News Column

WOODWARD, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations (Amounts in thousands, except per share amounts)

July 22, 2014

Forward Looking 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;

descriptions of our plans and expectations for future operations;

the effect of economic downturns or growth in particular regions;

the effect of changes in the level of activity in particular industries or

markets;

the availability and cost of materials, components, services, and supplies;

the scope, nature, or impact of acquisition activity and integration of such

acquisitions into our businesses;

the development, production, and support of advanced technologies and new

products and services;

new business opportunities;

restructuring and alignment costs and savings;

our plans, objectives, expectations and intentions with respect to recent

acquisitions and expected business opportunities that may be available to us;

the outcome of contingencies; future repurchases of common stock; future levels of indebtedness and capital spending; and pension plan assumptions and future contributions. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including:



a decline in business with, or financial distress of, our significant

customers;

global economic uncertainty and instability in the financial markets;

our ability to obtain financing, on acceptable terms or at all, to implement

our business plans, complete acquisitions, or otherwise take advantage of

business opportunities or respond to business pressures;

the long sales cycle, customer evaluation process, and implementation period of

some of our products and services;

our ability to implement and realize the intended effects of any restructuring

and alignment efforts;

our ability to successfully manage competitive factors, including prices,

promotional incentives, industry consolidation, and commodity and other input

cost increases;

our ability to manage our expenses and product mix while responding to sales

increases or decreases;

the ability of our subcontractors to perform contractual obligations and our

suppliers to provide us with materials of sufficient quality or quantity

required to meet our production needs at favorable prices or at all; 30

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our ability to monitor our technological expertise and the success of, and/or

costs associated with, our product development activities;

our ability to integrate acquisitions and manage costs related thereto;

our debt obligations, our debt service requirements, and our ability to operate

our business, pursue business strategies and incur additional debt in light of

covenants contained in our outstanding debt agreements;

risks related to our U.S. Government contracting activities, including

liabilities resulting from legal and regulatory proceedings, inquiries, or

investigations related to such activities;

the potential of a significant reduction in defense sales due to decreases in

the amount of U.S. Federal defense spending, including the impacts of the

sequestration of appropriations under the Budget Control Act of 2011 (the

"Budget Act"), or other specific budget cuts impacting defense programs in

which we participate;

changes in government spending patterns and/or priorities;

future impairment charges resulting from changes in the estimates of fair value

of reporting units or of long-lived assets;

future results of our subsidiaries;

environmental liabilities related to manufacturing activities and/or real

estate acquisitions;

our continued access to a stable workforce and favorable labor relations with

our employees;

physical and other risks related to our operations and suppliers, including

natural disasters, which could disrupt production;

our ability to successfully manage regulatory, tax, and legal matters

(including product liability, patent, and intellectual property matters);

risks from operating internationally, including the impact on reported earnings

from fluctuations in foreign currency exchange rates, and compliance with and

changes in the legal and regulatory environments of the United States and the

countries in which we operate;

fair value of defined benefit plan assets and assumptions used in determining

our retirement pension and other postretirement benefit obligations and related

expenses including, among others, discount rates and investment return on

pension assets;

our operations may be adversely affected by information systems interruptions

or intrusions; and

certain provisions of our charter documents and Delaware law that could

discourage or prevent others from acquiring our company.

These factors are representative of the risks, uncertainties, and assumptions that could cause actual outcomes and results to differ materially from what is expressed or forecast in our forward-looking statements. Other factors are discussed under the caption "Risk Factors" in Part I, Item 1A in our most recent Annual Report on Form 10-K filed with the SEC (our "Form 10-K"), as updated from time to time in our subsequent Securities and Exchange Commission ("SEC") filings. We undertake no obligation to revise or update any forward-looking statements for any reason. Unless we have indicated otherwise or the context otherwise requires, references in this Quarterly Report on Form 10-Q (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.

This discussion should be read together with Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recent Form 10-K and the Condensed Consolidated Financial Statements and Notes included therein and in this report. 31

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Non-U.S. GAAP Financial Measures

Earnings before interest and taxes ("EBIT"), earnings before interest, taxes, depreciation and amortization ("EBITDA"), and free cash flow are financial measures not prepared and presented in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").



Earnings based non-U.S. GAAP financial measures

Management uses EBIT to evaluate Woodward's performance without financing and tax related considerations, as these elements may not fluctuate with operating results. Management uses EBITDA in evaluating Woodward's operating performance, making business decisions, including developing budgets, managing expenditures, forecasting future periods, and evaluating capital structure impacts of various strategic scenarios. Securities analysts, investors and others frequently use EBIT and EBITDA in their evaluation of companies, particularly those with significant property, plant, and equipment, and intangible assets subject to amortization. EBIT and EBITDA for the three and nine-months ended June 30, 2014 and June 30, 2013 were as follows: Three-Months Ended June 30, Nine-Months Ended June 30, 2014 2013 2014 2013 Net earnings $ 46,001$ 23,663$ 114,182$ 93,477 Income taxes 16,467 11,834 37,986 30,893 Interest expense 5,972 6,723 18,219 20,196 Interest income (73) (68) (189) (205) EBIT 68,367 42,152 170,198 144,361 Amortization of intangible assets 8,357 9,769 25,498 27,249 Depreciation expense 10,489 8,559 32,183 28,971 EBITDA $ 87,213$ 60,480$ 227,879$ 200,581 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 EBIT and EBITDA exclude certain financial information compared with net earnings, the most comparable U.S. GAAP financial measure, users of this financial information should consider the information that is excluded. Our calculations of EBIT and 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 as net cash flows provided by operating activities less payments for property, plant and equipment, in reviewing the financial performance of Woodward's various business groups and evaluating cash levels. Securities analysts, investors, and others frequently use free cash flow in their evaluation of companies. The use of this non-U.S. GAAP financial measure 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. Free cash flow does not necessarily represent funds available for discretionary use and is not necessarily a measure of our ability to fund our cash needs. Our calculation of free cash flow may differ from similarly titled measures used by other companies, limiting its usefulness as a comparative measure. Free cash flows for the nine-months ended June 30, 2014 and June 30, 2013 were as follows: Nine-Months Ended June 30, 2014 2013



Net cash provided by operating activities $ 183,890$ 133,017 Payments for property, plant and equipment (104,530) (78,515) Free cash flow

$ 79,360$ 54,502 32

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OVERVIEW Operational Highlights Quarter to Date Highlights



Net sales for the third quarter of fiscal year 2014 were $524,284, an increase of $40,525 or 8.4%, compared to $483,759 for the third quarter of the prior fiscal year.

Net earnings for the third quarter of fiscal year 2014 were $46,001, or $0.69 per diluted share, an increase of $22,338, or 94.4%, compared to $23,663, or $0.34 per diluted share, for the third quarter of fiscal year 2013. During the third quarter of fiscal year 2013, net earnings results included specific charges of $15,707, or $0.17 per diluted share, related to the realignment of our renewable power business. The effective tax rate in the third quarter of fiscal year 2014 was 26.4% compared to 33.3% for the third quarter of the prior fiscal year. EBIT for the third quarter of fiscal year 2014 was $68,367, up 62.2% from $42,152 in the same period of fiscal year 2013. The prior year's third quarter EBIT included the $15,707 of specific charges related to our renewable power business. EBITDA for the third quarter of fiscal year 2014 was $87,213, an increase of 44.2% from $60,480 for the same period of fiscal year 2013.



Year to Date Highlights

Net sales for the first nine months of fiscal year 2014 were $1,435,793, an increase of 4.2% from $1,377,611 for the first nine months of the prior fiscal year. Net sales for the first nine months of fiscal 2014, excluding the Duarte Business (discussed below) for the first three months of fiscal year 2014, were $1,404,361, an increase of 1.9% from the first nine months of the prior fiscal year. Net earnings for the first nine months of fiscal year 2014 were $114,182, or $1.68 per diluted share, an increase of $20,705, or 22.1%, compared to $93,477, or $1.34 per diluted share, for the first nine months of fiscal year 2013. The first nine months of fiscal year 2013 net earnings results included specific charges of $15,707, or $0.17 per diluted share. The effective tax rate in the first nine months of fiscal year 2014 was 25.0% compared to 24.8% for the first nine months of the prior fiscal year. EBIT for the first nine months of fiscal year 2014 was $170,198, up 17.9% from $144,361 in the same period of fiscal year 2013. The first nine months of fiscal year 2013 included the $15,707 of specific charges related to our renewable power business. EBITDA for the first nine months of fiscal year 2014 was $227,879, up 13.6% from EBITDA of $200,581 for the same period of fiscal year 2013. Duarte Business Acquisition On December 27, 2012, Woodward entered into a definitive asset purchase agreement with GE Aviation Systems LLC (the "Seller") and General Electric Company for the acquisition of substantially all of the assets and certain liabilities related to the Seller's thrust reverser actuation systems business located in Duarte, California (the "Duarte Business") for an aggregate purchase price of $200,000. The sale was completed on December 28, 2012, and we paid cash at closing in the amount of $198,900. The Duarte Business develops and manufactures motion control technologies and platforms, more specifically thrust reverser actuation systems. The Duarte Business serves customers such as Airbus, Boeing, General Electric, Safran and the U.S. Government. Its products are used primarily on commercial aircraft, such as the Boeing 737, 747 and 777, and the Airbus A320. The Duarte Business has been integrated into Woodward's Aerospace segment and included in our operating results since the acquisition. Due to the timing of the closing of the acquisition, the Duarte Business had no impact on net sales, and except for acquisition costs of $1,707, had no impact on EBIT or net earnings for the first quarter of fiscal year 2013.



Liquidity Highlights

Net cash provided by operating activities for the first nine months of fiscal year 2014 was $183,890, compared to $133,017 for the same period of fiscal year 2013. Free cash flow for the first nine months of fiscal year 2014 was $79,360, compared to free cash flow of $54,502 for the same period of fiscal year 2013, primarily attributable to higher cash flow from operations in the current year related mostly to improved earnings and working capital management, partially offset by higher levels of capital expenditures in the current year. 33 -------------------------------------------------------------------------------- On October 1, 2013, we entered into a note purchase agreement (the "2013 Note Purchase Agreement") relating to the sale by Woodward of an aggregate principal amount of $250,000 of its senior unsecured notes in a series of private placement transactions. We issued the Series G, H and I Notes on October 1, 2013 in an aggregate principal amount of $100,000 and used the proceeds to repay all of the outstanding balance on the Series B Notes due October 1, 2013. We issued the Series J, K and L Notes in an additional $150,000 aggregate principal amount on November 15, 2013 and used the proceeds to partially repay the uncommitted line of credit discussed below. In connection with the acquisition of the Duarte Business on December 21, 2012, we entered into a 364 day uncommitted line of credit with JPMorgan Chase Bank, N.A. (the "Line of Credit"), which provided for unsecured loans to the Company of up to $200,000 on a revolving basis. The Line of Credit was repaid in full and terminated on December 20, 2013. At June 30, 2014, we held $95,842 in cash and cash equivalents, and had total outstanding debt of $665,000 with additional borrowing availability of $428,488 under our $600,000 revolving credit facility, net of outstanding letters of credit. There was additional borrowing capacity of $28,152 under various foreign lines of credit and foreign overdraft facilities.



RESULTS OF OPERATIONS

The following tables set forth selected consolidated statements of earnings data as a percentage of net sales for each period indicated:

Three-Months Ended Nine-Months Ended % of Net % of Net % of Net % of Net June 30, 2014 Sales June 30, 2013



Sales June 30, 2014 Sales June 30, 2013 Sales Net sales

$ 524,284 100 % $ 483,759



100 % $ 1,435,793 100 % $ 1,377,611 100 % Costs and expenses: Cost of goods sold

372,571 71.1 349,482 72.2 1,028,065 71.6 987,155 71.7 Selling, general, and administrative expenses 40,468 7.7 46,747 9.7 113,079 7.9 120,371 8.7 Research and development costs 34,990 6.7 35,487 7.3 100,219 7.0 99,505 7.2 Amortization of intangible assets 8,357 1.6 9,769 2.0 25,498 1.8 27,249 2.0 Interest expense 5,972 1.1 6,723 1.4 18,219 1.3 20,196 1.5 Interest income (73) (0.0) (68) (0.0) (189) (0.0) (205) (0.0) Other (income) expense, net (469) (0.1) 122 0.0 (1,266) (0.1) (1,030) (0.1) Total costs and expenses 461,816 88.1 448,262 92.7 1,283,625 89.4 1,253,241 91.0 Earnings before income taxes 62,468 11.9 35,497 7.3 152,168 10.6 124,370 9.0 Income tax expense 16,467 3.1 11,834 2.4 37,986 2.6 30,893 2.2 Net earnings $ 46,001 8.8 $ 23,663 4.9 $ 114,182 8.0 $ 93,477 6.8



Other select financial data:

June 30, September 30, 2014 2013 Working capital $ 661,620$ 541,183 Total debt 665,000 550,000



Total stockholders' equity 1,133,997 1,142,545

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Net Sales Consolidated net sales for the third quarter of fiscal year 2014 increased by $40,525, or 8.4%, compared to the same period of fiscal year 2013. Consolidated net sales for the first nine months of fiscal year 2014 increased by $58,182, or 4.2% compared to the same period of fiscal year 2013. Details of the changes in consolidated net sales are as follows: Three-Month Nine-Month Period Period Consolidated net sales for the period ended June 30, 2013 $ 483,759$ 1,377,611 Aerospace volume (1,740) (34,274) Energy volume 37,435 45,257 Price and sales mix 3,621 13,813 Duarte Business net sales from October 2013 to December 2013 -



31,432

Effects of changes in foreign currency rates 1,209



1,954

Consolidated net sales for the period ended June 30, 2014 $ 524,284$ 1,435,793 The increase in net sales for the third quarter of fiscal year 2014 was primarily attributable to improvements in a number of markets within both our Energy and Aerospace segments, partially offset by decreased volumes in defense sales in our Aerospace segment and lower sales of compressed natural gas ("CNG") systems in our Energy segment. Net sales for the first nine months of fiscal year 2014 include sales from the Duarte Business for the first quarter of fiscal year 2014 for which there were no comparable sales in the first quarter of fiscal year 2013 due to the timing of the acquisition. The remaining increase in net sales for the first nine months of fiscal year 2014 was primarily attributable to improvements in a number of markets within both our Energy and Aerospace segments, mostly offset by decreased volumes in defense sales in our Aerospace segment and lower sales of CNG systems in our Energy segment.



Price changes: Increases in selling prices were driven primarily by our Aerospace segment markets.

Foreign currency exchange rates: During the third quarter and first nine months of fiscal year 2014, our net sales were positively impacted by $1,209 and $1,954, respectively, due to favorable fluctuations in foreign currency exchange rates compared to the same periods of fiscal year 2013. Our worldwide sales activities are primarily denominated in U.S. dollars ("USD"), European Monetary Units (the "Euro"), Great Britain pounds ("GBP"), Japanese yen ("JPY"), and Chinese yuan ("CNY"). As the USD, Euro, GBP, JPY, and CNY fluctuate against each other and other currencies, we are exposed to gains or losses on sales transactions. If the CNY, which the Chinese government has not historically allowed to fluctuate significantly against USD, is allowed to fluctuate against USD in the future, we would be exposed to greater variability on sales transactions denominated in CNY. For additional information on foreign currency exchange rate risk, please refer to the risk factor titled "We derive a significant portion of our revenues from non-U.S. sales and are subject to the risks inherent in doing business in other countries" set forth under the caption "Risk Factors" in Part I, Item 1A of our most recent Form 10-K.



Costs and Expenses

Cost of goods sold, selling, general, and administrative expenses, and research and development costs as a percent of net sales decreased in the third quarter and first nine months of fiscal year 2014 as compared to the same periods of the prior fiscal year. This decrease in costs and expenses as a percent of net sales reflects several years of lean implementation, productivity improvements and cost control initiatives across the entire organization. The Woodward variable compensation plan covers all segments and substantially all members. The third quarter of fiscal year 2014 reflects a significant increase in our company-wide variable compensation expense both sequentially and compared to the prior year third quarter. As previously reported, the third quarter of fiscal year 2013 included specific charges of $15,707 related to our renewable power business. Uncertainty with respect to U.S. and other government renewable power incentives and economic factors associated with alternate energy sources resulted in significant overcapacity and financial distress in the renewable power industry, particularly in our fiscal year 2013. As a result, we made a decision in fiscal year 2013 to align our 35

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renewable power business appropriately for the then current environment and foreseeable future, through revaluation of its assets and liabilities, including workforce management actions.

Cost of goods sold increased by $23,089 to $372,571 for the third quarter of fiscal year 2014 from $349,482 for the third quarter of fiscal year 2013. Cost of goods sold for the first nine months of fiscal year 2014 increased by $40,910 to $1,028,065 from $987,155 for the first nine months of fiscal year 2013. The increase in costs of goods sold for the three and nine-month periods is primarily attributable to increased sales in our Energy segment and significant increases in variable compensation compared to the prior year periods. Cost of goods sold for the third quarter and first nine months of fiscal year 2013 included $8,300 of the specific charges (discussed above) related to the realignment of the renewable power business within our Energy segment. Gross margins (as measured by net sales less cost of goods sold, divided by net sales) were 28.9% for the third quarter of fiscal year 2014, compared to 27.8% for the same period of the prior year. Gross margins were 28.4% for the first nine months of fiscal year 2014, compared to 28.3% for the same period of the prior year. Excluding the $8,300 of specific charges from the gross margins in fiscal year 2013, gross margins for the third quarter and first nine months of fiscal year 2014 were down slightly compared to the same periods of fiscal year 2013, primarily related to significant increases in variable compensation in fiscal year 2014. Selling, general, and administrative expenses decreased by $6,279 or 13.4% to $40,468 for the third quarter of fiscal year 2014 as compared to $46,747 for the same period of fiscal year 2013. Selling, general and administrative expenses as a percentage of net sales decreased to 7.7% for the third quarter of fiscal year 2014 as compared to 9.7% for the same period of fiscal year 2013. Selling, general, and administrative expenses decreased by $7,292, or 6.1%, to $113,079 for the first nine months of fiscal year 2014 as compared to $120,371 for the same period of fiscal year 2013. Selling, general, and administrative expenses as a percentage of net sales decreased to 7.9% for the first nine months of fiscal year 2014 compared to 8.7% for the same period of fiscal year 2013. The third quarter and first nine months of fiscal year 2013 included $7,407 of the specific charges (discussed above) related to the realignment of the renewable power business within our Energy segment. Excluding these specific charges in the prior fiscal year periods, selling, general and administrative expenses in the current fiscal year were comparable to the prior year for both the three and nine-month periods. In both the third quarter and first nine months of fiscal year 2014, significantly higher levels of variable compensation were offset by cost control initiatives when compared to the same periods of the prior fiscal year. Research and development costs decreased by $497, or 1.4%, to $34,990 for the third quarter of fiscal year 2014 as compared to $35,487 for the same period of fiscal year 2013. Research and development costs decreased as a percentage of net sales to 6.7% for the third quarter of fiscal year 2014 as compared to 7.3% for the same period of fiscal year 2013. Research and development costs increased by $714, or 0.7%, to $100,219 for the first nine months of fiscal year 2014 as compared to $99,505 for the same period of fiscal year 2013. Research and development costs decreased as a percentage of net sales to 7.0% for the first nine months of fiscal year 2014 as compared to 7.2% for the same period of fiscal year 2013. Research and development costs for both the third quarter and first nine months of fiscal year 2014 reflected lower spending and increased variable compensation when compared to the same periods 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 due to the timing of achieving development milestones. Amortization of intangible assets decreased to $8,357 and $25,498 for the third quarter and first nine months of fiscal year 2014, respectively, compared to $9,769 and $27,249 for the same respective periods of fiscal year 2013. As a percentage of net sales, amortization of intangible assets decreased to 1.6% and 1.8% for the third quarter and first nine months of fiscal year 2014, respectively, as compared to 2.0% for both of the same periods of fiscal year 2013. Interest expense decreased to $5,972 and $18,219 for the third quarter and first nine months of fiscal year 2014, respectively, compared to $6,723 and $20,196 for the same respective periods of fiscal year 2013. As a percentage of net sales, interest expense was 1.1% and 1.3% for the third quarter and first nine months of fiscal year 2014, respectively, as compared to 1.4% and 1.5%, respectively, for the same periods of fiscal year 2013. 36

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Income taxes were provided at an effective rate on earnings before income taxes of 26.4% and 25.0% for the third quarter and first nine months of fiscal year 2014, respectively, compared to 33.3% and 24.8%, respectively, for the same periods of fiscal year 2013. The changes in components of our effective tax rate (as a percentage of earnings before income taxes) were attributable to the following: Three-Month Nine-Month Period Period



Effective tax rate for the period ended June 30, 2013 33.3 %

24.8 % Research and experimentation credit 1.6



6.7

Adjustment of prior period tax items (0.5)



(3.8)

Taxes on international activities (7.8)



(2.8)

Other (0.2)



0.1

Effective tax rate for the period ended June 30, 2014 26.4 %

25.0 % The decrease in the year-over-year third quarter effective tax rate is attributable to higher earnings in jurisdictions with lower tax rates, as the prior year third quarter foreign earnings included the specific charges of $15,707 related to our renewable power business. The year-over year third quarter effective tax rate also decreased because of reduced taxes on current and anticipated future distributions of foreign earnings to the U.S and the favorable impact of reviews by tax authorities. The overall year-over-year third quarter effective tax rate decrease was partially offset by the lack of a U.S. research and experimentation credit in the current year's third quarter. The year-over-year effective tax rate for the first nine months increased slightly due to the retroactive impact of the reinstatement of the U.S. research and experimentation credit in fiscal year 2013, which did not recur in fiscal year 2014. This increase was offset by larger net favorable resolutions and reviews of tax matters and lapses of applicable statutes of limitations, higher earnings in jurisdictions with lower tax rates, and reduced taxes on current and anticipated future distributions of foreign earnings to the U.S in the current year. Segment Results



The following table presents sales by segment:

Three-Months Ended June 30, Nine-Months Ended June 30, 2014 2013 2014 2013 Net sales: Aerospace $ 274,923 52.4 % $ 272,218 56.3 % $ 765,816 53.3 % $ 754,100 54.7 % Energy 249,361 47.6 211,541 43.7 669,977 46.7 623,511 45.3 Consolidated

net sales $ 524,284 100.0 % $ 483,759 100.0 % $ 1,435,793 100.0 % $ 1,377,611 100.0 %



The following table presents earnings by segment:

Three-Months Ended June 30, Nine-Months Ended June 30, 2014 2013 2014 2013 Aerospace $ 39,357$ 38,949$ 102,195$ 111,740 Energy 40,203 12,430 99,162 60,573 Total segment earnings 79,560 51,379 201,357 172,313 Nonsegment expenses (11,193) (9,227) (31,159) (27,952) Interest expense, net (5,899) (6,655) (18,030) (19,991) Consolidated earnings before income taxes 62,468 35,497 152,168 124,370 Income tax expense (16,467) (11,834) (37,986) (30,893) Consolidated net earnings $ 46,001$ 23,663$ 114,182$ 93,477 37

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The following table presents earnings by segment as a percent of segment net sales: Three-Months Ended June 30, Nine-Months Ended June 30, 2014 2013 2014 2013 Aerospace 14.3% 14.3% 13.3% 14.8% Energy 16.1% 5.9% 14.8% 9.7% Aerospace Aerospace segment net sales were $274,923 for third quarter of fiscal year 2014, compared to $272,218 for the same period of the prior year. The slight increase in segment net sales for the third quarter of fiscal year 2014 as compared to the same period of fiscal year 2013 was driven primarily by increases in commercial original equipment manufacturer ("OEM") and aftermarket sales, mostly offset by lower defense sales in both aftermarket and OEM. Aerospace segment net sales were $765,816 for the first nine months of fiscal year 2014, compared to $754,100 for the same period of fiscal year 2013. Segment net sales for first nine months of fiscal year 2014, excluding the sales from the acquired Duarte Business for the first quarter of fiscal year 2014, for which there were no comparable sales in the first quarter of fiscal year 2013 due to the timing of the acquisition, were $734,384, a decrease of $19,716, or 2.6%, compared to the same period of the prior fiscal year. Segment net sales for the first nine months of fiscal year 2014 excluding the net sales from the acquired Duarte Business, were lower compared to the same period of fiscal year 2013, driven primarily by significantly lower defense sales in both aftermarket and OEM, partially offset by increases in commercial OEM and aftermarket sales. Defense sales continue to reflect the ongoing U.S. government budget constraints, which impact the timing of contracts and upgrade programs and have caused quarterly variability during the current fiscal year, and have resulted in lower defense sales in the first nine months of fiscal year 2014 as compared to the prior fiscal year. Defense aftermarket sales decreased significantly from the prior year, particularly related to sales for rotorcraft programs. Defense OEM sales also declined as compared to the prior year, but not as significantly. We anticipate that continued budget uncertainties may result in quarterly variability in our defense sales for the remainder of the fiscal year. During our second quarter of fiscal year 2013, the sequestration of U.S. federal government appropriations took effect under the Budget Act. The impact of the sequester has been tempered by Congressional agreement, but it continues to result in budget uncertainties. We will continue to monitor any potential long-term effects of the Budget Act on our business. Commercial OEM aircraft deliveries of narrow-body and wide-body aircraft have continued to increase based on improved airline demand and new product introduction. The commercial aftermarket showed improvement as global passenger traffic growth continues to drive aircraft utilization. Aerospace segment earnings increased by $408, or 1.0%, to $39,357 and decreased by $9,545, or 8.5%, to $102,195 for the third quarter and first nine months of fiscal year 2014, respectively, as compared $38,949 and $111,740, respectively, for the same periods of fiscal year 2013 due to the following: Three-Month Nine-Month Period Period



Earnings for the period ended June 30, 2013$ 38,949$ 111,740 Sales volume

(2,139) (15,860) Price, sales mix and productivity 2,067 2,335 Research and development expense 4,633 6,723 Variable compensation (8,165) (10,026) Cost control initiatives 1,542 3,673 Other, net 2,470 3,610



Earnings for the period ended June 30, 2014$ 39,357$ 102,195

Segment earnings as a percentage of sales were 14.3% for the third quarter of both fiscal years 2014 and 2013. Segment earnings in the third quarter of fiscal year 2014 reflected cost control initiatives and lower research and development expenses, offset by increases in variable compensation. Segment earnings as a percentage of sales were 13.3% for first nine months of fiscal year 2014 compared, to 14.8% for the same period of fiscal year 2013. The decrease in Aerospace segment 38

-------------------------------------------------------------------------------- earnings in the first nine months of fiscal year 2014 compared to the same period of fiscal year 2013 was primarily attributable to the impact of reduced defense sales volumes and increases in variable compensation, partially offset by cost control initiatives and lower research and development expenses.



Energy

Energy segment net sales were $249,361 and $669,977 for the third quarter and first nine months of fiscal year 2014, respectively, compared to $211,541 and $623,511 for the same respective periods of fiscal year 2013. The increase in sales is primarily attributable to improvements in several markets, including the wind turbine converter, aero-derivative turbine, and large gas and diesel engine markets, partially offset by lower sales of CNG systems. Energy segment earnings increased by $27,773, or 223.4%, to $40,203 and $38,589, or 63.7% to $99,162 for the third quarter and first nine months of fiscal year 2014, respectively, as compared to $12,430 and $60,573, respectively, for the same periods of fiscal year 2013 due to the following: Three-Month Nine-Month Period Period Earnings for the period ended June 30, 2013 $ 12,430 $



60,573

Sales volume 15,975



19,655

Price, sales mix and productivity (2,260)



3,451

Specific charges related to renewable power business 15,707 15,707 Realignment savings 1,200 4,266 Variable compensation (6,083) (7,195) Effects of changes in foreign currency rates 703



(1,529)

Other, net 2,531



4,234

Earnings for the period ended June 30, 2014 $ 40,203$ 99,162 Segment earnings as a percentage of sales increased to 16.1% and 14.8% in the third quarter and first nine months of fiscal year 2014, respectively, compared to 5.9% and 9.7%, respectively, for the same periods of fiscal year 2013. Uncertainty with respect to U.S. and other government renewable power incentives and economic factors associated with alternate energy sources resulted in significant overcapacity and financial distress in the renewable power industry, particularly in our fiscal year 2013. As a result, we made a decision in fiscal year 2013 to align our renewable power business appropriately for the then current environment and foreseeable future, through revaluation of its assets and liabilities, including workforce management actions, which resulted in specific charges of $15,707 in the third quarter of fiscal year 2013. Excluding the specific charges of $15,707, the remaining increase in the Energy segment earnings for the third quarter and first nine months of fiscal year 2014 as compared to the same respective periods of fiscal year 2013 was driven primarily by increased sales volume and related fixed cost leverage, and realignment savings, partially offset by increases in variable compensation. Foreign currency exchange rates had a favorable impact of $703 and an unfavorable impact of $1,529 for the third quarter and first nine months of fiscal year 2014, respectively, compared to the same periods of fiscal year 2013.



Nonsegment expenses

Nonsegment expenses for the third quarter and first nine months of fiscal year 2014 increased to $11,193 and $31,159, respectively, compared to $9,227 and $27,952 for the same periods for fiscal year 2013. As a percent of sales, nonsegment expenses for the third quarter and first nine months of fiscal year 2014 increased to 2.1% and 2.2% of net sales, respectively, compared to 1.9% and 2.0% of net sales for the same periods of fiscal year 2013. The increase in nonsegment expense was primarily related to increases in variable compensation.



LIQUIDITY AND CAPITAL RESOURCES

Historically, we have been able to satisfy our working capital needs, as well as capital expenditures, product development and other liquidity requirements associated with our operations, with cash flow provided by operating activities and borrowings under our credit facilities. We expect that cash generated from our operating activities, together with borrowings under our revolving credit facility, will be sufficient to fund our continuing operating needs, including capital expansion funding. 39

-------------------------------------------------------------------------------- Our aggregate cash and cash equivalents were $95,842 and $48,556, and our working capital was $661,620 and $541,183 at June 30, 2014 and September 30, 2013, respectively. Of the $95,842 of cash and cash equivalents held at June 30, 2014, $79,296 was held by our foreign subsidiaries. We are not presently aware of any significant restrictions on the repatriation of these funds, although a portion is considered indefinitely reinvested in these foreign subsidiaries. If these funds were needed to fund our operations or satisfy obligations in the United States, they could be repatriated and their repatriation into the United States may cause us to incur additional U.S. income taxes or foreign withholding taxes. Any additional taxes could be offset, in part or in whole, by foreign tax credits. The amount of such taxes and application of tax credits would be dependent on the income tax laws and other circumstances at the time these amounts are repatriated. Based on these variables, it is not practicable to determine the income tax liability that might be incurred if these funds were to be repatriated. Consistent with business practice common in China, Woodward's Chinese subsidiary accepts from Chinese customers, in settlement of certain customer accounts receivable, bank drafts issued by creditworthy Chinese banks. Bank drafts are financial instruments issued by Chinese financial institutions as part of financing arrangements between the financial institution and a customer of the financial institution. Bank drafts represent a commitment by the issuing financial institution to pay a certain amount of money at a specified future maturity date to the legal owner of the bank draft as of the maturity date.



The

maturity date of bank drafts varies, but it is Woodward's policy to only accept bank drafts with maturity dates no more than 180 days from the date of Woodward's receipt of such draft. The issuing financial institution is the obligor, not Woodward's customers. Upon Woodward's acceptance of a bank draft from a customer, such customer has no further obligation to pay Woodward for the related accounts receivable balance. At June 30, 2014 and September 30, 2013, Woodward had bank drafts of $50,144 and $72,954, respectively, recorded as non-customer accounts receivable on its condensed consolidated balance sheets. Woodward only accepts bank drafts issued by creditworthy banks as to which the credit risk associated with the bank draft is assessed to be minimal. On October 1, 2013, we entered into the 2013 Note Purchase Agreement relating to the sale by Woodward of an aggregate principal amount of $250,000 of its senior unsecured notes in a series of private placement transactions. We issued the Series G, H and I Notes on October 1, 2013 in an aggregate principal amount of $100,000 and used the proceeds to repay all of the outstanding balance on our Series B Notes due October 1, 2013. We issued the Series J, K and L Notes in an additional $150,000 aggregate principal amount on November 15, 2013. The notes issued under the 2013 Note Purchase Agreement have not been registered under the Securities Act of 1933 and they may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. Holders of the notes under the 2013 Note Purchase Agreement are not entitled to any registration rights. For further discussion of the 2013 Note Purchase Agreement, see Note 13, 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. Our revolving credit facility, which we entered into on July 10, 2013, matures in July 2018 and provides a borrowing capacity of up to $600,000 with the option to increase total available borrowings to up to $800,000, subject to lenders' participation. We can borrow against our $600,000 revolving credit facility as long as we are in compliance with all of our debt covenants. Historically, we have used borrowings under our revolving credit facilities to meet certain short-term working capital needs, as well as for strategic uses, including repurchases of our stock, payments of dividends, and acquisitions. In addition, we have various foreign credit facilities, some of which are tied to net amounts on deposit at certain foreign financial institutions. These foreign credit facilities are reviewed annually for renewal. We use borrowings under these foreign credit facilities to finance certain local operations on a periodic basis. For further discussion of our $600,000 revolving credit facility and our other credit facilities, see Note 13, Credit facilities, short-term borrowings and long-term debt in the Notes to the Condensed Consolidated Financial Statements in Part I, Item I of this Form 10-Q. At June 30, 2014, we had total outstanding debt of $665,000 with additional borrowing availability of $428,488 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $28,152 under various foreign credit facilities. In connection with the acquisition of the Duarte Business on December 21, 2012, we entered into the Line of Credit. The Line of Credit provided for unsecured loans to the Company of up to $200,000 on a revolving basis. Loans made under the Line of Credit bore interest at a floating rate based, at the Company's option, on either the prime rate or an adjusted LIBOR. The Line of Credit was repaid in full and terminated on December 20, 2013. 40

-------------------------------------------------------------------------------- At June 30, 2014, we had $165,000 of borrowings outstanding on our revolving credit facility, of which all of it was classified as long-term, and no borrowings outstanding on our foreign credit facilities. Revolving credit facility and short-term borrowing activity during the nine-months ended June 30, 2014 was as follows: Maximum daily balance during the period $ 205,000 Average daily balance during the period $ 124,297



Weighted average interest rate on average daily balance 1.36%

We believe we were in compliance with all our debt covenants at June 30, 2014.

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 stock, payment of dividends, significant capital expenditures, consideration of strategic acquisitions and other potential uses of cash. We are currently developing a second campus in the greater-Rockford, Illinois area for our Aerospace segment. This campus is intended to support the growth expected over the next ten years and beyond stimulated by our being awarded a substantial number of new system platforms, particularly on narrow-body aircraft. These investments are expected to result in future productivity gains for our existing and new business. However, given the significance of the anticipated volumes associated with the new system platforms, we still expect our Rockford area workforce to increase substantially, by as much as 70%-90% from current levels, by the end of 2021. In addition, in September 2013, we invested in a building site in Niles, Illinois. We are building a new facility on this site for our Aerospace segment and will relocate some of our operations currently residing in nearby Skokie, Illinois, to this new facility. We are also developing a new campus at our corporate headquarters in Fort Collins, Colorado to support the continued growth of our Energy segment by supplementing our existing Colorado manufacturing facilities and corporate headquarters. We anticipate investing approximately $500,000 through fiscal year 2016 in land, buildings and equipment among our two Rockford area campuses, the facility in Niles, Illinois, and a new campus at our corporate headquarters in Fort Collins, Colorado. 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 banks supplying our borrowing requirements refuse to honor their contractual commitments, cease lending, or declare bankruptcy. While we believe the lending institutions participating in our credit arrangements are financially stable, events in the global credit markets, including the failure, takeover or rescue by various government entities of major financial institutions, have created uncertainty with respect to credit availability. 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. Cash Flows Nine-Months Ended June 30, 2014 2013 Net cash provided by operating activities $ 183,890 $



133,017

Net cash used in investing activities (104,272)



(277,021)

Net cash provided by (used in) financing activities (32,786) 142,887 Effect of exchange rate changes on cash and cash equivalents 454



260

Net change in cash and cash equivalents 47,286



(857)

Cash and cash equivalents at beginning of period 48,556 61,829 Cash and cash equivalents at end of period $ 95,842$ 60,972

41

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Net cash flows provided by operating activities for the first nine months of fiscal year 2014 was $183,890 compared to $133,017 for the same period of fiscal year 2013. The increase of $50,873 is primarily attributable to improved working capital and higher earnings in the current fiscal year. Net cash flows used in investing activities for the first nine months of fiscal year 2014 was $104,272 compared to $277,021 for the same period of fiscal year 2013. The decrease in cash used in investing activities compared to the same period of the last fiscal year is due primarily to the acquisition of the Duarte Business in the first quarter of fiscal year 2013, which utilized $198,860 of cash. In addition, payments for property, plant and equipment increased by $26,015 to $104,530 in the first nine months of fiscal year 2014 as compared to $78,515 in the same period of fiscal year 2013 related mainly to the development of a second campus in the greater-Rockford, Illinois area, a new facility in Niles, Illinois, and a new campus at our headquarters in Fort Collins, Colorado. Net cash flows used in financing activities for the first nine months of fiscal year 2014 was $32,786 compared to net cash provided by financing activities of $142,887 for the same period of fiscal year 2013. During the first nine months of fiscal year 2014, we had net short and long-term borrowings of $115,002 compared to net debt borrowings of $192,868 in the prior year. The higher borrowings in the first nine months of fiscal year 2013 were primarily attributable to the acquisition of the Duarte Business. We utilized $141,488 to repurchase 3,272 shares of our common stock in the first nine months of fiscal year 2014 and $45,754 to repurchase 1,233 shares of our common stock in the first nine months of fiscal year 2013. These repurchases were made under our existing stock repurchase program, which is described in greater detail under "Unregistered Sales of Equity Securities and Use of Proceeds" in Part II, Item 2 of this Form 10-Q. Contractual Obligations We have various contractual obligations, including obligations related to long-term debt, operating leases, purchases, retirement pension benefit plans, and other postretirement benefit plans. These contractual obligations are summarized and discussed more fully in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recent Form 10-K. There have been no material changes to our various contractual obligations during the first nine months of fiscal year 2014 other than our entering into the 2013 Note Purchase Agreement as discussed in Note 13, Credit facilities, short-term borrowings and long-term debt, in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. Critical Accounting Policies The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Note 1, Operations and summary of significant accounting policies, to the Consolidated Financial Statements in our most recent Form 10-K describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Our critical accounting estimates, identified in Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our most recent Form 10-K include the discussion of estimates used for revenue recognition, purchase accounting, inventory valuation, postretirement benefit obligations, reviews for impairment of goodwill, and our provision for income taxes. Such accounting policies and estimates require significant judgments and assumptions to be used in the preparation of the Condensed Consolidated Financial Statements, and actual results could differ materially from the amounts reported.



New Accounting Standards

From time to time, the Financial Accounting Standards Board ("FASB") or other standards-setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update. 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. To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2, Recent accounting pronouncements, in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q. 42



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