UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission file number 000-08408
WOODWARD, INC.
(Exact name of registrant as specified in its charter)
Delaware	36-1984010
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1081 Woodward Way, Fort Collins, Colorado	80524
(Address of principal executive offices)	(Zip Code)
(970) 482-5811
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer☒    Accelerated filer ☐    Non-accelerated filer ☐    Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

As of April 17,  2017, 61,272,506shares of the registrant’s common stock with a par value of $0.001455 per share were outstanding.

TABLE OF CONTENTS
		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Condensed Consolidated Statements of Earnings	2
	Condensed Consolidated Statements of Comprehensive Earnings	3
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Cash Flows	5
	Condensed Consolidated Statements of Stockholders’ Equity	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
	Forward Looking Statements	29
	Overview	31
	Results of Operations	32
	Liquidity and Capital Resources	36
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	40
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 6.	Exhibits	41
	Signatures	42

1

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)

(Unaudited)

	Three-Months Ended				Six-Months Ended
	March 31,				March 31,
	2017		2016		2017		2016
Net sales	$	500,381	$	479,382	$	943,275	$	924,492
Costs and expenses:
Cost of goods sold		365,156		346,139		692,350		679,516
Selling, general and administrative expenses		43,172		36,823		76,968		77,605
Research and development costs		30,385		31,762		56,925		63,359
Amortization of intangible assets		6,431		6,926		12,889		13,872
Interest expense		6,790		6,234		13,630		13,142
Interest income		(474)		(441)		(879)		(888)
Other (income) expense, net (Note 16)		(1,315)		(2,427)		(5,903)		(4,436)
Total costs and expenses		450,145		425,016		845,980		842,170
Earnings before income taxes		50,236		54,366		97,295		82,322
Income tax expense		12,131		13,542		12,642		15,678
Net earnings	$	38,105	$	40,824	$	84,653	$	66,644
Earnings per share (Note 3):
Basic earnings per share	$	0.62	$	0.66	$	1.38	$	1.07
Diluted earnings per share	$	0.60	$	0.65	$	1.33	$	1.05
Weighted Average Common Shares Outstanding (Note 3):
Basic		61,310		61,639		61,436		62,351
Diluted		63,499		63,064		63,593		63,768
Cash dividends per share paid to Woodward common stockholders	$	0.125	$	0.110	$	0.235	$	0.210

See accompanying Notes to Condensed Consolidated Financial Statements

2

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(In thousands)

(Unaudited)

	Three-Months Ended				Six-Months Ended
	March 31,				March 31,
	2017		2016		2017		2016
Net earnings	$	38,105	$	40,824	$	84,653	$	66,644
Other comprehensive earnings:
Foreign currency translation adjustments		7,741		10,125		(10,894)		(129)
Gain (loss) on foreign currency transactions designated as hedges of net investments in foreign subsidiaries (Note 6)		(945)		(345)		2,885		517
Taxes on changes in foreign currency translation adjustments		(180)		(601)		(486)		(295)
Foreign currency translation and transactions adjustments, net of tax		6,616		9,179		(8,495)		93
Reclassification of net realized (gains) losses on derivatives to earnings (Note 6)		(18)		28		(36)		57
Taxes on changes in derivative transactions		7		(10)		14		(21)
Derivative adjustments, net of tax		(11)		18		(22)		36
Minimum retirement benefit liability adjustments (Note 18)
Amortization of:
Net prior service cost		57		57		113		113
Net loss		640		425		1,281		852
Foreign currency exchange rate changes on minimum retirement benefit liabilities		(312)		287		943		571
Taxes on changes in minimum retirement liability adjustments, net of foreign currency exchange rate changes		(152)		(290)		(845)		(576)
Pension and other postretirement benefit plan adjustments, net of tax		233		479		1,492		960
Total comprehensive earnings	$	44,943	$	50,500	$	77,628	$	67,733

See accompanying Notes to Condensed Consolidated Financial Statements

3

WOODWARD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

	March 31,		September 30,
	2017		2016
ASSETS
Current assets:
Cash and cash equivalents	$	78,953	$	81,090
Accounts receivable, less allowance for uncollectible amounts of $2,494 and $2,540, respectively		279,897		343,768
Inventories		506,275		461,683
Income taxes receivable		15,942		20,358
Other current assets		29,456		37,525
Total current assets		910,523		944,424
Property, plant and equipment, net		888,235		876,350
Goodwill		553,974		555,684
Intangible assets, net		184,577		197,650
Deferred income tax assets		19,421		20,194
Other assets		50,430		48,060
Total assets	$	2,607,160	$	2,642,362
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt	$	134,300	$	150,000
Accounts payable		177,730		169,439
Income taxes payable		3,046		4,547
Accrued liabilities		105,978		156,627
Total current liabilities		421,054		480,613
Long-term debt, less current portion		562,045		577,153
Deferred income tax liabilities		9,403		3,777
Other liabilities		359,866		368,224
Total liabilities		1,352,368		1,429,767
Commitments and contingencies (Note 20)
Stockholders' equity:
Preferred stock, par value $0.003 per share, 10,000 shares authorized, no shares issued		-		-
Common stock, par value $0.001455 per share, 150,000 shares authorized, 72,960 shares issued		106		106
Additional paid-in capital		160,559		141,570
Accumulated other comprehensive losses		(72,730)		(65,705)
Deferred compensation		7,060		5,089
Retained earnings		1,719,744		1,649,506
		1,814,739		1,730,566
Treasury stock at cost, 11,688  shares and 11,374 shares, respectively		(552,887)		(512,882)
Treasury stock held for deferred compensation, at cost, 186 shares and 157 shares, respectively		(7,060)		(5,089)
Total stockholders' equity		1,254,792		1,212,595
Total liabilities and stockholders' equity	$	2,607,160	$	2,642,362

See accompanying Notes to Condensed Consolidated Financial Statements.

4

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six-Months Ended March 31,
	2017		2016
Cash flows from operating activities:
Net earnings	$	84,653	$	66,644
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		39,007		32,621
Net gain on sales of assets		(3,662)		(1,601)
Stock-based compensation		13,763		11,422
Deferred income taxes		4,589		(81,496)
(Gain) loss on derivatives reclassified from accumulated comprehensive earnings into earnings		(36)		57
Proceeds from formation of joint venture (Note 4)		-		250,000
Changes in operating assets and liabilities:
Accounts receivable		61,324		53,666
Inventories		(48,022)		(45,918)
Accounts payable and accrued liabilities		(23,834)		(10,734)
Current income taxes		3,339		91,800
Retirement benefit obligations		(1,715)		(1,969)
Other		588		(2,810)
Net cash provided by operating activities		129,994		361,682
Cash flows from investing activities:
Payments for purchase of property, plant, and equipment		(43,053)		(99,316)
Net proceeds from sale of assets		3,682		2,112
Proceeds from sales of short-term investments		4,994		-
Net cash used in investing activities		(34,377)		(97,204)
Cash flows from financing activities:
Cash dividends paid		(14,415)		(13,086)
Proceeds from sales of treasury stock		11,223		5,288
Payments for repurchases of common stock		(61,782)		(117,820)
Borrowings on revolving lines of credit and short-term borrowings		684,200		300,000
Payments on revolving lines of credit and short-term borrowings		(706,600)		(385,596)
Payments of long-term debt and capital lease obligations		(204)		(50,075)
Net cash used in financing activities		(87,578)		(261,289)
Effect of exchange rate changes on cash and cash equivalents		(10,176)		(646)
Net change in cash and cash equivalents		(2,137)		2,543
Cash and cash equivalents at beginning of year		81,090		82,202
Cash and cash equivalents at end of period	$	78,953	$	84,745

See accompanying Notes toCondensed Consolidated Financial Statements

5

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)

	Number of shares				Stockholders' equity
									Accumulated other comprehensive (loss) earnings
	Preferred stock	Common stock	Treasury stock	Treasury stock held for deferred  compensation	Common stock		Additional paid-in capital		Foreign currency translation adjustments		Unrealized derivative gains (losses)		Minimum retirement benefit liability adjustments		Total accumulated other  comprehensive (loss) earnings		Deferred compensation		Retained earnings		Treasury stock at cost		Treasury stock held for deferred compensation		Total stockholders' equity
Balances as of October 1, 2015	-	72,960	(9,763)	(173)	$	106	$	131,231	$	(21,610)	$	166	$	(30,014)	$	(51,458)	$	4,322	$	1,495,274	$	(422,049)	$	(4,322)	$	1,153,104
Net earnings	-	-	-	-		-		-		-		-		-		-		-		66,644		-		-		66,644
Other comprehensive income (loss), net of tax	-	-	-	-		-		-		93		36		960		1,089		-		-		-		-		1,089
Cash dividends paid ($0.210 per share)	-	-	-	-		-		-		-		-		-		-		-		(13,086)		-		-		(13,086)
Purchases of treasury stock	-	-	(2,543)	-		-		-		-		-		-		-		-		-		(120,119)		-		(120,119)
Sales of treasury stock	-	-	254	-		-		(2,366)		-		-		-		-		-		-		8,274		-		5,908
Common shares issued from treasury stock for benefit plans	-	-	317	-		-		5,319		-		-		-		-		-		-		8,680		-		13,999
Stock-based compensation	-	-	-	-		-		11,422		-		-		-		-		-		-		-		-		11,422
Purchases of stock by deferred compensation plan	-	-	-	(24)		-		-		-		-		-		-		1,195		-		-		(1,195)		-
Distribution of stock from deferred compensation plan	-	-	-	23		-		-		-		-		-		-		(298)		-		-		298		-
Balances as of March 31, 2016	-	72,960	(11,735)	(174)	$	106	$	145,606	$	(21,517)	$	202	$	(29,054)	$	(50,369)	$	5,219	$	1,548,832	$	(525,214)	$	(5,219)	$	1,118,961
Balances as of October 1, 2016	-	72,960	(11,374)	(157)	$	106	$	141,570	$	(25,971)	$	179	$	(39,913)	$	(65,705)	$	5,089	$	1,649,506	$	(512,882)	$	(5,089)	$	1,212,595
Net earnings	-	-	-	-		-		-		-		-		-		-		-		84,653		-		-		84,653
Other comprehensive income (loss), net of tax	-	-	-	-		-		-		(8,495)		(22)		1,492		(7,025)		-		-		-		-		(7,025)
Cash dividends paid ($0.235 per share)	-	-	-	-		-		-		-		-		-		-		-		(14,415)		-		-		(14,415)
Purchases of treasury stock	-	-	(915)	-		-		-		-		-		-		-		-		-		(63,255)		-		(63,255)
Sales of treasury stock	-	-	376	-		-		(2,015)		-		-		-		-		-		-		14,710		-		12,695
Common shares issued from treasury stock for benefit plans	-	-	199	-		-		6,501		-		-		-		-		-		-		7,513		-		14,014
Common shares issued from treasury stock to settle employee liabilities	-	-	26	(26)		-		740		-		-		-		-		1,767		-		1,027		(1,767)		1,767
Stock-based compensation	-	-	-	-		-		13,763		-		-		-		-		-		-		-		-		13,763
Purchases and transfers of stock by/to deferred compensation plan	-	-	-	(3)		-		-		-		-		-		-		211		-		-		(211)		-
Distribution of stock from deferred compensation plan	-	-	-	-		-		-		-		-		-		-		(7)		-		-		7		-
Balances as of March 31, 2017	-	72,960	(11,688)	(186)	$	106	$	160,559	$	(34,466)	$	157	$	(38,421)	$	(72,730)	$	7,060	$	1,719,744	$	(552,887)	$	(7,060)	$	1,254,792

See accompanying Notes to Condensed Consolidated Financial Statements

6

WOODWARD, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)

Note 1.  Basis of presentation

The Condensed Consolidated Financial Statements of Woodward, Inc. (“Woodward” or the “Company”) as of March 31, 2017 and for the three and six-months ended March 31, 2017 and March 31, 2016, included herein, have not been audited by an independent registered public accounting firm.  These Condensed Consolidated Financial Statements reflect all normal recurring adjustments that, in the opinion of management, are necessary to present fairly Woodward’s financial position as of March 31, 2017, and the statements of earnings, comprehensive earnings, cash flows, and changes in stockholders’ equity for the periods presented herein.  The results of operations for the three and six-months ended March 31, 2017 are not necessarily indicative of the operating results to be expected for other interim periods or for the full fiscal year.  Dollar and share amounts contained in these Condensed Consolidated Financial Statements are in thousands, except per share amounts.

The Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations.

These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in Woodward’s most recent Annual Report on Form 10-K filed with the SEC and other financial information filed with the SEC.

Management is required to use estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported revenues and expenses recognized during the reporting period, and certain financial statement disclosures, in the preparation of the Condensed Consolidated Financial Statements included herein.  Significant estimates in these Condensed Consolidated Financial Statements include allowances for uncollectible amounts, net realizable value of inventories, customer rebates earned and payable, warranty reserves, useful lives of property and identifiable intangible assets, the evaluation of impairments of property, the provision for income tax and related valuation reserves, assumptions used in the determination of the funded status and annual expense of pension and postretirement employee benefit plans, the valuation of stock compensation instruments granted to employees and board members, and contingencies.  Actual results could vary from Woodward’s estimates.

Note 2.  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 (“ASC”) are communicated through issuance of an Accounting Standards Update (“ASU”).

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 requires that the service cost component of net periodic benefit costs from defined benefit and other postretirement benefit plans be included in the same Statement of Earnings captions as other compensation costs arising from services rendered by the covered employees during the period. The other components of net benefit cost will be presented in the Statement of Earnings separately from service costs. ASU 2017-07 is effective for fiscal years beginning after December 31, 2017 (fiscal year 2019 for Woodward). Following adoption, only service costs will be eligible for capitalization into manufactured inventories, which should reduce diversity in practice. Early adoption is permitted as of the beginning of Woodward’s fiscal year 2018. Woodward has not determined whether it will adopt the new guidance in fiscal year 2018 or fiscal year 2019, and expects changes to earnings before income taxes to be insignificant in the year of adoption.

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment,” to simplify financial reporting by eliminating the need to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under ASU 2017-04, an entity should perform its goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, up to the amount of goodwill allocated to that reporting unit. The new guidance effectively eliminates “Step 2” from the previous goodwill impairment test. ASU 2017-04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019 (fiscal year 2021 for Woodward). Early adoption is permitted for goodwill impairment tests performed on testing

7

dates after January 1, 2017. Woodward has not determined in which period it will adopt the new guidance but does not expect the adoption of ASU 2017-04 to have a significant impact on the results of its goodwill impairment testing.

In October 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.”  ASU 2016-16 eliminates the current U.S. GAAP exception deferring the tax effects of intercompany asset transfers (other than inventory) until the transferred asset is sold to a third party or otherwise recovered through use.  After adoption of ASU 2016-16, Woodward will recognize the tax consequences of intercompany asset transfers in the buyer’s and seller’s tax jurisdictions when the transfer occurs, even though the pre-tax effects of these transactions are eliminated in consolidation.  ASU 2016-16 is effective for fiscal years beginning after December 15, 2017 (fiscal year 2019 for Woodward), including interim periods within the year of adoption.  Early adoption is allowed only in the first quarter of fiscal year 2017 or the first quarter of fiscal year 2018. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. Woodward currently anticipates the adoption of ASU 2016-16 will result in balance sheet reclassifications, but based on Woodward’s current transactional activity such adjustments are not expected to be significant.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.”  ASU 2016-13 adds a current expected credit loss (“CECL”) impairment model to U.S. GAAP that is based on expected losses rather than incurred losses.  ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 (fiscal year 2021 for Woodward), including interim periods within the year of adoption.  Early adoption is permitted for fiscal years beginning after December 15, 2018 (fiscal year 2020 for Woodward), including interim periods within those fiscal years.  Woodward has not determined in which period it will adopt the new guidance but does not expect the application of the CECL impairment model to have a significant impact on Woodward’s allowance for uncollectible amounts for accounts receivable and notes receivable from municipalities.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).”  The purpose of ASU 2016-02 is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  In addition, ASU 2016-02 modifies the definition of a lease to clarify that an arrangement contains a lease when such arrangement conveys the right to control the use of an identified asset. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (fiscal year 2020 for Woodward), including interim periods within the year of adoption.  In transition, Woodward will be required to recognize and measure leases beginning in the earliest period presented using a modified retrospective approach; therefore, Woodward anticipates restating its Consolidated Financial Statements for the two fiscal years prior to the year of adoption.  Early adoption is permitted.  Woodward has not determined in which period it will adopt the new guidance.  Woodward is currently assessing the impact this guidance may have on its Consolidated Financial Statements, including which of its existing lease arrangements will be impacted by the new guidance and whether other arrangements not currently classified as leases may become subject to the guidance of ASU 2016-02.  Rent expense for all operating leases in fiscal year 2016, none of which was recognized on the balance sheet, was $7,359.  As of September 30, 2016, future minimum rental payments required under operating leases, none of which were recognized on the balance sheet, were $15,612.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” and has subsequently issued several supplemental and/or clarifying ASUs (collectively “ASC 606”). ASC 606 prescribes a single common revenue standard that replaces most existing U.S. GAAP revenue recognition guidance.  ASC 606 outlines a five-step model, under which Woodward will recognize revenue as performance obligations within a customer contract are satisfied. ASC 606 is intended to provide more consistent interpretation and application of the principles outlined in the standard across filers in multiple industries and within the same industries compared to current practices, which should improve comparability. Adoption of ASC 606 is required for annual reporting periods beginning after December 15, 2017 (fiscal year 2019 for Woodward), including interim periods within the reporting period. While Woodward may elect to adopt ASC 606 in fiscal year 2018, it does not expect to do so. Upon adoption, Woodward must elect to adopt either retrospectively to each prior reporting period presented or using the cumulative effect transition method with the cumulative effect of initial adoption recognized at the date of initial application. Woodward has not determined what transition method it will use.

Woodward is currently assessing the impact that the future adoption of ASC 606 may have on its Consolidated Financial Statements by analyzing its current portfolio of customer contracts, including a review of historical accounting policies and practices to identify potential differences in applying the guidance of ASC 606. Based on Woodward’s preliminary review of its customer contracts, Woodward expects that revenue on the majority of its customer contracts will continue to be recognized at a point in time, generally upon shipment of products, consistent with Woodward’s current revenue recognition model. Upon adoption of ASC 606, however, Woodward also believessome of its revenues from sales of products and services to customers will be recognized over time, rather than at a point in time, due to the terms of certain customer contracts.  Some revenue related to customer funded development activities, currently recognized upon completion of the development activities, will be deferred and recognized over a number of years.  Related to recognizing some revenue over

8

time, various balance sheet line items will be impacted.  As such, Woodwardbelieves the adoption of ASC 606 will have an impact on both the timing of revenue recognition and various line items within the Consolidated Balance Sheet.

In addition, ASC 606 will require more comprehensive disclosures about revenue streams and contracts with customers, including significant judgments required. Woodward is currently evaluating potential changes to its processes for preparing required disclosures and to information systems that support the financial reporting process.  In addition, Woodward is evaluating implications to the Company’s system of internal controls, relative to revenue recognition and the related revenue disclosures, which are based on the criteria outlined in the Committee of Sponsoring Organizations of the Treadway Commission’s 2013 Internal Control – Integrated Framework.

Note 3.  Earnings per share

Basic earnings per share is computed by dividing net earnings available to common stockholders by the weighted-average number of shares of common stock outstanding for the period.

Diluted earnings per share reflects the weighted-average number of shares outstanding after consideration of the dilutive effect of stock options and restricted stock.

The following is a reconciliation of net earnings to basic earnings per share and diluted earnings per share:

	Three-Months Ended				Six-Months Ended
	March 31,				March 31,
	2017		2016		2017		2016
Numerator:
Net earnings	$	38,105	$	40,824	$	84,653	$	66,644
Denominator:
Basic shares outstanding		61,310		61,639		61,436		62,351
Dilutive effect of stock options and restricted stock		2,189		1,425		2,157		1,417
Diluted shares outstanding		63,499		63,064		63,593		63,768
Income per common share:
Basic earnings per share	$	0.62	$	0.66	$	1.38	$	1.07
Diluted earnings per share	$	0.60	$	0.65	$	1.33	$	1.05

The following stock option grants were outstanding during the three and six-months ended March 31, 2017 or 2016, but were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.

	Three-Months Ended				Six-Months Ended
	March 31,				March 31,
	2017		2016		2017		2016
Options		67		731		2		734
Weighted-average option price	$	62.98	$	46.55	$	70.39	$	46.55

The weighted-average shares of common stock outstanding for basic and diluted earnings per share included the weighted-average treasury stock shares held for deferred compensation obligations of the following:

	Three-Months Ended				Six-Months Ended
	March 31,				March 31,
	2017		2016		2017		2016
Weighted-average treasury stock shares held for deferred compensation obligations		185		185		175		181

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Note 4. Joint venture

On January 4, 2016, Woodward and General Electric Company (“GE”), acting through its GE Aviation business unit, consummated the formation of a strategic joint venture between Woodward and GE (the “JV”) to design, develop and source fuel systems for specified existing and all future GE commercial aircraft engines that produce thrust in excess of fifty thousand pounds.

As part of the JV formation, Woodward contributed to the JV certain contractual rights and intellectual property applicable to the existing GE commercial aircraft engine programs within the scope of the JV.  Woodward had no initial cost basis in the JV because Woodward had no cost basis in the contractual rights and intellectual property contributed to the JV.  GE purchased from Woodward a 50% ownership interest in the JV for a $250,000 cash payment to Woodward.  In addition, GE will pay contingent consideration to Woodward consisting of fifteen annual payments of $4,894 per year which began on January 4, 2017 subject to certain claw-back conditions.  Woodward received its first annual payment of $4,894, which was recorded as deferred income and is included in Net cash provided by operating activities under the caption “Other” on the Condensed Consolidated Statement of Cash Flows, during the three-months ended March 31, 2017.  Neither Woodward nor GE contributed any tangible assets to the JV.

Woodward determined that the JV formation was not the culmination of an earnings event because Woodward has significant performance obligations to support the future operations of the JV.  Therefore, Woodward recorded the $250,000 consideration received from GE, in January of 2016, for its purchase of a 50% equity interest in the JV as deferred income.  The $250,000 deferred income will be recognized as an increase to net sales in proportion to revenue realized on sales of applicable fuel systems within the scope of the JV in a particular period as a percentage of total revenue expected to be realized by Woodward over the estimated remaining lives of the underlying commercial aircraft engine programs assigned to the JV.  Unamortized deferred income recorded in connection with the JV formation included accrued liabilities of $6,352 as of March 31, 2017 and $6,552 as of September 30, 2016, and other liabilities of $240,153 as of March 31, 2017 and $238,187 as of September 30, 2016.  Amortization of the deferred income recognized as an increase to sales was $1,632 for the three months and $3,128 for the six-months ended March 31, 2017, and $1,962 for the three and six-months ended March 31, 2016.

Woodward and GE jointly manage the JV and any significant decisions and/or actions of the JV require the mutual consent of both parties.  Neither Woodward nor GE has a controlling financial interest in the JV, but both Woodward and GE dohave the ability to significantly influence the operating and financial decisions of the JV.  Therefore, Woodward is accounting for its 50% ownership interest in the JV using the equity method of accounting.  The JV is a related party to Woodward.  Other income includes $382 for the three months and $1,066 for the six-months ended March 31, 2017 and $2,158 for the three and six-months ended March 31, 2016 related to Woodward’s equity interest in the earnings of the JV.  During the three and six-months ended March 31, 2017 Woodward received a $2,500 cash distribution from the JV which is included in Net cash provided by operating activities under the caption “Other” on the Condensed Consolidated Statement of Cash Flows. Woodward received no cash distributions from the JVin the three and six-months ended March 31, 2016.  Woodward’s net investment in the JV, which is included in other assets, was $4,770 as of March 31, 2017 and $6,204 as of September 30, 2016.  

Woodward’s  net sales include $18,415 for the three months and $33,717 for the six-months ended March 31, 2017 of sales to the JV, compared to $15,015 for the three and six-months ended March 31, 2016.  Woodward recorded a reduction to sales of $5,674 for the three months and $11,077 for the six-months ended March 31, 2017 related to royalties paid to the JV by Woodward on sales by Woodward directly to third party aftermarket customers, compared to $7,016 for the three and six-months ended March 31, 2016.  The Condensed Consolidated Balance Sheets,  include “Accounts receivable” of $8,816at  March 31, 2017 and $5,326 at September 30, 2016 related to amounts the JV owed Woodward, and include “Accounts payable” of $7,019 at March 31, 2017, and $3,926 at September 30, 2016 related to amounts Woodward owed the JV.

Note 5.  Financial instruments and fair value measurements

Financial assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheets are categorized based upon a fair value hierarchy established by U.S. GAAP, which prioritizes the inputs used to measure fair value into the following levels:

Level 1: Inputs based on quoted market prices in active markets for identical assets or liabilities at the measurement date.

Level 2: Quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable and can be corroborated by observable market data.

Level 3: Inputs that reflect management’s best estimates and assumptions of what market participants would use in pricing the asset or liability at the measurement date.  The inputs are unobservable in the market and significant to the valuation of the instruments.

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The table below presents information about Woodward’s financial assets that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques Woodward utilized to determine such fair value.  Woodward had no financial liabilities required to be measured at fair value on a recurring basis as of March 31, 2017 or September 30, 2016.