Woodward, Inc. (WWD)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis should be read together with the Consolidated Financial Statements and Notes included in this report. Dollar and number of share amounts contained in this discussion and elsewhere in this Annual Report on Form 10-K are in thousands, except per share amounts. For a discussion of the 2023 Results of Operations, including a discussion of the financial results for the fiscal year ended September 30, 2023 compared to the fiscal year ended September 30, 2022, refer to Part I, Item 7 of our Form 10-K filed with the SEC on November 17, 2023.

OVERVIEW

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

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

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

Global Business Conditions

During fiscal year 2024, we saw significant sales growth and margin expansion. The compounding impacts of our focused efforts on operational excellence enabled us to increase output and capitalize on continued strong end market demand for our products and services across the aerospace and industrial markets. We continue to better align price to the value of our products which helps to mitigate the ongoing impacts of inflation.

We continue to monitor the macroeconomic environment as inflation, economic uncertainty, and supply chain challenges continue to impact certain aspects of our business. We remain committed to growth, operational excellence, and innovation to deliver long-term success and enhanced shareholder value. We are unable to predict the full extent to which macroeconomic factors will continue to adversely impact our business, including our operational performance, results of operations, cash flows, financial position, and the achievement of our strategic objectives. Such uncertainty may affect our ability to accurately predict our future performance and forecast our financial results.

BUSINESS ENVIRONMENT AND TRENDS

We serve the aerospace and industrial markets.

Aerospace Markets

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

Commercial and Civil Aircraft – The commercial aerospace markets experienced robust demand in fiscal year 2024 as a result of continued global air traffic growth. In response, aircraft operators are taking delivery of the newest generation aircraft models to meet the growing demand, replace aging aircraft, achieve greater fuel efficiency, and lower emissions. The delivery of the newest generation of aircraft is expected to favor our product offerings because we have more content on those aircraft. We expect production levels to continue to grow due to strong OEM order backlogs for the new aircraft models and continued demand supply imbalance. Demand in the widebody aviation market improved in fiscal year 2024

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compared to recent years due to increasing production rates on the A350, A330neo, Boeing 787, and 777. We expect narrowbody deliveries to improve due to backlog associated with single aisle programs and planned production ramps in fiscal year 2025 as compared to fiscal year 2024.

We have content on the Airbus A220, A320neo, A330neo, Bell 429, Boeing 737 MAX, 777, 787, and Comac C919. We have been awarded content on the 777-9 and a variety of business jet platforms, among others.

We continue to explore opportunities on new engine and aircraft programs that are under consideration or have been recently announced and have been selected to provide rotary actuation solutions for the NASA and Boeing Transonic Truss-braced Wing (TTBW) X-66A aircraft demonstrator, which is testing a concept to reduce fuel burn for the next single aisle aircraft designs.

With the full return to service of the 737 MAX aircraft and increasing deliveries, initial provisioning sales related to the aircraft and the CFM LEAP engine accelerated during the first half of fiscal year 2024.

In February 2024, the Federal Aviation Administration (“FAA”) required a quality production plan from Boeing in response to several aircraft issues. As part of this quality production plan, the FAA is exercising enhanced oversight of Boeing, including a requirement that the FAA have approval authority for build rate increases on the 737 MAX. During fiscal year 2024, overall 737 MAX orders and demand have not changed significantly. In fiscal year 2024, the enhanced FAA oversight had a slightly negative impact on commercial OEM sales, but this was offset by price realization. In the event the FAA approves increases to Boeing's build rates, we anticipate initial provisioning sales would continue to increase in subsequent periods. In November 2024, Boeing's U.S. West Coast factory workers accepted a new contract offer, ending a seven-week strike that halted production of the 737 MAX as well as the 777. As a result of the work stoppage, our direct sales in fiscal year 2025 to Boeing have been negatively impacted. However, now that the strike has ended we expect that deliveries of the 737 MAX program will continue to increase in future periods and that the long-term demand for the aircraft has not changed. However, a prolonged depression of build rates of the Boeing 737 MAX could decrease our OEM and initial provisioning sales for the 737 MAX and CFM LEAP engines in the near term, which could have an adverse effect on our business results.

Defense – In recent years, the defense industry has been strong as budgetary allocations have generally increased since 2016. Ongoing global conflicts and preparation for near-peer threats are leading to higher global defense budgets. The U.S. National Defense Authorization Act ("NDAA") for fiscal year 2024 resulted in higher levels of funding for procurement, research and development, and maintenance, which supported our growth for fiscal year 2024. We expect defense research and development, procurement, and maintenance to increase in future years, which would be beneficial for us for future opportunities in defense markets. Our involvement with a wide variety of defense programs in fixed-wing aircraft, rotorcraft, and weapons systems has provided relative stability for our defense market sales, as some newer programs increase (e.g., F-35 Lightning II and T-7A Trainer), and some legacy programs decrease (e.g., F/A-18 E/F Super Hornet and V-22 Osprey). Other programs are relatively steady (e.g., KC-46A Tanker, UH-60 Black Hawk, and A-64 Apache helicopter programs) and some legacy programs, such as the F-15, should maintain or potentially increase production. Smart defense programs for which we have sales include the Joint Direct Attack Munition (“JDAM”), Small Diameter Bomb (“SDB”), and AIM-9X smart defense systems. During fiscal year 2024, we experienced significant growth in smart defense programs following multiple years of decline. We expect overall demand to increase in the near term for these weapons programs.

Aftermarket – Our commercial aftermarket business increased significantly in fiscal year 2024, as global air traffic continued to grow and initial provisioning sales have increased. In addition, our products have been selected for new aerospace platforms and our content has increased across existing platforms, which drives increased aftermarket sales. With the entry into service of single aisle aircraft (Boeing 737 MAX and Airbus A320neo), we have seen a significant increase in initial provisioning sales to the operators of these new aircraft. As aircraft production levels increase to accommodate rising passenger demand and to mitigate higher operating costs driven largely by higher fuel costs on older and less fuel-efficient aircraft, we expect airlines will retire older generation aircraft as they reach certain age thresholds (typically between twenty and twenty-five years). However, in the past few years, aircraft retirements have lagged historical levels because passenger demand has outpaced deliveries of the newest generation aircraft, forcing airlines to keep older generation legacy aircraft in service longer than anticipated. This has led to increased demand for repairs and spare parts for older engine programs remaining in service, consistent with air traffic growth. This dynamic applies to commercial aftermarket related to repairs and spare parts for mature legacy programs with large in-service fleets, such as the Airbus A320 and the Boeing 777.

Our defense aftermarket sales also increased significantly during fiscal year 2024 due to increased defense budgets resulting in operations and maintenance upgrades. Global conflicts and growing international demand for various other

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military programs continue to drive demand for operations of defense aircraft, including fighter jets, transports and both utility and attack rotorcraft, which are all supported by our products and systems. Although we expect variability, which is generally attributable to the cycling of various maintenance and upgrade programs, as well as actual usage, our outlook for the defense aftermarket is strong. This is due primarily to growing fleets, the service lives of existing military programs being extended, and increased demand for repairs and spare parts for older military aircraft programs remaining in service.

Industrial Markets

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

Power Generation – The demand for power generation, which consists mainly of heavy frame, aero derivative, and small industrial gas turbines, increased in fiscal year 2024 due to increased demand from power generation and process industries, particularly in North America, the Middle East, Asia, and more broadly in support of fixed generation capacity to backstop the growing renewable energy installed base. Start reliability, fuel flexibility, safety, and part-load efficiency are all key drivers of the power generation market as the conversion from coal to natural gas usage continues, and we believe we continue to be well positioned to meet these market needs on the existing and next generation turbines. We project continued growth as demand for electricity is expected to increase through global electrification and growing power consumption for data center applications. This overall global demand will primarily be met through a balance of renewable power sources and newer industrial gas turbines for which we have been awarded increased content.

Transportation – Our key markets for transportation include compressed natural gas and liquefied natural gas trucks in Asia, mining, and commercial and defense marine markets. While full year sales in our on-highway natural gas truck business in China increased significantly as compared to fiscal year 2023, we saw a material decline in this business from the first half of fiscal year 2024 to the second half due to the deteriorating Chinese economy, a narrower natural gas to diesel spread, and elevated customer inventory levels. In fiscal year 2025, we expect a decline in demand in our on-highway natural gas trucks business in China as compared to fiscal year 2024, and future demand remains uncertain due to the volatility of this business. In global marine markets, demand in fiscal year 2024 increased due to increased ship build rates and higher ship utilization, driving current and future aftermarket activity. Both commercial and defense marine customers continue to launch additional projects to support new programs or modernize fleets, including incorporating alternative fuels capability, which should drive expanded OEM and service opportunities, as multi-fuel engines contain more of our content.

Oil and Gas – During fiscal year 2024, we experienced decreased demand due to decreased domestic rig counts and the decrease in global oil and gas prices. We expect market share gains by our customers and increased scope on the next generation reciprocating engines as energy policies in some countries encourage the use of compressed natural gas, liquefied natural gas, and other alternative fuels over carbon-rich petroleum fuels, which we expect will drive increased demand for our alternative fuel clean engine control technologies. Additionally, due to increased demand for fuel flexibility as well as natural gas price variability and global supply chain disruptions, power plant operations have transitioned to higher dual fuel use, thereby increasing the demand for our liquid fuel system and related products.

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RESULTS OF OPERATIONS

Financial Highlights

Adjusted net earnings, adjusted earnings per share, adjusted effective tax rate, EBIT, adjusted EBIT, EBITDA, adjusted EBITDA, and free cash flow, are non-U.S. GAAP financial measures. A description of these measures as well as a reconciliation of these non-U.S. GAAP financial measures to the closest U.S. GAAP financial measures can be found under the caption “Non-U.S. GAAP Measures” in this Item 7 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

Liquidity Highlights

Net cash provided by operating activities for fiscal year 2024 was $439,089, compared to $308,543 for fiscal year 2023. The increase in net cash provided by operating activities in fiscal year 2024 compared to fiscal year 2023 is primarily attributable to increased earnings and improved working capital.

For fiscal year 2024, free cash flow was $342,809, compared to $232,043 for fiscal year 2023. We define free cash flow as net cash flows from operating activities less payments for property, plant, and equipment. The increase in free cash flow for fiscal year 2024 as compared to the prior fiscal year was primarily due to increased earnings and improved working capital, partially offset by higher capital expenditures.

At September 30, 2024, we held $282,270 in cash and cash equivalents and had total outstanding debt of $872,470 with additional borrowing availability of $775,136, net of outstanding letters of credit, under our revolving credit agreement. At September 30, 2024, we also had additional borrowing capacity of $19,771 under various foreign lines of credit and foreign overdraft facilities.

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Consolidated Statements of Earnings and Other Selected Financial Data

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

Other select financial data:

2024 RESULTS OF OPERATIONS

2024 Net Sales Compared to 2023

Consolidated net sales for fiscal year 2024 increased by $409,683, or 14.1%, compared to fiscal year 2023.

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

In the Aerospace segment, the increase in net sales for fiscal year 2024 as compared to fiscal year 2023 was primarily attributable to price realization, as well as increases in both commercial and defense aftermarket due to higher aircraft utilization.

In the Industrial segment, the increase in net sales for fiscal year 2024 as compared to fiscal year 2023 was primarily attributable to growth in transportation, particularly in the on-highway natural gas truck business in China, price realization, and strong sales in power generation, partially offset by a decrease in oil and gas sales.

2024 Costs and Expenses Compared to 2023

Cost of goods sold increased by $210,787 to $2,447,770 for fiscal year 2024, from $2,236,983 for fiscal year 2023. The increase in cost of goods sold on an absolute basis in fiscal year 2024 compared to the prior fiscal year was primarily due to higher sales volume and net inflationary impacts on material and labor costs.

Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 26.4% for fiscal year 2024, compared to 23.2% for fiscal year 2023. The increase in gross margin for fiscal year 2024 is primarily attributable to price realization and higher sales volume, partially offset by net inflationary impacts on material and labor.

Selling, general and administrative expenses increased by $37,807, or 14.0%, to $307,499 for fiscal year 2024, compared to $269,692 for fiscal year 2023. Selling, general, and administrative expenses as a percentage of net sales were flat at 9.3% for fiscal year 2024 and fiscal year 2023. The increase in selling, general, and administrative expenses on an

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absolute basis for fiscal year 2024 as compared to prior fiscal year is primarily due to increased members, increased annual variable incentive compensation costs, and increased expenses relating to business development activities.

Research and development costs increased by $8,581, or 6.5%, to $140,676 for fiscal year 2024, as compared to $132,095 for fiscal year 2023. The increase in research and development costs on an absolute basis for fiscal year 2024 as compared to the prior fiscal year is primarily due to variability in the timing of projects and expenses. Research and development costs as a percentage of net sales decreased to 4.2% for fiscal year 2024, as compared to 4.5% for fiscal year 2023. The decrease in research and development costs as a percentage of net sales for fiscal year 2024 as compared to the prior fiscal year is primarily due to net sales increases in fiscal year 2024 compared to fiscal year 2023. Our research and development activities extend across both our operating segments and almost all of our customer base, and we anticipate ongoing variability in research and development costs due to the timing of customer business needs on current and future programs.

Interest expense remained flat at $47,959, or 1.4% of net sales for fiscal year 2024, compared to $47,898 or 1.6% of net sales for fiscal year 2023. Interest expense remained flat for fiscal year 2024 primarily due to consistent borrowings and interest rates on our revolving credit agreement as compared to the prior fiscal year.

Other income, net was $67,168 for fiscal year 2024, compared to $50,291 for fiscal year 2023. The increase in other income in fiscal year 2024 compared to fiscal year 2023 was primarily attributable to increased earnings of the JV and a non-recurring gain related to a previous acquisition that was recognized during the current fiscal year.

Income taxes were provided at an effective rate on earnings before income taxes of 17.8% for fiscal year 2024, compared to 15.7% for fiscal year 2023. The increase in the effective tax rate for fiscal year 2024 compared to fiscal year 2023 is primarily attributable to a smaller research and development credit, smaller net excess income tax benefit from stock-based compensation as a percent of current year earnings, fewer resolutions of tax items with taxing authorities, and increased return to provision items, partially offset by smaller current fiscal year projected future withholding taxes on unremitted earnings.

Segment Results

The following table presents sales by segment:

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

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

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2024 Segment Results Compared to 2023

Aerospace

Aerospace segment net sales increased by $260,515, or 14.7% to $2,028,618 for fiscal year 2024, compared to $1,768,103 for fiscal year 2023. Segment net sales increased for fiscal year 2024 as compared to fiscal year 2023 primarily due to price realization and increases in both commercial and defense aftermarket volumes due to higher aircraft utilization.

Defense OEM sales increased in fiscal year 2024 compared to prior fiscal year, primarily driven by the increased demand for smart defense. Our defense aftermarket sales increased in fiscal year 2024 compared to the prior fiscal year, primarily driven by increased output and supply chain stabilization.

Aerospace segment earnings increased by $95,256, or 32.8%, to $385,360 for fiscal year 2024, compared to $290,104 for fiscal year 2023.

The net increase in Aerospace segment earnings for fiscal year 2024 was due to the following:

Aerospace segment earnings as a percentage of segment net sales were 19.0% for fiscal year 2024 and 16.4% for fiscal year 2023.

Industrial

Industrial segment net sales increased by $149,168, or 13.0%, to $1,295,631 for fiscal year 2024, compared to $1,146,463 for fiscal year 2023. The increase in Industrial segment net sales in fiscal year 2024 as compared to the prior fiscal year was primarily attributable to growth in transportation, particularly in the on-highway natural gas truck business in China, price realization, and strong sales in power generation, partially offset by a decrease in oil and gas sales.

Industrial segment earnings increased by $68,235, or 42.2%, to $229,857 for fiscal year 2024, compared to $161,622 for fiscal year 2023.

The net increase in Industrial segment earnings for fiscal year 2024 was due to the following:

Industrial segment earnings as a percentage of segment net sales were 17.7% for fiscal year 2024, compared to 14.1% for fiscal year 2023. Industrial earnings in fiscal year 2024 benefited significantly from increases in transportation due to increased demand for on-highway natural gas trucks in China, as well as operational improvements including increased output and other efficiency gains.

We expect significant sales and earnings decreases in our China on-highway natural gas truck business in fiscal year 2025 as compared to fiscal year 2024 due to the deteriorating local Chinese economy, a narrower natural gas to diesel spread, and elevated customer inventory levels. Future demand remains uncertain due to the volatility of this business.

Nonsegment

Nonsegment expenses decreased by $11,066 to $119,745 for fiscal year 2024, compared to $130,811 for fiscal year 2023. The decrease in nonsegment expenses is primarily due to significant costs that occurred in fiscal year 2023 that did not reoccur in fiscal year 2024.

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The significant costs that impacted nonsegment expense are as follows:

Excluding these charges in the above table, nonsegment expenses increased $15,667 in fiscal year 2024 as compared to the prior fiscal year, primarily due to increased annual variable incentive compensation costs.

LIQUIDITY AND CAPITAL RESOURCES

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

Our total cash and cash equivalents were $282,270 at September 30, 2024 and $137,447 at September 30, 2023, and our working capital was $820,101 at September 30, 2024 and $852,256 at September 30, 2023. Of the cash and cash equivalents held at September 30, 2024, $279,070 was held by our foreign locations. We are not presently aware of any significant restrictions on the repatriation of these funds, although a portion is considered indefinitely reinvested in certain foreign subsidiaries. If these funds were needed to fund our operations or satisfy obligations in the United States, then they could be repatriated and their repatriation into the United States may cause us to incur additional U.S. income taxes or foreign withholding taxes. Any additional U.S. taxes could be offset, in part or in whole, by foreign tax credits. The amount of such taxes and application of tax credits would be dependent on the income tax laws and other circumstances at the time these amounts are repatriated. Based on these variables, it is impractical to determine the income tax liability that might be incurred if these funds were to be repatriated.

Our revolving credit facility, as amended, provides a borrowing capacity of up to $1,000,000 with the option to increase total available borrowings to up to $1,500,000, subject to lenders’ participation. We can borrow against our revolving credit facility as long as we are in compliance with all of our debt covenants. We believe we were in compliance with all our debt covenants as of September 30, 2024. Borrowings under the revolving credit facility can be made in U.S. dollars or in foreign currencies other than the U.S. dollar provided that the U.S. dollar equivalent of any foreign currency borrowings and U.S. dollar borrowings does not, in total, exceed the borrowing capacity of the revolving credit facility. Historically, we have used borrowings under our revolving credit facilities to meet certain short-term working capital needs, as well as for strategic uses, including repurchases of our common stock, payments of dividends, acquisitions, and facility expansions.

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

At September 30, 2024, we had total outstanding debt of $872,470 consisting of various series of unsecured notes due between 2025 and 2033, and amounts borrowed under our revolving credit facility, and our finance leases.

At September 30, 2024, we had additional borrowing availability of $775,136 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $19,771 under various foreign credit facilities.

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At September 30, 2024, we had $217,000 outstanding amount borrowed under our revolving credit facility. Revolving credit facility and short-term borrowing activity during the fiscal year ended September 30, 2024 were as follows:

We believe we were in compliance with all our debt covenants as of September 30, 2024. See Note 15, Credit facilities, short-term borrowings, and long-term debt in the Notes to the Consolidated Financial Statements in “Item 8 – Financial Statements and Supplemental Data,” for more information about our covenants.

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

We believe that cash flows from operations, along with our contractually committed borrowings and other borrowing capability, will continue to be sufficient to fund anticipated capital spending requirements and our operations for the foreseeable future. However, we could be adversely affected if the financial institutions providing our capital requirements refuse to honor their contractual commitments, cease lending, or declare bankruptcy. We believe the lending institutions participating in our credit arrangements are financially stable.

Cash Flows

2024 Cash Flows Compared to 2023

Net cash flows provided by operating activities for fiscal year 2024 was $439,089, compared to $308,543 for fiscal year 2023. The increase in net cash provided by operating activities in fiscal year 2024 compared to fiscal year 2023 is primarily attributable to increased earnings and improved working capital.

Net cash flows used in investing activities for fiscal year 2024 was $89,217, compared to $73,551 in fiscal year 2023. The increase in cash used in investing activities in fiscal year 2024 compared to fiscal year 2023 is primarily due to increased payments for property, plant, and equipment.

Net cash flows used in financing activities for fiscal year 2024 was $218,047, compared to $196,473 in fiscal year 2023. The increase in net cash flows used in financing activities in fiscal year 2024 compared to fiscal year 2023 was attributable to the increase in repurchases of common stock partially offset by a change in net debt borrowings as compared to payments. During fiscal year 2024, we made $390,819 of cash repurchases of common stock, compared to $126,380 of cash repurchases of common stock during fiscal year 2023. During fiscal year 2024, we had net debt borrowings in the amount of $141,183, compared to net debt payments in the amount of $67,579 in fiscal year 2023.

Non-U.S. GAAP Financial Measures

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

Earnings based non-U.S. GAAP financial measures

Adjusted net earnings is defined by the Company as net earnings excluding, as applicable, (i) a non-recurring gain related to a previous acquisition, (ii) costs related to business development activities, (iii) a non-recurring charge related to

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a previous acquisition, (iv) certain non-restructuring separation costs, (v) a specific charge for excess and obsolete inventory, (vi) product rationalization, (vii) a non-recurring charge related to customer collections, and (viii) restructuring charges. The product rationalization adjustment pertains to a non-recurring write-off of inventory and assets related to the elimination of certain product lines. The specific charge for excess and obsolete inventory pertains to a non-recurring process change that resulted in the identification and write down of certain excess inventory unrelated to product rationalization. The non-recurring charge related to customer collections pertains to a discrete process issue that was identified and corrected. The Company believes that these excluded items are short-term in nature, not directly related to the ongoing operations of the business and therefore, the exclusion of them illustrates more clearly how the underlying business of Woodward is performing. Management uses adjusted net earnings to evaluate the Company’s performance excluding these infrequent or unusual period expenses that are not necessarily indicative of the Company’s operating performance for the period. Management defines adjusted earnings per share as adjusted net earnings, as defined above, divided by the weighted-average number of diluted shares of common stock outstanding for the period. Management uses both adjusted net earnings and adjusted earnings per share when comparing operating performance to other periods which may not have similar infrequent or unusual charges.

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

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

Adjusted EBIT and adjusted EBITDA represent further non-U.S. GAAP adjustments to EBIT and EBITDA, in each case adjusted to exclude, as applicable, (i) a non-recurring gain related to a previous acquisition, (ii) costs related to business development activities, (iii) a non-recurring charge related to a previous acquisition, (iv) certain non-restructuring separation costs, (v) a specific charge for excess and obsolete inventory, (vi) product rationalization, (vii) a non-recurring charge related to customer collections, and (viii) restructuring charges. The product rationalization adjustment pertains to a non-recurring write-off of inventory and assets related to the elimination of certain product lines. The specific charge for excess and obsolete inventory pertains to a non-recurring process change that resulted in the identification and write down of certain excess inventory unrelated to product rationalization. The non-recurring charge related to customer collections pertains to a discrete process issue that was identified and corrected. As these charges are infrequent or unusual items that can be variable from period to period and do not fluctuate with operating results, management believes that by removing

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these gains and charges from EBIT and EBITDA it improves comparability of past, present, and future operating results and provides consistency when comparing EBIT and EBITDA between periods.

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

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

The use of these non-U.S. GAAP financial measures is not intended to be considered in isolation of, or as a substitute for, the financial information prepared and presented in accordance with U.S. GAAP. As adjusted net earnings, adjusted net earnings per share, adjusted effective tax rate, 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, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA may differ from similarly titled measures used by other companies, limiting their usefulness as comparative measures.

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

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

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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.

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

Free cash flow was as follows:

CRITICAL ACCOUNTING ESTIMATES

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

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

Revenue recognition

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

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

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

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Point in time and over time revenue recognition

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

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

Inventories

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

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

The carrying value of inventory was $609,092 at September 30, 2024 and $517,843 at September 30, 2023. If economic conditions, customer product requirements, or other factors significantly reduce future customer demand for our products from forecast levels, then future adjustments to the carrying value of inventory may become necessary. We attempt to maintain inventory quantities at levels considered necessary to fill firm and expected orders in a reasonable time frame, which we believe mitigates our exposure to future inventory carrying cost adjustments.

Reviews for impairment of goodwill and other indefinitely lived intangible assets

Goodwill

At September 30, 2024, we had $806,643 of goodwill representing approximately 18% of our total assets. Goodwill is tested for impairment at the reporting unit level on an annual basis and more often if an event occurs or circumstances change that indicate the fair value of a reporting unit may be below its carrying amount.

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

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During the fourth quarter, we completed our annual goodwill impairment test as of July 31, 2024 for the fiscal year ended September 30, 2024. The results of our annual goodwill impairment test performed as of July 31, 2024, indicated the estimated fair value of each reporting unit was in excess of its carrying value, and accordingly, no impairment existed.

Indefinitely lived intangible asset

We have one indefinitely lived intangible asset consisting of the Woodward L’Orange trade name. At September 30, 2024, the carrying value of the Woodward L’Orange trade name intangible asset was $64,751, representing approximately 1% of our total assets. The Woodward L’Orange trade name intangible asset is tested for impairment on an annual basis and more often if an event occurs or circumstances change that indicate the fair value of the Woodward L’Orange intangible asset may be below its carrying amount. The impairment test consists of comparing the fair value of the Woodward L’Orange trade name intangible asset, determined using discounted cash flows based on the relief from royalty method under the income approach, with its carrying amount. If the carrying amount of the Woodward L’Orange trade name intangible asset exceeds its fair value, an impairment loss would be recognized to reduce the carrying amount to its fair value. We have not recorded any impairment charges associated with the indefinitely lived intangible asset.

During the fourth quarter, we completed the annual impairment test, for the fiscal year ended September 30, 2024, of the Woodward L’Orange trade name intangible asset as of July 31, 2024. The results of the annual impairment test performed as of July 31, 2024 indicated the estimated fair value of the Woodward L’Orange trade name intangible asset was in excess of its carrying value, and accordingly, no impairment existed.

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

Income taxes

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

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

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

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

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

The Organization for Economic Cooperation and Development ("OECD") introduced Base Erosion and Profit Shifting Pillar Two rules that impose a global minimum tax rate of 15%. Numerous countries have enacted or are expected to enact legislation to be effective for Woodward as early as October 1, 2024, with general implementation of a global minimum tax for Woodward by October 1, 2025. There remains uncertainty as to the final Pillar Two model rules. We do not expect a material impact to our effective tax rate or cash flows based on currently enacted legislation and will continue to closely monitor evolving legislation and guidance that could change our current assessment.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis should be read together with the Consolidated Financial Statements and Notes included in this report. Dollar and number of share amounts contained in this discussion and elsewhere in this Annual Report on Form 10-K are in thousands, except per share amounts. For a discussion of the 2022 Results of Operations, including a discussion of the financial results for the fiscal year ended September 30, 2022 compared to the fiscal year ended September 30, 2021, refer to Part I, Item 7 of our Form 10-K filed with the SEC on November 18, 2022.

OVERVIEW

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

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

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

Global Business Conditions

During fiscal year 2023, we experienced strong end market demand for our products and services across aerospace and industrial markets; however, our financial performance continued to be adversely affected by macroeconomic issues, including global supply chain disruptions, rising labor costs, and material inflation. We remain intent on actively implementing strategic initiatives focused on increasing profitability through operational excellence, talent development, and simplifying and strengthening our supply chain. Our output is increasing, and we are seeing efficiency gains as our new members continue to gain additional experience and become more proficient in their jobs, and we continue to benefit from a more stable workforce. The strategic investments we made to simplify and strengthen our supply chain have improved stability and performance of our supply base; however, the environment remains challenging and we continue to actively manage and problem solve with our suppliers. We also continue to assess the environment and are executing multiple work streams to capture prices that better reflect the value we deliver.

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

BUSINESS ENVIRONMENT AND TRENDS

We serve the aerospace and industrial markets.

Aerospace Markets

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

Commercial and Civil Aircraft – In the commercial aerospace markets, global air traffic continued to grow in fiscal year 2023 as domestic passenger traffic surpassed pre-pandemic years and international travel has largely recovered. Aircraft

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operators are taking delivery of next generation aircraft models to meet the growing demand for passenger air travel, the need to replace aging aircraft, and the demand for more fuel efficient and lower emission aircraft. The delivery of the newest generation of aircraft is expected to favor our product offerings because we have more content on those aircraft. We expect production levels to continue to grow due to strong OEM order backlogs for the new aircraft models and pent-up demand. Demand in the narrowbody aviation market improved in fiscal year 2023 compared to recent years due to increasing production rates on the A320neo and the 737 MAX. We expect narrowbody deliveries to further improve in fiscal year 2024 due to backlog associated with single aisle programs and planned production ramps.

We have content on the Airbus A220, A320neo, A330neo, Bell 429, Boeing 737 MAX, 777, 787, and Comac C919. We have been awarded content on the 777-9 and a variety of business jet platforms, among others. We continue to explore opportunities on new engine and aircraft programs that are under consideration or have been recently announced.

The Boeing 737 MAX has returned to service in every jurisdiction. As the aircraft’s return to service progresses, we anticipate a large majority of the deliveries missed in fiscal year 2019 through 2022 will be fulfilled in future periods. With the full return to service of the 737 MAX aircraft and increasing deliveries, initial provisioning sales related to aircraft and the CFM LEAP engine have accelerated. We anticipate further recovery of OEM 737 MAX sales in fiscal year 2024.

Defense – In recent years, the defense industry has been strong as budgetary allocations have generally increased since 2016. Global conflicts are leading to higher global defense budgets. The U.S. National Defense Authorization Act for fiscal year 2023 resulted in higher levels of funding for procurement, research and development, and maintenance, and we believe budget increases in recent years will support growth in fiscal year 2024, with the exception of our guided tactical weapons programs. We expect defense research and development, as well as procurement, to increase, which is beneficial for future opportunities in defense markets. Our involvement with a wide variety of defense programs in fixed-wing aircraft, rotorcraft, and weapons systems has provided relative stability for our defense market sales, as some newer programs increase (e.g., F-35 Lightning II and T-7A Trainer), and some legacy programs decrease (e.g., F/A-18 E/F Super Hornet and V-22 Osprey). Other programs are relatively steady (e.g., KC-46A Tanker, UH-60 Black Hawk and A-64 Apache helicopter programs) and some legacy programs, such as the F-15, should maintain or potentially increase production. Guided tactical weapons programs for which we have sales include the Joint Direct Attack Munition (“JDAM”), Small Diameter Bomb (“SDB”), and AIM-9X guided tactical weapon systems. Following multiple years of decline from very strong demand levels, we expect overall demand to flatten for these weapons programs, with production of some programs decreasing and other programs increasing.

Aftermarket – Our commercial aftermarket business increased significantly in fiscal year 2023, as global air traffic continued to grow and OEM production rates have increased. In addition, our products have been selected for new aerospace platforms and our content has increased across existing platforms. With the entry into service of the new single aisle aircraft (Boeing 737 MAX and Airbus A320neo), we have seen a significant increase in initial provisioning sales to the operators of these new aircraft. As aircraft production levels increase to accommodate rising passenger demand and to mitigate higher operating costs driven largely by higher fuel costs on older and less fuel-efficient aircraft, we expect airlines will retire older generation aircraft as they reach certain age thresholds (typically around twenty-five years on average). However, in the past few years, aircraft retirements have decreased because passenger demand has outpaced deliveries of next generation aircraft, forcing older generation legacy aircraft to remain in service longer than anticipated. This has led to increased demand for repairs and spare parts for older engine programs remaining in service, consistent with air traffic growth. This dynamic applies to commercial aftermarket related to repairs and spare parts for mature legacy programs with large in-service fleets, such as the Airbus A320 and the Boeing 777.

Our defense aftermarket sales increased during fiscal year 2023 due to increased defense budgets resulting in operations and maintenance upgrades. Global conflicts and growing international demand for various other military programs continue to drive demand for operations of defense aircraft, including fighter jets, transports and both utility and attack rotorcraft, which are all supported by our products and systems. Although we expect variability, which is generally attributable to the cycling of various maintenance and upgrade programs, as well as actual usage, our outlook for the defense aftermarket is strong. This is due primarily to growing fleets, the service lives of existing military programs being extended and increased demand for repairs and spare parts for older military aircraft programs remaining in service.

Industrial Markets

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

Power Generation – The demand for power generation, which consists mainly of heavy frame, aero derivative, and steam industrial gas turbines, increased in fiscal year 2023 due to increased demand from power generation and process

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industries, particularly in Asia, and more broadly in support of fixed generation capacity to backstop the growing renewable energy installed base. Start reliability, fuel flexibility, safety, and part-load efficiency are all key drivers of the power generation market as the conversion from coal to natural gas usage continues, and we believe Woodward continues to be well positioned to meet these market needs on the existing and next generation turbines. We project continued growth as demand for electricity is met through a balance of renewable power sources and newer industrial gas turbines for which Woodward has been awarded increased content.

Transportation – Woodward’s key markets for transportation include compressed natural gas and liquified natural gas trucks in Asia, mining, and commercial and defense marine markets. During fiscal year 2023, demand increased across all key markets. Chinese heavy duty truck output increased significantly during the last three quarters of fiscal year 2023, as did the portion that is natural gas powered. The natural gas-powered production rate has been improving since the first quarter of fiscal year 2023, but future demand remains uncertain. Further, demand in the global marine market increased due to increased ship build rates and higher ship utilization, driving current and future aftermarket activity. Both commercial and defense marine customers continue to launch additional projects to support new programs or modernize fleets, including incorporating alternative fuels capability, which should drive expanded OEM and service opportunities, as multi-fuel engines contain greater Woodward content.

Oil and Gas – Due to increased demand for fuel flexibility as well as natural gas price variability and global supply chain disruptions, power plant operations have transitioned to higher dual fuel use, thereby increasing the demand for our liquid fuel system and related products. During fiscal year 2023, we experienced increased demand due to increased global rig counts and an increase in global large natural gas infrastructure. We anticipate strong demand in fiscal year 2024 for new highspeed engines and new marine engines. We expect market share gains by our customers and increased scope on the next generation reciprocating engines as energy policies in some countries encourage the use of compressed natural gas, liquefied natural gas, and other alternative fuels over carbon-rich petroleum fuels, which we expect will drive increased demand for our alternative fuel clean engine control technologies.

RESULTS OF OPERATIONS

Financial Highlights

Adjusted net earnings, adjusted earnings per share, adjusted effective tax rate, EBIT, adjusted EBIT, EBITDA, adjusted EBITDA, free cash flow, and adjusted free cash flow are non-U.S. GAAP financial measures. A description of these measures as well as a reconciliation of these non-U.S. GAAP financial measures to the closest U.S. GAAP financial measures can be found under the caption “Non-U.S. GAAP Measures” in this Item 7 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

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Liquidity Highlights

Net cash provided by operating activities for fiscal year 2023 was $308,543, compared to $193,638 for fiscal year 2022. The increase in net cash provided by operating activities in fiscal year 2023 compared to fiscal year 2022 is primarily attributable to increased earnings, partially offset by working capital increases, and the timing of certain tax payments.

For fiscal year 2023, free cash flow was $232,043, compared to $140,770 for fiscal year 2022. We define free cash flow as net cash flows from operating activities less payments for property, plant and equipment. Adjusted free cash flow, which we define as free cash flow, plus the payments for costs related to business development activities, restructuring activities, and certain non-restructuring separation costs, was $238,227, compared to $144,257 for fiscal year 2022. The increase in free cash flow and adjusted free cash flow for fiscal year 2023 as compared to the prior fiscal year was primarily due to increased earnings, partially offset by higher capital expenditures.

At September 30, 2023, we held $137,447 in cash and cash equivalents and had total outstanding debt of $721,526 with additional borrowing availability of $991,044, net of outstanding letters of credit, under our revolving credit agreement. At September 30, 2023, we also had additional borrowing capacity of $25,143 under various foreign lines of credit and foreign overdraft facilities.

Consolidated Statements of Earnings and Other Selected Financial Data

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

Other select financial data:

2023 RESULTS OF OPERATIONS

2023 Net Sales Compared to 2022

Consolidated net sales for fiscal year 2023 increased by $531,776, or 22.3%, compared to fiscal year 2022.

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

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In the Aerospace segment, the increase in net sales for fiscal year 2023 as compared to fiscal year 2022 was primarily attributable to a significant increase in commercial OEM and aftermarket sales driven by higher OEM production rates, continued recovery in passenger traffic, increasing aircraft utilization, and price realization, partially offset by lower defense OEM sales primarily driven by reduced demand for guided weapons.

In the Industrial segment, the increase in net sales for fiscal year 2023 as compared to fiscal year 2022 was primarily attributable to volume increases across all markets and price realization. Industrial sales benefited from significant operational improvements from our strategic initiatives including increased output and other efficiency gains as well as increased demand for on-highway natural gas truck production in China in the second half of fiscal year 2023.

2023 Costs and Expenses Compared to 2022

Cost of goods sold increased by $379,498 to $2,236,983 for fiscal year 2023, from $1,857,485 for fiscal year 2022. The increase in cost of goods sold on an absolute basis in fiscal year 2023 compared to the prior fiscal year was primarily due to higher sales volume and net inflationary impacts on material and labor costs.

Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 23.2% for fiscal year 2023, compared to 22.0% for fiscal year 2022. The increase in gross margin for fiscal year 2023 is primarily attributable to higher sales volume and price realization, partially offset by net inflationary impacts on material and labor costs, as well as non-recurring, specific charges for excess and obsolete inventory and product rationalization.

Selling, general and administrative expenses increased by $66,687, or 32.8%, to $269,692 for fiscal year 2023, compared to $203,005 for fiscal year 2022. Selling, general, and administrative expenses as a percentage of net sales increased to 9.3% for fiscal year 2023, compared to 8.5% for fiscal year 2022. The increase in selling, general, and administrative expenses, both in dollars and as a percentage of sales, for fiscal year 2023 as compared to prior fiscal year is primarily due to increased annual variable incentive compensation costs, increased expenses relating to inflation, increased headcount, and expenses relating to our deferred compensation program, as well as a non-recurring charge related to customer collections, and a product rationalization charge related to the write-off of assets. Such charges did not occur in the prior fiscal year.

Research and development costs increased by $12,313, or 10.3%, to $132,095 for fiscal year 2023, as compared to $119,782 for fiscal year 2022. Research and development costs as a percentage of net sales decreased to 4.5% for fiscal year 2023, as compared to 5.0% for fiscal year 2022. The increase in research and development costs in dollars for fiscal year 2022 as compared to the prior fiscal year is primarily due to variability in the timing of projects and expenses. The decrease in research and development costs as a percentage of net sales for fiscal year 2023 as compared to the prior fiscal year is primarily due to net sales increases in fiscal year 2023 compared to fiscal year 2022. Our research and development activities extend across both our operating segments and almost all of our customer base, and we anticipate ongoing variability in research and development costs due to the timing of customer business needs on current and future programs.

Restructuring activities of $5,172 were recognized in fiscal year 2023, primarily related to workforce management to implement a streamlined Aerospace and Industrial organizational and leadership structure designed to enhance the sales experience for customers, simplify operations, and increase profitability through improved execution. In fiscal year 2022, restructuring activities resulted in a benefit of $3,420, due primarily to a reversal of unpaid accrued amounts for restructuring activities as a result of changes in business conditions, including plans to insource work from suppliers, and to manage workforce levels through attrition.

Interest expense increased by $13,353, or 38.7%, to $47,898, for fiscal year 2023, compared to $34,545 for fiscal year 2022. Interest expense as a percentage of net sales increased to 1.6% for fiscal year 2023, as compared to 1.4% for fiscal year 2022. Interest expense increased for fiscal year 2023 as compared to fiscal year 2022 primarily due to increased borrowings and interest rates on our revolving credit agreement.

Other income, net was $50,291 for fiscal year 2023, compared to $26,691 for fiscal year 2022. The increase in other income in fiscal year 2023 compared to fiscal year 2022 was primarily attributable to increased earnings in the JV and a gain on investments in our deferred compensation program, whereas a loss on such investments was recognized in the prior fiscal year.

Income taxes were provided at an effective rate on earnings before income taxes of 15.7% for fiscal year 2023, compared to 14.1% for fiscal year 2022. The increase in the effective tax rate for fiscal year 2023 compared to fiscal year 2022 is primarily attributable to projected future withholding taxes on unremitted earnings recorded in fiscal year 2023,

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partially offset by a larger stock-based compensation tax benefit and larger favorable return to provision adjustments in fiscal year 2023.

Segment Results

The following table presents sales by segment:

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

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

2023 Segment Results Compared to 2022

Aerospace

Aerospace segment net sales increased by $248,781, or 16.4% to $1,768,103 for fiscal year 2023, compared to $1,519,322 for fiscal year 2022. Segment net sales increased for fiscal year 2023 as compared to fiscal year 2022, primarily due to higher commercial OEM and aftermarket sales as well as price realization, partially offset by the reduced demand for guided weapons.

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

Aerospace segment earnings increased by $59,171, or 25.6%, to $290,104 for fiscal year 2023, compared to $230,933 for fiscal year 2022.

The net increase in Aerospace segment earnings for fiscal year 2023 was due to the following:

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Aerospace segment earnings as a percentage of segment net sales were 16.4% for fiscal year 2023 and 15.2% for fiscal year 2022.

Industrial

Industrial segment net sales increased by $282,995, or 32.8%, to $1,146,463 for fiscal year 2023, compared to $863,468 for fiscal year 2022. The increase in Industrial segment net sales in fiscal year 2023 as compared to the prior fiscal year was primarily attributable to volume increases across all markets. Industrial sales in the fiscal year benefited from significant operational improvements including increased output and other efficiency gains as well as significantly increased demand for on-highway natural gas truck production in China in the second half of 2023.

Industrial segment earnings increased by $78,834, or 95.2%, to $161,622 for fiscal year 2023, compared to $82,788 for fiscal year 2022.

The net increase in Industrial segment earnings for fiscal year 2023 was due to the following:

Industrial segment earnings as a percentage of segment net sales were 14.1% for fiscal year 2023, compared to 9.6% for fiscal year 2022.

Industrial earnings in the fiscal year benefited from significant operational improvements including increased output and other efficiency gains as well as significantly increased demand for on-highway natural gas truck production in China in the second half of 2023.

Nonsegment

Nonsegment expenses increased by $49,719 to $130,811 for fiscal year 2023, compared to $81,092 for fiscal year 2022. The increase in nonsegment expenses is primarily due to the increase in the annual variable incentive compensation costs as compared to the prior fiscal year. Further, nonsegment expenses for fiscal year 2023 included a specific charge for excess and obsolete inventory of $11,995, a product rationalization charge of $10,504, a restructuring charge of $5,172, a non-recurring charge related to customer collections of $4,997, and certain non-restructuring separation costs of $2,208. Excluding these charges from 2023, nonsegment expenses increased by $14,843 in fiscal year 2023 compared to the prior fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

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

Our aggregate cash and cash equivalents were $137,447 at September 30, 2023 and $107,844 at September 30, 2022, and our working capital was $852,256 at September 30, 2023 and $772,856 at September 30, 2022. Of the cash and cash equivalents held at September 30, 2023, $132,069 was held by our foreign locations. We are not presently aware of any significant restrictions on the repatriation of these funds, although a portion is considered indefinitely reinvested in certain foreign subsidiaries. If these funds were needed to fund our operations or satisfy obligations in the United States, then they could be repatriated and their repatriation into the United States may cause us to incur additional U.S. income taxes or foreign withholding taxes. Any additional U.S. taxes could be offset, in part or in whole, by foreign tax credits. The amount of such taxes and application of tax credits would be dependent on the income tax laws and other circumstances at the time these amounts are repatriated. Based on these variables, it is impractical to determine the income tax liability that might be incurred if these funds were to be repatriated.

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

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

At September 30, 2023, we had total outstanding debt of $721,526 consisting of various series of unsecured notes due between 2023 and 2033, and amounts borrowed under our revolving credit facility, and our finance leases. On November 15, 2023, Woodward paid the entire principal balance of $75,000 on the Series H and K Notes using proceeds from borrowings under its existing revolving credit facility.

At September 30, 2023, we had additional borrowing availability of $991,044 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $25,143 under various foreign credit facilities.

At September 30, 2023, we had no outstanding amount borrowed under our revolving credit facility. Revolving credit facility and short-term borrowing activity during the fiscal year ended September 30, 2023 were as follows:

We believe we were in compliance with all our debt covenants as of September 30, 2023. See Note 15, Credit facilities, short-term borrowings and long-term debt in the Notes to the Consolidated Financial Statements in “Item 8 – Financial Statements and Supplemental Data,” for more information about our covenants.

In addition to utilizing our cash resources to fund the working capital needs of our business, we evaluate additional strategic uses of our funds, including the repurchase of our common stock, payment of dividends, significant capital expenditures, consideration of strategic acquisitions and other potential uses of cash. In January 2022, the Board terminated the 2019 Authorization and concurrently authorized a program for the repurchase of up to $800,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a two-year period ending in January 2024 (the “2022 Authorization”). During fiscal year 2023, we repurchased 1,060 shares of our common stock for $126,380 under the 2022 Authorization, as compared to 3,890 shares of our common stock for $446,042 under the 2022 Authorization during fiscal year 2022.

From time to time, the Company enters into various factoring agreements with third-party financial institutions to sell certain of its receivables. Factoring activity resulted in an increase of approximately $26,273 in cash provided by operating activities during the year ended September 30, 2023, compared to an increase in cash provided by operating activities of approximately $35,296 during the year ended September 30, 2022.

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

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.

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Cash Flows

2023 Cash Flows Compared to 2022

Net cash flows provided by operating activities for fiscal year 2023 was $308,543, compared to $193,638 for fiscal year 2022. The increase in net cash provided by operating activities in fiscal year 2023 compared to fiscal year 2022 is primarily attributable to increased earnings, partially offset by working capital increases, and timing of tax payments.

Net cash flows used in investing activities for fiscal year 2023 was $73,551, compared to $65,449 in fiscal year 2022. The increase in cash used in investing activities in fiscal year 2023 compared to fiscal year 2022 is primarily due to increased payments for property, plant, and equipment, partially offset by the purchase of PM Control in the prior fiscal year.

Net cash flows used in financing activities for fiscal year 2023 was $196,473, compared to $442,378 in fiscal year 2022. The decrease in net cash flows used in financing activities in fiscal year 2023 compared to fiscal year 2022 was attributable to the decrease in repurchases of common stock and a change in net debt payments as compared to borrowings. During fiscal year 2023, we made $126,380 of cash repurchases of common stock, compared to $485,300 of cash repurchases of common stock during fiscal year 2022. During fiscal year 2023, we had net debt payments in the amount of $67,579, compared to net debt borrowings in the amount of $66,003 in fiscal year 2022.

New Accounting Standards

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

To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2, New accounting standards, in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K. Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Consolidated Financial Statements upon adoption.

Non-U.S. GAAP Financial Measures

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

Earnings based non-U.S. GAAP financial measures

Adjusted net earnings is defined by the Company as net earnings excluding, as applicable, (i) a specific charge for excess and obsolete inventory, (ii) product rationalization, (iii) a restructuring charge, (iv) a non-recurring charge related to customer collections, (v) certain non-restructuring separation costs, (vi) a charge in connection with a non-recurring matter unrelated to the ongoing operations of the business, and (vii) costs related to business development activities. The product rationalization adjustment pertains to a non-recurring write-off of inventory and assets related to the elimination of certain product lines. The specific charge for excess and obsolete inventory pertains to a non-recurring process change that resulted in the identification and write down of certain excess inventory unrelated to product rationalization. The non-recurring charge related to customer collections pertains to a discrete process issue that was identified and corrected. The Company believes that these excluded items are short-term in nature, not directly related to the ongoing operations of the business and therefore, the exclusion of them illustrates more clearly how the underlying business of Woodward is performing. Management uses adjusted net earnings to evaluate the Company’s performance excluding these infrequent or unusual period expenses that are not necessarily indicative of the Company’s operating performance for the period. Management defines adjusted earnings per share as adjusted net earnings, as defined above, divided by the

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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 fiscal years ended and are shown in the table below:

(1)
Presented in the line item "Cost of goods sold" in Woodward's Consolidated Statements of Earnings.

(2)
$4,374 is presented in the line item "Cost of goods sold" and $3,522 is presented in the line item "Selling, general and administrative" expenses in Woodward's Consolidated Statements of Earnings.

(3)
Presented in the line item "Selling, general, and administrative" expenses in Woodward's Consolidated Statements of Earnings.

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

Adjusted EBIT and adjusted EBITDA represent further non-U.S. GAAP adjustments to EBIT and EBITDA, in each case adjusted to exclude, as applicable, (i) a specific charge for excess and obsolete inventory, (ii) product rationalization, (iii) a restructuring charge, (iv) a non-recurring charge related to customer collections, (v) certain non-restructuring separation costs, (vi) a charge in connection with a non-recurring matter unrelated to the ongoing operations of the business, and (vii) costs related to business development activities. The product rationalization adjustment pertains to a non-recurring write-off of inventory and assets related to the elimination of certain product lines. The specific charge for excess and obsolete inventory pertains to a non-recurring process change that resulted in the identification and write down of certain excess inventory unrelated to product rationalization. The non-recurring charge related to customer collections pertains to a discrete process issue that was identified and corrected. As these charges are infrequent or unusual items that can be variable from period to period and do not fluctuate with operating results, management believes 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.

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

(1)
Presented in the line item "Cost of goods sold" in Woodward's Consolidated Statements of Earnings.

(2)
$5,822 is presented in the line item "Cost of goods sold" and $4,682 is presented in the line item " Selling, general and administrative" expenses in Woodward's Consolidated Statements of Earnings.

(3)
Presented in the line item "Selling, general, and administrative" expenses in Woodward's Consolidated Statements of Earnings.

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

(1)
Presented in the line item "Cost of goods sold" in Woodward's Consolidated Statements of Earnings.

(2)
$5,822 is presented in the line item "Cost of goods sold" and $4,682 is presented in the line item " Selling, general and administrative" expenses in Woodward's Consolidated Statements of Earnings.

(3)
Presented in the line item "Selling, general, and administrative" expenses in Woodward's Consolidated Statements of Earnings.

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The use of these non-U.S. GAAP financial measures is not intended to be considered in isolation of, or as a substitute for, the financial information prepared and presented in accordance with U.S. GAAP. As adjusted net earnings, adjusted net earnings per share, adjusted effective tax rate, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA exclude certain financial information compared with net earnings, the most 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, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA may differ from similarly titled measures used by other companies, limiting their usefulness as comparative measures.

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

Management uses free cash flow, which is defined by the Company as net cash flows provided by operating activities less payments for property, plant, and equipment, in reviewing the financial performance of and cash generation by Woodward’s various business groups and evaluating cash levels. We believe free cash flow is a useful measure for investors because it portrays our ability to grow organically and generate cash from our businesses for purposes such as paying interest on our indebtedness, repaying maturing debt, funding business acquisitions, investing in research and development, purchasing our common stock, and paying dividends. In addition, securities analysts, investors, and others frequently use free cash flow in their evaluation of companies. Adjusted free cash flow represents a further non-U.S. GAAP adjustment to free cash flow to exclude the effect of cash paid for business development activities, restructuring activities, and certain non-restructuring separation costs. Management believes that excluding these infrequent or unusual items from free cash flow better portrays our ability to generate cash, as such items are not indicative of the Company’s operating performance for the period.

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

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

CRITICAL ACCOUNTING ESTIMATES

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

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

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Revenue recognition

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

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

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

Point in time and over time revenue recognition

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

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

Inventory

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

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

The carrying value of inventory was $517,843 at September 30, 2023 and $514,287 at September 30, 2022. If economic conditions, customer product requirements, or other factors significantly reduce future customer demand for our products from forecast levels, then future adjustments to the carrying value of inventory may become necessary. We attempt to maintain inventory quantities at levels considered necessary to fill firm and expected orders in a reasonable time frame, which we believe mitigates our exposure to future inventory carrying cost adjustments.

Reviews for impairment of goodwill and other indefinitely lived intangible assets

Goodwill

At September 30, 2023, we had $791,468 of goodwill representing approximately 20% of our total assets. Goodwill is tested for impairment at the reporting unit level on an annual basis and more often if an event occurs or circumstances change that indicate the fair value of a reporting unit may be below its carrying amount.

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

During the fourth quarter, we completed our annual goodwill impairment test as of July 31, 2023 for the fiscal year ended September 30, 2023. The results of our annual goodwill impairment test performed as of July 31, 2023, indicated the estimated fair value of each reporting unit was in excess of its carrying value, and accordingly, no impairment existed.

Indefinitely lived intangible asset

We have one indefinitely lived intangible asset consisting of the Woodward L’Orange trade name. At September 30, 2023, the carrying value of the Woodward L’Orange trade name intangible asset was $61,307, representing approximately 2% of our total assets. The Woodward L’Orange trade name intangible asset is tested for impairment on an annual basis and more often if an event occurs or circumstances change that indicate the fair value of the Woodward L’Orange intangible asset may be below its carrying amount. The impairment test consists of comparing the fair value of the Woodward L’Orange trade name intangible asset, determined using discounted cash flows based on the relief from royalty method under the income approach, with its carrying amount. If the carrying amount of the Woodward L’Orange trade name intangible asset exceeds its fair value, an impairment loss would be recognized to reduce the carrying amount to its fair value. Woodward has not recorded any impairment charges associated with the indefinitely lived intangible asset.

During the fourth quarter, we completed the annual impairment test, for the fiscal year ended September 30, 2023, of the Woodward L’Orange trade name intangible asset as of July 31, 2023. The results of the annual impairment test performed as of July 31, 2023 indicated the estimated fair value of the Woodward L’Orange trade name intangible asset was in excess of its carrying value, and accordingly, no impairment existed.

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

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Income taxes

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

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

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

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

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

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

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

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

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

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

Global Business Conditions

We continue to monitor a variety of external issues impacting our business, including ongoing global supply chain and labor disruptions, rising labor and material inflation, and unfavorable foreign currency exchange rates which together have led to a challenging industry-wide operating environment.

During fiscal year 2022, we continued to see recovery across our end markets with the exception of China. Our financial performance was adversely impacted by ongoing global supply chain and labor disruptions, rising labor and material inflation, and unfavorable foreign currency exchange rates. We are actively implementing strategies to mitigate our supply chain risk to better position us for future success. We also continue to assess the environment and are taking appropriate price actions in response to rising costs; however, the timing of many price increases can be delayed due to certain pre-existing contractual arrangements. We remain focused on operational excellence initiatives, talent development and innovation to help drive the company forward and create value for our shareholders. We are unable to predict the full extent to which these issues will continue to adversely impact our business, including our operational performance, results of operations, cash flows, financial position, and the achievement of our strategic objectives. Such uncertainty may affect our ability to accurately predict our future performance and financial results.

We continue to actively monitor the situation and may take further actions to alter our business operations if we determine such actions are in the best interests of our stockholders, employees, customers, communities, business partners, and suppliers. It is not currently clear what the potential effects of any such alterations or modifications may have on our business in future periods, including the effects on our customers, employees and prospects, or on our financial results.

The Russia-Ukraine Conflict

In February 2022, in response to the military conflict between Russia and Ukraine, the United States, other North Atlantic Treaty Organization (“NATO”) members, and certain non-member countries announced targeted economic sanctions on Russia and Russian enterprises. The continuation of the conflict may trigger additional economic and other sanctions enacted by the United States, other NATO member states, and other countries. Sales to Russia were less than 1% of our total sales during fiscal years 2022, 2021, and 2020, respectively. While the impact of any additional bans, sanction

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programs, and boycotts is uncertain at the current time due to the fluid nature of the military conflict as it continues to unfold, the impacts of the conflict have included and could continue to include supply chain and logistics disruptions, volatility in foreign exchange rates and interest rates, inflationary pressures on raw materials and energy, heightened cybersecurity threats, and other potential impacts.

PM Control Acquisition

On August 2, 2022, we entered into a series of Purchase Agreements with one of our Asia pacific channel partners, PM Control PLC (the “PM Agreements”). Pursuant to the PM Agreements, we agreed to acquire business assets and shares of stock of PM Control PLC and its affiliates (collectively “PM Control”), for a total consideration (excluding cash acquired from the acquisition and including the settlement of pre-existing relationships) of $22,299 (the “PM Acquisition”). The PM Acquisition closed on the end of business day August 31, 2022 (the “PM Closing”) and PM Control became a wholly owned subsidiary of the Company.

Financial information for PM Control is reflected in our financial statements from the date of the PM Closing. The comparison of results for fiscal year 2022 to fiscal years 2021 and 2020 will not be affected, as the amounts included in our financial statements for fiscal year 2022 are immaterial.

BUSINESS ENVIRONMENT AND TRENDS

We serve the aerospace and industrial markets.

Aerospace Markets

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

Commercial and Civil Aircraft – In the commercial aerospace markets, global air traffic continued to recover and grow in fiscal year 2022, though it remains below the historically high levels of pre-pandemic years. Commercial aircraft production has slowly increased, as aircraft OEMs continued to ramp from post-COVID production levels. We expect commercial aircraft production to continue to increase and to exceed pre-COVID production levels in the coming years.  Aircraft operators are taking delivery of next generation aircraft models to meet the growing demand for passenger air travel, the need to replace aging aircraft, and the demand for more fuel efficient and lower emission aircraft. The trend toward the newer generation of aircraft that have recently entered service or are scheduled to go into production over the next several years favors our product offerings because we have more content on those aircraft. We expect production levels to continue to grow due to solid OEM order backlogs for the new aircraft models and pent-up demand. Demand in the business and general aviation market improved in fiscal year 2022 as business jet deliveries were up because of the introduction of some new models, reduced availability of used aircraft, and improving corporate profitability. Turboprop and helicopter deliveries also improved in fiscal year 2022 in part due to increasing oil prices and overall financial market improvements. We expect business jet, turboprop and helicopter deliveries to further improve in fiscal year 2023 as aircraft operations continue to recover.

We have content on the Airbus A220, A320neo, and A330neo, Bell 429, Boeing 737 MAX, 777, 787, and 747-8. We have been awarded content on the 777-9, the Comac C919, and a variety of business jet platforms, among others. We continue to explore opportunities on new engine and aircraft programs that are under consideration or have been recently announced.

The Boeing 737 MAX has returned to service in every jurisdiction except China.  As the aircraft’s return to service progresses, we anticipate a large majority of the deliveries missed in fiscal year 2019 through 2022 will be fulfilled in future periods, although at a slower rate than previously estimated. The continuing return to service of the 737 MAX aircraft in many jurisdictions contributed to positive impacts on OEM sales, and initial provisioning sales related to the 737 MAX aircraft and CFM LEAP engine have begun to come through. We anticipate further recovery of OEM 737 MAX sales in fiscal year 2023.

Defense – In recent years, the defense industry has been strong as budgetary allocations have generally increased since 2016. The conflict in Ukraine and its influence on European defense postures are pressuring global defense budgets upward. The U.S. National Defense Authorization Act for fiscal year 2022 resulted in higher levels of funding for both procurement and research and development, and we believe budget increases in recent years will support growth in fiscal year 2023, with the exception of our guided tactical weapons programs. Our involvement with a wide variety of defense programs in fixed-wing aircraft, rotorcraft and weapons systems has provided relative stability for our defense market sales, as some newer programs increase (e.g., F-35 Lightning II, KC-46A Tanker, and T-7A Trainer), some legacy programs are

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decreased (e.g., F/A-18 E/F Super Hornet and V-22 Osprey). Other programs are relatively steady (e.g., UH-60 Black Hawk and A-64 Apache helicopter programs) and some legacy programs, such as the F-15, will maintain or potentially increase production.  Weapons programs for which we have significant sales include the Joint Direct Attack Munition (“JDAM”), Small Diameter Bomb (“SDB”) and AIM-9X guided tactical weapon systems. We expect overall production rates to decrease for some of these weapons programs due to anticipated decline in demand, compared to the very strong production rates in recent years.

Aftermarket – Our commercial aftermarket business has increased in fiscal year 2022, as global air traffic continued to recover and grow from its pandemic lows in fiscal year 2020, and because our products have been selected for new aerospace platforms and our content has increased across existing platforms. With the entry into service of the new single aisle aircraft (Boeing 737 MAX and Airbus A320neo), we have seen a significant increase in initial provisioning sales to the operators of these new aircraft. As new aircraft production levels increase to accommodate rising passenger demand and to mitigate higher operating costs driven largely by higher fuel costs on older and less fuel-efficient aircraft, we expect airlines will retire older generation aircraft as they reach certain age thresholds (typically around twenty-five years on average). However, in the past few years, aircraft retirements have decreased because passenger demand has outpaced deliveries of next generation aircraft, forcing older generation legacy aircraft to remain in service longer than anticipated. This has led to increased demand–for repairs and spare parts for older engine programs remaining in service–consistent with air traffic recovery from the post-COVID-19 low levels. This dynamic applies to commercial aftermarket related to repairs and spare parts for mature legacy programs with large in-service fleets, such as the Airbus A320 and the Boeing 777.

Our defense aftermarket was down during fiscal year 2022 due to global supply chain and labor disruptions. Global conflicts and growing international demand for various other military programs continue to drive demand for operations of defense aircraft, including fighter jets, transports and both utility and attack rotorcraft, which are all supported by our products and systems. Although we expect variability, which is generally attributable to the cycling of various maintenance and upgrade programs, as well as actual usage, our outlook for the defense aftermarket is strong. This is due primarily to growing fleets, the service lives of existing military programs being extended and increased demand for repairs and spare parts for older military aircraft programs remaining in service.

Space – Many new space launches and mission equipment opportunities are being driven by commercial space launch and satellite providers, who are rapidly increasing their investment and participation in these markets.

Industrial Markets

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

Industrial Turbines – The demand for industrial gas turbines for power generation, which consists mainly of heavy frames, aero derivatives, and steam, increased in fiscal year 2022 due to increased new unit build rates and high utilization of the in-service fleet driving the current and future marine aftermarket activity, and strong demand for power generation and process industries, particularly in Asia. Start reliability, fuel flexibility, safety, and part-load efficiency are all key drivers of the turbine market as the conversion from coal to natural gas usage continues, and we believe Woodward continues to be well positioned to meet these market needs on the existing and next generation turbines. We project continued growth as demand for electricity is met through a balance of renewable power sources and newer industrial gas turbines for which Woodward has been awarded increased content.

Reciprocating Engines – Woodward’s key markets for industrial engine control technologies and fuel system equipment are power generation, transportation (including compressed natural gas and liquified natural gas trucks in Asia, mining, and marine shipping), and oil and gas. Due to higher gas prices and global supply chain and labor disruptions, powerplant operations have transitioned to higher liquid fuel use, thereby increasing the demand for our products. The demand from internet traffic and data storage is driving demand for data center power generation. While demand growth for reciprocating engines in fiscal year 2022 was supported by aftermarket demand and investment into new highspeed equipment, we anticipate strong demand in fiscal year 2023 for new highspeed engines and new marine engines. We expect market share gains by our customers and increased scope on the next generation reciprocating engines as energy policies in some countries encourage the use of compressed natural gas, liquefied natural gas, and other alternative fuels over carbon-rich petroleum fuels, which we expect will drive increased demand for our alternative fuel clean engine control technologies.

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RESULTS OF OPERATIONS

Financial Highlights

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

Liquidity Highlights

Net cash provided by operating activities for fiscal year 2022 was $193,638, compared to $464,669 for fiscal year 2021. The decrease in net cash provided by operating activities in fiscal year 2022 compared to fiscal year 2021 is primarily attributable to production delays from global supply chain disruptions as well as increases in working capital (excluding cash) to support the growth we anticipate in the next fiscal year.

For fiscal year 2022, free cash flow, which we define as net cash flows from operating activities less payments for property, plant and equipment, was $140,770, compared to $426,980 for fiscal year 2021. Adjusted free cash flow, which we define as free cash flow, plus the payments for costs related to business development activities and restructuring activities, was $144,257. No adjustments were made to free cash flow for fiscal year 2021. The decrease in free cash flow for fiscal year 2022 as compared to the prior fiscal year was primarily due to production delays from supply chain disruptions as well as increases in working capital (excluding cash) to support the growth we anticipate in the next fiscal year, higher payments for property, plant and equipment and lower earnings. Free cash flow and adjusted free cash flow are non-U.S. GAAP financial measures. A description of these measures as well as a reconciliation of these non-U.S. GAAP financial measures to the closest U.S. GAAP financial measures can be found under the caption “Non-U.S. GAAP Measures” in this Item 2 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

At September 30, 2022, we held $107,844 in cash and cash equivalents and had total outstanding debt of $777,416 with additional borrowing availability of $923,506, net of outstanding letters of credit, under our revolving credit agreement. At September 30, 2022, we also had additional borrowing capacity of $27,266 under various foreign lines of credit and foreign overdraft facilities.

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Consolidated Statements of Earnings and Other Selected Financial Data

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

Other select financial data:

2022 RESULTS OF OPERATIONS

2022 Net Sales Compared to 2021

Consolidated net sales for fiscal year 2022 increased by $136,958, or 6.1%, compared to fiscal year 2021.

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

The increase in consolidated net sales for fiscal year 2022 compared to the prior fiscal year is primarily due to an increase in Aerospace sales volume, the impact of price increases, as well as increases in Industrial volume, partially offset by unfavorable foreign currency impacts.

In the Aerospace segment, the increase in net sales for fiscal year 2022 as compared to fiscal year 2021 was primarily attributable to a significant increase in commercial OEM and aftermarket sales driven by higher OEM aircraft production rates and increasing aircraft utilization, partially offset by lower defense aftermarket sales primarily driven by global supply chain and labor disruptions. As of September 30, 2022, Aerospace segment net sales were negatively impacted by approximately $40 million due to ongoing global supply chain and labor disruptions.

In the Industrial segment, the increase in net sales for fiscal year 2022 as compared to fiscal year 2021 was primarily attributable to higher industrial turbomachinery sales supporting increasing demand for power generation and process industries as well as higher marine sales driven by increased utilization of the in-service fleet, partially offset by weakness in natural gas engines in China and by unfavorable foreign currency impacts. Industrial segment net sales were negatively impacted by approximately $45 million due to ongoing global supply chain and labor disruptions.

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2022 Costs and Expenses Compared to 2021

Cost of goods sold increased by $162,711 to $1,857,485, or 78.0% of net sales, for fiscal year 2022, from $1,694,774, or 75.5% of net sales, for fiscal year 2021. The increase in cost of goods sold in fiscal year 2022, as compared to the same period of the prior year is primarily attributable to net inflationary impacts on material and labor costs, as well as increases in manufacturing costs related to global supply chain and labor disruptions.

Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 22.0% for fiscal year 2022, compared to 24.5% for fiscal year 2021. The decrease in gross margin for fiscal year 2021 is primarily attributable to net inflationary impacts on material and labor costs, increases in manufacturing costs related to global supply chain disruptions and inefficiencies related to training new members.

Selling, general and administrative expenses increased by $16,139, or 8.6%, to $203,005 for fiscal year 2022, compared to $186,866 for fiscal year 2021. Selling, general, and administrative expenses as a percentage of net sales increased to 8.5% for fiscal year 2022, compared to 8.3% for fiscal year 2021. The increase in selling, general and administrative expenses, both in dollars and as a percentage of sales, for fiscal year 2022 compared to the prior year is primarily due to the incurrence of a certain expense in fiscal year 2022 in connection with a non-recurring matter unrelated to the ongoing operations of the business, as well as certain business development activities, which in each case did not occur in the prior fiscal year period.

Research and development costs increased by $2,691, or 2.3%, to $119,782 for fiscal year 2022, as compared to $117,091 for fiscal year 2021. Research and development costs as a percentage of net sales decreased to 5.0% for fiscal year 2022, as compared to 5.2% for fiscal year 2021. The increase in research and development costs in dollars for fiscal year 2022 as compared to the prior year is primarily due to variability in the timing of projects and expenses. The decrease in research and development costs as a percentage of net sales for fiscal year 2022 as compared to the prior year is primarily due to net sales increases in fiscal year 2022 compared to fiscal year 2021.  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.

Restructuring activities decreased by $8,428, to a benefit of $3,420 for fiscal year 2022, compared to charges of $5,008 for fiscal year 2021. The decrease in restructuring activities is primarily attributable to a new organizational structure and leadership change approved during fiscal year 2022. In fiscal year 2022, due to changes in business conditions including plans to insource work from suppliers and to manage workforce levels through attrition, the remaining unpaid accrued amount of $4,503 is no longer needed and therefore reversed.

Interest expense increased by $263, or 0.8%, to $34,545, for fiscal year 2022, compared to $34,282 for fiscal year 2021. Interest expense decreased as a percentage of net sales at 1.4% for fiscal year 2022, as compared to 1.5% for fiscal year 2021. Interest expense increased for fiscal year 2022 as compared to fiscal year 2021 primarily due to increased borrowings on our revolving credit agreement, partially offset by reduced long-term debt balances. In fiscal year 2021, we paid the entire balance of two series of private placement notes totaling $100,000, primarily using cash from operations and borrowings from our revolving credit facility. In fiscal year 2022, we had outstanding balances on our revolving credit facility whereas in fiscal year 2021 we had no borrowings.

Other income, net was $26,691 for fiscal year 2022, compared to $36,493 for fiscal year 2021. The decrease in other income in fiscal year 2022 compared to fiscal year 2021 was primarily due to a loss on investments in our deferred compensation program, whereas a gain on investments was recognized in the prior fiscal year.

Income taxes were provided at an effective rate on earnings before income taxes of 14.1% for fiscal year 2022, compared to 15.1% for fiscal year 2021.

The decrease in the effective tax rate for fiscal year 2022 compared to fiscal year 2021 is primarily attributable to a partial release of valuation allowance related to state credits and increased Research and Development Credit in the current fiscal year when compared to the prior fiscal year. This decrease was partially offset by a reduced stock-based compensation tax benefit in the current fiscal year when compared to the prior fiscal year.

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Segment Results

The following table presents sales by segment:

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

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