~	$	~~46,877~~
~~Sales volume~~		~~18,207~~
~~Price, sales mix and productivity~~		~~(4,952)~~
~~Production capacity expansion costs~~		~~(5,138)~~
~~Increases in research and development expenses~~		~~(5,876)~~
~~Other, net~~		~~(5,565)~~
~~Earnings for the period ended December 31, 2017~~	$	~~43,553~~

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



~~Maximum daily balance during the period~~	$	~~194,950~~
~~Average daily balance during the period~~	$	~~163,406~~
~~Weighted average interest rate on average daily balance~~		~~2.29%~~

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



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, 2017 through October 31, 2017 (2)	258	$	77.33	-	$	428,803
November 1, 2017 through November 30, 2017 (2)	1,805		77.35	-		428,803
December 1, 2017 through December 31, 2017 (2)	11,520		76.54	-		428,803

Issuer Purchases of Equity Securities (In thousands, except for shares and per share amounts)	Total Number of Shares Purchased		Weighted Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased under the Plans or Programs at Period End (1)
October 1, 2020 through October 31, 2020		48	$	79.55		—	$	486,654
November 1, 2020 through November 30, 2020 (2)		2,383		111.83		—		486,654
December 1, 2020 through December 31, 2020 (2)		50		121.53		—		486,654

	Exhibit Number
	~~Exhibit Number~~		Description
*	31.1	Rule 13a-14(a)/15d-14(a) certification of Thomas A. Gendron
*	31.2	Rule 13a-14(a)/15d-14(a) certification of Robert F. Weber, Jr.
*	32.1	Section 1350 certifications
*	~~101.INS~~101	~~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 financial statements from the ~~following materials from Woodward, Inc.’s~~Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, ~~2017~~2020, formatted in ~~XBRL (eXtensible Business Reporting Language):~~Inline XBRL: (i) ~~the~~Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Earnings, ~~(ii) the~~(iii) 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.


*		104	Cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


		WOODWARD, INC.
Date: ~~January 23, 2018~~	February 4, 2021	/s/ Thomas A. Gendron
		Thomas A. Gendron
		Chairman of the Board, Chief Executive Officer, and President (on behalf of the registrant and as the registrant’s Principal Executive Officer)

Date: ~~January 23, 2018~~	February 4, 2021	/s/ Robert F. Weber, Jr.
		Robert F. Weber, Jr.
		Vice Chairman and Chief Financial Officer (on behalf of the registrant and ~~Treasurer~~as the registrant’s (Principal Financial and Accounting Officer)