Woodward, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward Looki ng Statements This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are statements that are deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of management. Words such as “anticipate,” “believe,” “estimate,” “seek,” “goal,” “expect,” “forecast,” “intend,” “continue,” “outlook,” “plan,” “project,” “target,” “strive,” “can,” “could,” “may,” “should,” “will,” “would,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characteristics of future events or circumstances are forward-looking statements. Forward-looking statements may include, among others, statements relating to: • future sales, earnings, cash flow, uses of cash, and other measures of financial performance, including our assumptions underlying our expectations; • trends in our business and the markets in which we operate, including expectations for those markets, our customers and their business and products; • our ability to manage risks from operating internationally; • expectations regarding demand for our products, in particular our expectations with respect to natural gas trucks in China; • our expected expenses in future periods and trends in such expenses over time; • our expectations regarding margins and the impact of specific products, product mix, and our strategic actions on margins; • descriptions of our plans and expectations for future operations, including our strategic initiatives and impact of such initiatives; • plans and expectations relating to the performance of our joint venture with General Electric Company; • the expected levels of activity in particular industries or markets and the effects of changes in those levels; • the scope, nature, or impact of acquisition activity and integration of such acquisition into our business; • the research, development, production, and support of new products and services; • ability to implement and realize the intended effects of any restructuring efforts; • our plans, objectives, expectations and intentions with respect to business opportunities that may be available to us; • our liquidity, including our ability to meet capital spending requirements and operations; • future dividends and repurchases of common stock; • future levels of indebtedness and capital spending; • the stability of financial institutions, including those lending to us; • pension and other postretirement plan assumptions and future contributions; • our tax rate and other effects of the changes in U.S. federal tax law; • availability of raw materials and components used in our products; • expectations relating to environmental and emissions regulations; • effects of data privacy, data protection, and information security regulations; • our ability to increase automation and develop competitive technologies; • our consolidated customer base and ability to enhance customer experience; • our ability to manage risks related to U.S. Government contracting, including defense activity and spending patterns; • our ability to attract, retain, and develop qualified personnel and maintain favorable labor relations; • impact of our ability to protect our intellectual property on our business, financial condition, results of operations, and cash flows; and • impact of any potential physical or cybersecurity attacks on our operations, business, including our financial condition, operating results, and reputation. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Factors that could cause actual results and the timing of certain events to differ materially from the forward-looking statements include, but are not limited to, risk factors described in Woodward's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended September 30, 2023, which was filed on November 17, 2023, and other risks described in Woodward’s filings with the Securities and Exchange Commission. We undertake no obligation to revise or update any forward-looking statements for any reason, except as required by applicable law. Unless we have indicated otherwise or the context otherwise requires, references in this Form 10-Q to “Woodward,” “the Company,” “we,” “us,” and “our” refer to Woodward, Inc. and its consolidated subsidiaries. Except where we have otherwise indicated or the context otherwise requires, amounts presented in this Form 10-Q are in thousands, except per share amounts. 25 OVERV IEW Global Business Conditions During the first three months of fiscal year 2024, we achieved significant sales growth and margin expansion as compared to the same period of the prior year. We continued to see strong end market demand for our products and services across the aerospace and industrial markets. We also saw improvement in our output as a result of our strategic initiatives and our supply chain has continued to stabilize. Further, we have also been able to more closely align price to the value of our products which helps to mitigate the impacts of inflation. We remain committed to growth, operational excellence, and innovation to deliver long-term success and enhanced shareholder value. We also continue to monitor the macroeconomic environment as inflation and economic uncertainty continues to impact certain aspects of our business. Operational Highlights Quarter to Date Highlights Three Months Ended December 31, 2023 2022 Net sales: Aerospace segment $ 460,756 $ 395,685 Industrial segment 325,974 222,934 Consolidated net sales $ 786,730 $ 618,619 Earnings: Aerospace segment $ 79,002 $ 55,434 Segment earnings as a percent of segment net sales 17.2 % 14.0 % Industrial segment $ 66,881 $ 11,402 Segment earnings as a percent of segment net sales 20.5 % 5.1 % Consolidated net earnings $ 90,044 $ 29,606 Adjusted net earnings $ 89,811 $ 29,606 Effective tax rate 17.9 % 6.7 % Adjusted effective tax rate 17.7 % 6.7 % Consolidated diluted earnings per share $ 1.46 $ 0.49 Consolidated adjusted diluted earnings per share $ 1.45 $ 0.49 Earnings before interest and taxes ("EBIT") $ 119,683 $ 42,525 Adjusted EBIT $ 119,118 $ 42,525 Earnings before interest, taxes, depreciation, and amortization ("EBITDA") $ 148,508 $ 71,829 Adjusted EBITDA $ 147,943 $ 71,829 Adjusted net earnings, adjusted earnings per share, adjusted effective tax rate, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA are non-U.S. GAAP financial measures. A description of these measures as well as a reconciliation of these non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found under the caption “Non-U.S. GAAP Financial Measures” in this Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations. Liquidity Highlights Net cash provided by operating activities for the first three months of fiscal year 2024 was $46,789, compared to $5,402 for the first three months of fiscal year 2023. The increase in net cash provided by operating activities in the first three months of fiscal year 2024 compared to the first three months of the prior fiscal year is primarily attributable to increased earnings, partially offset by the above-target payout for fiscal year 2023 annual incentive compensation. For the first three months of fiscal year 2024, free cash flow was $4,977, compared to negative $18,988 for the first three months of fiscal year 2023. We define free cash flow as net cash flow from operating activities less payments for property, plant, and equipment. Adjusted free cash flow, which we define as free cash flow excluding cash payments pertaining to a non-recurring matter unrelated to the ongoing operations and cash received for a non-recurring matter related to a previous acquisition, was $2,899 for the first three months of fiscal year 2024. No adjustments were made to free cash flow for the first three months of fiscal year 2023. The increase in free cash flow and adjusted free cash flow for the first three months of fiscal year 2024 as compared to the same period of the prior fiscal year was primarily due to increased earnings, partially offset by the above-target payout for fiscal year 2023 annual incentive compensation, as well 26 as higher capital expenditures. Free cash flow and adjusted free cash flow are non-U.S. GAAP financial measures. A description of these measures as well as a reconciliation of these non-U.S. GAAP financial measures to the most directly comparable U.S. GAAP financial measures can be found under the caption “Non-U.S. GAAP Financial Measures” in this Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations. At December 31, 2023, we held $144,348 in cash and cash equivalents and had total outstanding debt of $718,874. We have additional borrowing availability of $927,212, net of outstanding letters of credit, under our revolving credit agreement. At December 31, 2023, we also had additional borrowing capacity of $25,110 under various foreign lines of credit and foreign overdraft facilities. RESULTS OF OPERATIONS The following table sets forth condensed consolidated statements of earnings data as a percentage of net sales for each period indicated: Three Months Ended December 31, 2023 % of Net Sales December 31, 2022 % of Net Sales Net sales $ 786,730 100 % $ 618,619 100 % Costs and expenses: Cost of goods sold 582,381 74.0 % 492,663 79.6 % Selling, general, and administrative expenses 74,511 9.5 % 63,187 10.2 % Research and development costs 30,794 3.9 % 28,634 4.6 % Interest expense 11,436 1.5 % 11,142 1.8 % Interest income (1,473 ) (0.2 )% (366 ) (0.1 )% Other (income) expense, net (20,639 ) (2.6 )% (8,390 ) (1.4 )% Total costs and expenses 677,010 86.1 % 586,870 94.9 % Earnings before income taxes 109,720 13.9 % 31,749 5.1 % Income tax expense 19,676 2.5 % 2,143 0.3 % Net earnings $ 90,044 11.4 % $ 29,606 4.8 % Other select financial data: December 31, 2023 September 30, 2023 Working capital $ 963,343 $ 852,256 Total debt 718,874 721,526 Total stockholders' equity 2,190,062 2,070,989 Net Sales Consolidated net sales for the first quarter of fiscal year 2024 increased by $168,111, or 27.2%, compared to the same period of fiscal year 2023. Details of the changes in consolidated net sales are as follows: Three-Month Period Consolidated net sales for the period ended December 31, 2022 $ 618,619 Aerospace volume 34,493 Industrial volume 79,190 Effects of changes in price 49,805 Effects of changes in foreign currency rates 4,623 Consolidated net sales for the period ended December 31, 2023 $ 786,730 In the Aerospace segment, the increase in net sales for the first quarter of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily attributable to higher commercial OEM production rates, continued growth in both domestic and international passenger traffic, increasing aircraft utilization, and price realization. In the Industrial segment, the increase in net sales for the first quarter of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily attributable to volume increases across all markets, particularly in our on-highway natural gas truck business in China, and price realization. 27 Costs and Expenses Cost of goods sold increased by $89,718 to $582,381, or 74.0% of net sales, for the first quarter of fiscal year 2024, from $492,663, or 79.6% of net sales, for the first quarter of fiscal year 2023. The increase in cost of goods sold on an absolute basis in the first quarter of fiscal year 2024 compared to the same period of the prior fiscal year was primarily due to higher sales volume and net inflationary impacts on material and labor costs. Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 26.0% for the first quarter of fiscal year 2024, compared to 20.4% for the first quarter of fiscal year 2023. The increase in gross margin for the first quarter of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily attributable to higher sales volume and price realizations, partially offset by net inflationary impacts on material and labor costs. Selling, general, and administrative expenses increased by $11,324, or 17.9%, to $74,511 for the first quarter of fiscal year 2024, compared to $63,187 for the first quarter of fiscal year 2023. Selling, general, and administrative expenses as a percentage of net sales decreased to 9.5% for the first quarter of fiscal year 2024, compared to 10.2% for the first quarter of fiscal year 2023. The increase in selling, general, and administrative expenses on an absolute basis for the first quarter of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily due to increased expenses relating to business development activities, increased headcount, increased expenses relating to our deferred compensation program, and increases in our annual variable incentive compensation costs. Research and development costs increased by $2,160, or 7.5%, to $30,794 for the first quarter of fiscal year 2024, as compared to $28,634 for the first quarter of fiscal year 2023. The increase in research and development costs for the first quarter of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily due to variability in the timing of projects and expenses. As a percentage of net sales, research and development costs decreased to 3.9% for the first quarter of fiscal year 2024, as compared to 4.6% for the same period of the prior fiscal year. Our research and development activities extend across almost all of our customer base, and we anticipate ongoing variability in research and development costs due to the timing of customer business needs on current and future programs. Interest expense increased by $294, or 2.6%, to $11,436 for the first quarter of fiscal year 2024, compared to $11,142 for the first quarter of fiscal year 2023. Interest expense as a percentage of net sales was 1.5% for the first quarter of fiscal year 2024, compared to 1.8% for the first quarter of fiscal year 2023. The increase in interest expense on an absolute basis for the first quarter of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily attributable to increased borrowings and interest rates on the revolving credit facility during the first quarter of fiscal year 2024. Other income increased by $12,249 to $20,639 for the first quarter of fiscal year 2024, compared to $8,390 for the first quarter of fiscal year 2023. The increase in other income for the first quarter of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily attributable to increased earnings in the joint venture with General Electric and a non-recurring gain related to a previous acquisition that was recognized during the first quarter of fiscal year 2024. Income taxes were provided at an effective rate on earnings before income taxes of 17.9% for the first quarter of fiscal year 2024, and 6.7% for the first quarter of fiscal year 2023. The increase in the effective tax rate for the first quarter of fiscal 2024 compared to the first quarter of fiscal year 2023, is primarily attributable to the release of uncertain tax positions in the prior year and projected future withholding taxes on unremitted earnings, partially offset by a larger stock-based compensation tax benefit in the first quarter of fiscal year 2024. Segment Results The following table presents sales by segment: Three Months Ended December 31, 2023 2022 Net sales: Aerospace $ 460,756 58.6 % $ 395,685 64.0 % Industrial 325,974 41.4 % 222,934 36.0 % Consolidated net sales $ 786,730 100 % $ 618,619 100 % 28 The following table presents earnings by segment and reconciles segment earnings to consolidated net earnings: Three Months Ended December 31, 2023 2022 Aerospace $ 79,002 $ 55,434 Industrial 66,881 11,402 Nonsegment expenses (26,200 ) (24,311 ) Interest expense, net (9,963 ) (10,776 ) Consolidated earnings before income taxes 109,720 31,749 Income tax expense (19,676 ) (2,143 ) Consolidated net earnings $ 90,044 $ 29,606 The following table presents segment earnings as a percent of segment net sales: Three Months Ended December 31, 2023 2022 Aerospace 17.2 % 14.0 % Industrial 20.5 % 5.1 % Aerospace Aerospace segment net sales increased by $65,071, or 16.4%, to $460,756 for the first quarter of fiscal year 2024, compared to $395,685 for the first quarter of fiscal year 2023. The increase in Aerospace segment net sales in the first quarter of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily attributable to higher commercial OEM production rates, continued growth in passenger traffic, increasing aircraft utilization, and price realization. Defense OEM sales increased in the first quarter of fiscal year 2024 as compared to the same period of the prior fiscal year, primarily driven by increased demand for rotorcraft and ground vehicle components. Our defense aftermarket sales increased in the first quarter of fiscal year 2024 compared to the same period of the prior fiscal year, primarily driven by increased defense budgets resulting in operations and maintenance upgrades. Aerospace segment earnings increased by $23,568, or 42.5%, to $79,002 for the first quarter of fiscal year 2024, compared to $55,434 for the first quarter of fiscal year 2023. The increase in Aerospace segment earnings was due to the following: Three-Month Period Earnings for the period ended December 31, 2022 $ 55,434 Sales volume and mix 14,130 Price, inflation, and productivity 12,071 Other, net (2,633 ) Earnings for the period ended December 31, 2023 $ 79,002 Aerospace segment earnings as a percentage of segment net sales were 17.2% for the first quarter of fiscal year 2024, compared to 14.0% for the first quarter of fiscal year 2023. Industrial Industrial segment net sales increased by $103,040, or 46.2%, to $325,974 for the first quarter of fiscal year 2024, compared to $222,934 for the first quarter of fiscal year 2023. The increase in Industrial segment net sales in the first quarter of fiscal year 2024 as compared to the same period of the prior fiscal year was primarily attributable to volume increases across all markets, particularly in our on-highway natural gas truck business in China, as well as price realization. Industrial segment earnings increased by $55,479, or 486.6%, to $66,881 for the first quarter of fiscal year 2024, compared to $11,402 for the first quarter of fiscal year 2023. The increase in Industrial segment earnings was due to the following: Three-Month Period Earnings for the period ended December 31, 2022 $ 11,402 Sales volume and mix 43,745 Price, inflation, and productivity 13,918 Other, net (2,184 ) Earnings for the period ended December 31, 2023 $ 66,881 29 Industrial segment earnings as a percentage of segment net sales were 20.5% for the first quarter of fiscal year 2024, compared to 5.1% for the first quarter of fiscal year 2023. Industrial earnings benefited significantly from increased demand for on-highway natural gas trucks in China as well as from operational improvements including increased output and other efficiency gains, and favorable product mix. Nonsegment Nonsegment expenses increased by $1,889 to $26,200 for the first quarter of fiscal year 2024, compared to $24,311 for the first quarter of fiscal year 2023. The increase in nonsegment expenses for the first quarter of fiscal year 2024 as compared to the first quarter of fiscal year 2023 was primarily due to business development activity costs of $4,238 and a non-recurring gain of $4,803 related to a previous acquisition, each of which did not occur in the prior fiscal year. Excluding these charges from 2024, nonsegment expenses increased $2,454. LIQUIDITY AND CA PITAL RESOURCES Historically, we have satisfied our working capital needs, as well as capital expenditures, product development, and other liquidity requirements associated with our operations, with cash flow provided by operating activities and borrowings under our credit facilities. From time to time, we have also issued debt to supplement our cash needs, repay our other indebtedness, or finance our acquisitions. We continue to expect that cash generated from our operating activities, together with borrowings under our revolving credit facility and other borrowing capacity, will be sufficient to fund our continuing operating needs for the foreseeable future. In addition to our revolving credit facility, we have various foreign credit facilities, some of which are tied to net amounts on deposit at certain foreign financial institutions. These foreign credit facilities are reviewed annually for renewal. We use borrowings under these foreign credit facilities to finance certain local operations on a periodic basis. For further discussion of our revolving credit facility and our other credit facilities, see Note 14, Credit facilities, short-term borrowings and long-term debt in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Form 10-Q. At December 31, 2023, we had total outstanding debt of $718,874 consisting of various series of unsecured notes due between 2025 and 2033 and obligations under our finance leases. At December 31, 2023, we had $65,100 outstanding on our revolving credit facility, all of which is classified as short-term borrowings based on our intent and ability to repay this amount in the next twelve months. Revolving credit facility and short-term borrowing activity during the three months ended December 31, 2023 were as follows: Maximum daily balance during the period $ 270,400 Average daily balance during the period $ 174,426 Weighted average interest rate on average daily balance 6.43 % At December 31, 2023, we had additional borrowing availability of $927,212 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $25,110 under various foreign credit facilities. To our knowledge, we were in compliance with all our debt covenants as of December 31, 2023. See Note 15, Credit facilities, short-term borrowings and long-term debt in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of our most recently filed Form 10-K, for more information about our covenants. In addition to utilizing our cash resources to fund the working capital needs of our business, we evaluate additional strategic uses of our funds, including the repurchase of our common stock, payment of dividends, significant capital expenditures, strategic acquisitions, and other potential uses of cash. From time to time, the Company enters into various factoring agreements with third-party financial institutions to sell certain of its receivables. Factoring activity resulted in a decrease of approximately $5,161 in cash provided by operating activities during the three months ended December 31, 2023, compared to an increase in cash provided by operating activities of approximately $4,736 during the three months ended December 31, 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. 30 We believe that cash flows from operations, along with our contractually committed borrowings and other borrowing capability, will continue to be sufficient to fund anticipated capital spending requirements and our operations for the foreseeable future. However, we could be adversely affected if the financial institutions providing our capital requirements refuse to honor their contractual commitments, cease lending, or declare bankruptcy. We believe the lending institutions participating in our credit arrangements are financially stable and do not currently foresee adverse impacts to financial institutions supporting our capital requirements. Cash Flows Three Months Ended December 31, 2023 2022 Net cash provided by operating activities $ 46,789 $ 5,402 Net cash (used in) investing activities (41,776 ) (23,475 ) Net cash (used in) provided by financing activities (8,091 ) 5,877 Effect of exchange rate changes on cash and cash equivalents 9,979 3,687 Net change in cash and cash equivalents 6,901 (8,509 ) Cash and cash equivalents at beginning of year 137,447 107,844 Cash and cash equivalents at end of period $ 144,348 $ 99,335 Net cash flows provided by operating activities for the first three months of fiscal year 2024 was $46,789, compared to $5,402 for the same period of fiscal year 2023. The increase in net cash provided by operating activities in the first three months of fiscal year 2024 as compared to the first three months of the prior fiscal year is primarily attributable to increased earnings, partially offset by the above-target payout for fiscal year 2023 annual incentive compensation. Net cash flows used in investing activities for the first three months of fiscal year 2024 was $41,776, compared to $23,475 for the same period of fiscal year 2023. The increase in cash flows used in investing activities in the first three months of fiscal year 2024 as compared to the first three months of the prior fiscal year is primarily due to increased payments for property, plant, and equipment. Net cash flows used in financing activities for the first three months of fiscal year 2024 was $8,091, compared to net cash flows provided by financing activities of $5,877 for the same period of fiscal year 2023. The decrease in net cash flows used in financing activities in the first three months of fiscal year 2024 as compared to the first three months of the prior fiscal year is primarily attributable to the decrease in repurchases of common stock and an increase in net debt payments as compared to net borrowings. During the first three months of fiscal year 2024, we did not repurchase any common stock. During the first three months of fiscal year 2023, we repurchased $26,369 of common stock. During the first three months of fiscal year 2024, we had net debt payments in the amount of $10,149, compared to net debt borrowings of $42,402 in the first three months of 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, 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 non-recurring gain related to a previous acquisition, and (ii) costs related to business development activities. 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. 31 The reconciliation of net earnings and earnings per share to adjusted net earnings and adjusted earnings per share, respectively, is shown in the tables below: Three Months Ended December 31, 2023 2022 Net Earnings Earnings Per Share Net Earnings Earnings Per Share Net earnings (U.S. GAAP) $ 90,044 $ 1.46 $ 29,606 $ 0.49 Non-U.S. GAAP adjustments, net of tax: Non-recurring gain related to a previous acquisition (3,433 ) (0.06 ) — — Business development activities 3,200 0.05 — — Non-U.S. GAAP adjustments (233 ) (0.01 ) — — Adjusted net earnings (Non-U.S. GAAP) $ 89,811 $ 1.45 $ 29,606 $ 0.49 Management uses EBIT to evaluate Woodward’s performance without financing and tax related considerations, as these elements do not fluctuate with operating results. Management uses EBITDA in evaluating Woodward’s operating performance, making business decisions, including developing budgets, managing expenditures, forecasting future periods, and evaluating capital structure impacts of various strategic scenarios. Securities analysts, investors, and others frequently use EBIT and EBITDA in their evaluation of companies, particularly those with significant property, plant, and equipment, and intangible assets subject to amortization. The Company believes that EBIT and EBITDA are useful measures to the investor when measuring operating performance as they eliminate the impact of financing and tax expenses, which are non-operating expenses and may be driven by factors outside of the Company’s operations, such as changes in tax laws or regulations, and, in the case of EBITDA, the noncash charges associated with depreciation and amortization. Further, as interest from financing, income taxes, depreciation, and amortization can vary dramatically between companies and between periods, management believes that the removal of these items can improve comparability. Adjusted EBIT and adjusted EBITDA represent further non-U.S. GAAP adjustments to EBIT and EBITDA, in each case adjusted to exclude, as applicable, (i) a non-recurring gain related to a previous acquisition, and (ii) costs related to business development activities. As these charges are infrequent or unusual items that can be variable from period to period and do not fluctuate with operating results, management believes removing these gains and charges from EBIT and EBITDA improves comparability of past, present, and future operating results and provides consistency when comparing EBIT and EBITDA between periods. EBIT and adjusted EBIT reconciled to net earnings were as follows: Three Months Ended December 31, 2023 2022 Net earnings (U.S. GAAP) $ 90,044 $ 29,606 Income tax expense 19,676 2,143 Interest expense 11,436 11,142 Interest income (1,473 ) (366 ) EBIT (Non-U.S. GAAP) 119,683 42,525 Non-U.S. GAAP adjustments: Non-recurring gain related to a previous acquisition (4,803 ) — Business development activities 4,238 — Total non-U.S. GAAP adjustments (565 ) — Adjusted EBIT (Non-U.S. GAAP) $ 119,118 $ 42,525 32 EBITDA and adjusted EBITDA reconciled to net earnings were as follows: Three Months Ended December 31, 2023 2022 Net earnings (U.S. GAAP) $ 90,044 $ 29,606 Income tax expense 19,676 2,143 Interest expense 11,436 11,142 Interest income (1,473 ) (366 ) Amortization of intangible assets 8,599 9,178 Depreciation expense 20,226 20,126 EBITDA (Non-U.S. GAAP) 148,508 71,829 Non-U.S. GAAP adjustments: Non-recurring gain related to a previous acquisition (4,803 ) — Business development activities 4,238 — Total non-U.S. GAAP adjustments (565 ) — Adjusted EBITDA (Non-U.S. GAAP) $ 147,943 $ 71,829 The use of these non-U.S. GAAP financial measures is not intended to be considered in isolation of, or as a substitute for, the financial information prepared and presented in accordance with U.S. GAAP. As adjusted net earnings, adjusted net earnings per share, adjusted effective tax rate, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA exclude certain financial information compared with net earnings, the most directly comparable U.S. GAAP financial measure, users of this financial information should consider the information that is excluded. Our calculations of adjusted net earnings, adjusted net earnings per share, adjusted effective tax rate, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA may differ from similarly titled measures used by other companies, limiting their usefulness as comparative measures. Cash flow‐based non‐U.S. GAAP financial measures Management uses free cash flow, which is defined by the Company as net cash flows provided by operating activities less payments for property, plant, and equipment, in reviewing the financial performance of and cash generation by Woodward’s various business groups and evaluating cash levels. We believe free cash flow is a useful measure for investors because it portrays our ability to grow organically and generate cash from our businesses for purposes such as paying interest on our indebtedness, repaying maturing debt, funding business acquisitions, purchasing our common stock, paying dividends, and investing in additional research and development. In addition, securities analysts, investors, and others frequently use free cash flow in their evaluation of companies. Adjusted free cash flow represents a further non-U.S. GAAP adjustment to free cash flow to exclude the effect of cash payments pertaining to a non-recurring matter unrelated to the ongoing operations, and cash received for a non-recurring matter related to a previous acquisition. Management believes that excluding these infrequent or unusual items from free cash flow better portrays our ability to generate cash, as such items are not indicative of the Company’s operating performance for the period. The use of these non‐U.S. GAAP financial measures is not intended to be considered in isolation of, or as substitutes for, the financial information prepared and presented in accordance with U.S. GAAP. Free cash flow and adjusted free cash flow do not necessarily represent funds available for discretionary use and are not necessarily a measure of our ability to fund our cash needs. Our calculation of free cash flow and adjusted free cash flow may differ from similarly titled measures used by other companies, limiting their usefulness as comparative measures. Free cash flow and adjusted free cash flow reconciled to net cash provided by operating activities were as follows: Three Months Ended December 31, 2023 2022 Net cash provided by operating activities (U.S. GAAP) $ 46,789 $ 5,402 Payments for property, plant and equipment (41,812 ) (24,390 ) Free cash flow (Non-U.S. GAAP) 4,977 (18,988 ) Cash received for a non-recurring matter related to a previous acquisition (4,803 ) — Cash paid for a non-recurring matter unrelated to the ongoing operations of the business 2,725 — Adjusted free cash flow (Non-U.S. GAAP) $ 2,899 $ (18,988 ) 33 CRITICAL ACCOUNTING ESTIMATES The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Note 1, Operations and summary of significant accounting policies in the Notes to the Consolidated Financial Statements included in Part II, Item 8 of our most recently filed Form 10-K, describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Our critical accounting estimates, identified in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recently filed Form 10-K, include the discussion of estimates used for revenue recognition, inventory valuation, reviews for impairment of goodwill and other indefinitely lived intangible assets, and our provision for income taxes. Such accounting estimates require significant judgments and assumptions to be used in the preparation of the Condensed Consolidated Financial Statements included in this Form 10-Q, and actual results could differ materially from the amounts reported. New Accounting Standards From time to time, the FASB or other standards-setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update. To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2, New accounting standards in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Condensed Consolidated Financial Statements upon adoption.