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 GE Aerospace; • 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; • 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 cybersecurity regulations; • our ability to 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; • our ability to structure our operations in light of evolving market conditions; • our ability to mitigate the ongoing impacts of inflation; • 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, 2024, which was filed on November 26, 2024, 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. 26 OVERV IEW Operational Highlights Quarter to Date Highlights Three Months Ended December 31, 2024 2023 Net sales: Aerospace segment $ 493,882 $ 460,756 Industrial segment 278,843 325,974 Consolidated net sales $ 772,725 $ 786,730 Earnings: Aerospace segment $ 94,725 $ 79,002 Segment earnings as a percent of segment net sales 19.2 % 17.2 % Industrial segment $ 40,197 $ 66,881 Segment earnings as a percent of segment net sales 14.4 % 20.5 % Consolidated net earnings $ 87,091 $ 90,044 Adjusted net earnings $ 82,567 $ 89,811 Effective tax rate 14.5 % 17.9 % Adjusted effective tax rate 14.0 % 17.7 % Consolidated diluted earnings per share $ 1.42 $ 1.46 Consolidated adjusted diluted earnings per share $ 1.35 $ 1.45 Earnings before interest and taxes ("EBIT") $ 112,818 $ 119,683 Adjusted EBIT $ 106,975 $ 119,118 Earnings before interest, taxes, depreciation, and amortization ("EBITDA") $ 140,694 $ 148,508 Adjusted EBITDA $ 134,851 $ 147,943 Adjusted net earnings, adjusted effective tax rate, adjusted earnings per share, 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 2025 was $34,516, compared to $46,789 for the first three months of fiscal year 2024. The decrease in net cash provided by operating activities in the first three months of fiscal year 2025 compared to the first three months of the prior fiscal year is primarily attributable to the timing of certain cash payments for accounts payable, partially offset by timing of cash received from customers as well as increases in working capital. For the first three months of fiscal year 2025, free cash flow was $942, compared to $4,977 for the first three months of fiscal year 2024. We define free cash flow as net cash flow provided by operating activities less payments for property, plant, and equipment. The decrease in free cash flow for the first three months of fiscal year 2025 as compared to the same period of the prior fiscal year was primarily attributable to lower earnings, partially offset by lower capital expenditures. Free cash flow is a non-U.S. GAAP financial measure. A description of this measure as well as a reconciliation of this non-U.S. GAAP financial measure to the most directly comparable U.S. GAAP financial measure 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, 2024, we held $283,726 in cash and cash equivalents and had total outstanding debt of $902,174. We have additional borrowing availability of $734,108, net of outstanding letters of credit, under our revolving credit agreement. At December 31, 2024, we also had additional borrowing capacity of $19,730 under various foreign lines of credit and foreign overdraft facilities. 27 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, 2024 % of Net Sales December 31, 2023 % of Net Sales Net sales $ 772,725 100 % $ 786,730 100 % Costs and expenses: Cost of goods sold 583,091 75.5 % 582,381 74.0 % Selling, general, and administrative expenses 69,696 9.0 % 74,511 9.5 % Research and development costs 30,207 3.9 % 30,794 3.9 % Interest expense 12,341 1.6 % 11,436 1.5 % Interest income (1,377 ) (0.2 )% (1,473 ) (0.2 )% Other (income) expense, net (23,087 ) (3.0 )% (20,639 ) (2.6 )% Total costs and expenses 670,871 86.8 % 677,010 86.1 % Earnings before income taxes 101,854 13.2 % 109,720 13.9 % Income tax expense 14,763 1.9 % 19,676 2.5 % Net earnings $ 87,091 11.3 % $ 90,044 11.4 % Other select financial data: December 31, 2024 September 30, 2024 Net working capital $ 809,774 $ 820,101 Total debt 902,174 872,470 Total stockholders' equity 2,208,421 2,176,416 Net Sales Consolidated net sales for the first quarter of fiscal year 2025 decreased by $14,005, or 1.8%, compared to the same period of fiscal year 2024. Details of the changes in consolidated net sales are as follows: Three-Month Period Consolidated net sales for the period ended December 31, 2023 $ 786,730 Aerospace volume (7,202 ) Industrial volume (55,094 ) Effects of changes in price 49,615 Effects of changes in foreign currency rates (1,324 ) Consolidated net sales for the period ended December 31, 2024 $ 772,725 In the Aerospace segment, the increase in net sales for the first quarter of fiscal year 2025 as compared to the same period of the prior fiscal year is primarily attributable to price realization, partially offset by inflation, unfavorable mix, and lower volumes. In the Industrial segment, the decrease in net sales for the first quarter of fiscal year 2025 as compared to the same period of the prior fiscal year was primarily a result of lower volumes and unfavorable mix, partially offset by price realization and favorable foreign currency exchange rates. We expect significant sales and earnings decreases in our China on-highway natural gas truck business in fiscal year 2025 due to the deteriorating local Chinese economy. Future demand remains uncertain due to the volatility of this business. Costs and Expenses Cost of goods sold remained flat at $583,091, or 75.5% of net sales, for the first quarter of fiscal year 2025, as compared to $582,381, or 74.0% of net sales, for the first quarter of fiscal year 2024. Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 24.5% for the first quarter of fiscal year 2025, compared to 26.0% for the first quarter of fiscal year 2024. The decrease in gross margin for the first quarter of fiscal year 2025 as compared to the same period of the prior fiscal year is primarily attributable to lower sales volume, partially offset by price realization. 28 Selling, general, and administrative expenses decreased by $4,815, or 6.5%, to $69,696 for the first quarter of fiscal year 2025, compared to $74,511 for the first quarter of fiscal year 2024. Selling, general, and administrative expenses as a percentage of net sales decreased to 9.0% for the first quarter of fiscal year 2025, compared to 9.5% for the first quarter of fiscal year 2024. The decrease in selling, general, and administrative expenses on an absolute basis for the first quarter of fiscal year 2025 as compared to the same period of the prior fiscal year is primarily due to the positive effects of changes in foreign currency rates and decreased expenses relating to our deferred compensation program, partially offset by increased headcount. Research and development costs were consistent at $30,207, or 3.9% of net sales, for the first quarter of fiscal year 2025, as compared to $30,794, or 3.9% of net sales, for the first quarter of fiscal year 2024 primarily due to variability in the timing of projects and expenses. 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 $905, or 7.9%, to $12,341 for the first quarter of fiscal year 2025, compared to $11,436 for the first quarter of fiscal year 2024. Interest expense as a percentage of net sales was 1.6% for the first quarter of fiscal year 2025, compared to 1.5% for the first quarter of fiscal year 2024. The increase in interest expense on an absolute basis and percentage basis for the first quarter of fiscal year 2025 as compared to the same period of the prior fiscal year is primarily attributable to increased average daily borrowings on the revolving credit facility during the first quarter of fiscal year 2025. Other income increased by $2,448 to $23,087 for the first quarter of fiscal year 2025, compared to $20,639 for the first quarter of fiscal year 2024. The increase in other income for the first quarter of fiscal year 2025 as compared to the same period of the prior fiscal year is primarily attributable to a one-time gain related to product rationalization activities that was recognized in the current year first quarter that did not occur in the prior year first quarter, partially offset by a gain in the prior year first quarter associated with a non-recurring matter related to a previous acquisition that did not reoccur in the current year first quarter. Income taxes were provided at an effective rate on earnings before income taxes of 14.5% for the first quarter of fiscal year 2025, and 17.9% for the first quarter of fiscal year 2024. The decrease in the effective tax rate for the three months ended December 31, 2024 compared to the three months ended December 31, 2023 is primarily attributable to larger stock-based compensation tax benefit in the current quarter, partially offset by a smaller estimated Research and Development Credit as well as the impact of higher projected full year earnings on state income tax expense. Segment Results The following table presents sales by segment: Three Months Ended December 31, 2024 2023 Net sales: Aerospace $ 493,882 63.9 % $ 460,756 58.6 % Industrial 278,843 36.1 % 325,974 41.4 % Consolidated net sales $ 772,725 100 % $ 786,730 100 % The following table presents earnings by segment and reconciles segment earnings to consolidated net earnings: Three Months Ended December 31, 2024 2023 Aerospace $ 94,725 $ 79,002 Industrial 40,197 66,881 Nonsegment expenses (22,104 ) (26,200 ) Interest expense, net (10,964 ) (9,963 ) Consolidated earnings before income taxes 101,854 109,720 Income tax expense (14,763 ) (19,676 ) Consolidated net earnings $ 87,091 $ 90,044 29 The following table presents segment earnings as a percent of segment net sales: Three Months Ended December 31, 2024 2023 Aerospace 19.2 % 17.2 % Industrial 14.4 % 20.5 % Aerospace Aerospace segment net sales increased by $33,126, or 7.2%, to $493,882 for the first quarter of fiscal year 2025, compared to $460,756 for the first quarter of fiscal year 2024. The increase in Aerospace segment net sales in the first quarter of fiscal year 2025 as compared to the same period of the prior fiscal year is primarily attributable to price realization, partially offset by inflation, unfavorable mix, and lower volumes. Commercial OEM sales decreased in the first quarter of fiscal year 2025 as compared to the same period of the prior fiscal year, primarily driven by the impacts from the Boeing work stoppage. Commercial aftermarket sales increased in the first quarter of fiscal year 2025 as compared to the same period of the prior fiscal year, primarily due to high aircraft utilization rates. Defense OEM and defense aftermarket sales increased in the first quarter of fiscal year 2025 as compared to the same period of the prior fiscal year, primarily driven by increased demand for smart defense and fixed wing aircraft, respectively. Aerospace segment earnings increased by $15,723, or 19.9%, to $94,725 for the first quarter of fiscal year 2025, compared to $79,002 for the first quarter of fiscal year 2024. The increase in Aerospace segment earnings was due to the following: Three-Month Period Earnings for the period ended December 31, 2023 $ 79,002 Sales volume and mix (9,002 ) Price, inflation, and productivity 29,151 Other, net (4,426 ) Earnings for the period ended December 31, 2024 $ 94,725 Aerospace segment earnings as a percentage of segment net sales were 19.2% for the first quarter of fiscal year 2025, compared to 17.2% for the first quarter of fiscal year 2024. Industrial Industrial segment net sales decreased by $47,131, or 14.5%, to $278,843 for the first quarter of fiscal year 2025, compared to $325,974 for the first quarter of fiscal year 2024. The decrease in Industrial segment net sales in the first quarter of fiscal year 2025 as compared to the same period of the prior fiscal year was primarily attributable to lower volumes and unfavorable mix, partially offset by price realization and favorable foreign currency exchange rates. In the first quarter of fiscal year 2025 as compared to the same period of the prior year, we saw a substantial sales decline in our on-highway natural gas truck business in China due to the deteriorating local Chinese economy. Industrial segment earnings decreased by $26,684, or 39.9%, to $40,197 for the first quarter of fiscal year 2025, compared to $66,881 for the first quarter of fiscal year 2024. The decrease in Industrial segment earnings was due to the following: Three-Month Period Earnings for the period ended December 31, 2023 $ 66,881 Sales volume and mix (37,809 ) Price, inflation, and productivity 13,759 Effects of changes in foreign currency rates 3,118 Other, net (5,752 ) Earnings for the period ended December 31, 2024 $ 40,197 Industrial segment earnings as a percentage of segment net sales were 14.4% for the first quarter of fiscal year 2025, compared to 20.5% for the first quarter of fiscal year 2024. Industrial earnings were significantly impacted by the sales decline in our on-highway natural gas truck business in China, partially offset by price realization, volume increases in 30 power generation and oil and gas, as well as operational improvements, including increased output and other efficiency gains. Future demand in our on-highway natural gas truck business in China remains uncertain due to the volatility of this business. Nonsegment Nonsegment expenses decreased by $4,096 to $22,104 for the first quarter of fiscal year 2025, compared to $26,200 for the first quarter of fiscal year 2024. The significant items that impacted nonsegment expenses in the current year first quarter compared to the prior year first quarter are as follows: Three Months Ended December 31, 2024 2023 Nonsegment expenses $ (22,104 ) $ (26,200 ) Product rationalization (9,361 ) — Business development activities 3,518 4,238 Non-recurring gain related to a previous acquisition — (4,803 ) Nonsegment expenses excluding infrequent significant charges $ (27,947 ) $ (26,765 ) Excluding these items, nonsegment expenses increased $1,182 in the first quarter of fiscal year 2025 as compared to the same period of the prior fiscal year. The remaining increase in nonsegment expenses is due to increased headcount. 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 15, 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, 2024, we had total outstanding debt of $902,174 consisting of various series of unsecured notes due between 2025 and 2033 and obligations under our finance leases. At December 31, 2024, we had $258,000 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, 2024 were as follows: Maximum daily balance during the period $ 359,100 Average daily balance during the period $ 308,010 Weighted average interest rate on average daily balance 5.66 % At December 31, 2024, we had additional borrowing availability of $734,108 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $19,730 under various foreign credit facilities. To our knowledge, we were in compliance with all our debt covenants as of December 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 our Annual Report on Form 10-K for fiscal year 2024, 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. 31 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 $3,856 in cash provided by operating activities during the three months ended December 31, 2024, compared to a decrease in cash provided by operating activities of approximately $5,161 during the three months ended December 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 Three Months Ended December 31, 2024 2023 Net cash provided by operating activities $ 34,516 $ 46,789 Net cash (used in) investing activities (32,100 ) (41,776 ) Net cash provided by (used in) financing activities 19,386 (8,091 ) Effect of exchange rate changes on cash and cash equivalents (20,346 ) 9,979 Net change in cash and cash equivalents 1,456 6,901 Cash and cash equivalents at beginning of year 282,270 137,447 Cash and cash equivalents at end of period $ 283,726 $ 144,348 Net cash flows provided by operating activities for the first three months of fiscal year 2025 was $34,516, compared to $46,789 for the same period of fiscal year 2024. The decrease in net cash provided by operating activities in the first three months of fiscal year 2025 as compared to the first three months of the prior fiscal year is primarily attributable to the timing of certain cash payments for accounts payable, partially offset by timing of cash received from customers as well as increases in working capital. Net cash flows used in investing activities for the first three months of fiscal year 2025 was $32,100, compared to $41,776 for the same period of fiscal year 2024. The decrease in cash flows used in investing activities in the first three months of fiscal year 2025 as compared to the first three months of the prior fiscal year is primarily due to decreased payments for property, plant, and equipment. Net cash flows provided by financing activities for the first three months of fiscal year 2025 was $19,386, compared to net cash flows used in financing activities of $8,091 for the same period of fiscal year 2024. The increase in net cash flows provided by financing activities in the first three months of fiscal year 2025 as compared to the first three months of the prior fiscal year is primarily attributable to the change in net debt borrowings as compared to payments partially offset by an increase in repurchases of common stock. During the first three months of fiscal year 2025, we had net debt borrowings in the amount of $40,764, compared to net debt payments of $10,149 in the first three months of fiscal year 2024. During the first three months of fiscal year 2025, we repurchased $35,473 of our common stock, whereas in the first three months of fiscal year 2024, we did not repurchase any common stock. 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, and (iii) product rationalization. The 32 product rationalization adjustment pertains to the divestiture of certain product lines. 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. Adjusted income tax expense is defined by the Company as income tax expense excluding, as applicable, (i) a non-recurring gain related to a previous acquisition, (ii) costs related to business development activities, and (iii) product rationalization. The product rationalization adjustment pertains to the divestiture of certain product lines. Management uses adjusted net earnings, adjusted earnings per share, and the adjusted effective tax rate when comparing operating performance to other periods. 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, 2024 2023 Net Earnings Earnings Per Share Net Earnings Earnings Per Share Net earnings (U.S. GAAP) $ 87,091 $ 1.42 $ 90,044 $ 1.46 Non-U.S. GAAP adjustments: Product rationalization 1 (9,361 ) (0.15 ) — — Business development activities 2 3,518 0.06 4,238 0.07 Non-recurring gain related to a previous acquisition 1 — — (4,803 ) (0.09 ) Tax effect of Non-U.S. GAAP net earnings adjustments 1,319 0.02 332 0.01 Non-U.S. GAAP adjustments (4,524 ) (0.07 ) (233 ) (0.01 ) Adjusted net earnings (Non-U.S. GAAP) $ 82,567 $ 1.35 $ 89,811 $ 1.45 (1) Presented in the line item "Other (income) expense, net" in Woodward's Condensed Consolidated Statement of Earnings. (2) Presented in item "Selling, general and administrative" expenses in Woodward's Condensed Consolidated Statement of Earnings. The reconciliation of income tax expense to adjusted income tax expense and the adjusted effective tax rate respectively, is shown in the tables below: Three Months Ended December 31, 2024 2023 Income tax expense (U.S. GAAP) $ 14,763 $ 19,676 Tax effect of Non-U.S. GAAP net income adjustments (1,319 ) (332 ) Adjusted income tax expense (Non-U.S. GAAP) $ 13,444 $ 19,344 Adjusted effective tax rate (Non-U.S. GAAP) 14.0 % 17.7 % 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. 33 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, and (iii) product rationalization. The product rationalization adjustment pertains to the divestiture of certain product lines. 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 costs 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, 2024 2023 Net earnings (U.S. GAAP) $ 87,091 $ 90,044 Income tax expense 14,763 19,676 Interest expense 12,341 11,436 Interest income (1,377 ) (1,473 ) EBIT (Non-U.S. GAAP) 112,818 119,683 Non-U.S. GAAP adjustments: Product rationalization 1 (9,361 ) — Business development activities 2 3,518 4,238 Non-recurring gain related to a previous acquisition 1 — (4,803 ) Total non-U.S. GAAP adjustments (5,843 ) (565 ) Adjusted EBIT (Non-U.S. GAAP) $ 106,975 $ 119,118 (1) Presented in the line item "Other (income) expense, net" in Woodward's Condensed Consolidated Statement of Earnings. (2) Presented in item "Selling, general and administrative" expenses in Woodward's Condensed Consolidated Statement of Earnings. EBITDA and adjusted EBITDA reconciled to net earnings were as follows: Three Months Ended December 31, 2024 2023 Net earnings (U.S. GAAP) $ 87,091 $ 90,044 Income tax expense 14,763 19,676 Interest expense 12,341 11,436 Interest income (1,377 ) (1,473 ) Amortization of intangible assets 6,914 8,599 Depreciation expense 20,962 20,226 EBITDA (Non-U.S. GAAP) 140,694 148,508 Non-U.S. GAAP adjustments: Product rationalization 1 (9,361 ) — Business development activities 2 3,518 4,238 Non-recurring gain related to a previous acquisition 1 — (4,803 ) Total non-U.S. GAAP adjustments (5,843 ) (565 ) Adjusted EBITDA (Non-U.S. GAAP) $ 134,851 $ 147,943 (1) Presented in the line item "Other (income) expense, net" in Woodward's Condensed Consolidated Statement of Earnings. (2) Presented in item "Selling, general and administrative" expenses in Woodward's Condensed Consolidated Statement of Earnings. 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. 34 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. 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 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 comparative measures. Free cash flow reconciled to net cash provided by operating activities were as follows: Three Months Ended December 31, 2024 2023 Net cash provided by operating activities (U.S. GAAP) $ 34,516 $ 46,789 Payments for property, plant and equipment (33,574 ) (41,812 ) Free cash flow (Non-U.S. GAAP) $ 942 $ 4,977 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.