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. 27 OVERV IEW Global Business Conditions During the first half of fiscal year 2024, we achieved significant sales growth and margin expansion as compared to the same period of the prior year. 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. Further, we continue to better align price to the value of our products which helps to mitigate the ongoing 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 such as inflation, uncertain future demand relating to on-highway natural gas trucks in China, and economic uncertainty as they continue to impact certain aspects of our business. Operational Highlights Quarter and Year to Date Highlights Three Months Ended March 31, Six Months Ended March 31, 2024 2023 2024 2023 Net sales: Aerospace segment $ 497,512 $ 437,017 $ 958,268 $ 832,702 Industrial segment 337,831 281,197 663,805 504,131 Consolidated net sales $ 835,343 $ 718,214 $ 1,622,073 $ 1,336,833 Earnings: Aerospace segment $ 98,451 $ 73,314 $ 177,453 $ 128,748 Segment earnings as a percent of segment net sales 19.8 % 16.8 % 18.5 % 15.5 % Industrial segment $ 65,244 $ 37,571 $ 132,125 $ 48,973 Segment earnings as a percent of segment net sales 19.3 % 13.4 % 19.9 % 9.7 % Consolidated net earnings $ 97,556 $ 35,511 $ 187,600 $ 65,117 Adjusted net earnings $ 100,825 $ 61,719 $ 190,636 $ 91,325 Effective tax rate 19.1 % 11.8 % 18.6 % 9.5 % Adjusted effective tax rate 19.3 % 17.8 % 18.6 % 14.5 % Consolidated diluted earnings per share $ 1.56 $ 0.58 $ 3.02 $ 1.07 Consolidated adjusted diluted earnings per share $ 1.62 $ 1.01 $ 3.07 $ 1.50 Earnings before interest and taxes ("EBIT") $ 130,861 $ 52,578 $ 250,544 $ 95,103 Adjusted EBIT $ 135,191 $ 87,454 $ 254,309 $ 129,979 Earnings before interest, taxes, depreciation, and amortization ("EBITDA") $ 160,086 $ 82,531 $ 308,594 $ 154,360 Adjusted EBITDA $ 164,416 $ 117,407 $ 312,359 $ 189,236 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 half of fiscal year 2024 was $144,118, compared to $40,150 for the first half of fiscal year 2023. The increase in net cash provided by operating activities in the first half of fiscal year 2024 compared to the first half of the prior fiscal year is primarily attributable to increased earnings. For the first half of fiscal year 2024, free cash flow was $87,817, compared to negative $3,896 for the first half 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, payments for business development activities, payments for restructuring charges, and cash received for a non-recurring matter related to a previous acquisition, was $90,032 for the first half of fiscal year 2024, compared to a negative $1,060 for the first half of fiscal year 2023. The increase in free cash flow and adjusted free cash flow for the first half of fiscal year 2024 as compared to the same period of the prior fiscal year 28 was primarily due to increased earnings, partially offset by 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 March 31, 2024, we held $316,932 in cash and cash equivalents and had total outstanding debt of $791,038. We have additional borrowing availability of $850,764, net of outstanding letters of credit, under our revolving credit agreement. At March 31, 2024, we also had additional borrowing capacity of $25,585 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 Six Months Ended March 31, 2024 % of Net Sales March 31, 2023 % of Net Sales March 31, 2024 % of Net Sales March 31, 2023 % of Net Sales Net sales $ 835,343 100 % $ 718,214 100 % $ 1,622,073 100 % $ 1,336,833 100 % Costs and expenses: Cost of goods sold 600,954 71.9 % 559,149 77.9 % 1,183,335 73.0 % 1,051,812 78.7 % Selling, general, and administrative expenses 81,447 9.8 % 75,578 10.5 % 155,958 9.6 % 138,765 10.4 % Research and development costs 36,465 4.4 % 37,777 5.3 % 67,259 4.1 % 66,411 5.0 % Restructuring charges — 0.0 % 5,172 0.7 % — 0.0 % 5,172 0.4 % Interest expense 11,530 1.4 % 12,845 1.8 % 22,966 1.4 % 23,987 1.8 % Interest income (1,293 ) (0.2 )% (508 ) (0.1 )% (2,766 ) (0.2 )% (874 ) (0.1 )% Other (income) expense, net (14,384 ) (1.7 )% (12,040 ) (1.7 )% (35,023 ) (2.2 )% (20,430 ) (1.5 )% Total costs and expenses 714,719 85.6 % 677,973 94.4 % 1,391,729 85.8 % 1,264,843 94.6 % Earnings before income taxes 120,624 14.4 % 40,241 5.6 % 230,344 14.2 % 71,990 5.4 % Income tax expense 23,068 2.8 % 4,730 0.7 % 42,744 2.6 % 6,873 0.5 % Net earnings $ 97,556 11.7 % $ 35,511 4.9 % $ 187,600 11.6 % $ 65,117 4.9 % Other select financial data: March 31, 2024 September 30, 2023 Working capital $ 1,120,119 $ 852,256 Total debt 791,038 721,526 Total stockholders' equity 2,329,413 2,070,989 Net Sales Consolidated net sales for the second quarter of fiscal year 2024 increased by $117,129, or 16.3%, compared to the same period of fiscal year 2023. Consolidated net sales for the first half of fiscal year 2024 increased by $285,240, or 21.3%, compared to the same period of fiscal year 2023. Details of the changes in consolidated net sales are as follows: Three-Month Period Six-Month Period Consolidated net sales for the period ended March 31, 2023 $ 718,214 $ 1,336,833 Aerospace volume 29,145 63,638 Industrial volume 34,299 113,489 Effects of changes in price 56,958 106,763 Effects of changes in foreign currency rates (3,273 ) 1,350 Consolidated net sales for the period ended March 31, 2024 $ 835,343 $ 1,622,073 In the Aerospace segment, the increase in net sales for the second quarter and first half of fiscal year 2024 as compared to the same periods of the prior fiscal year is primarily attributable to increased aircraft utilization, as a result of continued growth in passenger traffic, and price realization. In the Industrial segment, the increase in net sales for the second quarter and first half of fiscal year 2024 as compared to the same periods of the prior fiscal year is primarily attributable to growth in transportation, particularly in the 29 on-highway natural gas truck business in China, strong sales in power generation, and price realization, partially offset by a decrease in oil and gas sales. Costs and Expenses Cost of goods sold increased by $41,805 to $600,954, for the second quarter of fiscal year 2024, from $559,149, for the second quarter of fiscal year 2023. Cost of goods sold decreased to 71.9% of net sales, for the second quarter of fiscal year 2024, compared to 77.9% of net sales for the second quarter of fiscal year 2023. Cost of goods sold increased by $131,523 to $1,183,335, for the first half of fiscal year 2024, from $1,051,812, for the first half of fiscal year 2023. Cost of goods sold decreased to 73.0% of net sales, for the first half of fiscal year 2024, compared to 78.7% of net sales for the first half of fiscal year 2023. The increase in cost of goods sold on an absolute basis in the second quarter and first half of fiscal year 2024 compared to the same periods of the prior fiscal year is primarily due to higher sales volume and net inflationary impacts on material and labor costs. The decrease in cost of goods sold as a percent of net sales in the second quarter and first half of fiscal year 2024 compared to the same periods of the prior fiscal year is primarily due to price realization. Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 28.1% for the second quarter of fiscal year 2024 and 27.0% for the first half of fiscal year 2024, compared to 22.1% for the second quarter of fiscal year 2023 and 21.3% for the first half of fiscal year 2023. The increase in gross margin for the second quarter and first half of fiscal year 2024 as compared to the same periods of the prior fiscal year is primarily attributable to higher sales volume and price realization, partially offset by net inflationary impacts on material and labor costs. Selling, general, and administrative expenses increased by $5,869, or 7.8%, to $81,447 for the second quarter of fiscal year 2024, compared to $75,578 for the second quarter of fiscal year 2023. Selling, general, and administrative expenses as a percentage of net sales decreased to 9.8% for the second quarter of fiscal year 2024, compared to 10.5% for the second quarter of fiscal year 2023. The increase in selling, general, and administrative expenses on an absolute basis for the second quarter of fiscal year 2024 compared to the same period of the prior fiscal year is primarily due to increased annual variable incentive compensation costs. Selling, general, and administrative expenses increased by $17,193, or 12.4%, to $155,958 for the first half of fiscal year 2024, compared to $138,765 for the first half of fiscal year 2023. Selling, general, and administrative expenses as a percentage of net sales decreased to 9.6% for the first half of fiscal year 2024, compared to 10.4% for the first half of fiscal year 2023. The increase in selling, general, and administrative expenses on an absolute basis for the first half of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily due to increased annual variable incentive compensation costs, increased expenses relating to business development activities, and increased headcount. Research and development costs decreased by $1,312, or 3.5%, to $36,465 for the second quarter of fiscal year 2024, compared to $37,777 for the second quarter of fiscal year 2023. The decrease in research and development costs for the second 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 4.4% for the second quarter of fiscal year 2024, as compared to 5.3% for the same period of the prior fiscal year. Research and development costs increased by $848, or 1.3%, to $67,259 for the first half of fiscal year 2024, compared to $66,411 for the first half of fiscal year 2023. The increase in research and development costs for the first half 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 4.1% for the first half of fiscal year 2024, as compared to 5.0% for the first half of fiscal year 2023. 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 decreased by $1,315, or 10.2%, to $11,530 for the second quarter of fiscal year 2024, compared to $12,845 for the second quarter of fiscal year 2023. Interest expense decreased by $1,021, or 4.3%, to $22,966 for the first half of fiscal year 2024, compared to $23,987 for the first half of fiscal year 2023. Interest expense as a percentage of net sales was 1.4% for each of the second quarter and first half of fiscal year 2024, compared to 1.8% for each of the second quarter and first half of fiscal year 2023. The decrease in interest expense for the second quarter and first half of fiscal year 2024 as compared to the same periods of the prior fiscal year is primarily attributable to increased payments on our revolving credit facility during the second quarter and first half of fiscal year 2024. During the first six months of fiscal year 2024, we paid the entire balance of two series of private placement notes totaling $75,000. 30 Other income increased by $2,344 to $14,384 for the second quarter of fiscal year 2024, compared to $12,040 for the second quarter of fiscal year 2023. The increase in other income for the second quarter of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily attributable to a gain on sales of assets and businesses whereas in the prior year we had a loss on the sale of assets and businesses. Other income increased by $14,593 to $35,023 for the first half of fiscal year 2024, compared to $20,430 for the first half of fiscal year 2023. The increase in other income for the second 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 half of fiscal year 2024. Income taxes were provided at an effective rate on earnings before income taxes of 19.1% for the second quarter and 18.6% for the first half of fiscal year 2024, and 11.8% for the second quarter and 9.5% for the first half of fiscal year 2023. The increase in the effective tax rate for the second quarter as compared to the same period of the prior fiscal year is primarily attributable to higher projected full-year earnings taxed at statutory rates ranging between approximately 19% and 35%. These higher projected earnings and higher actual quarterly earnings resulted in lower current quarter tax benefits as a percent of earnings when compared to the prior year quarter. Additionally, the increase is attributable to projected future withholding taxes on unremitted foreign earnings. The increase in the effective tax rate for the first half of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily attributable to higher projected full-year earnings taxed at statutory rates ranging between approximately 19% and 35%. These higher projected earnings and higher actual year-to-date earnings resulted in lower current year-to-date tax benefits as a percent of earnings when compared to the prior year. Additionally, the increase is attributable to projected future withholding taxes on unremitted foreign earnings and the release of uncertain tax positions that did not recur in the current fiscal year. Segment Results The following table presents sales by segment: Three Months Ended March 31, Six Months Ended March 31, 2024 2023 2024 2023 Net sales: Aerospace $ 497,512 59.6 % $ 437,017 60.8 % $ 958,268 59.1 % $ 832,702 62.3 % Industrial 337,831 40.4 % 281,197 39.2 % 663,805 40.9 % 504,131 37.7 % Consolidated net sales $ 835,343 100 % $ 718,214 100 % $ 1,622,073 100 % $ 1,336,833 100 % The following table presents earnings by segment and reconciles segment earnings to consolidated net earnings: Three Months Ended March 31, Six Months Ended March 31, 2024 2023 2024 2023 Aerospace $ 98,451 $ 73,314 $ 177,453 $ 128,748 Industrial 65,244 37,571 132,125 48,973 Nonsegment expenses (32,834 ) (58,307 ) (59,034 ) (82,618 ) Interest expense, net (10,237 ) (12,337 ) (20,200 ) (23,113 ) Consolidated earnings before income taxes 120,624 40,241 230,344 71,990 Income tax expense (23,068 ) (4,730 ) (42,744 ) (6,873 ) Consolidated net earnings $ 97,556 $ 35,511 $ 187,600 $ 65,117 The following table presents segment earnings as a percent of segment net sales: Three Months Ended March 31, Six Months Ended March 31, 2024 2023 2024 2023 Aerospace 19.8 % 16.8 % 18.5 % 15.5 % Industrial 19.3 % 13.4 % 19.9 % 9.7 % Aerospace Aerospace segment net sales increased by $60,495, or 13.8%, to $497,512 for the second quarter of fiscal year 2024, compared to $437,017 for the second quarter of fiscal year 2023. Aerospace segment net sales increased by $125,566, or 15.1%, to $958,268 for the first half of fiscal year 2024, compared to $832,702 for the first half of fiscal year 2023. The increase in Aerospace segment net sales in the second quarter and first half of fiscal year 2024 as compared to the same periods of the prior fiscal year is primarily attributable to increased aircraft utilization, as a result of continued growth in passenger traffic, and price realization. 31 Defense OEM sales increased in the second quarter and were approximately flat for the first half of fiscal year 2024 as compared to the same periods of the prior fiscal year, primarily driven by increased demand for ground vehicle components, partially offset by reduced demand for smart defense. Our defense aftermarket sales increased in the second quarter and first half of fiscal year 2024 compared to the same periods of the prior fiscal year, primarily driven by supply chain stabilization and increased output. Aerospace segment earnings increased by $25,137, or 34.3%, to $98,451 for the second quarter of fiscal year 2024, compared to $73,314 for the second quarter of fiscal year 2023. Aerospace segment earnings increased by $48,705, or 37.8%, to $177,453 for the first half of fiscal year 2024, compared to $128,748 for the first half of fiscal year 2023. The increase in Aerospace segment earnings was due to the following: Three-Month Period Six-Month Period Earnings for the period ended March 31, 2023 $ 73,314 $ 128,748 Sales volume and mix 17,159 31,289 Price, inflation, and productivity 16,775 28,846 Other, net (8,797 ) (11,430 ) Earnings for the period ended March 31, 2024 $ 98,451 $ 177,453 Aerospace segment earnings as a percentage of segment net sales were 19.8% for the second quarter and 18.5% for the first half of fiscal year 2024, compared to 16.8% for the second quarter and 15.5% for the first half of fiscal year 2023. Industrial Industrial segment net sales increased by $56,634, or 20.1%, to $337,831 for the second quarter of fiscal year 2024, compared to $281,197 for the second quarter of fiscal year 2023. Industrial segment net sales increased by $159,674, or 31.7%, to $663,805 for the first half of fiscal year 2024, compared to $504,131 for the first half of fiscal year 2023. The increase in Industrial segment net sales in the second quarter and first half of fiscal year 2024 as compared to the same periods of the prior fiscal year was primarily attributable to growth in transportation, particularly in the on-highway natural gas truck business in China, as well as strong sales in power generation and price realization, partially offset by decreased oil and gas sales. Future demand for on-highway natural gas trucks in China beyond the third quarter of fiscal year 2024 remains uncertain. Industrial segment earnings increased by $27,673, or 73.7%, to $65,244 for the second quarter of fiscal year 2024, compared to $37,571 for the second quarter of fiscal year 2023. Segment earnings increased by $83,152, or 169.8%, to $132,125 for the first half of fiscal year 2024, compared to $48,973 for the first half of fiscal year 2023. The increase in Industrial segment earnings was due to the following: Three-Month Period Six-Month Period Earnings for the period ended March 31, 2023 $ 37,571 $ 48,973 Sales volume and mix 11,629 55,374 Price, inflation, and productivity 24,609 38,527 Other, net (8,565 ) (10,749 ) Earnings for the period ended March 31, 2024 $ 65,244 $ 132,125 Industrial segment earnings as a percentage of segment net sales were 19.3% for the second quarter and 19.9% for the first half of fiscal year 2024, compared to 13.4% for the second quarter and 9.7% for the first half 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. Future demand for on-highway natural gas trucks in China beyond the third quarter of fiscal year 2024 remains uncertain. 32 Nonsegment Nonsegment expenses decreased by $25,473 to $32,834 for the second quarter of fiscal year 2024, compared to $58,307 for the second quarter of fiscal year 2023. Nonsegment expenses decreased by $23,584 to $59,034 for the first half of fiscal year 2024 compared to $82,618 for the first half of fiscal year 2023. The decrease in nonsegment expenses for the second quarter and first half of fiscal year 2024 as compared to the same periods of the prior year was primarily due to significant costs that occurred in the second quarter of fiscal year 2023 that did not reoccur in the second quarter or first half of fiscal year 2024. The significant charges that impacted nonsegment expenses are as follows: Three Months Ended March 31, Six Months Ended March 31, 2024 2023 2024 2023 Nonsegment expenses $ (32,834 ) $ (58,307 ) $ (59,034 ) $ (82,618 ) Non-recurring gain related to a previous acquisition — — (4,803 ) — Business development activities 1,664 — 5,902 — Certain non-recurring separation costs 2,666 2,208 2,666 2,208 Specific charge for excess and obsolete inventory — 11,995 — 11,995 Product rationalization — 10,504 — 10,504 Restructuring charges — 5,172 — 5,172 Non-recurring charge related to customer collections — 4,997 — 4,997 Nonsegment expenses excluding one time significant charges $ (28,504 ) $ (23,431 ) $ (55,269 ) $ (47,742 ) Excluding these charges, nonsegment expenses increased $5,073 in the second quarter of fiscal year 2024 as compared to the same period of the prior fiscal year. Excluding these charges, nonsegment expenses increased $7,527 in the first half of fiscal year 2024 as compared to the same period of the prior fiscal year. The remaining increase in nonsegment expenses for the second quarter and first half of fiscal year 2024 as compared to the same periods of the prior fiscal year is primarily due to increased annual variable incentive compensation costs. 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 March 31, 2024, we had total outstanding debt of $791,038 consisting of various series of unsecured notes due between 2025 and 2033 and obligations under our finance leases. At March 31, 2024, we had $141,300 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 six months ended March 31, 2024 were as follows: Maximum daily balance during the period $ 284,800 Average daily balance during the period $ 185,846 Weighted average interest rate on average daily balance 6.45 % 33 At March 31, 2024, we had additional borrowing availability of $850,764 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $25,585 under various foreign credit facilities. To our knowledge, we were in compliance with all our debt covenants as of March 31, 2024. 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 an increase of approximately $1,917 in cash provided by operating activities during the six months ended March 31, 2024, compared to an increase in cash provided by operating activities of approximately $1,569 during the six months ended March 31, 2023. 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 and do not currently foresee adverse impacts to financial institutions supporting our capital requirements. Cash Flows Six Months Ended March 31, 2024 2023 Net cash provided by operating activities $ 144,118 $ 40,150 Net cash (used in) investing activities (49,641 ) (35,236 ) Net cash provided by financing activities 80,588 24,337 Effect of exchange rate changes on cash and cash equivalents 4,420 (7,668 ) Net change in cash and cash equivalents 179,485 21,583 Cash and cash equivalents at beginning of year 137,447 107,844 Cash and cash equivalents at end of period $ 316,932 $ 129,427 Net cash flows provided by operating activities for the first half of fiscal year 2024 was $144,118, compared to $40,150 for the same period of fiscal year 2023. The increase in net cash provided by operating activities in the first half of fiscal year 2024 as compared to the first half of the prior fiscal year is primarily attributable to increased earnings. Net cash flows used in investing activities for the first half of fiscal year 2024 was $49,641 compared to $35,236 for the same period of fiscal year 2023. The increase in cash flows used in investing activities in the first half of fiscal year 2024 as compared to the first half of the prior fiscal year is primarily due to increased payments for property, plant, and equipment. Net cash flows provided by financing activities for the first half of fiscal year 2024 was $80,588, compared to $24,337 for the same period of fiscal year 2023. The increase in net cash flows provided by financing activities in the first half of fiscal year 2024 as compared to the first half of the prior fiscal year is primarily attributable to the decrease in repurchases of common stock and an increase in borrowings on revolving lines of credit, partially offset by an increase in payments on revolving lines of credit. During the first half of fiscal year 2024, we did not repurchase any common stock, compared to $26,369 of repurchases of common stock during the first half of fiscal year 2023. During the first half of fiscal year 2024, we had net debt borrowings in the amount of $65,828, compared to $63,412 in the first half 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 34 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) certain non-restructuring separation costs, (iv) a specific charge for excess and obsolete inventory, (v) product rationalization, (vi) restructuring charges, and (vii) a non-recurring charge related to customer collections. 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, is shown in the tables below: Three Months Ended March 31, 2024 2023 Net Earnings Earnings Per Share Net Earnings Earnings Per Share Net earnings (U.S. GAAP) $ 97,556 $ 1.56 $ 35,511 $ 0.58 Non-U.S. GAAP adjustments, net of tax: Business development activities 1,256 0.02 — — Certain non-restructuring separation costs 2,013 0.04 1,661 0.03 Specific charge for excess and obsolete inventory — — 9,016 0.15 Product rationalization — — 7,896 0.13 Restructuring charges — — 3,874 0.06 Non-recurring charge related to customer collections — — 3,761 0.06 Non-U.S. GAAP adjustments 3,269 0.06 26,208 0.43 Adjusted net earnings (Non-U.S. GAAP) $ 100,825 $ 1.62 $ 61,719 $ 1.01 Six Months Ended March 31, 2024 2023 Net Earnings Earnings Per Share Net Earnings Earnings Per Share Earnings per share (U.S. GAAP) $ 187,600 $ 3.02 $ 65,117 $ 1.07 Non-U.S. GAAP adjustments, net of tax: Non-recurring gain related to a previous acquisition (3,433 ) (0.06 ) — — Business development activities 4,456 0.07 — — Certain non-restructuring separation costs 2,013 0.04 1,661 0.03 Specific charge for excess and obsolete inventory — — 9,016 0.15 Product rationalization — — 7,896 0.13 Restructuring charges — — 3,874 0.06 Non-recurring charge related to customer collections — — 3,761 0.06 Total non-U.S. GAAP adjustments 3,036 0.05 26,208 0.43 Adjusted earnings per share (Non-U.S. GAAP) $ 190,636 $ 3.07 $ 91,325 $ 1.50 35 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, (ii) costs related to business development activities, (iii) certain non-restructuring separation costs, (iv) a specific charge for excess and obsolete inventory, (v) product rationalization, (vi) restructuring charges, and (vii) a non-recurring charge related to customer collections. 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 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 March 31, Six Months Ended March 31, 2024 2023 2024 2023 Net earnings (U.S. GAAP) $ 97,556 $ 35,511 $ 187,600 $ 65,117 Income tax expense 23,068 4,730 42,744 6,873 Interest expense 11,530 12,845 22,966 23,987 Interest income (1,293 ) (508 ) (2,766 ) (874 ) EBIT (Non-U.S. GAAP) 130,861 52,578 250,544 95,103 Non-U.S. GAAP adjustments: Non-recurring gain related to a previous acquisition — — (4,803 ) — Business development activities 1,664 — 5,902 — Certain non-recurring separation costs 2,666 2,208 2,666 2,208 Specific charge for excess and obsolete inventory — 11,995 — 11,995 Product rationalization — 10,504 — 10,504 Restructuring charges — 5,172 — 5,172 Non-recurring charge related to customer collections — 4,997 — 4,997 Total non-U.S. GAAP adjustments 4,330 34,876 3,765 34,876 Adjusted EBIT (Non-U.S. GAAP) $ 135,191 $ 87,454 $ 254,309 $ 129,979 36 EBITDA and adjusted EBITDA reconciled to net earnings were as follows: Three Months Ended March 31, Six Months Ended March 31, 2024 2023 2024 2023 Net earnings (U.S. GAAP) $ 97,556 $ 35,511 $ 187,600 $ 65,117 Income tax expense 23,068 4,730 42,744 6,873 Interest expense 11,530 12,845 22,966 23,987 Interest income (1,293 ) (508 ) (2,766 ) (874 ) Amortization of intangible assets 8,618 9,418 17,217 18,596 Depreciation expense 20,607 20,535 40,833 40,661 EBITDA (Non-U.S. GAAP) 160,086 82,531 308,594 154,360 Non-U.S. GAAP adjustments: Non-recurring gain related to a previous acquisition — — (4,803 ) — Business development activities 1,664 — 5,902 — Certain non-recurring separation costs 2,666 2,208 2,666 2,208 Specific charge for excess and obsolete inventory — 11,995 — 11,995 Product rationalization — 10,504 — 10,504 Restructuring charges — 5,172 — 5,172 Non-recurring charge related to customer collections — 4,997 — 4,997 Total non-U.S. GAAP adjustments 4,330 34,876 3,765 34,876 Adjusted EBITDA (Non-U.S. GAAP) $ 164,416 $ 117,407 $ 312,359 $ 189,236 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, as applicable, the effect of cash received for a non-recurring matter related to a previous acquisition, and cash payments for (i) business development activities, (ii) a non-recurring matter unrelated to the ongoing operations of the business, and (iii) restructuring charges. 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. 37 Free cash flow and adjusted free cash flow reconciled to net cash provided by operating activities were as follows: Six Months Ended March 31, 2024 2023 Net cash provided by operating activities (U.S. GAAP) $ 144,118 $ 40,150 Payments for property, plant and equipment (56,301 ) (44,046 ) Free cash flow (Non-U.S. GAAP) 87,817 (3,896 ) Cash received for a non-recurring matter related to a previous acquisition (4,803 ) — Cash paid for business development activities 4,293 — Cash paid for a non-recurring matter unrelated to the ongoing operations of the business 2,725 — Cash paid for restructuring charges — 2,836 Adjusted free cash flow (Non-U.S. GAAP) $ 90,032 $ (1,060 ) 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.