10-Q

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 June 30, 2018

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, a smaller reporting company or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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 August  2, 2018, 61,692,493 shares 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	39
	Forward Looking Statements	39
	Overview	41
	Results of Operations	43
	Liquidity and Capital Resources	49
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57
Item 4.	Controls and Procedures	58
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	58
Item 1A.	Risk Factors	59
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 6.	Exhibits	60
	Signatures	62

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				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Net sales	$	588,117	$	548,622	$	1,606,514	$	1,491,897
Costs and expenses:
Cost of goods sold		427,897		394,750		1,176,012		1,090,997
Selling, general and administrative expenses		54,600		44,561		140,362		130,521
Research and development costs		39,470		34,663		111,425		91,588
Restructuring charges		-		-		17,013		-
Interest expense		7,878		6,769		21,315		20,399
Interest income		(342)		(358)		(1,176)		(1,237)
Other expense (income), net (Note 17)		4,197		(450)		1,012		(6,353)
Total costs and expenses		533,700		479,935		1,465,963		1,325,915
Earnings before income taxes		54,417		68,687		140,551		165,982
Income tax expense		5,300		15,061		34,685		27,703
Net earnings	$	49,117	$	53,626	$	105,866	$	138,279
Earnings per share (Note 3):
Basic earnings per share	$	0.80	$	0.87	$	1.72	$	2.25
Diluted earnings per share	$	0.77	$	0.85	$	1.66	$	2.18
Weighted Average Common Shares Outstanding (Note 3):
Basic		61,608		61,288		61,417		61,387
Diluted		63,881		63,392		63,782		63,520
Cash dividends per share paid to Woodward common stockholders	$	0.1425	$	0.1250	$	0.4100	$	0.3600

See accompanying Notes to Condensed Consolidated Financial Statements

2

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(In thousands)

(Unaudited)

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Net earnings	$	49,117	$	53,626	$	105,866	$	138,279
Other comprehensive earnings:
Foreign currency translation adjustments		(21,864)		6,643		(7,177)		(4,251)
Net (loss) gain on foreign currency transactions designated as hedges of net investments in foreign subsidiaries (Note 7)		2,559		(3,313)		548		(428)
Taxes on changes in foreign currency translation adjustments		513		835		250		349
Foreign currency translation and transactions adjustments, net of tax		(18,792)		4,165		(6,379)		(4,330)
Unrealized loss on fair value adjustment of derivative instruments (Note 7)		(23,658)		-		(23,658)		-
Reclassification of net realized (gains) losses on derivatives to earnings (Note 7)		4,955		(18)		4,919		(54)
Taxes on changes in derivative transactions		8		7		21		21
Derivative adjustments, net of tax		(18,695)		(11)		(18,718)		(33)
Curtailment of postretirement benefit plan arising during the period		-		-		59		-
Amortization of pension and other postretirement plan:
Net prior service cost		137		55		413		168
Net loss		248		644		742		1,925
Foreign currency exchange rate changes on pension and other postretirement benefit plan liabilities		843		(746)		161		197
Taxes on changes in pension and other postretirement benefit plan liability adjustments, net of foreign currency exchange rate changes		(349)		6		(421)		(839)
Pension and other postretirement benefit plan adjustments, net of tax		879		(41)		954		1,451
Total comprehensive earnings	$	12,509	$	57,739	$	81,723	$	135,367

See accompanying Notes to Condensed Consolidated Financial Statements

3

WOODWARD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

	June 30,		September 30,
	2018		2017
ASSETS
Current assets:
Cash and cash equivalents, including restricted cash of $6,290 and $0, respectively	$	114,399	$	87,552
Accounts receivable, less allowance for uncollectible amounts of 3,668 and $3,776, respectively		386,110		402,182
Inventories		589,440		473,505
Income taxes receivable		7,994		19,376
Other current assets		39,171		38,574
Total current assets		1,137,114		1,021,189
Property, plant and equipment, net		1,044,033		922,043
Goodwill		826,926		556,545
Intangible assets, net		707,761		171,882
Deferred income tax assets		15,208		19,950
Other assets		73,022		65,500
Total assets	$	3,804,064	$	2,757,109
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings	$	144,000	$	32,600
Accounts payable		222,416		232,788
Income taxes payable		11,407		6,774
Accrued liabilities		162,211		155,072
Total current liabilities		540,034		427,234
Long-term debt, less current portion		1,211,396		580,286
Deferred income tax liabilities		170,101		33,408
Other liabilities		416,498		344,798
Total liabilities		2,338,029		1,385,726
Commitments and contingencies (Note 21)
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		184,814		163,836
Accumulated other comprehensive losses		(77,329)		(53,186)
Deferred compensation		8,393		7,135
Retained earnings		1,900,928		1,820,268
		2,016,912		1,938,159
Treasury stock at cost, 11,282  shares and 11,739 shares, respectively		(542,484)		(559,641)
Treasury stock held for deferred compensation, at cost, 202 shares and 186 shares, respectively		(8,393)		(7,135)
Total stockholders' equity		1,466,035		1,371,383
Total liabilities and stockholders' equity	$	3,804,064	$	2,757,109

See accompanying Notes to Condensed Consolidated Financial Statements.

4

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine-Months Ended June 30,
	2018		2017
Cash flows from operating activities:
Net earnings	$	105,866	$	138,279
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		72,137		59,587
Gain due to curtailment of postretirement plan		(330)		-
Net gain on sales of assets		(404)		(3,598)
Stock-based compensation		16,292		15,580
Deferred income taxes		(25,521)		(1,585)
Net loss (gain) on derivatives reclassified from accumulated comprehensive earnings into earnings		4,919		(54)
Changes in operating assets and liabilities:
Accounts receivable		42,322		26,052
Inventories		(46,002)		(48,075)
Accounts payable and accrued liabilities		(29,587)		2,345
Income taxes		39,966		8,066
Retirement benefit obligations		(3,883)		(2,321)
Other		(13,692)		(10,478)
Net cash provided by operating activities		162,083		183,798
Cash flows from investing activities:
Payments for purchase of property, plant, and equipment		(89,597)		(65,075)
Proceeds from sale of assets		1,213		3,697
Proceeds from sales of short-term investments		8,970		5,002
Payments for purchases of short-term investments		(824)		(7,344)
Business acquisitions, net of cash acquired		(771,069)		-
Net cash used in investing activities		(851,307)		(63,720)
Cash flows from financing activities:
Cash dividends paid		(25,206)		(22,076)
Proceeds from sales of treasury stock		7,102		12,554
Payments for repurchases of common stock		-		(61,782)
Borrowings on revolving lines of credit and short-term borrowings		1,769,105		1,106,000
Payments on revolving lines of credit and short-term borrowings		(1,422,624)		(1,145,800)
Proceeds from issuance of long-term debt		400,000		-
Payments of long-term debt and capital lease obligations		(315)		(307)
Payments of debt financing costs		(1,325)		-
Payment for forward option derivative instrument		(5,543)		-
Net cash provided by (used in) financing activities		721,194		(111,411)
Effect of exchange rate changes on cash and cash equivalents		(5,123)		(755)
Net change in cash and cash equivalents		26,847		7,912
Cash and cash equivalents at beginning of year		87,552		81,090
Cash and cash equivalents, including restricted cash, at end of period	$	114,399	$	89,002

See accompanying Notes to Condensed 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, 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			-	-	-	-			-		-			-		-		-		-		-		138,279		-		-		138,279
Other comprehensive income (loss), net of tax			-	-	-	-			-		-			(4,330)		(33)		1,451		(2,912)		-		-		-		-		(2,912)
Cash dividends paid ($0.3600 per share)			-	-	-	-			-		-			-		-		-		-		-		(22,076)		-		-		(22,076)
Purchases of treasury stock			-	-	(915)	-			-		-			-		-		-		-		-		-		(63,255)		-		(63,255)
Sales of treasury stock			-	-	416	-			-		(2,130)			-		-		-		-		-		-		16,157		-		14,027
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			-	-	-	-			-		15,580			-		-		-		-		-		-		-		-		15,580
Purchases and transfers of stock by/to deferred compensation plan			-	-	-	(3)			-		-			-		-		-		-		254		-		-		(254)		-
Distribution of stock from deferred compensation plan			-	-	-	-			-		-			-		-		-		-		(10)		-		-		10		-
Balances as of June 30, 2017			-	72,960	(11,648)	(186)		$	106	$	162,261		$	(30,301)	$	146	$	(38,462)	$	(68,617)	$	7,100	$	1,765,709	$	(551,440)	$	(7,100)	$	1,308,019
Balances as of October 1, 2017			-	72,960	(11,739)	(186)		$	106	$	163,836		$	(27,280)	$	135	$	(26,041)	$	(53,186)	$	7,135	$	1,820,268	$	(559,641)	$	(7,135)	$	1,371,383
Net earnings			-	-	-	-			-		-			-		-		-		-		-		105,866		-		-		105,866
Other comprehensive income (loss), net of tax	-			-	-	-			-		-			(6,379)		(18,718)		954		(24,143)		-		-		-		-		(24,143)
Cash dividends paid ($0.4100 per share)	-			-	-	-			-		-			-		-		-		-		-		(25,206)		-		-		(25,206)
Sales of treasury stock			-	-	255	-			-		(2,471)			-		-		-		-		-		-		9,573		-		7,102
Common shares issued from treasury stock for benefit plans			-	-	202	-			-		7,157			-		-		-		-		-		-		7,584		-		14,741
Stock-based compensation			-	-	-	-			-		16,292			-		-		-		-		-		-		-		-		16,292
Purchases and transfers of stock by/to deferred compensation plan			-	-	-	(17)			-		-			-		-		-		-		1,267		-		-		(1,267)		-
Distribution of stock from deferred compensation plan			-	-	-	1			-		-			-		-		-		-		(9)		-		-		9		-
Balances as of June 30, 2018			-	72,960	(11,282)	(202)		$	106	$	184,814		$	(33,659)	$	(18,583)	$	(25,087)	$	(77,329)	$	8,393	$	1,900,928	$	(542,484)	$	(8,393)	$	1,466,035

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 June 30, 2018 and for the three and nine-months ended June 30, 2018 and June 30, 2017, 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 June 30, 2018, 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 nine-months ended June 30, 2018 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, the valuation of assets and liabilities acquired in business combinations, the valuation of derivative instruments, 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.

As disclosed in Note 1, Operations and summary of significant accounting policies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of Woodward’s most recent Annual Report on Form 10-K, the amortization of intangible assets has been reclassified from a separate line in the Condensed Consolidated Statements of Earnings for the three and nine-months ended June 30, 2017 to an allocated expense/cost component of cost of goods sold and selling, general and administrative expenses based on the nature of the intangible asset that is being amortized.  The reclassification of these amounts conforms to the current period presentation.

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 2018, the FASB issued ASU 2018-05, “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118.”  ASU 2018-05 formally amended ASC Topic 740, Income Taxes (“ASC 740”) for the guidance previously provided by SEC Staff Accounting Bulletin 118 (“SAB 118”).  SAB 118 expressed views of the SEC regarding ASC 740 in the reporting period that includes the enactment date of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”).  The Company adopted SAB 118 in the first quarter of fiscal year 2018 and therefore, the Company’s subsequent adoption of ASU 2018-05 in the second quarter of fiscal year 2018 had no impact on its accounting for income taxes in the third quarter or first nine months of fiscal year 2018.

In February 2018, the FASB issued ASU 2018-02, “Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”  ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the enactment of tax reform under the Tax Act and provides guidance on the disclosure requirements regarding the stranded tax effects.  The

7

amendments in ASU 2018-02 are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption is permitted.  The amendments in ASU 2018-02 may be applied retrospectively in the period of adoption to all periods in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized or may be applied as of the beginning of the period of adoption.  Woodward is currently assessing the impact of the adoption of the new guidance and has not yet elected the method of adoption it will apply.  When adopted, if Woodward elects to reclassify under ASU 2018-02, a portion of accumulated other comprehensive earnings would be reclassified to retained earnings.   

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.”  ASU 2017-12 is intended to more closely align the financial statement reporting of hedging relationships with the economic results of an entity’s risk management activities and to make certain targeted improvements to simplify the application of hedge accounting guidance in current U.S. GAAP.  ASU 2017-12 is also intended to increase standardization of financial statement disclosures including requiring a tabular disclosure of the income statement effects of fair value and cash flow hedges.  Woodward early adopted the new guidance in the first quarter of fiscal year 2018.  Initial application of the new guidance did not have any impact on Woodward’s hedging arrangements or on the disclosures related to such arrangements as of the date of adoption and through the second quarter of fiscal year 2018.  In the third quarter of fiscal 2018, Woodward entered into new hedging arrangements and incorporated the provisions of this guidance in those hedging arrangements and related disclosures as discussed in Note 7, Derivative instruments and hedging activities.

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.  The amendments of ASU 2017-07 should be applied retrospectively for the presentation of the service cost component and the other components of net periodic benefit costs from defined benefit and other postretirement benefit plans in the statement of earnings and prospectively, on and after the effective date, for the capitalization of the service cost component into manufactured inventories.  Woodward will adopt the new guidance in fiscal year 2019, and expects changes to earnings before income taxes to be insignificant in the year of adoption.

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.  Woodward will adopt the new guidance in fiscal year 2019.  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 November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).”  ASU 2016-18 provides authoritative guidance requiring that restricted cash be included with cash and cash equivalents when reconciling the beginning of period and end of period amounts reported in the statement of cash flows. The guidance is applied retrospectively to all periods presented and is effective for annual reporting periods beginning after December 15, 2017 (fiscal year 2019 for Woodward), and interim periods within those annual periods.  In the third quarter of fiscal year 2018, the Company’s Condensed Consolidated Balance Sheet included restricted cash, and as a result, the Company concurrently early adopted this guidance in the three- months ended June 30, 2018. As a result of the adoption, the Company has included restricted cash of $6,290 as of June 30, 2018 in the end of period amounts reported in the statement of cash flows for the nine-months ended June 30, 2018.  There was no restricted cash in the beginning of year balance for the nine-months ended June 30, 2018, or in the beginning of year or end of period balances for the nine-months ended June 30, 2017.

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.  Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption.  ASU 2016-13 is effective for fiscal years beginning after December

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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 will adopt the new guidance in fiscal year 2021.  Woodward 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.  Originally under ASU 2016-2, an organization was required upon adoption to recognize and measure leases beginning in the earliest period presented using a modified retrospective approach and restate the financial statements for all periods presented.  In July 2018, the FASB issued ASU 2018-11, which amends ASU 2016-02 to provide organizations with an additional (and optional) transition method whereby it may elect to recognize and measure leases by applying the cumulative impact of adopting ASU 2016-02 to the opening retained earnings balance in the period of adoption, thereby removing the requirement that the financial statements of prior periods be restated.  Although early adoption is permitted, Woodward expects to adopt the new guidance in fiscal year 2020.  Woodward expects that it will elect to not restate fiscal years 2018 and 2019 and will recognize the cumulative impact of adopting the standard in Woodward’s opening retained earnings for fiscal year 2020, but has not made a final determination on its future adoption method.  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 2017, none of which was recognized on the balance sheet, was $8,302.  As of September 30, 2017, future minimum rental payments required under operating leases, none of which were recognized on the balance sheet, were $23,215.

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.  Woodward has determined it will elect to adopt using the cumulative effect transition method with the cumulative effect of initial adoption recognized at the date of initial application.  Further, under the cumulative effect transition method, Woodward will disclose the impact of changes to financial statement line items as a result of applying ASC 606 (rather than previous U.S. GAAP) and include an explanation of the reasons for significant changes.

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.  Woodward is also performing a comprehensive review of its current processes and systems to determine and implement changes required to support the adoption of ASC 606 on October 1, 2018, the first day of Woodward’s fiscal year 2019.  As part of this review process, Woodward is implementing new software solutions to support revenue reporting after adoption.

Based on Woodward’s review of its customer contracts, Woodward has determined 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 believes a significant portion of its revenues from sales of products and services to customers will be recognized over time, rather than at a point in time, due primarily to the terms of certain customer contracts.  As a result of recognizing some revenue over time, various balance sheet line items will be impacted.  As such, Woodward believes 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.

Woodward generally expenses costs as incurred for the engineering and development of new products.  Customer funding received for such engineering and development efforts is currently recognized as revenue when earned, with the corresponding costs recognized as cost of sales.  ASC 606 requires most customer funding of product engineering and development to be deferred and recognized as revenue as the related products are delivered to the customer.  ASC 606 also requires product engineering and development costs to be capitalized as contract fulfillment costs, to the extent recoverable from the deferred customer funding, and subsequently amortized as the related products are delivered to the customer.  Therefore, under ASC 606, Woodward expects to record both contract assets and contract liabilities related to such funded

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engineering and development efforts, which are expected to become material over time.  Recognized revenues and research and development costs are both expected to decrease in the year of adoption and for at least several years thereafter, due to the recognition of these contract assets and liabilities.  However, recognition of these contract assets and liabilities are expected to have an immaterial impact on pre-tax earnings in future periods.

In addition, ASC 606 will require more comprehensive disclosures about revenue streams and contracts with customers, including significant judgments required.  Woodward is currently implementing changes to its processes for preparing required disclosures and to information systems that support the financial reporting process.

Woodward is also 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				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Numerator:
Net earnings	$	49,117	$	53,626	$	105,866	$	138,279
Denominator:
Basic shares outstanding		61,608		61,288		61,417		61,387
Dilutive effect of stock options and restricted stock		2,273		2,104		2,365		2,133
Diluted shares outstanding		63,881		63,392		63,782		63,520
Income per common share:
Basic earnings per share	$	0.80	$	0.87	$	1.72	$	2.25
Diluted earnings per share	$	0.77	$	0.85	$	1.66	$	2.18

The following stock option grants were outstanding during the three and nine-months ended June 30, 2018 and 2017, but were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Options		764		780		760		66
Weighted-average option price	$	78.70	$	62.64	$	78.73	$	62.98

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				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Weighted-average treasury stock shares held for deferred compensation obligations		201		186		197		178

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Note 4.  Business acquisition

On April 8, 2018, the Company, and its wholly-owned subsidiary, Woodward Aken GmbH (collectively, the “Purchasers”), entered into a Share Purchase Agreement (the “L’Orange Agreement”) with MTU Friedrichshafen GmbH (“MTU”) and MTU America Inc. (together with MTU, the “Sellers”), both of which were subsidiaries of Rolls-Royce PLC (“Rolls-Royce”).  Pursuant to the L’Orange Agreement, the Purchasers agreed to acquire all of the outstanding shares of stock of L’Orange GmbH, together with its wholly-owned subsidiaries in China and Germany, as well as all of the outstanding equity interests of its affiliate, Fluid Mechanics LLC, and their related operations (collectively, “L’Orange”), for total consideration (including cash consideration and the assumption of certain liabilities) of €700,000, or approximately $811,000 based on the foreign currency exchange rate as of the date Woodward executed cross currency swaps in connection with the financing of the transaction as described in Note 7, Derivative instruments and hedging activities.  The total consideration to be paid is subject to customary post-closing adjustments.  The transactions contemplated by the L’Orange Agreement were completed on June 1, 2018 (the “Closing”) and L’Orange became a subsidiary of the Company.

L’Orange is a supplier of fuel injection systems for industrial diesel, heavy fuel oil and dual-fuel engines.  L’Orange supplies fuel injection technology for engines that power a wide range of industrial applications including marine power and propulsion systems, special-application vehicles, locomotives, oil and gas processing, and power generation.  L’Orange serves many large specialist diesel engine manufacturers, including Rolls-Royce Power Systems’ subsidiaries, MTU and Bergen Engines, and other low to high speed engine builders.  Following the Closing, L’Orange was renamed Woodward L’Orange and has been integrated into the Company’s Industrial segment.

In connection with the Closing, MTU and a subsidiary of Rolls-Royce, and L’Orange, entered into a long-term supply agreement, dated June 1, 2018 (the “LTSA”).  Pursuant to the terms of the LTSA, L’Orange will continue to supply to MTU and its affiliates within Rolls-Royce certain liquid fuel injection systems, injectors, pumps and other associated parts and components for industrial diesel, heavy fuel oil and dual-fuel engines in a manner consistent with the supply of such products prior to the transaction.  The LTSA has an initial term that extends through December 31, 2032.  During the term of the LTSA, MTU is required to continue to purchase certain of these products exclusively from L’Orange, subject to certain limitations specified therein, at pricing negotiated at arms-length.

ASC Topic 805, “Business Combinations” (“ASC 805”), provides a framework to account for acquisition transactions under US GAAP. The preliminary purchase price of L’Orange, prepared consistent with the required ASC 805 framework, is allocated as follows:

Cash paid to Sellers	$	780,355
Less acquired cash and restricted cash		(9,286)
Total purchase price	$	771,069

The cash consideration was financed through the use of cash on hand, the issuance of an aggregate principal amount of $400,000 of senior unsecured notes in a series of private placement transactions and $167,420 borrowed under Woodward’s existing revolving credit agreement (see Note 14, Credit Facilities, short-term borrowings and long-term debt).  In connection with these borrowings, the Company entered into cross currency swap transactions, which effectively lowered the interest rate on each tranche of the senior unsecured notes and the borrowings under the existing revolving credit agreement (see Note 7, Derivative instruments and hedging activities).

The allocation of the purchase price to the assets acquired and liabilities assumed was accounted for under the purchase method of accounting in accordance with ASC 805.  Assets acquired and liabilities assumed in the transaction were recorded at their estimated acquisition date fair values, while transaction costs associated with the acquisition were expensed as incurred.  Woodward’s preliminary allocation was based on an evaluation of the appropriate fair values and represents management’s best estimate based on available data. 

Due to the timing of the transaction, Woodward is in the process of finalizing valuations of current assets, property, plant and equipment (including estimated useful lives), goodwill, intangible assets (including estimated useful lives), and all current and noncurrent liabilities other than the valuation of the pension obligation, the valuation of which is complete.  Additionally, Woodward is finalizing the projected combined future tax rate to be applied to the valuation of assets, which could impact the valuation of goodwill and intangible assets.  The final determination of the fair value of assets and liabilities will be completed within the one year measurement period as allowed by ASC 805.

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The following table, which is preliminary and subject to change, summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition of L’Orange.  Any potential adjustments will be made retroactively and could be material to the preliminary values presented below.

Accounts receivable	$	26,538
Inventories (1)		72,674
Other current assets		1,385
Property, plant, and equipment		90,589
Goodwill		269,433
Intangible assets		556,023
Total assets acquired		1,016,642
Other current liabilities		40,362
Deferred income tax liabilities		164,791
Other noncurrent liabilities		40,420
Total liabilities assumed		245,573
Net assets acquired	$	771,069

(1) Inventories include a $15,107 adjustment to state work in progress and finished goods inventories at their fair value as of the acquisition date.  The inventory fair value adjustment is being recognized as a non-cash increase to cost of goods sold ratably over the estimated inventory turnover period, with the entire $15,107 fair value adjustment expected to be recognized in cost of goods sold during the year ending September 30, 2018. 

In connection with the acquisition of L’Orange, Woodward assumed the defined benefit pension obligations of the L’Orange defined benefit pension plans (see Note 19, Retirement benefits).  As of June 1, 2018, the total liability recognized by the Company associated with the L’Orange defined benefit pension plans was $38,998, of which $1,143 was considered current. 

As summary of the intangible assets acquired, weighted-average useful lives, and amortization methods follows:

	Estimated Amounts		Weighted-Average Useful Life		Amortization Method
Intangible assets with finite lives:
Customer relationships and contracts	$	379,423	20	years	Straight-line
Process technology		71,940	21	years	Straight-line
Backlog		40,611	1	year	Accelerated
Other		232	3	years	Straight-line
Intangible asset with indefinite life:
Trade name		63,817	Indefinite		Not amortized
Total	$	556,023

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Future amortization expense associated with the acquired intangibles as of June 1, 2018 is expected to be:

Year Ending September 30:
2018 (remaining)	$	18,832
2019		34,884
2020		19,701
2021		21,458
2022		21,745
Thereafter		375,586
	$	492,206

The preliminary purchase price allocation resulted in the recognition of $269,433 of goodwill.  Only the portion of goodwill which relates to the U.S. operations of L’Orange is expected to be deductible for tax purposes.  The Company has included all of the goodwill in its Industrial segment.  The goodwill represents the estimated value of potential expansion with new customers, the opportunity to further develop sales opportunities with new customers, other synergies including supply chain savings expected to be achieved through the integration of L’Orange with Woodward’s Industrial segment, and intangible assets that do not qualify for separate recognition, such as value of the assembled L’Orange workforce that is not included within the estimated value of the acquired backlog and customer relationship intangible assets.

Pro forma results for Woodward giving effect to the L’Orange acquisition

The following unaudited pro forma financial information presents the combined results of operations of Woodward and L’Orange as if the acquisition had been completed as of the beginning of the prior fiscal year, or October 1, 2016.  The unaudited pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisition and related borrowings had taken place on October 1, 2016, nor are they indicative of future results.

The unaudited pro forma financial information for the three and nine-months ended June 30, 2018 includes Woodward’s results, including the post-acquisition results of L’Orange, since June 1, 2018, and the pre-acquisition results of L’Orange for those periods.  The unaudited pro forma financial information for the three and nine-months ended June 30, 2017 combines Woodward’s results with the pre-acquisition results of L’Orange for those periods.

Prior to the L’Orange acquisition by Woodward, L’Orange was a wholly owned subsidiary of Rolls-Royce and as such was not a standalone entity for financial reporting purposes.  Accordingly, the historical operating results of L’Orange may not be indicative of the results that might have been achieved, historically or in the future, if L’Orange had been a standalone entity.

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The unaudited pro forma results for the three and nine-months ended June 30, 2018 and the three and nine-months ended June 30, 2017follow:

	Three-Months Ended				Three-Months Ended
	June 30, 2018				June 30, 2017
	As reported		Pro forma		As reported		Pro forma
Net sales	$	588,117	$	639,665	$	548,622	$	619,485
Net earnings		49,117		60,488		53,626		53,071
Earnings per share:
Basic earnings per share	$	0.80	$	0.98	$	0.87	$	0.87
Diluted earnings per share		0.77		0.95		0.85		0.84

	Nine-Months Ended				Nine-Months Ended
	June 30, 2018				June 30, 2017
	As reported		Pro forma		As reported		Pro forma
Net sales	$	1,606,514	$	1,830,515	$	1,491,897	$	1,684,071
Net earnings		105,866		129,191		138,279		108,190
Earnings per share:
Basic earnings per share	$	1.72	$	2.10	$	2.25	$	1.76
Diluted earnings per share		1.66		2.03		2.18		1.70

The unaudited pro forma results for all periods presented include adjustments made to account for certain costs and transactions that would have been incurred had the acquisition been completed as of October 1, 2016, including amortization charges for acquired intangible assets, eliminations of intercompany transactions, adjustments for acquisition transaction costs, adjustments for depreciation expense for property, plant, and equipment, and adjustments to interest expense.  These adjustments are net of any applicable tax impact and were included to arrive at the pro forma results above.

L’Orange’s operating results have been included in the Company’s operating results for the periods subsequent to the completion of the acquisition on June 1, 2018.  L’Orange contributed net sales of $24,878 for both the three and nine-months ended June 30, 2018 and a net loss of $1,215 for both the three and nine-months ended June 30, 2018.

Woodward incurred transaction-related costs of $10,755 for the three-months ended June 30, 2018 and $12,036 for the nine-months ended June 30, 2018, which are included in “Selling, general and administrative expenses” in the Condensed Consolidated Statements of Earnings. These transaction-related costs consisted of the L’Orange Acquisition transaction and integration costs, warranty and indemnity insurance costs, and German real estate transfer tax costs.  Woodward incurred acquisition financing related costs of $1,154 for the three and nine-months ended June 30, 2018, which are included in “Interest expense” in the Condensed Consolidated Statements of Earnings.  Included in other expense (income), net for the three and nine-months ended June 30, 2018 was the cost of $5,543 related to an at-the-money-forward option (the “Forward Option”) entered into by the Company on April 18, 2018.  The Forward Option, which was entered into to manage the Company’s exposure to fluctuations in the Euro prior to the anticipated close of the L’Orange Agreement, was not exercised by the Company and expired on June 1, 2018.

Note 5.  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,

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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.  During the three-months ended March 31, 2018, Woodward received its second annual payment of $4,894, which was recorded as deferred income and included in Net cash provided by operating activities under the caption “Other” on the Condensed Consolidated Statement of Cash Flows.  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 as deferred income the $250,000 consideration received from GE in January of 2016 for its purchase of a 50% equity interest in the JV.  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 $6,414 as of June 30, 2018 and $6,451 as of September 30, 2017, and other liabilities of $237,724 as of June 30, 2018 and $236,896 as of September 30, 2017.  Amortization of the deferred income recognized as an increase to sales was $1,564 for the three-months and $4,103 for the nine-months ended June 30, 2018, and $1,387 for the three-months and $4,515 for the nine-months ended June 30, 2017.

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 do have 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 income of $738 for the three-months and $2,340 for the nine-months ended June 30, 2018, and a loss of $432 for the three-months and income of $634 for the nine-months ended June 30, 2017 related to Woodward’s equity interest in the earnings of the JV.  Woodward received no cash distributions from the JV in the three and nine-months ended June 30, 2018, compared to a $2,500 cash distribution from the JV during the nine-months ended June 30, 2017, which was included in Net cash provided by operating activities under the caption “Other” on the Condensed Consolidated Statement of Cash Flows.  Woodward’s net investment in the JV, which is included in other assets, was $8,612 as of June 30, 2018 and $6,272 as of September 30, 2017.

Woodward’s net sales include $20,085 for the three-months and $50,137 for the nine-months ended June 30, 2018 of sales to the JV, compared to $18,645 for the three-months and $52,362 for the nine-months ended June 30, 2017.  Woodward recorded a reduction to sales of $7,340 for the three-months and $19,670 for the nine-months ended June 30, 2018 related to royalties paid to the JV by Woodward on sales by Woodward directly to third party aftermarket customers, compared to $6,163 for the three-months and $17,240 for the nine-months ended June 30, 2017.  The Condensed Consolidated Balance Sheets include “Accounts receivable” of $10,213 at June 30, 2018, and $8,554 at September 30, 2017, related to amounts the JV owed Woodward, and include “Accounts payable” of $4,261 at June 30, 2018, and $6,741 at September 30, 2017, related to amounts Woodward owed the JV.

Note 6.  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 and liabilities 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. 

	At June 30, 2018								At September 30, 2017
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial assets:
Cash	$	61,050	$	-	$	-	$	61,050	$	79,822	$	-	$	-	$	79,822
Restricted investments in money market funds		2,521		-		-		2,521		-		-		-		-
Investments in reverse repurchase agreements		185		-		-		185		1		-		-		1
Investments in term deposits with foreign banks		50,643		-		-		50,643		7,729		-		-		7,729
Equity securities		19,500		-		-		19,500		16,600		-		-		16,600
Total financial assets	$	133,899	$	-	$	-	$	133,899	$	104,152	$	-	$	-	$	104,152
Financial liabilities:
Cross currency interest rate swaps	$	-	$	23,527	$	-	$	23,527	$	-	$	-	$	-	$	-
Total financial liabilities	$	-	$	23,527	$	-	$	23,527	$	-	$	-	$	-	$	-

Restricted investments in money market funds:  A subsidiary of Woodward is required to maintain a balance in escrow to secure the indemnification obligations of the subsidiary's previous parent company.  As allowed by the escrow agreement, the cash held in escrow is invested in money market funds not insured by the Federal Deposit Insurance Corporation (“FDIC”).  The restriction on the use of the invested cash held in escrow will lapse once the underlying indemnification obligations are settled, which is expected to occur in the fourth quarter of fiscal year 2018.Woodward believes that the investments in money market funds are on deposit with creditworthy financial institutions and that the funds are highly liquid, although their use is restricted.  The investments in money market funds are reported at fair value, with realized gains from interest income realized in earnings and are included in “Cash and cash equivalents” in the Condensed Consolidated Balance Sheets.  The fair values of Woodward’s investments in money market funds are based on the quoted market prices for the net asset value of the various money market funds.

Investments in reverse repurchase agreements:  Woodward sometimes invests excess cash in reverse repurchase agreements.  Under the terms of Woodward’s reverse repurchase agreements, Woodward purchases an interest in a pool of securities and is granted a security interest in those securities by the counterparty to the reverse repurchase agreement.  At an agreed upon date, generally the next business day, the counterparty repurchases Woodward’s interest in the pool of securities at a price equal to what Woodward paid to the counterparty plus a rate of return determined daily per the terms of the reverse repurchase agreement.  Woodward believes that the investments in these reverse repurchase agreements are with creditworthy financial institutions and that the funds invested are highly liquid.  The investments in reverse repurchase agreements are reported at fair value, with realized gains from interest income recognized in earnings, and are included in “Cash and cash equivalents” in the Condensed Consolidated Balance Sheets.  Since the investments are generally overnight, the carrying value is considered to be equal to the fair value as the amount is deemed to be a cash deposit with no risk of change in value as of the end of each fiscal quarter.

Investments in term deposits with foreign banks: Woodward’s foreign subsidiaries sometimes invest excess cash in various highly liquid financial instruments that Woodward believes are with creditworthy financial institutions.  Such investments are reported in “Cash and cash equivalents” at fair value, with realized gains from interest income recognized in earnings.  The carrying value of Woodward’s investments in term deposits with foreign banks are considered equal to the fair value given the highly liquid nature of the investments.  As of June 30, 2018, $3,769 of the term deposits with foreign banks are restricted in use as they are pledged collateral for short-term borrowings.  The restriction will lapse when the related short-term borrowings are paid.

Equity securities: Woodward holds marketable equity securities, through investments in various mutual funds, related to its deferred compensation program.  Based on Woodward’s intentions regarding these instruments, marketable equity securities are classified as trading securities.  The trading securities are reported at fair value, with realized gains and losses recognized in “Other expense (income), net” on the Condensed Consolidated Statements of Earnings.  The trading securities are included in “Other assets” in the Condensed Consolidated Balance Sheets.  The fair values of Woodward’s trading securities are based on the quoted market prices for the net asset value of the various mutual funds.

Cross currency interest rate swaps:  Woodward holds cross currency interest rate swaps, which are accounted for at fair value.  The swaps are included in “Other liabilities” in the Condensed Consolidated Balance Sheets.  The fair values of

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Woodward’s cross currency interest rate swaps are determined using a market approach that is based on observable inputs other than quoted market prices, including contract terms, interest rates, currency rates, and other market factors.

Accounts receivable, accounts payable, and short-term borrowings are not remeasured to fair value, as the carrying cost of each approximates its respective fair value.  The estimated fair values and carrying costs of other financial instruments that are not required to be remeasured at fair value in the Condensed Consolidated Balance Sheets were as follows:

		At June 30, 2018				At September 30, 2017
	Fair Value Hierarchy Level	Estimated Fair Value		Carrying Cost		Estimated Fair Value		Carrying Cost
Assets:
Notes receivable from municipalities	2	$	14,523	$	14,475	$	15,848	$	14,507
Investments in short-term time deposits	2		103		104		8,227		8,223
Liabilities:
Long-term debt	2	$	(1,203,413)	$	(1,214,246)	$	(592,317)	$	(582,080)

In fiscal years 2014 and 2013, Woodward received long-term notes from municipalities within the states of Illinois and Colorado in connection with certain economic incentives related to Woodward’s development of a second campus in the greater-Rockford, Illinois area for its Aerospace segment and Woodward’s development of a new campus at its corporate headquarters in Fort Collins, Colorado.  The fair value of the long-term notes was estimated based on a model that discounted future principal and interest payments received at an interest rate available to the Company at the end of the period for similarly rated municipal notes of similar maturity, which is a level 2 input as defined by the U.S. GAAP fair value hierarchy.  The interest rates used to estimate the fair value of the long-term notes were 2.8% at June 30, 2018 and 2.6% at September 30, 2017.

From time to time, certain of Woodward’s foreign subsidiaries will invest excess cash in short-term time deposits with a fixed maturity date of longer than three months but less than one year from the date of the deposit.  Woodward believes that the investments are with creditworthy financial institutions. The fair value of the investments in short-term time deposits was estimated based on a model that discounted future principal and interest payments to be received at an interest rate available to the foreign subsidiary entering into the investment for similar short-term time deposits of similar maturity.  This was determined to be a level 2 input as defined by the U.S. GAAP fair value hierarchy.  The interest rates used to estimate the fair value of the short-term time deposits was 5.3% at September 30, 2017.  There were no investments in short-term time deposits as of June 30, 2018.

The fair value of long-term debt was estimated based on a model that discounted future principal and interest payments at interest rates available to the Company at the end of the period for similar debt of the same maturity, which is a level 2 input as defined by the U.S. GAAP fair value hierarchy.  The weighted-average interest rates used to estimate the fair value of long-term debt were 3.5% at June 30, 2018 and 2.4% at September 30, 2017.

Note 7.  Derivative instruments and hedging activities

Woodward has exposures related to global market risks, including the effect of changes in interest rates, foreign currency exchange rates, changes in certain commodity prices and fluctuations in various producer indices.  From time to time, Woodward enters into derivative instruments for risk management purposes only, including derivatives designated as accounting hedges and/or those utilized as economic hedges.  Woodward uses interest rate related derivative instruments to manage its exposure to fluctuations of interest rates.  Woodward does not enter into or issue derivatives for trading or speculative purposes.

By using derivative and/or hedging instruments to manage its risk exposure, Woodward is subject, from time to time, to credit risk and market risk on those derivative instruments.  Credit risk arises from the potential failure of the counterparty to perform under the terms of the derivative and/or hedging instrument.  When the fair value of a derivative contract is positive, the counterparty owes Woodward, which creates credit risk for Woodward.  Woodward mitigates this credit risk by entering into transactions with only counterparties that are believed to be creditworthy.  Market risk arises from the potential adverse effects on the value of derivative and/or hedging instruments that result from a change in interest rates, commodity prices, or foreign currency exchange rates.  Woodward minimizes this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

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Derivative instruments not designated or qualifying as hedging instruments

On April 18, 2018, the Company entered into a  Forward Option at a cost of $5,543 whereby, on May 30, 2018, the Company had the ability to exercise its option to purchase €490,000 on June 1, 2018 using U.S. dollars at a fixed exchange rate of 1.2432.The Forward Option was entered into to manage the Company’s exposure to fluctuations in the Euro prior to the anticipated close of the L’Orange Agreement.  The Company did not enter into the Forward Option for trading or speculative purposes.As the spot rate was below 1.2432 on May 30, 2018, the Company elected not to exercise the option and a loss of $5,543 was recognized on the Forward Option in “other (income) expense, net” in the Condensed Consolidated Statements of Earnings in the three and nine-months ended June 30, 2018.  The Forward Option expired on June 1, 2018.

In May 2018, Woodward entered into cross currency interest rate swap agreements that synthetically convert$167,420 of floating-rate debt under Woodward’s existing revolving credit agreement to Euro denominated floating-rate debt in conjunction with the L’Orange acquisition (the “Floating-Rate Cross Currency Swap”).   Also in May 2018, Woodward entered into cross currency interest rate swap agreements that synthetically convertan aggregate principal amount of $400,000 of fixed-rate debt associated with the 2018 Note Purchase Agreement (as defined at Note 14, Credit facilities short-term borrowings and long-term debt) to Euro denominated fixed-rate debt (the “Fixed-Rate Cross Currency Swaps”).  The cross currency interest rate swaps, which effectively reduce the interest rate on the underlying fixed and floating-rate debt under the 2018 Notes and Woodward’s existing revolving credit agreement, respectively, is recorded as a reduction to “Interest expense” in Woodward’s Condensed Consolidated Statements of Earnings.

Derivatives instruments in fair value hedging relationships

Concurrent with the entry into the Floating-Rate Cross Currency Swap, a corresponding Euro denominated intercompany loan receivable with identical terms and notional amount as the underlying Euro denominated floating-rate debt, with a reciprocal cross currency interest rate swap, was entered into by Woodward Barbados Financing SRL (“Barbados”), a wholly owned subsidiary of Woodward, and is designated as a fair value hedge under the criteria prescribed in ASC Topic 815, Derivatives and Hedging(“ASC 815”).  The objective of the derivative instrument is to hedge against the foreign currency exchange risk attributable to the spot remeasurement of the Euro denominated intercompany loan. 

Only the change in the fair value related to the cross currency basis spread, or excluded component, of the derivative instrument is recognized in accumulated OCI.  The remaining changein the fair value of the derivative instrument isrecognized in foreign currency transaction gain or loss included in “Selling, general and administrative costs” in Woodward’s Condensed Consolidated Statements of Earnings.  The change in the fair value of the derivative instrument in foreign currency transaction gain or loss offsets the change in the spot remeasurement of the intercompany Euro denominated loan.  Hedge effectiveness is assessed based on the fair value changes of the derivative instrument, after excluding any fair value changes related to the crosscurrency basis spread.  The initial cost of the cross currency basis spread is recorded in earnings each period through the swap accrual process.  There is no credit-risk-related contingent features associated with the floating-rate cross currency interest rate swap.

Derivative instruments in cash flow hedging relationships

In conjunction with the entry into the Fixed-Rate Cross Currency Swaps, five corresponding intercompany loans receivable, with identical terms and amounts of each tranche of the underlying aggregate principal amount of $400,000 of fixed-rate debt, and reciprocal cross currency interest rate swaps were entered into by Woodward Barbados, which are designated as cash flow hedges under the criteria prescribed in ASC 815.  The objective of these derivative instruments is to hedge the risk of variability in cash flows attributable to the foreign currency exchange risk of cash flows for future principal and interest payments associated with the Euro denominated intercompany loans over a fifteen year period. 

Changes in the fair values of the derivative instruments are recognized in accumulated OCI and reclassified to foreign currency transaction gain or loss included in “Selling, general and administrative costs” in Woodward’s Condensed Consolidated Statements of Earnings.  Reclassifications out of accumulated OCI of the change in fair value occur each reporting period based upon changes in the spot rate remeasurement of the Euro denominated intercompany loans, including associated interest.  Hedge effectiveness is assessed based on the fair value changes of the derivative instruments and deemed to be highly effective in offsetting exposure to variability in foreign exchange rates.  There are no credit-risk-related contingent features associated with these cross currency interest rate swaps.

In June 2013, in connection with Woodward’s expected refinancing of current maturities on its then existing long-term debt, Woodward entered into a treasury lock agreement with a notional amount of $25,000 that qualified as a cash flow hedge under ASC 815.  The objective of this derivative instrument was to hedge the risk of variability in cash flows attributable to changes in the designated benchmark interest rate over a seven-year period related to the future principal and interest payments on a portion of anticipated future debt issuances.  The treasury lock agreement was terminated in August 2013 and the resulting gain of $507 was recorded as a reduction to accumulated OCI and is being recognized as a decrease to interest

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expense over a seven-year period.Woodward expects to reclassify $72 of net unrecognized gains on terminated derivative instruments from accumulated OCI to earnings during the next twelve months.

Derivatives instruments in net investment hedging relationships

On September 23, 2016, Woodward and Woodward International Holding B.V., a wholly owned subsidiary of Woodward organized under the laws of The Netherlands (the “BV Subsidiary”), each entered into a note purchase agreement (the “2016 Note Purchase Agreement”) relating to the sale by Woodward and the BV Subsidiary of an aggregate principal amount of €160,000 of senior unsecured notes in a series of private placement transactions.  Woodward issued €40,000 aggregate principal amount of Woodward’s Series M Senior Notes due September 23, 2026 (the “Series M Notes”).  Woodward designated the Series M Notes as a hedge of a foreign currency exposure of Woodward’s net investment in its Euro denominated functional currency subsidiaries.  On the Series M Notes, included in foreign currency translation adjustments within total comprehensive (losses) earnings are net foreign exchange gains of $2,559 for the three-months and $548 for the nine-months ended June 30, 2018, compared to net foreign exchange losses of $880 for the three-months and $3,030 for the nine-months ended June 30, 2017. 

In July 2016, Woodward designated an intercompany loan of 160,000 renminbi between two wholly owned subsidiaries as a hedge of a foreign currency exposure of the net investment of the borrower in the lender.  Related to the intercompany loan, net unrealized foreign exchange losses of $283 for the three-months and net unrealized foreign exchange gains of $452 for the nine-months ended June 30, 2017 are included in foreign currency translation adjustments within total comprehensive (losses) earnings.  The intercompany loan was repaid in July 2017.

Impact of derivative instruments designated as qualifying hedging instruments

The following table discloses the impact of derivative instruments designated as qualifying hedging instruments on Woodward’s Condensed Consolidated Statements of Earnings:

		Three-Months Ended June 30, 2018						Three-Months Ended June 30, 2017
Derivatives in:	Location	Amount of (Income) Expense Recognized in Earnings on Derivative		Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative		Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings		Amount of (Income) Expense Recognized in Earnings on Derivative		Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative		Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings
Cross currency interest rate swap agreement designated as fair value hedges	Selling, general and administrative expenses	$	1,467	$	1,835	$	1,467	$	-	$	-	$	-
Cross currency interest rate swap agreements designated as cash flow hedges	Selling, general and administrative expenses		3,506		21,823		3,506		-		-		-
Treasury lock agreement designated as cash flow hedge	Interest expense		(18)		-		(18)		(18)		-		(18)
		$	4,955	$	23,658	$	4,955	$	(18)	$	-	$	(18)

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		Nine-Months Ended June 30, 2018						Nine-Months Ended June 30, 2017
Derivatives in:	Location	Amount of (Income) Expense Recognized in Earnings on Derivative		Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative		Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings		Amount of (Income) Expense Recognized in Earnings on Derivative		Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative		Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings
Cross currency interest rate swap agreement designated as fair value hedges	Selling, general and administrative expenses	$	1,467	$	1,835	$	1,467	$	-	$	-	$	-
Cross currency interest rate swap agreements designated as cash flow hedges	Selling, general and administrative expenses		3,506		21,823		3,506		-		-		-
Treasury lock agreement designated as cash flow hedge	Interest expense		(54)		-		(54)		(54)		-		(54)
		$	4,919	$	23,658	$	4,919	$	(54)	$	-	$	(54)

The remaining unrecognized gains and losses in Woodward’s Condensed Consolidated Balance Sheets associated with derivative instruments that were previously entered into by Woodward, which are classified in accumulated OCI were net losses of $18,521 as of June 30, 2018 and net gains of $218 as of September 30, 2017. 

Note 8.  Supplemental statement of cash flows information

	Nine-Months Ended June 30,
	2018		2017
Interest paid, net of amounts capitalized	$	24,966	$	24,879
Income taxes paid		31,443		29,807
Income tax refunds received		1,760		158
Non-cash activities:
Purchases of property, plant and equipment on account		8,438		12,252
Common shares issued from treasury to settle employee liabilities		-		1,767
Common shares issued from treasury to settle benefit obligations (Note 19)		14,741		14,014
Cashless exercise of stock options		-		1,473

Note 9.  Accounts receivable

Almost all of Woodward’s sales are made on credit and result in accounts receivable, which are recorded at the amount invoiced and are generally not collateralized.  In the normal course of business, not all accounts receivable are collected and, therefore, an allowance for uncollectible amounts is provided equal to the amount that Woodward believes ultimately will not be collected.  In establishing the amount of the allowance related to the credit risk of accounts receivable, customer-specific information is considered related to delinquent accounts, past loss experience, bankruptcy filings, deterioration in the customer’s operating results or financial position, and current economic conditions.  Accounts receivable losses are deducted from the allowance, and the related accounts receivable balances are written off when the receivables are deemed uncollectible.  Recoveries of accounts receivable previously written off are recognized when received.  In addition, an allowance associated with anticipated future sales returns is also established and is included in the allowance for uncollectible amounts.

Consistent with common business practice in China, Woodward’s Chinese subsidiaries accept from Chinese customers, in settlement of certain customer accounts receivable, bankers’ acceptance notes issued by Chinese banks that are believed to be creditworthy.  Bankers’ acceptance notes are financial instruments issued by Chinese financial institutions as part of financing arrangements between the financial institution and a customer of the financial institution.  Bankers’ acceptance notes 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 bankers’ acceptance note as of the maturity date.  The maturity date of bankers’ acceptance notes varies, but it is Woodward’s policy to only accept bankers’ acceptance notes with maturity dates no more

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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 banker’s acceptance note from a customer, such customer has no further obligation to pay Woodward for the related accounts receivable balance.  Woodward only accepts bankers’ acceptance notes issued by banks that are believed to be creditworthy and to which the credit risks associated with the bankers’ acceptance notes are believed to be minimal.

The composition of Woodward’s accounts receivable at June 30, 2018 and September 30, 2017 follows:

	June 30,		September 30,
	2018		2017
Accounts receivable from:
Customers	$	362,459	$	367,715
Other (Chinese financial institutions)		27,319		38,243
Allowance for uncollectible customer amounts		(3,668)		(3,776)
	$	386,110	$	402,182

Note 10.  Inventories

	June 30,		September 30,
	2018		2017
Raw materials	$	86,677	$	59,034
Work in progress		135,518		103,790
Component parts (1)		301,257		262,755
Finished goods		65,988		47,926
	$	589,440	$	473,505

(1) Component parts include items that can be sold separately as finished goods or included in the manufacture of other products.

Note 11.  Property, plant, and equipment

	June 30,		September 30,
	2018		2017
Land and land improvements	$	92,934	$	88,326
Buildings and building improvements		564,366		514,453
Leasehold improvements		17,827		16,142
Machinery and production equipment		654,495		543,641
Computer equipment and software		123,705		124,723
Office furniture and equipment		27,567		24,308
Other		19,326		19,393
Construction in progress		87,620		111,910
		1,587,840		1,442,896
Less accumulated depreciation		(543,807)		(520,853)
Property, plant, and equipment, net	$	1,044,033	$	922,043

In the second quarter of fiscal year 2018, the Company announced its decision to relocate its Duarte, California operations to the Company’s newly renovated Drake Campus in Fort Collins, Colorado.  The Company has identified assets held for sale with a carrying value of $8,853 at June 30, 2018, the majority of which are included in “Land and land

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improvements” and “Buildings and buildings improvements” which relate to the land, building and building improvements, and other assets at the Duarte facility.  The assets held for sale are included in the Company’s Aerospace segment.  The Company had no assets held for sale recorded as of September 30, 2017.  The carrying value of the remaining assets at the Duarte facility was approximately $3,400 as of June 30, 2018, of which the Company has identified approximately $500 that is planned to be disposed of as a result of the relocation.

The Company assessed whether the decision to relocate from its Duarte facility could indicate a potential impairment of the assets at the Duarte facility and concluded that the assets were not impaired as of June 30, 2018.

Included in “Office furniture and equipment” and “Other” is $1,676 at June 30, 2018 and $1,653 at September 30, 2017, of gross assets acquired on capital leases, and accumulated depreciation included $1,081 at June 30, 2018 and $739 at September 30, 2017 of amortization associated with the capital lease assets.

In fiscal year 2015, Woodward completed and placed into service a manufacturing and office building on a second campus in the greater-Rockford, Illinois area and has occupied the new facility for its Aerospace segment.  This campus is intended to support Woodward’s expected growth in its Aerospace segment as a result of Woodward being awarded a substantial number of new system platforms, particularly on narrow-body aircraft. 

Included in “Construction in progress” are costs of $30,198 at June 30, 2018 and $49,347 at September 30, 2017 associated with new equipment purchases for the greater-Rockford, Illinois campus and costs of $2,618 at June 30, 2018 and $15,584 at September 30, 2017 associated with the renovation of the Drake Campus. 

For the three and nine-months ended June 30, 2018 and 2017, Woodward had depreciation expense as follows:

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Depreciation expense	$	17,695	$	14,141	$	48,276	$	40,259

For the three and nine-months ended June 30, 2018 and 2017, Woodward capitalized interest that would have otherwise been included in interest expense of the following:

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Capitalized interest	$	607	$	567	$	1,841	$	1,521

Note 12.  Goodwill

	September 30, 2017		Additions		Effects of Foreign Currency Translation		June 30, 2018
Aerospace	$	455,423	$	-	$	-	$	455,423
Industrial		101,122		269,433		948		371,503
Consolidated	$	556,545	$	269,433	$	948	$	826,926

On June 1, 2018, Woodward completed the acquisition of L’Orange (see Note 4, Business acquisition), which resulted in the recognition of $269,433 in goodwill in the Company’s Industrial segment. 

Woodward tests goodwill for impairment during the fourth quarter of each fiscal year, or at any time there is an indication goodwill is more-likely-than-not impaired, commonly referred to as triggering events.  There have been no such triggering events during any of the periods presented and Woodward’s fourth quarter of fiscal year 2017 impairment test resulted in no impairment.

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Note 13.  Intangible assets, net

	June 30, 2018						September 30, 2017
	Gross Carrying Value		Accumulated Amortization		Net Carrying Amount		Gross Carrying Value		Accumulated Amortization		Net Carrying Amount
Intangible assets with finite lives:
Customer relationships and contracts:
Aerospace	$	281,683	$	(162,692)	$	118,991	$	282,225	$	(151,155)	$	131,070
Industrial		422,948		(35,198)		387,750		40,962		(34,407)		6,555
Total	$	704,631	$	(197,890)	$	506,741	$	323,187	$	(185,562)	$	137,625
Intellectual property:
Aerospace	$	-	$	-	$	-	$	-	$	-	$	-
Industrial		19,480		(18,527)		953		19,422		(18,196)		1,226
Total	$	19,480	$	(18,527)	$	953	$	19,422	$	(18,196)	$	1,226
Process technology:
Aerospace	$	76,372	$	(53,377)	$	22,995	$	76,605	$	(49,124)	$	27,481
Industrial		95,217		(19,139)		76,078		22,950		(17,756)		5,194
Total	$	171,589	$	(72,516)	$	99,073	$	99,555	$	(66,880)	$	32,675
Backlog:
Aerospace	$	-	$	-	$	-	$	-	$	-	$	-
Industrial		40,885		(4,579)		36,306		-		-		-
Total	$	40,885	$	(4,579)	$	36,306	$	-	$	-	$	-
Other intangibles:
Aerospace	$	-	$	-	$	-	$	-	$	-	$	-
Industrial		1,651		(1,211)		440		1,312		(956)		356
Total	$	1,651	$	(1,211)	$	440	$	1,312	$	(956)	$	356
Intangible asset with indefinite life:
Tradename:
Aerospace	$	-	$	-	$	-	$	-	$	-	$	-
Industrial		64,248		-		64,248		-		-		-
Total	$	64,248	$	-	$	64,248	$	-	$	-	$	-
Total intangibles:
Aerospace	$	358,055	$	(216,069)	$	141,986	$	358,830	$	(200,279)	$	158,551
Industrial		644,429		(78,654)		565,775		84,646		(71,315)		13,331
Consolidated Total	$	1,002,484	$	(294,723)	$	707,761	$	443,476	$	(271,594)	$	171,882

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For the three and nine-months ended June 30, 2018 and 2017, Woodward recorded amortization expense associated with intangibles of the following:

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Amortization expense	$	11,360	$	6,439	$	23,861	$	19,328

Future amortization expense associated with intangibles is expected to be:

Year Ending September 30:
2018 (remaining)	$	20,097
2019		58,284
2020		42,879
2021		39,994
2022		38,131
Thereafter		444,128
	$	643,513

Note 14.  Credit facilities, short-term borrowings and long-term debt

Revolving credit facility

Woodward maintains a $1,000,000 revolving credit facility established under a revolving credit agreement among Woodward, a syndicate of lenders and Wells Fargo Bank, National Association, as administrative agent (the “Revolving Credit Agreement”).  The Revolving Credit Agreement provides for the option to increase available borrowings up to $1,200,000, subject to lenders’ participation.  Borrowings under the Revolving Credit Agreement can be made by Woodward and certain of its foreign subsidiaries in U.S dollars or in foreign currencies other than the U.S. dollar and generally bear interest at LIBOR plus 0.85% to 1.65%.  The Revolving Credit Agreement matures in April 2020.  Under the Revolving Credit Agreement, there were $374,574 in principal amount of borrowings outstanding as of June 30, 2018, at an effective interest rate of 2.87%, and $32,600 in principal amount of borrowings outstanding as of September 30, 2017, at an effective interest rate of 2.29%.  As of June 30, 2018, $140,231 of the borrowings under the Revolving Credit Agreement were classified as short-term borrowings based on Woodward’s intent and ability to pay this amount in the next twelve months.  As of September 30, 2017, all of the borrowings under the Revolving Credit Agreement were classified as short-term borrowings.

Short-term borrowings

Woodward has other foreign lines of credit and foreign overdraft facilities at various financial institutions, which are generally reviewed annually for renewal and are subject to the usual terms and conditions applied by the financial institutions.  Pursuant to the terms of the related facility agreements, Woodward’s foreign performance guarantee facilities are limited in use to providing performance guarantees to third parties.  As of June 30, 2018, there were borrowings outstanding of $3,769 on Woodward’s foreign lines of credit and foreign overdraft facilities.   There were no borrowings outstanding as of September 30, 2017.

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Long-term debt

	June 30,		September 30,
	2018		2017
Long-term portion of revolving credit facility - Floating rate (LIBOR plus 0.85% - 1.65%), due April 2020; unsecured	$	234,343	$	-
Series D notes – 6.39%, due October 2018; unsecured		100,000		100,000
Series F notes – 8.24%, due April 2019; unsecured		43,000		43,000
Series G notes – 3.42%, due November 2020; unsecured		50,000		50,000
Series H notes – 4.03%, due November 2023; unsecured		25,000		25,000
Series I notes – 4.18%, due November 2025; unsecured		25,000		25,000
Series J notes – Floating rate (LIBOR plus 1.25%), due November 2020; unsecured		50,000		50,000
Series K notes – 4.03%, due November 2023; unsecured		50,000		50,000
Series L notes – 4.18%, due November 2025; unsecured		50,000		50,000
Series M notes – 1.12% due September 2026; unsecured		46,726		47,270
Series N notes – 1.31% due September 2028; unsecured		89,947		90,995
Series O notes – 1.57% due September 2031; unsecured		50,230		50,815
Series P notes – 4.27% due May 2025; unsecured		85,000		-
Series Q notes – 4.35% due May 2027; unsecured		85,000		-
Series R notes – 4.41% due May 2029; unsecured		75,000		-
Series S notes – 4.46% due May 2030; unsecured		75,000		-
Series T notes – 4.61% due May 2033; unsecured		80,000		-
Unamortized debt issuance costs		(2,850)		(1,794)
Total long-term debt		1,211,396		580,286
Less: Current portion of long-term debt		-		-
Long-term debt, less current portion	$	1,211,396	$	580,286

The Notes

In October 2008, Woodward entered into a note purchase agreement relating to the Series D Notes.  In April 2009, Woodward entered into a note purchase agreement relating to the Series F Notes.  The Series D Notes mature and are payable in October 2018, and the Series F Notes mature and are payable in April 2019.  As of June 30, 2018, the entire amount of debt under the Series D Notes and Series F Notes has been classified as long-term based on Woodward’s intent and ability to refinance this debt prior to maturity using cash proceeds from its existing revolving credit facility which, in turn, is expected to be repaid beyond the next twelve months.

On October 1, 2013, Woodward entered into a 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.  Woodward issued the Series G, H and I Notes (the “First Closing Notes”) on October 1, 2013.  Woodward issued the Series J, K and L Notes (the “Second Closing Notes”) on November 15, 2013.  

On September 23, 2016, Woodward and the BV Subsidiary each entered into note purchase agreements relating to the sale by Woodward and the BV Subsidiary of an aggregate principal amount of €160,000 of senior unsecured notes in a series of private placement transactions.  Woodward issued €40,000 Series M Notes.  The BV Subsidiary issued (a) €77,000 aggregate principal amount of the BV Subsidiary’s Series N Senior Notes (the “Series N Notes”) and (b) €43,000 aggregate principal amount of the BV Subsidiary’s Series O Senior Notes (the “Series O Notes” and together with the Series M Notes and the Series N Notes, the “2016 Notes,”) and, together with the Series D Notes, the Series F Notes, the First Closing Notes and the Second Closing Notes, collectively, the “Existing Notes”).

On May 31, 2018, Woodward entered into a note purchase agreement (the “2018 Note Purchase Agreement”) relating to the sale by Woodward of an aggregate principal amount of $400,000 of senior unsecured notes comprised of (a) $85,000 aggregate principal amount of its Series P Senior Notes due May 30, 2025 and bearing interest at a rate of 4.27% per annum (the “Series P Notes”), (b) $85,000 aggregate principal amount of its Series Q Senior Notes due May 30, 2027 and bearing interest at a rate of 4.35% per annum (the “Series Q Notes”), (c) $75,000 aggregate principal amount of its Series R Senior Notes due May 30, 2029 and bearing interest at a rate of 4.41% per annum (the “Series R Notes”), (d) $75,000 aggregate principal amount of its Series S Senior Notes due May 30, 2030 and bearing interest at a rate of 4.46% per annum (the “Series S Notes”), and (e) $80,000 aggregate principal amount of its Series T Senior Notes due May 30, 2033 and bearing interest at a rate of 4.61% per annum (the “Series T Notes”; together with the Series P Notes, the Series Q Notes, the Series R

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Notes, and the Series S Notes, the “2018 Notes” and; together with the Existing Notes, the “Notes”), in a series of private placement transactions.

In connection with the issuance of the 2018 Notes, the Company entered into cross currency swap transactions in respect of each tranche of the 2018 Notes, which effectively reduced the interest rates on the Series P Notes to 1.82% per annum, the Series Q Notes to 2.15% per annum, the Series R Notes to 2.42% per annum, the Series S Notes to 2.55% per annum and the Series T Notes to 2.90% per annum (see Note 7, Derivative instruments and hedging activities).

The Company’s obligations under the 2018 Note Purchase Agreement and the 2018 Notes will rank at all times at least pari passu, without preference or priority, with the Existing Notes and the Company’s outstanding debt under the Revolving Credit Agreement.

The 2018 Note Purchase Agreement contains restrictive covenants customary for such financings, including, among other things, covenants that place limits on the Company’s ability to incur liens on assets, incur additional debt (including a leverage test), transfer or sell the Company’s assets, merge or consolidate with other persons and enter into material transactions with affiliates.  The 2018 Note Purchase Agreement also contains financial covenants which require Woodward to maintain a specified leverage ratio of net indebtedness to consolidated earnings before interest, taxes, depreciation and amortization and a minimum consolidated net worth, which are, in each case, consistent with financial covenants set forth in the Existing Notes.

The 2018 Note Purchase Agreement also contains events of default customary for such financings, the occurrence of which would permit the holders of the 2018 Notes to accelerate the amounts due thereunder.  In the event of default, the interest rate accruing on each of the 2018 Notes would increase by 2.00%.  

The Company’s payment and performance obligations under the 2018 Note Purchase Agreement and the 2018 Notes, including without limitation the obligations for payment of all principal, interest and any applicable prepayment compensation amount on the 2018 Notes, are guaranteed by Woodward FST, Inc., MPC Products Corporation and Woodward HRT, Inc., each a wholly owned subsidiary of the Company.

The Company, at its option, is permitted at any time to prepay all or any part of the then-outstanding principal amount of any series of the 2018 Notes at 100% of the principal amount of the series of 2018 Notes to be prepaid (but, in the case of partial prepayment, not less than $1,000), together with interest accrued on such amount to be prepaid to the date of prepayment, plus any applicable prepayment compensation amount and, if any holder of the Notes has entered into a cross currency swap agreement in respect of the note held by such holder, certain losses (if any) incurred by such holder under such cross currency swap agreement as a result of such prepayment.

Interest on the Series D Notes, the First Closing Notes, and the Series K and L Notes is payable semi-annually on April 1 and October 1 of each year until all principal is paid.  Interest on the Series F Notes is payable semi-annually on April 15 and October 15 of each year until all principal is paid.  Interest on the 2016 Notes is payable semi-annually on March 23 and September 23 of each year, until all principal is paid.  Interest on the Series J Notes is payable quarterly on January 1, April 1, July 1 and October 1 of each year until all principal is paid.  As of June 30, 2018, the Series J Notes bore interest at an effective rate of 3.58%.  Commencing on November 30, 2018, interest on the 2018 Notes is payable semi-annually on May 30 and November 30 of each year until all principal is paid.

Debt Issuance Costs

Unamortized debt issuance costs associated with the Notes of $2,850 as of June 30, 2018 and $1,794 as of September 30, 2017 were recorded as a reduction in “Long-term debt, less current portion” in the Condensed Consolidated Balance Sheets.  Unamortized debt issuance costs of $1,603 associated with the Revolving Credit Agreement as of June 30, 2018 and $2,259 as of September 30, 2017 were recorded as “Other assets” in the Condensed Consolidated Balance Sheets.  Amortization of debt issuance costs is included in operating activities in the Condensed Consolidated Statements of Cash Flows.

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Note 15.  Accrued liabilities

	June 30,		September 30,
	2018		2017
Salaries and other member benefits	$	63,743	$	91,285
Warranties		19,802		13,597
Interest payable		8,856		9,626
Current portion of acquired performance obligations and unfavorable contracts (1)		1,627		1,627
Accrued retirement benefits		3,529		2,413
Current portion of loss reserve on contractual lease commitments		1,245		1,343
Current portion of deferred income from JV formation (Note 5)		6,414		6,451
Deferred revenues		2,689		4,625
Restructuring charges		16,574		-
Taxes, other than income		18,012		14,401
Other		19,720		9,704
	$	162,211	$	155,072

(1) In connection with Woodward’s acquisition of GE Aviation Systems LLC’s (the “Seller”) thrust reverser actuation systems business located in Duarte, California (the “Duarte Acquisition”) in fiscal year 2013, Woodward assumed current and long-term performance obligations for contractual commitments that are expected to result in future economic losses.  In addition, Woodward assumed current and long-term performance obligations for services to be provided to the Seller and others, partially offset by current and long-term assets related to contractual payments due from the Seller.  The current portion of both obligations is included in “Accrued liabilities” in the Condensed Consolidated Balance Sheets.

Warranties

Provisions of Woodward’s sales agreements include product warranties customary to these types of agreements.  Accruals are established for specifically identified warranty issues that are probable to result in future costs.  Warranty costs are accrued on a non-specific basis whenever past experience indicates a normal and predictable pattern exists.  Changes in accrued product warranties were as follows:

	Three-Months Ended June 30,				Nine-Months Ended June 30,
		2018		2017		2018		2017
Warranties, beginning of period	$	13,283	$	15,041	$	13,597	$	15,993
Increases due to acquisition of L'Orange		6,045		-		6,045		-
Expense, net of recoveries		2,696		2,746		3,000		6,808
Reductions for settling warranties		(1,838)		(3,746)		(2,670)		(8,528)
Foreign currency exchange rate changes		(384)		257		(170)		25
Warranties, end of period	$	19,802	$	14,298	$	19,802	$	14,298

Loss reserve on contractual lease commitments

In connection with the construction of a new production facility in Niles, Illinois, Woodward vacated a leased facility in Skokie, Illinois and recognized a loss reserve against the estimated remaining contractual lease commitments, less anticipated sublease income.  Changes in the loss reserve were as follows:

	Three-Months Ended June 30,				Nine-Months Ended June 30,
		2018		2017		2018		2017
Loss reserve on contractual lease commitments, beginning of period	$	4,478	$	8,395	$	5,270	$	9,242
Payments, net of sublease income		(267)		(382)		(1,059)		(1,229)
Non-cash adjustments		-		(2,322)		-		(2,322)
Loss reserve on contractual lease commitments, end of period	$	4,211	$	5,691	$	4,211	$	5,691

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Other liabilities included $2,966 and $3,927 of accrued loss reserve on contractual lease commitments as of June 30, 2018 and September 30, 2017, respectively, which are not expected to be settled or paid within twelve months of the respective balance sheet date.

Restructuring charges

In the second quarter of fiscal year 2018, the Company recorded restructuring charges totaling $17,013, the majority of which relate to the Company’s decision to relocate its Duarte, California operations to the Company’s newly renovated Drake Campus in Fort Collins, Colorado.  The Duarte facility, which manufactures thrust reverser actuation systems, is part of the Company’s Aerospace segment.  The remaining restructuring charges recognized during the first nine months of fiscal year 2018 consist of workforce management costs related to aligning the Company’s industrial turbomachinery business, which is part of the Company’s Industrial segment, with current market conditions.  All of the restructuring charges recorded in the second quarter and first nine months of fiscal year 2018 were recorded as nonsegment expenses and are expected to be paid within one year of the balance sheet date.

The summary of activity in accrued restructuring charges during the nine-months ended June 30, 2018 is as follows:

				Period Activity
	Balances as of October 1, 2017			Charges (gains)	Cash receipts (payments)		Non-cash activity		Balances as of June 30, 2018
Workforce management costs associated with:
Duarte plant relocation	$	-	$	12,504	$	-	$	-	$	12,504
Industrial turbomachinery business realignment		-		4,509		(439)		-		4,070
Total	$	-	$	17,013	$	(439)	$	-	$	16,574

In addition to the restructuring charges recognized in the first nine months of fiscal year 2018, the Company anticipates incurring additional costs associated with the relocation from Duarte to the Drake campus such as expenses associated with equipment relocation, employee training, accelerated depreciation, and increased labor expenses over the coming year.  The Company anticipates these additional expenses will vary by quarter, but are expected to be approximately $12,000 in total.  Although the Company plans to sell the Duarte facility’s land, building and building improvements, it is currently still occupying the Duarte facility and has recorded these as assets held for sale as of June 30, 2018 (see Note 11, Property, plant and equipment).

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Note 16.  Other liabilities

	June 30,		September 30,
	2018		2017
Net accrued retirement benefits, less amounts recognized within accrued liabilities	$	92,075	$	52,211
Noncurrent portion of deferred income from JV formation (1)		237,724		236,896
Total unrecognized tax benefits		9,910		20,949
Noncurrent income taxes payable (2)		23,920		-
Acquired unfavorable contracts (3)		591		2,076
Deferred economic incentives (4)		13,422		14,574
Loss reserve on contractual lease commitments (5)		2,966		3,927
Cross currency swap derivative liability (6)		23,527		-
Other		12,363		14,165
	$	416,498	$	344,798

(1) See Note 5, Joint venture for more information on the deferred income from JV formation.

(2) See Note 18, Income taxes for more information on the noncurrent income taxes payable.

(3) In connection with the Duarte Acquisition in fiscal year 2013, Woodward assumed current and long-term performance obligations for contractual commitments that are expected to result in future economic losses.  The long-term portion of the acquired unfavorable contracts is included in Other liabilities.

(4) Woodward receives certain economic incentives from various state and local authorities related to capital expansion projects.  Such amounts are initially recorded as deferred credits and are being recognized as a reduction to pre-tax expense over the economic lives of the related capital expansion projects.

(5) See Note 15, Accrued liabilities for more information on the loss reserve on contractual lease commitments.

(6) See Note 6,  Financial instruments and fair value measurements for more information on the cross currency swap derivative liability.

Note 17.  Other expense (income), net 

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Equity interest in the (earnings) losses of the JV (Note 5)	$	(738)	$	432	$	(2,340)	$	(634)
Net (gain) loss on sales of assets		50		64		(404)		(3,598)
Rent income		(28)		(53)		(99)		(196)
Net gain on investments in deferred compensation program		(257)		(523)		(957)		(1,252)
Loss on forward option derivative instrument (Note 7)		5,543		-		5,543		-
Other		(373)		(370)		(731)		(673)
	$	4,197	$	(450)	$	1,012	$	(6,353)

Note 18.  Income taxes

On December 22, 2017, the United States (“U.S.”) enacted significant changes to the U.S. tax law following the passage and signing of the Tax Act.  The Tax Act included significant changes to existing tax law, including a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, a one-time repatriation tax on deferred foreign income (“Transition Tax”), deductions, credits and business-related exclusions.

U.S. GAAP requires that the interim period tax provision be determined as follows:  

· At the end of each quarter, Woodward estimates the tax that will be provided for the current fiscal year stated as a percentage of estimated “ordinary income.”  The term ordinary income refers to earnings from continuing operations before income taxes, excluding significant unusual or infrequently occurring items. 

The estimated annual effective rate is applied to the year-to-date ordinary income at the end of each quarter to compute the estimated year-to-date tax applicable to ordinary income.  The tax expense or benefit related to ordinary

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income in each quarter is the difference between the most recent year-to-date and the prior quarter year-to-date computations.

· The tax effects of significant unusual or infrequently occurring items are recognized as discrete items in the interim period in which the events occur.  The impact of changes in tax laws or rates on deferred tax amounts, the effects of changes in judgment about beginning of the year valuation allowances, and changes in tax reserves resulting from the finalization of tax audits or reviews are examples of significant unusual or infrequently occurring items that are recognized as discrete items in the interim period in which the event occurs.  Enactment of the Tax Act during December 2017 resulted in a provisional discrete net charge to Woodward’s income tax expense in the amount of $14,778, which was recorded in the first quarter of fiscal year 2018.  The discrete net charge was increased by $3,671 in the three months ended June 30, 2018 resulting in a net discrete impact from the Tax Act of $18,449 in the nine-months ended June 30, 2018.

The determination of the annual effective tax rate is based upon a number of significant estimates and judgments, including the estimated annual pretax income of Woodward in each tax jurisdiction in which it operates, and the development of tax planning strategies during the year.  In addition, as a global commercial enterprise, Woodward’s tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, changes in the estimate of the amount of undistributed foreign earnings that Woodward considers indefinitely reinvested, and other factors that cannot be predicted with certainty.  As such, there can be significant volatility in interim tax provisions.

The permanent reduction to the U.S. federal corporate income tax rate from 35% to 21% is effective January 1, 2018 (the “Effective Date”).  When a U.S. federal tax rate change occurs during a taxpayer’s fiscal year, taxpayers are required to compute a weighted daily average rate for the fiscal year of enactment.  As a result of the Tax Act, Woodward has calculated a U.S. federal statutory corporate income tax rate of 24.5% for the fiscal year ending September 30, 2018 and applied this rate in computing the income tax provision for the three and nine-months ended June 30, 2018.  The U.S. federal statutory corporate income tax rate of 24.5% is the weighted daily average rate between the pre-enactment U.S. federal statutory tax rate of 35% applicable to Woodward’s 2018 fiscal year prior to the Effective Date and the post-enactment U.S. federal statutory tax rate of 21% applicable to the 2018 fiscal year after the Effective Date.  Woodward expects the U.S. federal statutory rate to be 21% for fiscal years beginning after September 30, 2018.

On December 22, 2017, the SEC issued SAB 118.  SAB 118 expresses views of the SEC regarding ASC 740 in the reporting period that includes the enactment date of the Tax Act.  Subsequent to the issuance of SAB 118, in March 2018, the FASB issued ASU 2018-05, which formally amended ASC 740 for the guidance previously provided by SAB 118.  The SEC staff issuing SAB 118 (the “Staff”) recognized that a registrant’s review of certain income tax effects of the Tax Act may be incomplete at the time financial statements are issued for the reporting period that includes the enactment date, including interim periods therein.  The Staff’s view of the enactment of the Tax Act has been developed considering the principles of ASC 805 which addresses the accounting for certain items in a business combination for which the accounting is incomplete upon issuance of the financial statements that include the reporting period in which the business combination occurs.  Specifically, the Staff provides that the accounting guidance in ASC Topic 805 may be analogized to the accounting for impacts of the Tax Act.  If a company does not have the necessary information available, prepared or analyzed for certain income tax effects of the Tax Act, SAB 118 allows a company to report provisional numbers and adjust those amounts during the measurement period not to extend beyond one year.  For the three and nine-months ended June 30, 2018, Woodward has recorded all known and estimable impacts of the Tax Act that are effective for fiscal year 2018.  Future adjustments to the provisional numbers will be recorded as discrete adjustments to income tax expense in the period in which those adjustments become estimable and/or are finalized.  The Company expects to finalize its assessment of the income tax effects of the Tax Act in the fourth quarter of fiscal year 2018.

Accordingly, Woodward’s income tax provision for the three and nine-months ended June 30, 2018 reflects (i) the current year impacts of the Tax Act on the estimated annual effective tax rate and (ii) discrete items, if any, resulting directly from the enactment of the Tax Act based on the information available, prepared, or analyzed (including computations) in reasonable detail.  The discrete net charge was increasedin the third quarter of fiscal year 2018 as a result of an IRS audit for fiscal years 2014, 2015 and 2016, which concluded during the quarter and resulted in an increase to the beginning fiscal year 2018 net deferred tax assets recorded by Woodward.  The application of the permanent reduction of the U.S. federal

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corporate income tax rate (enacted by the Tax Act) to the increase in the net deferred tax assets resulted in a net discrete charge of $3,671recorded in the three months ended June 30, 2018.

	Nine-Months Ended
	June 30, 2018
Transition tax (provisional)	$	26,000
Net impact on U.S. deferred tax assets and liabilities (provisional)		(16,260)
Net changes in deferred tax liability associated with anticipated repatriation taxes (provisional)		5,038
Total provisional discrete impact of the enactment of the Tax Act		14,778
Discrete impact recorded in the three months ended June 30, 2018		3,671
Net discrete impacts of the enactment of the Tax Act	$	18,449

Woodward determined that the Transition Tax is provisional because various components of the computation are unknown as of June 30, 2018, including the following significant items: the exchange rates for fiscal year 2018, the actual aggregate foreign cash position and the earnings and profits of the foreign entities as of September 30, 2018, the interpretation and identification of cash positions as of September 30, 2018, and incomplete computations of accumulated earnings and profits balances as of November 2, 2017 and December 31, 2017.  Consistent with provisions allowed under the Tax Act, the $26,000 estimated Transition Tax liability will be paid over an eight year period beginning in fiscal year 2019.  As of June 30, 2018, the current portion of the estimated Transition Tax liability in the amount of $2,080 has been included in “Income taxes receivable, net,” andthe noncurrent portion in the amount of $23,920 has been included in “Other liabilities” in the Condensed Consolidated Balance Sheets. 

Woodward also determined that the impact of the U.S. federal corporate income tax rate change on the U.S. deferred tax assets and liabilities is provisional because the number cannot be calculated until the underlying timing differences are known rather than estimated.   

Given the Tax Act’s significant changes and potential opportunities to repatriate cash tax free, Woodward is in the process of evaluating its current indefinite assertions.  As a result of the Tax Act, Woodward now expects to repatriate certain earnings which will be subject to withholding taxes.  These additional withholding taxes were recorded as an additional deferred tax liability associated with the basis difference in such jurisdictions.  The uncertainty related to the taxation of such withholding taxes on distributions under the Tax Act and finalization of the cash repatriation plan makes the deferred tax liability a provisional amount. 

Woodward continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and base erosion anti-abuse tax (“BEAT”) on Woodward, which are not effective until fiscal year 2019.  Woodward has not recorded any impact associated with either GILTI or BEAT in the tax rate as of the third quarter of fiscal year 2018. 

Within the calculation of Woodward’s annual effective tax rate Woodward has used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, and the FASB and/or various other taxing jurisdictions.  For example, Woodward anticipates that the state jurisdictions will continue to determine and announce their conformity to the Tax Act which could have an impact on the annual effective tax rate.

The following table sets forth the tax expense and the effective tax rate for Woodward’s earnings before income taxes:

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Earnings before income taxes	$	54,417	$	68,687	$	140,551	$	165,982
Income tax expense		5,300		15,061		34,685		27,703
Effective tax rate		9.7%		21.9%		24.7%		16.7%

The decrease in the year-over-year effective tax rate for the three-months ended June 30, 2018 is primarily attributable to the benefits of the current year effect of the U.S. federal corporate tax rate reduction in connection with the enactment of the Tax Act on the estimated annual effective tax rate, a higher favorable adjustment for the net excess income tax benefits from stock-based compensation compared to the prior fiscal year third quarter, and higher favorable resolutions of tax matters in the current quarter compared to the same quarter last year.This combined benefit was partially offset by the resolution of the fiscal year 2014, 2015, and 2016 IRS audits in the third quarter of fiscal year 2018, which resulted in an additional provisional discrete income tax expense of $3,671 recorded in the quarter in connection with the Tax Act.

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The increase in the effective tax rate for the nine-months ended June 30, 2018 compared to the nine-months ended June 30, 2017 is primarily attributable to the $18,449 net unfavorable impact in the period resulting from the enactment of the Tax Act.  Additionally, the benefit from the repatriation to the U.S. of certain net foreign profits and losses was higher in the nine-months ended June 30, 2017 compared to the nine-months ended June 30, 2018.  These increases were partially offset byhigher favorable resolutions of tax matters in the first nine months of fiscal year 2018 compared to the first nine months of fiscal year 2017, as well as the current year effect of the U.S. federal corporate tax rate reduction in connection with the enactment of the Tax Act on the estimated annual effective tax rate.  

Gross unrecognized tax benefits were $9,710 as of June 30, 2018, and $20,132 as of September 30, 2017.  Included in the balance of unrecognized tax benefits were $2,741 as of June 30, 2018 and $9,677 as of September 30, 2017 of tax benefits that, if recognized, would affect the effective tax rate.  At this time, Woodward estimates that it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $84 in the next twelve months due to the completion of reviews by tax authorities, lapses of statutes, and the settlement of tax positions.  Woodward accrues for potential interest and penalties related to unrecognized tax benefits and all other interest and penalties related to tax payments in tax expense.  Woodward had accrued gross interest and penalties of $255 as of June 30, 2018 and $1,123 as of September 30, 2017.

Woodward’s tax returns are subject to audits by U.S. federal, state, and foreign tax authorities, and these audits are at various stages of completion at any given time.  Reviews of tax matters by authorities and lapses of the applicable statutes of limitations may result in changes to tax expense.  Fiscal years remaining open to examination in significant foreign jurisdictions include 2008 and thereafter.  Woodward’s fiscal years remaining open to examination for U.S. Federal income taxes include fiscal years 2017 and thereafter.  Woodward has concluded U.S. federal income tax examinations through fiscal year 2016.  Woodward is generally subject to U.S. state income tax examinations for fiscal years 2013 and the periods thereafter.

Note 19.  Retirement benefits

Woodward provides various retirement benefits to eligible members of the Company, including contributions to various defined contribution plans, pension benefits associated with defined benefit plans, postretirement medical benefits and postretirement life insurance benefits.  Eligibility requirements and benefit levels vary depending on employee location.

Defined contribution plans

Most of the Company’s U.S. employees are eligible to participate in the U.S. defined contribution plan.  The U.S. defined contribution plan allows employees to defer part of their annual income for income tax purposes into their personal 401(k) accounts.  The Company makes matching contributions to eligible employee accounts, which are also deferred for employee personal income tax purposes.  Certain foreign employees are also eligible to participate in similar foreign plans.

Most of Woodward’s U.S. employees with at least two years of service receive an annual contribution of Woodward stock, equal to 5% of their eligible prior year wages, to their personal Woodward Retirement Savings Plan accounts.  Woodward fulfilled its annual Woodward stock contribution obligation using shares held in treasury stock by issuing a total of 202 shares of common stock for a value of $14,741 in the second quarter of fiscal year 2018, and 199 total shares of common stock for a value of $14,014 in the second quarter of fiscal year 2017.

The amount of expense associated with defined contribution plans was as follows:

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Company costs	$	8,262	$	8,039	$	24,858	$	23,790

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Defined benefit plans

Woodward has defined benefit plans that provide pension benefits for certain retired employees in the United States, the United Kingdom, Japan and, as a result of the acquisition of L’Orange, Germany.  Woodward also provides other postretirement benefits to its employees including postretirement medical benefits and life insurance benefits.  Postretirement medical benefits are provided to certain current and retired employees and their covered dependents and beneficiaries in the United States and the United Kingdom.  Lifeinsurance benefits are provided to certain retirees in the United States under frozen plans, which are no longer available to current employees.  A September 30 measurement date is utilized to value plan assets and obligations for all of Woodward’s defined benefit pension and other postretirement benefit plans.

In connection with the acquisition of L’Orange on June 1, 2018, Woodward assumed the unfunded defined benefit pension obligations of the L’Orange defined benefit pension plans (the “L’Orange Pension Plans”).  Woodward’s assumption of the liability associated with the L’Orange Pension Plans was part of the total consideration paid by Woodward to acquire L’Orange and thus reduced Woodward’s cash payment for the transaction.  Woodward has completed its valuation of the defined benefit pension obligations associated with the L’Orange Pension Plans and determined the value of the associated unfunded obligation was $38,998, of which $1,143 was considered current as of the June 1, 2018 acquisition date.  The L’Orange Pension Plans had expenses of $168 and Woodward made $54 of contributions to the L’Orange Pension Plans during the three and nine-months ended June 30, 2018.  Similar to Woodward’s other defined benefit plansand other postretirement benefit plans, a September 30 measurement date will be utilized to value the plan obligations of the L’Orange Pension Plans going forward.  The L’Orange Pension Plans are unfunded.

U.S. GAAP requires that, for obligations outstanding as of September 30, 2017, the funded status reported in interim periods shall be the same asset or liability recognized in the previous year end statement of financial position adjusted for (a) subsequent accruals of net periodic benefit cost that exclude the amortization of amounts previously recognized in other comprehensive income (for example, subsequent accruals of service cost, interest cost, and return on plan assets) and (b) contributions to a funded plan or benefit payments.

During the third quarter of fiscal year 2016, Woodward opened a lump-sum buy-out window, which closed in the fourth quarter of fiscal year 2016 and was fully settled during the first quarter of fiscal year 2017, for certain former U.S. employees and/or their dependents eligible to receive postretirement defined benefit pension payments for past employment services to the Company.  Eligible pension plan participants were provided the opportunity to elect to receive a one-time lump-sum payment or an immediate annuity in lieu of future pension benefit payments.  Pension benefit payments paid from available pension plan assets under the lump-sum buy-out options were $670 during the first nine months of fiscal year 2017.  Woodward made no further pension benefit payments under the lump-sum buy-out options.

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The components of the net periodic retirement pension costs recognized are as follows:

	Three-Months Ended June 30,
	United States				Other Countries				Total
	2018		2017		2018		2017		2018		2017
Service cost	$	410	$	419	$	283	$	192	$	693	$	611
Interest cost		1,501		1,439		386		305		1,887		1,744
Expected return on plan assets		(2,904)		(2,632)		(703)		(656)		(3,607)		(3,288)
Amortization of:
Net actuarial loss		150		464		74		130		224		594
Prior service cost		177		95		-		-		177		95
Net periodic retirement pension (benefit) cost	$	(666)	$	(215)	$	40	$	(29)	$	(626)	$	(244)
Contributions paid	$	-	$	-	$	227	$	99	$	227	$	99
	Nine-Months Ended June 30,
	United States				Other Countries				Total
	2018		2017		2018		2017		2018		2017
Service cost	$	1,232	$	1,256	$	606	$	571	$	1,838	$	1,827
Interest cost		4,503		4,318		1,059		897		5,562		5,215
Expected return on plan assets		(8,711)		(7,897)		(2,106)		(1,935)		(10,817)		(9,832)
Amortization of:
Net actuarial loss		449		1,391		221		383		670		1,774
Prior service cost		532		287		-		-		532		287
Net periodic retirement pension benefit	$	(1,995)	$	(645)	$	(220)	$	(84)	$	(2,215)	$	(729)
Contributions paid	$	-	$	-	$	658	$	565	$	658	$	565

The components of the net periodic other postretirement benefit costs recognized are as follows:

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Service cost	$	1	$	4	$	5	$	11
Interest cost		291		311		874		933
Amortization of:
Net actuarial loss		24		50		72		151
Prior service benefit		(40)		(40)		(119)		(119)
Curtailment gain		-		-		(330)		-
Net periodic other postretirement cost	$	276	$	325	$	502	$	976
Contributions paid	$	595	$	592	$	1,830	$	2,011

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The amount of cash contributions made to these plans in any year is dependent upon a number of factors, including minimum funding requirements in the jurisdictions in which Woodward operates and arrangements made with trustees of certain foreign plans.  As a result, the actual funding in fiscal year 2018 may differ from the current estimate.  Woodward estimates its remaining cash contributions in fiscal year 2018 will be as follows:

Retirement pension benefits:
United States	$	-
United Kingdom		155
Japan		-
Germany		329
Other postretirement benefits		2,041

Multiemployer defined benefit plans

Woodward operates multiemployer defined benefit plans for certain employees in both the Netherlands and Japan.  The amounts of contributions associated with the multiemployer defined benefit plans were as follows:

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Company contributions	$	86	$	73	$	253	$	220

Note 20.  Stockholders’ equity

Stock repurchase program

In the first quarter of fiscal year 2017, Woodward’s board of directors terminated the Company’s prior stock repurchase program and replaced it with a new program for the repurchase of up to $500,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a three-year period that will end in November 2019 (the “2017 Authorization”).  In the first nine-months of fiscal year 2017, Woodward purchased, under the 2017 Authorization, 886 shares of its common stock for $61,229, of which 350 shares were purchased pursuant to a 10b5-1 plan and 536 shares were purchased pursuant to a 10b-18 plan.  Woodward repurchased no common stock under the 2017 Authorization in the first nine-months of fiscal year 2018.

Stock-based compensation

Provisions governing outstanding stock option awards are included in the 2017 Omnibus Incentive Plan (the “2017 Plan”), the 2006 Omnibus Incentive Plan (the “2006 Plan”) and the 2002 Stock Option Plan (the “2002 Plan”).  The 2002 Plan provided that no further grants would be made after December 31, 2006.  No further grants will be made under the 2006 Plan, which expired in fiscal year 2016. 

Under the 2017 Plan, there were approximately 1,300 shares of Woodward’s common stock available for future grants as of June 30, 2018. 

Stock options

To date, equity awards under the 2017 Plan have consisted of grants of stock options to Woodward’s employees and directors.  Woodward believes that these stock options align the interests of its employees and directors with the interests of its stockholders.  Stock option awards are granted with an exercise price equal to the market price of Woodward’s stock at the date the grants are awarded, a ten-year term, and generally a four-year vesting schedule at a rate of 25% per year.

The fair value of options granted is estimated as of the grant date using the Black-Scholes-Merton option-valuation model using the assumptions in the following table.  Woodward calculates the expected term, which represents the average period of time that stock options granted are expected to be outstanding, based upon historical experience of plan participants.  Expected volatility is based on historical volatility using daily stock price observations.  The estimated dividend yield is based upon Woodward’s historical dividend practice and the market value of its common stock.  The risk-free rate is based on the U.S. treasury yield curve, for periods within the contractual life of the stock option, at the time of grant.

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	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018				2017
Weighted-average exercise price per share		n/a		n/a	$	78.91			$	62.64
Weighted-average grant date market value of Woodward stock		n/a		n/a	$	78.91			$	69.45
Expected term (years)		n/a		n/a		6.4	-	8.7		6.0	-	8.7
Estimated volatility		n/a		n/a		29.1%	-	32.7%		31.5%	-	33.7%
Estimated dividend yield		n/a		n/a		0.6%	-	0.8%		0.7%
Risk-free interest rate		n/a		n/a		2.1%	-	2.8%		2.2%	-	2.5%

The following is a summary of the activity for stock option awards during the three and nine-months ended June 30, 2018:

	Three-Months Ended				Nine-Months Ended
	June 30, 2018				June 30, 2018
	Number of options		Weighted-Average Exercise Price per Share		Number of options		Weighted-Average Exercise Price per Share
Options, beginning balance		5,880	$	44.62		5,236	$	39.58
Options granted		-		n/a		750		78.91
Options exercised		(158)		22.32		(255)		27.81
Options forfeited		(15)		59.97		(24)		58.27
Options, ending balance		5,707		45.20		5,707		45.20

Changes in non-vested stock options during the three and nine-months ended June 30, 2018 were as follows:

	Three-Months Ended				Nine-Months Ended
	June 30, 2018				June 30, 2018
	Number of options		Weighted-Average Grant Date Fair Value per Share		Number of options		Weighted-Average Grant Date Fair Value Per Share
Options outstanding, beginning balance		2,022	$	21.63		2,072	$	18.61
Options granted		-		n/a		750		25.66
Options vested		-		n/a		(791)		17.57
Options forfeited		(15)		20.85		(24)		20.45
Options outstanding, ending balance		2,007		21.64		2,007		21.64

Information about stock options that have vested, or are expected to vest, and are exercisable at June 30, 2018 was as follows:

	Number		Weighted- Average Exercise Price		Weighted- Average Remaining Life in Years		Aggregate Intrinsic Value
Options outstanding		5,707	$	45.20		5.8	$	182,230
Options vested and exercisable		3,699		36.25		4.5		150,207
Options vested and expected to vest		5,628		44.89		5.7		181,384

Stock-based compensation expense

Woodward recognizes stock-based compensation expense on a straight-line basis over the requisite service period.  Pursuant to form stock option agreements used by the Company, with terms approved by the administrator of the applicable

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plan, the requisite service period can be less than the four-year vesting period based on grantee’s retirement eligibility.  As such, the recognition of stock-based compensation expense associated with some stock option grants can be accelerated to a period of less than four years, including immediate recognition of stock-based compensation expense on the date of grant.

Upon approving the 2017 Plan, Woodward’s board of directors delegated authority to administer the 2017 Plan to the compensation committee of the board, including, but not limited to, the power to determine the recipients of awards and the terms of those awards.  The compensation committee approved issuance of options in the first quarter of fiscal year 2017 under the 2017 Plan, with an award date of October 3, 2016 conditional upon and subject to approval of the 2017 Plan by the stockholders.  The stock options conditionally awarded under the 2017 Plan were not granted or outstanding for accounting purposes prior to stockholder approval of the 2017 Plan, and as such no stock-based compensation expense related to such awards was recognized on these stock options, during the three-months ended December 31, 2016, but rather the expense was recognized in the three-months ended March 31, 2017.  Options granted in the three-months ended December 31, 2017 were not conditionally granted and, therefore, stock-based compensation expense related to those awards was recognized during the three-months ended December 31, 2017.  Total stock-based compensation expense was $1,858 for the three-months and $16,292 for the nine-months ended June 30, 2018, and $1,817 for the three-months and $15,580 for the nine-months ended June 30, 2017.

At June 30, 2018, there was approximately $10,938 of total unrecognized compensation expense related to non-vested stock-based compensation arrangements.  The pre-vesting forfeiture rates for purposes of determining stock-based compensation expense recognized were estimated to be 0% for members of Woodward’s board of directors and 9% for all others.  The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 2.0 years.

Note 21.  Commitments and contingencies

Woodward is currently involved in claims, pending or threatened litigation or other legal proceedings, investigations and/or regulatory proceedings arising in the normal course of business, including, among others, those relating to product liability claims, employment matters, worker’s compensation claims, contractual disputes, product warranty claims and alleged violations of various laws and regulations.  Woodward accrues for known individual matters using estimates of the most likely amount of loss where it believes that it is probable the matter will result in a loss when ultimately resolved and such loss is reasonably estimable. 

Legal costs are expensed as incurred and are classified in “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Earnings.

Woodward is partially self-insured in the United States for healthcare and worker’s compensation up to predetermined amounts, above which third party insurance applies.  Management regularly reviews the probable outcome of related claims and proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage, and the established accruals for liabilities.

While the outcome of pending claims, legal and regulatory proceedings, and investigations cannot be predicted with certainty, management believes that any liabilities that may result from these claims, proceedings and investigations will not have a material effect on Woodward's liquidity, financial condition, or results of operations.

In the event of a change in control of Woodward, as defined in change-in-control agreements with its current corporate officers, Woodward may be required to pay termination benefits to any such officer if such officer’s employment is terminated within two years following the change of control.

Note 22.  Segment information

Woodward serves the aerospace and industrial markets through its two reportable segments - Aerospace and Industrial.  When appropriate, Woodward’s reportable segments are aggregations of Woodward’s operating segments.  Woodward uses operating segment information internally to manage its business, including the assessment of operating segment performance and decisions for the allocation of resources between operating segments.  L’Orange has been included in Woodward’s Industrial segment results since the Closing.

The accounting policies of the reportable segments are the same as those of the Company.  Woodward evaluates segment profit or loss based on internal performance measures for each segment in a given period.  In connection with that assessment, Woodward generally excludes matters such as certain charges for restructuring, interest income and expense, certain gains and losses from asset dispositions, or other non-recurring and/or non-operationally related expenses. 

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A summary of consolidated net sales and earnings by segment follows:

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Segment external net sales:
Aerospace	$	404,612	$	355,992	$	1,096,860	$	943,198
Industrial		183,505		192,630		509,654		548,699
Total consolidated net sales	$	588,117	$	548,622	$	1,606,514	$	1,491,897
Segment earnings:
Aerospace	$	82,199	$	67,173	$	198,721	$	172,277
Industrial		10,450		20,870		40,031		55,957
Nonsegment expenses		(30,696)		(12,945)		(78,062)		(43,090)
Interest expense, net		(7,536)		(6,411)		(20,139)		(19,162)
Consolidated earnings before income taxes	$	54,417	$	68,687	$	140,551	$	165,982

(1) Nonsegment expenses for the nine-months ended June 30, 2018 includes restructuring charges of $17,013.  See Note 15, Accrued liabilities for further details.

Segment assets consist of accounts receivable, inventories, property, plant, and equipment, net, goodwill, and other intangibles, net.  A summary of consolidated total assets by segment follows:

	June 30, 2018		September 30, 2017
Segment assets:
Aerospace	$	1,744,825	$	1,722,789
Industrial		1,677,724		695,264
Unallocated corporate property, plant and equipment, net		126,537		104,755
Other unallocated assets		254,978		234,301
Consolidated total assets	$	3,804,064	$	2,757,109

Note 23.  Subsequent event

On July 31, 2018, Woodward’s Board of Directors declared a quarterly cash dividend of $0.1425 per share, payable on September 4, 2018, to stockholders of record as of August 21, 2018.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations (Amounts in thousands, except per share amounts)

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:

· plans and expectations related to our acquisition of L’Orange GmbH and its affiliate, Fluid Mechanics LLC, and their related operations in Germany, the United States and China;

· future sales, earnings, cash flow, uses of cash, and other measures of financial performance;

· trends in our business and the markets in which we operate, including expectations in those markets in future periods;

· our expected expenses in future periods and trends in such expenses over time;

· descriptions of our plans and expectations for future operations;

· plans and expectations relating to the performance of our joint venture with General Electric Company;

· investments in new campuses, business sites and related business developments;

· the effect of economic trends or growth;

· 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;

· new business opportunities;

· restructuring and alignment costs and savings;

· 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 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; and

· our tax rate and other effects of the changes to U.S. federal tax law.

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 manage product liability claims, product recalls or other liabilities associated with the products and services that we provide;

· 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, competitor product development, 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;

· our ability to monitor our technological expertise and the success of, and/or costs associated with, our product development activities;

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· consolidation in the aerospace market and our participation in a strategic joint venture with General Electric Company may make it more difficult to secure long-term sales in certain aerospace markets;

· 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;

· our ability to manage additional tax expense and exposures;

· 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 or other specific budget cuts impacting defense programs in which we participate;

· changes in government spending patterns, priorities, subsidy programs and/or regulatory requirements;

· 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 and legal matters (including the adequacy of amounts accrued for contingencies, the U.S. Foreign Corrupt Practices Act, U.S. and other tax laws,  international trade regulations, and product liability, patent, and intellectual property matters);

· changes in accounting standards, which could adversely impact our profitability or financial position;

· risks related to our common stock, including changes in prices and trading volumes;

· risks from operating internationally, including the impact on reported earnings from fluctuations in foreign currency exchange rates, tariffs, and compliance with and changes in the legal and regulatory environments of the United States and the countries in which we operate;

· risks associated with global political and economic uncertainty in the European Union and elsewhere;

· 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;

· industry risks, including changes in commodity prices for oil, natural gas, and other minerals, unforeseen events that may reduce commercial aviation, and changing emissions standards;

· possible information systems interruptions or intrusions, which may adversely affect our operations;

· certain provisions of our charter documents and Delaware law that could discourage or prevent others from acquiring our company; and

· risks associated with integration of our acquisitions and successful completion of divestitures.

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 elsewhere in this Quarterly Report on Form 10-Q (this “Form 10-Q”), under the caption “Risk Factors” in Part I, Item 1A in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) (our “Form 10-K”), as updated from time to time in our subsequent SEC filings, and other documents we have filed or will file with the SEC.  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.

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.

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OVERVIEW

Recent Developments

On April 8, 2018, we entered into a Share Purchase Agreement (the “L’Orange Agreement”) with MTU Friedrichshafen GmbH (“MTU”) and MTU America Inc. (together with MTU, the “Sellers”), both of which were subsidiaries of Rolls-Royce PLC (“Rolls-Royce”).  Pursuant to the L’Orange Agreement, we agreed to acquire all of the outstanding shares of stock of L’Orange GmbH, together with its wholly-owned subsidiaries in China and Germany, as well as all of the outstanding equity interests of its affiliate, Fluid Mechanics LLC, and their related operations (collectively, “L’Orange”), for total consideration (including cash consideration and the assumption of certain liabilities) of €700,000, or approximately $811,000 (the “L’Orange Acquisition”).  The L’Orange Acquisition closed on June 1, 2018 (the “Closing”) and L’Orange became a wholly-owned subsidiary of the Company.

L’Orange is a supplier of fuel injection systems for industrial diesel, heavy fuel oil and dual-fuel engines.  L’Orange supplies fuel injection technology for engines that power a wide range of industrial applications including marine power and propulsion systems, special-application vehicles, locomotives, oil and gas processing, and power generation.  L’Orange serves many large specialist diesel engine manufacturers, including Rolls-Royce Power Systems’ subsidiaries, MTU and Bergen Engines, and other low to high speed engine builders.  L’Orange, which was renamed Woodward L’Orange, has been integrated into the Company’s Industrial segment.

In connection with the Closing, MTU and a subsidiary of Rolls-Royce, and L’Orange, entered into a long-term supply agreement, dated June 1, 2018 (the “LTSA”).  Pursuant to the terms of the LTSA, L’Orange will continue to supply to MTU and its affiliates within Rolls-Royce certain liquid fuel injection systems, injectors, pumps and other associated parts and components for industrial diesel, heavy fuel oil and dual-fuel engines in a manner consistent with the supply of such products prior to the transaction.  The LTSA has an initial term that extends through December 31, 2032.  During the term of the LTSA, MTU is required to continue to purchase certain of these products exclusively from L’Orange, subject to certain limitations specified therein, at pricing that has been negotiated at arms-length.

Financial information for L’Orange is reflected in our financial statements from the date of Closing, June 1, 2018.  As a result of this acquisition, a comparison of results for the three and nine-months ended June 30, 2018 to the three and nine-months ended June 30, 2017 may not be particularly meaningful.  References to “organic” sales relate to net sales of Woodward businesses excluding the L’Orange Acquisition. 

Operational Highlights

Quarter to Date Highlights

Net sales for the third quarter of fiscal year 2018 were $588,117, an increase of 7.2% from $548,622 in the third quarter of fiscal year 2017.  Organic net sales for the third quarter of fiscal year 2018, which excludes $24,878 of net sales attributable to L’Orange, were $563,239, an increase of 2.7% compared to reported net sales for the third quarter of fiscal year 2017.  Foreign currency exchange rates had a favorable impact of $5,771 on net sales for the third quarter of fiscal year 2018.  Aerospace segment sales for the third quarter of fiscal year 2018 were up 13.7% to $404,612, compared to $355,992 for the third quarter of the prior fiscal year.  Industrial segment sales for the third quarter of fiscal year 2018 were down 4.7% to $183,505, compared to $192,630 for the third quarter of the prior fiscal year.  Organic Industrial segment sales, which excludes $24,878 of net sales attributable to L’Orange, were$158,627, down 17.7% compared to the third quarter of the prior year. 

Net earnings for the third quarter of fiscal year 2018 were $49,117, or $0.77 per diluted share, compared to $53,626, or $0.85 per diluted share, for the third quarter of fiscal year 2017.  Adjusted net earnings for the third quarter of fiscal year 2018 were $71,445, or adjusted earnings per share of $1.12 per diluted share.  Adjusted net earnings represents net earnings excluding, as applicable, (i) restructuring charges, (ii) move costs associated with the relocation of our Duarte, California operations to the Company’s newly renovated Drake Campus in Fort Collins, Colorado (“Duarte move related costs”), (iii) the purchase accounting impacts recognized in cost of goods sold related to the revaluation of the L’Orange inventory and the amortization of the backlog intangible, (iv) the L’Orange Acquisition transaction and integration costs, (v) cost associated with an at-the-money-forward option (the “Forward Option”),  (vi) warranty and indemnity insurance costs associated with the acquisition of L’Orange,(vii) German real estate transfer tax costs associated with the acquisition of L’Orange, and (viii) the transition impacts of the change in U.S. federal tax legislation in December 2017.  (Adjusted net earnings and adjusted earnings per share are non-U.S. GAAP financial measures.  A reconciliation of adjusted net earnings and adjusted earnings per share to the closest U.S. GAAP financial measures, net earnings and earnings per share, respectively, can be found under the caption “Non-U.S. GAAP Measures” in this Item 2 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations.)

The effective tax rate in the third quarter of fiscal year 2018 was 9.7% compared to 21.9% for the third quarter of the prior fiscal year primarily due to the benefits of the current year effect of the U.S. federal corporate tax rate reduction

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resulting from the enactment of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”) on the estimated annual effective tax rate and favorable resolutions of prior period tax matters.  

Earnings before interest and taxes (“EBIT”) for the third quarter of fiscal year 2018 were $61,953, a decrease of 17.5% from $75,098 in the third quarter of fiscal year 2017.  Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the third quarter of fiscal year 2018 were $91,008 compared to $95,678 for the third quarter of fiscal year 2017.  Adjusted EBIT and adjusted EBITDA for the third quarter of fiscal year 2018 were $88,607 and $113,086, respectively.  Adjusted EBIT and adjusted EBITDA represent EBIT and EBITDA, respectively, in each case adjusted to exclude as applicable, (i) restructuring charges, (ii) Duarte move related costs, (iii) the purchase accounting recognized in cost of goods sold related to the revaluation of the L’Orange inventory and the amortization of the backlog intangible, (iv) the L’Orange Acquisition transaction and integration costs, (v) cost associated with the Forward Option,  (vi) warranty and indemnity insurance costs associated with the acquisition of L’Orange, and (vii) German real estate transfer tax costs associated with the acquisition of L’Orange. (EBIT, adjusted EBIT, EBITDA and adjusted EBITDA are non-U.S. GAAP financial measures.  A reconciliation of these non-U.S. GAAP financial measures to the closest U.S. GAAP financial measure can be found under the caption “Non-U.S. GAAP Measures” in this Item 2 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations.)

Aerospace segment earnings as a percent of segment net sales increased to 20.3% in the third quarter of fiscal year 2018 from 18.9% in the third quarter of the prior fiscal year.  Industrial segment earnings as a percent of segment net sales in the third quarter of fiscal year 2018 decreased to 5.7% from 10.8% in the third quarter of the prior fiscal year.  Adjusted Industrial segment earnings as a percentage of segment net sales were 10.2% for the third quarter of fiscal year 2018.  (Adjusted Industrial segment earnings is a non-U.S. GAAP financial measures.  A reconciliation of adjusted Industrial segment earnings to the closest U.S. GAAP financial measure, Industrial segment earnings can be found under the caption “Non-U.S. GAAP Measures” in this Item 2 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations.)

Year to Date Highlights

Net sales for the first nine months of fiscal year 2018 were $1,606,514, an increase of 7.7% from $1,491,897 for the first nine months of the prior fiscal year.  Organic net sales for the first nine months of fiscal year 2018, which exclude $24,878 of net sales attributable to L’Orange, increased by $89,739 to $1,581,636, or 6.0%, compared to the first nine months of fiscal year 2017.  Foreign currency exchange rates had a favorable impact on net sales of $22,395 for the first nine months of fiscal year 2018.  Aerospace segment sales for the first nine months of fiscal year 2018 were up 16.3% to $1,096,860, compared to $943,198 for the first nine months of the prior fiscal year.  Industrial segment sales for the first nine months of fiscal year 2018 were $509,654, down 7.1% compared to $548,699 for the first nine months of fiscal year 2018.  Organic Industrial segment sales, which exclude $24,878 of net sales attributable to L’Orange, were down 11.6% to $484,776compared to $548,699 for the first nine months of the prior fiscal year. 

Net earnings for the first nine months of fiscal year 2018 were $105,866, or $1.66 per diluted share, compared to $138,279, or $2.18 per diluted share, for the first nine months of fiscal year 2017.  Adjusted net earnings for the first nine months of fiscal year 2018 were $156,634, or adjusted earnings per share of $2.46 per diluted share.

The effective tax rate in the first nine months of fiscal year 2018 was 24.7%, compared to 16.7% for the first nine months of the prior fiscal year primarily due to discrete charges related to recent changes in the U.S. federal tax law.

EBIT for the first nine months of fiscal year 2018 was $160,690, down 13.2% from $185,144 in the same period of fiscal year 2017.  EBITDA for the first nine months of fiscal year 2018 was $232,827, down 4.9% from $244,731 for the same period of fiscal year 2017.  Adjusted EBIT and adjusted EBITDA for the first nine months of fiscal year 2018 were $205,882 and $273,443, respectively.

Aerospace segment earnings as a percent of segment net sales decreased slightly to 18.1% in the first nine months of fiscal year 2018 from 18.3% in the first nine months of the prior fiscal year.  Industrial segment earnings as a percent of segment net sales in the first nine months of fiscal year 2018 decreased to 7.9% from 10.2% in the first nine months of the prior fiscal year.  Adjusted Industrial segment earnings as a percent of segment net sales were 9.5% for the first nine months of fiscal year 2018. 

Liquidity Highlights

Net cash provided by operating activities for the first nine months of fiscal year 2018 was $162,083, compared $183,798 for the first nine months of fiscal year 2017.  The decrease in net cash provided by operating activities in the first nine months of fiscal year 2018 compared to the first nine months of the prior year is primarily attributable to decreased net earnings in the current year.

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For the first nine months of fiscal year 2018, free cash flow, which we define as net cash flows from operating activities less payments for property, plant and equipment, was $72,486, compared to $118,723 for the first nine months of fiscal year 2017.  Higher payments for plant, property and equipment in the first nine months of fiscal year 2018 were largely the result of renovations at our Drake Campus in Fort Collins, Colorado and equipment purchases for our second campus in the greater-Rockford, Illinois area.  (A reconciliation of this non-U.S. GAAP financial measure to the closest U.S. GAAP financial measure can be found under the caption “Non-U.S. GAAP Measures” in this Item 2 – Management’s Discussion and Analysis of Financial Conditions and Results of Operations.)

On May 31, 2018, we entered into a note purchase agreement (the “2018 Note Purchase Agreement”) relating to the sale by Woodward of an aggregate principal amount of $400,000 of senior unsecured notes to various third parties in a series of private placement transactions.  We used the proceeds from the issuance of these notes, as well as borrowings from our revolving credit facility, to finance the acquisition of L’Orange.

At June 30, 2018, we held $114,399 in cash and cash equivalents, including restricted cash of $6,290, and had total outstanding debt of $1,355,396 with additional borrowing availability of $613,919, net of outstanding letters of credit, under our revolving credit agreement.  At June 30, 2018, we had additional borrowing capacity of $7,520under various foreign lines of credit and foreign overdraft facilities.

RESULTS OF OPERATIONS

The following table sets forth consolidated statements of earnings data as a percentage of net sales for each period indicated:

	Three-Months Ended								Nine-Months Ended
	June 30, 2018		% of Net Sales		June 30, 2017		% of Net Sales		June 30, 2018		% of Net Sales		June 30, 2017		% of Net Sales
Net sales	$	588,117	100	%	$	548,622	100	%	$	1,606,514	100	%	$	1,491,897	100	%
Costs and expenses:
Cost of goods sold		427,897	72.8			394,750	72.0			1,176,012	73.2			1,090,997	73.1
Selling, general, and administrative expenses		54,600	9.3			44,561	8.1			140,362	8.7			130,521	8.7
Research and development costs		39,470	6.7			34,663	6.3			111,425	6.9			91,588	6.1
Restructuring charges		-	-			-	-			17,013	1.1			-	-
Interest expense		7,878	1.3			6,769	1.2			21,315	1.3			20,399	1.4
Interest income		(342)	(0.1)			(358)	(0.1)			(1,176)	(0.1)			(1,237)	(0.1)
Other expense (income), net		4,197	0.7			(450)	(0.1)			1,012	0.1			(6,353)	(0.4)
Total costs and expenses		533,700	90.7			479,935	87.5			1,465,963	91.3			1,325,915	88.9
Earnings before income taxes		54,417	9.3			68,687	12.5			140,551	8.7			165,982	11.1
Income tax expense		5,300	0.9			15,061	2.7			34,685	2.2			27,703	1.9
Net earnings	$	49,117	8.4		$	53,626	9.8		$	105,866	6.6		$	138,279	9.3

Other select financial data:

	June 30,		September 30,
	2018		2017
Working capital	$	597,080	$	593,955
Short-term borrowings		144,000		32,600
Total debt		1,355,396		612,886
Total stockholders' equity		1,466,035		1,371,383

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Net Sales

Consolidated net sales for the third quarter of fiscal year 2018 increased by $39,495, or 7.2%, compared to the same period of fiscal year 2017.  Consolidated net sales for the first nine months of fiscal year 2018 increased by $114,617, or 7.7%, compared to the same period of fiscal year 2017.  Organic consolidated net sales for the third quarter and first nine months of fiscal year 2018, which excludes $24,878 of net sales in both periods attributable to L’Orange, increased by 2.7% and 6.0%, respectively, compared to the same periods of fiscal year 2017. Details of the changes in consolidated net sales are as follows:

	Three-Month Period		Nine-Month Period
Consolidated net sales for the period ended June 30, 2017	$	548,622	$	1,491,897
Aerospace volume		45,038		143,500
Industrial volume		(38,264)		(81,306)
Net sales attributable to L’Orange		24,878		24,878
Effects of changes in price and sales mix		2,072		5,150
Effects of changes in foreign currency rates		5,771		22,395
Consolidated net sales for the period ended June 30, 2018	$	588,117	$	1,606,514

The increase in net sales for the third quarter and first nine months of fiscal year 2018 was primarily attributable to increased commercial aftermarket and original equipment manufacturer (“OEM”) and defense OEM sales in the Aerospace segment, partially offset by ongoing weakness inorganic net sales volumes across the majority of the Industrial segment.  Net sales attributable to L’Orange partially offset the net sales decline in the Industrial segment in both the third quarter and first nine months of 2018. 

Costs and Expenses

Cost of goods sold increased by $33,147 to $427,897, or 72.8% of net sales, for the third quarter of fiscal year 2018 from $394,750, or 72.0% of net sales, for the third quarter of fiscal year 2017.  Cost of goods sold increased by $85,015 to $1,176,012, or 73.2% of net sales, for the first nine months of fiscal year 2018 from $1,090,997, or 73.1% of net sales, for the first nine months of fiscal year 2017.  The increase in cost of goods sold in the third quarter and first nine months of 2018 as compared to the same periods last year was primarily attributable to higher sales volume, additional costs of goods sold attributable to L’Orange sales,higher manufacturing costs related to increased capacity expansion costs to support increased production levels,and learning curve effects, partially offset by savings from cost reduction initiatives in our Industrial segment.

Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 27.2% for the third quarter of fiscal year 2018, compared to 28.0% for the third quarter of fiscal year 2017.  Gross margin was 26.8% for the first nine months of fiscal year 2018, compared to 26.9% for the first nine months of fiscal year 2017.  In both the third quarter and first nine months of fiscal 2018, the gross margin decreases are attributable to higher manufacturing costs related to increased capacity expansion costs to support increased production levels,  and unfavorable product mix, which more than offset the favorable impact of increased sales volume driven by our Aerospace segment.Additionally, the third quarter and first nine months of fiscal 2018 include the $8,299 impact of the adjustment to record the L’Orange inventories at their fair value as of the acquisition date and the amortization of the L’Orange backlog intangible asset.  Both the L’Orange inventory fair value adjustment and backlog intangible asset are being recognized as a non-cash increase to cost of goods sold.

Selling, general and administrative expenses increased by $10,039, or 22.5%, to $54,600 for the third quarter of fiscal year 2018, as compared to $44,561 for the third quarter of fiscal year 2017.  Selling, general and administrative expenses for the first nine months of fiscal year 2018 were $140,362, compared to $130,521 for the first nine months of fiscal year 2017.

The increase in selling, general and administrative expenses for both the third quarter and first nine months of fiscal year 2018 was primarily due to special charges associated with the acquisition of L’Orange, including L’Orange Acquisition transaction and integration costs of $3,077 and $4,358 in the third quarter and first nine months of fiscal year 2018, respectively, warranty and indemnity insurance costs of $4,293 in both the third quarter and first nine months of fiscal year 2018, and German real estate transfer tax charges of $3,385in both the third quarter and first nine months of fiscal year 2018.  Excluding these special charges, selling, general and administrative expenses as a percentage of net sales was 7.5% for the third quarter of fiscal year 2018,compared to 8.1% for the third quarter of fiscal year 2017, and 8.0% for the first nine months of fiscal year 2018, compared to 8.7% for the first nine months of fiscal year 2017.  

Research and development costs increased by $4,807, or 13.9%, to $39,470 for the third quarter of fiscal year 2018, as compared to $34,663 for the third quarter of fiscal year 2017.  Research and development costs as a percentage of net sales increased to 6.7% for the third quarter of fiscal year 2018 as compared to 6.3% for the third quarter of fiscal year 2017. 

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Research and development costs increased by $19,837, or 21.7%, to $111,425 for the first nine months of fiscal year 2018, as compared to $91,588 for the first nine months of fiscal year 2017.  Research and development costs increased as a percentage of net sales to 6.9% for the first nine months of fiscal year 2018, as compared to 6.1% for the first nine months of fiscal year 2017. 

Research and development costs in the third quarter and first nine months of fiscal year 2018 were higher due to increased spending on new awards and opportunities being pursued primarily in our Aerospace segment, as well as 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 due to the timing of customer business needs on current and future programs.

Restructuring charges of $17,013 in the first nine months of fiscal year 2018 relate primarily to workforce management cost associated with the Company’s decision in the second quarter of fiscal year 2018 to relocate its Duarte, California operations to the Company’s newly renovated Drake Campus in Fort Collins, Colorado.  Also included in the restructuring charges of $17,013 for the first nine months of fiscal year 2018 were workforce management costs related to the Company’s ongoing effort to align its industrial turbomachinery business with current market conditions.  All of the restructuring charges recorded in the first nine months of fiscal 2018 were recorded as nonsegment expenses.  There were no comparable costs and expenses recorded in the third quarter of fiscal year 2018 or fiscal year 2017 or the first nine months of fiscal year 2017.   

Interest expense was$7,878, or 1.3% of net sales, for the third quarter and $21,315, or 1.3% of net sales for the first nine months of fiscal year 2018, compared to $6,769, or 1.2% of net sales, for the third quarter and $20,399, or 1.4% of net sales for the first nine months of fiscal year 2017.  The increase in interest expense in both the third quarter and first nine months of fiscal year 2018 compared to the same periods in fiscal year 2017 is due to additional interest burden associated with the financing of the L’Orange acquisition.  Related to the acquisition, in the third quarter of fiscal year 2018 we issued an aggregate principal amount of $400,000 of senior unsecured notes in a series of private placement transactions and borrowed $167,420 under our existing revolving credit agreement to fund the acquisition.

Other expense, net was$4,197 for the third quarter and $1,012 for the first nine months of fiscal year 2018, compared to other income, net of $450 for the third quarter and $6,353 for the first nine months of fiscal year 2017.  The other expense, net in both the third quarter and first nine months of fiscal year 2018 is primarily attributable toa one-time cost of $5,543 associated with the Forward Option entered into in the third quarter of fiscal year 2018.  We entered into the Forward Option to manage our exposure to fluctuations in the Euro prior to the anticipated close of the L’Orange Acquisition.  We did not enter into the Forward Option for trading or speculative purposes.

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Income taxes were provided at an effective rate on earnings before income taxes of 9.7% for the third quarter and 24.7% for the first nine months of fiscal year 2018, compared to 21.9% for the third quarter and 16.7% for the first nine months of fiscal year 2017.  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, 2017		21.9	%		16.7	%
Current year effect of U.S. federal corporate rate reduction		(10.5)			(10.5)
Impact of the Tax Act:
Effect of U.S. federal corporate rate reduction on net U.S. deferred tax liability	8.4			(7.3)
Transition tax	-			18.5
Increased deferred tax liability associated with anticipated repatriation taxes	-			3.6
Net impact of enactment of the Tax Act		8.4			14.8
Taxes on international activities		1.2			7.1
Research and experimentation credit		(0.4)			(0.4)
State and local taxes		(0.1)			(0.1)
Adjustment of prior period tax items		(7.6)			(3.1)
Net excess income tax benefit from stock-based compensation		(2.9)			0.2
Other		(0.3)			-
Effective tax rate for the period ended June 30, 2018		9.7	%		24.7	%

The decrease in the year-over-year effective tax rate for the three-months ended June 30, 2018 is primarily attributable to the benefits of the current year effect of the U.S. federal corporate tax rate reduction in connection with the enactment of the Tax Act on the estimated annual effective tax rate, a higher favorable adjustment for the net excess income tax benefits from stock-based compensation compared to the prior fiscal year third quarter, and larger favorable resolutions of tax matters in the current quarter compared to the same quarter last year.This combined benefit was partially offset by the resolution of the fiscal year 2014, 2015, and 2016 IRS audits in the third quarter of fiscal year 2018, which resulted in an additional provisional discrete income tax expense of $3,671 recorded in the quarter in connection with the Tax Act.

The increase in the effective tax rate for the nine-months ended June 30, 2018 compared to the nine-months ended June 30, 2017 is primarily attributable to the $18,449 discrete net unfavorable impact in the period resulting from the enactment of the Tax Act.  Additionally, the benefit from the repatriation to the U.S. of certain net foreign profits and losses was higher in the nine-months ended June 30, 2017 compared to the nine-months ended June 30, 2018.  These increases were partially offset bylarger favorable resolutions of tax matters in the first nine months of fiscal year 2018 compared to the first nine months of fiscal year 2017, as well as the current year effect of the U.S. federal corporate tax rate reduction in connection with the enactment of the Tax Act on the estimated annual effective tax rate.  

As a result of the Tax Act, we have calculated a U.S. federal statutory corporate income tax rate of 24.5% for the fiscal year ending September 30, 2018 and we expect the U.S. federal statutory rate to be 21% for fiscal years beginning after September 30, 2018.  Overall, we anticipate the decrease in the U.S. federal statutory rate resulting from the enactment of the Tax Act will have a favorable impact on our future U.S. tax expense and operating cash flows.

Within the calculation of our annual effective tax rate we have used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, the Financial Accounting Standards Board (“FASB”) and/or various other taxing jurisdictions.  The Tax Act contains many significant changes to the U.S. tax laws, the consequences of which have not yet been fully determined.  Changes in corporate tax rates, the net deferred tax assets and/or liabilities relating to our U.S. operations, the taxation of foreign earnings, and the deductibility of expenses contained in the Tax Act or other future tax reform legislation could have a material impact on our future U.S. tax expense.

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Segment Results

The following table presents sales by segment:

	Three-Months Ended June 30,								Nine-Months Ended June 30,
	2018				2017				2018				2017
Net sales:
Aerospace	$	404,612	68.8	%	$	355,992	64.9	%	$	1,096,860	68.3	%	$	943,198	63.2	%
Industrial		183,505	31.2			192,630	35.1			509,654	31.7			548,699	36.8
Consolidated net sales	$	588,117	100.0	%	$	548,622	100.0	%	$	1,606,514	100.0	%	$	1,491,897	100.0	%

The following table presents earnings by segment and reconciles segment earnings to consolidated net earnings:

	Three-Months Ended June 30,				Nine-Months Ended June 30,
	2018		2017		2018		2017
Aerospace	$	82,199	$	67,173	$	198,721	$	172,277
Industrial		10,450		20,870		40,031		55,957
Nonsegment expenses		(30,696)		(12,945)		(78,062)		(43,090)
Interest expense, net		(7,536)		(6,411)		(20,139)		(19,162)
Consolidated earnings before income taxes		54,417		68,687		140,551		165,982
Income tax expense		(5,300)		(15,061)		(34,685)		(27,703)
Consolidated net earnings	$	49,117	$	53,626	$	105,866	$	138,279

The following table presents segment earnings as a percent of segment net sales:

	Three-Months Ended June 30,			Nine-Months Ended June 30,
		2018	2017		2018	2017
Aerospace		20.3%	18.9%		18.1%	18.3%
Industrial		5.7%	10.8%		7.9%	10.2%

Aerospace

Aerospace segment net sales were $404,612 for the third quarter of fiscal year 2018, up 13.7% compared to $355,922 for the third quarter of fiscal year 2017.  Aerospace segment net sales were $1,096,860 for the first nine months of fiscal year 2018, up 16.3% compared to $943,198 for the same period of fiscal year 2017.  The increase in segment net sales for the third quarter and first nine months of fiscal year 2018 as compared to the same periods of fiscal year 2017 was driven primarily by increased commercial OEM and aftermarket sales and increased defense OEM sales.  Defense aftermarket sales were down in the third quarter and first nine months of fiscal year 2018 as compared to the same periods of fiscal year 2017.  

Commercial OEM sales were up for the third quarter and first nine months of fiscal year 2018 as compared to the same periods of fiscal year 2017, driven by ongoing ramp-up in production of next generation aircraft on which we have increased content.

Commercial aftermarket sales increased significantly in the third quarter and first nine months of fiscal year 2018 as compared to the same periods of fiscal year 2017, benefitting from both the initial provisioning for new platforms and increased utilization of existing fleets.

U.S. government funds continue to be prioritized for defense platforms on which we have content.  Defense OEM sales increased in the third quarter and first nine months of fiscal year 2018 compared to the same periods of fiscal year 2017, driven primarily by continued strong demand for smart weapons, as well as growing international demand for various other military programs.  Sales of fixed wing platforms were particularly strong in the third quarter of fiscal year 2018.  Defense aftermarket sales continued to decrease in the third quarter and first nine months of fiscal year 2018 as compared to the third quarter and first nine months of fiscal year 2017, reflecting variability in the timing of continued maintenance needs and upgrade programs.

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Aerospace segment earningsincreased by $15,026, or 22.4%, to $82,199 for the third quarter of fiscal year 2018, compared to $67,173 for the third quarter of fiscal year 2017.  Aerospace segment earnings increased by $26,444, or 15.3%, to $198,721 for the first nine months of fiscal year 2018, compared to $172,277 for the first nine months of fiscal year 2017.  The net increase in Aerospace segment earnings for the third quarter and first nine months of fiscal year 2018 was due to the following:

	Three-Month		Nine-Month
	Period		Period
Earnings for the period ended June 30, 2017	$	67,173	$	172,277
Sales volume		25,185		73,618
Price, sales mix and productivity		(8,327)		(19,195)
Production capacity expansion costs		(2,845)		(12,007)
Increases in research and development expenses		(3,104)		(13,766)
Other, net		4,117		(2,206)
Earnings for the period ended June 30, 2018	$	82,199	$	198,721

Aerospace segment earnings as a percentage of segment net sales were 20.3% for the third quarter and 18.1% for the first nine months of fiscal year 2018, compared to 18.9% for the third quarter and 18.3% for the first nine months of fiscal year 2017.  Aerospace segment earnings in both the third quarter and first nine months of fiscal year 2018 benefitted from the impact of higher sales volume, which was partially offset by unfavorable product sales mix, higher manufacturing costs related to increased capacity expansion costs to support increased production levels, and learning curve effects.  Aerospace segment earnings were also negatively impacted by increased investment in research and development for new program awards and opportunities being pursued.

Industrial

Industrial segment net salesdecreased by 4.7% to $183,505 for the third quarter of fiscal year 2018, compared to $192,630 for the third quarter of fiscal year 2017. Segment net sales decreased by 7.1% to $509,654 for the first nine months of fiscal year 2018, compared to $548,699 for the same period of fiscal year 2017.  Foreign currency exchange rates had a favorable impact on segment net sales of $4,872 and $19,394 for the third quarter and first nine months of fiscal year 2018, respectively.  Organic Industrial segment sales,  which excludes $24,878 of net sales attributable to L’Orange, were $158,627for the third quarter of fiscal year 2018, a decrease of 17.7% compared to the third quarter of fiscal year 2017, and were $484,776 for the first nine months of fiscal year 2018, a decrease of 11.6% compared to the first nine months of fiscal year 2017.

The overall decreases in Industrial segment net sales for both periods were primarily due to declines in industrial gas turbines and renewables sales.  The decline in industrial gas turbine sales was the result of increased efficiency leading to lower overall demand for electricity and a decrease in volume resulting from the penetration of renewable power sources.  We project that the industrial gas turbine business may not begin to recover until 2020.  The sales decline in our renewables business was due to the short-term unfavorable impact of platform transitions by some of our customers.  Although sales of fuel systems for compressed natural gas (“CNG”) trucks in Asia decreased in the third quarter of fiscal year 2018 as compared to the third quarter of fiscal year 2017, sales of these fuel systems continue to be up for the first nine months of fiscal year 2018 compared to the first nine months of fiscal year 2017 as the Chinese government continues to encourage natural gas usage.

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Industrial segment earnings decreased by $10,420, or 49.9%, to $10,450 for the third quarter of fiscal year 2018, compared to $20,870 for the third quarter of fiscal year 2017.  Segment earnings decreased by $15,926, or 28.5% to $40,031 for the first nine months of fiscal year 2018 compared to $55,957 for the same period of 2017.  The net decrease in Industrial segment earnings for the third quarter and first nine months of fiscal year 2018 was due to the following:

	Three-Month		Nine-Month
	Period		Period
Earnings for the period ended June 30, 2017	$	20,870	$	55,957
Sales volume		(18,519)		(38,606)
Price, sales mix and productivity		4,645		8,177
Savings from cost reduction initiatives		259		4,024
Impact of L'Orange Acquisition		(1,215)		(1,215)
Effects of changes in foreign currency rates		1,458		2,986
Other, net		2,952		8,708
Earnings for the period ended June 30, 2018	$	10,450	$	40,031

Industrial segment earnings as a percentage of segment net sales were 5.7% for the third quarter and 7.9% for the first nine months of fiscal year 2018, compared to 10.8% for the third quarter and 10.2% for the first nine months of fiscal year 2017.  Adjusted Industrial segment earnings as a percentage of segment net sales were 10.2% for the third quarter and 9.5% for the first nine months of fiscal year 2018.  The decrease in segment earnings as a percentage of sales for the third quarter and first nine months of fiscal year 2018 were largely driven by sales volume decreases, partially offset by favorable sales mix.

Nonsegment expenses

Nonsegment expenses increased to $30,696 for the third quarter of fiscal year 2018, compared to $12,945 for the third quarter of fiscal year 2017.  The increase in nonsegment expenses in the third quarter of fiscal year 2018 as compared to the third quarter of fiscal year 2017 is due to certain special charges related to the acquisition of L’Orange (“L’Orange Acquisition Related Charges”) recognized in the third quarter of fiscal year 2018, as well as Duarte move related costs of $2,057 recognized in the quarter.  The L’Orange Acquisition Related Charges recognized in the third quarter of fiscal year 2018 included(i) merger and acquisition transaction and integration costs, (ii) cost associated with the Forward Option, (iii) warranty and indemnity insurance costs, and (iv) German real estate transfer tax costs.  Excluding these nonsegment expense recorded in the third quarter of fiscal year 2018, nonsegment expensesas a percent of consolidated net sales decreased to 2.1% of consolidated net sales for the third quarter of fiscal year 2018, compared to 2.4% of consolidated net sales for the third quarter of fiscal year 2017.

Nonsegment expenses increased to $78,062 for the first nine months of fiscal year 2018, compared to $43,090 for the first nine months of fiscal year 2017.  In addition to L’Orange Acquisition Related Charges, included in nonsegment expenses for the first nine months of fiscal year 2018 were Duarte move related costs of $2,301 and restructuring charges of $17,013.  Excluding these nonsegment expenses recorded in the third quarter of fiscal year 2018, nonsegment expensesas a percent of consolidated net sales were 2.6% of consolidated net sales for the first nine months of fiscal year 2018, compared to 2.9% of consolidated net sales for the first nine months of fiscal year 2017.

LIQUIDITY AND CAPITAL 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.  Historically, we have also issued debt to supplement our cash needs, repay our other indebtedness or finance our acquisitions.  We 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, including capital expansion funding for the foreseeable future.

Our aggregate cash and cash equivalents were $114,399 at June 30, 2018 and $87,552 at September 30, 2017, and our working capital was $597,080 at June 30, 2018 and $593,955 at September 30, 2017.  Of the $114,399 of cash and cash equivalents held at June 30, 2018, $6,290 is restricted in its use and $109,859 was held by our foreign locations.  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, then 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 U.S. 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

49

circumstances at the time these amounts are repatriated.  Based on these variables, it is impractical to determine the income tax liability that might be incurred if these funds were to be repatriated.  The additional uncertainty associated with the Tax Act increases the impracticality of determining this income tax liability.

We do not believe the one-time repatriation tax on deferred foreign income resulting from the Tax Act, which is expected to be paid over an eight year period beginning in January 2019, will have a significant impact on our cash flows in any individual fiscal year.

Consistent with common business practice in China, our Chinese subsidiaries accept bankers’ acceptance notes from Chinese customers, in settlement of certain customer accounts receivable.  Bankers’ acceptance notes are financial instruments issued by Chinese financial institutions as part of financing arrangements between the financial institution and a customer of the financial institution.  Bankers’ acceptance notes 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 bankers’ acceptance note as of the maturity date.  The maturity date of bankers’ acceptance notes varies, but it is our policy to only accept bankers’ acceptance notes with maturity dates no more than 180 days from the date of our receipt of such draft.  The issuing financial institution is the obligor, not our customers.  Upon our acceptance of a bankers’ acceptance note from a customer, such customer has no further obligation to pay us for the related accounts receivable balance.  We had bankers’ acceptance notes of $27,319 at June 30, 2018 and $38,243 at September 30, 2017 recorded as non-customer accounts receivable in our Condensed Consolidated Balance Sheets.  We only accept bankers’ acceptance notes issued by banks that are believed to be creditworthy and to which the credit risks associated with the bankers’ acceptance notes are believed to be low.

Our revolving credit facility matures in April 2020 and provides a borrowing capacity of up to $1,000,000 with the option to increase total available borrowings to up to $1,200,000, subject to lenders’ participation.  We can borrow against our $1,000,000 revolving credit facility as long as we are in compliance with all of our debt covenants.  Borrowings under the revolving credit facility can be made in U.S dollars or in foreign currencies other than the U.S. dollar provided that the U.S dollar equivalent of any foreign currency borrowings and U.S. dollar borrowings does not, in total, exceed the borrowing capacity of the revolving credit facility.  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 common stock, payments of dividends, acquisitions, and facilities expansions.  On May 31, 2018, we borrowed $167,420 under our revolving credit facility to finance a portion the L’Orange Acquisition.

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 $1,000,000 revolving credit facility and our other credit facilities, see Note 14, Credit facilities, short-term borrowings and long-term debt in the Notes to the Condensed Consolidated Financial Statements in Part I, Item I of this Form 10-Q.

On May 31, 2018, we entered into a note purchase agreement (the “2018 Note Purchase Agreement”) relating to the sale by Woodward of an aggregate principal amount of $400,000 of senior unsecured notes comprised of (a) $85,000 aggregate principal amount of its Series P Senior Notes due May 30, 2025, (b) $85,000 aggregate principal amount of its Series Q Senior Notes due May 30, 2027, (c) $75,000 aggregate principal amount of its Series R Senior Notes due May 30, 2029, (d) $75,000 aggregate principal amount of its Series S Senior Notes due May 30, 2030, and (e) $80,000 aggregate principal amount of its Series T Senior Notes due May 30, 2033 (collectively, the “2018 Notes”), in a series of private placement transactions.

Our obligations under the 2018 Note Purchase Agreement and the 2018 Notes will rank at all times at least pari passu, without preference or priority, with our existing senior unsecured notes and our outstanding debt under our revolving credit facility.  Similar to our existing senior unsecured debt, at our option, we are permitted at any time to prepay all or any part of the then-outstanding principal amount of any series of the 2018 Notes at 100% of the principal amount of the series of 2018 Notes to be prepaid (but, in the case of partial prepayment, not less than $1,000), together with interest accrued on such amount to be prepaid to the date of prepayment, plus any applicable prepayment compensation amount and, if any holder of the 2018 Notes has entered into a cross currency swap agreement in respect of the 2018 Note held by such holder, certain losses (if any) incurred by such holder under such cross currency swap agreement as a result of such prepayment.

At June 30, 2018, we had total outstanding debt of $1,355,396 consisting of amounts borrowed under our revolving credit facility and various series of unsecured notes due between 2018 and 2033, with additional borrowing availability of $613,919 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $7,520 under various foreign credit facilities.  As of June 30, 2018, an aggregate principal amount of $100,000 in debt related to our Series D Notes, which mature and are payable in October 2018, and an aggregate principal amount of $43,000 in debt related to our Series F Notes, which mature and are payable in April 2019, have been classified as long-term based on our intent and ability to refinance this debt using cash proceeds from our existing revolving credit facility which, in turn, is

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expected to be repaid beyond the next twelve months.  For further discussion of our notes, see Note 14, 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, 2018, we had $374,574 of borrowings outstanding under our revolving credit facility, $140,231 of which was classified as short-term borrowings based on our intent and ability to pay this amount in the next twelve months.  Of these borrowings, as of June 30, 2018, $342,800 is denominated in U.S. dollars and €27,200 is denominated in Euro.  Revolving credit facility and short-term borrowing activity during the nine-months ended June 30, 2018 were as follows:

Maximum daily balance during the period	$	439,654
Average daily balance during the period	$	191,060
Weighted average interest rate on average daily balance		2.60%

We believe we were in compliance with all our debt covenants as of June 30, 2018.  See Note 12, Credit facilities, short-term borrowings and long-term debt in the Notes to the Consolidated Financial Statements in Part II, Item 8 of our most recent 10-K, and Note 14, Credit facilities, short-term borrowings and long-term debt in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q, 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, consideration of strategic acquisitions and other potential uses of cash. 

On April 8, 2018, we entered into the L’Orange Agreement.  Pursuant to the L’Orange Agreement, we agreed to acquire all of the outstanding shares of stock of L’Orange.  We completed the acquisition of L’Orange on June 1, 2018, for total consideration (including cash consideration and the assumption of certain liabilities) of €700,000, or approximately $811,000.  The cash consideration was financed through the use of cash on hand, the issuance of the 2018 Notes and $167,420 borrowed under our existing revolving credit facility.  In connection with these borrowings, the Company entered into cross currency swap transactions, which effectively lowered the interest rate on each tranche of the 2018 Notes and the borrowings under the existing revolving credit agreement (see Note 7, Derivative instruments and hedging activities in the Notes to the Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q, for more information).

On April 18, 2018, we entered into the Forward Option at a cost of $5,543 to manage our exposure to fluctuations in the Euro prior to the anticipated close of the L’Orange Acquisition.  We did not enter into the Forward Option for trading or speculative purposes.  On May 30, 2018, we had the ability to exercise the option to purchase €490,000 on June 1, 2018 using U.S. dollars at a fixed exchange rate of 1.2432.  As the spot rate was below 1.2432 on May 30, 2018, we elected not to exercise the option and a loss of $5,543 was recognized on the Forward Option in “other (income) expense, net”in the Condensed Consolidated Statements of Earnings in the three and nine-months ended June 30, 2018. 

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.

In the first quarter of fiscal year 2017, our board of directors terminated the Company’s prior stock repurchase program and replaced it with a new program for the repurchase of up to $500,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a three-year period that will end in November 2019 (the “2017 Authorization”).  In the first nine months of fiscal year 2017, we purchased 886 shares of our common stock for $61,229 under the 2017 Authorization, of which 350 shares were purchased pursuant to a 10b5-1 plan and 536 were purchased pursuant to a 10b-18 plan.  We repurchased no stock in the nine-months ended June 30, 2018.

For our Aerospace segment, we have been purchasing production equipment for our second campus in the greater-Rockford, Illinois area and anticipate continuing such purchases as new aircraft platforms ramp up to full production volumes.  The second campus was built to support the expected growth in our Aerospace segment as a result of our being awarded a substantial number of new system platforms, particularly on narrow-body aircraft.

Associated with the relocation of our Duarte operations to our Drake campus, we have identified assets held for sale with a carrying value of $8,853 at June 30, 2018, which relate to the land, building and building improvements, and other assets at the Duarte facility.  Based on current market conditions, we expect to record a gain on the eventual sale of these assets.  The carrying value of the remaining assets at the Duarte facility was approximately $3,400 as of June 30, 2018.

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

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refuse to honor their contractual commitments, cease lending, or declare bankruptcy.  We believe the lending institutions participating in our credit arrangements are financially stable.

Cash Flows

	Nine-Months Ended
	June 30,
	2018		2017
Net cash provided by operating activities	$	162,083	$	183,798
Net cash used in investing activities		(851,307)		(63,720)
Net cash provided by (used in) financing activities		721,194		(111,411)
Effect of exchange rate changes on cash and cash equivalents		(5,123)		(755)
Net change in cash and cash equivalents		26,847		7,912
Cash and cash equivalents at beginning of year		87,552		81,090
Cash and cash equivalents at end of period	$	114,399	$	89,002

Net cash flows provided by operating activities for the first nine months of fiscal year 2018 was $162,083, compared to $183,798 for the same period of fiscal year 2017.  The decrease in cash flows from operating activities in the first nine months of fiscal year 2018 compared to the prior fiscal year is primarily attributable to decreased net earnings in the first nine months of fiscal year 2018.

Net cash flows used in investing activities for the first nine months of fiscal year 2018 was $851,307, compared to $63,720 in the third quarter of fiscal year 2017.  The increase in cash used in investing activities compared to the same period of the prior fiscal year is primarily due to the acquisition of L’Orange on June 1, 2018 which used $771,069 in cash, as well as increased payments for capital expenditures.  Payments for property, plant and equipment increased by $24,522 from $65,075 in the first nine months of fiscal year 2017 to $89,597 in the first nine months of this year primarily due to renovations at our Drake Campus in Fort Collins, Colorado and equipment purchases for our second campus in the greater-Rockford, Illinois area. 

Net cash flows provided by financing activities for the first nine months of fiscal year 2018 was $721,194, compared to net cash use of $111,411 in the first nine months of fiscal year 2017.  The net cash flows provided by financing activities in the first nine months of fiscal year 2018 is primarily the result of the issuance of an aggregate principal amount of $400,000 of long-term debt in May 2018 and borrowings of $167,420 under our existing revolving credit facility, both of which were used primarily to finance the acquisition of L’Orange.  Also during the first nine months of fiscal year 2018, we had net debt borrowings unrelated to the acquisition of L’Orange in the amount of $178,746, partially offset by cash dividends paid of $25,206 and payments of $5,543 for the settlement of the Forward Option.  In the first nine months of fiscal year 2017, we paid cash dividends of $22,076, made net debt payments of $40,107, and we utilized $61,782 to repurchase 886 shares of our common stock under the 2017 Authorization.  We made no stock repurchases in the first nine months of fiscal year 2018.

Contractual Obligations

We have various contractual obligations, including obligations related to long-term debt, operating and capital 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 2018 other than those related to the L’Orange Acquisition and the entry into the 2018 Note Purchase Agreement, described further above in Liquidity and Capital Resources.

Non-U.S. GAAP Financial Measures

Adjusted net earnings, adjusted earnings per share, adjusted Industrial segment earnings, 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.

Organic net sales and organic Industrial net sales

The Company presents certain sales measures excluding L’Orange net sales, which it refers to as “organic”, to show the changes to Woodward’s historical business. Management believes this improves comparability to the Company’s performance prior to the L’Orange Acquisition.

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Earnings based non-U.S. GAAP financial measures

Adjusted net earnings is defined by the Company as net earnings excluding, as applicable, (i) restructuring charges, (ii) Duarte move related costs, (iii) the purchase accounting impacts related to the revaluation of the L’Orange inventory recognized in cost of goods sold and the amortization of the backlog intangible, (iv) the L’Orange Acquisition transaction and integration costs, (v) cost associated with the Forward Option,  (vi) warranty and indemnity insurance costs associated with the acquisition of L’Orange,(vii) German real estate transfer tax costs associated with the acquisition of L’Orange, and (viii) the transition impacts of the change in U.S. federal tax legislation in December 2017.  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 in evaluating the Company’s performance excluding these infrequent or unusual period expenses that are not necessarily indicative of the Company’s operating performance for the period.  Management defines adjusted earnings per share as adjusted net earnings, as defined above, divided by the weighted-average number of diluted shares of common stock outstanding for the period.  Management uses both adjusted net earnings and adjusted earnings per share when comparing operating performance to other periods which may not have similar infrequent or unusual charges.

The reconciliation of net earnings and earnings per share to adjusted net earnings and adjusted earnings per share, respectively, for the three and nine-months ended June 30, 2018 are shown in the table below.  Adjusted net earnings and adjusted earnings per share for the three and nine-months ended June 30, 2017 are not shown, as there were no comparable adjustments to U.S. GAAP net earnings or earnings per share in those periods.

	Three-Months Ended June 30, 2018				Nine-Months Ended June 30, 2018
	Net Earnings		Earnings Per Share		Net Earnings		Earnings Per Share
Net earnings (U.S. GAAP)	$	49,117	$	0.77	$	105,866	$	1.66
Non-U.S. GAAP adjustments:
Restructuring charges, net of tax		-		-		12,674		0.20
Duarte move related costs, net of tax		1,440		0.02		1,733		0.03
Purchase accounting impacts, net of tax1		5,809		0.09		5,809		0.09
L'Orange Acquisition transaction and integration costs, net of tax		2,153		0.03		2,848		0.04
Costs associated with the Forward Option, net of tax		3,880		0.06		3,880		0.06
Warranty and indemnity insurance costs associated with the acquisition of L'Orange, net of tax		3,005		0.05		3,005		0.05
German real estate transfer costs associated with the acquisition of L'Orange, net of tax		2,370		0.04		2,370		0.04
Non-U.S. GAAP adjustments		18,657		0.29		32,319		0.51
Impact of recent changes to U.S. tax law		3,671		0.06		18,449		0.29
Total Non-U.S. GAAP adjustments		22,328		0.35		50,768		0.80
Adjusted net earnings (Non-U.S. GAAP)	$	71,445	$	1.12	$	156,634	$	2.46

(1) The purchase accounting impacts relate to the revaluation of the L’Orange inventory recognized in cost of goods sold and the amortization of the backlog intangible, net of tax.

Adjusted Industrial segment earnings is defined by the Company as Industrial segment earnings excluding the purchase accounting impacts related to the revaluation of the L’Orange inventory recognized in cost of goods sold and the amortization of the backlog intangible.  The Company believes that these purchase accounting impacts are short-term in nature, not related to the ongoing operations of the Industrial segment business and therefore, the exclusion of them illustrates more clearly how the underlying business of Woodward’s Industrial segment is performing.

The reconciliation of Industrial segment earnings to adjusted Industrial segment earnings for the three and nine-months ended June 30, 2018 are shown in the table below.  Adjusted Industrial segment earnings for the three and nine-months ended June 30, 2017 are not shown, as there were no comparable adjustments to U.S. GAAP net earnings or earnings per share in those periods.

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	Three-Months Ended		Nine-Months Ended
	June 30, 2018		June 30, 2018
Industrial segment earnings  (U.S. GAAP)	$	10,450	$	40,031
Purchase accounting impacts1		8,299		8,299
Adjusted Industrial segment earnings (Non-U.S. GAAP)	$	18,749	$	48,330

(1) The purchase accounting impacts relate to the revaluation of the L’Orange inventory recognized in cost of goods sold and the amortization of the backlog intangible.

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.

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) restructuring charges, (ii) Duarte move related costs, (iii) the purchase accounting impacts related to the revaluation of the L’Orange inventory recognized in cost of goods sold and the amortization of the backlog intangible, (iv) the L’Orange acquisition transaction and integration costs, (v) cost associated with the Forward Option,  (vi) warranty and indemnity insurance costs associated with the acquisition of L’Orange,and (vii) German real estate transfer tax costs associated with the acquisition of L’Orange.  As these charges are infrequent or unusual charges that can be variable from period to period and may not fluctuate with operating results, management believes that by removing these charges from EBIT and EBITDA it improves comparability of past, present and future operating results and provides consistency when comparing EBIT and EBITDA between periods.

EBIT and adjusted EBIT for the three and nine-months ended June 30, 2018 and June 30, 2017 were as follows:

	Three-Months Ended June 30,				Nine-Months Ended June 30,
	2018		2017		2018		2017
Net earnings (U.S. GAAP)	$	49,117	$	53,626	$	105,866	$	138,279
Income tax expense		5,300		15,061		34,685		27,703
Interest expense		7,878		6,769		21,315		20,399
Interest income		(342)		(358)		(1,176)		(1,237)
EBIT (Non-U.S. GAAP)		61,953		75,098		160,690		185,144
Non-U.S. GAAP adjustments:
Restructuring charges		-		-		17,013		-
Duarte move related costs		2,057		-		2,301		-
Purchase accounting impacts1		8,299		-		8,299		-
L'Orange Acquisition transaction and integration costs		3,077		-		4,358		-
Costs associated with the Forward Option		5,543		-		5,543		-
Warranty and indemnity insurance costs associated with the acquisition of L'Orange		4,293		-		4,293		-
German real estate transfer costs associated with the acquisition of L'Orange		3,385		-		3,385		-
Total non-U.S. GAAP adjustments		26,654		-		45,192		-
Adjusted EBIT (Non-U.S. GAAP)	$	88,607	$	75,098	$	205,882	$	185,144

(1) The purchase accounting impacts relate to the revaluation of the L’Orange inventory recognized in cost of goods sold and the amortization of the backlog intangible.

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EBITDA and adjusted EBITDA for the three and nine-months ended June 30, 2018 and June 30, 2017 were as follows:

	Three-Months Ended June 30,				Nine-Months Ended June 30,
	2018		2017		2018		2017
Net earnings (U.S. GAAP)	$	49,117	$	53,626	$	105,866	$	138,279
Income tax expense		5,300		15,061		34,685		27,703
Interest expense		7,878		6,769		21,315		20,399
Interest income		(342)		(358)		(1,176)		(1,237)
Amortization of intangible assets		11,360		6,439		23,861		19,328
Depreciation expense		17,695		14,141		48,276		40,259
EBITDA (Non-U.S. GAAP)		91,008		95,678		232,827		244,731
Non-U.S. GAAP adjustments:
Restructuring charges		-		-		17,013		-
Duarte move related costs		2,057		-		2,301		-
Purchase accounting impacts1		3,723		-		3,723		-
L'Orange Acquisition transaction and integration costs		3,077		-		4,358		-
Costs associated with the Forward Option		5,543		-		5,543		-
Warranty and indemnity insurance costs associated with the acquisition of L'Orange		4,293		-		4,293		-
German real estate transfer costs associated with the acquisition of L'Orange		3,385		-		3,385		-
Total non-U.S. GAAP adjustments		22,078		-		40,616		-
Adjusted EBITDA (Non-U.S. GAAP)	$	113,086	$	95,678	$	273,443	$	244,731

(1) The purchase accounting impacts relate to the revaluation of the L’Orange inventory recognized in cost of goods sold.

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 Industrial segment earnings, EBIT, adjusted EBIT, EBITDA, and adjusted 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 adjusted net earnings, adjusted net earnings per share, adjusted Industrial segment earnings, EBIT, adjusted EBIT, EBITDA, and adjusted EBITDA may differ from similarly titled measures used by other companies, limiting their usefulness as comparative measures.

Cash flow-based non-U.S. GAAP financial measures

Management uses free cash flow, which is defined by the Company as net cash flows provided by operating activities less payments for property, plant and equipment, in reviewing the financial performance and cash generation by Woodward’s various business groups.  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, investing in research and development, purchasing our common stock, and paying dividends.  In addition, 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 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 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 flow for the nine-months ended June 30, 2018 and June 30, 2017 were as follows:

	Nine-Months Ended June 30,
	2018		2017
Net cash provided by operating activities (U.S. GAAP)	$	162,083	$	183,798
Payments for property, plant and equipment		(89,597)		(65,075)
Free cash flow (Non-U.S. GAAP)	$	72,486	$	118,723

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CRITICAL ACCOUNTING POLICIES AND 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, 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, inventory valuation, depreciation and amortization, reviews for impairment of goodwill, postretirement benefit obligations, 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 included in this Form 10-Q, and actual results could differ materially from the amounts reported.  Other than the addition of the critical accounting policy and estimates discussed below related to the valuation of assets and liabilities acquired in business combinations, the critical accounting policies and estimates that were disclosed in our most recent Form 10-K have not materially changed since the date our most recent Form 10-K was filed with the SEC.

On June 1, 2018, we completed the acquisition of L'Orange. The preliminary allocation of the purchase price to the assets acquired and liabilities assumed was accounted for under the purchase method of accounting in accordance with ASC Topic 805, “Business Combinations.”  Assets acquired and liabilities assumed in the transaction were recorded at their estimated acquisition date fair values, while transaction costs associated with the acquisition were expensed as incurred.  Woodward’s preliminary allocation as of June 30, 2018 was based on an evaluation of the appropriate fair values and represents management’s best estimate based on available data.

Assigning fair values to the assets acquired and liabilities assumed at the date of an acquisition requires knowledge of current market values, and the values of assets in use, and often requires the application of judgment regarding estimates and assumptions.  While the ultimate responsibility resides with management, we retained the services of certified valuation specialists to assist with assigning estimated values to certain acquired assets and assumed liabilities, including intangible assets and other postretirement benefit plan assets and liabilities. 

Acquired intangible assets, excluding goodwill, are valued using a discounted cash flow methodology based on future cash flows specific to the type of intangible asset purchased.  This methodology incorporates various estimates and assumptions, the most significant being projected revenue growth rates, earnings margins, future tax rates, and forecasted cash flows based on the discount rate and terminal growth rate.  Management projects revenue growth rates, earnings margins and cash flows based on the historical operating results of the acquired entity adjusted for synergies anticipated to be achieved through integration, expected future performance, operational strategies, and the general macroeconomic environment.  We review finite-lived intangible assets for triggering events such as significant changes in operations, customers or future revenue that might indicate the need to impair the assets acquired or change the useful lives of the assets acquired.  We review indefinite-lived intangibles for impairment on an annual basis or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the indefinite-lived intangible asset below its carrying value.

Estimated values for acquired property, plant and equipment are based on current market values and replacement costs of similar assets.  Estimated values for inventory acquired is subject to reliable estimates, as of the acquisition date, of future sales volumes, replacement costs, costs of selling effort, anticipated selling prices, normal profit margins, and the percent complete and the costs to complete work-in-process inventory.  Estimated values for accounts receivable are subject to reliable estimates of collectability.

Assumed liabilities are valued based on estimates of anticipated expenditures to be incurred to satisfy the assumed obligations, including estimation of any warranty or other contractual liabilities assumed, which require the exercise of professional judgment.  Valuation of postretirement benefit plan assets and liabilities is dependent on similar assumptions and estimates as those used to value our non-acquisition postretirement benefit plan assets and liabilities.

Assumed contracts may have favorable or unfavorable terms that must be valued as of the acquisition date.  Such valuation is subject to management judgment regarding the evaluation and interpretation of contract terms in relation to other economic circumstances, such as the market rates for office space leases.

Assumed acquired tax liabilities for uncertain tax positions are dependent on assessing the past practices of the acquisition target based on review of actual tax filings and information obtained through due diligence procedures. Evaluation of the validity of tax positions taken by the acquisition target are subject to management judgment.

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On December 22, 2017, the United States enacted significant changes to the U.S. tax law following the passage and signing of the Tax Act.  Refer to Note 18, Income Taxes, in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for further discussion of management's significant estimates and judgements in accounting for income taxes as a result of the Tax Act.

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.

Off-Balance Sheet Arrangements

As of June 30, 2018, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures, or capital resources, that are material to investors.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, we have exposures to interest rate risk from our long-term and short-term debt and our postretirement benefit plans, and foreign currency exchange rate risk related to our foreign operations and foreign currency transactions.  We are also exposed to various market risks that arise from transactions entered into in the normal course of business related to items such as the cost of raw materials and changes in inflation.  Certain contractual relationships with customers and vendors mitigate risks from changes in raw material costs and foreign currency exchange rate changes that arise from normal purchasing and normal sales activities.

Our market risks are discussed more fully in “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of our most recent Form 10-K.  Other than that discussed below, these market risks have not materially changed since the date our most recent Form 10-K was filed with the Securities Exchange Commission.

In May 2018, we sold in a series of private placement transaction an aggregate principal amount of $400,000 of senior unsecured notes the proceeds of which, in combination with cash on hand and borrowings under our existing revolving credit facility of $167,420, were used to finance our acquisition ofL’Orange GmbH, as well as all of the outstanding equity interests of its affiliate, Fluid Mechanics LLC (“L’Orange”).  The aggregate principal amount of $400,000 of senior unsecured notes are comprised of (a) $85,000 aggregate principal amount of its Series P Senior Notes due May 30, 2025 and bearing interest at a rate of 4.27% per annum, (b) $85,000 aggregate principal amount of its Series Q Senior Notes due May 30, 2027 and bearing interest at a rate of 4.35% per annum, (c) $75,000 aggregate principal amount of its Series R Senior Notes due May 30, 2029 and bearing interest at a rate of 4.41% per annum, (d) $75,000 aggregate principal amount of its Series S Senior Notes due May 30, 2030 and bearing interest at a rate of 4.46% per annum, and (e) $80,000 aggregate principal amount of its Series T Senior Notes due May 30, 2033 and bearing interest at a rate of 4.61% per annum (the “2018 Notes). 

In connection with the occurrence of the additional debt used to finance the L’Orange acquisition, we entered into a cross currency interest rate swap agreement that synthetically convertsthe $167,420 floating-rate debt under our existing revolving credit agreement to Euro denominated floating-rate debt.  A corresponding Euro denominated intercompany loan receivable with identical terms and notional amount as the underlying Euro denominated floating-rate debt, with a reciprocal cross currency interest rate swap, was entered into by Woodward Barbados Financing SRL (“Barbados”), a wholly owned subsidiary of Woodward, and is designated as a fair value hedge.  The objective of the derivative instrument is to hedge against the foreign currency exchange risk attributable to the spot remeasurement of the Euro denominated intercompany loan.

In addition, we entered into five cross currency interest rate swap agreements that synthetically convertsan aggregate principal amount of $400,000 of fixed-rate debt associated with the 2018 Notes to Euro denominated fixed-rate debt. Five corresponding intercompany loans receivable, with identical terms and amounts of each trance of the 2018 Notes and reciprocal cross currency interest rate swaps were entered into by Woodward Barbados, which are designated as cash flow hedges.  The objective of these derivative instruments is to hedge the risk of variability in cash flows attributable to the foreign currency exchange risk of cash flows for future principal and interest payments associated with the Euro denominated intercompany loans over a fifteen year period.

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Changes in the fair values of the cross currency swaps designated as cash flow hedges are recognized in accumulated OCI and reclassified to foreign currency transaction gain or loss included in “Selling, general and administrative costs” in Woodward’s Condensed Consolidated Statements of Earnings.  Reclassifications out of accumulated OCI of the change in fair value occur each reporting period based upon changes in the spot rate remeasurement of the Euro denominated intercompany loan, including associated interest.  For the derivative instruments designated as fair value hedges, the change in the fair value related to the cross currency basis spread, or excluded component, of the derivative instrument is recognized in accumulated OCI.  The remaining changein the fair value of the derivative instrument isrecognized in foreign currency transaction gain or loss included in “Selling, general and administrative costs” in Woodward’s Condensed Consolidated Statements of Earnings.  The change in the fair value of the derivative instrument in foreign currency transaction gain or loss offsets the change in the spot remeasurement of the intercompany Euro denominated loan, with the initial cost of the cross currency basis spread recorded in earnings each period through the swap accrual process.  In the both the three and nine-months ended June 30, 2018, we recognized a loss related to the cross currency swaps of $23,658 in accumulated OCI.  The associated earnings reclassifications of $4,973 for both the three and nine-months ended June 30, 2018 were recorded as foreign currency transaction losses included in “Selling, general and administrative costs” in the Condensed Consolidated Statements of Earnings.  In both periods, the losses included in “Selling, general and administrative costs” offset the gain recognized on the spot remeasurement of the underlying Euro denominated intercompany loans resulting in a net impact to earnings in the respective periods of zero. 

For more information on our derivative instruments, see Note 7, Derivative instruments and hedging activities, in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Item 4.Controls and Procedures

We have established disclosure controls and procedures, which are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Act”) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.  These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Act is accumulated and communicated to management, including our Principal Executive Officer (Thomas A. Gendron, Chairman of the Board, Chief Executive Officer and President) and Principal Financial and Accounting Officer (Robert F. Weber, Jr., Vice Chairman, Chief Financial Officer and Treasurer), as appropriate, to allow timely decisions regarding required disclosures.

Thomas A. Gendron and Robert F. Weber, Jr., evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q.  Based on their evaluations, they concluded that our disclosure controls and procedures were effective as of June 30, 2018.

Furthermore, there have been no changes in our internal control over financial reporting during the fiscal quarter covered by this Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

On June 1, 2018, we acquired L’Orange as discussed in Note 4, Business acquisitions, in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.  We considered the results of our pre-acquisition due diligence activities and the continuation by L’Orange of its established internal controls over financial reporting as part of our overall evaluation of disclosure controls and procedures as of June 30, 2018.  The objectives of L’Orange’s established internal controls over financial reporting is consistent, in all material respects, with Woodward objectives.  We are in the process of completing a more comprehensive review of L’Orange’s internal control over financial reporting, and will be implementing changes to better align its reporting and controls with the rest of Woodward.  As a result of the timing of the acquisition and the changes that are anticipated to be made, and in accordance with the general guidance issued by the SEC regarding exclusion of certain acquired businesses, we currently intend to exclude L’Orange from the September 30, 2018 assessment of Woodward’s internal controls over financial reporting.  L’Orange accounted for approximately 27% of Woodward’s total assets at June 30, 2018.  L’Orange accounted for 4% of Woodward’s total net sales for the quarter ended June 30, 2018, as our results only included one month of L’Orange sales for the period June 1, 2018 through June 30, 2018.

PART II – OTHER INFORMATION

Item 1.Legal Proceedings

Woodward is currently involved in claims, pending or threatened litigation or other legal proceedings, investigations and/or regulatory proceedings arising in the normal course of business, including, among others, those relating to product liability claims, employment matters, worker’s compensation claims, contractual disputes, product warranty claims and alleged violations of various laws and regulations.  Woodward accrues for known individual matters using estimates of the

58

most likely amount of loss where it believes that it is probable the matter will result in a loss when ultimately resolved and such loss is reasonably estimable. 

While the outcome of pending claims, legal and regulatory proceedings, and investigations cannot be predicted with certainty, management believes that any liabilities that may result from these claims, proceedings and investigations will not have a material effect on Woodward's liquidity, financial condition, or results of operations.

Item 1A.Risk Factors

Investment in our securities involves risk.  An investor or potential investor should consider the risks summarized under the caption “Risk Factors” in Part I, Item 1A of our most recent Form 10-K, as well as the following risk factor, when making investment decisions regarding our securities.  Other than the addition of the below risk factor, the risk factors that were disclosed in our most recent Form 10-K have not materially changed since the date our most recent Form 10-K was filed with the SEC.

We may be unable to successfully execute or effectively integrate acquisitions, and divestitures may not occur as planned.

We recently acquired L’Orange and its related operations located in Germany, the United States and China.  We have in the past and may, in the future, pursue acquisitions of other companies and assets.  We may also seek to divest non-core businesses or assets.  The success of these transactions will depend on, among other things, our ability to integrate assets and personnel acquired in these transactions and to apply our internal controls process to these acquired businesses.  The integration of these acquisitions may require significant attention from our management, and the diversion of management’s attention and resources could have a material adverse effect on our ability to manage our business.  In addition, we may incur unanticipated costs or expenses following an acquisition, including post-closing asset impairment charges, expenses associated with eliminating duplicate facilities, and other liabilities.

The success of our acquisitions is subject to risk, including, among others, the following:

· failure to realize expected technological and product synergies, economies of scale and cost reductions;

· unforeseen expenses, delays or conditions may be imposed upon the acquisition, including due to required regulatory approvals or consents;

· the assumption of unexpected liabilities or the exposure to unexpected penalties or other enforcement actions;

· adverse effects on existing business relationships with suppliers and customers, including delays or cancellations of customer purchases, as well as revenue attrition in excess of anticipated levels if existing customers alter or reduce their historical buying patterns;

· risks associated with entering into markets in which Woodward has limited or no prior experience, including potentially less visibility into demand;

· inaccurate assumptions may be made regarding the integration process;

· unforeseen difficulties may arise in integrating operations, processes and systems;

· higher than expected investments may be required to implement necessary compliance processes and related systems, including information technology systems, accounting systems and internal controls over financial reporting;

· fluctuations in foreign currency exchange rates that may impact the agreed upon purchase price;

· the failure to retain, motivate and integrate key management and other employees of the acquired business;

· higher than expected costs may arise due to unforeseen changes in tax, trade, environmental, labor, safety, payroll or pension policies in any jurisdiction in which the acquired business conducts its operations; and

· we may experience problems in retaining customers and integrating customer bases.

Many of these factors will be outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and attention.  Furthermore, we may not realize the degree or timing of benefits we anticipate when we first enter into these transactions.  Failure to implement our acquisition strategy, including successfully integrating acquired businesses, could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities (In thousands, except for shares and per share amounts)	Total Number of Shares Purchased	Weighted Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Maximum Number (or Approximate Dollar Value) of Shares that may yet be Purchased under the Plans or Programs at Period End (1)
April 1, 2018 through April 30, 2018 (2)	305	$	71.94	-	$	428,803
May 1, 2018 through May 31, 2018 (2)	1,622		75.77	-		428,803
June 1, 2018 through June 30, 2018 (2)	373		76.86	-		428,803

(1) In November 2016, our board of directors approved a stock repurchase program for the repurchase of up to $500,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a three-year period that will end in November 2019. 

(2) Under a trust established for the purposes of administering the Woodward Executive Benefit Plan, 305 shares of common stock were acquired in April 2018 and 1,622 share of common stock were acquired in May 2018 on the open market related to the deferral of compensation by certain eligible members of Woodward’s management who irrevocably elected to invest some or all of their deferred compensation in Woodward common stock.  In addition, 373 shares of common stock were acquired in June 2018 on the open market related to the reinvestment of dividends for shares of treasury stock held for deferred compensation.  Shares owned by the trust, which is a separate legal entity, are included in "Treasury stock held for deferred compensation" in the Condensed Consolidated Balance Sheets.

Item 6.Exhibits

Exhibits filed as part of this Report are listed in the Exhibit Index.

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WOODWARD, INC.

EXHIBIT INDEX

	Exhibit Number	Description
*	2.1	Share Purchase Agreement relating to the sale and purchase of all shares in L’Orange GmbH and Fluid Mechanics LLC dated April 8, 2018.
*	10.1	Frame Development and Purchase Agreement between MTU Friedrichshafen GmbH and L’Orange GmbH.
†	10.2	Note Purchase Agreement, dated May 31, 2018, by and among Woodward, Inc. and the purchasers named therein, filed as Exhibit 10.1 to Current Report on Form 8-K, filed on June 4, 2018.
†	10.3	Amendment No. 1 to 2013 Note Purchase Agreement, dated as of May 31, 2018, by and among Woodward, Inc. and the noteholders names therein, filed as Exhibit 10.2 of the Company’s Current Report on Form 8-K, filed on June 4, 2018.
†	10.4	Amendment No. 1 to 2016 Series M Note Purchase Agreement, dated as of May 31, 2018, by and among Woodward, Inc. and the noteholders names therein filed as Exhibit 10.3 of the Company’s Current Report on Form 8-K, filed on June 4, 2018.
†	10.5	Amendment No. 1 to 2016 Series N and O Note Purchase Agreement, dated as of May 31, 2018, by and among Woodward International Holding B.V., Woodward, Inc. and the noteholders names therein, filed as Exhibit 10.4 of the Company’s Current Report on Form 8-K, filed on June 4, 2018.
*	31.1	Rule 13a-14(a)/15d-14(a) certification of Thomas A. Gendron
*	31.2	Rule 13a-14(a)/15d-14(a) certification of Robert F. Weber, Jr.
*	32.1	Section 1350 certifications
*	101.INS	XBRL Instance Document.
*	101.SCH	XBRL Taxonomy Extension Schema Document
*	101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
*	101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
*	101.LAB	XBRL Taxonomy Extension Label Linkbase Document
*	101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
	Attached as Exhibit 101 to this report are the following materials from Woodward, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Statements of Earnings, (ii) the Condensed Consolidated Statements of Comprehensive Earnings, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Condensed Consolidated Statements of Stockholders’ Equity, and (vi) the Notes to the Condensed Consolidated Financial Statements.
*	Filed as an exhibit to this Report
†	Incorporated by reference to this Report

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	WOODWARD, INC.
Date:  August 7, 2018	/s/ Thomas A. Gendron
	Thomas A. Gendron
	Chairman of the Board, Chief Executive Officer, and President (Principal Executive Officer)
Date:  August 7, 2018	/s/ Robert F. Weber, Jr.
	Robert F. Weber, Jr.
	Vice Chairman, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

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EX-2.1

Exhibit 2.1

DATED                                                  8 April 2018

SHARE PURCHASE AGREEMENT

relating to the sale and purchase
of all shares in

L’ORANGE GMBH

And

FLUID MECHANICS LLC

1

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

CONTENTS

1.	DEFINITIONS	6
2.	SALE AND PURCHASE OF SHARES	7
3.	CONSIDERATION; PAYMENTS	7
4.	MERGER CONTROL	9
5.	[INTENTIONALLY OMITTED]	9
6.	PRE-CLOSING MATTERS	9
7.	TERMINATION OF DPLTA	13
8.	TERMINATION AND SETTLEMENT OF CASH POOLING AND CASH IN THE COMPANY AS OF CLOSING	14
9.	INTRA-GROUP LOANS	15
10.	RELEASE OF GUARANTEES; INDEMNIFICATION	15
11.	CLOSING CONDITIONS; TERMINATION	15
12.	CLOSING	16
13.	SELLERS’ GUARANTEES	19
14.	REMEDIES; LIMITATIONS	36
15.	LOCKED-BOX, NO LEAKAGE	47
16.	TAXES	48
17.	PURCHASER GUARANTEES	63
18.	NON-COMPETITION; NON-SOLICITATION	64
19.	COOPERATION	66
20.	GUARANTEE OF PURCHASER’S GUARANTOR	67
21.	ACCESS TO BOOKS AND RECORDS	67
22.	CONFIDENTIALITY AND PRESS RELEASES	67
23.	NOTICES	68
24.	LIABILITY OF SELLERS	70
25.	COSTS	70
26.	GOVERNING LAW; ARBITRATION	71
27.	FINAL PROVISIONS	71

2

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

LIST OF EXHIBITS

EXHIBIT	CONTENT
Exhibit 1.1	Definitions
Exhibit 3.1.3	Equity Bridge
Exhibit 3.3.2	Account Details
Exhibit 6.2.2.4	List of planned Investments
Exhibit 6.2.3.1	Permitted replacements for vacant positions
Exhibit 6.2.3.3	List of Employees affected by Material Alterations of Terms and Conditions of Employment
Exhibit 6.2.4.5	Settlement of Proceedings
Exhibit 6.6	Works Council Support
Exhibit 8	Sample calculation
Exhibit 9.1	Existing Intra-Group Loans
Exhibit 10	Group Guarantees
Exhibit 12.3.1.1	Cash Pool Release Letter
Exhibit 12.3.1.2	DPLTA Termination Declaration
Exhibit 12.3.1.3	Draft Assignment of Membership Units
Exhibit 12.3.1.4	Amended and Restated Operating Agreement
Exhibit 12.3.1.5(1)	Draft Patent Assignment Agreement
Exhibit 12.3.1.5(2)	Patent rights to be assigned to L'Orange
Exhibit 12.3.1.7	Warranty Letter
Exhibit 12.3.2.1	Long Term Supply Agreement
Exhibit 12.3.2.2	Remanufactured Core Products
Exhibit 12.3.2.3	Transitional Services Agreement
Exhibit 12.3.4	Draft Power of Attorney for L’Orange Shareholder Meetings
Exhibit 12.4.1	Draft Closing Memorandum
Exhibit 13.5.1	Framework
Exhibit 13.5.2-1	[***]
Exhibit 13.5.2-2	[***]
Exhibit 13.5.2-3	[***]
Exhibit 13.5.2-4	[***]
Exhibit 15.3.9	Management Boni Recipients
Exhibit 16.7.1	Allocable Amount - Allocation Methodology
Exhibit 19.3	Long Term Supply Agreement Price List

LIST OF SCHEDULES

SCHEDULE	CONTENT
Schedule 13.3.3	Excerpts from the commercial register for each of the Group Companies
Schedule 13.3.4	Copies of current Articles of Association, By-laws or equivalent constitutional documents of each Group Company
Schedule 13.5.1	Locked Box Accounts
Schedule 13.5.4	Events since Locked Box Date
Schedule 13.6.1	Financial Statements as of the Group Companies as of 31 December 2017
Schedule 13.7.1(1)	Own Real Estate
Schedule 13.7.1(2)	Excerpt from land register for Own Real Estate
Schedule 13.7.3	Leased Real Estate
Schedule 13.9.1	IP Rights
Schedule 13.9.2	Disclosed restricted and non-exclusive ownership of Owned IP Rights

3

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

Schedule 13.11	Exceptions from Sellers' Guarantee on compliance with laws
Schedule 13.12.1	List of Material Agreements
Schedule 13.13.1	List of all employees and managing directors of Group Companies
Schedule 13.13.2	List of employees who have either terminated their employment or have threatened to terminate their employment
Schedule 13.13.3	Salary increases of Senior Employees since the Locked Box Date
Schedule 13.13.6	List of freelancers
Schedule 13.13.7	List of all collective arrangements
Schedule 13.14.1	Pension Scheme
Schedule 13.14.2	Employer and Employee contribution rates to the Pension Schemes
Schedule 13.15	List of Legal Disputes
Schedule 13.16.3	List and details of insurance claims made in respect of the Group Companies’ business
Schedule 13.17.5	Pending Tax audits
Schedule 13.17.8	Disclosures re Tax residence of Group Companies
Schedule 13.19.2	Disclosed Product Liability Claims
Schedule 13.20	Subsidies
Schedule 13.25-1	Knowledge Bearers
Schedule 13.25-2	Inquiry Individuals
Schedule 13.25-3	Further Inquiry Individuals
Schedule 13.27	[***]
Schedule 14.2.1-1	Purchaser’s Knowledge Bearers
Schedule 14.2.1-2	Purchaser’s Inquiry Advisors

4

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

This SHARE PURCHASE AGREEMENT (the “Agreement”) is made on April 8, 2018

AMONG:

(1)    MTU Friedrichshafen GmbH,  a limited liability company under German law (GmbH) with registered office at Maybachplatz 1, 88045 Friedrichshafen, Germany and registered with the commercial register of the local court (Amtsgericht)  of Ulm under HRB 630227

– “MTU Friedrichshafen” –

(2)    MTU America Inc., a company incorporated under the laws of the State of Delaware, USA whose registered office is at 251 Little Falls Drive, Wilmington, Delaware 19808, USA

– “MTU America” –

(3)    Woodward Aken GmbH,  a limited liability company under German law (GmbH) with registered office at Köthener Chaussee 46, 06385 Aken, Germany and registered with the commercial register of the local court (Amtsgericht)  of Stendal under HRB 10125

– “Purchaser” –

(4)    Woodward Inc., a company incorporated under the laws of the State of Delaware and whose registered office is at 1081 Woodward Way, Fort Collins, Colorado 80524, USA

– “Purchaser’s Guarantor”, and, together with Purchaser, the “Purchasers” –

MTU Friedrichshafen and MTU America are hereinafter each individually referred to as a “Seller” and jointly referred to as the “Sellers”.

The Sellers, the Purchaser and the Purchaser’s Guarantor are each individually referred to as a “Party” and jointly referred to as the “Parties”.

RECITALS:

A    MTU Friedrichshafen is the sole shareholder of L'Orange GmbH, a limited liability company under German law (GmbH) with registered office at Porschestraße 8, 70435 Stuttgart and registered with the commercial register of the local court (Amtsgericht) of Stuttgart under HRB 8012 (“L’Orange”). MTU Friedrichshafen and L’Orange have entered into a domination and profit and loss transfer agreement (Beherrschungs- und Gewinnabführungsvertrag) dated 21 December 1995 and amended by virtue of an amendment agreement dated 13 December 2013 (the “DPLTA“).

B    MTU America is the sole shareholder of Fluid Mechanics LLC, a limited liability company under US law with headquarters at 760 Moore Road, Avon Lake, Ohio 44012, USA (“Fluid Mechanics”; Fluid Mechanics and L’Orange are hereinafter jointly referred to as the “Target Companies”). Fluid Mechanics has acquired its business operations pursuant to an asset purchase agreement dated 16 December 2015 ("Fluid Mechanics APA").

C    L’Orange is the sole shareholder of the following direct subsidiaries:

(i)    L'Orange Unterstützungskasse Gesellschaft mit beschränkter Haftung, a limited liability company under German law (GmbH) with registered office at Rudolph-L'Orange-Straße 1, 72293 Glatten and registered with the commercial register of the local court (Amtsgericht) of Stuttgart under HRB 440081 (“L’Orange Unterstützungskasse”);

5

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

(ii)    L'Orange Fuel Injection (Ningbo) Co. Ltd., a limited liability company under Chinese law with headquarters at #3 Hall, No. 55 South Qihang Road, 315145 Ningbo City, Peoples Republic of China (“L'Orange Ningbo”);

(iii)    L'Orange Fuel Injection Trading (Suzhou) Co., Ltd., a limited liability company under Chinese law with headquarters at Room 306, International Financial Centre, 23-B Time Square, Huachi Street, Suzhou, Peoples Republic of China (“L'Orange Suzhou”).

L’Orange Unterstützungskasse, L'Orange Ningbo and L'Orange Suzhou are hereinafter jointly referred to as the “L’Orange Subsidiaries”. The L’Orange Subsidiaries and the Target Companies are hereinafter jointly referred to as “Group Companies” and individually as a “Group Company”).

D    The Sellers are indirect affiliated companies in the meaning of Sec. 15 of the German Stock Corporation Act (Aktiengesetz) (“Affiliates”) of Rolls-Royce Holdings plc., a public company registered in England with registered number 07524813 and registered office at 62 Buckingham Gate, London, SW1E 6AT, England. Rolls-Royce Holdings plc. and any of its Affiliates including the Sellers, but excluding the Group Companies, are hereinafter referred to as the “Sellers’ Group” and each of these entities as a “Sellers’ Group Company”.  “Purchaser Group” means each or any of (i) the Purchasers, any holding company of the Purchasers from time to time, and any company which from time to time is a subsidiary of the Purchasers or of any such holding company, and (ii) with effect from Closing, each Group Company.

E    MTU Friedrichshafen intends to dispose of all shares in L’Orange, consisting of one share with a nominal value of DEM 5,000,000.00, comprising the entire share capital of L'Orange, (the “L’Orange Share”) and MTU America intends to dispose of all 1,000 units, constituting the entire share capital, in Fluid Mechanics (the “Fluid Mechanics Shares”; together with the L’Orange Share jointly referred to as the “Shares”). The Purchaser intends to acquire the L'Orange Share from MTU Friedrichshafen and the Purchaser's Guarantor intends to acquire the Fluid Mechanics Shares from MTU America. It is hereby clarified that irrespective of the denomination of the shares in L’Orange and Fluid Mechanics it is the Parties’ intention to sell and transfer 100% of such shares in L’Orange and Fluid Mechanics pursuant to this Agreement.

IT IS AGREED:

1.    DEFINITIONS

1.1    For the purpose of this Agreement, the defined terms used in this Agreement that are identified by capitalized first letters (Großschreibung) always have the meaning as set forth in Exhibit 1.1 or else where in this agreement, it being understood that these definitions are applicable to the singular as well as the plural forms of such terms.

1.2    Wherever terms are defined in the Exhibits or Schedules to this Agreement in deviation from the terms as defined in clause 1.1, the definitions used in the Exhibits or Schedules shall, but only for the purposes of the interpretation and scope of the respective Exhibits or Schedules, prevail over the meaning of the terms as defined in Exhibit 1.1.

6

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

2.    SALE AND PURCHASE OF SHARES

2.1    Sale of the Shares

2.1.1    MTU Friedrichshafen hereby sells (verkauft) the L’Orange Share to the Purchaser under the terms and conditions of this Agreement. The Purchaser hereby accepts such sale.

2.1.2    MTU America hereby sells (verkauft) the Fluid Mechanics Shares to the Purchaser's Guarantor under the terms and conditions of this Agreement. The Purchaser's Guarantor hereby accepts such sale.

2.2    Assignment of the Shares

Subject to (aufschiebend bedingt) the satisfaction or, where applicable, waiver of the Closing Condition and Closing Actions in accordance with the terms of this Agreement, MTU Friedrichshafen hereby assigns and transfers in rem  (tritt mit dinglicher Wirkung ab) the L’Orange Share to the Purchaser and MTU America hereby assigns and transfers in rem  (tritt mit dinglicher Wirkung ab) the Fluid Mechanics Shares to the Purchaser's Guarantor, each with effect as of 24:00 hours CEST on the Closing Date; each of the Purchasers hereby accepts the respective assignment and transfer in rem (the “Transaction”).

2.3    Ancillary Rights and Dividends

The sale and transfer of the Shares shall include any and all rights associated with, or otherwise pertaining to, the Shares (Nebenrechte) as at Closing, including, but not limited to, the right to any retained and any future profits pertaining to the Shares, with the exception of any profits of L’Orange generated under the DPLTA prior to its termination to which MTU Friedrichshafen shall continue to be entitled after the Closing Date. Clause 7.3 shall remain unaffected by this clause 2.3.

3.    CONSIDERATION; PAYMENTS

3.1    Purchase Prices

3.1.1    The purchase price payable for the L’Orange Share equals EUR 576,400,000 (in words: five hundred seventy six million four hundred thousand euros) (the “L’Orange Purchase Price”).

3.1.2    The purchase price payable for the Fluid Mechanics Shares equals EUR 10,000,000 (in words: ten million euros) (the “Fluid Mechanics Purchase Price”; the L’Orange Purchase Price and the Fluid Mechanics Purchase Price are jointly referred to as the (“Total Share Purchase Price”).

3.1.3    The L'Orange Purchase Price and the Fluid Mechanics Purchase Price have been calculated based on the equity bridge attached hereto as Exhibit 3.1.3.

3.2    Interest

Interest of a daily total amount of EUR 45,000 (in words: forty-five thousand euros) from the Locked Box Date (as defined in clause 15.1 below) up until, but excluding, the Closing Date (hereinafter the “Interest”) shall accrue on the Total Share Purchase Price. The L’Orange Purchase Price and the Interest thereon together form the “L’Orange Consideration” and the Fluid Mechanics Purchase Price together with the Interest thereon together form the “Fluid

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Mechanics Consideration”. The L’Orange Consideration and the Fluid Mechanics Consideration are hereinafter jointly referred to as the “Consideration” and the Parties agree that the Consideration is solely paid for the L’Orange Share and the Fluid Mechanics Shares and that therefore no Taxes shall be withheld with regard to the Consideration.

3.3    General Rules for Payments

3.3.1    Modes of Payment

Any payments under this Agreement shall be made by wire transfer in immediately available funds, valued as at the relevant due date set out in this Agreement or otherwise provided by law, free of bank and/or any other charges, Taxes (subject to clauses 7.3 and 7.6 which shall take precedence) or other deductions and the receipt of such payment in the recipient's bank account shall constitute discharge of the relevant obligation to pay.

3.3.2    Bank Accounts

All payments to the Sellers or to the Purchasers under this Agreement shall be made into the bank accounts of the Sellers (the “Sellers’ Accounts”) or the Purchasers (the “Purchaser's Account”), as applicable, in each case as set forth in Exhibit 3.3.2, or to such other bank account designated by the recipient to the Party that has to make the payment in writing no later than five (5) Business Days prior to the relevant due date of such payment.

3.3.3    Default Interest

If any payment to be made by a Party under or in connection with this Agreement is not paid when due, default interest at the rate of ten percent (10%) p.a. (“Default Interest”) shall apply from the respective due date until the respective amount has been received in full by the entitled Party.

3.3.4    No Set-Off or Retention

In relation to its payment obligation in accordance with this Agreement (excluding any payment obligations included in any agreement entered into as part of the Closing Actions, for which the terms and conditions of such agreement shall apply), neither Party shall be entitled (i) to set off (aufrechnen) any rights and claims it may have under this Agreement, or (ii) to withhold payment on the grounds that it has a right of retention (Zurückbehaltungsrecht), unless the rights or claims of the obliged Party in relation to which such Party declares a set-off or retention have been acknowledged (anerkannt) in writing by the respective other Party or have been determined by the final and non-appealable decision of the court of competent jurisdiction.

3.4    Value-Added Tax

In case value added tax (Umsatzsteuer) shall be payable on any part of the Consideration by any Sellers' Group Company to the Tax Authority, the respective one of the Purchasers shall pay the value added tax (“VAT”) in addition to the Consideration against submission of an invoice reflecting the VAT and corresponding to the legal requirements, in particular the German VAT Act (Umsatzsteuergesetz) in order to obtain a refund of the input VAT paid. To the extent the applicable Tax Laws provide for a right of the Sellers to have the transaction

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being subject to VAT, the Sellers hereby guarantee not to exercise such right and will indemnify the Purchasers from any VAT resulting from an exercise of such right.

4.    MERGER CONTROL

4.1    The Parties shall use all reasonable efforts and render each other all reasonably necessary support and cooperation to ensure that the Closing Condition pursuant to clause 11.1 is fulfilled as soon as possible after the Signing Date. The Parties shall inform each other in writing without undue delay as soon as the Closing Condition has been fulfilled.

4.2    The Purchasers shall ensure that any filings or notifications for the Closing Condition will be made no later than ten (10) Business Days at the competent authority (“Competent Authority”) after the Signing Date, provided that the Sellers and their advisors have had reasonable opportunity to comment on any drafts and that the content of such filings have been approved in writing by the Sellers.

4.3    Each Party shall keep the other Parties informed about the status of the filing proceedings with the Competent Authority. The content of any substantive communications with any Competent Authority must be agreed between the Parties' outside counsel in charge of the relevant filings in advance. Each Party shall give reasonable notice to the other Parties of any substantive meeting, telephone call, or discussion with any Competent Authority.

4.4    If any Party becomes aware that it is reasonably likely that the Closing Condition will not be satisfied or that conditions or obligations (Auflagen oder Bedingungen) may be imposed which could affect any of the Parties or any of the Group Companies, it shall notify the respective other Parties forthwith in writing without undue delay. Notwithstanding the foregoing, the Parties undertake to use all commercially reasonable efforts to remove or prevent any impediments, restrictions, or conditions that may affect the Closing Condition, and for the Purchaser Group to offer any reasonable undertakings if necessary to obtain clearance as promptly as possible. For the avoidance of doubt, this provision does not oblige any of the Purchasers to offer as an undertaking (i) any divestiture of any of Purchasers’ businesses, or (ii) any significant divestiture of the Group Companies.

5.    [INTENTIONALLY OMITTED]

6.    PRE-CLOSING MATTERS

6.1    Subject to clause 6.3, from the Signing Date until and including the Closing Date, the Sellers

6.1.1    shall procure that the affairs of the Group Companies are conducted in the ordinary course consistent with past practice, including without limitation sales practices, price levels, mix and levels of inventory, procurement, manufacturing and delivery of products and services, quality and safety levels, accounts payable levels and receivables aging materially consistent with past practice;

6.1.2    shall procure that no payment is made by a Group Company other than (i) in the ordinary course of business or (ii) as required in order to preserve the value of the business of the Group Companies; and

6.1.3    shall apply commercially reasonable efforts that the business of the Group Companies, including the business relationships with the customers and suppliers of the Group Companies, is preserved intact in accordance with past practice.

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6.2    Subject to clause 6.3, from the date of this Agreement until and including the Closing Date, the Sellers shall procure that no member of the Sellers’ Group agrees to or permits the following conduct with respect to any of the Group Companies:

6.2.1    Share capital and distributions

6.2.1.1    Allot, issue or grant any option or right to subscribe for any shares or other securities convertible into shares.

6.2.1.2    Redeem any shares, purchase its own shares, reduce its share capital or grant any Encumbrances on any of its shares.

6.2.1.3    With respect to the Group Companies: declare, pay or make any dividend or other distribution with the exception of the L'Orange Profit Distribution.

6.2.1.4    Adopt any shareholder resolutions of any of the Group Companies regarding

(a)    the liquidation of any Group Company;

(b)    any change of the articles of association of any Group Company; or

(c)    the election of auditors of any Group Company.

6.2.2    Assets

6.2.2.1    Acquire or dispose of any shares or any other interest in any company or business;

6.2.2.2    Acquire or dispose of any real estate;

6.2.2.3    Fail to maintain, dispose of or out-license any intangible assets;

6.2.2.4    Other than pursuant to an existing contractual obligation at the Signing Date and the disclosed investment planning of the Group Companies (including the investments specifically disclosed in Exhibit 6.2.2.4), acquire or dispose of, or commit to the acquisition or disposal of, any other material assets (other than current assets in the ordinary course of business) with a value exceeding EUR 250,000.00 (two-hundred fifty thousand euros); or

6.2.2.5    fail to maintain its owned and leased properties and assets in accordance with its historical maintenance practice.

6.2.3    Employees

Other than to comply with law:

6.2.3.1    engage, hire (with the exception of replacements for the vacant positions listed in Exhibit 6.2.3.1) or (other than for serious misconduct) dismiss or give notice of dismissal to, any employee

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with an annual net remuneration exceeding EUR 100,000.00 (one hundred thousand euros) (“Senior Employee”);

6.2.3.2    transfer any employee of the Group Companies to another company of the Sellers' Group;

6.2.3.3    make any material alterations to the terms and conditions of employment (including remuneration, vacation times and other benefits) of any employee of the Group Companies, other than:

(a)    any alterations which are disclosed in Exhibit 6.2.3.3; or

(b)    salary or total target compensation increases in the ordinary course of business which do not exceed five per cent (5%) p.a.;

6.2.3.4    establish any new pension scheme, new compensation and benefit plans (including short and long-term incentive programs or other social benefit plans) or discontinue, amend or exercise any discretion in relation to any of such existing plans.

6.2.4    Operational issues

6.2.4.1    Assume any loans from a third party lender or grant any loans.

6.2.4.2    Enter into, amend or terminate any agreement or arrangement with the Sellers’ Group.

6.2.4.3    Amend or terminate any Material Agreement or enter into a new agreement which would be deemed to be a Material Agreement.

6.2.4.4    Grant any lease or tenancy of the real estate currently owned or leased by the Group Companies.

6.2.4.5    Commence or settle any litigation, arbitration, regulatory claim or enforcement actions in excess of EUR 250,000.00 (two hundred fifty thousand euros), except for the proceedings listed in Exhibit 6.2.4.5 which may be settled if the management of the Group Companies reasonably considers such settlements to be in the best interest of the Group Companies.

6.2.4.6    Other than in the ordinary course of business, create any mortgage, charge, pledge, lien or other security interest (“Encumbrance”) over any of its assets.

6.2.4.7    Fail to maintain the IT systems of the Group Companies as existing prior to the Signing Date.

6.2.4.8    Enter into any joint venture or partnership.

6.2.4.9    Give any guarantee or indemnity in relation to the obligations or liabilities of any other person (other than another Group Company).

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6.2.4.10    Cancel or fail to renew any of its insurance policies or fail to maintain the insurance coverage of the Group Companies in accordance with prior practice.

6.3    Nothing in this clause 6 shall operate so as to prevent or restrict:

6.3.1    Any matter approved by the Purchasers in writing, such approval not to be unreasonably withheld, conditioned or delayed;

6.3.2    Any matter reasonably undertaken by any member of the Sellers’ Group in an emergency or disaster situation with the intention of minimising any adverse effect of such situation in relation to any other operations of the Sellers, any member of the Sellers’ Group or the Group Companies;

6.3.3    Any member of the Sellers’ Group or Group Companies from fulfilling contractual obligations made prior to the date of this Agreement;

6.3.4    Any action required to be undertaken to comply with Applicable Law; or

6.3.5    Any action reasonably required to implement or comply with any obligations under this Agreement.

6.4    The Sellers shall procure as shareholders of the Group Companies that, so far as legally permissible (in particular, but not limited to, in relation to anti-trust and/or competition laws), during the period between the Signing Date and the Closing Date that the Group Companies allow the Purchasers and their agents, representatives and advisers upon reasonable prior notice to the Sellers and in coordination with the respective Group Companies, reasonable access to, and to take copies of, the books, records (including for the avoidance of doubt, the financial data) and documents, relating in whole or in part to, the Group Companies.

6.5    The Sellers shall endeavour commercially reasonable efforts to facilitate the discussions with the relevant third parties in order to obtain the third party waivers to the exercise of any contractual rights of the other contractual parties to the agreements of the Group Company which include change of control clauses. In case a third party (i) terminates or materially alters the terms of a supply agreement or (ii) ceases to have access to products or services under a supply arrangement of the Sellers’ Group with a third party to which the Group Companies had access prior to Closing, in each case as a consequence of the Transaction, the Sellers shall, upon the Purchasers' request, reasonably support the delivery of the respective products or services to the respective Group Company to the extent such products or services are also delivered by the respective supplier to the Sellers' Group for an interim period to be reasonably determined between the Parties. However, the Parties agree, that in the event this clause 6.5 causes the Sellers to incur any costs, the Purchasers shall indemnify and hold harmless the Sellers for such costs.

6.6    In addition, starting immediately after the Signing Date, the Sellers shall introduce representatives of Purchasers Guarantor and the Purchaser to (i) representatives of all L'Orange works councils and (ii) local metal workers' union leaders in the regions in which the Group Companies are active doing business and shall endeavour best efforts to facilitate discussions on post-acquisition strategies and plans and with the aim to establish positive labour relations between representatives of Woodward Inc. and the Purchasers on the one hand and (a) representatives of all the L'Orange works councils as well as (b) local metal workers' union leaders in the regions in which the Group Companies are active doing business, in particular in Baden-Württemberg on the other hand. As part of that facilitation, the Sellers shall endeavour best efforts to facilitate that, to the extent requested by Purchasers

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Guarantor and the Purchaser, the individuals disclosed on Exhibit 6.6 are introducing, taking part in, supporting and entertaining such discussions in person and on a reoccurring basis, including by using such individuals' personal relationships to the relevant works council / union counterparts.

6.7    The Sellers shall procure as shareholders of the Group Companies that, so far as legally permissible (in particular, but not limited to, in relation to anti-trust and/or competition laws), during the period between the Signing Date and the Closing Date that the Group Companies allow the Purchasers and their agents, representatives and advisers upon reasonable prior notice to the Sellers and in coordination with the respective Group Companies, reasonable access to (i) the leadership team of the Group Companies, and (ii) the sites, facilities and operations of the Group Companies.

7.    TERMINATION OF DPLTA

7.1    MTU Friedrichshafen shall provide the Purchaser with a written declaration terminating the DPLTA for cause (außerordentliche Kündigung aus wichtigem Grund) as set out in clause 12.3.1.2. MTU Friedrichshafen hereby irrevocably instructs the Purchaser, and the Purchaser hereby undertakes, to submit such written declaration to L’Orange once the transfer of the L’Orange Shares has become effective.

7.2    The Purchaser shall procure that within two (2) Business Days after Closing L’Orange acknowledges the termination of the DPLTA by giving written notice to MTU Friedrichshafen of the same and files the termination of the DPLTA for registration with the commercial register. Should any further measures become necessary to have such termination registered, the Parties shall without delay take all required actions.

7.3    Notwithstanding clause 2.3, MTU Friedrichshafen hereby undertakes to forward to the Purchaser within five (5) Business Days after receipt, net of Taxes payable on the distributed profits by any Sellers' Group Company under application of sec. 8b German Corporate Income Tax Act (Körperschaftsteuergesetz) (while, for the avoidance of doubt and including withholding Taxes pursuant to clause 7.6, any further Taxes payable in connection with the transfer/distribution of the profits are borne by MTU Friedrichshafen and if necessary fully reimbursed to L'Orange by MTU Friedrichshafen), any distributed profits which MTU Friedrichshafen receives based on profit transfer claims which it may have based on the DPLTA for profits generated after 1 January 2018 until the termination of the DPLTA. Conversely, Purchaser shall pay to MTU Friedrichshafen (i) an amount equal to any withholding tax deducted from the interim profit transfer/distribution 2018 pursuant to clause 7.6 if, contrary to the Parties' view and based on a final and binding Tax assessment, withholding tax thereon (A) was not payable and therefore repaid to L'Orange by the Tax Authority or (B) is refundable (by receipt of cash payment, credit, set-off, deduction or otherwise) for the benefit of the Purchaser Group (rather than the Sellers' Group) and (ii) an amount equal to the amount of the interim profit transfer/distribution 2018 multiplied by 29.5% (i.e. 31% minus 1.5%) if, contrary to the Parties' view and based on a final and binding Tax assessment, such profit transfer/distribution is classified as a tax deductible expense of L'Orange (rather than a non-deductible hidden profit distribution). MTU Friedrichshafen and the Purchaser shall cooperate and shall undertake, and the Purchaser shall procure that L'Orange will undertake best efforts to achieve that for Tax purposes the interim profit transfer/distribution 2018 is classified by the responsible Tax Authorities as a hidden profit distribution and any withholding tax payable is for the account of the Sellers' Group. Any payment from the Purchaser to MTU Friedrichshafen shall be treated as an increase of the L'Orange Purchase Price. Any payment from MTU Friedrichshafen to the Purchaser shall be treated as a reduction of the L’Orange Purchase Price. If L’Orange incurs losses during the

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same period, the Purchaser shall reimburse MTU Friedrichshafen for any loss compensation payments made by MTU Friedrichshafen to L’Orange under the DPLTA. Such payment from the Purchaser shall be treated as an increase of the L’Orange Purchase Price.

7.4    The Purchaser shall further indemnify and hold MTU Friedrichshafen harmless from (i) any obligation to provide security pursuant to sec. 303 para 1 German Stock Corporation Act (Aktiengesetz) if and to the extent such obligation refers to an account payable that was created or became due after the Locked Box Date and (ii) any claims L’Orange may have under the DPLTA resulting from any amendment of L’Orange's statutory financial statements that was initiated by L’Orange or the Purchaser after the Closing.

7.5    The Purchaser shall procure, with the due and reasonable support by the Sellers, that L’Orange determines the profit or loss generated between 1 January 2018 and the termination of the DPLTA within two (2) months after the Closing Date, based on interim financial statements of L'Orange as of the end of the Closing Date (24:00 hours CEST) to be prepared on the basis of the provisions of the German Commercial Code (Handelsgesetzbuch) consistently applied and in accordance with the provisions of the DPLTA (such documents, the “Profit and Loss Calculation”). The Purchaser shall procure that L’Orange submits the final draft of the Profit and Loss Calculation to MTU Friedrichshafen without undue delay for its review and comments once available but in any case within the aforementioned two (2) months period after the Closing Date. The Parties shall cooperate in good faith to finalize the Profit and Loss Calculation as soon as reasonably practical after the comments from MTU Friedrichshafen have been obtained by the Purchaser.

7.6    L'Orange is entitled to deduct and withhold any applicable withholding Taxes from the profit determined in the (final) Profit and Loss Calculation at the time of payment to MTU Friedrichshafen and pay such withholding Taxes to the responsible Tax Authority under issuance of any certificate required under applicable law to the relevant Sellers' Group Company.

8.    TERMINATION AND SETTLEMENT OF CASH POOLING AND CASH IN THE COMPANY AS OF CLOSING

The Sellers shall procure that L’Orangeis released from existing cash pooling arrangements (such system the “Cash Pooling”) with effect prior to the Closing Date, with all credit or debt balances between L’Orange on the one hand, and the cash pool leader on the other hand, subject to this clause 8, being settled without any obligations or claims from the Cash Pooling remaining for or against L’Orange.

Upon release of L’Orange from the Cash Pooling, MTU Friedrichshafen (pursuant to lit. (i) and (ii), if any) and the cash pool leader (pursuant to lit. (iii)) (each as lender) shall grant loans to L’Orange (as borrower) as follows:

(i)    newly injected cash in the amount of EUR 1,000,000 (in words: one million euros) (to be credited to a non Cash Pooling bank account of L'Orange); plus

(ii)    in the amount of a good faith estimate by Sellers, in prior consultation with the Purchasers, of cash required by L’Orange to conduct its business in the ordinary course until one (1) Business Day following the Closing Date (to be credited to a non Cash Pooling bank account of L'Orange), plus

(iii)    conversion of the amount of the debt balance, if any, owed by L’Orange in relation to the Cash Pooling as of immediately prior to the Closing Date (“Cash Pool Debt Balance”) into a loan from the cash pool leader of the Cash Pooling to L’Orange (for

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the avoidance of doubt, without funds other than pursuant to (i) and (ii), if any, to be newly injected),

such loans to form part of the Intra-Group Loans (as defined below).

For the avoidance of doubt, the repayment pursuant to clause 9.2 below of the Cash Pool Debt Balance, the contractual obligation to do so and the loans referred to above shall not constitute Leakage.

Exhibit 8 includes a sample calculation on the interplay between the payment mechanics included in clause 7 and in clause 8.

9.    INTRA-GROUP LOANS

9.1    The Sellers’ Group Companies have granted to the Group Companies certain loans listed in Exhibit 9.1(together with the loans referred to in clause 8 above, the “Intra-Group Loans”), the outstanding amounts of which, including interest accrued thereon, as of the Locked Box Date, except for the loans referred to in clause 8,are also shown in Exhibit 9.1.

9.2    The Purchasers herewith undertake to settle at Closing all outstanding amounts (including interest accrued thereon) as of the Closing Date in relation to the Intra-Group Loans including interest accrued thereon (“Intra-Group Loans Settlement Payments”). The Sellers shall inform the Purchasers at least two (2) Business Days prior to the Closing Date about the respective amounts of the Intra-Group Loans Settlement Payments, the company details of the borrowers and the bank account details of the bank accounts to which the Intra-Group Loans Settlement Payments shall be transferred.

10.    RELEASE OF GUARANTEES; INDEMNIFICATION

Sellers’ Group Companies have provided securities (Sicherheiten) for the obligations of the Group Companies vis-à-vis third parties, as set forth in Exhibit 10hereto (“Group Guarantees”). The Purchasers shall use their reasonable efforts to ensure that the respective Sellers’ Group Companies will be fully released from their obligations under the Group Guarantees as soon as is reasonably practicable following Closing. Pending release of any Group Guarantees, the Purchasers shall indemnify and hold harmless the Sellers against and from all losses suffered by the Sellers or any Sellers’ Group Company after Closing under or by reason of a Group Guarantee.

11.    CLOSING CONDITIONS; TERMINATION

11.1    ClosingCondition

The obligation to carry out the Closing Actions as defined under clause 12.3 below is subject to the satisfaction of the following condition (the “Closing Condition”):

The Closing is permissible as a result of

11.1.1.1    approval granted by the German Federal Cartel Office (Bundeskartellamt);

11.1.1.2    the expiration of any applicable waiting period and the absence of an order by the German Federal Cartel Office (Bundeskartellamt) or court preliminary or permanently prohibiting the transaction; or

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11.1.1.3    otherwise pursuant to the applicable merger control laws.

11.2    Termination

11.2.1    This Agreement shall terminate if the Closing Condition cannot be satisfied within a period of six (6) months from the Signing Date (the “Longstop Date”), upon written notice by either the Sellers acting jointly or the Purchasers acting jointly, provided that a Party is not entitled to terminate in case such Party is in breach of its obligations in relation to such Closing Condition.

11.2.2    Upon termination in accordance with clause 11.2.1, all rights and obligations of the Parties hereunder shall terminate and no liability of any Party to the other Parties shall remain, except for the confidentiality obligations under clause 22 which shall subsist.

12.    CLOSING

12.1    Closing Date

Unless any other day is mutually agreed by the Parties, the consummation (Vollzug) of the Transaction (the “Closing”) shall take place on the first Business Day of the calendar month immediately following the date on which the Closing Condition set forth in clause 11 has been satisfied (the “Closing Date”). Should the Closing Condition be satisfied five (5) or fewer Business Days prior to the end of a calendar month, the Closing shall be postponed until the first Business Day of the subsequent calendar month and this later day shall then be referred to as the Closing Date. The Parties agree, however, that, in case the Closing Date would be May 1, 2018 pursuant to the foregoing, the Purchasers shall have the right, acting reasonably, to have the Closing Date moved to June 1, 2018 instead in case reasonably required for them to prepare the Closing.

12.2    Closing Meeting

On the Closing Date, the Parties shall meet at the offices of DLA Piper UK LLP at Jungfernstieg 7, 20354 Hamburg, Germany at 9:00 a.m. CEST or in such other place and at such other time as agreed upon by the Parties, to perform the Closing Actions set forth in clause 12.3 (the “Closing Meeting”).

12.3    Closing Actions

At the Closing Meeting, the Parties shall take the following actions (the “Closing Actions”) or procure that such Closing Actions are taken, which shall be deemed to have been undertaken concurrently (Zug um Zug), in the following order:

12.3.1    First, the Sellers shall deliver (or cause to be delivered) to the Purchasers:

12.3.1.1    a written confirmation, in all material respects as set out in Exhibit 12.3.1.1, that L’Orange has been released from the Cash Pooling in accordance with clause 8;

12.3.1.2    the declaration of MTU Friedrichshafen, in all material respects as set out in Exhibit 12.3.1.2, to terminate the DPLTA for cause (cf. clause 7.1);

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12.3.1.3    a written “Assignment of Membership Units” in all material respects as set out in Exhibit 12.3.1.3 regarding the transfer of the Fluid Mechanics Shares in accordance with applicable US law (State of Delaware);

12.3.1.4    a signed “Amended and Restated Operating Agreement” showing the Purchaser's Guarantor as the sole member and owner of the Fluid Mechanics Shares and in all material respects as set out in Exhibit 12.3.1.4;  

12.3.1.5    an assignment agreement in all material respects as set out in Exhibit 12.3.1.5(1) pursuant to which title to the three (3) patents listed in Exhibit 12.3.1.5(2) is assigned by MTU Friedrichshafen to L'Orange;

12.3.1.6    a certification of non-foreign status of MTU America in the form prescribed by Treasury Regulation Section 1.1445-2(b)(2), to the Purchaser's Guarantor; and

12.3.1.7    the original of a letter substantially in the form attached hereto as Exhibit 12.3.1.7 (“Warranty Letter”).

12.3.2    Upon the delivery of the documents and confirmations by the Sellers pursuant to clause 12.3.1, the Parties shall execute or procure the execution by the relevant parties of the following agreements:

12.3.2.1    the Long Term Supply Agreement in the agreed form attached hereto as Exhibit 12.3.2.1(“Long Term Supply Agreement”);

12.3.2.2    a supply and support services agreement for remanufactured core product between MTU Magdeburg as supplier and L'Orange as customer in the agreed form attached hereto as Exhibit 12.3.2.2; and

12.3.2.3    a transitional services agreement between MTU Friedrichshafen (and certain of its Affiliates) and L'Orange (and certain of its affiliates) in the agreed form as attached hereto as Exhibit 12.3.2.3.

12.3.3    Subsequently, the Purchasers shall pay in cash as follows:

12.3.3.1    Purchaser, the L’Orange Consideration to MTU Friedrichshafen;

12.3.3.2    Purchaser's Guarantor the Fluid Mechanics Consideration to MTU America; and

12.3.3.3    Purchasers, or any one of them, the Intra-Group Loans Settlement Payments to the lenders’ bank accounts as provided by the Sellers.

12.3.4    MTU Friedrichshafen shall grant the Purchaser a power of attorney, substantially in the form of Exhibit 12.3.4, pursuant to which thePurchaser is entitled to hold shareholder meetings and adopt shareholder resolutions of L’Orange, it being understood that such power of attorney shall end automatically upon the Purchaser being registered as shareholder of L’Orange with the competent German commercial register.

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12.3.5    The Purchasers have, acting jointly, the right to waive any of the Closing Actions set forth in clauses 12.3.1 (excluding, however, the Closing Action set forth in clause 12.3.1.2) and 12.3.4. The Sellers have the right to waive any of the Closing Actions set forth in clause 12.3.3. The Parties may mutually waive any of the Closing Actions set forth in clause 12.3.1.2 or clause 12.3.2.

12.3.6    The Parties agree that:

12.3.6.1    the Sellers will most likely take a careful approach when filling in the Warranty Letter;

12.3.6.2    the mere notification of a (potential) Breach of Guarantee in the Warranty Letter (“Interim Event”) shall not constitute or be interpreted as, or alleged to constitute, an acknowledgement by the Sellers of an actual Breach of Guarantee;

12.3.6.3    a  notification in the Warranty Letter that a Sellers’ Guarantee that was given as true and correct subject to the Sellers’ Knowledge (which automatically means that such Sellers’ Guarantee was given as of the Signing Date only (and not the Closing Date)) and/or as of the Signing Date is, as of the date of the Warranty Letter, no longer true and correct under no circumstances constitutes a Breach of Guarantee;

12.3.6.4    the Sellers shall not be liable under any circumstances under the Warranty Letter or on the basis of the statements made therein, and the Purchasers shall indemnify and hold harmless the Sellers from any claim raised against the Sellers under or in connection with the Warranty Letter, it being understood that nothing in this clause 12.3.6.4 shall affect the Sellers liability under this Agreement and in particular in accordance with clause 12.3.6.5;

12.3.6.5    if an Interim Event gives rise to a Breach of Guarantee, such Breach of Guarantee is subject to the provisions (and in particular the limitations) set forth in this Agreement;

12.3.6.6    the Purchasers shall not be entitled to refuse to proceed with Closing on the basis of the occurrence of an Interim Event or anything else contained in the Warranty Letter provided, however, that the Purchasers thereby shall not be deprived of any of their rights pursuant to this Agreement, in particular those with respect to the Sellers' Guarantees.

12.4    Closing Memorandum

12.4.1    Upon completion of Closing, the Parties shall confirm to each other, in writing, that the Closing Condition has been satisfied and that all Closing Actions have been duly fulfilled or waived, in particular that payment of the Consideration has been effected as well as the effectiveness of the transfer of the Shares and the point in time at which the transfer of the Shares took effect by signing a closing memorandum substantially in the form attached hereto as Exhibit 12.4.1 (“Closing Memorandum”).

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12.4.2    Following Closing, the Parties shall submit a copy of the executed Closing Memorandum (without attachments, if any) to the acting notary.

12.5    Filing of New Shareholder List

The acting notary is hereby instructed to file a new shareholder list of L’Orange with the commercial register without undue delay (unverzüglich) once he has received a copy of the executed Closing Memorandum.

12.6    Cooperation; Non-Performance of Closing Actions

12.6.1    The Parties shall cooperate and procure that all Closing Actions are duly satisfied in accordance with the terms of this Agreement.

12.6.2    If the Sellers do not comply with their obligations under any provision of clause 12.3 at the Closing Date and the Purchasers have not elected to waive compliance with that particular provision, the Purchasers may at their discretion, despite the continued obligation of Sellers to fulfil their obligations pursuant to the Agreement:

12.6.2.1    proceed to Closing so far as is practical without affecting or waiving its rights under this Agreement; or

12.6.2.2    by giving notice to the Sellers,

(a)    defer Closing for up to thirty (30) Business Days after the proposed Closing Date (in which case the provisions of this clause 12.6.2 will apply to the deferred Closing); and

(b)    if the Sellers do not comply with their obligations under clause 12.3 at the deferred Closing Date, terminate this Agreement by written notice to the Sellers.

12.6.3    If the Purchasers do not perform the Closing Actions set forth in clause 12.3.3 at the Closing Date and, upon request by either Seller, do not perform these Closing Actions within 5 (five) Business Days after the proposed Closing Date, each Seller is entitled to terminate this Agreement by written notice to the Purchasers, unless the Sellers have elected to waive compliance with such particular Closing Action set forth in clause 12.3.3 or the Purchasers have, acting jointly, waived compliance with such particular Closing Actions set forth in clause 12.3.2.

13.    SELLERS’ GUARANTEES

13.1    Scope of Sellers’ Guarantees

13.1.1    The Sellers hereby guarantee to the Purchasers regardless of fault (verschuldensunabhängig), subject to the requirements and limitations provided in clause 14 hereof, by way of an independent promise of guarantee (selbstständiges Garantieversprechen) within the meaning of sec. 311 para. 1 of the German Civil Code (Bürgerliches Gesetzbuch – “BGB”), that the statements set forth in clauses 13.2 to 13.23 (the “Sellers’ Guarantees”) are true and correct as of the Signing Date except that (i) Sellers’ Guarantees which are expressly made as of any specific dates shall be true and correct only as of such dates (i.e. a Sellers’ Guarantee expressly made as of the Signing Date and the Closing Date, shall be

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and correct as of the Signing Date and the Closing Date) and (ii) it being understood that Sellers’ Guarantees which are subject to Sellers' Knowledge (as defined below) shall in any event only be true and correct as of the Signing Date.

13.1.2    The Sellers and the Purchasers agree and explicitly confirm that the statements set forth in clauses 13.2 to 13.23shall neither constitute an agreement on the quality within the meaning of sec. 434 para. 1 BGB (Beschaffenheitsvereinbarung), nor a warranty concerning the quality of the object of the purchase within the meaning of sec. 443 BGB (Garantie für die Beschaffenheit der Sache), but a contractual liability regime of its own kind (vertragliches Haftungsregime sui generis).

13.2    Status and Authority of the Sellers

13.2.1    As of the Signing Date and as of the Closing Date, each Seller has the unrestricted right, power, authority and capacity to execute and consummate this Agreement and the transactions contemplated therein.

13.2.2    As of the Signing Date and as of the Closing Date, this Agreement constitutes, and all other documents executed by the Sellers under or in connection with this Agreement will, when executed, constitute, legal, valid and binding obligations of the Sellers enforceable against the Sellers in accordance with their terms.

13.2.3    There is no action, suit, investigation or other proceeding pending against, or to the Sellers' Knowledge, threatened against or affecting the Sellers which in any manner challenges or seeks to prevent, enjoin, alter or materially delay the execution or consummation of this Agreement or the performance of the transactions contemplated hereunder.

13.2.4    As of the Signing Date and as of the Closing Date, no insolvency proceedings have been, or have been threatened to be, applied for regarding the assets of any of the Sellers and there are no circumstances which would require or justify the opening of or application of such proceedings.

13.3    Due Incorporation and Status of the Group Companies

13.3.1    As of the Signing Date and as of the Closing Date, the statements in the recitals regarding the Group Companies are true and correct. Each of the Group Companies has been duly incorporated and validly exists under its respective law and has the full corporate power and corporate authority to own or use its respective assets and properties.

13.3.2    As of the Signing Date and as of the Closing Date, except for the L’Orange Subsidiaries, none of the Group Companies holds, either directly, indirectly or in trust, any shares, interests or equity (including, without limitation, silent partnerships and sub-participations) in, or has entered into any agreement to acquire or hold any shares, interests or equity in or to establish any other entity.

13.3.3    As of the Signing Date and as of the Closing Date, the excerpts from the commercial register or equivalent corporate register for each of the Group Companies attached hereto as Schedule 13.3.3 accurately reflect the legal situation of the respective Group Company as regards the facts and circumstances which have to be registered with such register. As of the Signing Date, no applications for registration have been filed and no shareholders' resolutions

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passed which may require registration with such register and which are not reflected in these excerpts from such register.

13.3.4    As of the Signing Date and as of the Closing Date, Schedule 13.3.4 contains true and correct copies of the current Articles of Association, By-laws or equivalent constitutional documents of each Group Company, which are in full force and effect.

13.3.5    As of the Signing Date and as of the Closing Date:

13.3.5.1    No insolvency proceedings or similar proceedings have been applied for or initiated against any of the Group Companies in Germany or abroad.

13.3.5.2    There are neither circumstances that would require a petition for the institution of insolvency proceedings or of composition proceedings in Germany or abroad, in particular, no Group Company is insolvent (zahlungsunfähig) or over indebted (überschuldet)  nor is such situation imminent.

13.3.5.3    No Group Company has ceased nor suspended payments (Zahlungen eingestellt) or considers or has agreed to any debt settlement arrangements with any of its creditors.

13.4    Ownership of Shares

As of the Signing Date and as of the Closing Date:

13.4.1    The shares of each of the Group Companies (collectively the “Group Companies Shares”) are validly issued and are owned as described in the recitals.

13.4.2    The Group Companies Shares are fully paid up (voll eingezahlt) and have not been repaid, neither in whole nor in part. There is no shareholder obligation to make any additional payment or other contribution with respect to any of the Group Companies Shares (keine Nachschusspflicht).

13.4.3    The Group Companies Shares are free and clear of any liens, encumbrances, other rights of third parties or other defects of title (Rechtsmängel), and there are no pre-emptive rights, rights of first refusal, options, subscription rights or other rights (whether absolute or contingent) of any third party to purchase or acquire Group Companies Shares or have otherwise transferred to such third party any of the Group Companies Shares. None of the Group Companies is, with respect to any of the Group Companies Shares, bound by any agreement (including voting trust agreements – Stimmbindungsverträge), restrictions or obligations relating to any rights under any of the Group Companies Shares. There are no silent partnerships (stille Gesellschaften) in respect of any Group Company and no third party owns any indirect participation (Unterbeteiligung) in any of the Group Companies Shares.

13.5    Locked Box Accounts and Position Since the Locked Box Date

13.5.1    The column called “Pro Forma Locked Box Balance Sheet 31 Dec 2017” together with the labels set out in the far left column, each in the reference balance sheet attached as Schedule 13.5.1 (those two columns the “Locked Box Accounts”)

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has in all material respects been derived from and prepared on the basis of the combined financial information as of and for the period ended 31 December 2017 and the framework for the preparation of the combined financial information as of and for the period ended 31 December 2017 is attached hereto as Exhibit 13.5.1(“Framework”).

13.5.2    [***]

13.5.3    Except for the ones provided for in the Locked Box Accounts (a) there are as of the Locked Box Date no actual or contingent liabilities of the Group Companies which should have been reflected in the Locked Box Accounts in accordance with the Framework, and (b) other than disclosed in this Agreement or in any of the Schedules thereto, to the actual knowledge as of the Signing Date of the CFO of MTU Friedrichshafen in place on the Signing Date (after reasonable inquiry of the actual knowledge of the CFO of L’Orange in place on the Signing Date), there are no actual or contingent liabilities of the Group Companies existing as of the Locked Box Date which (i) individually exceed an amount of EUR 500,000 (five hundred thousand euros), and (ii) were unknown as of the Locked Box Date to the CFO of MTU Friedrichshafen in place on the Signing Date, and (iii) had they been known as of the Locked Box Date, would have been required to be reflected in the Locked Box Accounts in accordance with the Framework.

13.5.4    Since the Locked Box Date and unless disclosed otherwise in Schedule13.5.4

13.5.4.1    the business of the Group Companies has been carried on in the ordinary course so as to maintain the same as a going concern;

13.5.4.2    the business of the Group Companies has been conducted in accordance with the covenants included in clauses 6.1 and 6.2 without regard to the exceptions described in clause 6.3;

13.5.4.3    there has not been any damage, destruction or other loss or matter (whether covered by an existing insurance or not) adversely affecting the business, profitability, prospects, financial position or assets of any of the Group Companies which has or could have a material adverse effect on the financial position, profitability, prospects, results of operations or business operations of the Group Companies;

13.5.4.4    the Group Companies have not acquired or disposed of or agreed to acquire or dispose of any business or any material asset or assumed or acquired any material liability (including a contingent liability) or incurred any capital commitment otherwise than in the ordinary course of business.

13.6    Financial Statements and Forecasts

13.6.1    Schedule 13.6.1contains copies of the individual financial statements of each Group Company for the business year 2017 (the “Financial Statements”).

13.6.2    Where applicable, the Financial Statements have been prepared in accordance with the respective applicable statutory provisions and the generally accepted accounting principles applicable to the respective Group Company and past practice. L'Orange’s, L’Orange Ningbo’s and L’Orange Suzhou’s audited financial statements give a true and fair view of the asset position

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(Vermögenslage), financial condition (Finanzlage) and result of operation (Ertragslage) of L'Orange, L’Orange Ningbo and L’Orange Suzhou, respectivelyin accordance with the applied accounting standards.

13.6.3    The Group Companies maintain a standard system of accounting established and administered in accordance with generally accepted accounting principles (applicable to the respective Group Company), including, without limitation, books and records that are up-to-date, accurate and complete in all material respects in accordance with all applicable legal and accounting requirements and contain complete and accurate records of all matters to be dealt with in such books under applicable law and generally accepted accounting principles.

13.6.4    As of the Signing Date and as of the Closing Date: Fluid Mechanics has paid a certain amount into an escrow account, the remaining amount of which is sufficient to cover any payment obligations of Fluid Mechanics pursuant to the Fluid Mechanics APA.

13.7    Real Property

13.7.1    Schedule 13.7.1(1) lists for each Group Company all real estate, inheritable building rights (Erbbaurechte) and in-rem leases (Dauernutzungsrechte) or similar rights owned or, where indicated in Schedule 13.7.1(1), co-owned by the respective Group Company (“Own Real Estate”). All encumbrances in rem encumbering any of the Own Real Estate are stated in the respective excerpts from the land register attached hereto as Schedule 13.7.1(2).

13.7.2    Until the Signing Date, no Group Company has received any administrative acts restricting the continued use of the Own Real Estate for the operations of the respective Group Company as presently conducted. As of the Signing Date, there are no outstanding charges and levies, including all charges for the recoupment of public money spent on local public infrastructure (Erschließungsbeiträge).

13.7.3    Schedule 13.7.3 contains for each Group Company a correct and complete list of all real estate (i) leased by such Group Company from any third party (the “Leased Real Estate”) and (ii) let by the Group Companies to any third party.The Sellers have delivered to the Purchasers a complete and accurate copy of each lease agreement relating to the Leased Real Estate.

13.7.4    To the Sellers’ Knowledge the Group Companies have maintained the Own Real Estate and the Leased Real Estate (collectively, ”Real Estate”) in all material respects in accordance with the requirements of the applicable laws and in a manner sufficient to support the operations of the respective Group Company as presently conducted.  The Own Real Estate is not subject to any contractual restrictions (and to the Sellers’ Knowledge, any other restrictions) that materially limit or interfere with the Group Companies’ ability to carry on their business as presently conducted.

13.8    Environmental Matters

13.8.1    The Group Companies have during the five (5) year period prior to Closing conducted their business in material compliance with Environmental Law (as defined below) and no Group Company is or has during this period been in material breach of Environmental Law.

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13.8.2    All required environmental consents have been obtained by the relevant Group Company, are in force and are being and during the five (5) year period prior to Closing have been complied with in all material respects. To the Sellers’ Knowledge no circumstances exist which are likely to result in any Environmental Consent (as defined below) being revoked, suspended, lapsing due to passing of time or due to conditions, or limited or which might prejudice their renewal.

13.8.3    There is no civil, criminal, regulatory or administrative proceeding, claim or other suit or investigation of which any Group Company (or in case of Leased Real Estate, any landlord) has been notified in writing, in progress against any Group Company (or its landlord) with respect to its conduct of its business relating to Environmental Law or Environmental Consents, nor have any such investigations (of which the relevant Group Company or its landlord has been notified in writing) or proceedings taken place or been settled in the past five (5) years prior to Closing and to the Sellers’ Knowledge no such investigations or proceedings are pending or threatened or have been threatened in the last five (5) years prior to the Signing Date. No Own Real Estate or Leased Real Estate is registered in the register of contaminated sites (Altlastenkataster).

13.8.4    To the Sellers’ Knowledge, there is no Material Contamination (as defined below) present at, on, in, under, or emanating from any of the Own Real Estate or Leased Real Estate or for which any Group Company could incur liability, present at, on, in, under or emanating from any property formerly owned, occupied or otherwise used by that Group Company.

13.8.5    No Group Company has caused (either by itself or through its agents or contractors) the release, migration, leakage, spill, discharge, disposal, entry, deposit or emission of any Hazardous Substances (as defined below) on or into the Environment (as defined below) from or at any Own Real Estate or Leased Real Estate or any property owned or possessed in the past except in compliance with Environmental Law.

13.8.6    “Contamination”means the presence of any Hazardous Substance on or before the Closing Date in: (i) the soil, air within soil, groundwater or surface water at or under any of the Own Real Estate or Leased Real Estate or in the soil, air within soil, groundwater or surface water at or under part of them; and/or (ii) any other soil, air within soil, groundwater or surface water resulting from the migration of any Hazardous Substances from any of the Own Real Estate or Leased Real Estate.

13.8.7    “Environment” means all or any of the following media (alone or in combination): air; water; soil and land and any ecological systems and living organisms supported by any of those media, including man and his property.

13.8.8    “Environmental Consent” means any licence, approval, authorization, permission, registration, notification, waiver, order or exemption which is issued, granted or required under Environmental Law for the purposes of the businesses of the Group Companies on or before the Closing Date.

13.8.9    “Environmental Law”means all statutes, by-laws, regulations and subordinate legislation, judgments, notices, orders, circulars and codes of practice issued thereunder (including federal, state, local law and the laws of the European

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Union) to the extent that the same have force of law and are in force at the Closing Date concerning any Environmental Matter.

13.8.10    “Environmental Matter” means (i) the pollution or protection of, or compensation of damage or harm to, the Environment; environmental compliance matters including without limitation with regard to the placing on the market of Hazardous Substances; and/or (ii) emissions, discharges or releases into, or the presence in the Environment of Hazardous Substances and/or (iii) the control, use, treatment, storage, disposal, transportation or handling of Hazardous Substances.

13.8.11    “Hazardous Substances” means any natural or artificial substance of any nature whatsoever (whether in the form of a solid, liquid, gas or vapor alone or in combination with any substance and including unexploded or remains of military ordnance) which is capable of causing harm or damage to the Environment or to public health or welfare or capable of causing a nuisance.

13.8.12    “Material Contamination” means any Contamination which given the current use of Own Real Estate or Leased Real Estate and its respective adjacent properties and neighbors justifies or obliges any public authority or court (the latter upon claims made by any third party) at the Signing Date of this Agreement to issue any order, judgment or any other measure concerning an use restriction, investigation, exploring, securing, supervising, compensation, damages, intra-debtor balancing (Gesamtschuldner- oder Störerausgleich) or remediation.

13.9    Intellectual Property Rights

13.9.1    Schedule 13.9.1 contains a list of all registered (i) patents including all design or utility patents and all industrial property rights and applications for any of the foregoing; (ii) trademarks and service marks, including all applications and registrations for any of the foregoing; (iii) internet domain name registrations; (iv) copyrights, including all applications related to the foregoing and (v) other intellectual property and related proprietary rights, interests and/or protections either (a) owned by the Group Companies (the “OwnedIP Rights”) or (b) lawfully used on the basis of license agreements or otherwise by the Group Companies (the “Licensed IP Rights”) (together with the Owned IP Rights, the “IP Rights”). The IP Rights, together with all such unregistered rights, especially the goodwill connected with the use of and symbolized by the registered trademarks, service marks and trade names, constitute all of the intellectual property necessary for (i) the continued operation of the Group Companies’ business after the Closing in substantially the same manner as before Closing, and (ii) to Sellers' Knowledge the operation of the Group Companies’ business after Closing as contemplated by the Sellers in the period of financials as forecasted and presented to the Purchasers prior to the Signing Date, and (iii) includes all IP Rights to fulfil L'Orange's obligations pursuant to the Long Term Supply Agreement.

13.9.2    Except as disclosed in Schedule 13.9.2, the Group Companies are the unrestricted and exclusive owner of the Owned IP Rights; and the Owned IP Rights are free from any rights or Encumbrances of third parties (including, without limitation, the Sellers' Group, current and former employees or directors and officers of the Group Companies and current and former freelancers and independent contractors, but, for the avoidance of doubt, not including any moral rights that cannot be waived under statutory law). No third party has threatened,

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contested or challenged any of the Owned IP Rights or the validity or effectiveness of any of such. All Owned IP Rights that are capable of registration have been registered or applied for with the relevant governmental authority, as stated in Schedule 13.9.1.

13.9.3    The Group Companies have the right to use the IP Rights as they are currently being used by the Group Companies in the Group Companies’ conduct of the business as currently operated.

13.9.4    In relation to the IP Rights, the Group Companies have no notice of any threatened or pending infringement opposition, public opposition, cancellation, revocation or correction proceedings which could adversely affect the business of the Group Companies. The Group Company's conduct of its business as currently conducted, to Sellers’ Knowledge does not infringe, misappropriate or otherwise violate the intellectual property rights of any third party. To the Sellers’ Knowledge, no third party is infringing, misappropriating or otherwise violating any of the Group Companies’ IP Rights. All fees necessary to maintain, protect and enforce the Owned IP Rights have been paid, all necessary applications for renewal have been filed, and all other material steps necessary for their maintenance have been taken and there are no actions (including the payment of maintenance fees) that must be taken by the Group Companies within sixty (60) days after the Closing Date that, if not taken, will result in the loss of any registered IP Rights.

13.9.5    No employee of a Group Company has made an employee invention in the meaning of the German Employees’ Invention Code (Arbeitnehmererfindungsgesetz) or any applicable foreign law that is material for the business of the Group Companies and that have not been claimed by the Group Companies in compliance with the applicable law.

13.9.6    The Group Companies have taken reasonable and appropriate measures and precautions including without limitation, having their employees execute agreements restricting the use and disclosure of such, to protect and maintain the confidentiality and secrecy of all confidential IP Rights and trade secret rights, and there have been no material breaches or violations of the foregoing. The Group Companies have taken all necessary measures required under applicable law or under an agreement with any third party to protect and maintain the confidentiality and secrecy of all confidential information or trade secret rights of any third party that has provided any confidential information or trade secrets to the Group Companies and the Group Companies have no notice of any threatened or pending claim for unlawful acquisition, use, or disclosure of such by any third party.

13.10    Permits

The Group Companies hold all material permits, licenses and other public law approvals (öffentlich-rechtliche Erlaubnisse) which are necessary to conduct the business of the Group Companies as it is conducted on the Signing Date (the “Permits”). The Permits are in full force and effect (bestandskräftig) and the Group Companies have not been notified of a challenging action (Anfechtung) by any third party. No proceedings regarding a revocation (Widerruf) or withdrawal (Rücknahme) of any Permit have been notified or to the Sellers’ Knowledge threatened.

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13.11    Compliance with Laws

13.11.1    Except as disclosed in Schedule 13.11, the Group Companies have during the three (3) year period prior to the Signing Date conducted their business in material compliance with all laws (Gesetze,  Verordnungen) that are in force binding for or otherwise applicable to any of the Group Companies, including without limitation applicable anti-sanctions laws, non-bribery laws, laws relating to foreign investment, foreign exchange control, immigration, employment, wages and benefits, import, export and taxation and furthermore including the Permits (collectively, “Applicable Law”).

13.11.2    There is no order, decree, decision or judgment of any governmental entity outstanding with respect to any Group Company which is likely to have a material adverse effect upon the Group Companies’ business.

13.11.3    No written notice has beenreceived by any Group Company of any order, decree, decision or judgment of any governmental entity with respect to any employee of any Group Company which is likely to have a material adverse effect upon the Group Companies’ business.

13.11.4    No written notice has been received by any Group Company from any governmental entity with respect to any alleged, actual or potential violation of, and/or failure to comply with, any Applicable Law, or requiring it or them to take or omit any action which in any such case is likely to have a material adverse effect upon the Group Companies’ business.

13.11.5    To the Sellers' Knowledge, there is currently no non-Tax related investigation or audit by any governmental authority pending or threatened and no governmental authority has notified any of the Group Companies of an intention to conduct such an investigation or audit.

13.11.6    To the Sellers' Knowledge, the Group Companies have prepared and timely applied for all import and export licenses required in accordance with all international trade laws and regulations and have all necessary authority under the international trade laws and regulations to conduct its business as presently conducted in all material respects including (i) necessary permits for any export transactions, (ii) necessary permits and clearances for the disclosure of information to foreign persons and (iii) necessary registrations with any governmental authority having authority to implement applicable international trade laws and regulations.

13.12    Material Agreements

13.12.1    Schedule 13.12.1 contains a list of all material agreements concluded by the Group Companies as of the Signing Date and that falls under one of the following categories (collectively the “Material Agreements”):

13.12.1.1    any partnership, joint venture or similar contracts involving the ownership or operation of any business with any other person;

13.12.1.2    any lease agreement relating to any Leased Real Estate;

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13.12.1.3    contracts obligating any of the Group Companies to loan any amounts to, assume a payment guarantee or make any investment or capital contribution in, any person;

13.12.1.4    any franchise, dealer, reseller, sales agent, sales representative, distribution agreements, contract manufacturing, joint marketing, joint development, all similar agreements and any out-licensing agreements in relation to IP Rights, pursuant to which any of the Group Companies sells or otherwise distributes or subcontracts or licenses its products or services or IP Rights for a consideration of more than EUR 250,000 (in words: two hundred fifty thousand euros) in the aggregate during calendar year 2017 or reasonably expected during calendar year 2018;

13.12.1.5    any supply or purchase agreement pursuant to which any of the Group Companies is obligated to purchase goods or services for a consideration of more than EUR 250,000 (in words: two hundred fifty thousand euros) in the aggregate during calendar year 2017 or reasonably expected during calendar year 2018;

13.12.1.6    any customer agreement pursuant to which any of the Group Companies sells goods or services for a consideration of more than EUR 1,000,000 (in words: one million euros) in the aggregate during calendar year 2017 or reasonably expected during calendar year 2018;

13.12.1.7    any contract, indenture or other instrument relating to the borrowing of money by or the incurring of any indebtedness of the Group Companies of more than EUR 250,000(in words: two hundred fifty thousand euros) in the aggregate during calendar year 2017 or reasonably expected during calendar year 2018;

13.12.1.8    any contract providing for ”earn-outs”, ”performance payments“ or other similar contingent payments by any of the Group Companies for an amount, in each case pertaining to its business, in excess of EUR 250,000 (in words: two hundred fifty thousand euros);

13.12.1.9    any employment or service agreements with any of the managing directors or employees which have received in 2017 or are entitled in 2018 to a total gross compensation in excess of EUR 100,000 (in words: one hundred thousand euros);

13.12.1.10    any agreements or other contracts with any company of the Sellers' Group.

13.12.1    Each of the Material Agreements is in full force and effect and none of the Material Agreements has been materially amended. None of the Group Companies has received a written notice of termination with regard to the Material Agreements. Neither Group Company has materially breached any obligation of any Material Agreements. To the Sellers' Knowledge no other party to a Material Agreement has materially breached any obligation of a Material Agreement or has threatened to terminate or materially reduce any of the Material Agreements.

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13.13    Employment Matters

13.13.1    Schedule 13.13.1contains an anonymized list of all employees and managing directors of all of the Group Companies. Schedule 13.13.1further states the commencement of the employment agreements of such employees (including managing directors) employed with and by the Group Companies as well as their age, salary, pension plan participation and bonus entitlement.

13.13.2    Except as specified in Schedule 13.13.2, none of the listed employees and managing directors have terminated their employment, nor have any of them threatened in writing to terminate such employment, nor has any Group Company given notice of termination to any of these employees/ managing directors.

13.13.3    Except as allowed under clause 6.2.3.3 and except as specified otherwise in Schedule 13.13.3, no increases in salaries of Senior Employees have been agreed upon since the Locked Box Date.

13.13.4    To the Sellers' Knowledge, during the five (5) year period prior to the Signing Date the Group Companies are in compliance in all material respects with all applicable laws relating to employment, employment practices, anti-discrimination, employment terms and conditions and working times unless this has not had or is not likely to have a material adverse effect upon the Group Companies’ business and is not engaged in any unfair labour practice and there is no pending and to Sellers' Knowledge threatened charge, complaint or grievance against the Group Company related to any employment laws unless this has not had or is not likely to have a material adverse effect upon the Group Companies’ business. Clause 13.11.1 remains unaffected.

13.13.5    The Group Companies are not experiencing, are not reasonably anticipating to experience and have not experienced within the five (5) year period prior to the Signing Date (i) any strike, slowdown, or stoppage of work by or lockout of its employees or (ii) any lawsuit relating to the alleged violation of any law or order relating to discrimination, civil rights, workers' health and safety or working conditions unless this has not had or is not likely to have a material adverse effect upon the Group Companies’ business. Clause 13.11.1 remains unaffected.

13.13.6    Schedule 13.13.6 provides a complete and correct list of all currently contracted independent contractors, temporary workers, apprentices, together with a summary of the fees, salaries and bonuses payable by the Group Companies.

13.13.7    Schedule 13.13.7 includes a correct and complete list of all (i) reconciliation of interest agreement (Interessenausgleiche) and social plans (Sozialpläne) and (ii) any collective arrangements in the form of a general commitment (Gesamtzusage), shop agreements (Betriebsvereinbarungen) or collective bargaining agreements, each applicable to the employees of the Group Companies.

13.14    Retirement Benefits

13.14.1    Schedule 13.14.1 contains a correct and complete list of all pension schemes of the Group Companies (“Pension Schemes”).

13.14.2    Schedule 13.14.2 contains accurate details of the employer and employee contribution rates to the Pension Schemes.

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13.14.3    No Group Company in respect of any employee provides or contributes to or is liable to provide or contribute to any pension schemes other than the Pension Schemes and any statutory social security plans operated under public law, statute or regulation in the relevant jurisdiction.

13.14.4    The Pension Schemes are approved by and / or registered with all appropriate taxation, social security and supervisory authorities.

13.14.5    Pensions and similar obligations payable under the Pension Schemes which have been classified as defined benefit plans  have been sufficiently measured and sufficiently accounted as prescribed by IFRS in the Locked Box Accounts.

13.15    Legal Disputes

Schedule 13.15 contains a correct and complete list of all litigation proceedings (gerichtliche Rechtsstreitigkeiten), arbitration proceedings (Schiedsverfahren) and administrative proceedings (Verwaltungsgerichtsverfahren) that are intended by any Group Company or pending (rechtshängig) or threatened in writing by or against it, except for any litigation or arbitration or administrative proceedings where the amount in dispute does not exceed EUR 250,000 (in words: two hundred fifty thousand euros).

13.16    Insurance

13.16.1    All insurance policies maintained by the Sellers’ Group or the Group Companies in relation to the Group Companies are in full force and effect and are not void or voidable. All premiums for the existing insurances have been paid when due. There are no claims outstanding under any of the existing insurances and there are no circumstances likely to give rise to such claims.

13.16.2    All material business assets which are commercially reasonable to insure have at all material times been and are insured for amounts and with deductibles and excesses regarded by the Sellers’ Group as adequate against fire and other risks typically insured against by companies carrying on similar businesses or owning assets of a similar nature.

13.16.3    Schedule 13.16.3 contains a list and details of all insurance claims made by any member of the Sellers’ Group or a Group Company in respect of the Group Companies’ business in excess of EUR 100,000 (in words: one hundred thousand euros) during the three (3) years preceding the Signing Date.

13.16.4    No insurance claim made by any member of the Sellers’ Group or a Group Company in respect of the Group Companies’ business in excess of EUR 100,000 (in words: one hundred thousand euros) is outstanding at the Signing Date and all circumstances of which the Sellers are aware which might reasonably be expected to give rise to a claim under an insurance policy maintained by the Sellers’ Group in respect of the Group Companies’ business in excess of EUR 100,000 (in words: one hundred thousand euros) have been disclosed to the Purchasers.

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13.17    Tax

13.17.1    As of the Signing Date and as of the Closing Date, the Group Companies have (taking into account any permitted extension) timely paid or withheld and remitted all Taxes, including Tax prepayments, when due and payable to the appropriate Tax Authority.

13.17.2    As of the Signing Date and as of the Closing Date, the Group Companies have (taking into account any permitted extension) timely filed all income and other material Tax Returns required to be filed, and all statements and information in such Tax Returns are correct and complete in all significant respects and have been prepared in accordance with Tax Law and any agreements or arrangements made with any Tax Authorities.

13.17.3    As of the Signing Date and as of the Closing Date, the Group Companies have fulfilled their accounting and documentation obligations (including for transfer pricing purposes) in compliance with applicable generally accepted accounting principles and Tax Law in all material respects. As of the Signing Date and as of the Closing Date, the accounting and Tax documentation of the Group Companies has been kept and updated in compliance with applicable generally accepted accounting principles and Tax Law in all material respects.

13.17.4    All records, documents and photocopies which a Group Company is required to prepare, produce and keep for Tax purposes, including any documentation relating to transfer pricing, have been duly prepared, produced and kept and are available at the premises of the Group Company. Each Group Company is in possession of information or has access to information to enable it or its employees or representatives to compute its liability for Taxes insofar as it depends on any transaction occurring on or before Closing.

13.17.5    Except as specified in Schedule 13.17.5,  there are no pending or announced audits or other administrative investigations or court proceedings for the assessment, adjustment or collection of Taxes of a Group Company. There are no claims, proceeding or contests of any refund in respect of Taxes pending or on appeal from any Tax Authority for a Group Company.

13.17.6    With respect to the assessment or payment of Tax, no special agreements, rulings or compromises have been entered into by a Group Company with any Tax Authorities.

13.17.7    No Group Company is a party to or bound by any Tax indemnity agreement, Tax sharing agreement, Tax allocation agreement or similar contract (other than the DPLTA or US Tax consolidation or in respect of any VAT relating to L'Orange), in each case excluding any agreement or contract entered into in the ordinary course of business with a primary purpose unrelated to Tax (e.g. tax gross up clauses in financing or license agreements or similar clauses).

13.17.8    Except as specified in Schedule 13.17.8,  each Group Company has been resident for Tax purposes in its place of incorporation and nowhere else at all times since its incorporation. Each Group Company has never paid Taxes on income, profits or gains to any Tax Authority outside its place of incorporation.

13.17.9    No Group Company will have to repay any subsidies or grants or similar benefits in cash or in kind as a result of this transactions contemplated in this agreement.

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13.17.10    There are no liens for Taxes on any of the assets of any Group Company.

13.17.11    Since its formation, Fluid Mechanics has been an entity disregarded as separate from its owner for United States federal, and applicable state, income tax purposes pursuant to the provisions of Unites States Treasury Regulation Section 301.7701-3.

13.17.12    “Tax”  means, in each case under German law or as well as any equivalent items under any applicable foreign law, any

(i)    income, profits, gross receipts, net proceeds, alternative or add-on minimum, ad valorem, real property, personal property, value added, turnover, sales, use, environmental, stamp, leasing, lease, user, excise, duty, franchise, capital stock, transfer, registration, license, withholding, unemployment, disability, payroll, employment, escheat, environmental, deed, land value appreciation or other tax imposed by any Tax Authority, including taxes and ancillary charges (Steuern und steuerliche Nebenleistungen) within the meaning of sec. 3 of the German Fiscal Code (Abgabenordnung) excluding, for the avoidance of doubt, deferred taxes and tax loss carry forwards; and

(ii)    social security taxes or social security contributions (Sozialversicherungsbeiträge) and similar taxes or contributions of any kind as well as any ancillary charges (e.g. interest and penalties);

irrespective whether the tax (a) is owed as taxpayer or as obligor of a tax owed by another party (Haftungsschuld) or (b) is assessed, to be prepaid, to be withheld or payable by Tax Law or (c) is owed by way of tax allocation (Steuerumlage) or (d) is due to a succession in law and irrespective of the legal basis of the tax liability, e.g. including also any tax indemnification obligations based on agreements on the sale and purchase of shares (including partnership interests), assets or business units.

13.17.13    “Tax Authority” means any governmental or administrative public authority or court competent to administer, assess, impose, collect or enforce Taxes in any jurisdiction.

13.17.14    “Tax Law” means any laws, interpretations of the laws, opinions and decisions by Tax Authorities and decisions of Tax courts, in each case relating to or imposing any Tax.

13.17.15    “Tax Return” means all returns (Erklärungen), preliminary returns (Voranmeldungen) and notifications (Meldungen) as well as all other documents, forms, computations, disclosures and registrations as required to be filed for Taxes under German or any other applicable foreign law including applications asserting non-liability for Taxes.

13.17.16    The Sellers' Guarantees included in this clause 13.17 are hereinafter referred to as the ”Tax Guarantees”.

13.18    Assets

13.18.1    The Group Companies own all assets purported to be owned by them and required to conduct the business as presently conducted. No asset used or owned

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by the Group Companies is subject to any contractual or statutory retention of title rights, Encumbrances, pledges or other security right (save for title retentions (Eigentumsvorbehalte) or other security instruments arising by means of operation of law entered into in the ordinary course of business consistent with past practice for liabilities which are reflected in the Financial Statements) and the Group Companies have the right to use all assets currently owned or used by them.

13.18.2    The Group Companies own, lease, license or otherwise lawfully use all fixed and current assets required to substantially continue to operate the business of the Group Companies after the Closing Date in accordance with prior practice.

13.18.3    All items of the fixed assets owned or used by the Group Companies are in good operating condition, reasonable wear and tear excepted, and are adequate for the uses to which they are being put. The Group Companies have carried out a regular inventory counts (at least every three (3) years) for all fixed value items (“Festwert”) and the related adjustments were made in the Financial Statements.

13.18.4    All tangible property owned or used by the Group Companies is sufficient and is in good condition to allow that the business activities of the Group Company can be continued in the same way as at the Signing Date.

13.18.5    The Group Companies own, lease, license or otherwise legally hold or have a legal right to use all material assets which are presently used and necessary for the conduct of the business of the Group Companies as presently conducted.

13.18.6    The Group Companies own, lease, license or otherwise legally hold or have a legal right to use all software licenses which are presently used and necessary for the conduct of the business of the Group Companies as presently conducted.

13.18.7    The internal IT infrastructure of the Group Companies, including computer software, hardware, firmware, networks, interfaces and related systems of the Group Companies,

13.18.7.1    have sufficient capacity and capabilities to operate the Group Companies' business as currently conducted and are in good working condition,

13.18.7.2    have all the specifications and capacities which the Group Companies require (i) in order to fully comply with any of their existing contractual obligations, in particular, but not limited to meet the performance levels contractually agreed and/or (ii) to fully comply with all legal requirements applicable to the business of the Group Companies.

13.19    Quality Control

13.19.1    The processes and procedures of the Group Companies are sufficient for the design, development, testing, production, and repair of the Group Companies’ products in conformity with such products’ specifications.

13.19.2    Except as disclosed in Schedule 13.19.2: The Group Companies have not, within the past three (3) years prior to the Signing Date, received any written or oral notification or claims, nor are there any pending claims which were brought at

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any time, relating to, or alleging, negligent or defective design, negligent or defective manufacturing, assembly or test of product, product safety, quality or reliability issues, negligent provision of services, breach of product warranties, technical or quality problems or the non-conformance of a product to its specifications (collectively, “Product Liability Claims”) other than warranty service and repair claims in the ordinary course of business that are not material in amount. There are no contracts or other customer supply arrangements pursuant to which, to the Sellers' Knowledge, any of the Group Companies are reasonably expected to experience a loss (or loss of profit margin) in connection with any cost, schedule, technical or quality problems or any other potential or actual Product Liability Claims (other than managing service and repair claims in the ordinary course of business that are not material in amount) by its customers or any other Person against any of the Group Companies.

13.19.3    To the Sellers’ Knowledge, there are no existing design defects, production defects, process issues, supplier issues or other facts or circumstances relating to design, manufacturing, procurement, delivery, safety, quality or reliability of the Group Companies’ products or services that may serve as the basis for any future Product Liability Claims.

13.19.4    Clause 13.27 shall remain unaffected.

13.20    Subsidies

The indirect or direct subsidies, grants or financial assistance (“Subsidies”) made available or contributed to any of the Group Companies are listed in Schedule 13.20. None of the Group Companies is in breach of any material obligation under the terms and conditions underlying any of the Subsidies. None of the Subsidies (i) can be terminated and/or (ii) needs to be repaid by the respective Group Company as a consequence of the consummation of the Transaction.

13.21    Government Contracts

13.21.1    The Group Companies are, and have been in the five (5) years prior to Signing Date, in material compliance with (i) all terms and conditions of all Government Contracts (including all provisions and requirements incorporated expressly, by reference or by operation of law) and (ii) all requirements of law pertaining to each Government Contract and government bid and all requirements of governmental bodies regarding such law with respect to each Government Contract and government bid.

13.21.2    For purposes of this Section “Government Contract” means any contract, agreement, subcontract, teaming agreement or arrangement, joint venture, basic ordering agreement, blanket purchase agreement, letter agreement, purchase order, delivery order, task order, grant, cooperative agreement, change order or other commitment or funding vehicle with respect to the Group Companies that exist between any of the Group Companiesand any governmental body.

13.22    No Brokers' or Finders' Fee

Neither of the Sellers nor any of the Group Companies has retained any brokers, finders or similar agents with respect to the Transaction who might raise claims for commissions or other compensation against any of the Group Companies.

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13.23    German Foreign Trade Act

The Group Companies' business activities do not fall into the scope of sec. 55(1) sentences 2 and 3 Foreign Trade and Payments Regulation (Außenwirtschaftsverordnung – “AWV”) or Sec. 60(1) sentence 1 AWV.

13.24    No Other Sellers’ Guarantees

The Purchasers explicitly acknowledge:

13.24.1    that they purchase and acquire the Shares and the business associated therewith in the condition they are in on the Signing Date based upon their own inspection and assessment of all the facts and circumstances, and that they undertake the purchase based upon their own decision, inspection and assessment without reliance upon any express or implied warranties or guarantees of any nature made by the Sellers, except for the Sellers’ Guarantees which shall remain unaffected;

13.24.2    that the Sellers give no representation, warranty or guarantee with respect to any projections, estimates or budgets delivered or made available to the Purchasers (irrespective whether orally or documented) of future revenues, future results of operations (or any component thereof), future cash flows or future financial condition (or any component thereof) or the future business operations of the Group Companies; and

13.24.3    that all budgets, prospects, expectations and other prognostic and/or forward looking elements that Purchasers possibly rely on, or that may otherwise affect the execution hereof and / or the determination of the Consideration by the Purchasers, are the sole and exclusive responsibility of the Purchasers and that the Sellers do not assume any responsibility, obligations or liability for these elements and that the Purchasers shall have no rights whatsoever under, or in connection with, this Agreement against the Sellers should these elements prove incorrect. In particular, the Sellers have not commented on any expectations, qualifications and assumptions made by the Purchasers in their offer or in any other way which are the sole responsibility of the Purchasers, and the Sellers assume no liability of whatsoever nature with respect to such expectations, qualifications and assumptions, unless explicitly agreed in this Agreement.

13.25    Sellers’ Knowledge

“Sellers’ Knowledge” means the actual knowledge as of the Signing Date about the facts and circumstances relating to the Sellers’ Guarantees that any of the individuals listed in Schedule 13.25-1 (“Knowledge Bearers”) has after having made reasonable inquiry (or would have had in case they had made reasonable inquiry if the Knowledge Bearers have not actually done so) with the individuals listed in Schedule 13.25-2 (“Inquiry Individuals”) into the matters set out next to their name also in Schedule 13.25-2, provided that the Knowledge Bearers shall direct the individuals who are also listed in Schedule 13.25-3 (“Further Inquiry Individuals”) to, in advance of responding to the inquiry by the Knowledge Bearers, make reasonable inquiry within the Group Companies, it being understood, for the avoidance of doubt, that (i) a failure of the Inquiry Individuals to report facts or circumstances they have knowledge of to the Knowledge Bearers or (ii) a failure of the Further Inquiry Individuals to make reasonable inquiry as set out above shall not lead to Sellers being imputed or to otherwise deemed to have any knowledge.

13.26    Representations and Warranties Insurance

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13.26.1    The Purchasers are considering to take out at their own cost and risk a representation and warranty insurance policy from AIG, or another insurance company in case such insurance policy would not be entered into with AIG, in respect of certain claims which the Purchasers – or any of them – may potentially have against the Sellers under this Agreement (the “R&W Insurance Policy”). For the case that the Purchasers or any of them decide to take out any such R&W Insurance Policy, the Parties agree on the following:

(a)    the validity and collectability risk in respect of the R&W Insurance Policy shall solely and irrevocably rest with the Purchasers;

(b)    the policy for the R&W Insurance Policy shall provide for the benefit of the Sellers that only in case of willful misconduct of the Sellers any claims of the Purchasers against the Sellers shall be subrogated against the Sellers, by operation of law or contractually;

(c)    if and to the extent any claim of the Purchasers against the Sellers under this Agreement is covered by the R&W Insurance Policy, the Sellers shall only be liable for amounts not covered under the R&W Insurance Policy; and

(d)    the Purchasers' sole recourse for any claims covered by the R&W Insurance Policy in excess of the liability cap provided for in clause 14.7.1 below shall be solely against the entity underwriting the R&W Insurance Policy(the “Insurer”).

13.26.2    Purchasers shall indemnify and hold harmless the Sellers and any of their Affiliates from any claims brought by the Insurer against any of them in relation to any claims covered by the R&W Insurance Policy.

13.27    [***]

14.    REMEDIES; LIMITATIONS

14.1    Recoverable Damages

14.1.1    In the event that a Sellers’ Guarantee pursuant to clause 13 is breached (such event a “Breach of Guarantee”), the Sellers shall be obligated (“Guarantee Claim”) to put the Purchasers and/or, at the Purchasers’ sole discretion, the Group Companies, in such position as they would have been in had the Sellers’ Guarantee not been breached (restitution in kind – Naturalrestitution). This does not apply to any breach of the Sellers' Guarantee pursuant to clause 13.8 (“Environmental Guarantees”) or if such restitution in kind is not permitted by the nature of the breach or cannot be effected by the Sellers with reasonable effort. If the Sellers are unable to achieve restitution in kind within six (6) weeks after having been notified by the Purchasers of the breach, the Purchasers may claim monetary damages (Schadenersatz in Geld).

14.1.2    The Sellers shall be liable under this Agreement (whether in relation to a Breach of Guarantees or otherwise, except for clauses 15 and 16) only as follows:

14.1.2.1    In relation to a Breach of Guarantee (with the exception of a breach of the Fundamental Guarantees and the Environmental Guarantees) and / or clause 6.1.3, for

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(a)    any and all liabilities, reasonable costs and expenses and other damages within the meaning of sec. 249 et seqq. BGB, including any reasonably foreseeable consequential and/or indirect damages (Folgeschäden, mittelbare Schäden), including reasonably foreseeable lost profits (entgangener Gewinn) and reasonably foreseeable losses caused by business interruption (Betriebsunterbrechungsschäden);

(b)    excluding, however:

(i)    lost profits (entgangener Gewinn), losses caused by business interruption (Betriebsunterbrechungsschäden)and other consequential or indirect damages (Folgeschäden, mittelbare Schäden) that, in each case, have not been reasonably foreseeable; and

(ii)    any loss of goodwill or any reputational damage, punitive damage, income Taxes payable as a result of any indemnity payments, frustrated expenses (vergebliche Aufwendungen) within the meaning of sec. 284 BGB and internal administration and overhead costs.

14.1.2.2    In relation to any other (i.e. not covered by clause 14.1.2.1 above) breach of or liability under this Agreement (including in relation to a breach of the Fundamental Guarantees and the Environmental Guarantees), for

(a)    any losses incurred by any of the Purchasers or the Group Companies as a direct damage resulting from a breach of this Agreement (unmittelbare Schäden);

(b)    excluding, for the avoidance of doubt,

(i)    any indirect damages (mittelbare Schäden), consequential damages (Folgeschäden), loss of profits (entgangener Gewinn), losses caused by business interruption (Betriebsunterbrechungsschäden); or

(ii)    any loss of goodwill or any reputational damage, punitive damage, income Taxes payable as a result of any indemnity payments, frustrated expenses (vergebliche Aufwendungen) within the meaning of sec. 284 BGB and internal administration and overhead costs.  

Additionally, solely in relation to any breach of or liability under this Agreement not covered by clause 14.1.2.1 above the following shall apply: Irrespective of the Purchasers’ method to calculate the Consideration for the Shares, only the actual losses incurred by any of the Purchasers or any Group Company are to be taken into account and no multiplier of any kind shall be applied to the amount of any

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damage, nor shall any potential or actual reduction (Minderung) in the value of the Group Companies be taken into account.

14.1.3    The Sellers shall not be liable under this Agreement (other than in relation to clauses 15, 16 and 13.27) for, and the Purchasers shall not be entitled to claim compensation, for any losses if and to the extent that

(i)    the underlying facts constitute a final and binding claim (vollstreckbarer Anspruch) of any of the Purchasers or a Group Company against a third party other than the Parties, excluding insurance companies, and such claim is recoverable by any of the Purchasers or the respective Group Company from such third party (provided that, if such claim exists, but has not been realized by the Purchasers and/or the relevant Group Company, the Sellers shall only be obligated to pay damages to Purchasers in exchange for an assignment of the respective claim against these third parties by Purchasers or the respective Group Company to Sellers);

(ii)    the underlying facts constitute or likely constitute a not yet final and binding claim (noch nicht vollstreckbarer Anspruch) of any of the Purchasers or a Group Company against a third party other than the Sellers, excluding insurance companies, and such claim is recoverable by the Purchasers or the respective Group Company from such third party within three (3) months after a claim notice has been made to the third party; if no recovery can be obtained by the Purchasers or the respective Group Company within such three (3) months period despite the Purchasers having applied reasonable commercial efforts (which does not include the initiation of litigation measures), the respective of the Purchasers and the respective Group Company is entitled to claim losses pursuant to this Agreement from the Sellers but shall procure that the respective Group Company assigns the respective claim against the third party, to the extent such claim is legally assignable, to the respective Seller; or

(iii)    the respective claim is covered by a policy of insurance and the corresponding settlement amount has actually been received by the Purchasers, provided that any premium increases triggered by such insurance coverage shall be compensated as losses; or

(iv)    the Guarantee Claim refers to amounts that both (a) have been specifically taken into account (berücksichtigt) in the Locked Box Accounts as reserves, liabilities, depreciation or write-down (individually or as lump-sum) and (b) resulted in a reduction of the Consideration in accordance with Exhibit 3.1.3; or

(v)    the Guarantee Claim results from a failure by the Purchasers or any member of the Purchaser Group (including, after Closing, the Group Companies) to abide by the terms of this Agreement or to avoid or mitigate damages pursuant to sec. 254 BGB; or

(vi)    the relevant loss is compensated by any advantage of the Group Companies or the Purchaser Group (Prinzip der Vorteilsanrechnung); or

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(vii)    the relevant loss would not have occurred but for any (a) legislation not in force at the Signing Date or (b) change of law (or any change in interpretation on the basis of case law), regulation, directive, requirement or administrative practice; or

(viii)    the relevant loss would not have occurred but for any voluntary act, omission or transaction carried out (a) after Closing by any of the Purchasers or any member of the Purchaser’s Group (or its respective directors, employees, or agents) outside the ordinary and usual course of business of the Group Companies as at Closing or (b) before Closing by any Sellers’ Group Companies or any Group Company at the direction of the Purchasers or any member of the Purchaser Group; or

(ix)    the respective of the Purchasers or any Group Company has not complied with the obligations pursuant to clause 14.3 and 14.4 to the extent such failure has caused an increase of the respective losses; or

(x)    the relevant claim is based upon a liability which is contingent only, in which case the Sellers shall not be liable to pay unless and until such contingent liability gives rise to an obligation to make payment.

14.1.4    Where one and the same set of facts (Sachverhalt) qualifies under more than one provision entitling any of the Purchasers to a claim or remedy under this Agreement, there shall be only one claim or remedy (no double counting). In particular, the foregoing shall apply if one and the same set of facts (Sachverhalt) qualifies under more than one of the Sellers’ Guarantees.

14.1.5    Without prejudice to its duty to mitigate any loss, the Purchasers shall (or shall procure that the relevant member of the Purchaser Group or, after Closing, any Group Company shall) provide all reasonable assistance to the Sellers to remedy any such breach.

14.2    Purchasers' Knowledge

14.2.1    The Purchasers shall not be entitled to any claim for a Breach of Guarantees (other than in relation to Fundamental Guarantees) if and to the extent, in each case prior to the Signing Date, (i) Purchasers had Relevant Knowledge of the facts and circumstances underlying the Breach of Guarantee and (ii) a prudent business man should on the basis of such Relevant Knowledge have been able to assess the magnitude of the losses associated with such facts and circumstances.

“Relevant Knowledge” means the actual knowledge of any of the individuals listed in Schedule 14.2.1-1 (“Purchaser’s Knowledge Bearers”); provided however, that in the case of the Environmental Guarantees Relevant Knowledge means the actual knowledge any Purchaser's Knowledge Bearer has (or would have had in case they had made reasonable inquiry with the Purchaser’s Inquiry Advisors, if the Purchaser’s Knowledge Bearers have not actually done so) after having made reasonable inquiry with the advisors listed in Schedule 14.2.1-2 (“Purchaser’sInquiry Advisors”), it being understood, (i) for the avoidance of doubt, that a failure of the Purchaser’s Inquiry Advisors to report facts or circumstances they have knowledge of to the Purchaser’s Knowledge Bearers shall not lead to any of the Purchasers being imputed or to otherwise being deemed to have any knowledge and (ii) that, in respect of the individual marked

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with an asterisk in Schedule 14.2.1-2, it is sufficient if the Purchaser’s Knowledge Bearers use best efforts to make reasonable inquiry with him.

14.2.2    Notwithstanding clause 14.2.1 above, (i) the respective Purchasers’ rights under or in connection with this Agreement shall not be generally limited by the fact that the Purchasers have been able to conduct a due diligence exercise on the Group Companies prior to the Signing Date and (ii) the provisions of sec. 442 BGB and sec. 377 German Commercial Code (Handelsgesetzbuch - HGB) shall not apply.

14.2.3    Sellers' Guarantees shall not be deemed to be untrue, incomplete or not complied with if the information in the respective Schedule attached on the Signing Date pertaining to such specific Sellers' Guarantee fairly discloses the information in reasonable detail.

14.3    No Environmental Sampling; Limitation on Liability under Environmental Guarantees

14.3.1    Any sampling or analysis (“Inspections”) at, on, in, under any of the Own Real Estate or Leased Real Estate by (whether directly or indirectly) the Purchasers or any of their Affiliates or each of their legal successors or, any prospective or actual purchaser of the real property (other than in case of where, pursuant to clause 14.3.2.1, Purchasers actually do not provide Environmental Assurances, in which case this clause 14.3.1 shall not apply with respect to such prospective or actual purchaser), conducted after the Closing Date, is subject to the written consent of the Sellers.

The Sellers may withhold consent for such Inspections at their sole discretion, except if the particular Inspection is the minimum necessary in order to

(i)    comply with an express written requirement by a relevant governmental entity without prior request or information of the Purchasers to this authority and the Sellers are informed in advance about this requirement in writing;

(ii)    comply with an express and legally binding obligation or requirement to undertake Inspections that has actually arisen pursuant to or under Environmental Law;

(iii)    remove the immediate and direct cause of a significant and imminent danger to human health, which danger is capable of prevention or substantial limitation by immediate remedial action;

(iv)    enable the Purchasers to defend itself against a bona fide claim raised by a third party against any of the Purchasers or a Group Company, provided that such individual claim raised against any of the Purchasers or a Group Company exceeds an amount of 0.05% of the Consideration and that the sampling and analysis shall not be disclosed outside the respective proceeding to others, in particular but not limited to governmental authorities and public prosecution bodies (in each case unless required by applicable law);  

(v)    carry out such utility and or maintenance measures which (a) are required in order to conduct the business of the group Companies as

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conducted on the Closing Date in the ordinary course of business and (b) comply with good industry practice;

(vi)    other than in case of the Own Real Estate located in Wolfratshausen, Germany, meet the requirements of Environmental Law in relation to undertaking bona fide construction or expansion work that is in the ordinary course of business of the Group Companies; or

(vii)    other than in case of the Own Real Estate located in Glatten, Germany and subject to clause 14.3.2, sell the Own Real Estate to a bona fide third party industrial business purchaser;

in each case of which the Sellers shall be obliged to grant their consent.

In relation to any Inspection in accordance with this clause 14.3.1 the Purchasers and any of their Affiliates, and each of their legal successors or, in case of clause 14.3.2.2, a respective purchaser of the real property shall be obliged to mitigate damages in accordance with sec. 254 BGB.

14.3.2    In the event of a sale of the Own Real Estate to a bona fide third party industrial business purchaser in accordance with clause 14.3.1(vii), the following shall apply:

14.3.2.1    The Purchasers shall, and shall procure their Affiliates (including the Group Companies) to, in good faith use reasonable efforts not to provide any indemnity, warranty or covenant to or agree to any other contractual obligation towards the prospective purchaser of the Own Real Estate in relation to the Environment, Environmental Consents, Environmental Matters, Environmental Law, Hazardous Substances, or any Contamination (“Environmental Assurances”); and

14.3.2.2    if Environmental Assurances by the Purchasers or any of their Affiliates (including the Group Companies) nonetheless exist or come into existence,

(a)    the aggregate liability of the Purchasers and their Affiliates (including the Group Companies) under all such Environmental Assurances shall be limited to an amount equal to the fair market value of the respective Own Real Estate; and

(b)    the obligations of and stipulations to which the Purchasers or any of their Affiliates or each of their legal successors are bound in clause 14.3 shall be passed on to the prospective purchaser of the Own Real Estate and any of its Affiliates and each of their legal successors and they shall be bound by such obligations and stipulations.

14.3.3    Notwithstanding clauses 14.3.1 and 14.3.2, the Sellers shall not be liable for, and none of the Purchasers shall be entitled to claim compensation for any losses on the basis of a breach of the Environmental Guarantees, if and to the extent

14.3.3.1    that such breach and/or losses have been discovered, are based on, would not have occurred but for, and/or are increased or exacerbated

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by any Inspection in breach of clauses 14.3.1 or 14.3.2 above (provided that none of the Purchasers shall be deemed to be in breach of clauses 14.3.1 or 14.3.2 in case the Sellers have not granted their consent pursuant to clause 14.3.1 despite being obliged to do so);

14.3.3.2    that such breach and/or losses have been discovered, are based on, would not have occurred but for, and/or are increased or exacerbated by a change of use of any Own Real Estate or Leased Real Estate or part thereof from an industrial business (whether by Purchasers or any member of the Purchaser Group (including, after Closing, the Group Companies) or by a respective successor in title or (sub-) tenant); or

14.3.3.3    the losses and/or costs result from any remediation or other measure in relation to or in the context of this clause 14.3 or the Environmental Guarantees, being carried out with a higher standard than the minimum necessary in order to comply with this Agreement or to rectify the respective breach of the Environmental Guarantee.

14.4    Notice

14.4.1    In the event of any Breach of Guarantee, the respective of the Purchasers shall give the Sellers written notice thereof within twenty (20) Business Days after the Purchasers gained knowledge about the Breach of Guarantee, describing in reasonable detail all facts or circumstance that give rise to the Breach of Guarantee and (as far as possible) the monetary value of the claim.

14.4.2    The Purchasers shall allow, and shall cause the Group Companies to allow, the Sellers and their accountants and their professional advisors to investigate the matter or circumstances alleged to give rise to a Guarantee Claim. For such purpose, the Purchasers shall, and shall cause the Group Companies to, provide such information and assistance as the Sellers or its accountants or professional advisors may reasonably request in order to evaluate the Guarantee Claim.

14.5    Third Party Claims

14.5.1    If the Purchasers become aware of any claim threatened or asserted by a third party (including a public authority) or of any other matter or circumstance which is reasonably likely to result in a Breach of Guarantee (“Third Party Claim”), the Purchasers shall promptly (and in any event within ten (10) days of the Purchasers becoming aware of it) give written notice thereof to the Sellers, specifying the basis for such Third Party Claim in reasonable detail therein, and shall grant the Sellers the opportunity to review and assess the matter. Clause 14.4.2 shall apply accordingly.

14.5.2    The Purchasers shall ensure that the Sellers shall be provided with all material, information and assistance reasonably relevant in relation to the Third Party Claim, be given reasonable opportunity to comment or discuss with the Purchasers any measures which the Purchasers propose to take or to omit in connection with a Third Party Claim.

14.5.3    Upon the Sellers' request the Purchasers shall ensure that the respective Group Company defends under the control of the Purchasers the Third Party Claim by all reasonably appropriate proceedings. The Sellers shall have the right, at their

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own expense, to participate in the defence of the Third Party Claim with counsel of their choice. The Purchasers shall ensure that the Group Companies cooperate in good faith with the Sellers. The Purchasers shall keep the Sellers reasonably informed about the status of the proceedings. The Purchasers shall conduct such proceedings in good faith using reasonable endeavours to take the interests of Sellers into account.

14.5.4    In addition,

14.5.4.1    the respective Seller shall have the right to take control of the defence of a Third Party Claim the face value of which amounts to less than one per cent (1%) of the Consideration, if [***].

14.5.4.2    The respective Seller shall, in case of clause 14.5.4.1, be entitled to principally institute and control any and all appropriate proceedings and to coordinate such actions of defensive measures, it being understood that the relevant Purchaser shall have customary participation rights, including the following:

(a)    At its option and expense, the respective Purchaser shall have the right to reasonably participate in the defense (including through counsel of its choice).

(b)    The respective Seller shall (i) keep the respective Purchaser informed to a reasonable extent of the status of defense, (ii) give the respective Purchaser and the Insurer (if any and only to the extent concerning claims that are principally covered by the R&W Insurance Policy, if any) the opportunity to discuss and comment on proposed defense measures and (iii) comply with any reasonable requests of the respective Purchaser with respect to the defense necessary to avoid a material adverse effect on significant business interests of the Purchasers or the Group Companies as a whole.

14.5.4.3    The Purchasers and the Group Companies shall, in case of clause 14.5.4.1 and 14.5.5, be obliged to reasonably assist the respective Seller in the defending of the Third Party Claim and in particular to provide to the respective Seller all relevant documents in relation to the Third Party Claim and to permit the respective Seller and his representatives to consult the management and other key employees of the Purchasers or the Group Companies, in each case to the extent reasonably required by the respective Seller for the defense.

14.5.5    Irrespective of clause 14.5.4.1 above, for Third Party Claims in relation to the Environmental Guarantees or clause 13.27, the Sellers are entitled to take the control of the defence against a Third Party Claim in which case clauses 14.5.4.2 and 14.5.4.3 shall apply mutatis mutandis, it being understood that the Purchasers shall have control of the defence

14.5.5.1    in accordance with clause 14.5.3 in respect of Environmental Claims if and to the extent the aggregate amount of the claims made (including the Third Party Claim for which the Purchasers – or any of them – seek control of the defence pursuant to this clause 14.5.5) in

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relation to the Environmental Guarantee has not yet reached the amount of the Environmental Deductible; and

14.5.5.2    in accordance with clause 14.5.3 in respect of claims under clause 13.27, if and to the extent the aggregate amount of the claims made (including the Third Party Claim for which the Purchasers – or any of them – seek control of the defence pursuant to this clause 14.5.5) in relation to clause 13.27 has not yet reached the amount of EUR 2,000,000 (in words: two million euros).

14.5.6    In no event shall the Purchasers or the Group Companies be entitled to acknowledge or settle a claim or permit any such acknowledgement or settlement in relation to a Third Party Claim without the Sellers’ prior written consent.

14.5.7    If and to the extent a claim due to a Breach of Guarantee exists, all reasonable costs incurred by the Purchasers or the Group Company in defending a Third Party Claim shall be borne by the Sellers.

14.5.8    For the avoidance of doubt, this clause 14.5 shall not apply to any claims which are governed by clause 16.

14.6    De Minimis Amount; Threshold; Environmental Deductible

14.6.1    The Purchasers are entitled to make claims for Breach of Guarantee (in case of the Environmental Guarantees also subject to clause 14.6.4 below) only if (i) each individual claim or (ii) a group of related claims based on the same facts or economic context exceeds an amount of 0.05% of the Consideration (the “De Minimis Amount”) in which case the full amount shall be recoverable, it being understood that the further restriction in this Agreement shall apply.

14.6.2    The Sellers shall not be liable for monetary damages for Breach of Guarantee (other than in relation to the Environmental Guarantees for which clause 14.6.4 shall apply) if the amount of all claims that exceed the De Minimis Amount falls short of EUR 4,000,000 (in words: four million euros) (the “Threshold”), provided that if the amount of the Threshold is reached the Sellers shall be liable for the entire amount and not only the amount exceeding the Threshold.

14.6.3    Clauses 14.6.1 and 14.6.2 do not limit and shall not apply to the Purchasers' claims on account of any breach of the Fundamental Guarantees, the Sellers’ Guarantee in clause 13.6.4 or on account of a breach of any of the Tax Guarantees.

14.6.4    The Sellers shall not be liable for monetary damages for a breach of the Environmental Guarantees if the amount of all claims under the Environmental Guarantees (for the avoidance of doubt, irrespective of the De Minimis Amount) falls short of EUR 2,000,000 (in words: two million euros) (the “Environmental Deductible”), provided that if the amount of the Environmental Deductible is reached the Sellers shall be liable (i) only for such claims and amounts exceeding the Environmental Deductible and (ii) with respect to each individual claim, only if the De Minimis Amount is exceeded.

14.6.5    The De Minimis Amount shall not apply in case of a restitution in kind (Naturalrestitution) in relation to a breach of the Sellers’ Guarantee set out in clause 13.9.1.

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14.7    Liability Cap

14.7.1    With the exception of any liability of the Sellers pursuant to (i) clauses 13.2 (Status and Authority of the Sellers), 13.3 (Due Incorporation and Status of the Group Companies) and 13.4 (Ownership of Shares) (“Fundamental Guarantees”) and (ii) the Environmental Guarantees, the Sellers’ aggregate liability for all other Breaches of Guarantee shall be limited to an aggregate amount of one per cent (1%) of the Consideration.

14.7.2    Sellers’ aggregate liability pursuant to the Environmental Guarantees shall be limited

14.7.2.1    during the time period from the Closing Date until the fifth anniversary of the Closing Date to an aggregate amount of twenty per cent (20%) of the Consideration; and

14.7.2.2    during the time period after the fifth anniversary of the Closing Date until the seventh anniversary of the Closing Date to an aggregate amount of five per cent (5%) of the Consideration (it being understood that Sellers shall have no liability pursuant to the Environmental Guarantees during the time period after the fifth anniversary of the Closing Date until the seventh anniversary of the Closing Date if and to the extent Sellers’ liability under the Environmental Guarantees during the time period from the Closing Date until the fifth anniversary of the Closing Date already amounted to or exceeded an aggregate amount of five per cent (5%) of the Consideration).

14.7.3    Sellers’ aggregate liability pursuant to clause 13.27 shall be limited to the amount of [***] (in words: [***]).

14.7.4    Sellers’ aggregate liability under and in connection with this Agreement, including but not limited to the Fundamental Guarantees and any claims pursuant to clause 15 and 16 shall in any case be limited to the Consideration.

14.7.5    Clause 14.7 shall apply irrespective whether or not the Purchasers are able to recover under a R&W Insurance Policy.

14.8    Time Limitations, Suspension

14.8.1    All claims for any Breach of Guarantee shall become time-barred (verjähren) thirty-six (36) months after the Closing Date, except for (i) claims based on a breach of the Fundamental Guarantees or the Environmental Guarantees, which shall become time-barred seven (7) years after the Closing Date, and (ii)  claims based on a breach of the Tax Guarantee for which clause 14.9 shall apply (together with 14.8.2 “Time Limitation”).

14.8.2    Any claims by the Purchasers pursuant to clause 13.27 shall become time-barred sixty (60) days following the expiry of the applicable statutory limitation period for the respective claim raised by a third party.

14.8.3    Any claim by the Purchasers hereunder must be notified to the Sellers prior to the expiration of the applicable Time Limitation. Such notification suspends (hemmt) within the meaning of sec. 209 BGB such Time Limitation with respect to the

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specific claim so notified, provided that the Purchasers – or any one of them – commence arbitration proceedings within six months after the expiry of the relevant Time Limitation. Sec. 203 BGB shall not apply, unless the Sellers and the Purchasers agree in writing that the Time Limitation is suspended on the basis of pending settlement negotiations.

14.8.4    For the purpose of calculating the De Minimis Amount and the Threshold, only the amounts of such Guarantee Claims are to be included which are not already time-barred as at the time the respective amount is calculated.

14.9    Tax Claims

In respect of any Guarantee Claims brought by any of the Purchasers due to a breach of a Sellers’ Guarantee pursuant to clause 13.17 (Tax), clause 14.8.1 shall not apply and any such claims shall become time-barred pursuant to clause 16.6.1 below.

14.10    Treatment of Payments by the Sellers

Any payments made by (i) the Sellers pursuant to clauses 14 and 16 shall be considered a reduction, or (ii) the Purchasers pursuant to clause 16 and clause 17 shall be considered an increase of the Consideration agreed between the respective Seller and the respective Purchaser, unless otherwise provided for by mandatory law.

14.11    Fraud or Wilful Misconduct

None of the limitations of liability contained in this Agreement including the Time Limitation, shall apply in case of a wilful act (Vorsatz) or of deceit (arglistige Täuschung) by (i) the Sellers, provided that the burden of proof for such events shall be completely with the Purchasers, or (ii) the Purchasers, provided that the burden of proof for such events shall be completely with the Sellers.

14.12    Exclusion of Further Remedies

To the extent permitted by law and unless expressly provided otherwise in this Agreement (and in particular, but not limited to, in clause 13, which shall remain unaffected), any further claims and remedies are hereby expressly waived, including, without limitation, claims for breach of a pre-contractual duty (sec. 311 para 2 and 3, 241 para. 2 BGB), claims based on a breach of duty arising from an obligation (Verletzung einer Pflicht aus dem Schuldverhältnis) other than under this Agreement, claims based on statutory warranty provisions (gesetzliche Gewährleistungsbestimmungen) and liability in tort (unerlaubte Handlung) as well as any other claims which could, due to a revocation (Rücktritt), action for avoidance (Anfechtung), reduction of the Consideration (Minderung) or other reasons, result in the termination (Beendigung), ineffectiveness (Unwirksamkeit) or a reversal (Rückabwicklung) of this Agreement, in an amendment of its content or in a refund or reduction of the Consideration, except if and to the extent that any such claim is based on a wilful act (vorsätzliche Handlung) or on deceit (arglistige Täuschung) by the Sellers.

The Parties agree that no specific performance can be sought for breach of a Sellers’ Guarantee or breach of a guarantee under clause 17, however, nothing in this Agreement shall preclude the Parties from seeking specific performance in relation to any of the other obligations set out in this Agreement (whether or not such claim for specific performance relates to the same facts and circumstances which constitute a Sellers’ Guarantee or breach of a guarantee under clause 17).

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15.    LOCKED BOX, NO LEAKAGE

15.1    In the event of any Leakage from 1 January 2018, 00:00 hours CET, (the “Locked Box Date”) up to and including the Closing Date which does not qualify as Permitted Leakage, the Sellers agree, as a continuing obligation, to pay as joint and several debtors to the Purchasers, or at Purchasers' election to the respective Group Company, an amount in cash equal to the amount of any Leakage (plus, or minus the amount of any taxes or other duties payable, or saved by a Group Company as a consequence of such Leakage), or to procure that such payment is made.

For the avoidance of doubt, any further damage claims in addition to the previous sentence of any of Purchasers in relation to Leakage are excluded.

15.2    Any demand for payment under this clause 15 must be made within eighteen (18) months after the Closing Date.

15.3    “Leakage” means any of the following actions performed, or the agreement to perform any of the following actions, by any Group Company for the benefit of the Sellers’ Group:

15.3.1    any distribution, dividend or return of capital (whether by reduction of capital or redemption or purchase of shares) to the Sellers' Group;

15.3.2    any payments in respect of any measure regarding the share capital or any securities of the Group Company to the Sellers' Group;

15.3.3    any payments based on intra-group agreements other than in accordance with the provisions of the intra-group agreements between the Group Companies and the Sellers’ Group (i) existing on the Locked Box Date or (ii) entered into or amended after the Locked Box Date on arm’s length terms or (iii) entered into or amended between the Signing Date and the Closing Date in accordance with the terms of this Agreement;

15.3.4    any payments by L’Orange (for the avoidance of doubt, other than pursuant to clause 15.3.3 above) under the Cash Pooling, or any other payments by any of the Group Companies of a substantially similar nature and effect to the Cash Pooling, in each case to the extent they do not (i) reduce the debt balance under the Cash Pooling towards the cash pool leader or otherwise reduce the balance under the Intra Group Loans, or (ii) extinguish a bona-fide financial obligation of any of the Group Companies in the ordinary course of business or are otherwise made for or as arms’ length consideration;

15.3.5    any transfer of assets to the Sellers’ Group;

15.3.6    any waiver of debts owed to it by the Sellers’ Group;

15.3.7    any assumption or incurring of any liability on behalf of the Sellers’ Group;

15.3.8    any payment of fees or costs for the transactions set forth in this Agreement; or

15.3.9    any payment of bonus or other payments to employees, management or third parties which is triggered by, or the amount of which depends on, the transactions contemplated by this Agreement, including the bonuses set forth in Exhibit 15.3.9.

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15.4    “Permitted Leakage” means any of, or any agreement to do any of, the following:

15.4.1    any item constituting Leakage to the extent that both (i) provision, reserve or allowance for such item has been taken into account (berücksichtigt) in the Locked Box Accounts and (ii) such item resulted in reduction of the Consideration in accordance with Exhibit 3.1.3;

15.4.2    the distribution of L’Orange’s profit for the business year ending 2017 as determined in accordance with German GAAP in the amount of EUR 21,258,729.78 (twenty one million two hundred fifty eight thousand seven hundred twenty nine euros and seventy eight eurocents) to MTU Friedrichshafen in accordance with the DPLTA (“L’OrangeProfit Distribution”);

15.4.3    any payment or intra-group charge in connection with the Cash Pooling including its termination and settlement or the Intra Group Loans, but only if and to the extent they reduce the debt balance under the Cash Pooling towards the cash pool leader or are a (partial) repayment of the Intra Group Loans;

15.4.4    any payment made in the ordinary course of business, including for the avoidance of doubt:

15.4.4.1    any payment by way of recharge for costs (including any VAT) routinely recharged by a Sellers’ Group Company on a consistent basis with past practice;

15.4.4.2    any payment of management fees charged by a Sellers’ Group Company in accordance with past practice;

15.4.4.3    any payment by way of recharge for seconded staff;

15.4.4.4    any payment for goods and/or services supplied in the ordinary course of business;

15.4.5    any repayment of any indebtedness owed to the Sellers’ Group, and payment of interest accruing on it at rates consistent with prior practice;

15.4.6    anything contemplated by, or required to implement, this Agreement; and

15.4.7    anything undertaken at the written request, or with the prior written consent, of any of the Purchasers.

16.    TAXES

16.1    Tax Indemnity

16.1.1    MTU Friedrichshafen agrees to indemnify the Purchaser from and against any Taxes imposed on L’Orange and the L’Orange Subsidiaries relating to Tax assessment periods ending before the Locked Box Date (the “Pre-Locked Box Date Period” and the “Indemnifiable Taxes”).

16.1.2    The indemnification claim of the Purchaser pursuant to Section 16.1.1 shall be excluded if and to the extent that the Indemnifiable Taxes

16.1.2.1    have been paid until the Locked Box Date; or

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16.1.2.2    refer to amounts that both (i) have been specifically taken into account (berücksichtigt) in the Locked Box Accounts as Tax provisions or Tax payables and (ii) resulted in a reduction of the Consideration in Exhibit 3.1.3; or

16.1.2.3    are actually recovered or recoverable by the Purchaser or a Group Company in accordance with clause 14.1.3(i) or 14.1.3(ii); or

16.1.2.4    are directly or indirectly caused or triggered by (i) any change in the accounting and taxation principles or practices of the Group Companies after Closing; or (ii) any transaction, action, omission, declaration or other measure initiated or executed by the Purchaser, any person affiliated with the Purchaser, or – after the Closing – by one of the Group Companies or any future direct or indirect shareholder or partner of any Group Company (including, but not limited to, the change in the exercise of any Tax election right, the change in transfer pricing, the amendment of any Tax Return, the termination of any profit and loss absorption agreement or Tax consolidation scheme (other than between any of the Sellers on the one side and the Group Companies on the other side), the approval or implementation of any reorganizational measure or the sale of any asset), in each case unless required under mandatory law (including, for the avoidance of doubt, applicable generally accepted accounting principles) or done with the consent of the Sellers; or

16.1.2.5    correspond to or can be offset against Tax reductions (Steuerminderung) or Tax refunds, in each case arising out of or relating to circumstances triggering the Tax indemnification claim pursuant to clause 16.1.1, including but not limited to reciprocal effects (Wechselwirkung) resulting e.g. from the lengthening of depreciation periods or higher depreciation allowances (Phasenverschiebung) or from a transfer of items relevant for Taxes (e.g. turn-over, income, expenses, VAT payable corresponding to an input VAT refunded etc.) into another Tax assessment period or a transfer of Tax items from one entity to another entity, and occurring on or after the Locked Box Date at the tier of the Group Companies, the Purchaser, or an entity affiliated with the Purchaser (altogether “Tax Benefit”). Thereby it is understood that such Tax Benefit shall be equal to the net present value of the Tax Benefit whereby the net present value shall be determined on the basis of the statutory Tax rate applicable in the respective jurisdiction at the Locked Box Date and a discount factor of three per cent (3%) p.a.; or

16.1.2.6    subject to clause 7 and clause 16.8 which respectively shall take precedence, result from the signing of this Agreement or the consummation of the transactions contemplated in the Agreement; or

16.1.2.7    would not have occurred but for any (i) Tax Law not in force at the date of this Agreement or (ii) change of Tax Law after the date of this Agreement.

16.1.3    MTU America will report the taxable income, gain, loss and deduction of Fluid Mechanics for all Tax periods through the Closing Date (including) on its U.S. federal and state income Tax Returns. MTU America will be responsible for and

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indemnify the Purchaser's Guarantor from and against any unpaid Taxes of Fluid Mechanics attributable to a Tax period ending prior to the Locked Box Date to the extent such Taxes exceed the amounts that both (i) have been specifically taken into account (berücksichtigt) in the Locked Box Accounts as Tax provisions or Tax payables and (ii) resulted in a reduction of the Consideration in Exhibit 3.1.3, and for the avoidance of doubt from and against any capital gains or ordinary income Taxes arising from the sale of Fluid Mechanics.

16.1.4    In the case of a Tax period that begins prior to the Locked Box Date and ends on or after the Locked Box Date (“Straddle Period”), MTU America shall be allocated and shall bear all Taxes attributable to the portion of such Straddle Period ending on the day immediately prior to the Locked Box Date to the extent such Taxes exceed the amounts that both (i) have been specifically taken into account (berücksichtigt) in the Locked Box Accounts as Tax provisions or Tax payables and (ii) resulted in a reduction of the Consideration in Exhibit 3.1.3. The Purchaser's Guarantor shall be allocated and bear all Taxes attributable to the portion of any Straddle Period beginning on the Locked Box Date; and the Purchaser's Guarantor shall be allocated and bear all Taxes attributable to the portion of any Straddle Period ending on the day immediately prior to the Locked Box Date to the extent such Taxes both (i) have been specifically taken into account (berücksichtigt) in the Locked Box Accounts as Tax provisions or Tax payables and (ii) resulted in a reduction of the Consideration in Exhibit 3.1.3. For purposes of this clause 16.1.4, all (i) ad valorem, real property, personal property and similar Taxes imposed on a periodic basis pertaining to a Straddle Period shall be apportioned on a pro rata basis between MTU America and the Sellers on the one hand, and the Purchaser's Guarantor, on the other hand, based on the number of days of such Straddle Period, and (ii) Taxes not included in (i) that are pertaining to a Straddle Period shall be apportioned based on a closing of the books method as of the day immediately prior to the Locked Box Date. Subject to the Purchaser's Guarantor's indemnification rights herein, the Purchaser's Guarantor shall be responsible for payment to the applicable Tax Authority of all Straddle Period Taxes attributable to Fluid Mechanics that become due and payable after the Closing Date. For the avoidance of doubt, MTU America or its Affiliates shall bear any and all income or similar Taxes of MTU America or any of its Affiliates attributable to the disposition of Fluid Mechanics, including, but not limited to, capital gains or ordinary income Taxes arising from the sale of Fluid Mechanics.

16.1.5    Any indemnification payment to be made by a Seller pursuant to this clause 16.1 is due twenty (20) Business Days after the respective Seller has been notified in writing by the respective of the Purchasers about the payment obligation and the corresponding payment date and has received a copy of the underlying Tax assessment or payment order or similar measure of the competent Tax Authorities, but not later than five (5) Business Days prior to the date at which the Tax to be indemnified is due and payable to the Tax Authority. On request of the Sellers the respective of the Purchasers shall, at Sellers’ cost, procure that the respective Group Company undertakes best efforts to achieve a deferred payment date, in particular but not limited to the application for a suspension of enforcement of Tax payment obligation (Aussetzung der Vollziehung) or equivalent application in foreign jurisdiction; clause 16.5 shall apply. The Purchasers shall not be obliged to grant any security to the Tax Authorities in order to receive a suspension of execution; if required by the Tax Authority for the granting of a suspension of execution, however, the respective Seller shall be

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entitled at its discretion to provide at its own cost and expense such security to the respective Tax Authority. If the Tax for which an indemnification payment has been made is subsequently reduced, the difference between the higher indemnification payment and the lower Tax amount shall be reimbursed by the respective of the Purchasers to the respective of the Sellers, including all interests paid thereon by the respective Tax Authority. Clause 16.2.2 and clause 16.2.3 shall apply mutatis mutandis to the existence of over-indemnification and the reimbursement obligation of the respective of the Purchasers.

16.1.6    The Sellers agree to pay to the Purchasers an amount equal to the portion of any Tax receivable that (i) turns out not to be, or not to be fully collectible, (ii) has been specifically taken into account (berücksichtigt) in the Locked Box Accounts as Tax receivable and (iii) resulted in an increase of the Consideration in Exhibit 3.1.3. If and to the extent a payment pursuant to sentence 1 has been made by the Sellers to the Purchasers and, at a later point in time, the underlying Tax receivable which is collected is higher, such increased amount shall be reimbursed by the respective of the Purchasers to the Sellers together with any interest actually assessed. Clause 16.1.5 shall apply mutatis mutandis.

16.2    Tax Refund; Overstated Tax Provisions; Tax Asset

16.2.1    The Purchasers shall pay to the respective Seller

16.2.1.1    any Tax refund (to the extent not already taken into account as a Tax Benefit pursuant to clause 16.1.2.5) for the benefit of a Group Company relating to a Pre-Locked Box Date Period received by the respective of the Purchasers or one of the Group Companies on or after the Locked Box Date (by receipt of cash payments, credit, set-off, deduction or otherwise and net of any corresponding future Tax burden of the Group Companies; in calculating such future Tax burden clause 16.1.2.5, sentence 2 shall apply mutatis mutandis), unless such Tax refund both (i) has been specifically taken into account as a Tax receivable in the Locked Box Accounts and (ii) resulted in an increase of the Consideration as reflected in Exhibit 3.1.3(the “Tax Refund”); and

16.2.1.2    an amount equal to any Tax that (i) turns out not to be, or not to be fully payable, (ii) has been specifically taken into account (berücksichtigt) in the Locked Box Accounts as Tax provision or Tax payable and (iii) resulted in a reduction of the Consideration in Exhibit 3.1.3; and

16.2.1.3    to the extent not already taken into account as a Tax Benefit pursuant to clause 16.1.2.5, the amount of any Tax Refund, Tax credit, any Tax item (including interest) that can be carried forward or backward as a Tax loss to reduce any Tax (in respect of a Tax item, however, only up to the amount of any reduced Tax) (altogether the “Tax Asset”) caused by reciprocal effects (Wechselwirkungen) resulting e.g. from the lengthening of depreciation periods or higher depreciation allowances (Phasenverschiebung) or the transfer of items relevant for Taxes (e.g. turnover, income, expenses, VAT payable corresponding with a VAT refund etc.) into another calendar year or the transfer of Tax items from one entity to another entity, (i) occurring after the Locked Box Date at the tier of the respective of

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the Purchasers, any company affiliated with the Purchasers, any Group Company or any future direct or indirect shareholder or partner of any Group Company and (ii) corresponding to an increased Tax which due to the existence of a tax group between a Seller and any of the Group Companies is incurred at the tier of a Seller or any Sellers’ Group Company; as to the calculation of such Tax Asset, clause 16.1.2.5 sentence 2 shall apply mutatis mutandis; and

16.2.1.4    an amount equal to any corporate and trade Tax prepayments made by MTU Friedrichshafen or any other Sellers' Group Company relating to L'Orange for the period beginning on the Locked Box Date, if and to the extent any such prepayment results in a Tax refund (by receipt of cash payments, credit, set-off, deduction or otherwise) to the benefit of L'Orange for such period pursuant to an assessment by the competent Tax Authority; and

16.2.1.5    an amount equal to any Net Tax Amortization, Depreciation or Other Step-up in Basis Benefit (as defined below), if and when actually and finally realized (based on a final and binding assessment notice which includes such benefit), it being understood and agreed that the Sellers take the view that no intangible asset(s) are, were or will be granted, assigned, contributed or otherwise transferred for German Tax purposes from MTU Friedrichshafen in connection with the Transaction or any Closing Actions to any Group Company, to any of the Purchasers or to any Affiliate of, or other Person directly or indirectly controlled by, or controlling the Purchasers or either of the Purchasers (the “Sellers’ View”) and that the Purchasers shall, and shall procure that each of their Affiliates and each Group Company and each other Person directly or indirectly controlled by, or controlling the Purchasers (the “Related Person”) will, with respect to such matters (i) refrain from objecting to the Sellers’ View or obstruct the Sellers’ argumentation to uphold Sellers’ View, unless otherwise agreed to by MTU Friedrichshafen or required by mandatory law, (ii) promptly inform MTU Friedrichshafen about any Tax assessment or other decision or measure of any Tax Authority or court which deviates from the Sellers’ View, (iii) give MTU Friedrichshafen and their counsel, at their request and limited to the specific topic at hand (and at MTU Friedrichshafen’s sole cost and expense), the possibility (x) to directly argue the Sellers’ View and to challenge and litigate any Tax assessment or other decision or measure of any Tax Authority or court which deviates from the Sellers’ View, and (y) to directly take any measure to keep the respective Tax assessments of the concerned Group Companies, Purchasers, Affiliates or Related Persons of Purchasers procedurally open, respectively in the name and on behalf of the concerned Group Companies, Purchasers, Affiliates or Related Persons of Purchasers, and (iv) use best efforts, upon MTU Friedrichshafen's written request with evidence of an actually - and, only if and to the extent sec. 32a Corporate Income Tax Act (Körperschaftsteuergesetz – KStG) applies, also finally - taxed intangible asset transfer and at MTU Friedrichshafen's sole cost, to take the necessary measures with regard to post Locked Box Date Tax Returns to realize a Tax amortization, depreciation or other step-up in basis benefit with

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respect to such intangible asset. The “Net Tax Amortization, Depreciation or Other Step-up in Basis Benefit” shall mean the net of (a) any Tax benefit(s) actually and finally realized (based on a final and binding assessment notice which includes such benefit(s)), by any Group Company, by Purchasers, by any Affiliates or Related Persons of Purchasers,at any time on or after the Locked Box Date,  that (i) arise from an amortization or depreciation of any intangible asset(s), which at any time on or after the Locked Box Date and notwithstanding the Sellers’ View, (x) are deemed to be granted, assigned, contributed or otherwise transferred for German Tax purposes from MTU Friedrichshafen in connection with the Transaction or any Closing Actions to any Group Company, any of the Purchasers, Affiliates or Related Persons of Purchasers, or (y) are deemed to be, based on an initial transfer pursuant to (x) immediately above (and including, for the avoidance of doubt, any subsequent transfer pursuant to this (y)), further assigned, contributed or otherwise (legally or economically) transferred for German Tax purposes by any of the Group Companies, Purchasers, Affiliates or Related Persons of Purchasers to any other Person which is a Group Company, any of the Purchasers, Affiliates or Related Personsof Purchasers, or that (ii) arise, in consequence of a prior step-up in basis, from a reduced taxable profit (or an increased tax loss, taking into account the last sentence of this clause 16.2.1.5) of (x) the transferor (for German tax purposes) as a result of and upon any further assignment, contribution or other (legal or economic) transfer of any such intangible asset(s) for German Tax purposes from the concerned Group Companies, Purchasers, Affiliates or Related Persons of Purchasers to any other Person, or (y) the (legal or economic) owner of any such intangible asset(s) upon any other income recognition measure for German Tax purposes (e.g. upon any cross-border transfer of any such intangible asset(s) to a foreign permanent establishment of such owner) (it being understood, however, and for the avoidance of doubt, that there shall with respect to all the aforementioned scenarios be no double-counting for the benefit of the Sellers), less (b) the amount(s) of all reductions of Tax benefits to, or increases of Tax expenses for, any of the Purchasers, the Group Companies and/or their respective Affiliates, to the extent related to or caused by the Tax benefit described in (a) above. If the Tax benefit described in (a) above results in a Tax loss which is carried forward, the Purchasers are unilaterally entitled to postpone the payment obligation under this clause 16.2.1.5 accordingly up until a taxable profit is generated against which such Tax loss carried forward can be offset (on a "first in first out basis" if, as the case may be, any further Tax losses exist).

If and to the extent a payment pursuant to clause 16.2.1.2 has been made by any of the Purchasers to the Sellers and, at a later point in time, the underlying Tax is increased, such increased amount shall be reimbursed by the respective Seller to Purchasers together with any interest actually assessed. Clause 16.1.5 shall apply mutatis mutandis. If and to the extent a payment pursuant to clause 16.2.1.5 has been made by any of the Purchasers to the respective Seller and, at a later point in time, the Net Tax Amortization, Depreciation or Other Step-up in Basis Benefit is increased (e.g. by virtue of a subsequent decrease of Tax expenses

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within the meaning of (b) of clause 16.2.1.5 above), such increased amount shall be payable by the Purchasers to the respective Seller. Any Tax Refund and any Net Tax Amortization, Depreciation or Other Step-up in Basis Benefit payable pursuant to the provisions hereof shall be reduced by all reasonable out of pocket costs incurred by any of the Purchasers or any Group Company after Closing to obtain said refund or to prepare the schedule within the meaning of clause 16.2.2 and by any Taxes imposed with respect to the receipt of such refund.

16.2.2    The Purchasers shall notify the Sellers without undue delay in writing of the receipt of any Tax Refund, of the fact that the circumstances would allow a reasonable business person to conclude that a Tax is not or no longer payable within the meaning of clause 16.2.1.2 above, of any Tax refund within the meaning of clause 16.2.1.4, of any final and binding assessment notice which includes any Tax benefit as described in (a) of clause 16.2.1.5 above, and of any subsequent increase of a Net Tax Amortization, Depreciation or Other Step-up in Basis Benefit pursuant to clause 16.2.1 above. Notwithstanding the foregoing, and only if any Tax assessment or other decision or measure of any Tax Authority or court has deviated from the Sellers' View, the Purchasers shall provide MTU Friedrichshafen on an annual basis with a schedule setting forth (i) the amounts of (x) any Tax benefit(s) described in (a) of clause 16.2.1.5 above, (y) any reduction of Tax benefit(s) or any increase of Tax expenses described in (b) of clause 16.2.1.5 above and (z) any subsequent increase of a Net Tax Amortization, Depreciation or Other Step-up in Basis Benefit pursuant to clause 16.2.1 above, (ii) the respective tax assessment status in relation to any of the amounts under (i) above, and (iii) any postponement of the payment obligation pursuant to clause 16.2.1.5 above, together with information reasonably necessary to verify the respective amounts, tax assessment status and postponement as aforementioned.

16.2.3    Any amount payable to the Sellers pursuant to this clause 16.2shall be due and payable when (i) the Tax Refund has been refunded (by receipt of cash payments, credit, set-off, deduction or otherwise) to the Group Companies (with regard to clause 16.2.1.1 above), (ii) the circumstances would allow a reasonable business person to conclude that the respective Tax is not or no longer payable (with regard to clause 16.2.1.2 above), (iii) the respective of the Purchasers has received from the respective Seller a notification of the assessment of any Tax giving rise to a payment obligation and a calculation of the Tax Asset, which a Seller claims to be payable under clause 16.2.1.3 (with regard to clause 16.2.1.3 above), (iv) MTU Friedrichshafen has received from Purchaser a notification of the Tax refund (with regard to clause 16.2.1.4), (v) MTU Friedrichshafen has received from the Purchasers a notification of any final and binding assessment notice which includes any Tax amortization, depreciation or other step-up in basis benefit as described in (a) of clause 16.2.1.5 above, or (vi) MTU Friedrichshafen has received from Purchasers a notification of any subsequent increase of a Net Tax Amortization, Depreciation or Other Step-up in Basis Benefit (with regard to clause 16.2.1 above), but in no event shall any such amount (where applicable) be payable to the Sellers earlier than five (5) Business Days before the assessed Taxes become due and payable.

16.3    Reverse Indemnity; VAT-matters

16.3.1    The Purchasers shall indemnify the Sellers and all Sellers’ Group Companies for all Taxes, losses or reductions of a Tax Asset relating to a Pre-Locked Box Date Period, if and to the extent the Sellers' and the Sellers’ Group Companies' Taxes,

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losses or reductions of the Tax Asset are directly or indirectly caused by or result from

16.3.1.1    the breach of a covenant, obligation or other kind of commitment pursuant to this Agreement by the Purchasers or, after the Closing Date, also by the Group Companies; or

16.3.1.2    (i) any change in commercial or Tax accounting methods of the Group Companies after the Closing or (ii) any transaction, action, omission, declaration or other measure initiated or executed by the Purchasers, any company affiliated with the Purchasers, or – after the Closing Date – by one of the Group Companies or any future direct or indirect shareholder or partner of any Group Company (including, but not limited to, the change in the exercise of any Tax election right, the change in transfer pricing, the amendment of any Tax Return, the termination of any profit and loss absorption agreement or Tax consolidation scheme (other than between any of the Sellers on the one side and the Group Companies on the other side), the approval or implementation of any reorganizational measure or the sale of any asset), in each case to the extent such measures pertain to Pre-Locked Box Date Periods or have retroactive effect pursuant to statutory provisions (e.g. as a consequence of a retroactive transformation pursuant to the German Transformation Tax Act) and unless required under mandatory law (including, for the avoidance of doubt, applicable generally accepted accounting principles) or done with the consent of the Sellers.

Any such claim of the Sellers and the Sellers’ Group Companies shall be reduced by a corresponding Tax Asset for the benefit of the respective Seller or Sellers’ Group Company resulting from an event pursuant to clause 16.3.1.1 and 16.3.1.2 of this clause 16.3.1; clause 16.1.2.5, sentence 2 shall apply mutatis mutandis.

If and to the extent, a Sellers’ or a Sellers' Group Company's Tax items that could be deducted, carried forward or backward as losses (including interest) relating to a Pre-Locked Box Date Periodare lost or reduced (other than as a result of this transaction), the Purchasers will indemnify the Sellers or the Sellers' Group Companies only if and to the extent such Tax items could have been utilized by the Sellers or the Sellers' Group Companies. To substantiate that such utilization by the Sellers or the Sellers’ Group Companies would have been possible, it is sufficient (but also required) that the respective Seller or the respective Sellers' Group Company earns a taxable profit (before set off with existing losses or interest carried forward which were incurred after the Locked Box Date) and evidences such taxable profit to the Purchasers (e.g. through the submission of corresponding Tax Returns; provided, however, in no event will Tax Returns for MTU America be required to be submitted to the Purchaser's Guarantor). For the avoidance of doubt, it is in that respect irrelevant if the taxable profit leads to an effective Tax payment at the level of the Sellers or the Sellers' Group Companies if such taxable profit is (or could be) set off against post Locked Box Date losses. The Purchasers will, already upon the loss or reduction of Tax items which could be deducted, carried forward or backward as losses (including interest) pursuant to clause 16.3.1, sentence 1, certify to the respective Seller or Sellers’ Group Company in writing that the indemnification will be satisfied provided that the

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conditions under clause 16.3.1, sentence 3 are met and evidenced in accordance with clause 16.3.1, sentence 4.

16.3.2    With respect to the taxable income attributable to the net operating income of Fluid Mechanics for the period from the Locked Box Date (including) through the Closing Date (including), the Purchaser's Guarantor shall pay to MTU America an amount equal to the product of (i) the net income attributable to Fluid Mechanics for this period computed on the basis that Fluid Mechanics was a separate taxpayer for U.S. federal and state income tax purposes for this period and assuming a closing of the books method of accounting as of the Closing Date, multipliedby (ii) a combined effective Tax rate of twenty four per cent (24%); provided, however, none of the Purchasers shall be responsible for any such Taxes (and shall have no obligation to indemnify MTU America) to the extent such Taxes (i) have been specifically taken into account in the Locked Box Accounts as a Tax receivable and resulted in an increase of the Consideration as reflected in Exhibit 3.1.3, or (ii) have been paid as Permitted Leakage. Within sixty (60) days after the Closing Date, MTU America shall provide the Purchaser's Guarantor with a schedule setting forth the Tax liability contemplated by this clause 16.3.2 with respect to Fluid Mechanics together with supporting work papers prepared on a pro forma basis and any other information reasonably necessary to verify such Tax liability (“Tax Schedule”) and pay such Tax amount. For the avoidance of doubt, the Tax Schedule shall not include any income or similar Tax liability of MTU America or any of its Affiliates attributable to, or arising from, the disposition of Fluid Mechanics, including, but not limited to, capital gains or ordinary income Taxes, arising from the sale of Fluid Mechanics. Any payments pursuant to this clause 16.3.2 shall be treated as a purchase price adjustment for U.S. federal income tax purposes.

16.3.3    The indemnification or payment under clause 16.3.1 or clause 16.3.2 becomes due and payable twenty (20) Business Days after the respective of the Purchasers has been notified in writing by one of the Sellers about the indemnification or payment obligation and, if applicable, has received a copy of the underlying Tax assessment, but (where applicable) not later than five (5) Business Days prior to the date at which the Tax to be indemnified is due and payable to the Tax Authority. Clause 16.1.5 sentence 2 through 5 shall apply mutatis mutandis.

16.3.4    Except as set forth in clauses 16.1.3 and 25.2, the Sellers are not liable for any Tax imposed on any Group Company in connection with the signing or execution of the Agreement and the consummation of the transactions contemplated in the Agreement, a change of control or cancellation of fiscal unity (other than between any of the Sellers on the one side and the Group Companies on the other side) that occurred in connection with the transactions contemplated in the Agreement. The Purchasers shall not, and shall procure that none of the affiliates of Purchasers (including none of the Group Companies) will, raise any claim against the Sellers or Sellers’ Group Companies in respect of Taxes resulting from the signing or execution of the Agreement and the consummation of the transactions contemplated in the Agreement or such change of control or cancellation of fiscal unity (other than between any of the Sellers on the one side and the Group Companies on the other side). The Purchasers shall indemnify and hold harmless the Sellers and the Sellers’ Group Companies from all claims raised by any affiliates of Purchasers (including any Group Company) with respect to the signing or execution of the Agreement and the consummation of the transactions contemplated in the Agreement, a change of control or cancellation of fiscal unity

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(other than between any of the Sellers on the one side and the Group Companies on the other side).

16.3.5    With respect to the VAT group (umsatzsteuerliche Organschaft) between MTU Friedrichshafen (or any other Sellers' Group Company) on the one side and L'Orange on the other side, the Purchaser shall be fully responsible (verschuldensunabhängige Einstandspflicht) that MTU Friedrichshafen will be promptly forwarded the invoices received by L’Orange for any deliveries and services provided, but not yet invoiced, to L’Orange prior to the Closing. The Parties will treat deliveries made or received and services performed or received by L’Orange for purposes of an allocation of VAT payments and VAT reimbursements as if the VAT group had ceased to exist between MTU Friedrichshafen (or any other Sellers' Group Company) and L'Orange as of the Locked Box Date. For that purpose the Parties agree as follows: The Purchaser is liable that L'Orange will reimburse to MTU Friedrichshafen (or any other Sellers' Group Company) payable VAT in respect of deliveries made and services performed by L'Orange during the relevant period as of (and including) the Locked Box Date until (and including) the Closing. Any VAT payment in accordance with the preceding sentence can be claimed back by the Purchaser from MTU Friedrichshafen in case of and up to the amount of a VAT correction in favour of MTU Friedrichshafen (or any other Sellers' Group Company) that relates to any such transaction undertaken by L'Orange. MTU Friedrichshafen will repay to L'Orange VAT reimbursements in respect of deliveries and services received by L'Orange during the relevant period as of (and including) the Locked Box Date until (and including) the Closing. The Purchaser shall provide and can be held liable that L'Orange pays back to MTU Friedrichshafen (or any other Sellers' Group Company) any received VAT reimbursement in case of a correction of such VAT reimbursement in respect of any such deliveries and services received by L'Orange. The preceding sentences 3 et seq. shall only apply if and to the extent that the relevant VAT or VAT reimbursements have not yet been cleared by MTU Friedrichshafen (or any other Sellers' Group Company) or L'Orange due to statutory provisions, or pursuant to an implemented VAT allocation scheme or otherwise. The Purchaser shall notify MTU Friedrichshafen without undue delay of any matter relevant in connection with this clause 16.3.5. The Purchaser shall, and is fully responsible that the respective Group Companies shall, cooperate to provide information and documents reasonably necessary for MTU Friedrichshafen (or any other Sellers' Group Company) to file their own VAT returns under the VAT group and to make or ask for any VAT related corrections of invoices issued by or to L'Orange. MTU Friedrichshafen shall, and is fully responsible that the respective Sellers' Group Company shall, cooperate to provide information and documents reasonably necessary for L'Orange to file their own VAT returns after the termination of the VAT group and to make or ask for any VAT related corrections of invoices issued by or to L'Orange. This clause 16.3.5shall apply accordingly in case the VAT group terminates with effect prior to the Closing with respect to such earlier date. MTU Friedrichshafen and Purchaser agree to, and procure that L'Orange and any other Sellers' Group Company will reasonably work in a mutually beneficial manner, including for example communicating with suppliers and customers, to minimize negative effects for individual VAT group members arising from VAT audits for all periods for which the VAT group existed. If, for example, a Sellers' Group Company shall pay additional VAT due to a VAT audit relating to a supply made by L'Orange and L'Orange has been able to collect a corresponding amount from

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its customer, Purchaser will procure that L'Orange forwards such amount to the parent of the VAT group.

16.4    Tax Returns; Tax Assessments

16.4.1    MTU Friedrichshafen shall at its own cost be fully responsible for (i) the preparation and filing of all Tax Returns which are to be filed by MTU Friedrichshafen, (ii) only in relation to L'Orange the preparation of all Tax Returns to support the timely filing to be made by L'Orange for the Pre-Locked Box Date Period and (iii) only in relation to the L'Orange Subsidiaries the preparation of all Tax Returns which are due to be filed on or before the Closing Date. MTU America only in relation to Fluid Mechanics shall, at its own cost (a) include Fluid Mechanics on applicable U.S. federal income and state Tax Returns for Tax periods which end prior to or include the Closing Date and (b) file all Tax Returns (other than those described in (a)) which are required to be filed for a Tax period that ends on or prior to the Closing Date.

16.4.2    The Purchasers shall be fully responsible for the Group Companies to timely file all Tax Returns due to be filed by the Group Companies after Closing, but with regard to Fluid Mechanics only with respect to Tax periods which end after the Closing Date.

16.4.3    The Tax Returns that include a Tax period or any portion thereof that ends on or prior to the Closing (including, for the avoidance of doubt, relating to the Pre-Locked Box Date Period) shall be consistent with the policies, procedures, practices and election rights adopted in the financial statements of the relevant Tax period as well as the Tax Returns for previous Tax periods of the Group Companies submitting such Tax Return, but only to the extent that the adopted policies, procedures, practices and election rights are in compliance with applicable generally accepted accounting principles and mandatory law. Any such Tax Return within the meaning of this clause 16.4.3 that is to be filed on an annual basis and relating to a period beginning before the Locked Box Date shall be subject to the review and prior written consent of the Sellers, if not anyhow already prepared by Sellers and filed on such basis. The Purchasers shall provide copies of any such Tax Return to the Sellers no later than thirty (30) Business Days prior to the relevant due date of such Tax Return. The Sellers shall return their comments to the Purchasers or the respective Group Companies within fifteen (15) Business Days following the receipt (Zugang) of the Tax Return at the latest. The Sellers shall be deemed to have given their consent to any Tax Return sent to them for their review if they do not provide any comment to the Purchasers or the respective Group Companies within fifteen (15) Business Days following the receipt (Zugang) of the Tax Return. If the Sellers and the Purchasers fail to reach an agreement on the contents of the Tax Returns, the Tax Returns shall be filed according to the instructions of the Sellers taking into account the legitimate interests of the Purchasers (which, for the avoidance of doubt, can in no event prevail the legitimate interests of the Sellers), except if and to the extent that these instructions do not comply with mandatory law.

16.4.4    Tax Returns prepared and filed before Closing or in accordance with clause 16.4, but with respect to Tax Returns for which the Purchasers are responsible pursuant to clause 16.4.2 only as they relate to a period beginning before the Locked Box Date, shall not be amended or changed by the Purchasers or one of the Group Companies without the prior written consent of the respective Seller which shall

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not be unreasonably withheld, except if the amendment or change is required by mandatory law.

16.4.5    Following the Closing Date, the respective of the Purchasers shall provide complete copies of any Tax assessments (Steuerbescheide) relating to Pre-Locked Box Date Periods to the Sellers without undue delay.

16.5    Tax Proceedings

16.5.1    Following the Closing Date, the respective of the Purchasers shall without undue delay notify the respective Sellers of any announcement or commencement of any Tax audit or administrative or judicial proceeding that is announced or commenced for a Group Company and that relates to a Pre-Locked Box Date Period or to Indemnifiable Taxes (the “Tax Proceedings”). Such notice shall be in writing and shall contain factual information sufficiently describing the object of the Tax Proceeding or the asserted Tax liability in reasonable detail and shall include copies of any notice or other document received from any Tax Authority in respect of any such Tax Proceeding or asserted Tax liability.

16.5.2    MTU America shall control all Tax Proceedings of MTU America, including Fluid Mechanics, which relate to Tax Returns of MTU America for which Fluid Mechanics was included on a Tax Return filed by MTU America. Purchasers shall control any Tax Proceeding related to a Straddle Period Tax Return; provided, (i) the Sellers shall be provided the opportunity to fully participate from the beginning of such Tax Proceeding at the respective Seller’s own cost to the extent the item in dispute is related to a Pre-Locked Box Date Period or Indemnifiable Taxes, and (ii) the Purchasers shall not settle or compromise any such Tax Proceeding relating to an item in dispute for a Pre-Locked Box Date Period or Indemnifiable Taxes without first obtaining the prior written approval of Sellers (or the relevant Seller, as the case may be), such approval not to be unreasonable withheld, conditioned, or delayed.

16.5.3    Other than as set forth in clause 16.5.2, the Purchasers shall, and shall be fully responsible that the respective Group Company does, (i) give the respective Seller the opportunity to fully participate from the beginning on at the respective Seller’s own cost in all Tax Proceedings, (ii) upon the respective Seller’s request and at the respective Seller’s cost, challenge and litigate any Tax assessment or other decision of any Taxing Authority or Tax court if and to the extent it is related to a Pre-Locked Box Date Period or Indemnifiable Taxes and (iii) comply with any instructions given by the respective Seller in relation to the conduct of the Tax Proceedings referred in (i) and (ii) above taking into account legitimate interests of any of the Purchasers (which, for the avoidance of doubt, can in no event prevail the legitimate interests of Sellers). If the Sellers elect by a written request to lead Tax Proceedings (including but not limited to the objection of Tax assessment and appeals against court decisions) on their own or through counsel of their choice and at their expense, then the respective of the Purchasers shall promptly authorize, and shall cause the respective Group Companies to authorize, (by power-of-attorney and such other documentation as may be necessary or appropriate) the designated representative of the Sellers to represent the respective of the Purchasers and the respective Group Companies in the Tax Proceedings, while, for the avoidance of doubt, the respective of the Purchasers keeps its participation rights under statutory law and shall be informed and heard about any envisaged settlement measure, but the Sellers take the final decision

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(taking into account the legitimate interests of each of the Purchasers which however can in no event prevail the legitimate interests of the Sellers). In any case the Purchasers shall be fully responsible that after the Closing Date (i) no document or information related to the Pre-Locked Box Date Period, to Indemnifiable Taxes or to a Tax Proceeding is submitted to any Tax Authority without the prior written consent of the Sellers, which shall not be unreasonably withheld and deemed to be given at least two (2) Business Days prior to the due date of such submission if the submission of a specific document or information is required by mandatory law and the respective Seller has been notified in writing by the respective of the Purchasers or the respective Group Company about this submission requirement ten (10) Business Days prior to the submission date, unless an immediate submission is required by Tax Law. The Purchasers shall be responsible that after the Closing Date no Tax Proceeding is settled without the prior written consent of the Sellers, such consent not to be unreasonably withheld.

16.5.4    The Purchasers and the Sellers shall fully cooperate, and the Purchasers shall cause the respective Group Company and their representatives to fully cooperate, at their own expense, with the Sellers with respect to all Tax Proceedings. The Purchasers shall in particular be fully responsible that the Sellers obtain any documents or information relating to a Tax Proceeding which is or could be necessary for the Sellers to avoid or mitigate any liability under this clause 16, protect a legal position under this clause 16 or to protect a Tax Refund under clause 16.2 above. Sellers shall bear the cost and fees of their own advisors, any court fees and interest payments resulting from unsuccessful remedies or proceedings resulting from a Sellers' participation, request or instruction pursuant to clause 16.5.2 above. The Purchasers shall procure that upon written request and reasonable advance notice, the respective Seller shall in relation to a Tax Proceeding also be granted the possibility to examine such documentation at the business premises of the relevant Group Company, to question key employees and permit to copy and photograph such documents and records, in each case to be coordinated through the respective Group Company’s management. The Purchasers shall, and shall be fully responsible that the relevant Group Companies shall, store all records, documents and information relating to Tax Proceedings until the expiration of any applicable statute of limitations. Necessary outside counsel costs incurred by each of the Purchasers shall be borne by Sellers, if and to the extent such outside counsel has been involved on a Seller’s request.

16.5.5    The Sellers and the Purchasers shall (and the Purchasers shall cause the respective Group Company and their representatives to) fully cooperate and take any action or measure to preserve, and refrain from any actions or measures which may jeopardize, the recognition of any Tax groups between any Sellers' Group Company and L'Orange (including the income tax group created by virtue of the DPLTA).

16.6    Limitations; Miscellaneous

16.6.1    Any claims of the Purchasers, the Sellers and the Sellers’ Group Companies under this clause 16, clause 3.4 and clause 7.3 shall become time-barred upon the expiration of a period of six months after the final and binding (formell und materiell bestandskräftige) assessment of the respective Tax. Notwithstanding the foregoing, the Sellers’ or Sellers' Group Companies' respective claims or rights

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under clause 16.2 and clause 16.3 shall, however, not become time-barred before the lapse of six months after the respective due date pursuant to clause 16.2.3 or clause 16.3.3 has occurred. Any claim under this clause 16 must be notified to the other Party prior to the expiration of the applicable time limitation. Such notification suspends (hemmt) within the meaning of sec. 209 BGB such time limitation with respect to the specific claim so notified, provided that the respective notifying Party commences arbitration proceedings within six months after the expiry of the relevant time limitation. Sec. 203 BGB shall not apply, unless the Sellers and the Purchasers agree in writing that the time limitation is suspended on the basis of pending settlement negotiations.

16.6.2    If the respective of the Purchasers breaches its respective covenants, obligations or commitments pursuant to clause 16.4.3, sentences 3 to 5 or clause 16.5 and the Sellers are materially prejudiced by such breach, Sellers shall not be obliged to indemnify the Purchasers anymore from Taxes (or parts thereof) which are affected by such breach, unless the Purchasers can evidence that the respective Taxes (or parts thereof) would also have been incurred had the Purchasers satisfied the relevant covenant, obligation or commitment. If the Purchasers breach their covenants or obligations under clauses 16.4.2 and 16.4.3 sentences 1 to 2, or a breach pursuant to sentence 1 of this clause 16.6.2 does not materially prejudice the Sellers, the Sellers shall not be obliged to indemnify from Taxes (or parts thereof) if and to the extent the Sellers can prove that the corresponding Tax liability would not have been incurred had the Purchasers properly complied with their covenants, obligations or commitment.

16.6.3    As it relates to the Sellers’ Group Companies, clause 16.3 constitutes a contract for the benefit of a third party within the meaning of sec. 328 para. 1 BGB (Vertrag zugunsten Dritter) respectively.

16.6.4    Within the meaning of this clause 16, the terms Sellers, MTU Friedrichshafen, MTU America, Sellers’ Group Companies, Purchasers, Purchaser Group, Group Companies, L'Orange, L'Orange Subsidiaries, Fluid Mechanics and direct or indirect shareholders, members or partners shall also embrace any of their legal successors.

16.6.5    In case of any conflict or overlap between this clause 16 and clause 13.17 in conjunction with clause 14, this clause 16 shall prevail. For the avoidance of doubt, the Purchasers shall recover with respect to a particular claim only once and without duplication.

16.6.6    Any payments pursuant to this clause 16 by the Sellers to any of the Purchasers shall for Tax purposes be deemed to be a subsequent reduction of the Total Share Purchase Price. Any payments pursuant to this clause 16 by any of the Purchasers to the Sellers shall for Tax purposes be deemed to be a subsequent increase of the Total Share Purchase Price.

16.6.7    Each Party may request a confirmation to be issued by an audit firm to be engaged by the other Party to confirm that the other Party has complied with its information obligations under this clause 16; should the other Party not provide such a confirmation within reasonable time, the requesting Party is entitled to engage an audit firm to perform a review whether or not the other Party has complied with its information obligation.

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16.7    Purchase Price Allocation

16.7.1    The Parties agree that the Fluid Mechanics Purchase Price and any liabilities properly treated as consideration for U.S. federal income Tax purposes (collectively, the “Allocable Amount”) shall be allocated among the purchased assets of Fluid Mechanics for U.S. federal and applicable state income Tax purposes in accordance with Section 1060 of the Code based on the methodology set forth in Exhibit 16.7.1. The initial draft of such allocation shall be prepared by the Purchasers and shall be provided to MTU America no later than one hundred twenty (120) days after the Closing Date. MTU America shall have thirty (30) days after the receipt of the draft allocation to propose in writing any changes to Purchasers’ draft (a “Change Notice”).

16.7.2    The Purchaser's Guarantor and MTU America shall reasonably cooperate to promptly resolve any disputes with respect to the allocation. In the event that the Parties are unable to resolve a dispute with respect to the allocation within thirty (30) days after the date on which MTU America provides the Change Notice to the Purchaser's Guarantor, the parties shall refer any disputed items to the Independent Accountant. As soon as practicable after the referral of any such matters to the Independent Accountant (but in any event, not later than sixty (60) days after such referral), the Independent Accountant will make a final determination as to each of the matters that are in dispute. The allocation as agreed upon by the parties or as determined by the Independent Accountant shall become final and binding (such allocation, the “Allocation Schedule”) and in the event there is an adjustment to the Allocable Amount after the Allocation Schedule has been determined, the Allocation Schedule shall be revised to reflect such adjustments in accordance with this clause 16.7.1. The Allocation Schedule shall be reflected on a completed Internal Revenue Service Form 8594 (Asset Acquisition Statement under Section 1060), which Form shall be timely filed separately by the Purchaser's Guarantor and MTU America with the Internal Revenue Service pursuant to the requirements of Section 1060(b) of the Code. Each Party agrees not to take (or allow its Affiliates to take) any position inconsistent with the allocations set forth in the Allocation Schedule, including on any Tax Return; provided, however, neither party shall be unreasonably impeded in its ability and discretion to negotiate, compromise and/or settle any Tax audit, claim or similar proceedings.

16.8    PRC Withholding Tax

16.8.1    The Purchaser envisages to complete and file a Bulletin 7 Reporting within thirty (30) days of the Signing Date. The Sellers hereby confirm that such Bulletin 7 Reporting does not constitute a breach of clause 22.

16.8.2    The Purchaser encourages MTU Friedrichshafen to participate in such filing and to inform the Purchaser in writing within ten (10) Business Days after the Signing Date of its desire to participate, it being understood, however, that MTU Friedrichshafen has no obligation to participate. If MTU Friedrichshafen chooses to participate in the filing (as a joint filing or providing comments to the Purchaser), the Purchaser and MTU Friedrichshafen agree to cooperate in good faith, but that in case of any deviating views, the Purchaser is entitled to make the final decision on the content and the timing of the Bulletin 7 Reporting.

16.8.3    Regardless whether MTU Friedrichshafen chooses to participate in the filing, the Purchaser shall send a photocopy of the Bulletin 7 Reporting Materials submitted

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to the PRC Tax Authority on the same day of submission and, if any, a receipt issued by the PRC Tax Authority acknowledging the receipt of Bulletin 7 Reporting Materials. After submission of the Bulletin 7 Reporting Materials by the Purchaser, any Party that receivesfollow-up inquiry or request from the PRC Tax Authority for additional information in connection with the Bulletin 7 Reporting shall inform the other Party within three (3) Business Days after receipt thereof but in no case later than any due date specified by the PRC Tax Authority. The Purchaser shall direct all follow-up inquiry or request from the PRC Tax Authority to MTU Friedrichshafen and MTU Friedrichshafen shall comply in full with and respond promptly to such inquiry or request at its own cost. The Purchaser may decide to participate in, at its own cost, in responding to such inquiry or request. In the event that the Purchaser wants to participate in responding to such inquiry or request, the Purchaser is to inform MTU Friedrichshafenabout its decision in writing within ten (10) Business Days after receipt of such inquiry or request from the PRC Tax Authority (or the notice of such inquiry or request from MTU Friedrichshafen as applicable), but in no case later than any due date specified by the PRC Tax Authority. For the avoidance of doubt, MTU Friedrichshafen is entitled to make the final decision on the content and the timing of the response to such follow-up inquiry and request from the PRC tax Authority.

16.8.4    In the event that MTU Friedrichshafen initiates administrative or judicial proceeding in the PRC in relation to Bulletin 7 dispute on the Transaction, MTU Friedrichshafen shall inform the Purchaser at least fifteen (15) Business Days or as early as practical before the filing of any document with the relevant governmental authority or court to initiate such proceeding. The Purchaser may decide to participate in, at its own cost, such administrative or judicial proceeding. In the event that the Purchaser wants to participate in such administrative or judicial proceeding, the Purchaser is to inform MTU Friedrichshafen about its decision in writing within ten (10) Business Days after receipt of such notice from MTU Friedrichshafen. For the avoidance of doubt, regardless of the Purchaser's participation, the MTU Friedrichshafen shall have the sole control and discretion in its own appearance and representation in such administrative or judicial proceeding.

16.8.5    MTU Friedrichshafen shall indemnify and hold harmless Purchaser from any PRC Withholding Tax and interests or penalty levied on the Purchaser under Bulletin 7. At Purchaser's request, MTU Friedrichshafen shall pay the PRC Withholding Tax directly to the responsible PRC Tax Authority.

17.    PURCHASER GUARANTEES

17.1    Purchaser and Purchaser’s Guarantor Guarantees

The Purchaser and the Purchaser’s Guarantor hereby guarantee to the Sellers regardless of fault (verschuldensunabhängig), subject to the requirements and limitations provided in clause 17.2, by way of an independent promise of guarantee (selbstständiges Garantieversprechen) within the meaning of sec. 311 para. 1 BGB that the following statements (the “Purchaser Guarantees”) are correct, complete, and not misleading as of the Signing Date and as of the Closing Date or as of such other date expressly stated in the respective Purchaser Guarantee.

17.1.1    The Purchaser is duly incorporated and validly existing under the laws of the Federal Republic of Germany and the Purchaser’s Guarantor is duly incorporated

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and validly existing under the laws of the State of Delaware. Both have all requisite corporate power and authority to own their assets and to carry out their business.

17.1.2    The Purchaser and the Purchaser’s Guarantor have all requisite corporate power and authority and have been duly authorized by all necessary corporate actions to enter into and perform this Agreement and the legal transactions (Rechtsgeschäfte) contemplated herein.

17.1.3    The execution and performance by the Purchaser and the Purchaser’s Guarantor of this Agreement and the consummation of the legal transactions contemplated herein do not violate the Purchaser’s and the Purchaser’s Guarantor’s articles of association (Gesellschaftsvertrag) or internal rules of management and do not violate any applicable statutory provision, judgment, injunction or other rule binding upon the Purchaser or the Purchaser’s Guarantor and there are no legal, investigatory or other proceedings pending against, or, to the Purchaser’s Knowledge or the knowledge of the Purchaser’s Guarantor, threatened against, the Purchaser before any court, arbitration tribunal or governmental authority which in any manner challenges the Transaction or may result in its being prevented, altered or delayed.

17.1.4    The Purchasers have available cash which will at Closing provide in immediately available funds the necessary cash resources to pay the Consideration and to make all other payments required to be made under or in connection with this Agreement.

17.2    Remedies and Limitations

Clauses 14.1 and 14.11 relating to remedies of the Purchasers (or any of them) for Breaches of Guarantee shall apply mutatis mutandis to breaches by the Purchaser or the Purchaser’s Guarantor of Purchaser Guarantees, provided that all claims of the Sellers under this clause 17 shall become time-barred five (5) years after Closing.

18.    NON-COMPETITION; NON-SOLICITATION

18.1    Non-Compete Undertaking

18.1.1    For a period of [***] after Closing, neither Seller shall, and Sellers shall procure that none of the Sellers’ Group Companies do, directly or indirectly, engage in any activity that would compete with or result in competition with the business of the Group Companies as presently conducted (the “Restricted Activity”), provided that any activities permitted pursuant to the Long Term Supply Agreement shall be carved-out from the Restricted Activities.

18.1.2    Nothing contained in clause 18.1.1 precludes the Sellers or any of the Sellers’ Group Companies from:

18.1.2.1    selling products purchased from the Group Companies under the Long Term Supply Agreement for use by the Sellers’ Group Companies in original equipment and aftermarket sales for their own products;

18.1.2.2    fulfilling any obligation pursuant to this Agreement or the Long Term Supply Agreement;

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18.1.2.3    acquiring or owning direct or indirect shareholdings in other companies conducting a Restricted Activity for financial purposes if and so long as, in each case, such shareholding represents less than ten (10) per cent of the issued share capital and the voting rights of the relevant company;

18.1.2.4    acquiring any one or more companies and/or businesses (taken together, the “Acquired Business”) where, at the time of the acquisition, the activities of the Acquired Business include a Restricted Activity (the “Acquired Restricted Business”) and subsequently carrying on or being engaged in such Acquired Restricted Business as carried on by the Acquired Business at the time of acquisition, if the turnover attributed to the Acquired Restricted Business in its last financial year is less than ten per cent (10%) of the turnover of the Acquired Business as a whole, it being understood that if an Acquired Restricted Business has a turnover of more than [***], a part of such Acquired Restricted Business to the extent exceeding such turnover amount of [***] shall in due course be disposed of by the Sellers.

In the event of an acquisition of an Acquired Restricted Business, the Sellers shall ensure and shall procure that their Affiliates ensure, for a period of [***] after Closing, that (i) none of the sensitive information concerning the Group Companies' business that has already been prior to the Closing and at the relevant point in time still is in possession of the Sellers' Group, will be shared with or otherwise be directly or indirectly made available in any way to the persons employed by or otherwise active in the Acquired Restricted Business, except to the extent that (a) the relevant information is in the public domain or is already known to the Acquired Restricted Business (other than due to violation of the provisions hereof) or (b) its disclosure is required by an applicable stock exchange regulation or by law and, (ii) no former directors or employees of the Group Companies that immediately after Closing are employed by the Sellers’ Group, shall actively by the Sellers or its Affiliates be seconded or otherwise transferred to the Acquired Restricted Business.

18.2    Non-Solicitation

For a period of thirty-six (36) monthsafter Closing, neither Seller shall, and the Sellers shall procure that none of the Sellers’ Group Companies, directly or indirectly, solicit or entice away from the Group Companies any Senior Employee of the Group Companies with the exception of persons who have been given notice of termination (Kündigung) by the respective Group Company or whose employment was terminated by mutual consent.

18.3    Breach

In the event of a breach of the covenants set forth in this clause 18, the Purchasers may request the respective Seller (i) to immediately cease, or procure that the Sellers’ Group Company immediately ceases, the activities constituting such breach and (ii) to put the Purchasers (or, in the Purchasers’ discretion, the respective of them or the respective Group Company) in such position it would be in without such breach.

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19.    COOPERATION

19.1    The Sellers and the Purchasers shall cooperate in good faith to provide for a smooth transition of the Group Companies to the Purchasers. The Parties will take all actions necessary to ensure the implementation of the transactions contemplated by this Agreement.

19.2    The Sellers shall procure that on or before the Closing Date, all agreements between any of the companies of the Sellers' Group on the one side and any of the Group Companies on the other side shall be terminated by mutual agreement with effect as of the Closing Date, except for (i) the DPLTA for which the clauses 7.1 and 7.2 shall apply, and (ii) any agreements to be entered into pursuant to this Agreement.

The termination shall be made without any termination costs for any Group Company, other than any fees, charges and expenses to be paid pursuant to the terms of the respective agreement until and including the Closing Date. Other than set out in the foregoing sentence, the Group Companies shall be fully released from any liability under the respective agreements to the Sellers' Group.

19.3    Bergen LTSA

19.3.1    The Parties shall use best efforts and negotiate in good faith for L'Orange and BEAS to enter into a long-term agreement on the Closing Date, for the supply of fuel injection products for use on Bergen engines.

19.3.2    In the event that the Parties, notwithstanding clause 19.3.1, are unable to reach such agreement prior to or on Closing, the supply of fuel injection products for use on Bergen engines between L'Orange and BEAS shall, until the Parties have reached an agreement in accordance with clause 19.3.3 below, be in accordance with the following:

19.3.2.1    pricing shall be in accordance with Exhibit 19.3; and

19.3.2.2    the same terms as in the Long Term Supply Agreement shall apply; provided, however, that the following shall not apply: [***].

19.3.3    The Parties agree, that, in the event that they are unable to reach agreement pursuant to clause 19.3.1 prior to or on Closing (and thus the terms of clause 19.3.2 apply), the Parties shall continue also after Closing to use best efforts and to negotiate in good faith for L'Orange and BEAS to enter into a long-term agreement (separate to the Long Term Supply Agreement and terms applicable pursuant to clause 19.3.2) in relation the supply of fuel injection products for use on Bergen engines.

19.4    The Sellers hereby agree that they shall hand over to the Purchasers by no later than on the Closing Date at the Closing Meeting prior to the undertaking of the Closing Actions pursuant to the terms of this Agreement four complete copies of the data room for project Apollo, hosted on the electronic platform run and operated by Irooms - Imprima as of April 6, 2018, it being understood that nothing contained in this clause 19.4 or the copies of the data room, shall (i) constitute any representation, warranty or guarantee with respect to the data room content or otherwise and (ii) not be used in relation to the Sellers for any other purpose than informational purposes only.

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20.    GUARANTEE OF PURCHASER’S GUARANTOR

20.1    In consideration of the Sellers entering into this Agreement, the Purchaser’s Guarantor unconditionally and irrevocably guarantees to the Sellers the due and timely performance and observance by the Purchaser of all of its obligations pursuant to the Agreement when due pursuant to this Agreement (“Guaranteed Obligations”).

20.2    If and whenever the Purchaser defaults for any reason whatsoever in the performance of any Guaranteed Obligation, the Purchaser’s Guarantor shall forthwith upon demand unconditionally perform (or procure performance of) and satisfy (or procure the satisfaction of) the Guaranteed Obligation. The Purchaser’s Guarantor waives any rights which it may have to require the Sellers to proceed first against or claim payment from the Purchaser with respect to the Guaranteed Obligations.

20.3    This guarantee is to be a continuing security to the Sellers for all the Guaranteed Obligations and shall not be satisfied, discharged or affected by an intermediate payment or settlement of account by, or change in the constitution or control of, or the insolvency of or winding-up or analogous proceeding relating to, the Purchaser or by any other matter or thing whatsoever.

21.    ACCESS TO BOOKS AND RECORDS

For a period of ten (10) years following the Closing Date, but in no event longer than the statutory terms to preserve business records (gesetzliche Aufbewahrungsfristen), (i) the Group Companies shall, and the Purchasers shall procure that the Group Companies shall, keep all documents, data and books of the Group Companies and shall grant the Sellers and their authorized representatives reasonable access, during normal business hours and upon reasonable advance notice, to any and all documents, data and books of the Group Companies relating to time periods prior to the Closing Date, reasonably required by the Sellers to complete any Tax returns or other statutory filings relating to period prior to the Closing Date and the Purchasers shall procure that the Group Companies allow the Sellers to appropriately review the documents, data and books of the Group Companies relating to time periods prior to the Closing Date and to make, at Sellers’ costs, copies or printouts reasonably required for the aforementioned purpose and (ii) the Sellers shall, and shall procure that each member of the Sellers' Group shall keep all documents, data and books of the Group Companies to the extent not physically or electronically transferred to the Group Companies or the Purchasers and shall grant the Purchasers and the Group Companies and their respective authorized representatives reasonable access, during normal business hours and upon reasonable advance notice, to any and all such respective documents, data and books of the Group Companies relating to time periods prior to the Closing Date, reasonably required by the Purchasers or the Group Companies, as the case may be, to (a) complete any Tax returns or other statutory filings relating to the period prior to the Closing Date or (b) operate the business of the Group Companies as operated until the Closing Date, and the Sellers shall in each such case and shall procure that the Sellers' Group in each such case allows the Purchasers or the Group Companies to appropriately review the documents, data and books of the Group Companies relating to time periods prior to the Closing Date and to make, at their own costs, copies or printouts reasonably required for the aforementioned purpose.

22.    CONFIDENTIALITY AND PRESS RELEASES

22.1    The Parties mutually undertake

22.1.1    to keep the contents of this Agreement secret and confidential vis-à-vis any third party,

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22.1.2    not to use the contents or the fact of existence of this Agreement for their own benefit or for the benefit of others, except as allowed under this Agreement, and

22.1.3    to protect the contents of this Agreement effectively against access by third parties.

22.2    Neither the Parties nor their representatives will disclose publicly any information in connection with this Agreement nor issue any press release or similar public announcement without obtaining prior written consent of the other Parties, except to the extent that the relevant facts are in the public domain or their disclosure is required by an applicable stock exchange regulation or by law. Where disclosure is required by an applicable stock exchange regulation or by law, the Parties shall, so far as it is lawful and practical to do so prior to such disclosure, inform each other Party prior to such disclosure and shall limit any disclosure to the minimum required by statute or the authorities. The text of such announcement which is required by law shall be approved by each other Party prior to the disclosure if reasonably possible. Disclosure can also be made to a Party's professional advisors, financiers and their professional advisors on a confidential basis.

22.3    In the event that this Agreement is terminated in accordance with its terms, each of the Purchasers undertakes to treat as strictly confidential any and all information received from the Sellers and the Group Companies in connection with the transaction and to destroy all documents and information which the Purchasers have received from the Sellers and the Group Companies, together with any copies thereof, unless (i) such information has entered the public domain without a breach of the confidentiality covenant by the Purchasers, or (ii) the information cannot be destroyed under any document retention obligations, in which case access to it shall be limited to the legal representatives of the Purchasers.

23.    NOTICES

23.1    Form of Notices

All legally binding statements and other notices in connection with this Agreement (collectively the “Notices”) shall be made in writing (including telefax) unless another specific form is required by law.

23.2    Notices to MTU Friedrichshafen

Any Notices to be delivered to MTU Friedrichshafen hereunder shall be addressed as follows:

Position:    General Counsel

Address:    Rolls-Royce Power Systems AG
Maybachplatz 1, 88045 Friedrichshafen/Germany

Fax Number: +49 (7541) 90-8043

With copy (which shall not constitute notice) to:

Position:    M&A Director

Address:    Rolls-Royce plc
PO Box 31, Moor Lane, Derby DE24 8BJ

Fax Number:    +44 (0) 1332 260 429

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23.3    Notices to the MTU America

Any Notices to be delivered to MTU America hereunder shall be addressed as follows:

Position:    General Counsel

Address:    Rolls-Royce Power Systems AG
Maybachplatz 1, 88045 Friedrichshafen/Germany

Fax Number:    +49 (7541) 90-8043

With copy (which shall not constitute notice) to:

Position:    M&A Director

Address:    Rolls-Royce plc
PO Box 31, Moor Lane, Derby DE24 8BJ

Fax Number:     +44 (0) 1332 260 429

23.4    Notices to the Purchaser

Any Notices to be delivered to the Purchaser hereunder shall be addressed as follows:

Name:    Associate General Counsel: Joachim Spalcke

Address:    Handwerkstrasse 29, 70565 Stuttgart, Germany

Fax Number:    +49 (711) 78954-100

With copy (which shall not constitute notice) to:

Hogan Lovells International LLP
Attn. Volker Geyrhalter / Mark Kurtenbach
Karl-Scharnagl-Ring 5
80539 Munich
Telefax: +49 89 290 12 222

23.5    Notices to the Purchaser’s Guarantor

Any Notices to be delivered to the Purchaser’s Guarantor hereunder shall be addressed as follows:

Name:    Corporate VP and General Counsel: A. Chris Fawzy

Address:    1081 Woodward Way, Fort Collins CO 80521, USA

Fax Number:    +1-970-619-3713

With copy (which shall not constitute notice) to:

Hogan Lovells International LLP
Attn. Volker Geyrhalter / Mark Kurtenbach
Karl-Scharnagl-Ring 5

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[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

80539 Munich
Telefax: +49 89 290 12 222

23.6    Change of Address

Each Party shall without undue delay give written Notice to the other Parties of any changes in the addresses set forth in clauses 23.2 to 23.5 above. In the absence of such communication, any Notices sent to the address stated above shall be deemed to have reached (zugegangen) the respective Party.

23.7    Notices to Advisors

23.7.1    The receipt of Notices or any copies thereof in connection with this Agreement by the Parties’ advisors shall not constitute the receipt, or serve as a substitute for the receipt of, such Notice by the Parties themselves.

23.7.2    Whether or not the advisor to a Party or the acting notary received the Notice for its/his/her information is irrelevant for purposes of determining receipt of the Notice by a Party, even if this Agreement specifically provides that Notice should be given to the respective advisor or acting notary for information purposes.

24.    LIABILITY OF SELLERS

The Sellers shall with regard to any obligations undertaken by the Sellers in this Agreement be liable as joint and several debtors (Gesamtschuldner).

25.    COSTS

25.1    Costs

The costs for notarizing this Agreement shall be borne by the Purchaser. The Purchaser shall also be responsible for all fees and other costs related to merger control proceedings (except for fees and costs of advisors which shall always be borne by the Party retaining the services of such advisor in accordance with clause 25.3).

25.2    Transfer Taxes

Except for any US transfer Taxes and, for the avoidance of doubt, except for any PRC Withholding Tax (see above clause 16.8), any other transfer Taxes (including but not limited to any real estate transfer Taxes in Germany), stamp duties and similar domestic or foreign Taxes or charges resulting from the signing, execution and consummation of this Agreement shall be borne by the respective of the Purchasers. Any US transfer Taxes shall be split fifty/fifty (50/50) between the Purchaser's Guarantor and MTU America.

25.3    Costs of Advisors

Each Party shall bear its own costs and expenses in connection with the preparation, conclusion and performance of this Agreement, including any professional fees, charges and expenses of its respective advisors.

70

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

26.    GOVERNING LAW; ARBITRATION

26.1    Governing Law

26.2    This Agreement and any non-contractual obligations in connection therewith shall be governed by, and be construed in accordance with, the laws of the Federal Republic of Germany, excluding its conflicts of law rules and excluding the United Nations Convention on Contracts for the International Sale of Goods (CISG), and, to the extent required for effecting the transfer of the Fluid Mechanics Shares, by applicable US law.

26.3    Arbitration

26.3.1    Any dispute or controversy arising out of or in relation to this Agreement including its existence, validity or termination (“Dispute”) shall be settled amicably by negotiation between the Parties within thirty (30) days from the date of written notice of either Party of the existence of such Dispute.

26.3.2    Failing such amicable settlement, all Disputes shall be finally settled in accordance with the Arbitration Rules of the German Institution of Arbitration (Deutsche Institution für Schiedsgerichtbarkeit e.V. - DIS) without recourse to the ordinary courts of law. Temporary relief (Einstweiliger Rechtsschutz) before the courts of the competent jurisdiction shall remain unaffected. If temporary relief is sought before the ordinary courts, the courts of Munich, Germany, shall have jurisdiction.

26.3.3    The place of arbitration is Munich, Germany. The arbitral tribunal consists of three (3) arbitrators and the chairman shall be eligible for the office of a judge in Germany. The language of the arbitral proceedings is English. The arbitral tribunal shall also determine the costs of the arbitration proceeding, including reasonable attorney fees, and decide upon their allocation among the Parties.

26.3.4    The Parties undertake to keep confidential (i) all awards obtained in the arbitration, (ii) all materials submitted or created for the purposes of the arbitration and (iii) all other documents produced by a Party, in each case of (i) to (iii) except and to the extent that information or documents are (a) already lawfully in the public domain, or (b) disclosure thereof may be required by a Party to comply with mandatory law or to protect or pursue a legal right or to enforce or challenge an award granted in legal proceedings before a court.

27.    FINAL PROVISIONS

27.1    Exhibits and Schedules

The Exhibits and Schedules to this Agreement are an integral part of this Agreement and any reference to this Agreement includes this Agreement and the Exhibits and Schedules as a whole.

27.2    Entire Agreement

This Agreement (including all Exhibits and Schedules hereto) contains the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements and understandings with respect thereto except as expressly provided otherwise herein. There are no side agreements to this Agreement.

71

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

27.3    Amendments to this Agreement

This Agreement or any of its provisions (including this clause 27.3) may be amended, waived or terminated only by written instrument (or any stricter form required by mandatory law) executed by all Parties and explicitly referring to this Agreement.

27.4    Assignment

Except as expressly set forth in this Agreement, no Party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the consent of the other Parties.

27.5    Interpretation

27.5.1    The table of contents and the descriptive headings and sub-headings of the clauses and subclauses and appendices contained in this Agreement are for convenience and reference purposes only. They shall be disregarded for purposes of interpreting or construing this Agreement.

27.5.2    The obligation of a Party to use best efforts to accomplish an objective shall be construed as an obligation to timely take all reasonable actions that a diligent party would be expected to take in its own interest in order to achieve such objective, and not as an absolute obligation to ensure that such objective is, in fact, accomplished.

27.5.3    Any reference in this Agreement to a “day” or number of “days” (without the explicit qualification of Business Day) shall be interpreted as a reference to a calendar day or number of calendar days. If any action or notice is to be taken or given on or by a particular calendar day, and such calendar day is not a Business Day, then such action or notice shall be deferred until, or may be taken or given on, the next Business Day.

27.5.4    Any references made in this Agreement to any types of companies or equity participations, proceedings, government authorities or other bodies, rights, institutions, regulations or legal relationships under German law shall extend to any equivalent (funktionsgleich) legal terms under foreign law to the extent that relevant facts and circumstances must be assessed under such foreign law. If there is no functionally equivalent legal term under the foreign law, then such legal term which most closely reflects the functionality of the legal term under German law shall be referenced into the Agreement.

27.5.5    Any reference made in this Agreement to any clauses, paragraphs, sentences, Exhibits and Schedules without further indication of a law or an agreement shall mean the clauses, paragraphs, sentences, Exhibits and Schedules of this Agreement.

27.5.6    This Agreement is executed in the English language, but has been prepared against a German commercial and legal background. If any term of this Agreement is open for interpretation, the intended German meaning shall prevail. Where a German term has been inserted in parenthesis or italics, this German term alone (and not the English term to which it relates) shall be authoritative for the purpose of the interpretation of the relevant English term in this Agreement.

72

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

27.6    Severability

Should any provision of this Agreement be or become, either in whole or in part, void (nichtig), ineffective (unwirksam) or unenforceable (undurchsetzbar), then the validity, effectiveness and enforceability of the other provisions of this Agreement shall remain unaffected thereby. Any such invalid, ineffective or unenforceable provision shall, to the extent permitted by law, be deemed replaced by such valid, effective and enforceable provision as most closely reflects the economic intent and purpose of the invalid, ineffective or unenforceable provision regarding its subject matter, scale, time, place and scope of application. The aforesaid rule shall apply mutatis mutandis to fill any unintended gap that may be found to exist in this Agreement. It is the express intent of the Parties hereto that this clause 27.6 shall not merely result in a reversal of the burden of proof but that sec. 139 BGB is hereby contracted out in its entirety.

73

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

The notarial deed including the Share Purchase Agreement was read out to the persons appearing by the civil law notary, approved by the persons appearing and signed by them and the civil law notary in their own hand as follows:

/s/ Mr. Sebastian Decker

/s/ Mr. Benjamin Horsley

/s/ Dr. Hanns Jӧrg Herwig

/s/ Dr. Oliver Habighorst

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

Exhibit 1.1

LIST OF DEFINITIONS

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

LIST OF DEFINITIONS

DEFINED TERM	MEANING
Acquired Business	as defined in clause 18.1.2.4
Acquired Restricted Business	as defined in clause 18.1.2.4
Affiliates	as defined in recital D
Agreement	as defined in the caption
Allocable Amount	as defined in clause 16.7.1
Allocation Schedule	as defined in clause 16.7.2
Amended and Restated Operating Agreement	as defined in clause 12.3.1.4
Assignment of Membership Units	as defined in clause 12.3.1.3
Applicable Law	as defined in clause 13.11.1
AWV	as defined in clause 13.23
BGB	as defined in clause 13.1.1
Breach of Guarantee	as defined in clause 14.1.1
Bulletin 7	shall mean the Tax circular issued by the Chinese State Administration of Taxation entitled the State Administration of Taxation Bulletin on Several Issues of Enterprise Income Tax on Income Arising from Indirect Transfers of Property by Non-resident Enterprise (State Administration of Taxation Bulletin 2015 No. 7), as may be amended or supplemented from time to time and including any similar or replacement Applicable PRC Laws on the Tax treatment of offshore indirect transfers of any PRC taxable property
Bulletin 7 Reporting	shall mean the reporting of the Transaction along with the submission of Bulletin 7 Reporting Materials to the applicable PRC Tax Authority in accordance with Article 9 of Bulletin 7
Bulletin 7 Reporting Materials	shall mean the documents and materials as required to be submitted to the applicable PRC Tax Authority under Article 9 of Bulletin 7
Business Day	shall mean all days on which banks in both Frankfurt, Germany and London, England provide their banking services
Cash Pooling	as defined in clause 8
Cash Pool Debt Balance	as defined in clause 8(iii)
Change Notice	as defined in clause 16.7.1
Closing	as defined in clause 12.1
Closing Actions	as defined in clause 12.3
Closing Condition	as defined in clause 11.1
Closing Date	as defined in clause 12.1
Closing Meeting	as defined in clause 12.2
Closing Memorandum	as defined in clause 12.4.1
Competent Authority	as defined in clause 4.2
Contamination	as defined in clause 13.8.6
Consideration	as defined in clause 3.2
De Minimis Amount	as defined in clause 14.6.1

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

Default Interest	as defined in clause 3.3.3
Dispute	as defined in clause 26.3.1
DPLTA	as defined in recital A
Encumbrance	as defined in clause 6.2.4.6
Environment	as defined in clause 13.8.7
Environmental Assurances	as defined in clause 14.3.2.1
Environmental Consent	as defined in clause 13.8.8
Environmental Deductible	as defined in clause 14.6.4
Environmental Guarantees	as defined in clause 14.1.1
Environmental Law	as defined in clause 13.8.9
Environmental Matter	as defined in clause 13.8.10
Financial Statements	as defined in clause 13.6.1
Fluid Mechanics	as defined in recital B
Fluid Mechanics APA	as defined in recital B
Fluid Mechanics Consideration	as defined in clause 3.2
Fluid Mechanics Purchase Price	as defined in clause 3.1.2
Fluid Mechanics Shares	as defined in recital E
Framework	as defined in clause 13.5.1
Fundamental Guarantees	as defined in clause 14.7.1
Further Inquiry Individuals	as defined in clause 13.25
GAAP	shall mean Generally Accepted Accounting Principles
Government Contract	as defined in clause 13.21.2
Group Companies	as defined in recital C
Group Companies Shares	as defined in clause 13.4.1
Group Company	as defined in recital C
Group Guarantees	as defined in clause 10
Guarantee Claim	as defined in clause 14.1.1
Guaranteed Obligations	as defined in clause 20.1
Hazardous Substances	as defined in clause 13.8.11
Indemnifiable Taxes	as defined in clause 16.1.1
Inquiry Individuals	as defined in clause 13.25
Inspections	as defined in clause 14.3.1
Interest	as defined in clause 3.2
Interim Event	as defined in clause 12.3.6.1
Intra-Group Loans	as defined in clause 9.1
Intra-Group Loans Settlement Payments	as defined in clause 9.2
Insurer	as defined in clause 13.26.1(d)
IP Rights	as defined in clause 13.9.1
Knowledge Bearers	as defined in clause 13.25
Leakage	as defined in clause 15.3
Leased Real Estate	as defined in clause 13.7.3
Licensed IP Rights	as defined in clause 13.9.1
L’Orange	as defined in recital A
L’Orange Consideration	as defined in clause 3.2
L'Orange Ningbo	as defined in recital C(ii)
L’Orange Profit Distribution	as defined in clause 15.4.2
L’Orange Purchase Price	as defined in clause 3.1.1
L’Orange Share	as defined in recital E
L’Orange Subsidiaries	as defined in recital C
L'Orange Suzhou	as defined in recital C(iii)
L’Orange Unterstützungskasse	as defined in recital C(i)

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

Locked Box Accounts	as defined in clause 13.5.1
Locked Box Date	as defined in clause 15.1
Longstop Date	as defined in clause 11.2.1
Long Term Supply Agreement	as defined in clause 12.3.2.1
Material Agreements	as defined in clause 13.12.1
Material Contamination	as defined in clause 13.8.12
MTU America	as defined in the caption
MTU Friedrichshafen	as defined in the caption
Net Tax Amortization, Depreciation or Other Step-up in Basis Benefit	as defined in clause 16.2.1.5
Notices	as defined in clause 23.1
Own Real Estate	as defined in clause 13.7.1
Owned IP Rights	as defined in clause 13.9.1
Parties	as defined in the caption
Party	as defined in the caption
Pension Schemes	as defined in clause 13.14.1
Permits	as defined in clause 13.10
Permitted Leakage	as defined in clause 15.4
Person	shall mean any natural person, corporation, company, corporate body, association, cooperative, foundation, special-purpose assets (Zweckvermögen), pool of assets (Vermögensmasse), partnership (including any atypical silent partnership), joint venture, estate, trust, firm, public agency, authority, or other entity, enterprise, association, organization or body
PRC	shall mean the People's Republic of China
PRC Withholding Taxes	shall mean withholding Taxes due and owed by MTU Friedrichshafenunder Bulletin 7
Pre-Locked Box Date Period	as defined in clause 16.1.1
Product Liability Claims	as defined in clause 13.19.2
Profit and Loss Calculation	as defined in clause 7.5
Purchaser	as defined in the caption
Purchasers	as defined in the caption
Purchaser Group	as defined in recital D
Purchaser Guarantees	as defined in clause 17.1
Purchaser's Account	as defined in clause 3.3.2
Purchaser’s Guarantor	as defined in the caption
Purchaser's Inquiry Advisors	as defined in clause 14.2.1
Purchaser's Knowledge Bearers	as defined in clause 14.2.1
Real Estate	as defined in clause 13.7.4
Related Person	as defined in clause 16.2.1.5
Relevant Knowledge	as defined in clause 14.2.1
Restricted Activity	as defined in clause 18.1.1
R&W Insurance Policy	as defined in clause 13.26.1
Seller	as defined in the caption
Sellers	as defined in the caption
Sellers’ Accounts	as defined in clause 3.3.2
Sellers’ Group	as defined in recital D
Sellers’ Group Company	as defined in recital D
Sellers’ Guarantees	as defined in clause 13.1.1
Sellers’ Knowledge	as defined in clause 13.25

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

Sellers‘ View	as defined in clause 16.2.1.5
Senior Employee	as defined in clause 6.2.3.1
Shares	as defined in recital E
Signing Date	shall mean 8 April 2018
[***]	[***]
[***]	[***]
[***]	[***]
Straddle Period	as defined in clause 16.1.4
Subsidies	as defined in clause 13.20
Target Companies	as defined in recital B
Tax	as defined in clause 13.17.12
Tax Asset	as defined in clause 16.2.1.3
Tax Authority	as defined in clause 13.17.13
Tax Benefit	as defined in clause 16.1.2.5
Tax Guarantees	as defined in clause 13.17.16
Tax Laws	as defined in clause 13.17.14
Tax Proceedings	as defined in clause 16.5.1
Tax Refund	as defined in clause 16.2.1.1
Tax Return	as defined in clause 13.17.15
Tax Schedule	as defined in clause 16.3.2
Third Party Claim	as defined in clause 14.5.1
Threshold	as defined in clause 14.6.2
Time Limitation	as defined in clause 14.8.1
Total Share Purchase Price	as defined in clause 3.1.2
Transaction	as defined in clause 2.2
VAT	as defined in clause 3.4
Warranty Letter	as defined in clause 12.3.1.7

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

PROJECT APOLLO

___________________________________

Exhibit 3.1.3

EQUITY BRIDGE

___________________________________

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

Enterprise value to equity price bridge
Sonntag, 31. Dezember 2017
Currency, € m		Seller revised proposal	Ref: Financial Fact Book Addendum	Notes
Enterprise Value	A	700.0
Net financial debt
Shareholder loan – LOR		[***]
Shareholder loan – FML		[***]
Shareholder loan – Ningbo		[***]
FY17 profit distribution to MTU		[***]		[***]
Total shareholder and group loans		[***]	Page 14
Cash		[***]	Page 14	[***]
Financial assets – Escrow Amount (current and non-current)		[***]	Page 14	[***]
Total net financial debt		(73.7)
Debt-like items
Provisions for pensions and similar obligations (non-current)		[***]	Page 14
Deferred tax asset on pension		[***]		[***]
Earn-out FML acquisition		[***]	Page 14
Provisions for partial retirement		[***]	Page 14
Provisions for LTIC		[***]	Page 14
CapEx creditor debt		[***]		[***]
Total debt-like items		(34.8)
Total Net Debt	B	(108.5)
Net Working Capital
Actual Working Capital at 31 December 2017		[***]		See Appendix 3 for further details
Less: Target Working Capital		[***]		See Appendix 3 for further details
Net working capital adjustment	C	(5.1)
Equity Price (A+B+C)		586.4
Value accrual	D	[  ]		Amount to be determined at Closing
Total Consideration (A+B+C+D)		586.4

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

[***]

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

[***]

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

EX-10.1

Exhibit 10.1

Frame Development and Purchase Agreement

between

MTU Friedrichshafen GmbH

Maybachplatz 1

88045 Friedrichshafen, Germany

- hereinafter referred to as "MTU" -

and

L'Orange GmbH

Porschestr. 8, 70435 Stuttgart

Germany

- hereinafter referred to as "L'Orange" -

- L'Orange and MTU hereinafter referred to individually
as a "Party" or collectively as the "Parties"-

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

2

1.	DEFINITIONS	3
2.	SCOPE OF THE AGREEMENT	9
3.	PRODUCT DEVELOPMENT AND MANUFACTURING	9
4.	PURCHASE AND SUPPLY OF PRODUCTS AND SERVICES	14
5.	CAPACITY, FORECAST, ORDER PROCESS	17
6.	CHANGE REQUEST FOR PRODUCTS	19
7.	TERMS OF DELIVERY	20
8.	PACKAGING REQUIREMENTS	20
9.	DELAY	21
10.	QUALITY OF PRODUCTS, CLAIMS FOR DEFECTS	21
11.	LIMITATION OF LIABILITY	23
12.	QUALITY ASSURANCE	24
13.	PRODUCT RECALL	24
14.	[***] AND COMPONENT SUPPLIES	25
15.	SPARE PARTS	26
16.	PRICES, INVOICES, PAYMENT AND ADJUSTMENTS	27
17.	OFFSET AGREEMENTS	28
18.	COMPLIANCE, ENVIRONMENTAL PROTECTION	29
19.	EXPORT CONTROL AND FOREIGN TRADE DATA REGULATIONS	29
20.	CODE OF CONDUCT	30
21.	ANTI-BRIBERY AND CORRUPTION	30
22.	INSURANCE	31
23.	AUDIT	32
24.	CONFIDENTIALITY AND PUBLICATIONS	32
25.	[***], FORCE MAJEURE	34
26.	TERM AND TERMINATION	34
27.	COMPETITOR CHANGE IN CONTROL	36
28.	DISPUTE RESOLUTION	37
29.	MISCELLANEOUS	38

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

3

Preamble

(A)    MTU is one of the world’s leading manufacturers of large diesel and gas engines and complete propulsion systems.

(B)    L'Orange develops and manufactures fuel injection technology systems to be used in diesel and gas engines.

(C)    Pursuant to a share purchase agreement between, among others, MTU and Woodward Aken GmbH, notarial deed no. 223/2018 of the notary public Dr. Oliver Habighorst, Frankfurt am Main, dated 8 April 2018, MTU sold and Woodward Aken GmbH purchased all of the shares in L'Orange ("Transaction"). Notwithstanding closing of the Transaction, the Parties intend to continue their close and mutually beneficial business partnership whereby L’Orange develops, manufactures, sells and delivers to MTU systems, products and/or components in accordance with the terms of this Agreement.

(D)    MTU’s objectives of obtaining high quality products and services under this Agreement in a cost effective and timely manner are hereby acknowledged by L’Orange.

(E)    L'Orange's objectives of obtaining long-term development and purchase commitments with respect to fuel injection technology systems to be used in diesel and gas engines by MTU and its Affiliates are hereby acknowledged by MTU.

Now therefore,  the Parties enter into this Frame Development and Purchase Agreement.

1.    Definitions

1.1    "ABC Legislation" shall mean:

1.1.1    in respect to each Party, any legislation enacted in the country in which it is incorporated or carries out business, or in any other jurisdiction where the Agreement is performed, to enforce or implement either the United Nations Convention Against Corruption (being the subject of General Resolution 58/4 of 31 October 2003 of the General Assembly of the United Nations) or the OECD Convention on combating Bribery of Foreign Public Officials in International Business Transactions adopted on 21 November 1997; and

1.1.2    the United Kingdom Proceeds of Crime Act 2002, the United Kingdom Bribery Act 2010 and the United States Foreign Corrupt Practices Act 1977 (15 U.S.C. Section 78dd-1, et. Seq.) as amended, the German Money Laundering Act and

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

4

any other legislation relating to anti-bribery, corruption and anti-money laundering matters applicable to this agreement.

1.2    [***] shall have the meaning set out in Section 16.4.2;

1.3    "Adjustment Period" shall have the meaning set out in Section 16.4.2;

1.4    "Affiliate" shall mean, in relation to any Person, any other Person which, directly or indirectly, Controls, is Controlled by or is under common Control with, such Person, provided, however, that for the purpose of this Agreement, Bergen Engines AS, Hordvikneset 125, NO-5108 Hordvik, Norway, shall not be considered an Affiliate of MTU; for the avoidance of doubt, any joint venture of MTU or its Affiliates shall be considered an Affiliate within the meaning of this definition;

1.5    "Aftermarket" shall mean the secondary market of the medium and high speed reciprocating fueled products industry, concerned with the installation, maintenance and support of equipment, as well as [***], after the sale of the MTU products by or on behalf of MTU and/or its Affiliate as the original equipment manufacturer (OEM) to its customers;

1.6    [***];

1.7    "Agreement" shall mean this Frame Development and Purchase Agreement;

1.8    "Agreed Performance Standard" shall have the meaning as set out in Section 29.1.2;

1.9    "Background IP" shall have the meaning as set out in Section 3.5.3;

1.10    "Baseline Performance Standard"  shall have the meaning as set out in Section 29.1.2;

1.11    "Breakthrough Foreground IP" shall mean Foreground IP that substantively contributes to a material improvement in one or more product attributes including injection volumes, multiple injection characteristics, injection pressures, injection quality control systems, and needle opening and closing, but not including cost attributes;

1.12    "Bid Summary" shall have the meaning as set out in Section 3.1.3(iii);

1.13    "Code of Conduct" shall have the meaning as set out in Section 20.1;

1.14    "Competitor" shall mean any direct competitor of MTU, any Affiliate of such direct competitor and/or its or their joint ventures.

1.15    "Competitor Change in Control" shall mean [***].

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

5

For the avoidance of doubt, a Competitor Change in Control shall not include such changes listed above that relate to a change in control of Woodward, Inc.

1.16    "Confidential Information" shall have the meaning as set out in Section 24.1;

1.17    "Contractual Services" shall mean Product manufacturing, sale and delivery including Development Services;

1.18    "Control" of a Person shall mean the power, directly or indirectly:

1.18.1    to vote 50% (fifty percent) or more of the securities having ordinary voting power of that Person;

1.18.2    to appoint or remove 50% (fifty percent) or more of the directors (or persons performing similar functions) of such Person; or

1.18.3    to direct or cause the direction of the management and policies of such Person, in each case whether by contract or otherwise,

and "Controls" and "Controlled" shall be interpreted accordingly;

1.19    "Current Exclusive Rights Products"shall mean any Products supplied, or as of the Effective Date intended to be supplied, by L'Orange to MTU or its Affiliates for application on any MTU Engine existing as of the Effective Date;

1.20    "Disclosing Party" shall have the meaning as set out in Section 24.1;

1.21    "Dispute" shall have the meaning as set out in Section 28.1;

1.22    "Development Contract" shall have the meaning as set out in Section 4.1.2;

1.23    "Development Order"  shall have the meaning as set out in Section 4.1.2;

1.24    "Development Results" shall have the meaning as set out in Section 3.2.3;

1.25    "Development Services" shall have the meaning as set out in Section 3.1.1;

1.26    "Effective Date" shall have the meaning as set out in Section 26.1;

1.27    "End Product" shall mean the product into which the MTU Engine is implemented into and that is sold to the end customer;

1.28    [***];

1.29    "Foreground IP" shall have the meaning as set out in Section 3.5.1;

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

6

1.30    "Foreign TradeRegulations" shall have the meaning as set out in Section 19.1;

1.31    "Future MTU Engines" shall have the meaning as set out in Section 3.1.1;

1.32    [***];

1.33    [***];

1.34    "Government Authority"shall mean any (a) nation, region, state, city, town, village, district or other jurisdiction, (b) federal, state, local, municipal, foreign or other government, (c) governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department or other entity and any court or other tribunal), (d) multinational organisation or (e) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power of any nature;

1.35    "Government Official"shall meanany person who would constitute a:

1.35.1    "foreign public official" as defined in the United Kingdom Bribery Act 2010; or

1.35.2    "foreign official" as defined in the United States Foreign Corrupt Practices Act (15 U.S.C. Section 78dd-1, et. Seq.), as amended.

1.36    "Guarantees" shall have the meaning as set out in Section 29.1;

1.37    "Intellectual Property Rights" shall mean all rights in and to all patents, utility models inventions and improvements or discoveries, copyrights, trade secrets, design rights and Know-How;

1.38    "KCDs" shall have the meaning as set out in Section 4.1.5;

1.39    "Know-How" shall mean non-patented, practical information resulting from knowledge, experience or testing which is secret, not generally known or easily accessible, and substantial, including but not limited to information contained in drawings and associated technical information, plans, descriptions, process data, test reports, projects schedules and other technical information;

1.40    "KPIs" shall have the meaning as set out in Section 4.2.2;

1.41    "Liability Cap" shall have the meaning as set out in Section 11.1;

1.42    "Losses" shall have the meaning as set out in Section 3.6;

1.43    [***];

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

7

1.44    "Management Board" shall have the meaning as set out in Section 28.2;

1.45    "Minimum Term" shall have the meaning as set out in Section 26.2;

1.46    "MRF" or "MonthlyRolling Forecast" shall have the meaning as set out in Section 5.1.1;

1.47    "MTU Claim Basis" shall have the meaning as set out in Section 29.1;

1.48    "MTU Engines" shall mean medium and high speed reciprocating diesel, gas and dual fueled engines by MTU or its Affiliates;

1.49    "New Agreement" shall have the meaning as set out in Section 27.1.1(i);

1.50    [***] shall mean:

1.50.1    any New Products for any application on any Future MTU Engine that is or has come into development by MTU at any time prior to the [***] year anniversary following the Effective Date and is

(i)    [***];

(ii)    [***]; or

(iii)    [***]; and

1.50.2    [***].

1.51    "New Products”shall have the meaning as set out in Section 3.1.1;

1.52    "Order" shall have the meaning as set out in Section 4.1.2;

1.53    "Other New Products" shall mean all New Products that are not [***];

1.54    "Person" shall mean an individual or an entity, including a company, corporation, limited liability company, limited liability partnership, general or limited partnership, consortium, joint venture, trust, association or other business or investment entity, or any Government Authority;

1.55    "Plant" shall mean the plant operated by L'Orange at Rudolf-L'Orange-Straße 1, 72293 Glatten, Germany;

1.56    "ProductPrices" shall have the meaning as set out in Section 16.1.1;

1.57    [***];

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

8

1.58    "Product Specifications" shall have the meaning as set out in Section 4.1.1;

1.59    "Products"  shall mean any gaseous and liquid fuel injection systems, injectors, pumps and other associated parts and components, as specified and defined through its respective fit, form and function, being Current Exclusive Rights Products and New Products that are supplied or to be supplied by L'Orange under this Agreement;

1.60    "PurchaseContract" shall have the meaning as set out in Section 4.1.2;

1.61    "Purchase Orders" shall have the meaning as set out in Section 4.1.2;

1.62    "Receiving Party" shall have the meaning as set out in Section 24.1;

1.63    "Release Schedule" shall have the meaning as set out in Section 3.2.2;

1.64    [***];

1.65    [***];

1.66    [***];

1.67    "Representative" shall in respect of a Person mean:

1.67.1    the Affiliates of that Person; and

1.67.2    the directors, officers, employees, temporarily contracted personnel, agents, contractors and subcontractors of that Person or of any Affiliate of that Person.

1.68    "Revised Bid"  shall have the meaning as set out in Section 3.1.3(iii);

1.69    "Series [***]"  shall mean the next generation (as may be renamed from time to time) of [***];

1.70    "SPA" shall have the meaning as set out in Section 26.1;

1.71    "Specified Product Issues" shall have the meaning as set out in the SPA;

1.72    "Superior Proposal" shall have the meaning as set out in Section 3.1.3(iii);

1.73    [***] shall have the meaning set out in Section 16.4.1;

1.74    "Transaction" shall have the meaning as set out in the Preamble;

1.75    "TSA" shall mean the Transitional Services Agreement between, among others Rolls-Royce Power Systems AG, MTU and L'Orange dated 1 June 2018; and

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

9

1.76    "Working Day" shall mean any day other than (i) Saturday, (ii) Sunday or (iii) a bank holiday at MTU's seat or at the Plant.

2.    Scope of the Agreement

This Agreement sets forth terms and conditions for the delivery of the Products by L'Orange to MTU and/or its Affiliates and for the associated exclusivity rights as well as for the development of New Products and for the associated tender and/or exclusivity rights.

3.    Product Development and Manufacturing

3.1    Development of New Products

3.1.1    From time to time, MTU will develop new MTU Engines ("Future MTU Engines") which will require, among other components, complementary fuel injection systems. In such circumstances, MTU shall invite L’Orange to – depending on the category of such new fuel injection product assigned to it by this Agreement – either submit an offer or participate in a tender process, as described below, for services relating to the development ("Development Services") of such fuel injection products to be introduced after the Effective Date and to be used in Future MTU Engines (all such fuel injection products for Future MTU Engines, "New Products"). For the avoidance of doubt, Future MTU Engines shall also include MTU Engines which are in development at the time of Effective Date.

3.1.2    With regard to [***], MTU shall invite L’Orange to, and L'Orange shall, submit a qualified offer (qualifiziertes Angebot) for the Development Services. The Parties shall negotiate and agree in good faith on the terms (including the price) of the Development Services. If the Parties cannot agree on the price for such Development Services, L'Orange will determine the price based on its standard development pricing schedules and allocated resources and time, consistent with past practices. MTU shall be entitled to review the underlying basis for the price determination via an audit in accordance with Section 23. In the event the audit does not confirm a reasonable price determination by L'Orange, Section 28.6 shall apply.

3.1.3    With regard to Other New Products, MTU shall invite L’Orange, and L'Orange shall be entitled, to participate in a tender process as set out below.

(i)    Following an invitation to participate in a tender, L'Orange may submit a qualified offer (qualifiziertes Angebot) for the Development Services.

(ii)    Except as provided under Section 3.1.3(iii), MTU shall be free to award Development Services relating to Other New Products to the party that

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

10

submitted the best bid. If MTU awards the tender to L'Orange, MTU shall source such Other New Product exclusively from L'Orange in accordance with Section 4.1.4, unless provided otherwise in this Agreement.

(iii)    [***].

3.1.4    The Development Services will be conducted in accordance with the specifications provided by MTU, be state of the art (Stand der Technik) and, unless otherwise specified in this Section 3, be in line with the provisions of the development terms and process set out by the Parties. The Parties will agree on the exact scope and time schedule for the Development Services separately.

3.2    Release and Acceptance of New Products

3.2.1    Each New Product shall be released by L'Orange and accepted by MTU in accordance with the provisions herein.

3.2.2    The Parties shall agree in writing on a release schedule ("Release Schedule") for the release of each New Product containing milestones, necessary tests, inspections as well as other procedures to be conducted by the Parties in order to ensure that New Products conform with the agreed design specifications. The deliverables shall be specified for each milestone.

3.2.3    L'Orange will present MTU with the results of the Development Services ("Development Results") for final inspection and approval in due time so that the Release Schedule can be met. If the Development Results meet the agreed design specifications, MTU will notify L’Orange of the same in writing, in which case L’Orange shall declare the series release of the New Product. If MTU accepts the Development Results with reservations as to any reasonable determination that the agreed design specifications have not been met, MTU will notify L’Orange of the same in writing, following which L'Orange shall remedy the Development Results without undue delay and at its costs in order to reach the series release. MTU may not refuse acceptance of the Development Results in the case of non-material deviations from the agreed design specifications.

3.3    Changes during Product Development

3.3.1    Any changes or modifications that L’Orange wishes to implement regarding the design specifications for New Products that become subject to this Agreement shall be approved by MTU in advance. Such approval shall not be unreasonably withheld, conditioned or delayed.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

11

3.3.2    MTU reserves the right to request changes to the New Products, which shall be accepted by L'Orange to the extent they are technically feasible (including design and production feasibility) and subject to the following cost mechanism.

(i)    MTU will submit such change request to L'Orange in writing following which L'Orange shall evaluate the change request and its impact on the New Products and respond to such request within a reasonable period of time, but in any event within three (3) weeks from receipt of such change request. Such response shall include a reasonable, good faith determination of the estimated development costs associated with such change request. Upon MTU’s request, L’Orange will provide further substantiation and support for such estimated development costs.

(ii)    The Parties thereafter shall enter into good faith negotiations to reach agreement as to the development costs for such change request. In the event the Parties are unable to reach agreement, the development costs for such change request shall be based on L’Orange’s standard development pricing schedules (with appropriate allocated resources and time) consistent with L’Orange’s general practices. Notwithstanding the foregoing, in the event MTU continues to dispute or question the development costs associated with such change request, MTU shall be entitled to submit the matter to audit pursuant to Section 23. In the event the audit does not confirm a reasonable determination of the development cost by L'Orange, Section 28.6 shall apply.Following the decision of the neutral expert or auditor on the reimbursement of the increase in development costs for a change request, MTU shall be entitled to cancel its change request at its sole discretion (subject to reimbursement of any costs that have been reasonably incurred by L'Orange up to the cancellation date in connection with such change request).

(iii)    [***].

(iv)    If the Parties have already agreed on the purchase prices for such New Products prior to a change request by MTU and the change request would impact the recurring costs for such New Products, the corresponding purchase prices for such New Products will be, (i) in the case of Other New Products, adjusted based on an increase or decrease (as the case may be) in price by the same percentage as the respective increase or decrease in recurrent cost, consistent with past practice and subject to MTU’s audit rights pursuant to Section 23, and (ii) in the case of [***], adjusted in accordance with Section 16.1.2. In the event the Parties cannot reach an agreement on the amounts of such price increase within one (1) month after the evaluation of the respective impact by L'Orange was received by MTU, Section 28.6 shall apply.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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3.4    Warranty during the Release Period

The release period shall serve the Parties to gain operational experience and to start the series production. The warranty rights applicable to New Products during the release period will be as provided in the co-development process with customers, unless otherwise specified and agreed to by the Parties in the respective Development Contract.

3.5    Licenses to Foreground IP and Background IP

3.5.1    For purposes of this Agreement,  "Foreground IP" shall consist of all Intellectual Property Rights that are created or conceived by a Party solely to the extent that such Intellectual Property Rights are created or conceived exclusively in the course and scope of that Party’s performance of this Agreement. Foreground IP shall be owned by the Party that created or conceived it, and each Party shall be free in using their respective Foreground IP for their own purpose without limitation, except for such limitations that are provided for explicitly in this Agreement.

3.5.2    L'Orange hereby grants to MTU and its ordering Affiliates and MTU hereby accepts (also on behalf of its ordering Affiliates), a non-exclusive, global, perpetual (and surviving this Agreement), irrevocable, non-transferable, sublicensable license to use any Foreground IP of L'Orange in connection with any OEM development activities, the integration or use of any Products in the MTU Engines and any Product support in connection with the MTU Engines, including but not limited to repair, maintenance or [***]; provided, however, such license shall be sublicensable by MTU or its ordering Affiliates solely to the extent it exclusively applies to Products sold by L'Orange. Nothing in the foregoing shall obligate L’Orange to provide or license any Know-How and Confidential Information of L'Orange, except where this is necessary for MTU, its ordering Affiliate or sublicensee to make full use of the Product sold by L'Orange, in which case it shall automatically be part of the license granted. The Parties agree that the license granted under this Section 3.5.2 is fully paid up, including for future known or unknown usage rights, by payment of the charges to L'Orange as set out in this Agreement.

3.5.3    In addition, each Party grants to the respective other Party, who accepts this, a non-exclusive, non-sub-licensable, non-transferrable, royalty-free license to use the Intellectual Property Rights, owned or controlled by that Party, in existence at the date of this Agreement ("Background IP"), for the term and the conduct of the performance owed under this Agreement to the extent it is required for the fulfillment of the obligations under this Agreement. L'Orange further grants to MTU and its ordering Affiliates and MTU hereby accepts (also on behalf of its ordering Affiliates) a non-exclusive, royalty-free, global, perpetual (and surviving this Agreement), irrevocable,

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

13

non-transferable, sublicensable license in L'Orange's Background IP, solely to the extent this is required for purposes of using and exploiting the Development Results in connection with any OEM development activities, the integration or use of Products in the MTU Engines and any Product support in connection with the MTU Engines, including but not limited to repair, maintenance or [***]; provided, however, such license shall be sublicensable by MTU solely to the extent it exclusively applies to Products sold by L'Orange. Nothing in the foregoing shall obligate L’Orange to provide or license any Know-How and Confidential Information of L'Orange, except where this is necessary for MTU, its ordering Affiliate or sublicensee to make full use of the Product sold by L'Orange, in which case it shall automatically be part of the license granted.

3.5.4    [***].

3.5.5    Other than as provided in the preceding paragraph, L'Orange shall be free to use its Foreground IP, including any Breakthrough Foreground IP, for its own purposes, including but not limited to the development of products for its customers, other than MTU, provided that such products are not identical with or equivalent in all material aspects of form, fit and function to the Products supplied by L’Orange hereunder. For the avoidance of doubt, L’Orange shall be free to use any ideas, concepts and/or information in which at the time of use there are no Intellectual Property Rights; such ideas, concepts and/or information which are not subject to Intellectual Property Rights and that L'Orange shall thus be free to use may e.g. include information disclosed in any published patent (or patent application) owned by MTU or any of its Affiliates unless such idea, concept and/or information is covered by any of the patent claims in force at the time of such use.

3.5.6    By way of clarification, both Parties are free in using their respective Background IP for their own purpose without limitation.

3.6    Indemnification

3.6.1    L'Orange shall defend, indemnify and hold MTU and its Affiliates harmless from and against any damages, losses, charges, liabilities, proceedings, payments, judgments, settlements, assessments, deficiencies, taxes, interest, penalties and costs and expenses (including reasonable attorneys' fees and expenses) (collectively, "Losses"), arising from any claim or allegation by a third party against MTU or any of its Affiliates to the extent that claim or allegation alleges that the normal and specified use of a Product, as well as any Foreground IP developed or owned by L'Orange and licensed to MTU in accordance with the provisions of this Agreement, infringes, misappropriates, or otherwise violates the Intellectual Property Rights of a third party within the territories of the European Economic Area and/or the United States of

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

14

America, irrespective of L'Orange's fault (Verschulden), provided that (a) MTU promptly notifies L’Orange in writing of such, (b) L’Orange is given complete control of the defense of such, including the right to defend, settle and make changes in the Products for the purpose of avoiding infringement and (c) MTU provides L’Orange with reasonable information and assistance and takes no action in conflict with or inconsistent with L'Orange's position in such matter, provided however that L'Orange may not admit any wrongdoing of MTU in any settlement or defense without the prior written consent of MTU; further, in addition to any remedies MTU may have against L'Orange under this Agreement, if the Products, or any portion thereof, become the subject of a claim or allegation or if in L’Orange's opinion such is likely to become the subject to such a claim or allegation, L’Orange may cease the delivery of such Products pending resolution thereof and if the Products or the use thereof is enjoined, or if in L’Orange’s opinion is likely to be enjoined, L’Orange may at its option and expense (a) procure for MTU the right to continue using the Products, or applicable portion thereof, (b) modify or replace such in whole or in part to make such non-infringing, or (c) if neither of the forgoing is practical, refund to MTU an equitable portion of the amount paid by MTU to L’Orange for the specific Products, or portions thereof, so affected. Section 29.1 below shall remain unaffected.

3.6.2    With regard to territories not covered by the aforementioned indemnification, L'Orange shall use its reasonable endeavors to ensure that the normal and specified use of a Product, as well as any Foreground IP developed or owned by L'Orange and licensed to MTU in accordance with the provisions of this Agreement, shall not infringe, misappropriate, or otherwise violate the Intellectual Property Rights of a third party.

3.7    Joint Development

The Parties may, from time to time, agree on pursuing jointly certain development projects. Such joint development projects shall be agreed on, in particular with respect to IP ownership and use or, to the extent not predetermined in this Agreement. pricing, between the Parties separately and shall not be subject to this Agreement.  For the avoidance of doubt, this Section 3.7 shall not limit or restrict L'Orange's rights including but not limited to exclusivity rights granted under this Agreement in respect of jointly developed Products.

4.    Purchase and Supply of Products and Services

4.1    Scope

4.1.1    L'Orange shall provide to MTU and its Affiliates, as the case may be, Products to be supplied by L’Orange hereunder, which shall be reflected in Annex 1,  as may be amended from time to time as further described in this Section 4.1.  The supply of

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

15

Products shall be in accordance with the agreed specifications ("Product Specifications"), as amended from time to time.  Any co-governing standards set out in Product Specifications and as mutually agreed on by the Parties from time to time may be accessed by L'Orange via MTU's webpage at http://www.mtu-online.com/mtu/einkauf/downloads/index.de.html.

4.1.2    The terms of this Agreement shall apply exclusively to any individual contract on the development of New Products ("Development Contract") or to any individual contract on the sale of Products ("Purchase Contract") based on individual orders by MTU as accepted by L'Orange ("Development Orders" or "PurchaseOrders" as the case may be), whether or not this Agreement or its terms are expressly referenced in the Development Order or Purchase Order (together, "Order").

4.1.3    Any deviating or additional terms, in particular the Parties' general terms and conditions, shall not apply, even if they have not been expressly rejected by the other Party or any Affiliate placing or accepting an Order under this Agreement and even if the other Party or any Affiliate placing or accepting an Order under this Agreement, having knowledge of such deviating or additional terms, performs its obligations under a Development Contract or Purchase Contract without reservation.

4.1.4    Exclusivity Requirements During the Minimum Term.

a)    During the first five (5) years of the Minimum Term, MTU shall (itself or through its Affiliates) procure 100% (one hundred percent) of its and its Affiliates' demand requirements for Current Exclusive Rights Products and [***] and, in each case, all associated services and related [***] process' demand, exclusively from L'Orange.

b)    During the last ten (10) years of the Minimum Term, MTU shall (itself or through its Affiliates) procure no less than [***] of its and its Affiliates' demand requirements for each Current Exclusive Rights Product and [***] and, in each case, all associated services and related [***] process’ demand, exclusively from L’Orange. For the avoidance of doubt, the [***] minimum demand requirements under this Section 4.1.4b) shall apply individually (by part number) with respect to each Current Exclusive Rights Product and [***].

4.1.5    With regard to New Products, in the event L’Orange fails to meet key development standards pertaining to development milestones, key customer deliverables (“KCDs”), targets and/or quality gates that have been agreed between the Parties with a specific reference to this Agreement as being of relevance for maintaining the exclusivity for the relevant New Products and continues to fail those, after being provided timely and adequate notice of such failure, to address such failure within a reasonable time,

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

16

MTU’s exclusivity requirements of Section 4.1.4 shall cease to apply with respect to such New Products and MTU shall be entitled to award the development to a third party.  For the avoidance of doubt, nothing in this Section 4.1.5 shall in any manner affect any of L’Orange’s rights with respect to (i) any New Product not specifically being subject of such failure, or (ii) any of the provisions of Section 16.

4.1.6    With regard to Other New Products, in the event L’Orange, fails to meet key performance standards pertaining to KPIs that have been agreed between the Parties with a specific reference to this Agreement as being of relevance for maintaining the exclusivity for the relevant Other New Products and continues to fail, after being provided timely and adequate notice of such failure, to address such failure within a reasonable time, MTU’s exclusivity requirements of Section 4.1.4 shall cease to apply with respect to such Other New Products and MTU shall be entitled to award the development to and/or source the Other New Product from a third party.  For the avoidance of doubt, nothing in this Section 4.1.6 shall in any manner affect any of L’Orange’s rights with respect to (i) any Other New Product not specifically being subject of such failure, and (ii) any of the provisions of Section 16.

4.1.7    Should MTU (itself or through its Affiliates) fail to purchase its and its Affiliates' demand pursuant to this Section 4.1, due to reasons not caused by L'Orange's inadequate performance or fault, L'Orange shall be entitled to a contractual penalty (Vertragsstrafe) in the amount of [***]% ([***] percent) of the respective value, which shall be paid in addition to any remedies L'Orange may have against MTU, such as specific performance (Erfüllungsanspruch) or damage claims. In accordance with Section 23, MTU shall maintain complete and accurate records to sufficiently reflect the purchases hereunder.

4.2    Performance Standards

Subject to Section 29.1.2:

4.2.1    L'Orange shall provide the Contractual Services in a professional and workmanlike manner by using skill and care of a highly qualified provider of such services. 

4.2.2    Annex 3 and Annex 5 set out certain current key performance indicators ("KPIs") by which the performance of L'Orange will be measured. The KPIs will be mutually agreed on by the Parties on an annual basis.

4.2.3    Subject to acceptable lead times and order volumes within the forecasts under this Agreement, L'Orange shall implement appropriate measures to ensure an average reliability level for adherence to agreed dates and quantities of at least 95 pointsfor all deliveries to MTU measured on a monthly basis. If L'Orange falls short of this 95-percent point target in three (3) consecutive calendar months, it shall, together with

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

17

MTU if necessary, determine the causes and initiate further measures in order to achieve the minimum target (improvement of supplier's logistical capabilities).

4.2.4    Until such time as the agreed reliability targets are met, L'Orange shall establish a reasonable buffer with a defined range of coverage, without charging additional costs.

4.2.5    L’Orange will endeavor to continuously improve its average reliability level for all deliveries to MTU.

4.3    Exclusivity

L'Orange will deliver Products to be supplied by L’Orange hereunder and used for OEM sales to MTU on an exclusive basis. The Products to be provided for the Aftermarket sales, including spare parts, will be sold by L'Orange to MTU on a non-exclusive basis. For the avoidance of doubt, MTU or any of its Affiliates, for which MTU shall be responsible, shall not use, within the Aftermarket, any Products supplied by L’Orange hereunder and designated as being for OEM sales. MTU shall maintain complete and accurate records to sufficiently reflect the uses hereunder.

4.4    MTU Affiliates

The Affiliates of MTU are entitled to place Purchase Orders and conclude Purchase Contracts subject to the conditions of this Agreement. The conclusion of individual Purchase Contracts by the Affiliates of MTU shall leave MTU's obligations under this Agreement unaffected. MTU shall not be liable for obligations assumed by the Affiliate of MTU under individual Purchase Contracts.

5.    Capacity, Forecast, Order Process

5.1    Capacity

Subject to Section 29.1.2:

5.1.1    L'Orange shall hold available sufficient capacity for the provision of Products to be supplied hereunder. L'Orange shall at least be able to deliverthe quantities of each specific Product forecasted by MTU for the next twelve (12) forecasted weeks in the monthly rolling forecast as defined in Section 5.2 (the "MonthlyRolling Forecast" or "MRF") plus a buffer of additional 15% (fifteen percent).

5.1.2    In case L'Orange does not have sufficient capacity in any relevant plant to fulfil all of its customers' requirements and if L'Orange thus needs to allocate capacity in the Plant, it shall treat MTU no less favorably than any other customer of L'Orange and shall allocate capacity accordingly to fulfil MTU's requirements. For the avoidance of doubt,

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

18

this shall not release L'Orange from any other obligation or liability it may have under this Agreement.

5.2    Forecast

At the latest on the last Working Day of a calendar month, MTU will provide L'Orange with a non-binding Monthly Rolling Forecast for MTU's estimated demand of Products to be supplied hereunder for the twelve (12) months following the next calendar month. The MRF shall only contain Products that are needed by MTU on a regular basis.

L'Orange shall confirm in writing within seven (7) Working Days of receipt of a MRF the quantities of Products that L'Orange is able to deliver within the first twelve (12) forecasted weeks. If no such confirmation is received by MTU within the applicable period, the MRF shall be deemed to be accepted by L'Orange and the Product quantities concerned shall be assumed to be available to MTU taking into account the replenishment lead time.

5.3    Order Process

5.3.1    If MTU requests L'Orange to provide Contractual Services other than Development Services, it will issue an Order via EDI or such other format as agreed in writing between the Parties. The Parties may enter into a separate EDI agreement to further specify the details.

5.3.2    The required Products indicated in the MRF for the first six (6) weeks of the MRF shall be deemed to have been ordered by way of a binding order and are subject to daily call-offs or Kanban orders as follows:

(i)    The purpose of daily call-offs is to control on a day-to-day basis the dispatch of goods by L'Orange. The schedule line of daily call-offs within the defined horizon will not be subsequently changed. Daily call-offs do not need to be confirmed and will be deemed accepted unless rejected by L'Orange within one (1) Working Day.

(ii)    Kanban orders may be used for selected materials that are continuously consumed. Kanban orders are placed daily at agreed times and contain specific order quantities for the following day based on actual consumption. Kanban orders are deemed accepted unless rejected by L'Orange within three (3) hours of receipt provided that such Kanban order has been received prior to 2 pm local time at the Plant.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

19

The same applies to the required Products indicated in the MRF for the weeks seven (7) through twelve (12) of the MRF, provided, however, that MTU may deviate from such forecasted amounts by +/- 10% (ten percent).

5.3.3    L'Orange may reject an Order (including daily call-offs and Kanban orders) only if such Order is not within the volumes set out in the MRF plus a flexibility range of 15%. Unless otherwise specified for certain kinds of Orders, L'Orange shall accept or reject an Order via EDI or such other format as agreed in writing between the Parties. Except for daily call-offs and Kanban orders, if L'Orange fails to notify MTU within three (3) Working Days after receipt of an Order, such Order shall be deemed to be accepted by L'Orange.

6.    Change Request for Products

MTU may from time to time after a product enters serial production request reasonable changes in the Products, which shall be accepted by L'Orange to the extent they are technically feasible (including design and production feasibility) and subject to the following cost mechanism.

(i)    MTU will submit such change request to L'Orange in writing following which L'Orange shall evaluate the change request and its impact on the Products and respond to such request within a reasonable period of time, but in any event within three (3) weeks from receipt of such change request. Such response shall include a reasonable, good faith determination of any development costs and any impact on recurring pricing associated with such change request. Upon MTU’s request, L’Orange will provide further substantiation and support for such estimated costs.

(ii)    The Parties thereafter shall enter into good faith negotiations to reach agreement as to any development costs and recurring cost changes for such change request. In the event the Parties are unable to reach agreement, (A) the development costs for such change request shall be based on L’Orange’s standard development pricing schedules (with appropriate allocated resources and time) consistent with L’Orange’s general practices; and (B) the changes to recurring production costs shall be determined based on past practice, and in either case (A) or (B) subject to MTU’s audit rights pursuant to Section 23.  In the event the Parties cannot reach an agreement on the amounts of such increase in development costs and recurring cost changes within one (1) month after the evaluation of the respective impact by L'Orange was received by MTU, Section 28.6 shall apply.

(iii)    [***].

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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7.    Terms of Delivery

7.1    Products shall be delivered FCA, L'Orange's Plant in Glatten (Incoterms 2010). L'Orange shall give timely notice to the forwarding companies commissioned by MTU and timely nominated by MTU that the Products are ready to be picked up.

7.2    Subject to Section 29.1.2, L'Orange shall supply the Products in the agreed quantity and quality on the date specified in the respective Purchase Contract (or Order, as the case may be), which shall take into account the applicable lead times. The agreed delivery dates specified in the individual Purchase Contract are binding and shall be understood as dates on which the Products shall be received by MTU according to the Incoterm agreed (i.e., in case of FCA to be picked up in Glatten by a forwarding company chosen by MTU).

7.3    The specific lead and delivery times for Products are set out in Annex 1. Further details on the delivery of Products are set out in Annex 4.  The delivery times set out in Annex 1 are standard delivery times calculated from the date of L'Orange's receipt of the Order until delivery of the Products to MTU or such other destination as specified in the Order, subject to the proviso that the Products have been cleared (released) for series production.

8.    Packaging Requirements

8.1    Products shall be packed and labeled in a manner sufficient to ensure the safety and good condition of the Products in transit in accordance with all applicable laws, regulations and conventions. Standard delivery specifications are included in Annex 4.

8.2    In addition to the standard delivery specifications, special packaging requirements must be observed for certain Products, which the Parties will agree to separately in individual Purchase Contracts. These special requirements usually relate to, among other things, the quantity and position of the Products per load carrier, particular packaging materials and preservation requirements.

8.3    MTU will report any alleged non-compliance with the prescribed delivery conditions to L'Orange in the form of a logistics quality report, which will, in the case of actual non-compliance, be incorporated in L'Orange's supplier evaluation.

8.4    Where load carriers / containers are provided by MTU, L'Orange shall, if commercially reasonable, participate in MTU's container management system. MTU and L'Orange will enter into a separate agreement regarding the terms of L'Orange's participation in the container management system.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

21

8.5    Delivery notes, invoices and other paperwork shall include specific information (such as order number, part number, position and, for replacement orders pursuant to claims for defect, the inspection report number). The Products shall also be labeled for delivery and packaged in the agreed quantity. The binding address for delivery is indicated in the individual Purchase Contract (or Order).

9.    Delay

Subject to Section 29.1.2:

9.1    If L'Orange becomes aware of a possible delay in the provision of Products, including deliveries of Products, L'Orange shall immediately (unverzüglich) - at the latest three (3) Working Days after L'Orange has become aware of the possible delay - inform MTU thereof and shall notify MTU of the corresponding estimated delivery date in writing. For the avoidance of doubt, such note shall not release L'Orange from any claims MTU may have in case of delay.

9.2    In case of delay with the delivery of Products due to the fault (Verschulden) of L'Orange, L'Orange shall pay to MTU a contractual penalty (Vertragsstrafe) [***]. The contractual penalty shall be accounted against any damage claims or other rights MTU may have in addition. Section 341 para. 3 BGB shall not apply; however, a claim of MTU to a contractual penalty under this Section 9.2 shall expire if it has not been asserted in writing within one month after delivery of the Products affected by the relevant delay.

10.    Quality of Products, Claims for Defects

Subject to Section 29.1.2:

10.1    The Products shall comply with the Product Specifications, otherwise the Products are deemed to be defective.

10.2    Notwithstanding Section 10.1, a Product shall not be deemed to be defective if the Product fails due to normal wear and tear, the Product was modified or repaired by unauthorized Person, in case of non-compliance with storage, maintenance, inspection or operating instructions or in case of operation outside the intended use.

10.3    In case of defects to the Products MTU will be entitled to the claims for defects under statutory law unless otherwise provided in this Agreement; claims related to defects in title (Rechtsmangel) and/or violation of third party Intellectual Property Rights are restricted to the territory of the European Economic Area and the United States of America. However, the right to price reduction (Minderung) of the individual Purchase Contract shall be excluded.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

22

10.4    The limitation period for claims for defects is [***].  

10.5    In case of defects, L'Orange shall send to MTU a statement in the form of an 8D report on the immediate action taken in response to reported defects within 48 (forty-eight) hours after receiving the notice of defects. The report shall be sent by e-mail to Reklamation@mtu-online.com. L'Orange shall also advise MTU in the form of an 8D report of the cause of the defect or perpetrator identified by it and the action initiated to permanently cure the reported defects within fifteen (15) Working Days of receiving the notice of defects or the defective Product (whichever occurs first). The report shall be sent by e-mail to Reklamation@mtu-online.com.

10.6    To the extent technically and commercial feasible, L'Orange shall rectify material defects in Products which have been distributed to MTU's customers or end consumers, upon mutual agreement by the Parties, either at the location of the Product or the place of performance, and will do so without delay and free of charge by repair or replacement of defective parts.

10.7    [***].

10.8    [***].

10.9    In the event of defects in quality, L'Orange shall, at MTU's reasonable request, inspect the stock of Products at MTU's warehouse. If reasonably requested to do so, L'Orange will advise MTU within 48 (forty-eight) hours of who will conduct the stock inspection and at what time. In order to ensure the availability of the materials it requires for production and assembly, MTU may (at L'Orange's costs) engage a suitable third party to conduct the stock inspection if L'Orange or a third party engaged by L'Orange fails to commence the stock inspection within a reasonable time or at all. The stock inspection may also include other Products which could potentially be affected by the same defect in quality as the Product originally notified as defective.

10.10    [***]

10.11    Products which cannot be used by MTU because of defects will be returned to L'Orange only after consultation with L'Orange.

10.12    If the use of the Products leads to a breach of Intellectual Property Rights of a third party, then as a general rule L'Orange shall, at its own expense, procure a right for MTU to continue using the Products, or modify the Products in a manner reasonable for MTU so that the Intellectual Property Rights are no longer breached, provided that such breach occurred after the Effective Date. If this is not possible on commercially reasonable conditions or within a reasonable period of time, MTU is, in addition to any

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

23

remedies MTU may have against L'Orange in connection with this Agreement, entitled to withdraw from the individual Purchase Contract.

10.13    The Parties undertake to inform each other immediately of defects in title that become known and alleged rights violations, and to give each other the opportunity to take mutually agreed action against such claims. However, L'Orange may defend such claims at its sole reasonable discretion, in which case MTU shall provide reasonable support in defending such claims.

10.14    MTU will reimburse L'Orange for the costs incurred by L'Orange as a result of unsubstantiated complaints.

11.    Limitation of Liability

11.1    L'Orange's annual liability for any claims by MTU under this Agreement is limited to a total amount of [***] ("LiabilityCap").

11.2    L'Orange's liability under this Agreement resulting from business interruption, loss of business, revenue, profit, goodwill, business opportunity, anticipated earnings or savings or unforeseeable or atypical damages, costs, expenses or losses shall be excluded unless and to the extent such damages are covered by the amounts, if any, actually paid to L'Orange under its insurance policies. In case such damages are, in fact, so covered, L'Orange shall be liable for such damages under this Agreement to the extent of the amounts actually paid to L'Orange under its insurance policies with respect to such damages. L'Orange shall be in this respect obliged to make commercially reasonable efforts to receive such actual payments under the respective insurance coverage. For the avoidance of doubt, nothing in this Section 11.2 shall in any way oblige L'Orange to obtain insurance coverage exceeding the coverage agreed on in Section 22.

11.3    For the avoidance of doubt, the limitations of liability under Sections 11.1 and 11.2 shall not apply to any liability due to willful misconduct.

11.4    To the extent that L'Orange is not liable under this Agreement, MTU shall defend, and indemnify L'Orange from and against any third party claims and hold harmless L'Orange against MTU's and its Affiliates claims with regard to Losses. Subject to Section 11.5, the foregoing obligation to indemnity (not however, the obligation to hold harmless), shall only apply to the extent such damages are caused by MTU's and/or its Affiliates fault (Verschulden) and subject to the limitations on liability set out Sections 11.1 and 11.2.

11.5    Indemnification in relation to [***].

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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12.    Quality Assurance

Subject to Section 29.1.2:

12.1    L'Orange shall have an adequate quality management system in place and act in line with it. L'Orange shall comply with the quality assurance requirements (quality assurance standard MTQ 5003 and standard production and assembly specification MMN 332) set out in Annex 5. In order to ensure L'Orange's long-term compliance with the quality management standards, the Parties intend to enter into a separate quality management agreement substantially in accordance with the template provided in Annex 5 within six (6) months from the Effective Date of this Agreement.

12.2    L'Orange shall be responsible for the inspection of outgoing Products in accordance with Annex 5. The inspection duties of Section 377 of the German Commercial Code (HGB) shall apply only with respect to identity, quantity and any evident damages, or losses during transport. To the extent MTU - without acknowledgement of any legal obligation to conduct inspection beyond the scope defined in the foregoing sentence - becomes aware of any defects upon delivery of Products in accordance with Section 7.1, MTU will immediately (unverzüglich) notify the corresponding transport person and L'Orange of such defect, damage or loss.

13.    Product recall

13.1    Where an authority or government agency with the power to order a recall of the Products has notified MTU or L'Orange in writing that, or where MTU or L'Orange has a reasonable reason to assume that the Products:

(i)    pose a potential safety risk or could create or cause dangerous situations, including the risk of serious injury or death; or

(ii)    have a material fault, material defect or are otherwise of material impaired quality; or

(iii)    do not comply with material statutory or other applicable requirements and standards; and

(iv)    to the extent deemed reasonably advisable or necessary on these grounds, the Products concerned must be recalled and/or repaired;

L'Orange and MTU will immediately inform one another of the situation and of the underlying facts and circumstances.

13.2    Except in cases where a recall is unavoidable because it has been legally ordered by the competent authority or government agency or is time-critical due to the safety risk

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

25

deriving from the defect, the Parties shall discuss in good faith and agree whether a recall of the Products concerned is appropriate.

13.3    If a recall is required pursuant to statutory provisions, or where the Parties agree that a recall is appropriate, L'Orange will promptly develop a plan or plans for implementing corrective measures, which will include, among other things, reasonable measures that are necessary and required pursuant to the statutory provisions or other requirements and standards applicable in the specific case. L'Orange will present such plans for corrective measures to MTU for its review and approval prior to their implementation.

13.4    MTU and L'Orange will work together and jointly ensure that the plans for corrective measures are reasonable and acceptable to both Parties before their implementation. To enable identification of the Products, L'Orange will provide MTU with usable delivery data and identifying features as and when reasonably requested.

13.5    MTU may at any time itself take any corrective measures and, if either (i) legally ordered by the competent authority or government agency, or (ii) reasonably required, send information to the competent authorities and government agencies involved. In such cases, L'Orange shall reasonably cooperate with MTU accordingly and offer its reasonable support.

13.6    Where it is established that the recall was caused by fault, material defect or other material quality impairment or material failure to comply with quality standards or statutory or other applicable requirements and provisions for which a Party is responsible, that Party will, at its own expense, and depending on the other Party's reasonable election, either carry out all of the repairs and adjustments necessary as part of the recall, or, provided that the recall was caused by fault (Verschulden), reasonably compensate the other Party for all reasonable costs incurred as a result of or in connection with the other Party carrying out the repairs and adjustments itself. The foregoing does not apply if a Party is not responsible for the cause for the recall.

13.7    Each Party will consult the other before notifications relating to potential safety concerns associated with the relevant products are released to the public, the media or authorities and government agencies. However, there shall be no obligation to consult if prior consultation would prevent timely notification of safety concerns under the relevant statutory provisions.

14.    [***] and Component Supplies

14.1    [***].

14.2    Prior to the Effective Date, L'Orange obtained supplies of certain components for its products, including without limitation [***], from MTU or its Affiliates. The Parties wish

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

26

to continue such supply also in the future. The supply shall be based on individual orders placed by L'Orange, at the prices applicable between L'Orange and the respective supplier during the calendar year 2017 and, in other aspects, subject to German statutory laws. Deviating from the currently applicable terms or German statutory law, the supplies from MTU or its Affiliates to L'Orange shall be subject to the warranty limitation period applicable between the Parties under this Agreement at the time the order for such components is issued. Prices for such components shall be adjusted upwards or downwards by the same percentage as prices for the Products, for which such components are used, change after the Effective Date.

15.    Spare Parts

L'Orange will supply the spare parts for Products during the entire lifetime of the End Product series and for a period of [***] years after serial production of the particular End Product has been stopped. In the case of Products intended for military or rail use, L'Orange will supply the spare parts for Products during the entire lifetime of the End Product series and for a period of [***] years after serial production of the particular End Product has been stopped, provided that corresponding obligations exist in MTU's customers' contracts and MTU has informed L'Orange about the Products concerned at the end of the serial production.  

All parts or Products delivered to and/or ordered by MTU's warehouse in Überlingen, including [***], shall be considered spare parts and thus being determined for the Aftermarket. No parts or Products that have not been ordered by or delivered to MTU's warehouse in Überlingen shall be used as spare parts.

The usual ratio of spare parts among Products ordered by MTU from L'Orange will be measured during a calendar year. MTU will report to L'Orange the ratio of spare parts among the Products ordered and delivered on an annual basis in January. Should L'Orange have any reasonable basis to so request (such reasonable basis shall include, by way of illustration only and without limitation, the ratio of spare parts among the Products ordered fall by more than [***]% ([***] percent) below the usual ratio), L'Orange will be entitled to request and receive detailed documentation confirming that no Products not determined in accordance with the foregoing paragraph as spare parts have been sold to the Aftermarket.  For the avoidance of doubt, this provision shall be without prejudice to, and in no way shall affect, either Party’s rights pursuant to Section 23.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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16.    Prices, Invoices, Payment and Adjustments

16.1    Product Prices

16.1.1    The current prices for Products, including but not limited to spare parts, are set out in Annex 1, as amended from time to time to include prices for Products as referred to in Section 3.1.4, as adjusted in accordance with this Section 16.1 (such prices for Products, "Product Prices").

16.1.2    The Product Prices for (i) Current Exclusive Rights Products, to the extent the Product Prices are not set out in Annex 1 upon signing of this Agreement, and (ii) [***], shall be determined so as to achieve the gross margins ((sales - cost of goods sold) / sales) achieved by L’Orange during calendar year 2017 for similar Products sold by L’Orange to MTU for, as applicable, OEM and for Aftermarket [***]; provided, however, that if such Product has not substantially achieved mature volumes, gross margins shall be as planned at maturity.

16.1.3    In the event pricing for Products to be sold hereunder as of the Effective Date is not reflected in Annex 1, the pricing established pursuant Section 16.1.2 shall be made applicable retroactively as of January 1st, 2018; provided that, in the case of Aftermarket sales, retroactive pricing from January 1, 2018 through the day prior to the Effective Date shall not take into consideration the [***].

16.1.4    The Product Prices are exclusive of applicable VAT and shall be paid in Euro.

16.1.5    The Product Prices for any Product that is or becomes subject to this Agreement, shall be subject to the following annual price adjustment for each calendar year beginning with calendar year 2019 based on the below [***] escalation formula; [***].

16.1.6    L’Orange and MTU will work together toward continuous improvement (VA/VE) objectives on an ongoing basis to endeavor to offset labor and material inflation that face the relevant markets, supply base and industries. [***].

16.2    Invoices

16.2.1    Each invoice of L'Orange to MTU shall in all respects comply with the requirements of a proper invoice.

16.2.2    L'Orange shall send each invoice to the address indicated in the corresponding Order or as otherwise notified by MTU.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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16.3    Payment Terms

16.3.1    MTU shall pay invoices for Contractual Services within [***] after receipt of the corresponding invoice in accordance with Section 16.2 and after provision of the corresponding Contractual Services by L'Orange.

16.3.2    Payment shall not be deemed an acceptance of Contractual Services, including Products, by MTU.

16.4    Aftermarket [***]

16.4.1    For purposes of this Section 16.4

[***] shall mean [***].

[***]

[***]shall mean

(i)    For FY2018, [***]

(ii)    For FY2019, [***]

(iii)    For FY2020, [***]

(iv)    For FY2021, [***]

(v)    For FY2022, [***]

(vi)    For FY2023, [***].

16.4.2    [***].

16.4.3    [***].

16.4.4    [***].

16.4.5    [***]

17.    Offset Agreements

L'Orange agrees that the individual Purchase Contracts (Orders) are placed with respect to MTU's offset obligations worldwide. Therefore, the procurements and activities done based on such individual Purchase Contracts (Orders) may be reported as offset in each order country by MTU or MTU's customer. L'Orange will endeavor to assist MTU in connection with the recognition process reasonably necessary for MTU

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

29

to fulfill the requirements of offset of the respective country and its current offset policy. MTU's offset management will inform L'Orange about the country and such country’s valid offset policy.

18.    Compliance, Environmental Protection

18.1    L'Orange shall comply with all applicable local and European statutory laws, regulations, directives (in particular but not limited to the EU "New Approach and Global Approach" Directives, REACH or Machinery Directive and its German implementation) and other official requirements, such as safety standards and guidelines of public authorities, trade associations and professional associations as well as any applicable safety, workers' protection and health and environmental regulations and to obtain all necessary permits required to fulfill its obligations under this Agreement.

18.2    L'Orange shall ensure that all components and materials included in the Products comply at the time of their delivery with all applicable statutory and official requirements relating to constituent substances, chemical work and material safety and environmental protection within the European Economic Area and/or the United States of America. L'Orange shall ensure that the Products comply with the legal requirements that must be met so that the Products are legally allowed to be implemented into End Products and marketed to end customers within the territory of the European Economic Area and/or the United States of America.

18.3    L'Orange shall inform MTU without undue delay (unverzüglich) in the case L'Orange becomes aware that, following the Effective Date, any Product sold by L’Orange hereunder does no longer comply with the requirements set out in Section 18.2.

18.4    L'Orange may retain performance towards MTU if it would violate such requirements set out in Section 16.1 for reasons not due to L'Orange's fault or responsibility.

19.    Export Control and Foreign Trade Data Regulations

19.1    L'Orange acknowledges and agrees that the Products and Contractual Services provided hereunder may be subject to the export control laws and regulations of the United States, EU and national legislation. This includes but is not limited to the Export Administration Regulations (EAR), German Global Trade Regulations (Aussenwirtschaftsgesetz / Verordnung), EU Dual-Use-Regulation and sanctions regimes of the U.S. Department of Treasury or Office of Foreign Asset Controls. For all Products to be delivered and Contractual Services to be provided L'Orange shall comply with all applicable export control, customs and foreign trade regulations ("Foreign Trade Regulations") and shall, at MTU's expense, obtain all necessary export licenses, unless MTU or any party other than L'Orange is required to apply for

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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the export licenses pursuant to the applicable Foreign Trade Regulations. In any case, L'Orange shall, to a reasonable extent and at no cost to MTU, provide all necessary documents, specifications, certificates etc. that are required by law. MTU shall provide assistance in properly identifying this documentation.

19.2    L'Orange shall advise MTU in writing (including fax and email) as early as possible but not later than five (5) weeks prior to the agreed delivery date of any information and data required by MTU to comply with all Foreign Trade Regulations for the Products and Contractual Services applicable in the countries of export and import as well as re-export in case of resale. MTU shall provide reasonable assistance in properly identifying this information and data required.

19.3    MTU's and L'Orange' obligation to fulfill this Agreement and any individual order resulting therefrom is subject to the proviso that the fulfillment is not prevented by any impediments arising out of national and international foreign trade and customs requirements or any embargos or other sanctions.

20.    Code of Conduct

20.1    L'Orange shall implement procedures that demonstrate its commitment to the Rolls-Royce Supplier Code of Conduct as set out in Annex 6 ("Code of Conduct"). L'Orange shall use its commercially reasonable efforts to communicate these principles to its suppliers and encourage them to implement practices consistent with these principles. L'Orange will further endeavor to convey these principles in an appropriate manner to its employees.

20.2    MTU reserves the right, upon reasonable written notice, to review the L’Orange ethics program, and L’Orange shall provide reasonable support to MTU in the conduct of any such review.

21.    Anti-Bribery and Corruption

21.1    Each Party makes the following warranties to the other Party on the date of this Agreement:

21.1.1    that this Agreement, the relationship created hereby and its activities hereunder and including any services rendered on its behalf by any third party in relation to the activities undertaken pursuant to this Agreement, do not and will not violate applicable laws, including but not limited to the ABC Legislation, or put the other Party in violation of any such laws;

21.1.2    that its Representatives and any other Person acting on its behalf have not, in respect of the subject matter of this Agreement authorised, offered, promised, paid or

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

31

otherwise given anything of value, any benefit or any financial or other advantage to or for the use or benefit of:

(i)    any Government Official;

(ii)    any director, officer, employee, agent or representative of any commercial organisation or private individual; or

(iii)    any other Person, entity or third party intermediary while knowing or having reason to know that all or any portion of such payment, thing of value or advantage would be offered, promised, paid or given to any of the Persons described in Section 21.1.2,

for the purpose of improperly influencing any act, inaction or decision by such Person in order to obtain or retain business, direct business to any Person or secure any other advantage;

21.1.3    that its Representatives and any other Person acting on its behalf have not, in respect of the subject matter of this Agreement engaged in any other conduct which would constitute an offence under the ABC Legislation; and

21.1.4    that neither it nor any Person acting on its behalf, including without limitation any of its current or former directors, officers or employees, whether directly or indirectly, in connection with the subject matter of this Agreement, will carry out any of the acts described in Section 21.1.

Each Party will procure compliance with the provisions of Section 21.1 by any Person acting on its behalf, including its Representatives, in relation to this Agreement.

22.    Insurance

22.1    L'Orange shall maintain at least the following insurances, each with an insurance coverage of [***] per occurrence and of [***] per aggregate:

(i)    commercial general liability insurance inclusive of coverage for public liability and product liability; and

(ii)    property insurance covering business interruption coverage.

22.2    L'Orange shall give immediate written notice to MTU in the event of a cancellation, material variation of terms, default or any other change to the insurance coverage L'Orange has to maintain according to this Section 22 that may affect MTU's interest.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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23.    Audit

23.1    Upon 15 (fifteen) Working Days prior notice, each Party or any accountant nominated by such Party shall have the right to audit any place where the other Party performs work in connection with this Agreement and has the right to audit, examine and inspect all or any portion of the other Party’s records and documents related to and relevant for this Agreement on the audited Party’s property as such auditing Party may reasonably require for the purpose of verifying the other Party’s compliance with its obligations under this Agreement. Such audit shall be made during the usual business hours.

23.2    The audited Party shall provide competent personnel with sufficient knowledge of any books, documents and records and shall reasonably assist the auditing Party or the accountant during the audit.

23.3    The audit shall generally be conducted at the auditing Party’s cost, except in cases where the audit reveals that the audited Party has been in breach of obligations under this Agreement to the disadvantage of the auditing Party; in such case the audited Party shall bear the respective costs for the audit. The audited Party shall also bear the costs of event-related audits in cases where the audit has been conducted due to repeated deliveries of defective Products, provided, however, that in such case the audited Party shall pay to the auditing Party a lump sum fee of EUR 2,000 per event-related audit.

23.4    If the audit reveals that the audited Party is in breach of obligations under this Agreement, the audited party shall immediately take all actions reasonably necessary to remedy such breach and to be in compliance with the obligations under this Agreement. Further, if the audit reveals that the auditing Party can be held responsible for defects of Products due to faulty manufacturing, an 8D Report will be generated by the auditing Party, applied and provided to MTU.

24.    Confidentiality and Publications

24.1    The Parties shall keep confidential all documents, information, Know-How and data furnished by or on behalf of a Party ("Disclosing Party") to the other Party ("Receiving Party") and which the Disclosing Party orally or in writing marks or designates as or are of the nature such that they may be presumed to be 'confidential' and which are made available to them or of which they gain knowledge on the basis of the co-operation under this Agreement ("Confidential Information"). This also applies to the existence and the content of this Agreement, MTU Intellectual Property Rights (in this case MTU as Disclosing Party) and L'Orange Intellectual Property Rights (in this case L'Orange as Disclosing Party). The Parties shall treat the Confidential Information in the same way as its own confidential information, but at least with the

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

33

due care of a prudent businessman. This obligation shall apply for 10 (ten) years after this Agreement has terminated.

24.2    Any disclosure by a Receiving Party of the Disclosing Party's Confidential Information to third parties requires the Disclosing Party's prior written consent. Disclosure of Confidential Information to directors, officers, employees, temporarily contracted personnel, agents, contractors and subcontractors is permitted only within the scope required for the performance of the obligations incumbent on the Parties under this Agreement.

24.3    Confidential Information shall not include and the foregoing obligations shall not apply to any information:

(i)    which had been known to the Receiving Party before the latter received the same from the Disclosing Party;

(ii)    which the Receiving Party developed itself independently without recourse to or use of the information of the Disclosing Party;

(iii)    which the Receiving Party lawfully obtained from third parties who to the knowledge of the Receiving Party (a) were not subject to any confidentiality undertaking towards the Disclosing Party and (b) such third parties in turn did not acquire the information through the infringement of protective provisions in favor of the Disclosing Party;

(iv)    which became known to the Receiving Party without violation of these provisions or any other regulations on the protection of business secrets of the Disclosing Party or are or were publicly known; or

(v)    which the Receiving Party must disclose based on statutory, official or judicial order; in this case the Receiving Party shall inform the Disclosing Party prior to the disclosure and shall restrict as far as possible the scope of such disclosure.

24.4    Upon the Disclosing Party's request or after termination of this Agreement, the Receiving Party shall promptly either return to the Disclosing Party all Confidential Information received by the Receiving Party or destroy such Confidential Information and confirm in writing to the Disclosing Party that the Confidential Information has been destroyed. For the sole purposes of (i) evidencing compliance with this Agreement in the case of disputes in connection with this Agreement and (ii) complying with legal obligations, the Receiving Party may maintain a secure file containing a single copy of the Confidential Information returned to the Disclosing Party.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

34

24.5    All publications in connection with the subject matter of this Agreement require the respective other Party's prior written consent.

25.    [***], Force Majeure

25.1    [***].

25.2    If L'Orange is hindered in its performance of its contractual obligations due to force majeure such as mobilisation, war, terrorism, unrest, fire, flood or other unforeseeable circumstances for which L'Orange is not responsible, such as strikes or lock-outs, disruptions in operations, shortage of transportation, difficulties in procuring raw materials or inadequate deliveries to L'Orange by its suppliers, the agreed delivery periods shall be extended in each case by the duration of the hindrance plus a reasonable start-up period, but by three months at the most. L'Orange shall not be responsible for the foregoing circumstances even where such circumstances occur during an already existing default. L'Orange shall notify MTU of the circumstances of the hindrance as well as the probable duration of the delay and take reasonable steps to mitigate the consequences of the force majeure event.

If the hindrance lasts for two (2) months or longer, each Party may rescind the affected Order.

26.    Term and Termination

26.1    This Agreement shall commence on the closing date of the transaction contemplated by the Sale and Purchase Agreement in relation to the Transaction ("SPA") (such date, the "Effective Date"), subject to the condition precedent (aufschiebende Bedingung) that closing under the SPA took place.

26.2    This Agreement shall have an indefinite term. It may be terminated by either Party by 18 (eighteen) months' prior notice, but in no event with effect prior to 31 December 2032 ("Minimum Term") (in which case the termination notice has to be served by 30 June 2031 the latest). In the event that the Minimum Term is not extended, the terms and conditions of this Agreement shall remain applicable to any performance of obligations under this Agreement.

26.3    The right to termination for good cause (Kündigung aus wichtigem Grund) shall not be affected. For MTU, such good cause exists only if:

(i)    L'Orange repeatedly and continuously is in material non-compliance with Product Specifications; provided that in all cases L'Orange shall have the right to cure this breach within a reasonable period, which shall reflect commercially reasonable technical capacities and resources of L'Orange required to cure this

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

35

breach; in particular, given the importance of the long-term development and purchase commitments by MTU and its Affiliates towards L'Orange under this Agreement, (a) the reasonable period to cure this breach shall be no less than twelve (12) months, (b) MTU shall provide all reasonable efforts in supporting L’Orange’s efforts to cure such breach, and (c) for so long as such breach remains uncured, on a quarterly basis the matter must be elevated to each Party’s respective highest principal officer.

(ii)    L'Orange finally ceases to provide Contractual Services to MTU;

(iii)    a Party becomes insolvent, an application to initiate insolvency proceedings against a Party has been filed, any such application has been rejected due to lack of assets, any executions against a Party have been fruitless or any execution measures have been initiated against a Party which have not been cancelled within one (1) month (e.g. cancellation of seizure) (in this case, without prejudice to any other termination rights L'Orange may have, termination right also for L'Orange); or

(iv)    a Competitor Change in Control in L'Orange occurs and MTU has a reasonable basis to believe in good faith that the competitor gaining Control in L'Orange will cause a material breach of this Agreement by L'Orange, in which case this subsection (iv) shall apply. Should such Competitor Change in Control occur during the Minimum Term, MTU shall be entitled to exercise its right to terminate this Agreement by serving a termination notice within six (6) months from such Competitor Change in Control becoming effective; such termination notice shall end this Agreement twelve (12) months after having been served. In such case, [***];

(v)    a Competitor Change in Control in L'Orange occurs and MTU does not have a reasonable basis to believe in good faith that the competitor gaining Control in L'Orange will cause a material breach of this Agreement by L'Orange, in which case this subsection (v) shall apply. Should such Competitor Change in Control occur during the Minimum Term, MTU shall be entitled to exercise its right to terminate this Agreement by serving a termination notice within six (6) months from such Competitor Change in Control becoming effective; such termination notice shall end this Agreement twelve (12) months after having been served. In such case, MTU shall be obliged to compensate L'Orange for the fair market value of the future business lost by such termination. For this purpose, the fair market value of the future business lost shall be established by using valuation methodology and inputs (net present value of future cash flows, discount rates, EBITDA multiples, etc.) that are comparable to methodologies and inputs for

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

36

the valuation that are reasonable for M&A transactions of a similar business within the applicable industry. In such case, [***].

26.4    Termination notices have to be in writing.

26.5    In case of termination of this Agreement by either Party, except for cases in which L'Orange terminated this Agreement due to good cause, L'Orange shall immediately provide reasonable assistance to enable MTU to continue the provision of Contractual Services within due time. L'Orange shall in particular allow MTU to place final purchase Orders and provide any documentation, technical assistance and training as well as license any L'Orange IP rights required for the provision of Contractual Services. Except for cases in which L'Orange terminated this Agreement due to good cause, L'Orange will after termination of this Agreement further deliver Products to MTU based either on individual purchase orders or on a separate transition agreement to be concluded, until MTU has found a new supplier, but in no event longer than 12 (twelve) months after this Agreement has terminated. Such deliveries shall in no event lead to an extension of this Agreement.

26.6    Upon termination, either Party shall without undue delay (unverzüglich) return to the other Party all Confidential Information, Know-How as well as Background IP, unless provided otherwise in this Agreement.

26.7    The termination shall have no effect on already concluded individual Purchase Contracts.

27.    Competitor Change in Control

27.1    In the event (and only in the event) of a Competitor Change in Control, the following shall automatically become effective immediately upon the Competitor Change in Control:

27.1.1    [***]

27.1.2    [***].

27.1.3    [***].

27.1.4    [***].

27.1.5    [***].

27.2    In deviation from Section 27.1, Section 27.1.5 shall apply immediately prior to Competitor Change in Control and L'Orange shall notify MTU about such upcoming

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

37

Competitor Change in Control in writing reasonably prior to such Competitor Change in Control, to enable MTU to exercise its right under Section 27.1.5(iv).

28.    Dispute Resolution

28.1    Any dispute or controversy arising out of or in relation to this Agreement including its existence, validity or termination ("Dispute") shall be settled amicably by negotiation between the Parties within 30 (thirty) days from the date of written notice of either Party of the existence of such Dispute.  

28.2    Failing such amicable settlement, all Disputes shall be escalated by either Party to the "Management Board" consisting of representatives of both Parties at least of vice president level. Such Dispute shall be settled amicably by negotiations between the members of the Management Board within 30 (thirty) days from the date of the written notice of escalation.

28.3    Failing such amicable settlement by the Management Board, all Disputes shall be finally settled in accordance with the Arbitration Rules of the German Institution of Arbitration (Deutsche Institution für Schiedsgerichtbarkeit e.V. (DIS)) without recourse to the ordinary courts of law. Temporary relief (Einstweiliger Rechtsschutz) before the courts of the competent jurisdiction shall remain unaffected. If temporary relief is sought before the ordinary courts, the courts of Munich, Germany, shall have jurisdiction.

28.4    The place of arbitration is Munich, Germany. The arbitral tribunal consists of three arbitrators and the chairman shall be eligible for the office of a judge in Germany. The language of the arbitral proceedings is English. The arbitral tribunal shall also determine the costs of the arbitration proceeding, including reasonable attorney fees, and decide upon their allocation among the Parties.

28.5    The Parties undertake to keep confidential (i) all awards obtained in the arbitration, (ii) all materials submitted or created for the purposes of the arbitration and (iii) all other documents produced by a Party, in each case of (i) to (iii) except and to the extent that information or documents are (x) already lawfully in the public domain, or (y) disclosure thereof may be required by a Party to comply with mandatory law or to protect or pursue a legal right or to enforce or challenge an award granted in legal proceedings before a court.

28.6    Solely with respect to those instances in which this Agreement refers to this Section 28.6 and in the event in such instances the Parties could not otherwise reach an agreement on a reasonable price determination or reasonable cost determination or other value determination required in this Agreement, such reasonable determination of price, cost or other value in accordance with the principles agreed between the

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

38

Parties for the relevant price, cost and/or other value shall be conducted by an independent and neutral expert or auditor (Sachverständiger oder Wirtschaftsprüfer) mutually agreed on by the Parties. Should the Parties not be able to agree on a neutral expert or auditor within ten (10) days, each Party shall have the right to refer the matter to the Chamber of Industry and Commerce Bodensee-Oberschwaben (IHK Bodensee-Oberschwaben) to determine the respective expert or auditor. The neutral expert or auditor shall make its decision in accordance with Section 317 of the German Civil Code (BGB) and the respective decision shall be binding and final unless it shows manifest errors. Any costs and expenses incurred by the neutral expert or auditor shall be borne equally by the Parties.

29.    Miscellaneous

29.1    No Breach of Agreement

29.1.1    Any claims of MTU or any of its Affiliates against L'Orange under this Agreement ("MTU Claim Basis") shall be excluded to the extent the facts relating to the MTU Claim Basis, (i) constitute a previous or continuing course of action that qualifies as a breach of the representations, warranties, guarantees, covenants or indemnification obligations (collectively, "Guarantees") provided by MTU pursuant to the SPA or this Agreement, or (ii) are caused by a breach of the TSA (during its term) by MTU or its Affiliates; in each case, such exclusions shall apply without regard to any applicable limitations in the SPA or the TSA that may preclude the enforcement of such Guarantees or corresponding claims under the TSA such as, without limitation, expiry of limitation period, de-minimis amount, threshold, caps, and disclosure schedules.

29.1.2    To the extent (i) this Agreement imposes on L'Orange any performance obligations in connection with Sections 4.2, 5.1, 7.2, 9, 10 and 12 ("Agreed Performance Standard"), and (ii) L'Orange’s actual performance during the last 12 months prior to the Effective Date would have constituted a breach of such Agreed Performance Standard, L’Orange shall for the first six (6) month period following the Effective Date be held only to the standard of L’Orange’s actual performance during the 12 month period prior to the Effective Date ("Baseline Performance Standard"). L'Orange shall thereafter endeavor to achieve the Agreed Performance Standard as soon as reasonably practicable, at improvement rates consistent with past performance improvement rates that L'Orange has demonstrated, or such greater improvement rates as can be reasonably expected by MTU (e.g., such as those reflected on mutually agreed scorecards), until the Agreed Performance Standard is achieved.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

39

29.2    Entire Agreement

This Agreement represents the entire provisions relating to the subject matter of this Agreement and replaces all previous provisions agreed between the Parties in respect of the subject matter of this Agreement, in particular the frame agreement between MTU und L'Orange (Rahmenvereinbarung) dated 30 July 2010 (document 20100205_Rahmenvereinbarung_L'O_MTU_12.doc). For the avoidance of doubt, any orders placed by MTU with L'Orange before the Effective Date and regarding the subject matter of this Agreement shall remain unaffected. Annexes form an integral part of this Agreement. No oral side agreements have been made.

29.3    Written Form Requirement

Amendments and modifications to or cancellation of this Agreement including its Annexes shall be made in writing in order to be valid. This shall also apply to the cancellation of this written-form requirement. For the avoidance of doubt, email and fax shall not be sufficient to comply with this written-form requirement.

29.4    Severability

Should any provision of this Agreement be or become, either in whole or in part, void, ineffective or unenforceable, then the validity, effectiveness and enforceability of the other provisions of this Agreement shall remain unaffected thereby. Any such invalid, ineffective or unenforceable provision shall, to the extent permitted by law, be deemed replaced by such valid, effective and enforceable provision as most closely reflects the economic intent and purpose of the invalid, ineffective or unenforceable provision regarding its subject-matter, scale, time, place and scope of application. The aforesaid rule shall apply mutatis mutandis to fill any gap that may be found to exist in this Agreement.

29.5    Notices

To the extent notifications or other declarations to the other Party have to be made in writing, email and fax shall be sufficient to comply with this written-form requirement.

29.6    Assignment

Without the respective other Party's prior written consent, no Party shall, in part or in whole, assign its rights and obligations under this Agreement. However, each Party may assign its contractual position (i.e. its rights and obligations as a whole) under this Agreement to its Affiliates upon the other Party's prior written consent; such consent must not be unreasonably withheld or delayed.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

40

29.7    Assignment of IP Rights

L'Orange may only assign any item of Foreground IP or Background IP to which a license is granted to MTU under this Agreement to any third party if such assignment does not affect the terms of the respective license granted to MTU, unless MTU agrees otherwise in writing. Any attempted assignment, directly or indirectly, made in breach of this Section 29.7 shall be null and void ab initio, and L'Orange shall indemnify and hold MTU harmless from and against any damage resulting therefrom.

29.8    Subcontracting

L'Orange shall not, without prior written consent of MTU, materially subcontract a substantial portion of the provision of any Contractual Service or parts thereof to third parties. Even if MTU consents to such subcontracting, L'Orange will remain fully responsible for the proper and timely provision of all Contractual Services. For the avoidance of doubt such consent must not unreasonably be withheld or delayed.

29.9    Language

This Agreement, its words and phrases are to be construed under German law paying regard to the use of English as language of convenience for both Parties. Terms in brackets shall have their meaning under German law without recourse to any other law.

29.10    Governing Law

Any and all legal relationships relating to this Agreement shall be governed exclusively by the laws of the Federal Republic of Germany, excluding the UN Convention on Contracts for the International Sale of Goods (CISG).

29.11    Order of Precedence

Except to the extent that any other provision of this Agreement provides to the contrary by express reference to the order of precedence of documents, if there is any inconsistency between this Agreement, any Order or any Annex, the documents will take the following order of precedence:

(i)    the body of this Agreement;

(ii)    the Annexes to this Agreement;

(iii)    accepted Order.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

41

29.12    Annexes

The following Annexes are part of this Agreement:

Annex 1:	Products, Product Prices (Table) Lead Times
Annex 2a:	[***]
Annex 2b:	[***]
Annex 3:	[***]
Annex 4:	MTU's General Specifications for Delivery
Annex 5:	Quality Assurance Standards, Template of the Quality Management Agreement
Annex 6:	Rolls-Royce Supplier Code of Conduct

Signed for and on behalf of	Signed for and on behalf of
L'Orange GmbH	MTU Friedrichshafen GmbH
Place, Date:	Place, Date:
Hamburg, Germany	Hamburg, Germany
1 June 2018	1 June 2018
Name:	Name:
/s/ Katherine Minski	/s/ Daniel Weiss
(Print)	(Print)
Title:	Title:
Based on Power of Attorney	Based on Power of Attorney

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

Annex 1 to the Frame Development and Purchase Agreement – Price List

[***]

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

1

Annex 2a to the Frame Development and Purchase Agreement – [***]

[***]

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

1

Annex 2b to the Frame Development and Purchase Agreement – [***]

[***]

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

1

Annex 3 to the Frame Development and Purchase Agreement – [***]

[***]

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

1

Annex 4 to the Frame Development and Purchase Agreement – MTU’s General Specifications for Delivery

1.     Documentation 1.1   Delivery note a)  The delivery note (Annex 1) should be issued in accordance with DIN 4991 and must contain the following data fields:     MTU order number(s)     MTU order item number (for multi-item orders only)     Delivery point (as specified in the order)     MTU material number(s)     Part name     Quantity being delivered     Type and quantity of individual load carriers / packages (euro-pallets, disposable cardboard boxes, etc.); if MTU load carriers are used: Material no. according to the MTU container management system (see Clause 4 d)     Total gross weight incl. unit of measure     Name and address of supplier, including point of contact for any queries     Delivery note number     Delivery note date     Shipping method (e.g. by truck)     Name of freight carrier / forwarder     Shipping terms (e.g. FCA)     special notes, e.g. reference to ESD Guidelines (in cases of electronic components), details as per order in cases of limited-life materials, uneven weight distribution, reference to special points of agreement or goods for consignment stock (where consignment stocking has been agreed), reference to any accompanying test certificate / initial sample test report (see Clause 3.3c) b)  A separate delivery note must be issued for each delivery point. 1.2   Bill of lading a)  The supplier must issue the forwarding agent one bill of lading per delivery point. If necessary, the online form available on the MTU Purchasing website (www.mtu-online.com) may be used. Attention must be drawn to any package peculiarities such as uneven weight distribution or non-stackables. b)  Delivery note numbers must be listed on the bills of lading to ensure traceability. c)  Where Europool load carriers are used, the bill of lading must contain details of type and quantity thereof. d)  Associated delivery notes must be appended to the bill of lading. Bills of lading complete with delivery notes must be issued separately to the carrier. e)  An additional weather-protected copy of the delivery note must be affixed firmly and visibly to the outside of the load carrier or package (for requirement see Clause 3.3 b). f)   Where deliveries are made by the supplier, a bill of lading, whereas not mandatory, is recommended in the interests of ensuring fast processing of incoming goods. 1.3   Customs documents (non-EU consignments) In addition to the delivery note and bill of lading, import processing also requires (Street: CMR bill of lading, Air: AWB, Sea: bill of lading):

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

General Specifications for Deliveries

    Commercial invoice (or proforma invoice where consignment is free of charge)     Original preference documents (only where the goods are coming from a country which has a treaty with the EU), such as ATR, EUR.1, UZ Form A, etc. Five copies of the commercial invoice or proforma invoice must be issued (2 for the carrier, 1 attached to the package, 1 inside the package, 1 to the MTU Customs Office) and must incorporate the following features:     Title: Commercial invoice or proforma invoice     Invoice number and date     Correspondence addresses of seller, buyer and consignee     Carrier     Port of departure/arrival     Incoterms     Terms of payment     MTU order number     MTU material number and name     Goods number (HS code)     Indication of origin     Quantity     Unit price and total price or the comment “For customs clearance only. No payment required!”     Net and gross weights     Type and quantity of packages The copy for the MTU Customs Office must arrive before the goods. 1.4   Documentation language Documents, markings and delivery papers intended to identify the consignment must be in German or English. Where statutory requirements (e.g. customs regulations) stipulate a different language, a German or English translation must be included. 2.     Component protection and packaging 2.1   General protection for components All components must essentially be packaged in a manner which is suitable for the chosen mode of transport and which provides protection against: a)  Corrosion (as per process standard MTV5066; see Clause 6.2) b)  Soiling and contamination c)  Damage, in particular to functional or sealing surfaces d)  Electrostatic charging (where necessary) e)  Buckling or breakage Packaging should be selected to offer the smallest possible dimensions and the smallest possible amount of unfilled space therein. Packaging should also be chosen such that it enables packages to be stacked. Components should, for example, not be allowed to protrude over the top edge of the load carrier. Where they protrude laterally from the side of the carrier, collision guards must be attached. Where cardboard boxes or similar are used, these must be robust enough, even after removal of transit protection, to permit safe storage and removal of individual components. 2.2   Specific protection for components Protective measures over and above the general packaging requirements are specified by MTU Friedrichshafen in the form of (material number specific) packing instructions,

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

2

General Specifications for Deliveries

which are agreed in advance with the relevant suppliers. As a result, packing instructions do not replace these General Specifications for Deliveries, but simply augment them. A valid packing instruction is included on the order or in the scheduled delivery call-off. 3.     Markings 3.1   ID Marking of packages Packages must be marked with the following information in accordance with the example set out below (as per VDA Recommendation 4902):     MTU material number (where possible also in barcode form, EAN type 128)     Part name     Quantity per package (min. 12mm font size)     Delivery point (min. 12mm font size)     Delivery note number Non-stackables and goods with uneven weight distribution and/or other special requirements (e.g. lashing) must have a clearly visible marking as per ISO 780 on their packaging. Sample package label: 3.2   Special points of note for unitary multi-package deliveries a)  Where deliveries are made using multi-item containers, the individual material numbers must be collated into sub-packages able to be handled individually. b)  Multi-item containers must contain packages for a single delivery address only. 3.3   Marking of sub-packages a)  The sub-package must be marked as follows:     MTU material number (where possible also in barcode form, EAN type 128)     Part name     Quantity per package (min. 12mm font size)     Expiry date where required on the order Sample label for sub-package / small load carrier:   b)  The marking must be attached to the side of the load carrier / sub-package and must be clearly legible:   c)  Where the consignment is accompanied by a test certificate and/or an initial sample inspection report, this must be affixed in a protective envelope to the outside of the package in a manner analogous to Clause 3.3 b).

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

3

General Specifications for Deliveries

3.4   Miscellaneous a)  To prevent confusion, any old markings still present (or remains thereof) must be removed from load carriers. b)  Where a single material number is made up of more than one component, each type must be packaged together to form an individual set and must be labeled in such a way as to make it unambiguously clear which parts belong together. Where joint packaging is impracticable, the packages must be numbered clearly (min. 12mm font size) and contiguously using the following convention: “Package <x> of <y>“ (e.g. “Material no. 123, Package 2 of 5”). In this special instance, a packing list must be provided, showing the correct relationship of components to packages, with one “package level” packing list attached to each load carrier. c)  With MTU reusable load carriers, marking labels should be placed in suitable card pockets. Adhesive labels may not be used on MTU reusable load carriers. d)  Labels should be adhered to cardboard boxes in a manner analogous 4.     Handling a)  The damage-free condition of EUR pallets (1200 x 800 mm) and EUR wire-mesh boxes must be ensured as per the exchange criteria set out by the European Pallet Association EPAL (Internet: www.epal-pallets.org). Other EPAL load carriers and EPAL accessories (e.g. collars) are treated by MTU as disposable packaging. EPAL load carriers are essentially exchanged via the freight carrier. b)  Print products (e.g. newspaper, etc.) are not permitted to be used as packaging material. c)  MTU reusable transportation containers / load carriers (e.g. small load carriers, wire-mesh boxes, etc.) may only be used where expressly agreed in the packing specification for the relevant material number. d)  Composite consignments / unitary multi-package deliveries may not contain several different revision levels collated into a single package. Each material number must be packaged separately and be able to be transported individually. e)  Where materials with limited lifespans for use are involved, consignments made up of products with several different expiry dates and/or production dates may not be made. f)   Packages must be collated to form a single consignment unit able to withstand the rigors of transit and must be secured against sliding around during transit. Suitable means of securing the load must be provided (e.g. belt eyes, lashing points). g)  Load carriers and packages weighing over 25 kg must permit drive-in access underneath (min. 100 mm drive-in height). Sub-packages and small load carriers are subject to a maximum weight limit of 15 kg. Small load carriers and cardboard boxes lashed together are subject to a maximum height limit of 1 m and a maximum weight limit of 1.5 t (where component geometry permits). 5.     Disposal of packaging a)  Where disposable packaging is used, this should be kept to a minimum in terms of both volume and weight. b)  Environmentally friendly and recyclable materials must be used for all packaging. c)  Combinations of materials (e.g. iron clamps, nails in wood) must be kept to a minimum and must be able to be separated easily after use.  

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

4

General Specifications for Deliveries

d)  Packaging labels must not be allowed to impair recyclability (no adhesive PVC labels on cardboard boxes). e)  Unless special agreement has been reached (e.g. loan containers listed in an MTU packing instruction) between MTU and the supplier, essentially no packaging will be sent back. 6.     Miscellaneous 6.1   Exceptions clause Deliveries which do not comply with these General Specifications for Deliveries must be approved in advance by MTU Friedrichshafen GmbH and must carry special reference to this fact on the delivery note and the package(s) involved. 6.2   Other applicable regulations a)  These General Specifications for Deliveries do not release the supplier from currently applicable statutory requirements. b)  In the case of components required by specification to meet special standards of cleanliness, standards MTN5253-1 and/or MTN5253-2 must be observed. c)  For components at risk of corrosion, the requirements of process standard MTV 5066 must be met. d)  In cases of materials with limited lifespans for use, process standard MTV5005 applies. e)  Where timber packaging is used in cases of deliveries coming from non-EU countries, the requirements of the IPPC (“International Plant Protection Convention”) standard ISPM (“International Standards for Phytosanitary Measures”) No. 15 must be observed. f)   Where the MTU packing instruction requires the use of reusable load carriers, the “General Regulations on Management of Containers” must be followed. g)  All applicable standards, guidelines and regulations are available for inspection on the MTU Purchasing website (www.mtu-online.com). Version date: February 2016 MTU Friedrichshafen GmbH

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

5

General Specifications for Deliveries

Annex 1

Bloggs & Sons

Main St. 1 D-77777 Anytown

Customer	Delivery note
MTU Friedrichshafen GMBH P.O. Box 88040 Freidrichshafen	Delivery note no.	Date
	571 12392	10.11.09
	Administrator/Contact
	Mr. Doe
Consignee/Delivery point
	Tel.	Fax
MTU Plant 2 – Bay 34 DOMÄNENSTRASSE 88047 FRIEDRICHSHAFEN	07 11-777777 E-mail address blogs@sons.com	07 11-777770
	Items dispatched
	Plant 0001      77777 Anytown
	Destination country
	Germany

Shipping method	Truck haulage
Carrier	Bloggs
Shipping terms	FCA
Consignment ref.	Quantity	Package	Total gross weight	Total net weight
712392-001-002	2	KLT-6428	28.300 kg	19.500 kg

Order no.		Order information
Order item	Material number	Designation / Customer part number	Quantity	ME
177789131	Order no. 155-1080311 dated Oct 15, 09
0010	3931070220	Oil separator	50	pcs.
		Net weight per item	0.390	kg
0020	4891235410	Bearing shell	10	pcs.
		Net weight per item	0.580	kg.

The delivery contains the following packaging:

2KLT-6428

1KLT-1234

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

6

Annex 5 to the Frame Development and Purchase Agreement

Quality Assurance Agreement

between

MTU Friedrichshafen GmbH

Maybachplatz 1

88045 Friedrichshafen

– hereinafter referred to as 'Customer' –

and

Company

Street address/Post Office box

Town, zip/postal code

– hereinafter referred to as 'Supplier' –

Revision

As at:

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

1

Table of Contents:

0.	PREAMBLE	3
1.	OBJECT OF THE CONTRACT	3
2.	GENERAL QUALITY ASSURANCE PROVISIONS	3
3.	MAXIMUM DEFECT RATES	3
4.	CALCULATION OF DEFECT RATE	4
5.	CONSEQUENCES OF EXCEEDING THE AGREED DEFECT RATES	5
6.	RELATION TO FRAMEWORK AGREEMENT	6
7.	DEFINITION OF TARGETS FOR PPM AND NUMBER OF QL-REPORTS (LINECALLS P.A)	6

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

2

0.Preamble

The Customer and the Supplier are parties to a framework agreement concluded in (hereinafter referred to as the 'framework agreement'), of which the subject is the delivery to the Customer by the Supplier of products individually named in the framework agreement.

Among other things, this framework agreement makes provisions for certain quality management requirements whose purpose is to reduce the costs for defective products and to avoid materials defect liability and product liability claims being made by the Customer's customers.

The aim of this Quality Assurance Agreement is to ensure supply quality on a long-term basis. Supply quality is to be assured through the consistent implementation of quality improvement measures. To this end, maximum defect rates are to be specified, as are the consequences that arise when such defect rates are exceeded.

On the above basis, the parties conclude the following quality assurance agreement:

1.Object of the contract

1.1The subject of this quality assurance agreement is the extension of existing quality management requirements regarding component quality and maximum defect rates on Supplier's products which are to be delivered to the Customer in the form of individual parts, engine components or project-specific systems components (so-called 'zero hours products'). It also stipulates the extended applicability of the framework agreement to further products and the legal consequences which arise when the products fail to meet the requirements with respect to the agreed component quality and maximum defect rate.

This quality assurance agreement refers to products delivered against vendor number on the basis of initial sample or batch orders.

All delivery items defined above are hereinafter referred to as 'products'.

2.General quality assurance provisions

2.1The Supplier undertakes to manufacture and inspect all products in accordance with the framework agreement specifications and quality assurance standard MTQ 5003 as attached hereto.

Addendum: Since October 1, 2013, the two quality assurance standards MTQ5011 and MTQ5003 have been amalgamated into MTQ5003.

3.Maximum defect rates

3.1The maximum defect rates for given products as agreed in the following are calculated on the basis of ppm (parts per million). To take into account changes due to return deliveries, inspections, and investigations, the contract parties shall evaluate and determine the actual defect rates in review meetings that take place at suitable intervals.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

3

3.2Inasfar as no other agreement has been reached between the contract parties, and in the context of the Continuous Improvement Process and zero-defect target, all target values named under paragraph 7 of this agreement shall be automatically reduced by     % per year based on the given target value of the previous year on expiry of the specified period.

4.Calculation of defect rate

4.1The actual defect rate in ppm that has arisen for a specific product owed under the contract is calculated as follows:

Number of acknowledged defects per calendar year x 1,000,000
Number of incoming units per calendar year

4.2The number of incoming units is defined as the total number of units supplied to the Customer in one calendar year of an individual product named in this agreement. Not to be included in this number are repeat deliveries effected in connection with QL-reports, or returned parts. To this extent, the Customer's LQA data bank provides the data basis. A comparison with Supplier data shall be effected monthly by the relevant technical departments.

4.3The number of defects is defined as the total number of a given product on which, in a calendar year, deviations from the contract specifications of the Customer – in particular, from drawings or applicable standards – are identified with respect to one or more of the contractually agreed quality characteristics. Other subsidiary agreements (in the sense of agreements that do not concern the required product properties or specifications) contained in order placement texts shall not be relevant to the determination of the number of acknowledged defects or number of incoming units within the context of this quality assurance agreement. To this extent the data basis shall be provided by the LQA data bank of the customer. A comparison with Supplier data shall be effected monthly by the relevant technical departments.

4.4Defects are considered to be acknowledged when the Supplier upon formal written notification of the specific defects by the Customer does not provide feedback within 2 weeks of receipt of the QL-report. In the event that no agreement can be reached regarding the acknowledgment of a defect on an individual product, a settlement shall be reached at the end of the year in a routine meeting between the parties or, if necessary, during the year.

4.5If products for which no defects have been reported by the Customer are recalled by the Supplier for inspection, whereby recall does not affect the production operations of the Customer, the said defects shall not be regarded as acknowledged. The SAP report shall be deleted on re-delivery of the products.

4.6Assessment of the Supplier's performance by the Customer shall therefore remain unaffected.

4.7If the Customer has a reasonable basis to believe not only an individual part to be defective, but also the Customer's further stocks of that part, the Customer shall be entitled to inspect the entire stock of the product in question himself or to have the inspection carried out by the Supplier or a third party. The Supplier shall reimburse the Customer with reasonable expenses in connection with such inspection.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

4

In this case, the number of acknowledged defects is the actual number of defective products counted. If an inspection is carried out at the Supplier's site, whereby the number of defective parts is not known in advance, 100% of the defective products counted shall always be taken as the number of acknowledged defects, insofar as no other agreement is made

5.Consequences of exceeding the agreed defect rates

5.1The Supplier takes reasonable measures necessary to ensure that the zero defects target is consistently met.

5.2If the defect rates exceed the agreed defect rates in two consecutive months, or if a Linecall arises due to a deviation on a contractual product(a Linecall is a malfunction that leads to delays in or to shutdown of the production operations), the Supplier shall implement the measures described in more detail in subparagraphs 5.3 to 5.7. If the average defect rate in ppm or the number of QLreports in a calendar year exceeds the agreed target by more than 10%, the Supplier shall likewise implement the measures stipulated in subparagraphs 5.3- 5.7 at the beginning of the following year.

5.3A qualified 100% outgoing goods inspection shall be instated at the expense of the Supplier within 10 days after the end of the month. If a 100% outgoing goods inspection has already been instated, this shall be supplemented by a further inspection in accordance with the two-man rule.

5.4The type, method and location of the inspection(s) shall be based on the causal defect occurrence. If necessary, the inspection part spectrum can be limited to certain models, series or part families after joint inspection by the Supplier and Customer.

5.5Documentation of the inspection(s) shall be presented to MTU on demand.

5.6All defects which occur following introduction of the 100% outgoing goods inspection shall be analyzed in a risk assessment (e. g process FMEA) and corrective measures shall be defined. In this case, both the defect cause in the manufacturing process and the cause of the inspection slip are considered. A revision is effected if risk assessments already exist.

5.7The measures taken as a result of the risk assessment shall be presented to MTU on demand in a quality assurance meeting. Regardless of the exceeding of the agreed defect rate, the Customer is at any time entitled to schedule additional quality assurance meetings and/or visits to the Supplier.

The measures set out in subparagraphs 5.3-5.7 shall continue to be conducted until the defect rate either meets or falls short of the agreed ppm target values for six months consecutively and until the Linecall target values are met with no Linecall registered for the specific defect. Furthermore, the causal weak points in the manufacturing and/or inspection process must be verifiably eliminated by implementing suitable measures, e.g. auditing of the manufacturing process and identification of the weak points.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

5

6.Relation to framework agreement

6.1This quality assurance agreement solely serves as a supplement for or more detailed specification of the terms of the framework agreement, the validity of which remains unaffected. In the event of deviations or discrepancies between this quality assurance agreement and the framework agreement the framework agreement shall prevail.

6.2If the existing quality assurance agreement affects products that were not previously the subject of the framework agreement, it is agreed that the framework agreement according to subparagraph 6.1 of the existing agreement shall also apply to these products.

7.[***]

[***].

L'Orange	MTU Friedrichshafen GmbH
Place, Date	Place, Date
(Stamp, Signature of Supplier)	(Stamp, Signature of Supplier)
L‘Orange	MTU Friedrichshafen GmbH
Place, Date	Place, Date
(Stamp, Signature of Customer)	(Stamp, Signature of Customer)

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

6

Evans – LTSA Annex 5 – Attachment to Annex 5 – QAA – MTQ5003-MUNLIB01

QUALITATSSICHERUNGSNORM / QUALITY MANAGEMENT STANDARD	März 2017 March 2017
Qualitätssicherungsnorm für Lieferanten von Produktionsmaterial und Projektsystemgeschäft (PSG) - Komponenten Quality Assurance Standard for Suppliers of Production Material and Project System Business (PSB) - Components	MTQ5003
Ersatz fȕr Ausgabe 11.2014	Replaces Edition 11.2014
The English version is a translation. In case of dispute the Ger- men original will govern.

Vorwort

Diese Qualitätssicherungsnorm ist Bestandteil des Liefervertrags mit Rolls-Royce Powersys-tems (RRPS) und der Geschäftsbeziehung zwischen Auftragnehmer / Lieferant– nachfolgend AN genannt - und RRPS. Gegenstand der Qualitätssicherungsnorm sind alle vom AN gelieferten Produkte. Der AN sichert zu, alle erforderlichen personellen, organisatorischen, sachlichen und fi-nanziellen Ressourcen einzusetzen, um die Qualität seiner Produkte sicherzustellen.

Die Einhaltung der Regeln dieser Qualitätssicherungsnorm wird RRPS gemeinsam mit dem AN langfristig Vorteile auf dem Markt sichern und ist damit Garant für eine erfolgreiche Partner-schaft.

Preface

This quality assurance standard forms part of the supply contract concluded with RRPS and the business relationships between CONTRACTOR and RRPS.

Subject of the quality assurance standard are all products supplied by the CONTRACTOR. The CONTRACTOR warrants to employ all the human, organizational, material and financial resources required to ensure the quality of the products.

Compliance with the rules of this quality assurance standard will safeguard long-term advantages in the market for RRPS together with the CONTRACTOR and is therefore a guarantee for successful cooperation.

Fortsetzung Seite 2 bis 20 Continued on pages 2 to 20
Bearbeitet Compiled by:	Geprüft Checked by:	Freigegeben Approved by:	Änderungsdienst TQZS Amendment Service TQZS	Ordnungs-Nr. Order No.
gez./sign. Klischowski Müller	gez./sign. Klischowski	gez./sign. Gotterbarm	1/2017	F17
	MTU Friedrichshafen GmbHFür diese Werknorm behalten wir uns alle Rechte vor All rights reserved for this MTU Factory standard

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

MTQ5003 Seite/Page 2 von/of 20

Inhalt / Contens		Seite / Page
1	Begriffsdefinition	4
1	Definition of Terms	4
1.1	Qualifizierung	4
1.1	Qualification	4
1.2	Produktkategorien	4
1.2	Product Categories	4
1.2.1	Prototypen	4
1.2.1	Prototypes	4
1.2.2	Vormuster	4
1.2.2	Preliminary Samples	4
1.2.3	Erstmuster	5
1.2.3	Initial Samples	5
1.2.4	Projektsystemgeschäft (PSG)-Komponenten	5
1.2.4	Project System Business (PSB)- Components	5
2	Qualitätsmanagementsystem	5
2	Quality Management System	5
2.1	Qualitätsmanagementsytem des AN	5
2.1	Contractor’s Quality Management System	5
2.2	Qualitätsmanagementsystem des Unterauftragnehmers	5
2.2	Subcontractor’s Quality Management System	5
2.3	Audit	6
2.3	Audit	6
2.4	Information, Änderungsmanagement und Dokumentation	6
2.4	Information, Change Management and Documentation	6
3	Produktentstehungsprozess	7
3	Product Creation Process	7
3.1	Planung, Freigabe	7
3.1	Planning, Approval	7
3.2	Key Characteristics (KC)	8
3.2	Key Characteristics (KC)	8
4	Produktionsprozess- und Produktfreigabe	8
4	Production Process and Product Approval	8
4.1	Qualitätsprüfung und Dokumentation für Vor-/ Erstmuster und PSG-Komponenten	8
4.1	Quality Inspection and Documentation for Preliminary/Initial Samples and PSB Components	8
4.2	Vor- und Erstmuster von Guss- und Schmiederohteilen	9
4.2	Preliminary and Initial Samples of Raw Castings and Forgings	9
4.3	Gegenprüfungen durch RRPS	10
4.3	Verification Inspections by RRPS	10
4.3.1	Begriffsdefinition Prüfarten	10
4.3.1	Inspection Type Definitions	10
4.3.2	Freigabe durch RRPS	11
4.3.2	Approval by RRPS	11
4.4	Kennzeichnung	11
4.4	Marking	11
4.5	Anlieferung	12
4.5	Delivery	12
4.6	Aussetzen der Fertigung und reduzierte Bemusterung	12
4.6	Discontinuation of Production and Reduced Sampling	12
4.7	Vordrucke für Prüfbericht für Vor-/ Erstmuster und PSG-Komponenten	12
4.7	Templates for Inspection Reports for Preliminary/Initial Samples and PSB Components	12
4.8	Rückstellmuster	13
4.8	Reference Samples	13

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

MTQ5003 Seite/Page 3 von/of 20

5	Serienbegleitende Qualitätsmaßnahmen	13
5	Series Related Quality Assurance Measures	13
5.1	Kennzeichnung	13
5.1	Marking	13
5.2	Rückverfolgbarkeit	13
5.2	Traceability	13
5.3	Prüfung im Wareneingang - Serie	14
5.3	Incoming Goods Inspection - Series	14
5.4	Sicherstellung der Serienqualität	14
5.4	Assurance of Series Quality	14
5.4.1	Requalifizierung - Serie	14
5.4.1	Requalification - Series	14
6	Qualitätsziele	15
6	Quality Objectives	15
6.1	Fehlerfreie Lieferung / AN-Entwicklung	15
6.1	Zero Defect Supply / Contractor Development	15
7	Änderungen / Abweichungen der Spezifikationen (Normen, Zeichnungen, Lastenheft usw.); Änderungen im Lieferumfang	16
7	Changes/Deviations of Specifications (standards, drawings, requirements specifications, etc.); Change to Scope of Supply	16
7.1	Antrag auf Abweichungslaubnis (AE)	16
7.1	Application for Deviation Approval	16
7.2	Änderungsantrag	17
7.2	Application for Change	17
7.3	Kosten	17
7.3	Costs	17
7.3.1	Qualifizierung	17
7.3	Qualification	17
7.3.2	Antrag auf Abweicherlaubnis / Konstruktionsänderungsantrag / Änderungsantrag	17
7.3.2	Application for Deviation Approval / Application for Design Change / Applic. for Change	17
8	Behandlung von Beanstandungen	18
8	Handling of Complaints	18
8.1	8-D-Report	18
8.1	8-D-Report	18
8.2	Annahme unter Vorbehalt	18
8.2	Conditional Acceptance	18
8.3	Rückversand	18
8.3	Return Shipments	18
8.4	Montageversorgung	18
8.4	Assembly Supply	18
8.5	Nachbesserung durch Dritte	19
8.5	Rectification by Third Parties	19
9	Versicherungspflicht des AN	19
9	Contractor’s Obligation to Take out Insurance	19
10	Lieferantenbewertung	19
10	Contractor Assessment	19
11	Arbeitssicherheits- und Umweltschutzvorschriften	20
11	Health & Safety and Environmental Regulations	20

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

MTQ5003 Seite/Page 4 von/of 20

1.    Begriffsdefinition	1.    Definition of Terms
1.1    Qualifizierung	1.1    Qualification
Die Qualifizierung von Produkten umfasst die Er-bringung von Nachweisen für die Eignung des Pro-duktionsprozesses und die Erfüllung aller verein-barten Produkteigenschaften. Der Abschluss des Qualifizierungsprozesses seitens des AN erfolgt durch die Produktionsprozess- und/ oder Produkt-freigabe.	The qualification of products comprises providing proof of the suitability of the production process and compliance with all product properties agreed. Completion of the qualification process on the part of the contractor is performed by way of the production process and/or product approval procedure.
1.2    Produktkategorien	1.2    Product Categories
Die nachstehend beschriebenen Produktkategorien werden in der jeweiligen Bestellung für das Ver-tragsprodukt ausgewiesen.	The product categories described below are specified in each order for a contractual product.
1.2.1    Prototypen	1.2.1    Prototypes
Prototypen sind Produkte, die nicht für die Qualifi-zierung verwendet werden. Die Herstellung erfolgt nicht zwingend mit den für die spätere Serienferti-gung vorgesehenen Betriebsmitteln, Verfahren und Bedingungen. Beispiele für Prototypen sind Produk-te, die im Rapid Prototyping-Verfahren hergestellt werden, Baumuster und Versuchsteile. Der Umfang von Nachweisen für die Freigabe von Prototypen ist fallbezogen zwischen RRPS und dem AN abzustimmen.	Prototypes are products which are not used for the qualification process. They are not necessarily manufactured using the same production equipment, processes and conditions as those envisaged for later series production. Examples of prototypes are products manufactured with the rapid prototyping process, design samples and experimental samples. The scope of proofs to be provided for the approval of prototypes shall be agreed between RRPS and the contractor on a case-to-case basis.
1.2.2    Vormuster Vormuster sind Produkte für die Qualifizierung, die noch nicht zwingend mit den für die spätere Serien-fertigung vorgesehenen Betriebsmitteln, Verfahren und Bedingungen hergestellt wurden. Ziel ist es, die Vormuster unter seriennahen Bedingungen herzu-stellen. Vormuster werden in der Regel beschafft, wenn die Produkteigenschaften lt. Spezifikation und/ oder der Produktionsprozess noch nicht final für die Serie definiert sind. Die vorläufige Produktionsprozess- und Produkt-freigabe erfolgt nach dem Freigabeprozess, der in Abschnitt 4 näher beschrieben wird. Die Vormusterfreigabe stellt keine Freigabe für die Serienlieferung dar.	1.2.2    Preliminary Samples Preliminary samples are products intended for the qualification process that were not necessarily manufactured yet using the same production equipment, processes and conditions as those envisaged for later series production. It is the objective to manufacture the preliminary samples under conditions that are close to series production. Preliminary samples are usually obtained if the product properties defined in the specifications and/or the production process are not yet finally defined for series production. The preliminary production process and product approval follows the approval process described in more detail in section 4. Preliminary sample approval does not constitute approval for series product shipments.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

MTQ5003 Seite/Page 5 von/of 20

1.2.3    Erstmuster	1.2.3    Initial Samples
Erstmuster sind Produkte für die Qualifizierung, die vollständig mit serienmäßigen Betriebsmitteln und unter serienmäßigen Bedingungen hergestellt wur-den und, bei stabilem Produktionsprozess, der späteren Serienfertigung hinsichtlich Maßen, Werk-stoffen, Werkstoffeigenschaften und Funktionen entsprechen. Die Produktionsprozess- und Produktfreigabe er-folgt nach dem Freigabeprozess, der in Abschnitt 4 näher beschrieben wird. Eine Serienlieferung darf nur nach einer Erstmusterfreigabe durch RRPS erfolgen.	Initial samples are products intended for the qualification process that are manufactured completely with series-production equipment and under series-production conditions and correspond to the later series products with regard to dimensions, materials, material properties and functions, produced in a stable production process. The production process and product approval follows the approval process described in more detail in section 4. A series product shipment shall not be made until initial sample approval by RRPS Frie-drichshafen is obtained
1.2.4    Projektsystemgeschäft (PSG)- Komponenten	1.2.4    Project System Business (PSB)- Components
PSG-Komponenten sind Produkte, welche nicht unter Serienbedingungen hergestellt werden. Bei-spiele hierfür sind Einzelkomponenten oder Klein-stückzahlen mit spezifischen Projektanforderungen. Die Qualifizierung von PSG-Komponenten umfasst im Unterschied zu Vor- und Erstmustern nur die vereinbarten Produkteigenschaften und schließt mit der Produktfreigabe ab. Die generelle Freigabe der Produktionsprozesse incl. Fertigungs- und Prüfver-fahren erfolgt für PSG-Komponenten in der Regel im Rahmen der Auditierung des AN.	Project system business (PSB) components are products which are not manufactured under series-production conditions. Examples are single components or small-volume orders involving specific project requirements. In contrast with preliminary and initial samples, the qualification of PSB components covers only the product properties agreed and is completed on product approval. The general approval of the production processes including manufacturing and inspection/test procedures for PSB components is usually performed within the scope of contractor auditing.
2    Qualitätsmanagementsystem	2    Quality Management System
2.1    Qualitätsmanagementsytem des AN	2.1    Contractor’s Quality Management System
Um die einwandfreie Qualität ihrer Produkte und Dienstleistungen gewährleisten zu können, müssen die AN mindestens über ein zertifiziertes Qualitäts-managementsystem nach ISO 9001 in der jeweils aktuellen Ausgabe verfügen und danach verfahren. Verbunden damit ist die Verpflichtung des AN zur Null-Fehler-Zielsetzung und der kontinuierlichen Verbesserung seiner Leistungen. Im Projektsystemgeschäft kann in Einzelfällen nach entsprechender Prüfung durch die Qualitätsabtei-lung von dieser Forderung abgewichen werden.	Contractors must have and use at least a certified quality management system based on the ISO 9001 standard in the current version at any one time in order to be able to ensure the required quality of their products and services. This involves the contractor’s obligation to aim for zero-defect production and continuous improvement of performance. In the context of Project Systems Business, this requirement may be waived in individual cases following appropriate investigation by the Quality department.
2.2    Qualitätsmanagementsystem des Unterauftragnehmers	2.2    Subcontractor’s Quality Management System
Vergibt der AN Aufträge an Unterauftragnehmer, so hat er RRPS darüber rechtzeitig zu informieren und sicherzustellen, dass die Forderungen dieser Quali-tätssicherungsnorm ebenfalls durch den Unterauf-tragnehmer eingehalten werden. Bei nicht zertifi-zierten Unterauftragnehmern hat der AN die Quali-tät aufgrund seiner Systemverantwortung in geeig-neter Art und Weise sicherzustellen. Der Wechsel des Unterauftragnehmers ist RRPS rechtzeitig an-zuzeigen.	If the contractor awards contracts to subcontractors, the contractor shall inform RRPS at the point of decision prior to implementation and make sure that the requirements of this quality management standard are also complied with by the subcontractor. If non-certified subcontractors are employed, the contractor shall take suitable measures to safeguard quality in view of contractor’s system responsibility. Any change of subcontractor shall be notified to RRPS at the point of decision prior to implementation.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

MTQ5003 Seite/Page 6 von/of 20

2.3    Audit	2.3    Audit
Der AN gestattet RRPS, durch Audits festzustellen, ob seine Qualitätssicherungsmaßnahmen die For-derungen von RRPS erfüllen. RRPS behält sich vor, AN sowie gegebenenfalls Unterauftragnehmer zu auditieren. Nach vorheriger Ankündigung wird der AN selbst kurzfristige Terminwünsche ermögli-chen. Der AN gewährt RRPS und - soweit erforderlich - dessen Kunden Zutritt zu allen Betriebsstätten, Prüfstellen, Lagern und angrenzenden Bereichen sowie Einsicht in qualitätsrelevante Dokumente. Dabei werden notwendige und angemessene Ein-schränkungen des AN zur Sicherung seiner Be-triebsgeheimnisse akzeptiert. RRPS teilt dem AN das Ergebnis dieser Audits mit. Sind aus Sicht von RRPS Maßnahmen erforderlich, verpflichtet sich der AN, unverzüglich einen Maß-nahmenplan für sich zu erstellen, diesen fristge-recht umzusetzen und RRPS hierüber zu unterrich-ten.	The contractor grants RRPS the right to conduct audits to verify that the quality assurance measures meet RRPS’s requirements. RRPS reserves the right to audit both the contractor and, if required, the sub-contractor. The contractor shall facilitate scheduling of audits even at very short notice. The contractor permits RRPS and - where necessary - its customers access to all operating facilities, test areas, stores and peripheral areas, as well as the inspection of quality-relevant documentation. In this respect, the necessary and reasonable restrictions to protect the contractor’s company secrets will be accepted. RRPS will inform the contractor about the results of such audits. If, from RRPS’s point of view, corrective actions should be required, the contractor is obliged to immediately establish an action plan and to implement this as scheduled and inform RRPS accordingly
2.4    Information, Änderungsmanagement und Dokumentation	2.4    Information, Change Management and Documentation
Der AN erhält von RRPS den letztgültigen Stand der technischen Unterlagen im Änderungsdienst und muss sicherstellen, dass dieser von allen be-troffenen Stellen immer beachtet wird. Der AN muss prüfen, ob ihm alle benannten technischen Unterlagen zur Verfügung stehen. Entsprechend dieser Vorgehensweise hat der AN auch seine Unterauftragnehmer einzubeziehen. Wird erkennbar, dass getroffene Vereinbarungen wie z.B. Qualitätsmerkmale, Termine, Liefermen-gen nicht eingehalten werden können, informiert der AN RRPS hierüber unverzüglich. Der AN wird RRPS auch über alle nach Auslieferung erkannten Abweichungen unverzüglich in Kenntnis setzen. Im Interesse einer schnellen Lösung verpflichtet sich der AN zur Offenlegung aller benötigten Informatio-nen (siehe Abschnitt 7). Der AN verpflichtet sich, vor	The contractor receives the latest revision of the technical documentation subject to amendments service from RRPS and must ensure that it is always adhered to by all departments involved. It is the contractor’s duty to verify that all technical documents referred to are available. The contractor must also involve any subcontractors accordingly in this procedure. If it becomes obvious that agreed elements such as quality characteristics, schedules or delivery quantities cannot be fulfilled, the contractor shall inform RRPS about this without delay. The contractor shall also inform RRPS immediately about all deviations recognized after delivery. With a view to achieving a quick solution, the contractor shall disclose all necessary information (see section 7). The contractor is obliged to obtain authorization from RRPS before
a)  Wechsel des Unterauftragsnehmer b)  Verlagerung von Fertigungsstandorten c)  Änderung von Prüfverfahren/ -einrichtungen d)  Verlagerung von Fertigungseinrichtungen am Standort e)  Änderung von Fertigungsverfahren, - abläufen und –materialien (auch bei Unterlieferanten) f)   Änderungen der Verpackung die Zustimmung von RRPS einzuholen und die in diesem Zusammenhang vereinbarten Qualitäts-nachweise für eine Prozess- und Produktfreigabe zu erbringen (siehe Abschnitt 3 und 7).	a)  changing a subcontractor b)  relocating production sites c)  modifying test procedures or equipment d)  relocating production facilities within a site e)  modifying any production procedures, sequences and/or materials (also at sub-suppliers) f)  modifying packaging and to provide the agreed quality-related evidence for process and product approval accordingly (see section 3 and 7).

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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Bei PSG-Komponenten ist die Information und Zu-stimmung von RRPS zu den Punkten c), d) und e) nur notwendig, wenn das Risiko einer Veränderung von Form, Fit, Function besteht oder wenn zu den Punkten c), d) und e) seitens RRPS spezifische Anforderungen definiert wurden. Die Punkte a) und b) sind in jedem Fall der RRPS anzuzeigen. Der Qualifizierungsumfang für PSG-Komponenten ist in diesem Zusammenhang jeweils mit RRPS abzu-stimmen. Sämtliche Änderungen am Produkt und in der Pro-zesskette von erstmusterpflichtigen Bauteilen wer-den vom AN in einem Produktlebenslauf dokumen-tiert und RRPS auf Verlangen vorgezeigt. Die Bemusterungsunterlagen sind mindestens 12 Jahre aufzubewahren. Die Protokolle der Wareneingangsprüfungen (be-treffend Zulieferteile und sonstige Vorprodukte der Unterauftragsnehmer), der Funktions-, Zuverlässig-keits- und Lebensdauertests, der Ausgangsprüfun-gen sowie gegebenenfalls der Fehleranalysen wer-den beim AN über den gesamten Produktlebens-zyklus, mindestens aber 12 Jahre, aufbewahrt. Der AN gewährt RRPS auf Wunsch Einsicht in die Auf-zeichnungen. In Einzelfällen kann RRPS eine län-gere Aufbewahrungsfrist verlangen.	For PSB components, providing information to and obtaining authorization from RRPS in relation to the items c), d) and e) is only required if there is a risk of changing form, fit, function or if specific requirements were defined by RRPS regarding items c), d) and e). RRPS must always be informed in any case about any change in relation to a) or b). The scope of qualification for PSB components must be agreed with RRPS accordingly. All changes to the product and process chain of parts that are subject to initial sampling shall be documented by the contractor in a product history which shall be submitted to RRPS on request. The sampling documentation shall be kept on file for at least 12 years. The records of incoming goods inspections (as regards bought-in parts and other pre-production items from subcontractors), the functional, reliability and durability tests, the final inspections and, if necessary, the failure analyses shall be filed and kept by the contractor for the complete product life cycle, however, at least 12 years. The contractor shall permit RRPS the inspection of these records on request. RRPS shall be entitled to demand a longer period of retention on a case-to-case basis.
3    Produktentstehungsprozess	3    Product Creation Process
3.1    Planung, Freigabe	3.1    Planning, Approval
Im Zuge der Vertragsprüfung wird der AN nach Erhalt aller technischen Unterlagen wie Spezifikati-onen, Zeichnungen, Stücklisten, CAD-Daten die Realisierbarkeit sofern nicht anders vereinbart auf Basis einer Herstellbarkeitsanalyse prüfen. Dabei erkannte Mängel und Risiken sowie Verbesse-rungsmöglichkeiten teilt der AN RRPS unverzüglich mit. Wenn nicht anders vereinbart, ist die Herstell-barkeitsanalyse zusammen mit dem Angebot an den Einkauf zu senden. Entsprechende Formulare siehe unter: http://www.mtu- online.com/mtu/einkauf/downloads/index.de.html Der AN führt eine Prozessplanung (Arbeitspläne, Prüfpläne, Betriebsmittel, Werkzeuge, Maschinen etc.) durch. Die Produktqualität interner und externer Erzeugnisse wird durch angemessene Maßnahmen bspw. Audits überwacht.	In the course of contract review, the contractor shall check the feasibility on the basis of a feasibility study after receipt of all technical documents such as specifications, drawings, parts lists, CAD data. The contractor shall inform RRPS without delay of any defects or risks as well as possible improvements recognized in this process. Unless otherwise agreed, the feasibility study shall be sent to Purchasing together with the offer. For the appropriate form, refer to: http://www.mtu- online.com/mtu/einkauf/downloads/index.de.html The contractor shall maintain a process plan (work plans, inspection plans, production equipment, tools, machines, etc.). The product quality of internal and external products shall be monitored by appropriate measures such as, for example, audit procedures.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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3.2    Key Characteristics (KC)	3.2    Key Characteristics (KC)
Für KC muss grundsätzlich die Prozesssicherheit nachgewiesen werden (cpk ≥ 1,67). Alternativ ist eine 100%-Prüfung mit dokumentierten IST-Werten zulässig. In der Zeichnung sind KC durch das nach-folgende Symbol gekennzeichnet:	As a matter of principle, the process reliability must be evidenced for all key characteristics (cpk ≥ 1.67). Alternatively, a 100% test with the documented “as is” values shall be admissible. The key characteristics are marked with the following symbol in the drawing:
Alle Produkt- und Prozessmerkmale sind spezifika-tionsgerecht zu erfüllen. Funktionskritische Merk-male (KC) erfordern jedoch besondere Beachtung, da Abweichungen bei diesen Merkmalen zu Funkti-onsausfall des Motors oder sonstigen Komponen-ten führen können. Funktionskritische Merkmale für Teile ohne Design-verantwortung des AN werden von RRPS festge-legt. Für Teile mit Designverantwortung des AN erfolgt die Festlegung in gemeinsamer Abstim-mung. Der AN macht hierzu Vorschläge. KC-Merkmale sind auf AN eigene Zeichnungen, Arbeits- und Prüfpläne zu übertragen.	All product and process characteristics shall be met as per specifications. However, those characteristics which are critical for function (KC, key characteristics) require special consideration since any associated deviations may result in failure of the engine or other components. Key characteristics for those parts for the design of which the contractor is not responsible will be defined by RRPS. For parts with design responsibility of the contractor, the definition shall be made by joint coordination. The contractor shall make suggestions for this. Key characteristics shall be incorporated in the contractor’s own drawings, work and test plans.
4    Produktionsprozess- und Produktfreigabe	4    Production Process and Product Approval
4.1    Qualitätsprüfung und Dokumentation für Vor-/ Erstmuster und PSG-Komponenten	4.1    Quality Inspection and Documentation for Preliminary/Initial Samples and PSB Components
Grundsätzlich sind alle Merkmale nach Zeichnung/ Spezifikation und 3D-Modell (sofern 3D-Modell verfügbar) zu prüfen, die im Herstellprozess er-zeugt oder beeinflusst werden. Erfordert die Prüfung besondere Prüfeinrichtungen, über die der AN nicht verfügt, ist eine fremde Prüf-stelle zu beauftragen. Die Verantwortung für diese Prüfung trägt der AN. Gegebenenfalls ist ein ein-heitliches Prüfverfahren und/oder einheitliche Messstellen am Bauteil zwischen AN und RRPS abzustimmen. Prüfergebnisse sind in der Form von Prüfberichten zu dokumentieren (siehe 4.7 Vordru-cke). Vermessene Teile sind deutlich erkennbar durch-zunummerieren, um eine Zuordnung der Teile zu den Messergebnissen zu gewährleisten. Art und Weise der Kennzeichnung ist bei Bedarf mit RRPS abzustimmen. Alle Merkmale sind auf der Zeichnung zu numme-rieren und mit Nummer im Prüfbericht für Vor-/ Erstmuster und PSG-Komponenten (nachstehend Prüfbericht genannt) einzutragen. Die Ankreuz-Spalten i.O./n.i.O. (OK/not OK) sind ebenfalls aus-zufüllen.	In all cases, all characteristics which are produced or influenced during the manufacturing process must be inspected to ensure compliance with drawing and 3D-model specifications (if 3D-models are available). If this inspection requires special inspection/test devices which the contractor does not have at his disposal, then a third-party testing/inspection body must be commissioned. The contractor bears responsibility for such inspection/testing. Where appropriate, standard inspection/test procedures and/or standard measuring points on the component must be agreed between the contractor and RRPS. The results of tests/inspections must be documented in the form of test/inspection reports (see 4.7 Templates). Components which have undergone measurement must be clearly and comprehensively marked with serial numbers in order to ensure that the results of measurements can be unmistakably allocated to individual components. If necessary, the type and method of ID-marking must be agreed with RRPS. All characteristics shall be numbered in the drawing and entered with the number in the inspection report for preliminary/initial samples and PSB components (referred to as inspection report below). The tick columns (i.O. = OK / n.i.O. = not OK) shall also be filled in.

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Wenn nicht anders vereinbart, sind vom AN nach-folgende Unterlagen dem Produkt beizulegen bzw. bei Prüfungen im Hause des AN vorzulegen:	Unless otherwise agreed, the contractor shall enclose the following documents with the product or submit them in case of inspections carried out on the contractor’s premises:-Inspection and test results
- Deckblatt - Prüfergebnisse - RRPS freigegebene Zeichnung (alle Merkmale nummeriert) - Werkstoff- und Wärmebehandlungsnachweise - ggf. Fotodokumentation des Gussmodells Nur bei Erstmustern und PSG -Komponenten sind beizulegen: - ggf. Konstruktions- und Entwicklungsfreigaben - Abnahmeprotokolle	- Cover sheet - Drawing approved by RRPS (all characteristics numbered) - Materials and heat treatment certificates - Photographic documentation of the casting pattern, if applicable The following documents are only required for initial samples and PSB components: - Design and development approval documents, if applicable - Acceptance records
Weitere auf der Zeichnung oder im Lastenheft spe-zifizierte Prüfanforderungen und -nachweise sind zu beachten und zu erbringen und auf dem Prüfbe-richt zu vermerken. Das Vorhandensein einer Risikoanalyse für Prozesse z.B. in Form einer Prozess-FMEA sowie eines Prozessablaufplanes ist auf dem Deckblatt zu bestätigen. Der Nachweis dazu wird z.B. im Rahmen eines Audits geführt. Sofern eine Design-FMEA erforder-lich ist, wird diese vertraglich gefordert. Bei ähnlichen Teilen ist eine übergeordnete Risiko-analyse für Prozesse oder der Teilefamilien ausrei-chend. Die geforderten Zulassungen bei den Klassifikati-onsgesellschaften sind nachzuweisen.	Other inspection/test requirements and documents specified in the drawing or in the requirements specifications must be observed, provided and documented in the inspection report. The availability of a risk analysis for processes e.g. in the form of a process FMEA and a process flow schedule must be confirmed on the cover sheet. Verification of this will take place within the context of (for example) an audit. If a design FMEA is required, this will be contractually stipulated. In the case of components which are similar, an overall risk analysis for processes or component families is adequate. Verification must be provided that the required classification society approvals are available
4.2    Vor- und Erstmuster von Guss- und Schmiederohteilen	4.2    Preliminary and Initial Samples of Raw Castings and Forgings
Guss- und Schmiederohteile sind vor der Weiter-verarbeitung durch den AN separat zu bemustern Gussrohteile sind an kritischen Stellen zu schnei-den und die Wandstärke zu messen und zu doku-mentieren. Wenn Teile durch einen Unterauftragnehmer des AN hergestellt werden, müssen diese durch den AN freigegeben werden. Liegen 3D-Daten zur Rohgeometrie vor, sind alle Maße über ein 3D-Verfahren (z.B. taktiles Messen, Laserscannen oder photooptische Vermessung) zu erfassen, zu dokumentieren und diese mit den 3D-CAD-Fertigteil-Daten zu vergleichen. Die Auswer-tung ist nach MTP5028-1 durchzuführen.	Raw castings and forgings must undergo separate sample inspections conducted by the contractor before further processing takes place. Raw castings must be cut at critical points and wall thickness must be measured and documented. Components manufactured by a sub-contractor of the contractor must be approved by the contractor. Where 3D data on the raw geometry are available, all dimensions must be registered and documented using a 3D procedure (e.g. tactile measurement, laser scanning or photo-optic measurement) and these data must be compared with the 3D-CAD data for the finished component. Evaluation must be conducted in accordance with MTP5028-1.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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4.3    Gegenprüfungen durch RRPS	4.3    Verification Inspections by RRPS
4.3.1    Begriffsdefinition Prüfarten	4.3.1    Inspection Type Definitions
Die nachfolgend beschriebenen Prüfarten definie-ren die Produktkategorie (siehe Abschnitt 1), den Prüfort und den Prüfumfang für eine Gegenprüfung durch RRPS. Die Prüfarten werden in der jeweili-gen Bestellung für das Vertragsprodukt ausgewie-sen. Die Prüfart ist durch den AN auf dem Deckblatt des Prüfberichts durch Ankreuzen zu vermerken.	The inspection types described below define the product category (see section 1), the inspection location and the scope of inspection for a verification inspection by RRPS. The inspection types are specified in each order for a contractual product. The appropriate inspection type shall be ticked by the contractor on the cover sheet of the inspection report.
Vormusterprüfung: RRPS führt nach Wareneingang bei RRPS eine Prüfung an der Vormusterlieferung durch.	Preliminary sample inspection: RRPS will perform an inspection of the preliminary sample delivered after receipt of the delivery at RRPS.
Erstmusterprüfung intern: RRPS führt nach Wareneingang bei RRPS eine Prüfung an der Erstmusterlieferung durch.	Internal initial sample inspection: RRPS will perform an inspection of the initial sample delivered after receipt of the delivery at RRPS.
Erstmusterprüfung extern: RRPS führt eine Prüfung am Erstmuster im Hause des AN durch.	External initial sample inspection: RRPS will perform an inspection of the initial sample at the contractor’s premises.
PSG-Neuteilprüfung intern: RRPS führt nach Wareneingang bei RRPS eine Prü-fung an der ersten Lieferung der PSG-Komponente durch.	Internal PSB new part inspection: RRPS will perform an inspection of the first PSB component delivered after receipt of the delivery at RRPS.
PSG-Neuteilprüfung extern: RRPS führt im Hause des AN eine Prüfung an der ersten Lieferung der PSG-Komponente durch bzw. begleitet diese.	External PSB new part inspection: RRPS will perform or attend an inspection of the first PSB component to be delivered at the contractor’s premises.
PSG-Vollprüfung intern RRPS führt nach Wareneingang bei RRPS eine Prü-fung an jeder Lieferung der PSG-Komponente durch.	Internal PSB component full inspection RRPS will perform an inspection of every PSB component delivered after receipt of the delivery at RRPS.
PSG-Vollprüfung extern RRPS führt im Hause des AN eine Prüfung an jeder Lieferung der PSG-Komponente durch bzw. begleitet diese.	External PSB component full inspection RRPS will perform or attend an inspection of every PSB component to be delivered at the contractor’s premises.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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4.3.2    Freigabe durch RRPS	4.3.2    Approval by RRPS
Nach Erhalt des Vormusters/ Erstmusters oder der PSG-Komponente und des Prüfberichts führt RRPS nach Ermessen Prüfungen durch.	RRPS will make inspections and tests according to its own discretion on receipt of the preliminary/initial sample or PSB component and initial sample inspection report.
Aufgrund des Prüfberichts und der selbst durchge-führten Prüfungen trifft RRPS folgende Entschei-dung:	RRPS will take one of the following decisions on the basis of the inspection report and its own inspections:
a)frei	a)Approved
b)mit Auflagen frei, Nachbemusterung bzw. erneu-te Vorstellung zur Prüfung erforderlich	b)Conditionally approved; re-sampling and/or resubmission for inspection required
c)abgelehnt, Nachbemusterung bzw. erneute Vorstellung zur Prüfung erforderlich	c)Rejected; re-sampling and/or re-submission for inspection required
Die Entscheidung wird dem AN mit einer Kopie des Prüfberichts unverzüglich zugeleitet.	The decision will be communicated to the contractor without delay along with a copy of the inspection report.
Bei Entscheidung a) wird die Freigabe zur Serien-lieferung erteilt.	In case of decision a), approval for series product shipments is issued.
Bei Entscheidung b) müssen die Abweichungen abgestellt und zur Nachbemusterung bzw. zur er-neuten Prüfung vorgestellt werden.	In case of decision b), the non-conformities found must be remedied and re-sampling and/or resubmission for inspection is required.
Bei Entscheidung c) ist die Vorlage neuer Vormus-ter/ Erstmuster/ PSG-Komponenten einschließlich Prüfbericht erforderlich.	In case of decision c), new preliminary samples / initial samples / PSB components must be submitted including inspection report.
Ist zusätzlich eine weitere Qualifizierung oder Pro-bebearbeitung bei RRPS erforderlich, erfolgt die Freigabe nach der Qualifizierung.	If the process should require additional qualification or sample processing/working at RRPS, approval will be issued after qualification.
Die Prüfungen von RRPS sowie Freigaben und Zu-stimmungen nach dieser Norm entlasten den AN nicht von seiner Gewährleistung und Verantwortung für die Fehlerfreiheit seiner Produkte und Dienst-leistungen.	Tests/inspections conducted by RRPS and approvals and agreements issued in accordance with this standard do not absolve the contractor of its warranty obligations or responsibility to ensure that its products and services are free of defects.
Die RRPS ist berechtigt, an vom AN und seinen Unterauftragnehmer durchgeführten Prüfungen oder Befundungen teilzunehmen, derartige durch von RRPS autorisierte Personen beobachten zu lassen oder selbst derartige Prüfungen beim AN nach vorheriger Abstimmung mit diesem selbst durchzuführen.	RRPS reserves the right to participate in tests / inspections and investigations conducted by the contractor and its sub-contractors or authorize observers to attend such events or conduct such tests, inspections or investigations itself at the con-tractor’s premises subject to prior agreement with the contractor.
Bei einer Qualitätsprüfung beim AN sind die ver-traglich geschuldeten Anforderungen bzgl. Planung, Durchführung und Teilnehmerkreis (z. B. bei einer Güteprüfung durch Vertragspartner und/ oder End-kunden der RRPS) einzuhalten. Nach erfolgter Prüfung sind die Unterlagen vollständig dem Ab-nahmebeauftragten der RRPS zu übergeben.	In case of a quality inspection at the contractor’s premises, the contractually agreed requirements regarding planning, implementation and participants (e.g. for a quality inspection by contractual partners and/or end customers of RRPS) must be complied with. On completion of inspection, the related documents must be handed over completely to the RRPS Acceptance Officer.
4.4    Kennzeichnung	4.4    Marking
Um Verwechslungen auszuschließen muss die Kennzeichnung der Vormuster/ Erstmuster/ PSG-Neuteile am Teil selbst und außen am Packstück eindeutig und dauerhaft sein. Sie erfolgt durch An-hänger, Etiketten, Klebstreifen oder ähnliches und auf dem Lieferschein. Die Kennzeichnung besteht aus folgenden Daten, die ebenfalls im Erstmusterprüfbericht aufzuführen sind: Anzahl der Muster, Materialnummer, Bezeich-nung, Änderungsstand und Einkaufsbeleg. Etikettenvordrucke können unter http://www.mtu- online.com/mtu/einkauf/downloads/index.de.html  heruntergeladen werden.	The marking on the preliminary/initial samples/PSB new parts and the packaging must be unique and durable in order to prevent any confusion. It must be made by means of tags, labels, adhesive strips or similar items and on the delivery note. The marking comprises the following data, which must also be included in the initial sample inspection report: Number of samples, material number, designation, revision status and purchasing voucher. Label templates (forms) can be downloaded from: http://www.mtu- online.com/mtu/einkauf/downloads/index.de.html

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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4.5    Anlieferung	4.5    Delivery
Zur Vermeidung von Beschädigungen sind für die Anlieferung geeignete bzw. bestimmungsgemäße Transportbehälter zu verwenden. Eine gemeinsame Anlieferung der ersten Serienlie-ferung mit dem Erstmuster ist zulässig. PSG-Neuteile dürfen zusammen mit der ersten Folgelie-ferung angeliefert werden. Besteht die Lieferung aus mehreren Packungsein-heiten, so muss das Vormuster/ Erstmuster oder das PSG-Neuteil in der oberen Lage des Ladungs-trägers/Packstücks sein. Die Dokumentation ist spätestens zum Zeitpunkt der Vor-/Erstmuster- bzw. PSG-Teil-Lieferung mit folgender Betreffzeile an empb-doku@mtu-online.com zu senden: Materialnummer=Lieferantennummer=Lief.-Name	Suitable transport containers matching the intended purpose must be used for shipment. Delivery of the first series products together with the initial sample is admissible. PSB new parts may be delivered together with the first follow-up shipment. If a shipment consists of several packaging units, the preliminary sample / initial sample or PSB new part must be in the top layer of the load carrier/package. The documentation is to be sent to empb-doku@mtu-online.com with the following reference line at the time of preliminary sample/initial sample and PSG part delivery at the latest: Material number=Supplier number=Supplier name
4.6    Aussetzen der Fertigung und reduzierte Bemusterung	4.6    Discontinuation of Production and Reduced Sampling
Nach Aussetzen der Fertigung > 36 Monaten ist ein erneutes Erstmuster erforderlich. Zur Aufwandsreduzierung ist für diese Fälle eine reduzierte Bemusterung unter Verweis auf das freigegebene Erstmuster zulässig. Ebenfalls ist eine reduzierte Bemusterung z.B. bei Teilefamilien mit Tabellenzeichnungen erlaubt. Für das Formular für reduzierte Bemusterung siehe im Abschnitt 4.7 Vordrucke. Bei PSG-Komponenten ist nach Aussetzen der Fertigung > 36 Monaten immer eine erneute voll-ständige Qualifizierung erforderlich.	After discontinuation of production for > 36 months, a new initial sample is required. In order to reduce the overhead, reduced sampling is acceptable in such cases, referring to the initial sample approved. Reduced sampling is also acceptable, for example, for part families involving tabular drawings. See section 4.7, Templates..., for a form provided for reduced sampling. PSB components always require another full qualification process after discontinuation of production for > 36 months.
4.7    Vordrucke für Prüfbericht für Vor-/ Erstmuster und PSG-Komponenten	4.7    Templates for Inspection Reports for Preliminary/Initial Samples and PSB Components
Vordrucke für den Prüfbericht sind unter http://www.mtu- online.com/mtu/einkauf/downloads/index.de.html  abrufbar. Der Prüfbericht besteht aus dem Blatt “Deckblatt” und beliebig vielen Blättern “Prüfergebnisse” Das Deckblatt enthält notwendige Kenndaten des Produkts, erforderliche Bestätigungen und das zusammengefasste Ergebnis der Entscheidungen. Wenn nicht anders vereinbart, sind die aktuellen RRPS-Formulare zu verwenden. Die Verwendung von Formularen, die nicht dem aktuellen Standard entsprechen, wird sofern nicht anders vereinbart beanstandet. Das Blatt “Prüfergebnisse” enthält, um die Zuord-nung zum Deckblatt zu gewährleisten, die Kennda-ten des Produkts und die detaillierten Prüfergebnis-se aller Merkmale, getrennt nach Maßprüfung, Werkstoffprüfung und Funktionsprüfung.	Templates (forms) for the inspection report are available at: http://www.mtu- online.com/mtu/einkauf/downloads/index.de.html. The inspection report consists of the `Cover Sheet´ and the required number of `Test Result´ sheets. The cover sheet lists essential characteristics of the product, verifications required and the summarized result of decisions. Unless otherwise agreed, current RRPS templates must be used. The use of forms which do not meet current standards will not be accepted unless otherwise agreed. The inspection results sheet contains the identification data of the product as a cross-reference to the cover sheet and the detailed inspection results of all characteristics, broken down according to dimensional inspections/tests, material inspec-tions/tests and functional inspections/tests.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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4.8    Rückstellmuster	4.8    Reference Samples
Definition: Rückstellmuster sind unter Serienbedingungen hergestellte erstmusterpflichtige Bauteile, die dazu dienen, den erprobten Zustand zu Serienbeginn in Hardware zu konservieren. Zielsetzung: Ziel ist dabei, bei späteren Serienproblemen Pro-blemursachen und erforderliche Maßnahmen z.B. Rückrufaktionen schnell und zielgerichtet ermitteln zu können. Dem AN wird empfohlen, Rückstellmuster für eine Frist von 12 Jahren einzulagern. Zur Erstbemuste-rung von Gussteilen kann alternativ zum Rück-stellmuster das Bauteil gescannt und der 3D-Datensatz abgespeichert werden. Materialproben, Schliffbilder etc. sind 12 Jahre auf-zubewahren	Definition: Reference samples are parts that are subject to initial sampling, produced under series production conditions and intended to serve as a hardware reference for the condition tested at the beginning of series production. Objective: The objective is to be able to determine root causes and necessary action, e.g. product recall, quickly and directly if any problems should arise later in series production. Contractors are recommended to retain reference samples in store for a period of 12 years. As an alternative to the retention of reference samples, in the case of the initial sampling of castings, the component may be scanned and the 3D data record retained. Material samples, micrographs, etc. must be retained for 12 years.
5    Serienbegleitende Qualitätsmaß-nahmen	5    Series Related Quality Assurance Measures
5.1    Kennzeichnung	5.1    Marking
Bezüglich der Kennzeichnung von Produkten, Tei-len und der Verpackung sind die mit RRPS verein- barten allgemeinen Anliefervorschriften (http://www.mtu- online.com/mtu/einkauf/downloads/index.de.html) einzuhalten. Es ist sicherzustellen, dass die Kenn-zeichnung der verpackten Produkte auch während des Transportes und der Lagerung erkennbar ist. Abweichungen von bestehenden Kennzeichnungs-pflichten bedürfen einer schriftlichen Vereinbarung zwischen AN und RRPS.	With regard to marking of products, parts and packaging, the General Specifications for Deliveries agreed with RRPS shall be complied with (http://www.mtu- online.com/mtu/einkauf/downloads/index.de.html). Measures shall be taken to ensure that the marking of the packaged products is also visible during transport and storage. Any deviation from the existing marking obligations is subject to a written agreement between the contractor and RRPS.
5.2    Rückverfolgbarkeit	5.2    Traceability
Der AN verpflichtet sich, die Rückverfolgbarkeit der von ihm gelieferten Produkte sicherzustellen. Im Falle einer festgestellten Abweichung muss eine Rückverfolgbarkeit derart möglich sein, dass eine Eingrenzung zumindest auf die betroffenen Liefe-rungen durchgeführt werden kann. RRPS wird dem AN die bei RRPS verfügbaren, zur Rückverfolgbar-keit benötigten Daten mitteilen.	The contractor commits to ensure the traceability of the products supplied as far as possible. If a deviation should be detected, the traceability must be ensured in such a way that a containment at least of the shipments affected can be made. RRPS will communicate to the contractor the data needed for traceability that are available from RRPS.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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5.3    Prüfung im Wareneingang - Serie	5.3    Incoming Goods Inspection - Series
RRPS prüft die vom AN bezogenen Produkte nach deren Erhalt auf die Einhaltung von Menge und Identität sowie auf äußerlich erkennbare Schäden. Im Übrigen wird RRPS von der Untersuchungs- und Rügepflicht befreit (§ 377 HGB). Mängel an einer Lieferung hat RRPS dem AN un-verzüglich anzuzeigen, sobald sie nach den Gege-benheiten eines ordnungsgemäßen Geschäftsab-laufes festgestellt wurden. Insoweit verzichtet der AN auf den Einwand der verspäteten Mängelrüge. Der AN muss seine Qualitätssicherungsmaßnah-men auf diese reduzierte Wareneingangsprüfung ausrichten.	RRPS will inspect the products procured from the contractor on receipt for compliance with quantity and identity as well as for any obvious damage. In all other respects, RRPS is exempt from the obligation of inspection and notification of defects (§ 377 HGB, German Commercial Code). RRPS shall notify any defects to the contractor without delay as soon as they are detected in the ordinary course of business procedures. In this respect, the contractor waivers the objection of delayed notification of defect. The contractor must adjust his quality assurance measures according to the reduced scope of the incoming goods inspection.
5.4    Sicherstellung der Serienqualität	5.4    Assurance of Series Quality
Der AN ist nach ISO 9001 (Absatz 9.1 Überwa-chung, Messung, Analyse und Bewertung) ver-pflichtet eine angemessene Prozessdokumentation zu führen und ggf. RRPS auf Anfrage zur Verfü-gung zu stellen.	Based on the ISO 9001 standard (section 9.1 Monitoring, Measurement, Analysis and Evaluation), the contractor is obliged to compile appropriate process documentation and if required to provide this to RRPS upon request.
5.4.1    Requalifizierung - Serie	5.4.1    Requalification - Series
Über Monate/Jahre können sich schleichende Pro-zessänderungen ergeben, die über die vereinbarte reduzierte Wareneingangsprüfung seitens des AG ggf. nicht entdeckt werden können. Mit der Requali-fizierungsprüfung werden Serienbauteile systema-tisch und vollständig geprüft, ob Sie den Spezifika-tionen noch entsprechen. Eine Requalifizierungs-prüfung umfasst eine vollständige Maß- Werkstoff-und ggf. Funktionsprüfung. Die Prüfergebnisse werden in Form eines „Erstmusterprüfberichtes” dokumentiert. RRPS führt in regelmäßigen Abständen nach RRPS-Prüflogik Requalifizierungsprüfungen von Serienbauteilen in der Wareneingangsprüfung durch. Beim Auftreten von Spezifikationsabweichungen in der Requalifizierungsprüfung behält sich der AG abhängig von der Kritikalität der Bauteile und der Fehlerart vor, durch den AN serienbegleitende Re-qualifizierungsprüfungen zu Lasten des AN zu ver-anlassen. Dies kann auch für ähnliche Teile dersel-ben Teilefamilie gelten. Bis zur Wiederherstellung der erforderlichen Prozesssicherheit hat der AN verschärfte Qualitätsprüfungen zu installieren bis hin zu einem 100%-igen Warenausgangs-Qualitätstor	Over months/years, changes can creep into the process which may not be covered by the reduced scope of the RRPS incoming goods inspection agreed upon. Using the requalification test, series components are systematically and fully checked for their compliance with specifications. A requalification test includes a full dimensions, material and if required function test. The results are documented in the form of an “Initial Sample Test Report”. RRPS regularly carries out requalification tests of series components during incoming goods inspection as per RRPS test logic. If deviations from specifications are determined during the requalification test, RRPS reserves the right to instruct the contractor to carry out a series production requalification test at his own cost depending on the criticality of the component and type of fault. This can also apply to similar parts of the same part family. The contractor shall implement tighter quality tests up to a 100% outgoing quality gate control until the required process safety is restored.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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6    Qualitätsziele	6    Quality Objectives
6.1    Fehlerfreie Lieferung / AN-Entwicklung	6.1    Zero Defect Supply / Contractor De- velopment
Im Rahmen des Qualitätsmanagements ist der AN zu fehlerfreien Lieferungen von Produkten und Leistungen verpflichtet. Der AN gewährleistet, dass alle von ihm zu liefern-den Produkte den jeweiligen Spezifikationen, den vereinbarten Bedingungen, einschließlich der Halt-barkeitseigenschaften entsprechen und der aktuelle Stand der Technik berücksichtigt ist. Sofern das Null-Fehler-Ziel nicht kurzfristig erreich-bar ist, wird der AN zeitlich befristete Obergrenzen für Fehlerraten (ppm-Quote) als Zwischenziele und Maßnahmen vorschlagen und mit RRPS abstim-men. Bei unzureichender Kaufteilequalität bzw. einer Häufung von Spezifikationsabweichungen fordert RRPS vom AN entsprechende Optimierungsmaß-nahmen. Dafür werden bei RRPS verschiedene AN-Entwicklungsstufen mit steigenden Eskalati-onsmaßnahmen wie beispielsweise Warenaus-gangsprüfung, Q-Offensive oder Sperre für Neuge-schäft eingesetzt. RRPS behält sich vor, den AN nach Absprache an den Kosten zu beteiligen. Die Haftung des AN für Mängel oder für Schaden-ersatzansprüche wegen fehlerhafter Lieferungen, nicht Einhaltung von Verträgen oder Absprachen bleibt unberührt.	The contractor is obliged to deliver zero-defect products and services within the scope of the quality management. The contractor warrants that all products to be delivered comply with the applicable specifications, the agreed conditions including durability characteristics and that the current state of technology has been taken into account. If it should not be possible to attain the zero-defect target at short term, the contractor shall suggest upper limits for defect rates (ppm quota) limited in time as interim targets and suggest and coordinate actions with RRPS. If the quality of purchased parts should be insufficient or if frequent non-conformities in relation to the specifications should occur, RRPS will request the contractor to take appropriate action. In this regard, various contractor development stages with increasing escalation levels of actions are used at RRPS such as, for example, outgoing goods inspection, Q-campaign or freeze for new business. RRPS reserves the right to request the contractor to accept a share of the costs following prior consultation. The contractor’s liability for defects or damages because of defective deliveries or non-compliance with contracts or agreements shall remain unaffected.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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7    Änderungen / Abweichungen der Spezifikationen (Normen, Zeichnungen, Lastenheft usw.); Änderungen im Lie- ferumfang	7    Changes/Deviations of Specifications (standards, drawings, requirements specifications, etc.); Change to Scope of Supply
7.1    Antrag auf Abweichungslaubnis (AE)	7.1    Application for Deviation Approval
Temporäre Abweichungen sind mit Antrag auf “Ab-weichungserlaubnis” anzuzeigen: Wird erkennbar, dass Spezifikationen bzw. Quali-tätsmerkmale nicht eingehalten werden können, informiert der AN RRPS hierüber mit dem Formular „Antrag auf Abweichungserlaubnis” (Formular unter http://www.mtu- online.com/mtu/einkauf/downloads/index.de.html) per Email an reklamation@mtu-online.com.	Temporary deviations shall be notified by way of an application for deviation approval: If it should become obvious that specifica-tion/quality characteristics cannot be complied with, the contractor shall inform RRPS of this by sending the deviation approval application form (“Application for Deviation Allowance”, download from http://www.mtu- online.com/mtu/einkauf/downloads/index.de.html) via e-mail to reklamation@mtu-online.com.
Die Erstellung einer AE wird nicht empfohlen bei:	The preparation of a Deviation Approval is notrecommended:
-    Erstmusterteilen -    Toleranzabweichung bei Schlüssel- bzw. Keymerkmalen. -    Toleranzabweichung größer 50% der Toleranz-breite und Nacharbeit ist unwirtschaftlich -    Bauteilwert/Liefervolumen kleiner 200,- € und spezifikationsgerechte Bauteile stehen zur Ver-fügung bzw. sind termingerecht produzierbar. -    Bauteil mit mehr als 3 unterschiedlichen Fehlermerkmalen	-    for initial sample parts -    for tolerance deviations for key features -    where tolerance deviation is greater than 50% of the tolerance width and rework is uneconomic -    where component/supply volume value is less than €200 and specification-compliant components are available or can be produced on schedule -    for components with more than 3 different defect characteristics The contractor shall also inform RRPS immediately about any deviation recognized after delivery.
Der AN wird RRPS auch über alle nach Ausliefe-rung erkannten Abweichungen unverzüglich in Kenntnis setzen. Lieferungen mit Abweichungser-laubnis dürfen nur nach Information an den Einkauf mit einer separaten Bestellung - die Lieferung wird vom Einkäufer auf Prüfung gesetzt - für eine abge-stimmte Menge oder einen abgestimmten Zeitraum getätigt werden. Ist keine Menge/Zeitraum angege-ben gilt die AE 2 Jahre ab Entscheid. Jeder Sendung ist der freigegebene AE-Antrag beizulegen und sofern nicht anders festgelegt alle betroffenen Bauteile mit der AE-Nr. zu kennzeich-nen. Bei Nichtbeachtung wird nach Absprache der AN mit den ggf. entstehenden Folgekosten belas-tet.	Deliveries under a deviation allowance shall only be permitted for an agreed quantity or an agreed period after informing the Purchasing department to this effect with a separate purchase order - the delivery is assigned inspection status by the purchaser. If a quantity/period is not specified, the deviation allowance shall be valid for 2 years from the decision. Each shipment must be accompanied by the approved application for deviation allowance and all parts affected shall be marked with the corresponding deviation allowance number unless otherwise specified. In the event of failure to comply with this stipulation, any consequential costs shall be charged to the contractor following prior consultation.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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7.2    Änderungsantrag	7.2    Application for Change
Ein Änderungsantrag ist zu stellen bei:	An application for change is to be put in in case of:
    dauerhaft verbleibenden Änderungen mit Än-derung der Bauteilspezifikation (Konstrukti-onsänderung)     dauerhaft verbleibenden Abweichungen, die bei Bedarf mittels AE bereits genehmigt sind mit Änderung der Bauteilspezifikation (Kon-struktionsänderung)     Änderungen, bei denen sich die Spezifikatio-nen nicht ändern (Fertigungsverfahren, Pro-duktionsverlagerung usw.)	    Permanently remaining changes with change of the component specification (design change)     Permanently remaining deviations, which have already been approved in a deviation permit – if required – and with change of the component specification (design change)     Changes which do not cause the specification to change (manufacturing procedure, production shift etc.)
Der Antrag ist vom AN mit allen für eine Entschei-dung/Änderung notwendigen Daten vollständig auszufüllen. Das Formular kann unter http://www.mtu- online.com/mtu/einkauf/downloads/index.de.html heruntergeladen werden. Der Antrag ist an die zentrale Emailadresse rekla-mation@mtu-online.com zu senden. Der Antrag-steller wird grundsätzlich durch die Organisations-einheit “Einkauf” über den RRPS-Entscheid infor-miert. Ohne RRPS-Entscheid ist eine Änderung nicht zulässig!	The contractor is to completely fill in the application with all data required for a decision/change. The form can be downloaded under http://www.mtu- online.com/mtu/einkauf/downloads/index.de.html. The application is to be sent to the central email address: reklamation@mtu-online.com. The applicant will be informed of the RRPS decision by the Purchasing division in all cases. Without RRPS approval, changes are not permissible!
7.3    Kosten	7.3    Costs
7.3.1    Qualifizierung	7.3    Qualification
Für die Qualifizierung incl. der Erfüllung aller Vor-gaben dieser Norm trägt der AN die bei ihm auftre-tenden Kosten. Im Falle einer Nachbemusterung oder erneuten Prüfung von PSG-Komponenten behält RRPS sich vor, die auftretenden Kosten nach Absprache zu belasten.	The contractor shall bear his own costs incurred for the qualification process and for complying with all the requirements of this standard. In case of re-sampling or re-inspection of PSB components, RRPS reserves the right to charge the costs incurred to the contractor following prior consultation.
7.3.2    Antrag auf Abweicherlaubnis / Kon- struktionsänderungsantrag / Ände-rungsantrag	7.3.2    Application for Deviation Approval / Application for Design Change / Application for Change
RRPS behält sich vor, den Mehraufwand durch die Bearbeitung der Anträge bei durch AN verursach-ten Anträgen in Rechnung zu stellen. Je nach Aufwand werden 150 € oder mehr berech-net.	RRPS reserves the right to invoice extra costs incurred by processing the applications caused by the contractor. The charge is governed by the work involved, with a minimum of 150 €.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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8    Behandlung von Beanstandungen	8    Handling of Complaints
8.1    8-D-Report	8.1    8-D-Report
Werden von RRPS Mängel festgestellt, werden diese mit einer Mängelrüge dem AN angezeigt. Der AN erstellt unabhängig davon, ob die Beanstan-dung beim Wareneingang, bei einer Prüfung beim AN, bei der Weiterverarbeitung oder in der Phase der Nutzung festgestellt wurde, unverzüglich einen 8-D-Report (Formular unter http://www.mtu- online.com/mtu/einkauf/downloads/index.de.html) und informiert innerhalb eines Tages RRPS über die eingeleiteten Sofortmaßnahmen und nach Ab-schluss erneut per Email an reklamation@mtu-online.com. Ursachenermittlung und Maßnahmenfestlegung muss im Team erfolgen. Ggf. ist ein Ishikawa-Diagramm (Ursachen/Wirkungsdiagramm) anzu-wenden. Grundsätzlich sind dabei Poka Yoke Lösungen anzustreben. Mitarbeiterunterweisungen sind mit Inhalt, Teilnehmer, Datum und Unterschrift nach-zuweisen Die erste Folgelieferung nach Reklamationen ist äußerlich am Packstück zu kennzeichnen, zudem müssen 100 % der Einzelteile geeignet gekenn-zeichnet werden. Die Kennzeichnung ist mit dem Ersteller der Re-klamation abzustimmen.	If RRPS should discover any defects, these will be communicated to the contractor by means of a notification of defect. Regardless of whether the defect was found in the incoming goods department, during inspection at the contractor’s, during processing or in the utilization phase, the contractor shall immediately create an 8-D report (form avail- able at http://www.mtu-online.com/mtu/einkauf/downloads/index.de.html) and inform RRPS of the immediate action taken by sending an e-mail to reklamation@mtu-online.com  within one day and again after completion. Root causes shall be determined and actions defined in the team. It may be necessary to use an Ishikawa diagram (cause/effect diagram). As a matter of principle, Poka Yoke solutions shall be aimed for. Employee instruction shall be substantiated by contents, participants, date and signature. The first consignment delivered after a complaint must be marked as such on the outside of the packaging. In addition, 100 % of the individual components must be suitably marked. The type of marking shall be agreed with the sender of the complaint.
8.2    Annahme unter Vorbehalt	8.2    Conditional Acceptance
RRPS behält sich vor, trotz vorhandener Mängel Bauteile anzunehmen, für Folgelieferungen jedoch auf Mängelfreiheit zu bestehen.	RRPS reserves the right to accept parts in spite of existing defects but insist on zero-defect subsequent deliveries.
8.3    Rückversand	8.3    Return Shipments
Teile, die RRPS aufgrund einer Mangelhaftigkeit nicht verwenden kann, werden mit Mängelrüge im vereinbarten Umfang zu Lasten des AN zurückge-schickt.	Those parts which cannot be used by RRPS because of a defect will be returned at the contractor’s charge to the agreed extent, accompanied by a notification of defects.
8.4    Montageversorgung	8.4    Assembly Supply
Drohen durch Anlieferung von nicht der Spezifikati-on entsprechenden Produkten Montagestillstände bei RRPS oder deren Kunden, muss der AN in Abstimmung mit RRPS durch geeignete von ihm zu tragende Sofortmaßnahmen für Abhilfe sorgen (Ersatzlieferungen, Sortier-, Nacharbeit, Sonder-schichten, Eiltransport, usw.).	If the delivery of non-conforming products should cause the risk of impending assembly downtimes at RRPS or its customers, the contractor shall remedy the situation in coordination with RRPS by suitable immediate action at contractor’s charge (compensation delivery, sorting or rework, extra shifts, express transport, etc.).

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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8.5    Nachbesserung durch Dritte	8.5    Rectification by Third Parties
Kann die Nachbesserung aus Kapazitätsgründen und/oder aufgrund der Terminsituation weder durch RRPS noch durch den AN durchgeführt werden, hat RRPS das Recht, nach Rücksprache, einen geeigneten Dritten, für den die Forderungen dieser QS-Norm ebenso gelten, mit der Nachbesserung zu beauftragen. Ist keine zeitnahe Absprache mit dem AN möglich, kann RRPS ohne Absprache einen Dritten beauftragen, um die Montageversor-gung zu sichern. Die Kosten für die Nachbesserung gehen nach Absprache zu Lasten des AN.	If neither RRPS nor the contractor are able to carry out the rectification for reasons of capacity or deadlines, RRPS shall be entitled to have the rectification performed by a suitable third party with consultation of the contractor; the third party shall also be subject to the requirements of this quality standard. If an agreement with the contractor is not possible at short notice, RRPS shall also be entitled to engage a third party without consulting him in order to safeguard the provision of parts to assembly. The costs of such rectification shall be entirely for the contractor’s account.
9    Versicherungspflicht des AN	9    Contractor’s Obligation to Take out Insurance
Dem AN wird empfohlen, eine Produkthaftpflicht-und Rückrufkostenhaftpflichtversicherung mit einer Deckungssumme für Personen-/Sach- und Vermö-gensschäden in Höhe von jeweils mindestens 2,5 Mio. Euro / Schadensfall abzuschließen. Je nach Forderung des jeweiligen Kunden von RRPS, der Leistungsfähigkeit des AN, der Ge-schäftsbeziehung und der Haftpflichtrisiken wird RRPS den AN auffordern, seinen Versicherungs-schutz sowohl dem Grunde als auch der Höhe nach zu erweitern. Der AN verpflichtet sich, diese Forde-rung zu prüfen und nach Möglichkeit zuzustimmen. Sollte ein Versicherungsfall eintreten, sind RRPS und der AN zur gegenseitigen Information über alle mit dem Versicherungsfall zusammenhängenden Umstände und Vorkommnisse verpflichtet. Der AN ist verpflichtet, seinen Haftpflichtversicherer über den Inhalt dieser Vereinbarung zu informieren.	The contractor is recommended to take out a product liability and recall cost liability insurance policy with a minimum sum insured of 2.5 million Euros / damage event for personal injuries, material damage and financial loss. RRPS may request the contractor to extend the insurance coverage both with regard to the merits and sum insured, depending on the requirements imposed by a specific customer of RRPS, the capabilities of the contractor, the business relationships and the liability risks. The contractor undertakes to consider this request and accept it if possible.If a damage event should occur, RRPS and the contractor are committed to mutual information about all circumstances and incidents related with the damage event. The contractor is obliged to inform the liability insurance company about the contents of this agreement.
10    Lieferantenbewertung	10    Contractor Assessment
RRPS führt bei Ziel-Lieferanten (Target Supplier) eine Lieferantenbewertung mit den Hauptkriterien Einkauf, Qualität, Logistik und Umwelt-/Arbeitsschutz durch. Es erfolgt eine Einteilung in A-, AB-, B- und C-Lieferanten. AB und B-Lieferanten sind aufgefordert noch be-stehende Defizite abzustellen. C-Lieferanten sind angehalten, intensive Maßnahmen zur Situations-verbesserung einzuführen. RRPS unterhält zu C-Lieferanten keine langfristigen Lieferbeziehungen. Ziel-Lieferanten werden regelmäßig über das Be-wertungsergebnis informiert. Hierzu wird empfoh-len, eine mitarbeiterneutrale Emailadresse z.B. Quality@lieferant.com einzurichten.	RRPS conducts a contractor assessment process for target suppliers with the main criteria of purchasing, quality, logistics and environmental/occupational safety. Contractors are categorized according to the A, AB, B and C ratings. Contractors of category AB and B are requested to improve any existing deficiencies. Contractors of category C are urged to introduce intensive measures for improving the situation. RRPS will not maintain long-term supply relationships with category C contractors. Target suppliers will be regularly informed of the assessment results. For this purpose, it is recommended to create a workflow email address such as Quality@supplier.com.

[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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11    Arbeitssicherheits- und Umwelt- schutzvorschriften	11    Health & Safety and Environmental Regulations
Die Einführung von Umwelt-, Gesundheits- und Sicherheitsmanagementsystemen (ISO 14001, OHSAS 18001) wird empfohlen. Die Umweltzertifi-zierung fließt positiv in die Lieferantenbewertung ein. Ergänzend zu den geltenden Gesetzen und Vor-schriften zum Schutz der Menschen und der Um-welt dürfen Teile und Materialien keine verbotenen Stoffe nach MTL5054 enthalten, bzw. sind deklara-tionspflichtige Stoffe nach MTL5054 über das an-gegebene Datenblatt zu deklarieren. Das Datenblatt kann unter http://www.mtu-online.com/mtu/einkauf/downloads/index.de.html  heruntergeladen werden.	It is recommended to establish environmental, health and safety management systems (ISO 14001, OHSAS 18001). Environmental certification has a positive influence on the contractor assessment rating. In addition to compliance with the valid laws and regulations for the protection of human beings and the environment, all parts and materials must not contain any substances prohibited according to MTL5054 or, if applicable, substances subject to declaration pursuant to MTL5054 must be declared using the specified form. For the specified form, refer to http://www.mtu-online.com/mtu/einkauf/downloads/index.de.html
Ergänzende Angaben Literaturhinweise ISO 9001    Qualitätsmanagementsysteme, Anforderungen ISO 14001    Umweltmanagementsysteme, Anforderungen mit Anleitung zur Anwendung MTL5054    Inhaltsstoffe in Bauteilen und Werkstoffen - Deklarationspflichtige Stoffe, Strahlenschutz MTP5028-1    Vor-/Erstmusterprüfung mittels berührungsloser 3D-Datenerfassung – Standardteile OHSAS 18001 Arbeits- und Gesundheitsschutz-Managementsysteme - Anforderungen Frühere Ausgaben 11.81, 11.84, 01.99, 06.2002, 10.2004, 03.2005, 06.2007, 04.2010, 09.2011, 06.2013, 10.2013, 11.2014 Änderungen -Abschnitt 2.4, 3.1, 4.1, 4.7, 5.3, 6.1, 7.1, 7.2, 7.3.2, 10 überar- beitet -  Norm redaktionell überarbeitet	Supplementary information References ISO 9001    Quality Management Systems, Requirements ISO 14001    Environmental Management Systems, Re- quirements with Guidance for Use MTL5054    Substances in Components and Construction – Declarable Materials, Radiation Protection MTP5028-1    Pro-/initial-sample testing by means of non- contact 3D data acquisition – Standard parts OHSAS 18001 Occupational health and safety management systems - Requirements Previous versions 11.81, 11.84, 01.99, 06.2002, 10.2004, 03.2005, 06.2007, 04.2010, 09.2011, 06.2013, 10.2013, 11.2014 Changes -  Section 2.4, 3.1, 4.1, 4.7, 5.3,6.1,7.1, 7.2, 7.3.2, 10 -  revised - Standard revised editorially

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Global Supplier Code of Conduct

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Message from our Chief Executive Officer At Rolls-Royce our strategy focuses on customer, innovation and profitable growth to ensure a sustainable business. This includes being a good corporate citizen in our dealings with customers, suppliers, employees and wider society, wherever we do business around the world. High standards of corporate conduct, ethical behaviour and compliance are critical for Rolls-Royce and our suppliers – our mutual success depends upon it. The Rolls-Royce Board and I have made it clear that Rolls-Royce will not tolerate improper business conduct of any sort. Our zero tolerance approach applies to our own people, and to our suppliers. To ensure you are clear what is expected, we have revised our Global Supplier Code of Conduct. This document replaces our previous Code, issued in 2008. Our Global Supplier Code of Conduct sets out the behaviours, practices and standards we expect to see demonstrated and complied with, all of which are based on our own Rolls-Royce Global Code of Conduct, policies and standards. We expect our suppliers to be ethical, responsible and to fully comply with all applicable laws and regulations. At Rolls-Royce, we have a simple brand promise and set of values – we are ‘trusted to deliver excellence’. We need your support as our suppliers, and that of our broader supply chain, to ensure that together we are able to live up to that promise and continue to be successful. Thank you John Rishton Chief Executive Officer Contents Section 1 Introduction 4 1.1 Purpose 4 1.2 Content, scope and applicability 4 1.3 Asking questions and raising concerns 4 Section 2 Working together 5 2.1 Child and forced labour 5 2.2 Fair pay and benefits 5 2.3 Diversity and inclusion 5 2.4 Collective bargaining 5 Section 3 Running our company 6 3.1 Quality and continuous improvement 6 3.2 Proprietary information 6 Section 4 Conducting our business 7 4.1 Anti-bribery and corruption 7 4.2 Conflicts of interest 7 4.3 Export controls and import obligations 7 4.4 Competitive behaviour and antitrust 7 Section 5 Our place in the world 8 5.1 Health, safety and environment 8 5.2 Community involvement 9 5.3 Lobbying and political support 9 Section 6 Supplier commitment 10 6.1 Communication 10 6.2 Code adherence 10 6.3 Supplier ethical concerns 10

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1 Introduction We set high standards for the way we do business. This helps our customers know that we can be ‘trusted to deliver excellence’. This Global Supplier Code of Conduct (the Code) sets out minimum standards of behaviour and practices we require from our suppliers. We expect our suppliers to adhere to this Code, in addition to the provisions of any commercial terms agreed between Rolls-Royce plc and the supplier. In the event that local law, regulation or rules impose stricter requirements than this Code, suppliers must comply with those requirements. 1.1 Purpose The Code specifies the minimum standards of behaviour Rolls-Royce requires of our suppliers. The requirements identified in the Code are based on the principles of the Rolls-Royce Global Code of Conduct and are mandated through the Rolls-Royce General Conditions of Purchase. The purpose of the Code is to formally communicate the Rolls-Royce requirements and expectations to the global supply chain; it is freely available to view and can be downloaded from the Rolls-Royce Global Supplier Portal: https://suppliers.rolls-royce.com Suppliers are required to adhere and comply with the principles set out in this document. For more information see section 6 – Supplier commitment. 1.2 Content, scope and applicability The Code is applicable to all suppliers and partners who supply product or services related to Rolls-Royce contracts or purchase orders. Suppliers are expected to cascade these principles to their own suppliers in order to ensure alignment across the supply chain. This may involve the establishment of supply chain management processes that integrate the requirements of this Code. 1.3 Asking questions and raising concerns If any employee of a supplier has an actual or potential ethical concern they are encouraged to make Rolls-Royce aware. For more information see section 6.3 – Supplier ethical concerns. 2 Working together At Rolls-Royce, our culture fosters innovation, collaboration and continuous improvement. We support our people in their development and create the right climate for success to make sure everyone can do their best and fulfil their potential. All suppliers must comply with applicable international and national laws and standards in relation to labour practises and human rights. 2.1 Child and forced labour Our principles: What this means for our suppliers: We do not accept child labour or any practice that inhibits the development of children. Suppliers must never use or support practices that inhibit the development of children.  Suppliers must not employ anyone under the age of 15 years or, where it is higher, the mandatory national school leaving age. We believe that all employment should be freely chosen. Suppliers must refrain from using any form of involuntary labour including forced, prison or debt-bonded labour. 2.2 Fair pay and benefits Our principles: What this means for our suppliers: We recognise the need to reward fairly for skill, contribution and performance. Suppliers must ensure that all wages meet local minimum wage requirements. Any overtime shall be voluntary and workers must receive adequate compensation for any overtime worked. Standard working hours must not exceed legal limits and over time must not exceed the maximum allowed by law. 2.3 Diversity and inclusion Our principles: What this means for our suppliers: We treat each other openly, honestly and courteously. Suppliers are expected to promote equal opportunities for all and value diversity. We do not tolerate bullying, harassment or unlawful discrimination of any kind. Harassment or discrimination towards employees, including all forms of physical, verbal or psychological abuse must not be tolerated. 2.4 Collective bargaining Our principles: What this means for our suppliers: The decision on whether to join a trade union or not is an individual choice. Suppliers are expected to respect this choice and the relevant processes and laws on collective representation and consultation where applicable.

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3 Running our company Rolls-Royce engages in dialogue and partnerships to align our business needs with the requirements of our major stakeholders, including customers, governments and industry bodies. Suppliers are expected to behave ethically and appropriately in all dialogue, and to respect the proprietary information of Rolls-Royce and other parties. 3.1 Quality and continuous improvement Our principles: What this means for our suppliers: We make sure that quality is central to all we do. We are committed to continuous improvement by working together and complying with agreed processes across businesses, functions and geographies Suppliers must demonstrate a commitment to quality and, where applicable, comply with the requirements of our SABRe Supplier Management System Requirements (available on the Global Supplier Portal), as modified upon the structure of ISO 9001. Suppliers are encouraged to seek opportunities for continuous improvement throughout their operations. We encourage suppliers to work openly and collaboratively with us to ensure we are continually improving our operations. 3.2 Proprietary information Our principles: What this means for our suppliers: Rolls-Royce is committed to treating all other parties’ confidential, proprietary or trade secret information with integrity. We respect the confidentiality of commercially sensitive information provided to us and we only use it appropriately for legitimate business purposes. Suppliers must safeguard Rolls-Royce proprietary information. Suppliers must neither receive nor supply information unless either already legitimately in the public domain or given with permission. Appropriate non-disclosure or confidentiality agreements should be used to protect proprietary information. 4 Conducting our business High standards of ethical behaviour and compliance with laws and regulations are essential to protecting the reputation and long-term success of our business. We expect suppliers to behave ethically, to comply with legal and industry requirements and seek to implement best practice in their industries. 4.1 Anti-bribery and corruption Our principles: What this means for our suppliers: Rolls-Royce has a zero tolerance policy for bribery and corruption. Suppliers are expected to behave ethically in all business dealings. Suppliers must not offer, give or accept anything of value that may be viewed as, or has the effect of, improperly influencing business decisions. Suppliers must not offer or give gifts or hospitality to any employee that is intended as, or may be viewed as, an attempt to improperly influence business decisions. Suppliers must not make facilitation payments or permit them to be made on behalf of the supplier or Rolls-Royce. Suppliers must comply with all applicable anti-bribery and corruption laws and regulations of the countries in which they operate 4.2 Conflicts of interest Our principles: What this means for our suppliers: We seek to avoid conflicts of interest in our business dealings, but where they do occur we manage them. All suppliers must make Rolls-Royce aware of any potential conflicts of interest as soon as they are known. 4.3 Export controls and import obligations Our principles: What this means for our suppliers: We are committed to compliance with import and export laws, regulations and procedures that apply to our operations globally Suppliers must comply with all relevant export control legislations when exporting goods or technology, and shall plan for and obtain all necessary authorisations and permits to ensure timely and compliant delivery of their products. Where an authorisation or permit so requires, suppliers shall also have in place all the necessary processes to manage access to export controlled goods or technology only by staff or other entities authorised to have such access. Where applicable, this requirement shall be flowed down to any sub-tier suppliers. 4.4 Competitive behaviour and antitrust Our principles: What this means for our suppliers: We conduct our business in compliance with competition (antitrust) laws Suppliers must comply with competition (antitrust) laws in the countries where they operate or sell product or services. Suppliers must not co-ordinate market conduct with competitors or their own suppliers in a way that improperly restricts competition.

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5 Our place in the world As a global company we seek to be a good corporate citizen in our dealings with customers, suppliers, employees and communities where we operate. All suppliers must make proper provision for the health, safety and welfare of their employees, contractors, visitors and those in the community who may be affected by their operations. We expect suppliers to comply with legal and industry requirements and seek to implement best practice in their industries. 5.1 Health, safety and environment (HS&E) Our principles: What this means for our suppliers: We have a strong approach to HS&E management, where our vision is to be known for the excellence of our HS&E performance in all our business activities and our products. Our HS&E goals are to: • Create a safe and healthy work environment with no injuries, no work related ill-health, and no environmental incidents, and • Prevent or minimise the negative impacts of our products and services We expect our suppliers to take personal and collective responsibility to help fulfil our HS&E goals. Suppliers must make proper provision for the health, safety and the welfare of their employees, contractors, visitors and those in the community who may be affected by their activities. The supplier shall care for the environment through a commitment to good environmental practices. We have a robust HS&E management system in place across our global operations Suppliers are expected to develop, implement and maintain a management system for managing health, safety and environmental risks. This system may be integrated into the supplier’s business management system and associated processes, or act as a standalone HS&E management system. As a minimum this management system shall include processes for: • Identifying, assessing and managing HS&E risks and opportunities • Planning improvements and establishing objectives and targets where applicable • Identifying and delivering learning relevant to identified risks • Monitoring performance • Assurance of the effective management of HS&E risks Suppliers are encouraged to have management systems in place that are equivalent to the requirements of OHSAS 18001  and ISO 14001. We do not mandate certification to these standards. Suppliers who carry out activities on our premises, in our facilities or under our direct control shall follow the requirements set out in the Rolls-Royce HS&E management system. We participate annually in the Carbon Disclosure Project (www.cdp.net) to measure, analyse and benchmark our environmental performance. Suppliers are encouraged to register as members of the Carbon Disclosure Project and participate in annual submissions 5.2 Community involvement Our principles: What this means for our suppliers: We are committed to building positive relationships with the communities in which we live and work Suppliers are encouraged to seek similar opportunities in their local communities. Suppliers are expected to listen carefully to requests or concerns from the community and address them appropriately. 5.3 Lobbying and political support Our principles: What this means for our suppliers: We are committed to undertaking any lobbying activities in compliance with all applicable laws, and to behaving ethically in all our interactions with governments, agencies and their representatives.. Suppliers must undertake any and all lobbying activities in compliance with all applicable laws. Suppliers are expected to behave ethically in all interactions with governments, their agencies and representatives. We expect suppliers to refrain from making any corporate contributions or donations to political parties, or any think-tanks, academic institutions or charities closely linked to political parties, intended as, or that may be viewed as, attempts to influence decision making.

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6 Supplier commitment 6.1 Communication Suppliers must make the Rolls-Royce Global Supplier Code of Conduct available to employees in the business language of the company. Suppliers are encouraged to make their employees aware of the Rolls-Royce Ethics Line, as detailed in 6.3 below. 6.2 Code adherence Suppliers must conform to all aspects of the Rolls-Royce Global Supplier Code of Conduct, as mandated through the Rolls-Royce General Conditions of Purchase. Rolls-Royce reserves the right to audit against compliance to this Supplier Code of Conduct. Suppliers are expected to ensure that documentation is kept that demonstrates compliance with this Code; Rolls-Royce may request access to that documentation at any time. Rolls-Royce may also request access to supplier sites for audit purposes. Rolls-Royce reserves the right to terminate contracts in the event of material breach of the principles set out in the Code. Suppliers are encouraged to disseminate these expectations throughout their own supply chain and incorporate the principles set out in this document as part of routine sustainable business practices. 6.3 Supplier ethical concerns If any supplier has an actual or potential ethical concern related to the subject matter of the Code or any engagement or relationship with Rolls-Royce they are encouraged to make Rolls-Royce aware. This can be done through the Rolls-Royce Ethics Line, anonymously if required. Concerns may be raised either online or via telephone. The following website contains a full list of worldwide telephone numbers for reporting concerns, or alternatively you can use the online system also provided at:  EthicsPoint – Rolls-Royce www.rolls-royce.com/ethicsline  We encourage suppliers to provide a similar anonymous service for raising ethical concerns. © Rolls-Royce plc 2015 The information in this document is the property of Rolls-Royce plc and may not be copied, or communicated to a third party, or used, for any purpose other than that for which it is supplied without the express written consent of Rolls-Royce plc. While this information is given in good faith based upon the latest information available to Rolls-Royce plc, no warranty or representation is given concerning such information, which must not be taken as establishing any contractual or other commitment binding upon Rolls-Royce plc or any of its subsidiary or associated companies. CTA334   March 2015 Rolls-Royce plc 62 Buckingham Gate London SW1E 6AT United Kingdom rolls-royce.com

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[***] Confidential treatment has been requested for the bracketed portions.  The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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EX-31.1

Exhibit 31.1

Woodward, Inc.

Rule 13a-14(a)/15d-14(a) certifications

CERTIFICATION

I, Thomas A. Gendron, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2018, of Woodward, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  August 7, 2018	/s/ Thomas A. Gendron
	Thomas A. Gendron
	Chairman of the Board, Chief Executive Officer, and President (Principal Executive Officer)

A signed original of this written statement required by Rule 13a-14(a)/15d-14(a), or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Rule 13a-14(a)/15d-14(a), has been provided to Woodward and will be retained by Woodward and furnished to the Securities and Exchange Commission or its staff upon request.

EX-31.2

Exhibit 31.2

Woodward, Inc.

Rule 13a-14(a)/15d-14(a) certifications

CERTIFICATION

I, Robert F. Weber, Jr., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2018, of Woodward, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  August 7, 2018	/s/ Robert F. Weber, Jr.
	Robert F. Weber, Jr.
	Vice Chairman, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer)

A signed original of this written statement required by Rule 13a-14(a)/15d-14(a), or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Rule 13a-14(a)/15d-14(a), has been provided to Woodward and will be retained by Woodward and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.1

Exhibit 32.1

Woodward, Inc.

Section 1350 certifications

We hereby certify, pursuant to 18 U.S.C. Section 1350, that the accompanying Quarterly Report on Form 10-Q for the period ended June 30, 2018 (the “Quarterly Report”), of Woodward, Inc., fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the QuarterlyReport fairly presents, in all material respects, the financial condition and results of operations of Woodward, Inc.

Date:	August 7, 2018	/s/ Thomas A. Gendron Thomas A. Gendron Chairman of the Board, Chief Executive Officer,  and President
Date:	August 7, 2018	/s/ Robert F. Weber, Jr. Robert F. Weber, Jr. Vice Chairman, Chief Financial Officer,  and Treasurer

A signed original of this written statement required by Rule 13a-14(b)/15d-14(b) and 18 U.S.C. Section 1350, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement, has been provided to Woodward and will be retained by Woodward and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Document and Entity Information - shares	9 Months Ended
	Jun. 30, 2018	Aug. 02, 2018
Document and Entity Information
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2018
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q3
Entity Registrant Name	WOODWARD, INC.
Entity Central Index Key	0000108312
Current Fiscal Year End Date	--09-30
Entity Filer Category	Large Accelerated Filer
Entity Common Stock, Shares Outstanding		61,692,493

XML

Consolidated Statements of Earnings - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Consolidated Statements of Earnings
Net sales	$ 588,117	$ 548,622	$ 1,606,514	$ 1,491,897
Costs and expenses:
Cost of goods sold	427,897	394,750	1,176,012	1,090,997
Selling, general and administrative expenses	54,600	44,561	140,362	130,521
Research and development costs	39,470	34,663	111,425	91,588
Restructuring Charges	0	0	17,013	0
Interest expense	7,878	6,769	21,315	20,399
Interest income	(342)	(358)	(1,176)	(1,237)
Other expense (income), net (Note 17)	4,197	(450)	1,012	(6,353)
Total costs and expenses	533,700	479,935	1,465,963	1,325,915
Earnings before income taxes	54,417	68,687	140,551	165,982
Income tax expense	5,300	15,061	34,685	27,703
Net earnings	$ 49,117	$ 53,626	$ 105,866	$ 138,279
Earnings per share (Note 3):
Basic earnings per share	$ 0.80	$ 0.87	$ 1.72	$ 2.25
Diluted earnings per share	$ 0.77	$ 0.85	$ 1.66	$ 2.18
Weighted Average Common Shares Outstanding (Note 3):
Basic	61,608	61,288	61,417	61,387
Diluted	63,881	63,392	63,782	63,520
Cash dividends per share paid to Woodward common stockholders	$ 0.1425	$ 0.1250	$ 0.4100	$ 0.3600

XML

Consolidated Statements of Comprehensive Earnings - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Comprehensive earnings
Net earnings	$ 49,117	$ 53,626	$ 105,866	$ 138,279
Other comprehensive earnings:
Foreign currency translation adjustments	(21,864)	6,643	(7,177)	(4,251)
Net gain (loss) on foreign currency transactions designated as hedges of net investments in a foreign subsidiaries	2,559	(3,313)	548	(428)
Taxes on changes in foreign currency translation adjustments	513	835	250	349
Foreign currency translation and transactions adjustments, net of tax	(18,792)	4,165	(6,379)	(4,330)
Unrealized loss on fair value adjustment of derivative instruments	(23,658)		(23,658)
Reclassification of net realized (gains) losses on derivatives to earnings	4,955	(18)	4,919	(54)
Taxes on changes in derivative transactions	8	7	21	21
Derivative adjustments, net of tax	(18,695)	(11)	(18,718)	(33)
Minimum retirement benefit liability adjustments:
Loss (gain) due to settlement or curtailment arising during the period	0	0	59	0
Amortization of net prior service cost (benefit)	137	55	413	168
Amortization of net loss	248	644	742	1,925
Foreign currency exchange rate changes on pension and other postretirement benefit plan liabilities	843	(746)	161	197
Taxes on changes in pension and other postretirement benefit plan liability, net of foreign currency exchange rate changes	(349)	6	(421)	(839)
Pension and other postretirement benefit plan adjustments, net of tax	879	(41)	954	1,451
Total comprehensive earnings	$ 12,509	$ 57,739	$ 81,723	$ 135,367

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Jun. 30, 2018	Sep. 30, 2017
Current assets:
Cash and cash equivalents, including restricted cash of $6,290 and $0, respectively	$ 114,399	$ 87,552
Inventories	589,440	473,505
Accounts receivable, less allowance for uncollectible amounts of $3,668 and $3,776, respectively	386,110	402,182
Income taxes receivable	7,994	19,376
Other current assets	39,171	38,574
Total current assets	1,137,114	1,021,189
Property, plant and equipment, net	1,044,033	922,043
Goodwill	826,926	556,545
Intangible assets, net	707,761	171,882
Deferred income tax assets	15,208	19,950
Other assets	73,022	65,500
Total assets	3,804,064	2,757,109
Current liabilities:
Short-term borrowings and current portion of long-term debt	144,000	32,600
Accounts payable	222,416	232,788
Income taxes payable	11,407	6,774
Accrued liabilities	162,211	155,072
Total current liabilities	540,034	427,234
Long-term debt, less current portion	1,211,396	580,286
Deferred income tax liabilities	170,101	33,408
Other liabilities	416,498	344,798
Total liabilities	2,338,029	1,385,726
Commitments and contingencies (Note 21)
Stockholders' equity:
Preferred stock, par value $0.003 per share, 10,000 shares authorized, no shares issued	0	0
Common stock, par value $0.001455 per share, 150,000 shares authorized, 72,960 shares issued	106	106
Additional paid-in capital	184,814	163,836
Accumulated other comprehensive losses	(77,329)	(53,186)
Deferred compensation	8,393	7,135
Retained earnings	1,900,928	1,820,268
Stockholders' equity excluding treasury stock	2,016,912	1,938,159
Treasury stock at cost, 11,282 shares and 11,739 shares, respectively	(542,484)	(559,641)
Treasury stock held for deferred compensation, at cost, 202 shares and 186 shares, respectively	(8,393)	(7,135)
Total Stockholders' Equity	1,466,035	1,371,383
Total liabilities and stockholders' equity	$ 3,804,064	$ 2,757,109

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Consolidated Balance Sheets (Parenthetical) - USD ($) shares in Thousands, $ in Thousands	Jun. 30, 2018	Sep. 30, 2017
Current assets:
Restricted cash	$ 6,290
Allowance, accounts receivable	$ 3,668	$ 3,776
Stockholders' equity:
Preferred stock, par value	$ 0.003	$ 0.003
Preferred stock, shares authorized	10,000	10,000
Preferred stock, shares issued	0	0
Common stock, par value	$ 0.001455	$ 0.001455
Common stock, shares authorized	150,000	150,000
Common stock, shares issued	72,960	72,960
Treasury stock, shares	11,282	11,739
Treasury stock held for deferred compensation, shares	202	186

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Consolidated Statements of Cash Flows - USD ($) $ in Thousands	9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017
Cash flows from operating activities:
Net earnings	$ 105,866	$ 138,279
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	72,137	59,587
Loss (gain) due to settlements or curtailments of postretirement plan	(330)	0
Net (gain) loss on sales of assets	(404)	(3,598)
Stock-based compensation	16,292	15,580
Deferred income taxes	(25,521)	(1,585)
(Gain) loss on derivatives reclassified from accumulated comprehensive earnings into earnings	4,919	(54)
Changes in operating assets and liabilities:
Accounts receivable	42,322	26,052
Inventories	(46,002)	(48,075)
Accounts payable and accrued liabilities	(29,587)	2,345
Income taxes	39,966	8,066
Retirement benefit obligations	(3,883)	(2,321)
Other	(13,692)	(10,478)
Net cash provided by operating activities	162,083	183,798
Cash flows from investing activities:
Payments for purchase of property, plant and equipment	(89,597)	(65,075)
Proceeds from sale of assets	1,213	3,697
Proceeds from sales of short-term investments	8,970	5,002
Payments for purchases of short-term investments	(824)	(7,344)
Business acquisitions, net of cash acquired	(771,069)
Net cash used in investing activities	(851,307)	(63,720)
Cash flows from financing activities:
Cash dividends paid	(25,206)	(22,076)
Proceeds from sales of treasury stock	7,102	12,554
Payments for repurchases of common stock	0	(61,782)
Borrowings on revolving lines of credit and short-term borrowings	1,769,105	1,106,000
Payments on revolving lines of credit and short-term borrowings	(1,422,624)	(1,145,800)
Proceeds from issuance of long-term debt	400,000
Payments of long-term debt and capital lease obligations	(315)	(307)
Payments of debt financing costs	(1,325)
Payment for forward option derivative instrument	(5,543)
Net cash used in financing activities	721,194	(111,411)
Effect of exchange rate changes on cash and cash equivalents	(5,123)	(755)
Net change in cash and cash equivalents	26,847	7,912
Cash and cash equivalents, including restricted cash at beginning of year	87,552	81,090
Cash and cash equivalents, including restricted cash at end of period	$ 114,399	$ 89,002

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Consolidated Statements of Stockholders' Equity - USD ($) shares in Thousands, $ in Thousands	Total stockholders equity	Preferred Stock [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	Total Accumulated Other Comprehensive (Loss) Earnings [Member]	Foreign Currency Translation Adjustments [Member]	Unrealized Derivative Gains (Losses) [Member]	Minimum Retirement Benefit Liability Adjustments [Member]	Deferred Compensation in Equity [Member]	Retained Earnings [Member]	Treasury Stock at Cost [Member]	Treasury Stock Held for Deferred Compensaton [Member]	Total
Balances at Sep. 30, 2016	$ 1,212,595		$ 106	$ 141,570	$ (65,705)	$ (25,971)	$ 179	$ (39,913)	$ 5,089	$ 1,649,506	$ (512,882)	$ (5,089)
Balance, Preferred Stock, shares at Sep. 30, 2016		0
Balance, Common Stock, shares at Sep. 30, 2016			72,960
Balance, Treasury Stock, shares at Sep. 30, 2016											(11,374)
Balance, Treasury stock held for deferred compensation, Shares at Sep. 30, 2016												(157)
Net earnings	138,279									138,279			$ 138,279
Other comprehensive income (loss), net of tax	(2,912)				(2,912)	(4,330)	(33)	1,451
Cash dividends paid	(22,076)									(22,076)
Purchases of treasury stock	(63,255)										$ (63,255)
Purchases of treasury stock, shares											(915)
Sales of treasury stock	14,027			(2,130)							$ 16,157
Sales of treasury stock, shares											416
Common shares issued from treasury stock to settle employee liabilities	1,767			740					1,767		$ 1,027	$ (1,767)	1,767
Common shares issued from treasury stock to settle employee liabilities, shares											26	(26)
Common shares issued from treasury stock for benefit plans	14,014			6,501							$ 7,513		$ 14,014
Common shares issued from treasury stock for benefit plans, shares											199		199
Stock-based compensation	15,580			15,580
Purchases of stock by deferred compensation plan									254			$ (254)
Purchases of stock by deferred compensation plan, shares												(3)
Distribution of stock from deferred compensation plan									(10)			$ 10
Balances at Jun. 30, 2017	1,308,019		$ 106	162,261	(68,617)	(30,301)	146	(38,462)	7,100	1,765,709	$ (551,440)	$ (7,100)
Balance, Preferred Stock, shares at Jun. 30, 2017		0
Balance, Common Stock, shares at Jun. 30, 2017			72,960
Balance, Treasury Stock, shares at Jun. 30, 2017											(11,648)
Balance, Treasury stock held for deferred compensation, Shares at Jun. 30, 2017												(186)
Balances at Sep. 30, 2017	1,371,383		$ 106	163,836	(53,186)	(27,280)	135	(26,041)	7,135	1,820,268	$ (559,641)	$ (7,135)	$ 1,371,383
Balance, Preferred Stock, shares at Sep. 30, 2017		0											0
Balance, Common Stock, shares at Sep. 30, 2017			72,960										72,960
Balance, Treasury Stock, shares at Sep. 30, 2017											(11,739)		(11,739)
Balance, Treasury stock held for deferred compensation, Shares at Sep. 30, 2017												(186)	(186)
Net earnings	105,866									105,866			$ 105,866
Other comprehensive income (loss), net of tax	(24,143)				(24,143)	(6,379)	(18,718)	954
Cash dividends paid	(25,206)									(25,206)
Sales of treasury stock	7,102			(2,471)							$ 9,573
Sales of treasury stock, shares											255
Common shares issued from treasury stock to settle employee liabilities													0
Common shares issued from treasury stock for benefit plans	14,741			7,157							$ 7,584		$ 14,741
Common shares issued from treasury stock for benefit plans, shares											202		202
Stock-based compensation	16,292			16,292
Purchases of stock by deferred compensation plan									1,267			$ (1,267)
Purchases of stock by deferred compensation plan, shares												(17)
Distribution of stock from deferred compensation plan									(9)			$ 9
Distribution of stock from deferred compensation plan, shares												1
Balances at Jun. 30, 2018	$ 1,466,035		$ 106	$ 184,814	$ (77,329)	$ (33,659)	$ (18,583)	$ (25,087)	$ 8,393	$ 1,900,928	$ (542,484)	$ (8,393)	$ 1,466,035
Balance, Preferred Stock, shares at Jun. 30, 2018		0											0
Balance, Common Stock, shares at Jun. 30, 2018			72,960										72,960
Balance, Treasury Stock, shares at Jun. 30, 2018											(11,282)		(11,282)
Balance, Treasury stock held for deferred compensation, Shares at Jun. 30, 2018												(202)	(202)

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Consolidated Statement of Stockholders' Equity (Parenthetical) - $ / shares	3 Months Ended		9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Stockholders Equity [Abstract]
Common Stock, Dividends, Per Share, Cash Paid	$ 0.1425	$ 0.1250	$ 0.4100	$ 0.3600

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Basis of Presentation

9 Months Ended

Jun. 30, 2018

Basis of Presentation

Basis of Presentation

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 June 30, 2018 and for the three and nine-months ended June 30, 2018 and June 30, 2017, 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 June 30, 2018, 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 nine-months ended June 30, 2018 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, the valuation of assets and liabilities acquired in business combinations, the valuation of derivative instruments, 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.

As disclosed in Note 1, Operations and summary of significant accounting policies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of Woodward’s most recent Annual Report on Form 10-K, the amortization of intangible assets has been reclassified from a separate line in the Condensed Consolidated Statements of Earnings for the three and nine-months ended June 30, 2017 to an allocated expense/cost component of cost of goods sold and selling, general and administrative expenses based on the nature of the intangible asset that is being amortized.  The reclassification of these amounts conforms to the current period presentation.

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New Accounting Standards

9 Months Ended

Jun. 30, 2018

Recent Accounting Pronouncements

New Accounting Pronouncements and Changes in Accounting Principles [Text Block]

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 2018, the FASB issued ASU 2018-05, “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118.”  ASU 2018-05 formally amended ASC Topic 740, Income Taxes (“ASC 740”) for the guidance previously provided by SEC Staff Accounting Bulletin 118 (“SAB 118”).  SAB 118 expressed views of the SEC regarding ASC 740 in the reporting period that includes the enactment date of H.R.1, “An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Tax Act”) (previously known as “The Tax Cuts and Jobs Act”).  The Company adopted SAB 118 in the first quarter of fiscal year 2018 and therefore, the Company’s subsequent adoption of ASU 2018-05 in the second quarter of fiscal year 2018 had no impact on its accounting for income taxes in the third quarter or first nine months of fiscal year 2018.

In February 2018, the FASB issued ASU 2018-02, “Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.”  ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the enactment of tax reform under the Tax Act and provides guidance on the disclosure requirements regarding the stranded tax effects.  The amendments in ASU 2018-02 are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.  Early adoption is permitted.  The amendments in ASU 2018-02 may be applied retrospectively in the period of adoption to all periods in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized or may be applied as of the beginning of the period of adoption.  Woodward is currently assessing the impact of the adoption of the new guidance and has not yet elected the method of adoption it will apply.  When adopted, if Woodward elects to reclassify under ASU 2018-02, a portion of accumulated other comprehensive earnings would be reclassified to retained earnings.   

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.”  ASU 2017-12 is intended to more closely align the financial statement reporting of hedging relationships with the economic results of an entity’s risk management activities and to make certain targeted improvements to simplify the application of hedge accounting guidance in current U.S. GAAP.  ASU 2017-12 is also intended to increase standardization of financial statement disclosures including requiring a tabular disclosure of the income statement effects of fair value and cash flow hedges.  Woodward early adopted the new guidance in the first quarter of fiscal year 2018.  Initial application of the new guidance did not have any impact on Woodward’s hedging arrangements or on the disclosures related to such arrangements as of the date of adoption and through the second quarter of fiscal year 2018.  In the third quarter of fiscal 2018, Woodward entered into new hedging arrangements and incorporated the provisions of this guidance in those hedging arrangements and related disclosures as discussed in Note 7, Derivative instruments and hedging activities.

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.  The amendments of ASU 2017-07 should be applied retrospectively for the presentation of the service cost component and the other components of net periodic benefit costs from defined benefit and other postretirement benefit plans in the statement of earnings and prospectively, on and after the effective date, for the capitalization of the service cost component into manufactured inventories.  Woodward will adopt the new guidance in fiscal year 2019, and expects changes to earnings before income taxes to be insignificant in the year of adoption.

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.  Woodward will adopt the new guidance in fiscal year 2019.  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 November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force).”  ASU 2016-18 provides authoritative guidance requiring that restricted cash be included with cash and cash equivalents when reconciling the beginning of period and end of period amounts reported in the statement of cash flows. The guidance is applied retrospectively to all periods presented and is effective for annual reporting periods beginning after December 15, 2017 (fiscal year 2019 for Woodward), and interim periods within those annual periods.  In the third quarter of fiscal year 2018, the Company’s Condensed Consolidated Balance Sheet included restricted cash, and as a result, the Company concurrently early adopted this guidance in the three- months ended June 30, 2018. As a result of the adoption, the Company has included restricted cash of $6,290 as of June 30, 2018 in the end of period amounts reported in the statement of cash flows for the nine-months ended June 30, 2018.  There was no restricted cash in the beginning of year balance for the nine-months ended June 30, 2018, or in the beginning of year or end of period balances for the nine-months ended June 30, 2017.

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.  Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption.  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 will adopt the new guidance in fiscal year 2021.  Woodward 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.  Originally under ASU 2016-2, an organization was required upon adoption to recognize and measure leases beginning in the earliest period presented using a modified retrospective approach and restate the financial statements for all periods presented.  In July 2018, the FASB issued ASU 2018-11, which amends ASU 2016-02 to provide organizations with an additional (and optional) transition method whereby it may elect to recognize and measure leases by applying the cumulative impact of adopting ASU 2016-02 to the opening retained earnings balance in the period of adoption, thereby removing the requirement that the financial statements of prior periods be restated.  Although early adoption is permitted, Woodward expects to adopt the new guidance in fiscal year 2020.  Woodward expects that it will elect to not restate fiscal years 2018 and 2019 and will recognize the cumulative impact of adopting the standard in Woodward’s opening retained earnings for fiscal year 2020, but has not made a final determination on its future adoption method.  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 2017, none of which was recognized on the balance sheet, was $8,302.  As of September 30, 2017, future minimum rental payments required under operating leases, none of which were recognized on the balance sheet, were $23,215.

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.  Woodward has determined it will elect to adopt using the cumulative effect transition method with the cumulative effect of initial adoption recognized at the date of initial application.  Further, under the cumulative effect transition method, Woodward will disclose the impact of changes to financial statement line items as a result of applying ASC 606 (rather than previous U.S. GAAP) and include an explanation of the reasons for significant changes.

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.  Woodward is also performing a comprehensive review of its current processes and systems to determine and implement changes required to support the adoption of ASC 606 on October 1, 2018, the first day of Woodward’s fiscal year 2019.  As part of this review process, Woodward is implementing new software solutions to support revenue reporting after adoption.

Based on Woodward’s review of its customer contracts, Woodward has determined 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 believes a significant portion of its revenues from sales of products and services to customers will be recognized over time, rather than at a point in time, due primarily to the terms of certain customer contracts.  As a result of recognizing some revenue over time, various balance sheet line items will be impacted.  As such, Woodward believes 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.

Woodward generally expenses costs as incurred for the engineering and development of new products.  Customer funding received for such engineering and development efforts is currently recognized as revenue when earned, with the corresponding costs recognized as cost of sales.  ASC 606 requires most customer funding of product engineering and development to be deferred and recognized as revenue as the related products are delivered to the customer.  ASC 606 also requires product engineering and development costs to be capitalized as contract fulfillment costs, to the extent recoverable from the deferred customer funding, and subsequently amortized as the related products are delivered to the customer.  Therefore, under ASC 606, Woodward expects to record both contract assets and contract liabilities related to such funded engineering and development efforts, which are expected to become material over time.  Recognized revenues and research and development costs are both expected to decrease in the year of adoption and for at least several years thereafter, due to the recognition of these contract assets and liabilities.  However, recognition of these contract assets and liabilities are expected to have an immaterial impact on pre-tax earnings in future periods.

In addition, ASC 606 will require more comprehensive disclosures about revenue streams and contracts with customers, including significant judgments required.  Woodward is currently implementing changes to its processes for preparing required disclosures and to information systems that support the financial reporting process.

Woodward is also 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. 

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Earnings Per Share

9 Months Ended

Jun. 30, 2018

Earnings Per Share

Earnings Per Share

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				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Numerator:
Net earnings	$	49,117	$	53,626	$	105,866	$	138,279
Denominator:
Basic shares outstanding		61,608		61,288		61,417		61,387
Dilutive effect of stock options and restricted stock		2,273		2,104		2,365		2,133
Diluted shares outstanding		63,881		63,392		63,782		63,520
Income per common share:
Basic earnings per share	$	0.80	$	0.87	$	1.72	$	2.25
Diluted earnings per share	$	0.77	$	0.85	$	1.66	$	2.18

The following stock option grants were outstanding during the three and nine-months ended June 30, 2018 and 2017, but were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Options		764		780		760		66
Weighted-average option price	$	78.70	$	62.64	$	78.73	$	62.98

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				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Weighted-average treasury stock shares held for deferred compensation obligations		201		186		197		178

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Business Acquisitions

9 Months Ended

Jun. 30, 2018

Business Combinations

Business Acquisitions

Note 4.  Business acquisition

On April 8, 2018, the Company, and its wholly-owned subsidiary, Woodward Aken GmbH (collectively, the “Purchasers”), entered into a Share Purchase Agreement (the “L’Orange Agreement”) with MTU Friedrichshafen GmbH (“MTU”) and MTU America Inc. (together with MTU, the “Sellers”), both of which were subsidiaries of Rolls-Royce PLC (“Rolls-Royce”).  Pursuant to the L’Orange Agreement, the Purchasers agreed to acquire all of the outstanding shares of stock of L’Orange GmbH, together with its wholly-owned subsidiaries in China and Germany, as well as all of the outstanding equity interests of its affiliate, Fluid Mechanics LLC, and their related operations (collectively, “L’Orange”), for total consideration (including cash consideration and the assumption of certain liabilities) of €700,000, or approximately $811,000 based on the foreign currency exchange rate as of the date Woodward executed cross currency swaps in connection with the financing of the transaction as described in Note 7, Derivative instruments and hedging activities.  The total consideration to be paid is subject to customary post-closing adjustments.  The transactions contemplated by the L’Orange Agreement were completed on June 1, 2018 (the “Closing”) and L’Orange became a subsidiary of the Company.

L’Orange is a supplier of fuel injection systems for industrial diesel, heavy fuel oil and dual-fuel engines.  L’Orange supplies fuel injection technology for engines that power a wide range of industrial applications including marine power and propulsion systems, special-application vehicles, locomotives, oil and gas processing, and power generation.  L’Orange serves many large specialist diesel engine manufacturers, including Rolls-Royce Power Systems’ subsidiaries, MTU and Bergen Engines, and other low to high speed engine builders.  Following the Closing, L’Orange was renamed Woodward L’Orange and has been integrated into the Company’s Industrial segment.

In connection with the Closing, MTU and a subsidiary of Rolls-Royce, and L’Orange, entered into a long-term supply agreement, dated June 1, 2018 (the “LTSA”).  Pursuant to the terms of the LTSA, L’Orange will continue to supply to MTU and its affiliates within Rolls-Royce certain liquid fuel injection systems, injectors, pumps and other associated parts and components for industrial diesel, heavy fuel oil and dual-fuel engines in a manner consistent with the supply of such products prior to the transaction.  The LTSA has an initial term that extends through December 31, 2032.  During the term of the LTSA, MTU is required to continue to purchase certain of these products exclusively from L’Orange, subject to certain limitations specified therein, at pricing negotiated at arms-length.

ASC Topic 805, “Business Combinations” (“ASC 805”), provides a framework to account for acquisition transactions under US GAAP. The preliminary purchase price of L’Orange, prepared consistent with the required ASC 805 framework, is allocated as follows:

Cash paid to Sellers	$	780,355
Less acquired cash and restricted cash		(9,286)
Total purchase price	$	771,069

The cash consideration was financed through the use of cash on hand, the issuance of an aggregate principal amount of $400,000 of senior unsecured notes in a series of private placement transactions and $167,420 borrowed under Woodward’s existing revolving credit agreement (see Note 14, Credit Facilities, short-term borrowings and long-term debt).  In connection with these borrowings, the Company entered into cross currency swap transactions, which effectively lowered the interest rate on each tranche of the senior unsecured notes and the borrowings under the existing revolving credit agreement (see Note 7, Derivative instruments and hedging activities).

The allocation of the purchase price to the assets acquired and liabilities assumed was accounted for under the purchase method of accounting in accordance with ASC 805.  Assets acquired and liabilities assumed in the transaction were recorded at their estimated acquisition date fair values, while transaction costs associated with the acquisition were expensed as incurred.  Woodward’s preliminary allocation was based on an evaluation of the appropriate fair values and represents management’s best estimate based on available data. 

Due to the timing of the transaction, Woodward is in the process of finalizing valuations of current assets, property, plant and equipment (including estimated useful lives), goodwill, intangible assets (including estimated useful lives), and all current and noncurrent liabilities other than the valuation of the pension obligation, the valuation of which is complete.  Additionally, Woodward is finalizing the projected combined future tax rate to be applied to the valuation of assets, which could impact the valuation of goodwill and intangible assets.  The final determination of the fair value of assets and liabilities will be completed within the one year measurement period as allowed by ASC 805.

The following table, which is preliminary and subject to change, summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition of L’Orange.  Any potential adjustments will be made retroactively and could be material to the preliminary values presented below.

Accounts receivable	$	26,538
Inventories (1)		72,674
Other current assets		1,385
Property, plant, and equipment		90,589
Goodwill		269,433
Intangible assets		556,023
Total assets acquired		1,016,642
Other current liabilities		40,362
Deferred income tax liabilities		164,791
Other noncurrent liabilities		40,420
Total liabilities assumed		245,573
Net assets acquired	$	771,069

(1) Inventories include a  $15,107 adjustment to state work in progress and finished goods inventories at their fair value as of the acquisition date.  The inventory fair value adjustment is being recognized as a non-cash increase to cost of goods sold ratably over the estimated inventory turnover period, with the entire $15,107 fair value adjustment expected to be recognized in cost of goods sold during the year ending September 30, 2018. 

In connection with the acquisition of L’Orange, Woodward assumed the defined benefit pension obligations of the L’Orange defined benefit pension plans (see Note 19, Retirement benefits).  As of June 1, 2018, the total liability recognized by the Company associated with the L’Orange defined benefit pension plans was $38,998, of which $1,143 was considered current. 

As summary of the intangible assets acquired, weighted-average useful lives, and amortization methods follows:

	Estimated Amounts		Weighted-Average Useful Life		Amortization Method
Intangible assets with finite lives:
Customer relationships and contracts	$	379,423	20	years	Straight-line
Process technology		71,940	21	years	Straight-line
Backlog		40,611	1	year	Accelerated
Other		232	3	years	Straight-line
Intangible asset with indefinite life:
Trade name		63,817	Indefinite		Not amortized
Total	$	556,023

Future amortization expense associated with the acquired intangibles as of June 1, 2018 is expected to be:

Year Ending September 30:
2018 (remaining)	$	18,832
2019		34,884
2020		19,701
2021		21,458
2022		21,745
Thereafter		375,586
	$	492,206

The preliminary purchase price allocation resulted in the recognition of $269,433 of goodwill.  Only the portion of goodwill which relates to the U.S. operations of L’Orange is expected to be deductible for tax purposes.  The Company has included all of the goodwill in its Industrial segment.  The goodwill represents the estimated value of potential expansion with new customers, the opportunity to further develop sales opportunities with new customers, other synergies including supply chain savings expected to be achieved through the integration of L’Orange with Woodward’s Industrial segment, and intangible assets that do not qualify for separate recognition, such as value of the assembled L’Orange workforce that is not included within the estimated value of the acquired backlog and customer relationship intangible assets.

Pro forma results for Woodward giving effect to the L’Orange acquisition

The following unaudited pro forma financial information presents the combined results of operations of Woodward and L’Orange as if the acquisition had been completed as of the beginning of the prior fiscal year, or October 1, 2016.  The unaudited pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisition and related borrowings had taken place on October 1, 2016, nor are they indicative of future results.

The unaudited pro forma financial information for the three and nine-months ended June 30, 2018 includes Woodward’s results, including the post-acquisition results of L’Orange, since June 1, 2018, and the pre-acquisition results of L’Orange for those periods.  The unaudited pro forma financial information for the three and nine-months ended June 30, 2017 combines Woodward’s results with the pre-acquisition results of L’Orange for those periods.

Prior to the L’Orange acquisition by Woodward, L’Orange was a wholly owned subsidiary of Rolls-Royce and as such was not a standalone entity for financial reporting purposes.  Accordingly, the historical operating results of L’Orange may not be indicative of the results that might have been achieved, historically or in the future, if L’Orange had been a standalone entity.

The unaudited pro forma results for the three and nine-months ended June 30, 2018 and the three and nine-months ended June 30, 2017follow:

	Three-Months Ended				Three-Months Ended
	June 30, 2018				June 30, 2017
	As reported		Pro forma		As reported		Pro forma
Net sales	$	588,117	$	639,665	$	548,622	$	619,485
Net earnings		49,117		60,488		53,626		53,071
Earnings per share:
Basic earnings per share	$	0.80	$	0.98	$	0.87	$	0.87
Diluted earnings per share		0.77		0.95		0.85		0.84

	Nine-Months Ended				Nine-Months Ended
	June 30, 2018				June 30, 2017
	As reported		Pro forma		As reported		Pro forma
Net sales	$	1,606,514	$	1,830,515	$	1,491,897	$	1,684,071
Net earnings		105,866		129,191		138,279		108,190
Earnings per share:
Basic earnings per share	$	1.72	$	2.10	$	2.25	$	1.76
Diluted earnings per share		1.66		2.03		2.18		1.70

The unaudited pro forma results for all periods presented include adjustments made to account for certain costs and transactions that would have been incurred had the acquisition been completed as of October 1, 2016, including amortization charges for acquired intangible assets, eliminations of intercompany transactions, adjustments for acquisition transaction costs, adjustments for depreciation expense for property, plant, and equipment, and adjustments to interest expense.  These adjustments are net of any applicable tax impact and were included to arrive at the pro forma results above.

L’Orange’s operating results have been included in the Company’s operating results for the periods subsequent to the completion of the acquisition on June 1, 2018.  L’Orange contributed net sales of $24,878 for both the three and nine-months ended June 30, 2018 and a net loss of $1,215 for both the three and nine-months ended June 30, 2018.

Woodward incurred transaction-related costs of $10,755 for the three-months ended June 30, 2018 and $12,036 for the nine-months ended June 30, 2018, which are included in “Selling, general and administrative expenses” in the Condensed Consolidated Statements of Earnings. These transaction-related costs consisted of the L’Orange Acquisition transaction and integration costs, warranty and indemnity insurance costs, and German real estate transfer tax costs.  Woodward incurred acquisition financing related costs of $1,154 for the three and nine-months ended June 30, 2018, which are included in “Interest expense” in the Condensed Consolidated Statements of Earnings.  Included in other expense (income), net for the three and nine-months ended June 30, 2018 was the cost of $5,543 related to an at-the-money-forward option (the “Forward Option”) entered into by the Company on April 18, 2018.  The Forward Option, which was entered into to manage the Company’s exposure to fluctuations in the Euro prior to the anticipated close of the L’Orange Agreement, was not exercised by the Company and expired on June 1, 2018.

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Joint Venture

9 Months Ended

Jun. 30, 2018

Equity Method Investments and Joint Ventures [Abstract]

Joint Venture

Note 5.  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.  During the three-months ended March 31, 2018, Woodward received its second annual payment of $4,894, which was recorded as deferred income and included in Net cash provided by operating activities under the caption “Other” on the Condensed Consolidated Statement of Cash Flows.  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 as deferred income the $250,000 consideration received from GE in January of 2016 for its purchase of a 50% equity interest in the JV.  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 $6,414 as of June 30, 2018 and $6,451 as of September 30, 2017, and other liabilities of $237,724 as of June 30, 2018 and $236,896 as of September 30, 2017.  Amortization of the deferred income recognized as an increase to sales was $1,564 for the three-months and $4,103 for the nine-months ended June 30, 2018, and $1,387 for the three-months and $4,515 for the nine-months ended June 30, 2017.

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 do have 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 income of $738 for the three-months and $2,340 for the nine-months ended June 30, 2018, and a loss of $432 for the three-months and income of $634 for the nine-months ended June 30, 2017 related to Woodward’s equity interest in the earnings of the JV.  Woodward received no cash distributions from the JV in the three and nine-months ended June 30, 2018, compared to a $2,500 cash distribution from the JV during the nine-months ended June 30, 2017, which was included in Net cash provided by operating activities under the caption “Other” on the Condensed Consolidated Statement of Cash Flows.  Woodward’s net investment in the JV, which is included in other assets, was $8,612 as of June 30, 2018 and $6,272 as of September 30, 2017.

Woodward’s net sales include $20,085 for the three-months and $50,137 for the nine-months ended June 30, 2018 of sales to the JV, compared to $18,645 for the three-months and $52,362 for the nine-months ended June 30, 2017.  Woodward recorded a reduction to sales of $7,340 for the three-months and $19,670 for the nine-months ended June 30, 2018 related to royalties paid to the JV by Woodward on sales by Woodward directly to third party aftermarket customers, compared to $6,163 for the three-months and $17,240 for the nine-months ended June 30, 2017.  The Condensed Consolidated Balance Sheets include “Accounts receivable” of $10,213 at June 30, 2018, and $8,554 at September 30, 2017, related to amounts the JV owed Woodward, and include “Accounts payable” of $4,261 at June 30, 2018, and $6,741 at September 30, 2017, related to amounts Woodward owed the JV.

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Financial Instruments and Fair Value Measurements

9 Months Ended

Jun. 30, 2018

Financial Instruments and Fair Value Measurments

Financial Instruments and Fair Value Measurements

Note 6.  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.

The table below presents information about Woodward’s financial assets and liabilities 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. 

	At June 30, 2018								At September 30, 2017
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial assets:
Cash	$	61,050	$	-	$	-	$	61,050	$	79,822	$	-	$	-	$	79,822
Restricted investments in money market funds		2,521		-		-		2,521		-		-		-		-
Investments in reverse repurchase agreements		185		-		-		185		1		-		-		1
Investments in term deposits with foreign banks		50,643		-		-		50,643		7,729		-		-		7,729
Equity securities		19,500		-		-		19,500		16,600		-		-		16,600
Total financial assets	$	133,899	$	-	$	-	$	133,899	$	104,152	$	-	$	-	$	104,152
Financial liabilities:
Cross currency interest rate swaps	$	-	$	23,527	$	-	$	23,527	$	-	$	-	$	-	$	-
Total financial liabilities	$	-	$	23,527	$	-	$	23,527	$	-	$	-	$	-	$	-

Restricted investments in money market funds:  A subsidiary of Woodward is required to maintain a balance in escrow to secure the indemnification obligations of the subsidiary's previous parent company.  As allowed by the escrow agreement, the cash held in escrow is invested in money market funds not insured by the Federal Deposit Insurance Corporation (“FDIC”).  The restriction on the use of the invested cash held in escrow will lapse once the underlying indemnification obligations are settled, which is expected to occur in the fourth quarter of fiscal year 2018.Woodward believes that the investments in money market funds are on deposit with creditworthy financial institutions and that the funds are highly liquid, although their use is restricted.  The investments in money market funds are reported at fair value, with realized gains from interest income realized in earnings and are included in “Cash and cash equivalents” in the Condensed Consolidated Balance Sheets.  The fair values of Woodward’s investments in money market funds are based on the quoted market prices for the net asset value of the various money market funds.

Investments in reverse repurchase agreements:  Woodward sometimes invests excess cash in reverse repurchase agreements.  Under the terms of Woodward’s reverse repurchase agreements, Woodward purchases an interest in a pool of securities and is granted a security interest in those securities by the counterparty to the reverse repurchase agreement.  At an agreed upon date, generally the next business day, the counterparty repurchases Woodward’s interest in the pool of securities at a price equal to what Woodward paid to the counterparty plus a rate of return determined daily per the terms of the reverse repurchase agreement.  Woodward believes that the investments in these reverse repurchase agreements are with creditworthy financial institutions and that the funds invested are highly liquid.  The investments in reverse repurchase agreements are reported at fair value, with realized gains from interest income recognized in earnings, and are included in “Cash and cash equivalents” in the Condensed Consolidated Balance Sheets.  Since the investments are generally overnight, the carrying value is considered to be equal to the fair value as the amount is deemed to be a cash deposit with no risk of change in value as of the end of each fiscal quarter.

Investments in term deposits with foreign banks: Woodward’s foreign subsidiaries sometimes invest excess cash in various highly liquid financial instruments that Woodward believes are with creditworthy financial institutions.  Such investments are reported in “Cash and cash equivalents” at fair value, with realized gains from interest income recognized in earnings.  The carrying value of Woodward’s investments in term deposits with foreign banks are considered equal to the fair value given the highly liquid nature of the investments.  As of June 30, 2018, $3,769 of the term deposits with foreign banks are restricted in use as they are pledged collateral for short-term borrowings.  The restriction will lapse when the related short-term borrowings are paid.

Equity securities: Woodward holds marketable equity securities, through investments in various mutual funds, related to its deferred compensation program.  Based on Woodward’s intentions regarding these instruments, marketable equity securities are classified as trading securities.  The trading securities are reported at fair value, with realized gains and losses recognized in “Other expense (income), net” on the Condensed Consolidated Statements of Earnings.  The trading securities are included in “Other assets” in the Condensed Consolidated Balance Sheets.  The fair values of Woodward’s trading securities are based on the quoted market prices for the net asset value of the various mutual funds.

Cross currency interest rate swaps:  Woodward holds cross currency interest rate swaps, which are accounted for at fair value.  The swaps are included in “Other liabilities” in the Condensed Consolidated Balance Sheets.  The fair values of Woodward’s cross currency interest rate swaps are determined using a market approach that is based on observable inputs other than quoted market prices, including contract terms, interest rates, currency rates, and other market factors.

Accounts receivable, accounts payable, and short-term borrowings are not remeasured to fair value, as the carrying cost of each approximates its respective fair value.  The estimated fair values and carrying costs of other financial instruments that are not required to be remeasured at fair value in the Condensed Consolidated Balance Sheets were as follows:

		At June 30, 2018				At September 30, 2017
	Fair Value Hierarchy Level	Estimated Fair Value		Carrying Cost		Estimated Fair Value		Carrying Cost
Assets:
Notes receivable from municipalities	2	$	14,523	$	14,475	$	15,848	$	14,507
Investments in short-term time deposits	2		103		104		8,227		8,223
Liabilities:
Long-term debt	2	$	(1,203,413)	$	(1,214,246)	$	(592,317)	$	(582,080)

In fiscal years 2014 and 2013, Woodward received long-term notes from municipalities within the states of Illinois and Colorado in connection with certain economic incentives related to Woodward’s development of a second campus in the greater-Rockford, Illinois area for its Aerospace segment and Woodward’s development of a new campus at its corporate headquarters in Fort Collins, Colorado.  The fair value of the long-term notes was estimated based on a model that discounted future principal and interest payments received at an interest rate available to the Company at the end of the period for similarly rated municipal notes of similar maturity, which is a level 2 input as defined by the U.S. GAAP fair value hierarchy.  The interest rates used to estimate the fair value of the long-term notes were 2.8% at June 30, 2018 and 2.6% at September 30, 2017.

From time to time, certain of Woodward’s foreign subsidiaries will invest excess cash in short-term time deposits with a fixed maturity date of longer than three months but less than one year from the date of the deposit.  Woodward believes that the investments are with creditworthy financial institutions. The fair value of the investments in short-term time deposits was estimated based on a model that discounted future principal and interest payments to be received at an interest rate available to the foreign subsidiary entering into the investment for similar short-term time deposits of similar maturity.  This was determined to be a level 2 input as defined by the U.S. GAAP fair value hierarchy.  The interest rates used to estimate the fair value of the short-term time deposits was 5.3% at September 30, 2017.  There were no investments in short-term time deposits as of June 30, 2018.

The fair value of long-term debt was estimated based on a model that discounted future principal and interest payments at interest rates available to the Company at the end of the period for similar debt of the same maturity, which is a level 2 input as defined by the U.S. GAAP fair value hierarchy.  The weighted-average interest rates used to estimate the fair value of long-term debt were 3.5% at June 30, 2018 and 2.4% at September 30, 2017.

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Derivative Instruments and Hedging Activities

9 Months Ended

Jun. 30, 2018

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Note 7.  Derivative instruments and hedging activities

Woodward has exposures related to global market risks, including the effect of changes in interest rates, foreign currency exchange rates, changes in certain commodity prices and fluctuations in various producer indices.  From time to time, Woodward enters into derivative instruments for risk management purposes only, including derivatives designated as accounting hedges and/or those utilized as economic hedges.  Woodward uses interest rate related derivative instruments to manage its exposure to fluctuations of interest rates.  Woodward does not enter into or issue derivatives for trading or speculative purposes.

By using derivative and/or hedging instruments to manage its risk exposure, Woodward is subject, from time to time, to credit risk and market risk on those derivative instruments.  Credit risk arises from the potential failure of the counterparty to perform under the terms of the derivative and/or hedging instrument.  When the fair value of a derivative contract is positive, the counterparty owes Woodward, which creates credit risk for Woodward.  Woodward mitigates this credit risk by entering into transactions with only counterparties that are believed to be creditworthy.  Market risk arises from the potential adverse effects on the value of derivative and/or hedging instruments that result from a change in interest rates, commodity prices, or foreign currency exchange rates.  Woodward minimizes this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

Derivative instruments not designated or qualifying as hedging instruments

On April 18, 2018, the Company entered into a  Forward Option at a cost of $5,543 whereby, on May 30, 2018, the Company had the ability to exercise its option to purchase €490,000 on June 1, 2018 using U.S. dollars at a fixed exchange rate of 1.2432.The Forward Option was entered into to manage the Company’s exposure to fluctuations in the Euro prior to the anticipated close of the L’Orange Agreement.  The Company did not enter into the Forward Option for trading or speculative purposes.As the spot rate was below 1.2432 on May 30, 2018, the Company elected not to exercise the option and a loss of $5,543 was recognized on the Forward Option in “other (income) expense, net” in the Condensed Consolidated Statements of Earnings in the three and nine-months ended June 30, 2018.  The Forward Option expired on June 1, 2018.

In May 2018, Woodward entered into cross currency interest rate swap agreements that synthetically convert$167,420 of floating-rate debt under Woodward’s existing revolving credit agreement to Euro denominated floating-rate debt in conjunction with the L’Orange acquisition (the “Floating-Rate Cross Currency Swap”).   Also in May 2018, Woodward entered into cross currency interest rate swap agreements that synthetically convertan aggregate principal amount of $400,000 of fixed-rate debt associated with the 2018 Note Purchase Agreement (as defined at Note 14, Credit facilities short-term borrowings and long-term debt) to Euro denominated fixed-rate debt (the “Fixed-Rate Cross Currency Swaps”).  The cross currency interest rate swaps, which effectively reduce the interest rate on the underlying fixed and floating-rate debt under the 2018 Notes and Woodward’s existing revolving credit agreement, respectively, is recorded as a reduction to “Interest expense” in Woodward’s Condensed Consolidated Statements of Earnings.

Derivatives instruments in fair value hedging relationships

Concurrent with the entry into the Floating-Rate Cross Currency Swap, a corresponding Euro denominated intercompany loan receivable with identical terms and notional amount as the underlying Euro denominated floating-rate debt, with a reciprocal cross currency interest rate swap, was entered into by Woodward Barbados Financing SRL (“Barbados”), a wholly owned subsidiary of Woodward, and is designated as a fair value hedge under the criteria prescribed in ASC Topic 815, Derivatives and Hedging(“ASC 815”).  The objective of the derivative instrument is to hedge against the foreign currency exchange risk attributable to the spot remeasurement of the Euro denominated intercompany loan. 

Only the change in the fair value related to the cross currency basis spread, or excluded component, of the derivative instrument is recognized in accumulated OCI.  The remaining changein the fair value of the derivative instrument isrecognized in foreign currency transaction gain or loss included in “Selling, general and administrative costs” in Woodward’s Condensed Consolidated Statements of Earnings.  The change in the fair value of the derivative instrument in foreign currency transaction gain or loss offsets the change in the spot remeasurement of the intercompany Euro denominated loan.  Hedge effectiveness is assessed based on the fair value changes of the derivative instrument, after excluding any fair value changes related to the crosscurrency basis spread.  The initial cost of the cross currency basis spread is recorded in earnings each period through the swap accrual process.  There is no credit-risk-related contingent features associated with the floating-rate cross currency interest rate swap.

Derivative instruments in cash flow hedging relationships

In conjunction with the entry into the Fixed-Rate Cross Currency Swaps, five corresponding intercompany loans receivable, with identical terms and amounts of each tranche of the underlying aggregate principal amount of $400,000 of fixed-rate debt, and reciprocal cross currency interest rate swaps were entered into by Woodward Barbados, which are designated as cash flow hedges under the criteria prescribed in ASC 815.  The objective of these derivative instruments is to hedge the risk of variability in cash flows attributable to the foreign currency exchange risk of cash flows for future principal and interest payments associated with the Euro denominated intercompany loans over a fifteen year period. 

Changes in the fair values of the derivative instruments are recognized in accumulated OCI and reclassified to foreign currency transaction gain or loss included in “Selling, general and administrative costs” in Woodward’s Condensed Consolidated Statements of Earnings.  Reclassifications out of accumulated OCI of the change in fair value occur each reporting period based upon changes in the spot rate remeasurement of the Euro denominated intercompany loans, including associated interest.  Hedge effectiveness is assessed based on the fair value changes of the derivative instruments and deemed to be highly effective in offsetting exposure to variability in foreign exchange rates.  There are no credit-risk-related contingent features associated with these cross currency interest rate swaps.

In June 2013, in connection with Woodward’s expected refinancing of current maturities on its then existing long-term debt, Woodward entered into a treasury lock agreement with a notional amount of $25,000 that qualified as a cash flow hedge under ASC 815.  The objective of this derivative instrument was to hedge the risk of variability in cash flows attributable to changes in the designated benchmark interest rate over a seven-year period related to the future principal and interest payments on a portion of anticipated future debt issuances.  The treasury lock agreement was terminated in August 2013 and the resulting gain of $507 was recorded as a reduction to accumulated OCI and is being recognized as a decrease to interest expense over a seven-year period.Woodward expects to reclassify $72 of net unrecognized gains on terminated derivative instruments from accumulated OCI to earnings during the next twelve months.

Derivatives instruments in net investment hedging relationships

On September 23, 2016, Woodward and Woodward International Holding B.V., a wholly owned subsidiary of Woodward organized under the laws of The Netherlands (the “BV Subsidiary”), each entered into a note purchase agreement (the “2016 Note Purchase Agreement”) relating to the sale by Woodward and the BV Subsidiary of an aggregate principal amount of €160,000 of senior unsecured notes in a series of private placement transactions.  Woodward issued €40,000 aggregate principal amount of Woodward’s Series M Senior Notes due September 23, 2026 (the “Series M Notes”).  Woodward designated the Series M Notes as a hedge of a foreign currency exposure of Woodward’s net investment in its Euro denominated functional currency subsidiaries.  On the Series M Notes, included in foreign currency translation adjustments within total comprehensive (losses) earnings are net foreign exchange gains of $2,559 for the three-months and  $548 for the nine-months ended June 30, 2018, compared to net foreign exchange losses of $880 for the three-months and $3,030 for the nine-months ended June 30, 2017. 

In July 2016, Woodward designated an intercompany loan of 160,000 renminbi between two wholly owned subsidiaries as a hedge of a foreign currency exposure of the net investment of the borrower in the lender.  Related to the intercompany loan, net unrealized foreign exchange losses of $283 for the three-months and net unrealized foreign exchange gains of $452 for the nine-months ended June 30, 2017 are included in foreign currency translation adjustments within total comprehensive (losses) earnings.  The intercompany loan was repaid in July 2017.

Impact of derivative instruments designated as qualifying hedging instruments

The following table discloses the impact of derivative instruments designated as qualifying hedging instruments on Woodward’s Condensed Consolidated Statements of Earnings:

		Three-Months Ended June 30, 2018						Three-Months Ended June 30, 2017
Derivatives in:	Location	Amount of (Income) Expense Recognized in Earnings on Derivative		Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative		Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings		Amount of (Income) Expense Recognized in Earnings on Derivative		Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative		Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings
Cross currency interest rate swap agreement designated as fair value hedges	Selling, general and administrative expenses	$	1,467	$	1,835	$	1,467	$	-	$	-	$	-
Cross currency interest rate swap agreements designated as cash flow hedges	Selling, general and administrative expenses		3,506		21,823		3,506		-		-		-
Treasury lock agreement designated as cash flow hedge	Interest expense		(18)		-		(18)		(18)		-		(18)
		$	4,955	$	23,658	$	4,955	$	(18)	$	-	$	(18)

		Nine-Months Ended June 30, 2018						Nine-Months Ended June 30, 2017
Derivatives in:	Location	Amount of (Income) Expense Recognized in Earnings on Derivative		Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative		Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings		Amount of (Income) Expense Recognized in Earnings on Derivative		Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative		Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings
Cross currency interest rate swap agreement designated as fair value hedges	Selling, general and administrative expenses	$	1,467	$	1,835	$	1,467	$	-	$	-	$	-
Cross currency interest rate swap agreements designated as cash flow hedges	Selling, general and administrative expenses		3,506		21,823		3,506		-		-		-
Treasury lock agreement designated as cash flow hedge	Interest expense		(54)		-		(54)		(54)		-		(54)
		$	4,919	$	23,658	$	4,919	$	(54)	$	-	$	(54)

The remaining unrecognized gains and losses in Woodward’s Condensed Consolidated Balance Sheets associated with derivative instruments that were previously entered into by Woodward, which are classified in accumulated OCI were net losses of $18,521 as of June 30, 2018 and net gains of $218 as of September 30, 2017. 

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Supplemental Statements of Cash Flows Information

9 Months Ended

Jun. 30, 2018

Supplemental Statements of Cash Flows Information

Supplemental Statements of Cash Flows Information

Note 8.  Supplemental statement of cash flows information

	Nine-Months Ended June 30,
	2018		2017
Interest paid, net of amounts capitalized	$	24,966	$	24,879
Income taxes paid		31,443		29,807
Income tax refunds received		1,760		158
Non-cash activities:
Purchases of property, plant and equipment on account		8,438		12,252
Common shares issued from treasury to settle employee liabilities		-		1,767
Common shares issued from treasury to settle benefit obligations (Note 19)		14,741		14,014
Cashless exercise of stock options		-		1,473

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Accounts Receivable

9 Months Ended

Jun. 30, 2018

Accounts Receivable Disclosure

Accounts Receivable

Note 9.  Accounts receivable

Almost all of Woodward’s sales are made on credit and result in accounts receivable, which are recorded at the amount invoiced and are generally not collateralized.  In the normal course of business, not all accounts receivable are collected and, therefore, an allowance for uncollectible amounts is provided equal to the amount that Woodward believes ultimately will not be collected.  In establishing the amount of the allowance related to the credit risk of accounts receivable, customer-specific information is considered related to delinquent accounts, past loss experience, bankruptcy filings, deterioration in the customer’s operating results or financial position, and current economic conditions.  Accounts receivable losses are deducted from the allowance, and the related accounts receivable balances are written off when the receivables are deemed uncollectible.  Recoveries of accounts receivable previously written off are recognized when received.  In addition, an allowance associated with anticipated future sales returns is also established and is included in the allowance for uncollectible amounts.

Consistent with common business practice in China, Woodward’s Chinese subsidiaries accept from Chinese customers, in settlement of certain customer accounts receivable, bankers’ acceptance notes issued by Chinese banks that are believed to be creditworthy.  Bankers’ acceptance notes are financial instruments issued by Chinese financial institutions as part of financing arrangements between the financial institution and a customer of the financial institution.  Bankers’ acceptance notes 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 bankers’ acceptance note as of the maturity date.  The maturity date of bankers’ acceptance notes varies, but it is Woodward’s policy to only accept bankers’ acceptance notes 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 banker’s acceptance note from a customer, such customer has no further obligation to pay Woodward for the related accounts receivable balance.  Woodward only accepts bankers’ acceptance notes issued by banks that are believed to be creditworthy and to which the credit risks associated with the bankers’ acceptance notes are believed to be minimal.

The composition of Woodward’s accounts receivable at June 30, 2018 and September 30, 2017 follows:

	June 30,		September 30,
	2018		2017
Accounts receivable from:
Customers	$	362,459	$	367,715
Other (Chinese financial institutions)		27,319		38,243
Allowance for uncollectible customer amounts		(3,668)		(3,776)
	$	386,110	$	402,182

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Inventories

9 Months Ended

Jun. 30, 2018

Inventories

Inventories

Note 10.  Inventories

	June 30,		September 30,
	2018		2017
Raw materials	$	86,677	$	59,034
Work in progress		135,518		103,790
Component parts (1)		301,257		262,755
Finished goods		65,988		47,926
	$	589,440	$	473,505

(1) Component parts include items that can be sold separately as finished goods or included in the manufacture of other products.

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Property, Plant, and Equipment, Net

9 Months Ended

Jun. 30, 2018

Property, Plant, and Equipment, Net

Property, Plant and Equipment, Net

Note 11.  Property, plant, and equipment

	June 30,		September 30,
	2018		2017
Land and land improvements	$	92,934	$	88,326
Buildings and building improvements		564,366		514,453
Leasehold improvements		17,827		16,142
Machinery and production equipment		654,495		543,641
Computer equipment and software		123,705		124,723
Office furniture and equipment		27,567		24,308
Other		19,326		19,393
Construction in progress		87,620		111,910
		1,587,840		1,442,896
Less accumulated depreciation		(543,807)		(520,853)
Property, plant, and equipment, net	$	1,044,033	$	922,043

In the second quarter of fiscal year 2018, the Company announced its decision to relocate its Duarte, California operations to the Company’s newly renovated Drake Campus in Fort Collins, Colorado.  The Company has identified assets held for sale with a carrying value of $8,853 at June 30, 2018, the majority of which are included in “Land and land improvements” and “Buildings and buildings improvements” which relate to the land, building and building improvements, and other assets at the Duarte facility.  The assets held for sale are included in the Company’s Aerospace segment.  The Company had no assets held for sale recorded as of September 30, 2017.  The carrying value of the remaining assets at the Duarte facility was approximately $3,400 as of June 30, 2018, of which the Company has identified approximately $500 that is planned to be disposed of as a result of the relocation.

The Company assessed whether the decision to relocate from its Duarte facility could indicate a potential impairment of the assets at the Duarte facility and concluded that the assets were not impaired as of June 30, 2018.

Included in “Office furniture and equipment” and “Other” is $1,676 at June 30, 2018 and $1,653 at September 30, 2017, of gross assets acquired on capital leases, and accumulated depreciation included $1,081 at June 30, 2018 and $739 at September 30, 2017 of amortization associated with the capital lease assets.

In fiscal year 2015, Woodward completed and placed into service a manufacturing and office building on a second campus in the greater-Rockford, Illinois area and has occupied the new facility for its Aerospace segment.  This campus is intended to support Woodward’s expected growth in its Aerospace segment as a result of Woodward being awarded a substantial number of new system platforms, particularly on narrow-body aircraft. 

Included in “Construction in progress” are costs of $30,198 at June 30, 2018 and $49,347 at September 30, 2017 associated with new equipment purchases for the greater-Rockford, Illinois campus and costs of $2,618 at June 30, 2018 and $15,584 at September 30, 2017 associated with the renovation of the Drake Campus. 

For the three and nine-months ended June 30, 2018 and 2017, Woodward had depreciation expense as follows:

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Depreciation expense	$	17,695	$	14,141	$	48,276	$	40,259

For the three and nine-months ended June 30, 2018 and 2017, Woodward capitalized interest that would have otherwise been included in interest expense of the following:

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Capitalized interest	$	607	$	567	$	1,841	$	1,521

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Goodwill

9 Months Ended

Jun. 30, 2018

Goodwill Disclosure

Goodwill

Note 12.  Goodwill

	September 30, 2017		Additions		Effects of Foreign Currency Translation		June 30, 2018
Aerospace	$	455,423	$	-	$	-	$	455,423
Industrial		101,122		269,433		948		371,503
Consolidated	$	556,545	$	269,433	$	948	$	826,926

On June 1, 2018, Woodward completed the acquisition of L’Orange (see Note 4, Business acquisition), which resulted in the recognition of $269,433 in goodwill in the Company’s Industrial segment. 

Woodward tests goodwill for impairment during the fourth quarter of each fiscal year, or at any time there is an indication goodwill is more-likely-than-not impaired, commonly referred to as triggering events.  There have been no such triggering events during any of the periods presented and Woodward’s fourth quarter of fiscal year 2017 impairment test resulted in no impairment.

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Intangible Assets, Net

9 Months Ended

Jun. 30, 2018

Intangible Assets, Net

Intangible Assets, Net

Note 13.  Intangible assets, net

	June 30, 2018						September 30, 2017
	Gross Carrying Value		Accumulated Amortization		Net Carrying Amount		Gross Carrying Value		Accumulated Amortization		Net Carrying Amount
Intangible assets with finite lives:
Customer relationships and contracts:
Aerospace	$	281,683	$	(162,692)	$	118,991	$	282,225	$	(151,155)	$	131,070
Industrial		422,948		(35,198)		387,750		40,962		(34,407)		6,555
Total	$	704,631	$	(197,890)	$	506,741	$	323,187	$	(185,562)	$	137,625
Intellectual property:
Aerospace	$	-	$	-	$	-	$	-	$	-	$	-
Industrial		19,480		(18,527)		953		19,422		(18,196)		1,226
Total	$	19,480	$	(18,527)	$	953	$	19,422	$	(18,196)	$	1,226
Process technology:
Aerospace	$	76,372	$	(53,377)	$	22,995	$	76,605	$	(49,124)	$	27,481
Industrial		95,217		(19,139)		76,078		22,950		(17,756)		5,194
Total	$	171,589	$	(72,516)	$	99,073	$	99,555	$	(66,880)	$	32,675
Backlog:
Aerospace	$	-	$	-	$	-	$	-	$	-	$	-
Industrial		40,885		(4,579)		36,306		-		-		-
Total	$	40,885	$	(4,579)	$	36,306	$	-	$	-	$	-
Other intangibles:
Aerospace	$	-	$	-	$	-	$	-	$	-	$	-
Industrial		1,651		(1,211)		440		1,312		(956)		356
Total	$	1,651	$	(1,211)	$	440	$	1,312	$	(956)	$	356
Intangible asset with indefinite life:
Tradename:
Aerospace	$	-	$	-	$	-	$	-	$	-	$	-
Industrial		64,248		-		64,248		-		-		-
Total	$	64,248	$	-	$	64,248	$	-	$	-	$	-
Total intangibles:
Aerospace	$	358,055	$	(216,069)	$	141,986	$	358,830	$	(200,279)	$	158,551
Industrial		644,429		(78,654)		565,775		84,646		(71,315)		13,331
Consolidated Total	$	1,002,484	$	(294,723)	$	707,761	$	443,476	$	(271,594)	$	171,882

For the three and nine-months ended June 30, 2018 and 2017, Woodward recorded amortization expense associated with intangibles of the following:

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Amortization expense	$	11,360	$	6,439	$	23,861	$	19,328

Future amortization expense associated with intangibles is expected to be:

Year Ending September 30:
2018 (remaining)	$	20,097
2019		58,284
2020		42,879
2021		39,994
2022		38,131
Thereafter		444,128
	$	643,513

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Credit Facilities, Short-term Borrowings and Long-term Debt

9 Months Ended

Jun. 30, 2018

Debt Disclosure

Credit Facilities, Short-term Borrowings and Long-term Debt

Note 14.  Credit facilities, short-term borrowings and long-term debt

Revolving credit facility

Woodward maintains a $1,000,000 revolving credit facility established under a revolving credit agreement among Woodward, a syndicate of lenders and Wells Fargo Bank, National Association, as administrative agent (the “Revolving Credit Agreement”).  The Revolving Credit Agreement provides for the option to increase available borrowings up to $1,200,000, subject to lenders’ participation.  Borrowings under the Revolving Credit Agreement can be made by Woodward and certain of its foreign subsidiaries in U.S dollars or in foreign currencies other than the U.S. dollar and generally bear interest at LIBOR plus 0.85% to 1.65%.  The Revolving Credit Agreement matures in April 2020.  Under the Revolving Credit Agreement, there were $374,574 in principal amount of borrowings outstanding as of June 30, 2018, at an effective interest rate of 2.87%, and $32,600 in principal amount of borrowings outstanding as of September 30, 2017, at an effective interest rate of 2.29%.  As of June 30, 2018, $140,231 of the borrowings under the Revolving Credit Agreement were classified as short-term borrowings based on Woodward’s intent and ability to pay this amount in the next twelve months.  As of September 30, 2017, all of the borrowings under the Revolving Credit Agreement were classified as short-term borrowings.

Short-term borrowings

Woodward has other foreign lines of credit and foreign overdraft facilities at various financial institutions, which are generally reviewed annually for renewal and are subject to the usual terms and conditions applied by the financial institutions.  Pursuant to the terms of the related facility agreements, Woodward’s foreign performance guarantee facilities are limited in use to providing performance guarantees to third parties.  As of June 30, 2018, there were borrowings outstanding of $3,769 on Woodward’s foreign lines of credit and foreign overdraft facilities.   There were no borrowings outstanding as of September 30, 2017.

Long-term debt

	June 30,		September 30,
	2018		2017
Long-term portion of revolving credit facility - Floating rate (LIBOR plus 0.85% - 1.65%), due April 2020; unsecured	$	234,343	$	-
Series D notes – 6.39%, due October 2018; unsecured		100,000		100,000
Series F notes – 8.24%, due April 2019; unsecured		43,000		43,000
Series G notes – 3.42%, due November 2020; unsecured		50,000		50,000
Series H notes – 4.03%, due November 2023; unsecured		25,000		25,000
Series I notes – 4.18%, due November 2025; unsecured		25,000		25,000
Series J notes – Floating rate (LIBOR plus 1.25%), due November 2020; unsecured		50,000		50,000
Series K notes – 4.03%, due November 2023; unsecured		50,000		50,000
Series L notes – 4.18%, due November 2025; unsecured		50,000		50,000
Series M notes – 1.12% due September 2026; unsecured		46,726		47,270
Series N notes – 1.31% due September 2028; unsecured		89,947		90,995
Series O notes – 1.57% due September 2031; unsecured		50,230		50,815
Series P notes – 4.27% due May 2025; unsecured		85,000		-
Series Q notes – 4.35% due May 2027; unsecured		85,000		-
Series R notes – 4.41% due May 2029; unsecured		75,000		-
Series S notes – 4.46% due May 2030; unsecured		75,000		-
Series T notes – 4.61% due May 2033; unsecured		80,000		-
Unamortized debt issuance costs		(2,850)		(1,794)
Total long-term debt		1,211,396		580,286
Less: Current portion of long-term debt		-		-
Long-term debt, less current portion	$	1,211,396	$	580,286

The Notes

In October 2008, Woodward entered into a note purchase agreement relating to the Series D Notes.  In April 2009, Woodward entered into a note purchase agreement relating to the Series F Notes.  The Series D Notes mature and are payable in October 2018, and the Series F Notes mature and are payable in April 2019.  As of June 30, 2018, the entire amount of debt under the Series D Notes and Series F Notes has been classified as long-term based on Woodward’s intent and ability to refinance this debt prior to maturity using cash proceeds from its existing revolving credit facility which, in turn, is expected to be repaid beyond the next twelve months.

On October 1, 2013, Woodward entered into a 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.  Woodward issued the Series G, H and I Notes (the “First Closing Notes”) on October 1, 2013.  Woodward issued the Series J, K and L Notes (the “Second Closing Notes”) on November 15, 2013.  

On September 23, 2016, Woodward and the BV Subsidiary each entered into note purchase agreements relating to the sale by Woodward and the BV Subsidiary of an aggregate principal amount of €160,000 of senior unsecured notes in a series of private placement transactions.  Woodward issued €40,000 Series M Notes.  The BV Subsidiary issued (a) €77,000 aggregate principal amount of the BV Subsidiary’s Series N Senior Notes (the “Series N Notes”) and (b) €43,000 aggregate principal amount of the BV Subsidiary’s Series O Senior Notes (the “Series O Notes” and together with the Series M Notes and the Series N Notes, the “2016 Notes,”) and, together with the Series D Notes, the Series F Notes, the First Closing Notes and the Second Closing Notes, collectively, the “Existing Notes”).

On May 31, 2018, Woodward entered into a note purchase agreement (the “2018 Note Purchase Agreement”) relating to the sale by Woodward of an aggregate principal amount of $400,000 of senior unsecured notes comprised of (a) $85,000 aggregate principal amount of its Series P Senior Notes due May 30, 2025 and bearing interest at a rate of 4.27% per annum (the “Series P Notes”), (b) $85,000 aggregate principal amount of its Series Q Senior Notes due May 30, 2027 and bearing interest at a rate of 4.35% per annum (the “Series Q Notes”), (c) $75,000 aggregate principal amount of its Series R Senior Notes due May 30, 2029 and bearing interest at a rate of 4.41% per annum (the “Series R Notes”), (d) $75,000 aggregate principal amount of its Series S Senior Notes due May 30, 2030 and bearing interest at a rate of 4.46% per annum (the “Series S Notes”), and (e) $80,000 aggregate principal amount of its Series T Senior Notes due May 30, 2033 and bearing interest at a rate of 4.61% per annum (the “Series T Notes”; together with the Series P Notes, the Series Q Notes, the Series R Notes, and the Series S Notes, the “2018 Notes” and; together with the Existing Notes, the “Notes”), in a series of private placement transactions.

In connection with the issuance of the 2018 Notes, the Company entered into cross currency swap transactions in respect of each tranche of the 2018 Notes, which effectively reduced the interest rates on the Series P Notes to 1.82% per annum, the Series Q Notes to 2.15% per annum, the Series R Notes to 2.42% per annum, the Series S Notes to 2.55% per annum and the Series T Notes to 2.90% per annum (see Note 7, Derivative instruments and hedging activities).

The Company’s obligations under the 2018 Note Purchase Agreement and the 2018 Notes will rank at all times at least pari passu, without preference or priority, with the Existing Notes and the Company’s outstanding debt under the Revolving Credit Agreement.

The 2018 Note Purchase Agreement contains restrictive covenants customary for such financings, including, among other things, covenants that place limits on the Company’s ability to incur liens on assets, incur additional debt (including a leverage test), transfer or sell the Company’s assets, merge or consolidate with other persons and enter into material transactions with affiliates.  The 2018 Note Purchase Agreement also contains financial covenants which require Woodward to maintain a specified leverage ratio of net indebtedness to consolidated earnings before interest, taxes, depreciation and amortization and a minimum consolidated net worth, which are, in each case, consistent with financial covenants set forth in the Existing Notes.

The 2018 Note Purchase Agreement also contains events of default customary for such financings, the occurrence of which would permit the holders of the 2018 Notes to accelerate the amounts due thereunder.  In the event of default, the interest rate accruing on each of the 2018 Notes would increase by 2.00%.  

The Company’s payment and performance obligations under the 2018 Note Purchase Agreement and the 2018 Notes, including without limitation the obligations for payment of all principal, interest and any applicable prepayment compensation amount on the 2018 Notes, are guaranteed by Woodward FST, Inc., MPC Products Corporation and Woodward HRT, Inc., each a wholly owned subsidiary of the Company.

The Company, at its option, is permitted at any time to prepay all or any part of the then-outstanding principal amount of any series of the 2018 Notes at 100% of the principal amount of the series of 2018 Notes to be prepaid (but, in the case of partial prepayment, not less than $1,000), together with interest accrued on such amount to be prepaid to the date of prepayment, plus any applicable prepayment compensation amount and, if any holder of the Notes has entered into a cross currency swap agreement in respect of the note held by such holder, certain losses (if any) incurred by such holder under such cross currency swap agreement as a result of such prepayment.

Interest on the Series D Notes, the First Closing Notes, and the Series K and L Notes is payable semi-annually on April 1 and October 1 of each year until all principal is paid.  Interest on the Series F Notes is payable semi-annually on April 15 and October 15 of each year until all principal is paid.  Interest on the 2016 Notes is payable semi-annually on March 23 and September 23 of each year, until all principal is paid.  Interest on the Series J Notes is payable quarterly on January 1, April 1, July 1 and October 1 of each year until all principal is paid.  As of June 30, 2018, the Series J Notes bore interest at an effective rate of 3.58%.  Commencing on November 30, 2018, interest on the 2018 Notes is payable semi-annually on May 30 and November 30 of each year until all principal is paid.

Debt Issuance Costs

Unamortized debt issuance costs associated with the Notes of $2,850 as of June 30, 2018 and $1,794 as of September 30, 2017 were recorded as a reduction in “Long-term debt, less current portion” in the Condensed Consolidated Balance Sheets.  Unamortized debt issuance costs of $1,603 associated with the Revolving Credit Agreement as of June 30, 2018 and $2,259 as of September 30, 2017 were recorded as “Other assets” in the Condensed Consolidated Balance Sheets.  Amortization of debt issuance costs is included in operating activities in the Condensed Consolidated Statements of Cash Flows.

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Accrued Liabilities

9 Months Ended

Jun. 30, 2018

Accrued Liabilities

Accrued Liabilities

Note 15.  Accrued liabilities

	June 30,		September 30,
	2018		2017
Salaries and other member benefits	$	63,743	$	91,285
Warranties		19,802		13,597
Interest payable		8,856		9,626
Current portion of acquired performance obligations and unfavorable contracts (1)		1,627		1,627
Accrued retirement benefits		3,529		2,413
Current portion of loss reserve on contractual lease commitments		1,245		1,343
Current portion of deferred income from JV formation (Note 5)		6,414		6,451
Deferred revenues		2,689		4,625
Restructuring charges		16,574		-
Taxes, other than income		18,012		14,401
Other		19,720		9,704
	$	162,211	$	155,072

(1) In connection with Woodward’s acquisition of GE Aviation Systems LLC’s (the “Seller”) thrust reverser actuation systems business located in Duarte, California (the “Duarte Acquisition”) in fiscal year 2013, Woodward assumed current and long-term performance obligations for contractual commitments that are expected to result in future economic losses.  In addition, Woodward assumed current and long-term performance obligations for services to be provided to the Seller and others, partially offset by current and long-term assets related to contractual payments due from the Seller.  The current portion of both obligations is included in “Accrued liabilities” in the Condensed Consolidated Balance Sheets.

Warranties

Provisions of Woodward’s sales agreements include product warranties customary to these types of agreements.  Accruals are established for specifically identified warranty issues that are probable to result in future costs.  Warranty costs are accrued on a non-specific basis whenever past experience indicates a normal and predictable pattern exists.  Changes in accrued product warranties were as follows:

	Three-Months Ended June 30,				Nine-Months Ended June 30,
		2018		2017		2018		2017
Warranties, beginning of period	$	13,283	$	15,041	$	13,597	$	15,993
Increases due to acquisition of L'Orange		6,045		-		6,045		-
Expense, net of recoveries		2,696		2,746		3,000		6,808
Reductions for settling warranties		(1,838)		(3,746)		(2,670)		(8,528)
Foreign currency exchange rate changes		(384)		257		(170)		25
Warranties, end of period	$	19,802	$	14,298	$	19,802	$	14,298

Loss reserve on contractual lease commitments

In connection with the construction of a new production facility in Niles, Illinois, Woodward vacated a leased facility in Skokie, Illinois and recognized a loss reserve against the estimated remaining contractual lease commitments, less anticipated sublease income.  Changes in the loss reserve were as follows:

	Three-Months Ended June 30,				Nine-Months Ended June 30,
		2018		2017		2018		2017
Loss reserve on contractual lease commitments, beginning of period	$	4,478	$	8,395	$	5,270	$	9,242
Payments, net of sublease income		(267)		(382)		(1,059)		(1,229)
Non-cash adjustments		-		(2,322)		-		(2,322)
Loss reserve on contractual lease commitments, end of period	$	4,211	$	5,691	$	4,211	$	5,691

Other liabilities included $2,966 and $3,927 of accrued loss reserve on contractual lease commitments as of June 30, 2018 and September 30, 2017, respectively, which are not expected to be settled or paid within twelve months of the respective balance sheet date.

Restructuring charges

In the second quarter of fiscal year 2018, the Company recorded restructuring charges totaling $17,013, the majority of which relate to the Company’s decision to relocate its Duarte, California operations to the Company’s newly renovated Drake Campus in Fort Collins, Colorado.  The Duarte facility, which manufactures thrust reverser actuation systems, is part of the Company’s Aerospace segment.  The remaining restructuring charges recognized during the first nine months of fiscal year 2018 consist of workforce management costs related to aligning the Company’s industrial turbomachinery business, which is part of the Company’s Industrial segment, with current market conditions.  All of the restructuring charges recorded in the second quarter and first nine months of fiscal year 2018 were recorded as nonsegment expenses and are expected to be paid within one year of the balance sheet date.

The summary of activity in accrued restructuring charges during the nine-months ended June 30, 2018 is as follows:

				Period Activity
	Balances as of October 1, 2017			Charges (gains)	Cash receipts (payments)		Non-cash activity		Balances as of June 30, 2018
Workforce management costs associated with:
Duarte plant relocation	$	-	$	12,504	$	-	$	-	$	12,504
Industrial turbomachinery business realignment		-		4,509		(439)		-		4,070
Total	$	-	$	17,013	$	(439)	$	-	$	16,574

In addition to the restructuring charges recognized in the first nine months of fiscal year 2018, the Company anticipates incurring additional costs associated with the relocation from Duarte to the Drake campus such as expenses associated with equipment relocation, employee training, accelerated depreciation, and increased labor expenses over the coming year.  The Company anticipates these additional expenses will vary by quarter, but are expected to be approximately $12,000 in total.  Although the Company plans to sell the Duarte facility’s land, building and building improvements, it is currently still occupying the Duarte facility and has recorded these as assets held for sale as of June 30, 2018 (see Note 11, Property, plant and equipment).

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Other Liabilities

9 Months Ended

Jun. 30, 2018

Other Liabilities

Other Liabilities

Note 16.  Other liabilities

	June 30,		September 30,
	2018		2017
Net accrued retirement benefits, less amounts recognized within accrued liabilities	$	92,075	$	52,211
Noncurrent portion of deferred income from JV formation (1)		237,724		236,896
Total unrecognized tax benefits		9,910		20,949
Noncurrent income taxes payable (2)		23,920		-
Acquired unfavorable contracts (3)		591		2,076
Deferred economic incentives (4)		13,422		14,574
Loss reserve on contractual lease commitments (5)		2,966		3,927
Cross currency swap derivative liability (6)		23,527		-
Other		12,363		14,165
	$	416,498	$	344,798

(1) See Note 5, Joint venture for more information on the deferred income from JV formation.

(2) See Note 18, Income taxes for more information on the noncurrent income taxes payable.

(3) In connection with the Duarte Acquisition in fiscal year 2013, Woodward assumed current and long-term performance obligations for contractual commitments that are expected to result in future economic losses.  The long-term portion of the acquired unfavorable contracts is included in Other liabilities.

(4) Woodward receives certain economic incentives from various state and local authorities related to capital expansion projects.  Such amounts are initially recorded as deferred credits and are being recognized as a reduction to pre-tax expense over the economic lives of the related capital expansion projects.

(5) See Note 15, Accrued liabilities for more information on the loss reserve on contractual lease commitments.

(6) See Note 6,  Financial instruments and fair value measurements for more information on the cross currency swap derivative liability.

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Other (Income) Expense, Net

9 Months Ended

Jun. 30, 2018

Other (Income) Expense, Net

Other (Income) Expense, Net

Note 17.  Other expense (income), net 

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Equity interest in the (earnings) losses of the JV (Note 5)	$	(738)	$	432	$	(2,340)	$	(634)
Net (gain) loss on sales of assets		50		64		(404)		(3,598)
Rent income		(28)		(53)		(99)		(196)
Net gain on investments in deferred compensation program		(257)		(523)		(957)		(1,252)
Loss on forward option derivative instrument (Note 7)		5,543		-		5,543		-
Other		(373)		(370)		(731)		(673)
	$	4,197	$	(450)	$	1,012	$	(6,353)

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Income Taxes

9 Months Ended

Jun. 30, 2018

Income Taxes

Income Taxes

Note 18.  Income taxes

On December 22, 2017, the United States (“U.S.”) enacted significant changes to the U.S. tax law following the passage and signing of the Tax Act.  The Tax Act included significant changes to existing tax law, including a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, a one-time repatriation tax on deferred foreign income (“Transition Tax”), deductions, credits and business-related exclusions.

U.S. GAAP requires that the interim period tax provision be determined as follows:  

· At the end of each quarter, Woodward estimates the tax that will be provided for the current fiscal year stated as a percentage of estimated “ordinary income.”  The term ordinary income refers to earnings from continuing operations before income taxes, excluding significant unusual or infrequently occurring items. 

The estimated annual effective rate is applied to the year-to-date ordinary income at the end of each quarter to compute the estimated year-to-date tax applicable to ordinary income.  The tax expense or benefit related to ordinary income in each quarter is the difference between the most recent year-to-date and the prior quarter year-to-date computations.

· The tax effects of significant unusual or infrequently occurring items are recognized as discrete items in the interim period in which the events occur.  The impact of changes in tax laws or rates on deferred tax amounts, the effects of changes in judgment about beginning of the year valuation allowances, and changes in tax reserves resulting from the finalization of tax audits or reviews are examples of significant unusual or infrequently occurring items that are recognized as discrete items in the interim period in which the event occurs.  Enactment of the Tax Act during December 2017 resulted in a provisional discrete net charge to Woodward’s income tax expense in the amount of $14,778, which was recorded in the first quarter of fiscal year 2018.  The discrete net charge was increased by $3,671 in the three months ended June 30, 2018 resulting in a net discrete impact from the Tax Act of $18,449 in the nine-months ended June 30, 2018.

The determination of the annual effective tax rate is based upon a number of significant estimates and judgments, including the estimated annual pretax income of Woodward in each tax jurisdiction in which it operates, and the development of tax planning strategies during the year.  In addition, as a global commercial enterprise, Woodward’s tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, changes in the estimate of the amount of undistributed foreign earnings that Woodward considers indefinitely reinvested, and other factors that cannot be predicted with certainty.  As such, there can be significant volatility in interim tax provisions.

The permanent reduction to the U.S. federal corporate income tax rate from 35% to 21% is effective January 1, 2018 (the “Effective Date”).  When a U.S. federal tax rate change occurs during a taxpayer’s fiscal year, taxpayers are required to compute a weighted daily average rate for the fiscal year of enactment.  As a result of the Tax Act, Woodward has calculated a U.S. federal statutory corporate income tax rate of 24.5% for the fiscal year ending September 30, 2018 and applied this rate in computing the income tax provision for the three and nine-months ended June 30, 2018.  The U.S. federal statutory corporate income tax rate of 24.5% is the weighted daily average rate between the pre-enactment U.S. federal statutory tax rate of 35% applicable to Woodward’s 2018 fiscal year prior to the Effective Date and the post-enactment U.S. federal statutory tax rate of 21% applicable to the 2018 fiscal year after the Effective Date.  Woodward expects the U.S. federal statutory rate to be 21% for fiscal years beginning after September 30, 2018.

On December 22, 2017, the SEC issued SAB 118.  SAB 118 expresses views of the SEC regarding ASC 740 in the reporting period that includes the enactment date of the Tax Act.  Subsequent to the issuance of SAB 118, in March 2018, the FASB issued ASU 2018-05, which formally amended ASC 740 for the guidance previously provided by SAB 118.  The SEC staff issuing SAB 118 (the “Staff”) recognized that a registrant’s review of certain income tax effects of the Tax Act may be incomplete at the time financial statements are issued for the reporting period that includes the enactment date, including interim periods therein.  The Staff’s view of the enactment of the Tax Act has been developed considering the principles of ASC 805 which addresses the accounting for certain items in a business combination for which the accounting is incomplete upon issuance of the financial statements that include the reporting period in which the business combination occurs.  Specifically, the Staff provides that the accounting guidance in ASC Topic 805 may be analogized to the accounting for impacts of the Tax Act.  If a company does not have the necessary information available, prepared or analyzed for certain income tax effects of the Tax Act, SAB 118 allows a company to report provisional numbers and adjust those amounts during the measurement period not to extend beyond one year.  For the three and nine-months ended June 30, 2018, Woodward has recorded all known and estimable impacts of the Tax Act that are effective for fiscal year 2018.  Future adjustments to the provisional numbers will be recorded as discrete adjustments to income tax expense in the period in which those adjustments become estimable and/or are finalized.  The Company expects to finalize its assessment of the income tax effects of the Tax Act in the fourth quarter of fiscal year 2018.

Accordingly, Woodward’s income tax provision for the three and nine-months ended June 30, 2018 reflects (i) the current year impacts of the Tax Act on the estimated annual effective tax rate and (ii) discrete items, if any, resulting directly from the enactment of the Tax Act based on the information available, prepared, or analyzed (including computations) in reasonable detail.  The discrete net charge was increasedin the third quarter of fiscal year 2018 as a result of an IRS audit for fiscal years 2014, 2015 and 2016, which concluded during the quarter and resulted in an increase to the beginning fiscal year 2018 net deferred tax assets recorded by Woodward.  The application of the permanent reduction of the U.S. federal corporate income tax rate (enacted by the Tax Act) to the increase in the net deferred tax assets resulted in a net discrete charge of $3,671recorded in the three months ended June 30, 2018.

	Nine-Months Ended
	June 30, 2018
Transition tax (provisional)	$	26,000
Net impact on U.S. deferred tax assets and liabilities (provisional)		(16,260)
Net changes in deferred tax liability associated with anticipated repatriation taxes (provisional)		5,038
Total provisional discrete impact of the enactment of the Tax Act		14,778
Discrete impact recorded in the three months ended June 30, 2018		3,671
Net discrete impacts of the enactment of the Tax Act	$	18,449

Woodward determined that the Transition Tax is provisional because various components of the computation are unknown as of June 30, 2018, including the following significant items: the exchange rates for fiscal year 2018, the actual aggregate foreign cash position and the earnings and profits of the foreign entities as of September 30, 2018, the interpretation and identification of cash positions as of September 30, 2018, and incomplete computations of accumulated earnings and profits balances as of November 2, 2017 and December 31, 2017.  Consistent with provisions allowed under the Tax Act, the $26,000 estimated Transition Tax liability will be paid over an eight year period beginning in fiscal year 2019.  As of June 30, 2018, the current portion of the estimated Transition Tax liability in the amount of $2,080 has been included in “Income taxes receivable, net,” andthe noncurrent portion in the amount of $23,920 has been included in “Other liabilities” in the Condensed Consolidated Balance Sheets. 

Woodward also determined that the impact of the U.S. federal corporate income tax rate change on the U.S. deferred tax assets and liabilities is provisional because the number cannot be calculated until the underlying timing differences are known rather than estimated.   

Given the Tax Act’s significant changes and potential opportunities to repatriate cash tax free, Woodward is in the process of evaluating its current indefinite assertions.  As a result of the Tax Act, Woodward now expects to repatriate certain earnings which will be subject to withholding taxes.  These additional withholding taxes were recorded as an additional deferred tax liability associated with the basis difference in such jurisdictions.  The uncertainty related to the taxation of such withholding taxes on distributions under the Tax Act and finalization of the cash repatriation plan makes the deferred tax liability a provisional amount. 

Woodward continues to review the anticipated impacts of the global intangible low taxed income (“GILTI”) and base erosion anti-abuse tax (“BEAT”) on Woodward, which are not effective until fiscal year 2019.  Woodward has not recorded any impact associated with either GILTI or BEAT in the tax rate as of the third quarter of fiscal year 2018. 

Within the calculation of Woodward’s annual effective tax rate Woodward has used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, and the FASB and/or various other taxing jurisdictions.  For example, Woodward anticipates that the state jurisdictions will continue to determine and announce their conformity to the Tax Act which could have an impact on the annual effective tax rate.

The following table sets forth the tax expense and the effective tax rate for Woodward’s earnings before income taxes:

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Earnings before income taxes	$	54,417	$	68,687	$	140,551	$	165,982
Income tax expense		5,300		15,061		34,685		27,703
Effective tax rate		9.7%		21.9%		24.7%		16.7%

The decrease in the year-over-year effective tax rate for the three-months ended June 30, 2018 is primarily attributable to the benefits of the current year effect of the U.S. federal corporate tax rate reduction in connection with the enactment of the Tax Act on the estimated annual effective tax rate, a higher favorable adjustment for the net excess income tax benefits from stock-based compensation compared to the prior fiscal year third quarter, and higher favorable resolutions of tax matters in the current quarter compared to the same quarter last year.This combined benefit was partially offset by the resolution of the fiscal year 2014, 2015, and 2016 IRS audits in the third quarter of fiscal year 2018, which resulted in an additional provisional discrete income tax expense of $3,671 recorded in the quarter in connection with the Tax Act.

The increase in the effective tax rate for the nine-months ended June 30, 2018 compared to the nine-months ended June 30, 2017 is primarily attributable to the $18,449 net unfavorable impact in the period resulting from the enactment of the Tax Act.  Additionally, the benefit from the repatriation to the U.S. of certain net foreign profits and losses was higher in the nine-months ended June 30, 2017 compared to the nine-months ended June 30, 2018.  These increases were partially offset byhigher favorable resolutions of tax matters in the first nine months of fiscal year 2018 compared to the first nine months of fiscal year 2017, as well as the current year effect of the U.S. federal corporate tax rate reduction in connection with the enactment of the Tax Act on the estimated annual effective tax rate.  

Gross unrecognized tax benefits were $9,710 as of June 30, 2018, and $20,132 as of September 30, 2017.  Included in the balance of unrecognized tax benefits were $2,741 as of June 30, 2018 and $9,677 as of September 30, 2017 of tax benefits that, if recognized, would affect the effective tax rate.  At this time, Woodward estimates that it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $84 in the next twelve months due to the completion of reviews by tax authorities, lapses of statutes, and the settlement of tax positions.  Woodward accrues for potential interest and penalties related to unrecognized tax benefits and all other interest and penalties related to tax payments in tax expense.  Woodward had accrued gross interest and penalties of $255 as of June 30, 2018 and $1,123 as of September 30, 2017.

Woodward’s tax returns are subject to audits by U.S. federal, state, and foreign tax authorities, and these audits are at various stages of completion at any given time.  Reviews of tax matters by authorities and lapses of the applicable statutes of limitations may result in changes to tax expense.  Fiscal years remaining open to examination in significant foreign jurisdictions include 2008 and thereafter.  Woodward’s fiscal years remaining open to examination for U.S. Federal income taxes include fiscal years 2017 and thereafter.  Woodward has concluded U.S. federal income tax examinations through fiscal year 2016.  Woodward is generally subject to U.S. state income tax examinations for fiscal years 2013 and the periods thereafter.

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Retirement Benefits

9 Months Ended

Jun. 30, 2018

Retirement Benefits - General

Retirement Benefits

Note 19.  Retirement benefits

Woodward provides various retirement benefits to eligible members of the Company, including contributions to various defined contribution plans, pension benefits associated with defined benefit plans, postretirement medical benefits and postretirement life insurance benefits.  Eligibility requirements and benefit levels vary depending on employee location.

Defined contribution plans

Most of the Company’s U.S. employees are eligible to participate in the U.S. defined contribution plan.  The U.S. defined contribution plan allows employees to defer part of their annual income for income tax purposes into their personal 401(k) accounts.  The Company makes matching contributions to eligible employee accounts, which are also deferred for employee personal income tax purposes.  Certain foreign employees are also eligible to participate in similar foreign plans.

Most of Woodward’s U.S. employees with at least two years of service receive an annual contribution of Woodward stock, equal to 5% of their eligible prior year wages, to their personal Woodward Retirement Savings Plan accounts.  Woodward fulfilled its annual Woodward stock contribution obligation using shares held in treasury stock by issuing a total of 202 shares of common stock for a value of $14,741 in the second quarter of fiscal year 2018, and 199 total shares of common stock for a value of $14,014 in the second quarter of fiscal year 2017.

The amount of expense associated with defined contribution plans was as follows:

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Company costs	$	8,262	$	8,039	$	24,858	$	23,790

Defined benefit plans

Woodward has defined benefit plans that provide pension benefits for certain retired employees in the United States, the United Kingdom, Japan and, as a result of the acquisition of L’Orange, Germany.  Woodward also provides other postretirement benefits to its employees including postretirement medical benefits and life insurance benefits.  Postretirement medical benefits are provided to certain current and retired employees and their covered dependents and beneficiaries in the United States and the United Kingdom.  Lifeinsurance benefits are provided to certain retirees in the United States under frozen plans, which are no longer available to current employees.  A September 30 measurement date is utilized to value plan assets and obligations for all of Woodward’s defined benefit pension and other postretirement benefit plans.

In connection with the acquisition of L’Orange on June 1, 2018, Woodward assumed the unfunded defined benefit pension obligations of the L’Orange defined benefit pension plans (the “L’Orange Pension Plans”).  Woodward’s assumption of the liability associated with the L’Orange Pension Plans was part of the total consideration paid by Woodward to acquire L’Orange and thus reduced Woodward’s cash payment for the transaction.  Woodward has completed its valuation of the defined benefit pension obligations associated with the L’Orange Pension Plans and determined the value of the associated unfunded obligation was $38,998, of which $1,143 was considered current as of the June 1, 2018 acquisition date.  The L’Orange Pension Plans had expenses of $168 and Woodward made $54 of contributions to the L’Orange Pension Plans during the three and nine-months ended June 30, 2018.  Similar to Woodward’s other defined benefit plansand other postretirement benefit plans, a September 30 measurement date will be utilized to value the plan obligations of the L’Orange Pension Plans going forward.  The L’Orange Pension Plans are unfunded.

U.S. GAAP requires that, for obligations outstanding as of September 30, 2017, the funded status reported in interim periods shall be the same asset or liability recognized in the previous year end statement of financial position adjusted for (a) subsequent accruals of net periodic benefit cost that exclude the amortization of amounts previously recognized in other comprehensive income (for example, subsequent accruals of service cost, interest cost, and return on plan assets) and (b) contributions to a funded plan or benefit payments.

During the third quarter of fiscal year 2016, Woodward opened a lump-sum buy-out window, which closed in the fourth quarter of fiscal year 2016 and was fully settled during the first quarter of fiscal year 2017, for certain former U.S. employees and/or their dependents eligible to receive postretirement defined benefit pension payments for past employment services to the Company.  Eligible pension plan participants were provided the opportunity to elect to receive a one-time lump-sum payment or an immediate annuity in lieu of future pension benefit payments.  Pension benefit payments paid from available pension plan assets under the lump-sum buy-out options were $670 during the first nine months of fiscal year 2017.  Woodward made no further pension benefit payments under the lump-sum buy-out options.

The components of the net periodic retirement pension costs recognized are as follows:

	Three-Months Ended June 30,
	United States				Other Countries				Total
	2018		2017		2018		2017		2018		2017
Service cost	$	410	$	419	$	283	$	192	$	693	$	611
Interest cost		1,501		1,439		386		305		1,887		1,744
Expected return on plan assets		(2,904)		(2,632)		(703)		(656)		(3,607)		(3,288)
Amortization of:
Net actuarial loss		150		464		74		130		224		594
Prior service cost		177		95		-		-		177		95
Net periodic retirement pension (benefit) cost	$	(666)	$	(215)	$	40	$	(29)	$	(626)	$	(244)
Contributions paid	$	-	$	-	$	227	$	99	$	227	$	99
	Nine-Months Ended June 30,
	United States				Other Countries				Total
	2018		2017		2018		2017		2018		2017
Service cost	$	1,232	$	1,256	$	606	$	571	$	1,838	$	1,827
Interest cost		4,503		4,318		1,059		897		5,562		5,215
Expected return on plan assets		(8,711)		(7,897)		(2,106)		(1,935)		(10,817)		(9,832)
Amortization of:
Net actuarial loss		449		1,391		221		383		670		1,774
Prior service cost		532		287		-		-		532		287
Net periodic retirement pension benefit	$	(1,995)	$	(645)	$	(220)	$	(84)	$	(2,215)	$	(729)
Contributions paid	$	-	$	-	$	658	$	565	$	658	$	565

The components of the net periodic other postretirement benefit costs recognized are as follows:

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Service cost	$	1	$	4	$	5	$	11
Interest cost		291		311		874		933
Amortization of:
Net actuarial loss		24		50		72		151
Prior service benefit		(40)		(40)		(119)		(119)
Curtailment gain		-		-		(330)		-
Net periodic other postretirement cost	$	276	$	325	$	502	$	976
Contributions paid	$	595	$	592	$	1,830	$	2,011

The amount of cash contributions made to these plans in any year is dependent upon a number of factors, including minimum funding requirements in the jurisdictions in which Woodward operates and arrangements made with trustees of certain foreign plans.  As a result, the actual funding in fiscal year 2018 may differ from the current estimate.  Woodward estimates its remaining cash contributions in fiscal year 2018 will be as follows:

Retirement pension benefits:
United States	$	-
United Kingdom		155
Japan		-
Germany		329
Other postretirement benefits		2,041

Multiemployer defined benefit plans

Woodward operates multiemployer defined benefit plans for certain employees in both the Netherlands and Japan.  The amounts of contributions associated with the multiemployer defined benefit plans were as follows:

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Company contributions	$	86	$	73	$	253	$	220

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Stockholders' Equity

9 Months Ended

Jun. 30, 2018

Stockholders' Equity and Stock-Based Compensation [Abstract]

Stockholders' Equity

Note 20.  Stockholders’ equity

Stock repurchase program

In the first quarter of fiscal year 2017, Woodward’s board of directors terminated the Company’s prior stock repurchase program and replaced it with a new program for the repurchase of up to $500,000 of Woodward’s outstanding shares of common stock on the open market or in privately negotiated transactions over a three-year period that will end in November 2019 (the “2017 Authorization”).  In the first nine-months of fiscal year 2017, Woodward purchased, under the 2017 Authorization, 886 shares of its common stock for $61,229, of which 350 shares were purchased pursuant to a 10b5-1 plan and 536 shares were purchased pursuant to a 10b-18 plan.  Woodward repurchased no common stock under the 2017 Authorization in the first nine-months of fiscal year 2018.

Stock-based compensation

Provisions governing outstanding stock option awards are included in the 2017 Omnibus Incentive Plan (the “2017 Plan”), the 2006 Omnibus Incentive Plan (the “2006 Plan”) and the 2002 Stock Option Plan (the “2002 Plan”).  The 2002 Plan provided that no further grants would be made after December 31, 2006.  No further grants will be made under the 2006 Plan, which expired in fiscal year 2016. 

Under the 2017 Plan, there were approximately 1,300 shares of Woodward’s common stock available for future grants as of June 30, 2018. 

Stock options

To date, equity awards under the 2017 Plan have consisted of grants of stock options to Woodward’s employees and directors.  Woodward believes that these stock options align the interests of its employees and directors with the interests of its stockholders.  Stock option awards are granted with an exercise price equal to the market price of Woodward’s stock at the date the grants are awarded, a ten-year term, and generally a four-year vesting schedule at a rate of 25% per year.

The fair value of options granted is estimated as of the grant date using the Black-Scholes-Merton option-valuation model using the assumptions in the following table.  Woodward calculates the expected term, which represents the average period of time that stock options granted are expected to be outstanding, based upon historical experience of plan participants.  Expected volatility is based on historical volatility using daily stock price observations.  The estimated dividend yield is based upon Woodward’s historical dividend practice and the market value of its common stock.  The risk-free rate is based on the U.S. treasury yield curve, for periods within the contractual life of the stock option, at the time of grant.

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018				2017
Weighted-average exercise price per share		n/a		n/a	$	78.91			$	62.64
Weighted-average grant date market value of Woodward stock		n/a		n/a	$	78.91			$	69.45
Expected term (years)		n/a		n/a		6.4	-	8.7		6.0	-	8.7
Estimated volatility		n/a		n/a		29.1%	-	32.7%		31.5%	-	33.7%
Estimated dividend yield		n/a		n/a		0.6%	-	0.8%		0.7%
Risk-free interest rate		n/a		n/a		2.1%	-	2.8%		2.2%	-	2.5%

The following is a summary of the activity for stock option awards during the three and nine-months ended June 30, 2018:

	Three-Months Ended				Nine-Months Ended
	June 30, 2018				June 30, 2018
	Number of options		Weighted-Average Exercise Price per Share		Number of options		Weighted-Average Exercise Price per Share
Options, beginning balance		5,880	$	44.62		5,236	$	39.58
Options granted		-		n/a		750		78.91
Options exercised		(158)		22.32		(255)		27.81
Options forfeited		(15)		59.97		(24)		58.27
Options, ending balance		5,707		45.20		5,707		45.20

Changes in non-vested stock options during the three and nine-months ended June 30, 2018 were as follows:

	Three-Months Ended				Nine-Months Ended
	June 30, 2018				June 30, 2018
	Number of options		Weighted-Average Grant Date Fair Value per Share		Number of options		Weighted-Average Grant Date Fair Value Per Share
Options outstanding, beginning balance		2,022	$	21.63		2,072	$	18.61
Options granted		-		n/a		750		25.66
Options vested		-		n/a		(791)		17.57
Options forfeited		(15)		20.85		(24)		20.45
Options outstanding, ending balance		2,007		21.64		2,007		21.64

Information about stock options that have vested, or are expected to vest, and are exercisable at June 30, 2018 was as follows:

	Number		Weighted- Average Exercise Price		Weighted- Average Remaining Life in Years		Aggregate Intrinsic Value
Options outstanding		5,707	$	45.20		5.8	$	182,230
Options vested and exercisable		3,699		36.25		4.5		150,207
Options vested and expected to vest		5,628		44.89		5.7		181,384

Stock-based compensation expense

Woodward recognizes stock-based compensation expense on a straight-line basis over the requisite service period.  Pursuant to form stock option agreements used by the Company, with terms approved by the administrator of the applicable plan, the requisite service period can be less than the four-year vesting period based on grantee’s retirement eligibility.  As such, the recognition of stock-based compensation expense associated with some stock option grants can be accelerated to a period of less than four years, including immediate recognition of stock-based compensation expense on the date of grant.

Upon approving the 2017 Plan, Woodward’s board of directors delegated authority to administer the 2017 Plan to the compensation committee of the board, including, but not limited to, the power to determine the recipients of awards and the terms of those awards.  The compensation committee approved issuance of options in the first quarter of fiscal year 2017 under the 2017 Plan, with an award date of October 3, 2016 conditional upon and subject to approval of the 2017 Plan by the stockholders.  The stock options conditionally awarded under the 2017 Plan were not granted or outstanding for accounting purposes prior to stockholder approval of the 2017 Plan, and as such no stock-based compensation expense related to such awards was recognized on these stock options, during the three-months ended December 31, 2016, but rather the expense was recognized in the three-months ended March 31, 2017.  Options granted in the three-months ended December 31, 2017 were not conditionally granted and, therefore, stock-based compensation expense related to those awards was recognized during the three-months ended December 31, 2017.  Total stock-based compensation expense was $1,858 for the three-months and $16,292 for the nine-months ended June 30, 2018, and $1,817 for the three-months and $15,580 for the nine-months ended June 30, 2017.

At June 30, 2018, there was approximately $10,938 of total unrecognized compensation expense related to non-vested stock-based compensation arrangements.  The pre-vesting forfeiture rates for purposes of determining stock-based compensation expense recognized were estimated to be 0% for members of Woodward’s board of directors and 9% for all others.  The remaining unrecognized compensation cost is expected to be recognized over a weighted-average period of approximately 2.0 years.

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Commitments and Contingencies

9 Months Ended

Jun. 30, 2018

Commitments and Contingencies Disclosure

Commitments and Contingencies

Note 21.  Commitments and contingencies

Woodward is currently involved in claims, pending or threatened litigation or other legal proceedings, investigations and/or regulatory proceedings arising in the normal course of business, including, among others, those relating to product liability claims, employment matters, worker’s compensation claims, contractual disputes, product warranty claims and alleged violations of various laws and regulations.  Woodward accrues for known individual matters using estimates of the most likely amount of loss where it believes that it is probable the matter will result in a loss when ultimately resolved and such loss is reasonably estimable. 

Legal costs are expensed as incurred and are classified in “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Earnings.

Woodward is partially self-insured in the United States for healthcare and worker’s compensation up to predetermined amounts, above which third party insurance applies.  Management regularly reviews the probable outcome of related claims and proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage, and the established accruals for liabilities.

While the outcome of pending claims, legal and regulatory proceedings, and investigations cannot be predicted with certainty, management believes that any liabilities that may result from these claims, proceedings and investigations will not have a material effect on Woodward's liquidity, financial condition, or results of operations.

In the event of a change in control of Woodward, as defined in change-in-control agreements with its current corporate officers, Woodward may be required to pay termination benefits to any such officer if such officer’s employment is terminated within two years following the change of control.

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Segment Information

9 Months Ended

Jun. 30, 2018

Segment Information

Segment Information

Note 22.  Segment information

Woodward serves the aerospace and industrial markets through its two reportable segments - Aerospace and Industrial.  When appropriate, Woodward’s reportable segments are aggregations of Woodward’s operating segments.  Woodward uses operating segment information internally to manage its business, including the assessment of operating segment performance and decisions for the allocation of resources between operating segments.  L’Orange has been included in Woodward’s Industrial segment results since the Closing.

The accounting policies of the reportable segments are the same as those of the Company.  Woodward evaluates segment profit or loss based on internal performance measures for each segment in a given period.  In connection with that assessment, Woodward generally excludes matters such as certain charges for restructuring, interest income and expense, certain gains and losses from asset dispositions, or other non-recurring and/or non-operationally related expenses. 

A summary of consolidated net sales and earnings by segment follows:

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Segment external net sales:
Aerospace	$	404,612	$	355,992	$	1,096,860	$	943,198
Industrial		183,505		192,630		509,654		548,699
Total consolidated net sales	$	588,117	$	548,622	$	1,606,514	$	1,491,897
Segment earnings:
Aerospace	$	82,199	$	67,173	$	198,721	$	172,277
Industrial		10,450		20,870		40,031		55,957
Nonsegment expenses		(30,696)		(12,945)		(78,062)		(43,090)
Interest expense, net		(7,536)		(6,411)		(20,139)		(19,162)
Consolidated earnings before income taxes	$	54,417	$	68,687	$	140,551	$	165,982

(1) Nonsegment expenses for the nine-months ended June 30, 2018 includes restructuring charges of $17,013.  See Note 15, Accrued liabilities for further details.

Segment assets consist of accounts receivable, inventories, property, plant, and equipment, net, goodwill, and other intangibles, net.  A summary of consolidated total assets by segment follows:

	June 30, 2018		September 30, 2017
Segment assets:
Aerospace	$	1,744,825	$	1,722,789
Industrial		1,677,724		695,264
Unallocated corporate property, plant and equipment, net		126,537		104,755
Other unallocated assets		254,978		234,301
Consolidated total assets	$	3,804,064	$	2,757,109

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Subsequent Events

9 Months Ended

Jun. 30, 2018

Subsequent Events [Abstract]

Subsequent Events

Note 23.  Subsequent event

On July 31, 2018, Woodward’s Board of Directors declared a quarterly cash dividend of $0.1425 per share, payable on September 4, 2018, to stockholders of record as of August 21, 2018.

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Earnings Per Share (Tables)

9 Months Ended

Jun. 30, 2018

Earnings Per Share

Reconciliation of Net Earnings to Net Earnings Per Share Basic and Diluted

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Numerator:
Net earnings	$	49,117	$	53,626	$	105,866	$	138,279
Denominator:
Basic shares outstanding		61,608		61,288		61,417		61,387
Dilutive effect of stock options and restricted stock		2,273		2,104		2,365		2,133
Diluted shares outstanding		63,881		63,392		63,782		63,520
Income per common share:
Basic earnings per share	$	0.80	$	0.87	$	1.72	$	2.25
Diluted earnings per share	$	0.77	$	0.85	$	1.66	$	2.18

Anti-dilutive Stock Options Excluded from Computation of Earnings Per Share

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Options		764		780		760		66
Weighted-average option price	$	78.70	$	62.64	$	78.73	$	62.98

Schedule of Treasury Stock Shares Held for Deferred Compensation Included in Basic and Diluted Shares Outstanding

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Weighted-average treasury stock shares held for deferred compensation obligations		201		186		197		178

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Business Acquisitions (Tables)

9 Months Ended

Jun. 30, 2018

Business Acquisition [Line Items]

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense

Year Ending September 30:
2018 (remaining)	$	20,097
2019		58,284
2020		42,879
2021		39,994
2022		38,131
Thereafter		444,128
	$	643,513

Business Acquisition, Acquiree - L'Orange [Member]

Business Acquisition [Line Items]

Schedule of the Purchase Price

Cash paid to Sellers	$	780,355
Less acquired cash and restricted cash		(9,286)
Total purchase price	$	771,069

Schedule of assets acquired and liabililties assumed

Accounts receivable	$	26,538
Inventories (1)		72,674
Other current assets		1,385
Property, plant, and equipment		90,589
Goodwill		269,433
Intangible assets		556,023
Total assets acquired		1,016,642
Other current liabilities		40,362
Deferred income tax liabilities		164,791
Other noncurrent liabilities		40,420
Total liabilities assumed		245,573
Net assets acquired	$	771,069

(1) Inventories include a  $15,107 adjustment to state work in progress and finished goods inventories at their fair value as of the acquisition date.  The inventory fair value adjustment is being recognized as a non-cash increase to cost of goods sold ratably over the estimated inventory turnover period, with the entire $15,107 fair value adjustment expected to be recognized in cost of goods sold during the year ending September 30, 2018. 

Schedule of Finite-Lived and Indefinite-Lived Intangible Assets Acquired

	Estimated Amounts		Weighted-Average Useful Life		Amortization Method
Intangible assets with finite lives:
Customer relationships and contracts	$	379,423	20	years	Straight-line
Process technology		71,940	21	years	Straight-line
Backlog		40,611	1	year	Accelerated
Other		232	3	years	Straight-line
Intangible asset with indefinite life:
Trade name		63,817	Indefinite		Not amortized
Total	$	556,023

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense

Year Ending September 30:
2018 (remaining)	$	18,832
2019		34,884
2020		19,701
2021		21,458
2022		21,745
Thereafter		375,586
	$	492,206

Schedule of Unaudited Pro Forma Results

	Three-Months Ended				Three-Months Ended
	June 30, 2018				June 30, 2017
	As reported		Pro forma		As reported		Pro forma
Net sales	$	588,117	$	639,665	$	548,622	$	619,485
Net earnings		49,117		60,488		53,626		53,071
Earnings per share:
Basic earnings per share	$	0.80	$	0.98	$	0.87	$	0.87
Diluted earnings per share		0.77		0.95		0.85		0.84

	Nine-Months Ended				Nine-Months Ended
	June 30, 2018				June 30, 2017
	As reported		Pro forma		As reported		Pro forma
Net sales	$	1,606,514	$	1,830,515	$	1,491,897	$	1,684,071
Net earnings		105,866		129,191		138,279		108,190
Earnings per share:
Basic earnings per share	$	1.72	$	2.10	$	2.25	$	1.76
Diluted earnings per share		1.66		2.03		2.18		1.70

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Financial Instruments and Fair Value Measurements (Tables)

9 Months Ended

Jun. 30, 2018

Financial Instruments and Fair Value Measurments

Financial Assets that are Measured at Fair Value on a Recurring Basis

	At June 30, 2018								At September 30, 2017
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial assets:
Cash	$	61,050	$	-	$	-	$	61,050	$	79,822	$	-	$	-	$	79,822
Restricted investments in money market funds		2,521		-		-		2,521		-		-		-		-
Investments in reverse repurchase agreements		185		-		-		185		1		-		-		1
Investments in term deposits with foreign banks		50,643		-		-		50,643		7,729		-		-		7,729
Equity securities		19,500		-		-		19,500		16,600		-		-		16,600
Total financial assets	$	133,899	$	-	$	-	$	133,899	$	104,152	$	-	$	-	$	104,152
Financial liabilities:
Cross currency interest rate swaps	$	-	$	23,527	$	-	$	23,527	$	-	$	-	$	-	$	-
Total financial liabilities	$	-	$	23,527	$	-	$	23,527	$	-	$	-	$	-	$	-

Estimated Fair Values of Financial Instruments

		At June 30, 2018				At September 30, 2017
	Fair Value Hierarchy Level	Estimated Fair Value		Carrying Cost		Estimated Fair Value		Carrying Cost
Assets:
Notes receivable from municipalities	2	$	14,523	$	14,475	$	15,848	$	14,507
Investments in short-term time deposits	2		103		104		8,227		8,223
Liabilities:
Long-term debt	2	$	(1,203,413)	$	(1,214,246)	$	(592,317)	$	(582,080)

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Derivative Instruments and Hedging Activities (Tables)

9 Months Ended

Jun. 30, 2018

Derivative Instruments and Hedging Activities

Impact of Derivative Instruments on Earnings

		Three-Months Ended June 30, 2018						Three-Months Ended June 30, 2017
Derivatives in:	Location	Amount of (Income) Expense Recognized in Earnings on Derivative		Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative		Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings		Amount of (Income) Expense Recognized in Earnings on Derivative		Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative		Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings
Cross currency interest rate swap agreement designated as fair value hedges	Selling, general and administrative expenses	$	1,467	$	1,835	$	1,467	$	-	$	-	$	-
Cross currency interest rate swap agreements designated as cash flow hedges	Selling, general and administrative expenses		3,506		21,823		3,506		-		-		-
Treasury lock agreement designated as cash flow hedge	Interest expense		(18)		-		(18)		(18)		-		(18)
		$	4,955	$	23,658	$	4,955	$	(18)	$	-	$	(18)

		Nine-Months Ended June 30, 2018						Nine-Months Ended June 30, 2017
Derivatives in:	Location	Amount of (Income) Expense Recognized in Earnings on Derivative		Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative		Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings		Amount of (Income) Expense Recognized in Earnings on Derivative		Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative		Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings
Cross currency interest rate swap agreement designated as fair value hedges	Selling, general and administrative expenses	$	1,467	$	1,835	$	1,467	$	-	$	-	$	-
Cross currency interest rate swap agreements designated as cash flow hedges	Selling, general and administrative expenses		3,506		21,823		3,506		-		-		-
Treasury lock agreement designated as cash flow hedge	Interest expense		(54)		-		(54)		(54)		-		(54)
		$	4,919	$	23,658	$	4,919	$	(54)	$	-	$	(54)

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Supplemental Statements of Cash Flows Information (Tables)

9 Months Ended

Jun. 30, 2018

Supplemental Statements of Cash Flows Information

Schedule of Cash Flow Supplemental Disclosures

	Nine-Months Ended June 30,
	2018		2017
Interest paid, net of amounts capitalized	$	24,966	$	24,879
Income taxes paid		31,443		29,807
Income tax refunds received		1,760		158
Non-cash activities:
Purchases of property, plant and equipment on account		8,438		12,252
Common shares issued from treasury to settle employee liabilities		-		1,767
Common shares issued from treasury to settle benefit obligations (Note 19)		14,741		14,014
Cashless exercise of stock options		-		1,473

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Accounts Receivable (Tables)

9 Months Ended

Jun. 30, 2018

Accounts Receivable Disclosure

Schedule of Accounts Receivable

	June 30,		September 30,
	2018		2017
Accounts receivable from:
Customers	$	362,459	$	367,715
Other (Chinese financial institutions)		27,319		38,243
Allowance for uncollectible customer amounts		(3,668)		(3,776)
	$	386,110	$	402,182

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Inventories (Tables)

9 Months Ended

Jun. 30, 2018

Inventories

Schedule of Inventories

	June 30,		September 30,
	2018		2017
Raw materials	$	86,677	$	59,034
Work in progress		135,518		103,790
Component parts (1)		301,257		262,755
Finished goods		65,988		47,926
	$	589,440	$	473,505

(1) Component parts include items that can be sold separately as finished goods or included in the manufacture of other products.

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Property, Plant, and Equipment, Net (Tables)

9 Months Ended

Jun. 30, 2018

Property, Plant, and Equipment, Net

Schedule of Property Plant and Equipment, Net

	June 30,		September 30,
	2018		2017
Land and land improvements	$	92,934	$	88,326
Buildings and building improvements		564,366		514,453
Leasehold improvements		17,827		16,142
Machinery and production equipment		654,495		543,641
Computer equipment and software		123,705		124,723
Office furniture and equipment		27,567		24,308
Other		19,326		19,393
Construction in progress		87,620		111,910
		1,587,840		1,442,896
Less accumulated depreciation		(543,807)		(520,853)
Property, plant, and equipment, net	$	1,044,033	$	922,043

Schedule of Depreciation Expense

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Depreciation expense	$	17,695	$	14,141	$	48,276	$	40,259

Schedule of Capitalized Interest

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Capitalized interest	$	607	$	567	$	1,841	$	1,521

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Goodwill (Tables)

9 Months Ended

Jun. 30, 2018

Goodwill Disclosure

Schedule of Goodwill

	September 30, 2017		Additions		Effects of Foreign Currency Translation		June 30, 2018
Aerospace	$	455,423	$	-	$	-	$	455,423
Industrial		101,122		269,433		948		371,503
Consolidated	$	556,545	$	269,433	$	948	$	826,926

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Intangible Assets, Net (Tables)

9 Months Ended

Jun. 30, 2018

Intangible Assets, Net

Schedule of Finite-lived and Indefinite-lived Intangible Assets by Major Class

	June 30, 2018						September 30, 2017
	Gross Carrying Value		Accumulated Amortization		Net Carrying Amount		Gross Carrying Value		Accumulated Amortization		Net Carrying Amount
Intangible assets with finite lives:
Customer relationships and contracts:
Aerospace	$	281,683	$	(162,692)	$	118,991	$	282,225	$	(151,155)	$	131,070
Industrial		422,948		(35,198)		387,750		40,962		(34,407)		6,555
Total	$	704,631	$	(197,890)	$	506,741	$	323,187	$	(185,562)	$	137,625
Intellectual property:
Aerospace	$	-	$	-	$	-	$	-	$	-	$	-
Industrial		19,480		(18,527)		953		19,422		(18,196)		1,226
Total	$	19,480	$	(18,527)	$	953	$	19,422	$	(18,196)	$	1,226
Process technology:
Aerospace	$	76,372	$	(53,377)	$	22,995	$	76,605	$	(49,124)	$	27,481
Industrial		95,217		(19,139)		76,078		22,950		(17,756)		5,194
Total	$	171,589	$	(72,516)	$	99,073	$	99,555	$	(66,880)	$	32,675
Backlog:
Aerospace	$	-	$	-	$	-	$	-	$	-	$	-
Industrial		40,885		(4,579)		36,306		-		-		-
Total	$	40,885	$	(4,579)	$	36,306	$	-	$	-	$	-
Other intangibles:
Aerospace	$	-	$	-	$	-	$	-	$	-	$	-
Industrial		1,651		(1,211)		440		1,312		(956)		356
Total	$	1,651	$	(1,211)	$	440	$	1,312	$	(956)	$	356
Intangible asset with indefinite life:
Tradename:
Aerospace	$	-	$	-	$	-	$	-	$	-	$	-
Industrial		64,248		-		64,248		-		-		-
Total	$	64,248	$	-	$	64,248	$	-	$	-	$	-
Total intangibles:
Aerospace	$	358,055	$	(216,069)	$	141,986	$	358,830	$	(200,279)	$	158,551
Industrial		644,429		(78,654)		565,775		84,646		(71,315)		13,331
Consolidated Total	$	1,002,484	$	(294,723)	$	707,761	$	443,476	$	(271,594)	$	171,882

Schedule of Finite-Lived Intangible Assets Amortization Expense

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Amortization expense	$	11,360	$	6,439	$	23,861	$	19,328

Schedule of Finite-Lived Intangible Assets, Future Amortization Expense

Year Ending September 30:
2018 (remaining)	$	20,097
2019		58,284
2020		42,879
2021		39,994
2022		38,131
Thereafter		444,128
	$	643,513

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Credit Facilities, Short-term Borrowings and Long-term Debt (Tables)

9 Months Ended

Jun. 30, 2018

Debt Disclosure

Schedule of Long-term Debt

	June 30,		September 30,
	2018		2017
Long-term portion of revolving credit facility - Floating rate (LIBOR plus 0.85% - 1.65%), due April 2020; unsecured	$	234,343	$	-
Series D notes – 6.39%, due October 2018; unsecured		100,000		100,000
Series F notes – 8.24%, due April 2019; unsecured		43,000		43,000
Series G notes – 3.42%, due November 2020; unsecured		50,000		50,000
Series H notes – 4.03%, due November 2023; unsecured		25,000		25,000
Series I notes – 4.18%, due November 2025; unsecured		25,000		25,000
Series J notes – Floating rate (LIBOR plus 1.25%), due November 2020; unsecured		50,000		50,000
Series K notes – 4.03%, due November 2023; unsecured		50,000		50,000
Series L notes – 4.18%, due November 2025; unsecured		50,000		50,000
Series M notes – 1.12% due September 2026; unsecured		46,726		47,270
Series N notes – 1.31% due September 2028; unsecured		89,947		90,995
Series O notes – 1.57% due September 2031; unsecured		50,230		50,815
Series P notes – 4.27% due May 2025; unsecured		85,000		-
Series Q notes – 4.35% due May 2027; unsecured		85,000		-
Series R notes – 4.41% due May 2029; unsecured		75,000		-
Series S notes – 4.46% due May 2030; unsecured		75,000		-
Series T notes – 4.61% due May 2033; unsecured		80,000		-
Unamortized debt issuance costs		(2,850)		(1,794)
Total long-term debt		1,211,396		580,286
Less: Current portion of long-term debt		-		-
Long-term debt, less current portion	$	1,211,396	$	580,286

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Accrued Liabilities (Tables)

9 Months Ended

Jun. 30, 2018

Accrued Liabilities [Line Items]

Accrued Liabilities

	June 30,		September 30,
	2018		2017
Salaries and other member benefits	$	63,743	$	91,285
Warranties		19,802		13,597
Interest payable		8,856		9,626
Current portion of acquired performance obligations and unfavorable contracts (1)		1,627		1,627
Accrued retirement benefits		3,529		2,413
Current portion of loss reserve on contractual lease commitments		1,245		1,343
Current portion of deferred income from JV formation (Note 5)		6,414		6,451
Deferred revenues		2,689		4,625
Restructuring charges		16,574		-
Taxes, other than income		18,012		14,401
Other		19,720		9,704
	$	162,211	$	155,072

(1) In connection with Woodward’s acquisition of GE Aviation Systems LLC’s (the “Seller”) thrust reverser actuation systems business located in Duarte, California (the “Duarte Acquisition”) in fiscal year 2013, Woodward assumed current and long-term performance obligations for contractual commitments that are expected to result in future economic losses.  In addition, Woodward assumed current and long-term performance obligations for services to be provided to the Seller and others, partially offset by current and long-term assets related to contractual payments due from the Seller.  The current portion of both obligations is included in “Accrued liabilities” in the Condensed Consolidated Balance Sheets.

Warranties

	Three-Months Ended June 30,				Nine-Months Ended June 30,
		2018		2017		2018		2017
Warranties, beginning of period	$	13,283	$	15,041	$	13,597	$	15,993
Increases due to acquisition of L'Orange		6,045		-		6,045		-
Expense, net of recoveries		2,696		2,746		3,000		6,808
Reductions for settling warranties		(1,838)		(3,746)		(2,670)		(8,528)
Foreign currency exchange rate changes		(384)		257		(170)		25
Warranties, end of period	$	19,802	$	14,298	$	19,802	$	14,298

Loss Reserve On Contractual Lease Commitments [Member]

Accrued Liabilities [Line Items]

Loss Reserve & Restructuring Reserve Activity

	Three-Months Ended June 30,				Nine-Months Ended June 30,
		2018		2017		2018		2017
Loss reserve on contractual lease commitments, beginning of period	$	4,478	$	8,395	$	5,270	$	9,242
Payments, net of sublease income		(267)		(382)		(1,059)		(1,229)
Non-cash adjustments		-		(2,322)		-		(2,322)
Loss reserve on contractual lease commitments, end of period	$	4,211	$	5,691	$	4,211	$	5,691

Employee Severance [Member]

Accrued Liabilities [Line Items]

Loss Reserve & Restructuring Reserve Activity

				Period Activity
	Balances as of October 1, 2017			Charges (gains)	Cash receipts (payments)		Non-cash activity		Balances as of June 30, 2018
Workforce management costs associated with:
Duarte plant relocation	$	-	$	12,504	$	-	$	-	$	12,504
Industrial turbomachinery business realignment		-		4,509		(439)		-		4,070
Total	$	-	$	17,013	$	(439)	$	-	$	16,574

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Other Liabilities (Tables)

9 Months Ended

Jun. 30, 2018

Other Liabilities

Schedule of Other Liabilities

	June 30,		September 30,
	2018		2017
Net accrued retirement benefits, less amounts recognized within accrued liabilities	$	92,075	$	52,211
Noncurrent portion of deferred income from JV formation (1)		237,724		236,896
Total unrecognized tax benefits		9,910		20,949
Noncurrent income taxes payable (2)		23,920		-
Acquired unfavorable contracts (3)		591		2,076
Deferred economic incentives (4)		13,422		14,574
Loss reserve on contractual lease commitments (5)		2,966		3,927
Cross currency swap derivative liability (6)		23,527		-
Other		12,363		14,165
	$	416,498	$	344,798

(1) See Note 5, Joint venture for more information on the deferred income from JV formation.

(2) See Note 18, Income taxes for more information on the noncurrent income taxes payable.

(3) In connection with the Duarte Acquisition in fiscal year 2013, Woodward assumed current and long-term performance obligations for contractual commitments that are expected to result in future economic losses.  The long-term portion of the acquired unfavorable contracts is included in Other liabilities.

(4) Woodward receives certain economic incentives from various state and local authorities related to capital expansion projects.  Such amounts are initially recorded as deferred credits and are being recognized as a reduction to pre-tax expense over the economic lives of the related capital expansion projects.

(5) See Note 15, Accrued liabilities for more information on the loss reserve on contractual lease commitments.

See Note 6,  Financial instruments and fair value measurements for more information on the cross currency swap derivative liability.

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Other (Income) Expense, Net (Tables)

9 Months Ended

Jun. 30, 2018

Other (Income) Expense, Net

Schedule of Other (Income) Expense, Net

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Equity interest in the (earnings) losses of the JV (Note 5)	$	(738)	$	432	$	(2,340)	$	(634)
Net (gain) loss on sales of assets		50		64		(404)		(3,598)
Rent income		(28)		(53)		(99)		(196)
Net gain on investments in deferred compensation program		(257)		(523)		(957)		(1,252)
Loss on forward option derivative instrument (Note 7)		5,543		-		5,543		-
Other		(373)		(370)		(731)		(673)
	$	4,197	$	(450)	$	1,012	$	(6,353)

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Income Taxes (Tables)

9 Months Ended

Jun. 30, 2018

Income Taxes

Schedule of Components of Income Tax Expense (Benefit) [Table Text Block]

	Nine-Months Ended
	June 30, 2018
Transition tax (provisional)	$	26,000
Net impact on U.S. deferred tax assets and liabilities (provisional)		(16,260)
Net changes in deferred tax liability associated with anticipated repatriation taxes (provisional)		5,038
Total provisional discrete impact of the enactment of the Tax Act		14,778
Discrete impact recorded in the three months ended June 30, 2018		3,671
Net discrete impacts of the enactment of the Tax Act	$	18,449

Tax Expense and Effective Tax Rate

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Earnings before income taxes	$	54,417	$	68,687	$	140,551	$	165,982
Income tax expense		5,300		15,061		34,685		27,703
Effective tax rate		9.7%		21.9%		24.7%		16.7%

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Retirement Benefits (Tables)

9 Months Ended

Jun. 30, 2018

Defined Benefit Plans and Other Postretirement Benefit Plans Table Text Block [Line Items]

Schedule of Estimated Remaining Cash Contributions

Retirement pension benefits:
United States	$	-
United Kingdom		155
Japan		-
Germany		329
Other postretirement benefits		2,041

Defined Benefit Pension Plan [Member]

Defined Benefit Plans and Other Postretirement Benefit Plans Table Text Block [Line Items]

Schedule of Net Periodic Benefit Costs

	Three-Months Ended June 30,
	United States				Other Countries				Total
	2018		2017		2018		2017		2018		2017
Service cost	$	410	$	419	$	283	$	192	$	693	$	611
Interest cost		1,501		1,439		386		305		1,887		1,744
Expected return on plan assets		(2,904)		(2,632)		(703)		(656)		(3,607)		(3,288)
Amortization of:
Net actuarial loss		150		464		74		130		224		594
Prior service cost		177		95		-		-		177		95
Net periodic retirement pension (benefit) cost	$	(666)	$	(215)	$	40	$	(29)	$	(626)	$	(244)
Contributions paid	$	-	$	-	$	227	$	99	$	227	$	99
	Nine-Months Ended June 30,
	United States				Other Countries				Total
	2018		2017		2018		2017		2018		2017
Service cost	$	1,232	$	1,256	$	606	$	571	$	1,838	$	1,827
Interest cost		4,503		4,318		1,059		897		5,562		5,215
Expected return on plan assets		(8,711)		(7,897)		(2,106)		(1,935)		(10,817)		(9,832)
Amortization of:
Net actuarial loss		449		1,391		221		383		670		1,774
Prior service cost		532		287		-		-		532		287
Net periodic retirement pension benefit	$	(1,995)	$	(645)	$	(220)	$	(84)	$	(2,215)	$	(729)
Contributions paid	$	-	$	-	$	658	$	565	$	658	$	565

Defined Contribution Plan [Member]

Defined Benefit Plans and Other Postretirement Benefit Plans Table Text Block [Line Items]

Schedule of Costs of Retirement Plans

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Company costs	$	8,262	$	8,039	$	24,858	$	23,790

Other Postretirement Benefit Plans [Member]

Defined Benefit Plans and Other Postretirement Benefit Plans Table Text Block [Line Items]

Schedule of Net Periodic Benefit Costs

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Service cost	$	1	$	4	$	5	$	11
Interest cost		291		311		874		933
Amortization of:
Net actuarial loss		24		50		72		151
Prior service benefit		(40)		(40)		(119)		(119)
Curtailment gain		-		-		(330)		-
Net periodic other postretirement cost	$	276	$	325	$	502	$	976
Contributions paid	$	595	$	592	$	1,830	$	2,011

Multiemployer Plans, Pension [Member]

Defined Benefit Plans and Other Postretirement Benefit Plans Table Text Block [Line Items]

Schedule of Costs of Retirement Plans

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Company contributions	$	86	$	73	$	253	$	220

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Stock-Based Compensation (Tables)

9 Months Ended

Jun. 30, 2018

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018				2017
Weighted-average exercise price per share		n/a		n/a	$	78.91			$	62.64
Weighted-average grant date market value of Woodward stock		n/a		n/a	$	78.91			$	69.45
Expected term (years)		n/a		n/a		6.4	-	8.7		6.0	-	8.7
Estimated volatility		n/a		n/a		29.1%	-	32.7%		31.5%	-	33.7%
Estimated dividend yield		n/a		n/a		0.6%	-	0.8%		0.7%
Risk-free interest rate		n/a		n/a		2.1%	-	2.8%		2.2%	-	2.5%

Activity for Stock Option Awards

	Three-Months Ended				Nine-Months Ended
	June 30, 2018				June 30, 2018
	Number of options		Weighted-Average Exercise Price per Share		Number of options		Weighted-Average Exercise Price per Share
Options, beginning balance		5,880	$	44.62		5,236	$	39.58
Options granted		-		n/a		750		78.91
Options exercised		(158)		22.32		(255)		27.81
Options forfeited		(15)		59.97		(24)		58.27
Options, ending balance		5,707		45.20		5,707		45.20

Stock Options Vested, Or Expected to Vest and Are Exercisable

	Number		Weighted- Average Exercise Price		Weighted- Average Remaining Life in Years		Aggregate Intrinsic Value
Options outstanding		5,707	$	45.20		5.8	$	182,230
Options vested and exercisable		3,699		36.25		4.5		150,207
Options vested and expected to vest		5,628		44.89		5.7		181,384

Stock Options [Member]

Share-based Compensation Arrangement by Share-based Payment Award [Line Items]

Changes in Nonvested Stock Options

	Three-Months Ended				Nine-Months Ended
	June 30, 2018				June 30, 2018
	Number of options		Weighted-Average Grant Date Fair Value per Share		Number of options		Weighted-Average Grant Date Fair Value Per Share
Options outstanding, beginning balance		2,022	$	21.63		2,072	$	18.61
Options granted		-		n/a		750		25.66
Options vested		-		n/a		(791)		17.57
Options forfeited		(15)		20.85		(24)		20.45
Options outstanding, ending balance		2,007		21.64		2,007		21.64

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Segment Information (Tables)

9 Months Ended

Jun. 30, 2018

Segment Information

Consolidated Net Sales and Earnings by Segment

	Three-Months Ended				Nine-Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Segment external net sales:
Aerospace	$	404,612	$	355,992	$	1,096,860	$	943,198
Industrial		183,505		192,630		509,654		548,699
Total consolidated net sales	$	588,117	$	548,622	$	1,606,514	$	1,491,897
Segment earnings:
Aerospace	$	82,199	$	67,173	$	198,721	$	172,277
Industrial		10,450		20,870		40,031		55,957
Nonsegment expenses		(30,696)		(12,945)		(78,062)		(43,090)
Interest expense, net		(7,536)		(6,411)		(20,139)		(19,162)
Consolidated earnings before income taxes	$	54,417	$	68,687	$	140,551	$	165,982

(1) Nonsegment expenses for the nine-months ended June 30, 2018 includes restructuring charges of $17,013.  See Note 15, Accrued liabilities for further details.

Consolidated Total Assets by Segment

	June 30, 2018		September 30, 2017
Segment assets:
Aerospace	$	1,744,825	$	1,722,789
Industrial		1,677,724		695,264
Unallocated corporate property, plant and equipment, net		126,537		104,755
Other unallocated assets		254,978		234,301
Consolidated total assets	$	3,804,064	$	2,757,109

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Recent Accounting Pronouncements (Narrative) (Details) $ in Thousands	12 Months Ended
	Sep. 30, 2017 USD ($)
Recent Accounting Pronouncements
Rent expense for all operating leases	$ 8,302
Future minimum rental payments required under operating leases	$ 23,215

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Earnings Per Share (Reconciliation of Net Earnings to Net Earnings Per Share Basic and Diluted) (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Earnings Per Share
Net earnings	$ 49,117	$ 53,626	$ 105,866	$ 138,279
Basic shares outstanding	61,608	61,288	61,417	61,387
Dilutive effect of stock options and restricted stock	2,273	2,104	2,365	2,133
Diluted shares outstanding	63,881	63,392	63,782	63,520
Basic earnings per share	$ 0.80	$ 0.87	$ 1.72	$ 2.25
Diluted earnings per share	$ 0.77	$ 0.85	$ 1.66	$ 2.18

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Earnings Per Share (Anti-dilutive Stock Options Excluded from Computation of Earnings Per Share) (Details) - $ / shares shares in Thousands	3 Months Ended		9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Earnings Per Share
Options	764	780	760	66
Weighted-average option price	$ 78.70	$ 62.64	$ 78.73	$ 62.98

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Earnings Per Share (Schedule of Treasury Stock Shares Held for Deferred Compensation Included in Basic and Diluted Shares Outstanding) (Details) - shares shares in Thousands	3 Months Ended		9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Earnings Per Share
Weighted-average treasury stock shares held for deferred compensation obligations	201	186	197	178

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Business Acquisitions (Narrative) (Details) € in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Jun. 30, 2018 USD ($)	Jun. 30, 2017 USD ($)	Jun. 30, 2018 USD ($)	Jun. 30, 2017 USD ($)	Jun. 30, 2018 EUR (€)	Jun. 30, 2018 USD ($)	Jun. 01, 2018 USD ($)
Business Acquisition [Line Items]
Total purchase price			$ 771,069
Proceeds from issuance of long-term debt			400,000
Borrowings on revolving lines of credit			1,769,105	$ 1,106,000
Goodwill, Acquired During Period			269,433
Interest Expense	$ 7,878	$ 6,769	21,315	$ 20,399
Cost of forward option	5,543		$ 5,543
Business Acquisition, Acquiree - L'Orange [Member]
Business Acquisition [Line Items]
Date of Acquisition Agreement			Apr. 08, 2018
Effective Date of Acquisition			Jun. 01, 2018
Purchase agreement contract price					€ 700,000	$ 811,000
Total purchase price			$ 771,069
Cash paid at closing			780,355
Proceeds from issuance of long-term debt			400,000
Borrowings on revolving lines of credit			167,420
Goodwill, Acquired During Period			269,433
Net sales since acquisition date			24,878
Net loss since acquisition date			1,215
Transaction costs	$ 10,755		12,036
Interest Expense			1,154
Cost of forward option			5,543
Business Combination, Pro Forma Information, Earnings or Loss of Acquiree since Acquisition Date, Actual			1,215
Defined Benefit Pension Plan [Member] | Business Acquisition, Acquiree - L'Orange [Member]
Business Acquisition [Line Items]
Pension obligation assumed in L'Orange aquisition			$ 38,998
Current portion of pension obligation							$ 1,143

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Business Acquisitions (Schedule of Purchase Price) (Details) $ in Thousands	9 Months Ended
	Jun. 30, 2018 USD ($)
Business Acquisition [Line Items]
Total purchase price	$ 771,069
Business Acquisition, Acquiree - L'Orange [Member]
Business Acquisition [Line Items]
Cash paid to seller	780,355
Less cash and restricted cash acquired	(9,286)
Total purchase price	$ 771,069

XML

Business Acquisitions (Schedule of Purchase Price Allocation) (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Jun. 01, 2018	Sep. 30, 2017
Business Acquisition [Line Items]
Goodwill	$ 826,926		$ 556,545
Fair value adjustment to inventory as of acquisition date		$ 15,107
Business Acquisition, Acquiree - L'Orange [Member]
Business Acquisition [Line Items]
Accounts receivable		26,538
Inventories		72,674
Other current assets		1,385
Property, plant, and equipment		90,589
Goodwill		269,433
Intangible assets		556,023
Total assets acquired		1,016,642
Other current liabilities		40,362
Deferred tax liabilities		164,791
Other noncurrent liabilities		40,420
Total liabilities assumed		245,573
Net assets acquired		$ 771,069

XML

Business Acquisitions (Schedule of Finite-Lived and Indefinite-Lived Intangible Assets Acquired) (Details) - USD ($) $ in Thousands	9 Months Ended
	Jun. 30, 2018	Jun. 01, 2018
Business Acquisition, Acquiree - L'Orange [Member]
Business Acquisition [Line Items]
Intangible assets		$ 556,023
Business Acquisition, Acquiree - L'Orange [Member] | Trade Names [Member]
Business Acquisition [Line Items]
Intangible assets		63,817
Process Technology [Member]
Business Acquisition [Line Items]
Weighted Average Useful Life	21 years
Process Technology [Member] | Business Acquisition, Acquiree - L'Orange [Member]
Business Acquisition [Line Items]
Intangible assets		71,940
Customer Relationships [Member]
Business Acquisition [Line Items]
Weighted Average Useful Life	20 years
Customer Relationships [Member] | Business Acquisition, Acquiree - L'Orange [Member]
Business Acquisition [Line Items]
Intangible assets		379,423
Other Intangibles [Member]
Business Acquisition [Line Items]
Weighted Average Useful Life	3 years
Other Intangibles [Member] | Business Acquisition, Acquiree - L'Orange [Member]
Business Acquisition [Line Items]
Intangible assets		232
Backlog [Member]
Business Acquisition [Line Items]
Weighted Average Useful Life	1 year
Backlog [Member] | Business Acquisition, Acquiree - L'Orange [Member]
Business Acquisition [Line Items]
Intangible assets		$ 40,611

XML

Business Acquisitions (Schedule of Finite-Lived Intangible Assets Acquired, Future Amortization Expense) (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Jun. 01, 2018
Business Acquisition [Line Items]
2018 (remaining)	$ 20,097
2019	58,284
2020	42,879
2021	39,994
2022	38,131
Thereafter	444,128
Total Finite-Lived Intangible Assets, Net	$ 643,513
Business Acquisition, Acquiree - L'Orange [Member]
Business Acquisition [Line Items]
2018 (remaining)		$ 18,832
2019		34,884
2020		19,701
2021		21,458
2022		21,745
Thereafter		375,586
Total Finite-Lived Intangible Assets, Net		$ 492,206

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Business Acquisitions (Schedule of Unaudited Pro Forma Results) (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Business Acquisition [Line Items]
Net sales	$ 588,117	$ 548,622	$ 1,606,514	$ 1,491,897
Net earnings	$ 49,117	$ 53,626	$ 105,866	$ 138,279
Basic earnings per share	$ 0.80	$ 0.87	$ 1.72	$ 2.25
Diluted earnings per share	$ 0.77	$ 0.85	$ 1.66	$ 2.18
Business Acquisition, Acquiree - L'Orange [Member]
Pro forma
Net earnings	$ 60,488	$ 53,071	$ 129,191	$ 108,190
Net sales	$ 639,665	$ 619,485	$ 1,830,515	$ 1,684,071
Basic earnings per share	$ 0.98	$ 0.87	$ 2.10	$ 1.76
Diluted earnings per share	$ 0.95	$ 0.84	$ 2.03	$ 1.70

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Joint Ventures (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Sep. 30, 2016	Sep. 30, 2017	Jan. 04, 2016
Schedule of Equity Method Investments [Line Items]
Current portion of deferred income recorded in connection with joint venture	$ 6,414		$ 6,414			$ 6,451
Noncurrent portion of deferred income recorded in connection with joint venture	237,724		237,724			236,896
Equity interest in earnings (losses) of joint venture	$ 738	$ (432)	$ 2,340	$ 634
Woodward and General Electric Joint Venture [Member]
Schedule of Equity Method Investments [Line Items]
Agreement to Form Joint Venture, Execution Date					Jan. 04, 2016
Equity Method Investment, Ownership Percentage	50.00%		50.00%
Cash received from formation of joint venture					$ 250,000
Cash received annually from formation of joint venture			$ 4,894
Amount of deferred income recorded in connection with joint venture							$ 250,000
Current portion of deferred income recorded in connection with joint venture	$ 6,414		6,414			6,451
Noncurrent portion of deferred income recorded in connection with joint venture	237,724		237,724			236,896
Equity interest in earnings (losses) of joint venture	738	(432)	2,340	634
Cash distributions from joint venture			0	2,500
Net investment in joint venture	8,612		8,612			6,272
Accounts receivable from related party	10,213		10,213			8,554
Accounts payable to related party	4,261		4,261			$ 6,741
Woodward and General Electric Joint Venture [Member] | Sales [Member]
Schedule of Equity Method Investments [Line Items]
Amortization of deferred income recognized as an increase to sales	1,564	1,387	4,103	4,515
Sales to related party	20,085	18,645	50,137	52,362
Reduction to sales related to royalties paid to joint venture	$ 7,340	$ 6,163	$ 19,670	$ 17,240
Woodward and General Electric Joint Venture [Member] | Scenario, Forecast [Member]
Schedule of Equity Method Investments [Line Items]
Cash received annually from formation of joint venture					$ 4,894

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Financial Instruments and Fair Value Measurements (Narrative) (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Jun. 30, 2018	Sep. 30, 2017
Investments in Short-Term Time Deposits [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Interest rate used to estimate fair value		5.30%
Long Term Notes Receivable From Municipalities [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Interest rate used to estimate fair value	2.80%	2.60%
Long-Term Debt [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Interest rate used to estimate fair value	3.50%	2.40%
Cash [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Cash and Cash Equivalents, Fair Value Disclosure	$ 61,050	$ 79,822
Investments in Reverse Repurchase Agreements [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Cash and Cash Equivalents, Fair Value Disclosure	185	1
Investments in Term Deposits with Foreign Banks [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Cash and Cash Equivalents, Fair Value Disclosure	50,643	$ 7,729
Restricted Investments in Term Deposits with Foreign Banks [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Cash and Cash Equivalents, Fair Value Disclosure	$ 3,769

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Financial Instruments and Fair Value Measurements (Financial Assets that are Measured at Fair Value on a Recurring Basis) (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Sep. 30, 2017
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total financial assets	$ 133,899	$ 104,152
Total financial liabilities	23,527
Cross Currency Interest Rate Contract [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Hedging liabilities, cross currency interest rate swaps	23,527
Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total financial assets	133,899	104,152
Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total financial assets	0	0
Total financial liabilities	23,527
Fair Value, Inputs, Level 2 [Member] | Cross Currency Interest Rate Contract [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Hedging liabilities, cross currency interest rate swaps	23,527
Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total financial assets	0	0
Cash [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents	61,050	79,822
Cash [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents	61,050	79,822
Cash [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents	0	0
Cash [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents	0	0
Restricted Investments in Money Market Funds [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents	2,521
Restricted Investments in Money Market Funds [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents	2,521
Investments in Reverse Repurchase Agreements [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents	185	1
Investments in Reverse Repurchase Agreements [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents	185	1
Investments in Reverse Repurchase Agreements [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents	0	0
Investments in Reverse Repurchase Agreements [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents	0	0
Investments in Term Deposits with Foreign Banks [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents	50,643	7,729
Investments in Term Deposits with Foreign Banks [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents	50,643	7,729
Investments in Term Deposits with Foreign Banks [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents	0	0
Investments in Term Deposits with Foreign Banks [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash and cash equivalents	0	0
Equity Securities [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Equity securities	19,500	16,600
Equity Securities [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Equity securities	19,500	16,600
Equity Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Equity securities	0	0
Equity Securities [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Equity securities	$ 0	$ 0

XML

Financial Instruments and Fair Value Measurements (Estimated Fair Values of Financial Instruments) (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Sep. 30, 2017
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Notes receivable from municipalities, Carrying Cost	$ 14,475	$ 14,507
Investments in short-term time deposits, Carrying Cost	104	8,223
Long-term debt, excluding current portion, Carrying Cost	(1,214,246)	(582,080)
Fair Value, Inputs, Level 2 [Member]
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Notes receivable from municipalities, Estimated Fair Value	14,523	15,848
Investments in short-term time deposits, Estimated Fair Value	103	8,227
Long-term debt, excluding current portion, Estimated Fair Value	$ (1,203,413)	$ (592,317)

XML

Derivative Instruments and Hedging Activities (Narrative) (Details) € in Thousands, ¥ in Thousands, $ in Thousands		3 Months Ended				9 Months Ended
	Apr. 18, 2018 EUR (€)	Jun. 30, 2018 USD ($)	Jun. 30, 2017 USD ($)	Mar. 31, 2017 USD ($)	Sep. 30, 2013 USD ($)	Jun. 30, 2018 USD ($)	Jun. 30, 2017 USD ($)	Jun. 30, 2018 EUR (€)	Jun. 30, 2018 USD ($)	Sep. 30, 2017 USD ($)	Sep. 30, 2016 CNY (¥)	Jun. 30, 2013 USD ($)
Derivative Instruments, Gain (Loss) [Line Items]
Amount of Gain (Loss) Recognized in Accumulated OCI on Derivative		$ (23,658)				$ (23,658)
Unrealized Gain (Loss) on Derivatives Arising During Period		(23,658)				$ (23,658)
Term of gain or loss recognition in interest expense on terminated derivatives recorded in OCI						12 months
Face Amount | €								€ 160,000
Derivative, Currency Bought	Euro
Derivative, Cost of Hedge		5,543				$ 5,543
Intercompany Loan [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Gain (loss) on foreign currency transaction designated as a hedge of a net investment in a foreign subsidiary				$ 283
Second China Intercompany Loan [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Value of Net Investment Hedging Instruments Used | ¥											¥ 160,000
Designated as Hedging Instrument [Member] | Net Investment Hedging [Member] | EUR Denominated Loan [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Gain (loss) on foreign currency transaction designated as a hedge of a net investment in a foreign subsidiary		$ (2,559)	$ (880)			(548)	$ 3,030
Designated as Hedging Instrument [Member] | Net Investment Hedging [Member] | Intercompany Loan [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Gain (loss) on foreign currency transaction designated as a hedge of a net investment in a foreign subsidiary			$ 283				$ 452
Total Accumulated Other Comprehensive (Loss) Earnings [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Remaining unrecognzied gains (losses) associated with derivative instruments included in AOCI									$ (18,521)	$ 218
Floating-Rate Cross Currency Interest Rate Contract [Member] | Not Designated as Hedging Instrument, Economic Hedge [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Derivative, Notional Amount									167,420
Derivative, Notional Amount									167,420
Fixed-Rate Cross Currency Interest Rate Contract [Member] | Designated as Hedging Instrument [Member] | Derivatives in Cash Flow Hedging Relationships [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Derivative, Notional Amount									400,000
Derivative, Notional Amount									400,000
Fixed-Rate Cross Currency Interest Rate Contract [Member] | Not Designated as Hedging Instrument, Economic Hedge [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Derivative, Notional Amount									400,000
Derivative, Notional Amount									400,000
Foreign Exchange Option [Member] | Not Designated as Hedging Instrument, Economic Hedge [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Derivative, Notional Amount | €	€ 490,000
Derivative, Notional Amount | €	€ 490,000
Derivative, Forward Exchange Rate	1.2432
Derivative, Cost of Hedge						$ 5,543
Derivative, Inception Date						Apr. 18, 2018
Derivative, Maturity Date						Jun. 01, 2018
Derivative, Exercise Date						May 30, 2018
Treasury Lock [Member] | Designated as Hedging Instrument [Member] | Derivatives in Cash Flow Hedging Relationships [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Amount of Gain (Loss) Recognized in Accumulated OCI on Derivative					$ 507
Net unrecognized gains on terminated derivative instruments expected to be reclassified to earnings						$ 72
Derivative, Notional Amount												$ 25,000
Derivative, Notional Amount												$ 25,000
Series D Notes [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Issuance Date						Oct. 01, 2008
Series F Notes [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Issuance Date						Apr. 01, 2009
2013 Note Purchase Agreement [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Issuance Date						Oct. 01, 2013
Face Amount									$ 250,000
First Closing Notes [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Issuance Date						Oct. 01, 2013
Second Closing Notes [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Issuance Date						Nov. 15, 2013
2016 Note Purchase Agreements [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Issuance Date						Sep. 23, 2016
Face Amount | €								160,000
Series M Notes [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Face Amount | €								40,000
Series N Notes [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Face Amount | €								77,000
Series O Notes [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Face Amount | €								€ 43,000

XML

Derivative Instruments and Hedging Activities (Impact of Derivative Instruments on Earnings) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Derivative Instruments, Gain (Loss) [Line Items]
Amount of (Income) Expense Recognized in Earnings on Derivative	$ 4,955	$ (18)	$ 4,919	$ (54)
Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative	(23,658)		(23,658)
Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings	4,955	(18)	4,919	(54)
Fixed-Rate Cross Currency Interest Rate Contract [Member] | Selling, General and Administrative Expenses [Member] | Derivatives in Cash Flow Hedging Relationships [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Amount of (Income) Expense Recognized in Earnings on Derivative	3,506		3,506
Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative	(21,823)		(21,823)
Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings	3,506		3,506
Floating-Rate Cross Currency Interest Rate Contract [Member] | Selling, General and Administrative Expenses [Member] | Derivatives in Fair Value Hedging Relationships [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Amount of (Income) Expense Recognized in Earnings on Derivative	1,467		1,467
Amount of (Gain) Loss Recognized in Accumulated OCI on Derivative	(1,835)		(1,835)
Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings	1,467		1,467
Treasury Lock [Member] | Interest Expense [Member] | Derivatives in Cash Flow Hedging Relationships [Member]
Derivative Instruments, Gain (Loss) [Line Items]
Amount of (Income) Expense Recognized in Earnings on Derivative	(18)	(18)	(54)	(54)
Amount of (Gain) Loss Reclassified from Accumulated OCI into Earnings	$ (18)	$ (18)	$ (54)	$ (54)

XML

Supplemental Statements of Cash Flows Information (Schedule of Cash Flow Supplemental Disclosures) (Details) - USD ($) $ in Thousands	9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017
Supplemental Statements of Cash Flows Information
Interest paid, net of amounts capitalized	$ 24,966	$ 24,879
Income taxes paid	31,443	29,807
Income tax refunds received	1,760	158
Purchases of property, plant and equipment on account	8,438	12,252
Common shares issued from treasury stock to settle employee liabilities	0	1,767
Common shares issued from treasury stock for benefit plans	14,741	14,014
Cashless exercise of stock options	$ 0	$ 1,473

XML

Accounts Receivable (Schedule of Accounts Receivable) (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Sep. 30, 2017
Accounts, Notes, Loans and Financing Receivable [Line Items]
Allowance for uncollectible customer amounts	$ (3,668)	$ (3,776)
Accounts receivable	386,110	402,182
Trade Accounts Receivable [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Accounts Receivable, Gross	362,459	367,715
Accounts Receivable from Chinese Financial Institution [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Accounts Receivable, Gross	$ 27,319	$ 38,243

XML

Inventories (Schedule of Inventories) (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Sep. 30, 2017
Inventories
Raw Materials	$ 86,677	$ 59,034
Work in progress	135,518	103,790
Component Parts	301,257	262,755
Finished Goods	65,988	47,926
Inventory, net	$ 589,440	$ 473,505

XML

Property, Plant, and Equipment, Net (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Sep. 30, 2017
Property, Plant and Equipment [Line Items]
Property, plant and equipment held for sale	$ 8,853		$ 8,853		$ 0
Property, plant and equipment remaining	3,400		3,400
Assets planned to be disposed of as a result of relocation	500		500
Depreciation expense	17,695	$ 14,141	48,276	$ 40,259
Second Campus Rockford Illinois [Member]
Property, Plant and Equipment [Line Items]
Construction in progress	30,198		30,198		49,347
Drake Campus Fort Collins Colorado Member
Property, Plant and Equipment [Line Items]
Construction in progress	2,618		2,618		15,584
Office furniture and equipment [Member]
Property, Plant and Equipment [Line Items]
Gross assets acquired on capital leases	1,676		1,676		1,653
Accumulated depreciation on capital lease assets	$ 1,081		$ 1,081		$ 739

XML

Property, Plant, and Equipment, Net (Property, Plant, and Equipment - Net) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Sep. 30, 2017
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Gross	$ 1,587,840		$ 1,587,840		$ 1,442,896
Less accumulated depreciation	(543,807)		(543,807)		(520,853)
Property, Plant and Equipment, Net, Total	1,044,033		1,044,033		922,043
Depreciation expense	17,695	$ 14,141	48,276	$ 40,259
Capitalized interest	607	$ 567	1,841	$ 1,521
Land and Land Improvements [Member]
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Gross	92,934		92,934		88,326
Building and Building Improvements [Member]
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Gross	564,366		564,366		514,453
Leasehold Improvements [Member]
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Gross	17,827		17,827		16,142
Machinery and Equipment, Excluding Computer and Office Equipment [Member]
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Gross	654,495		654,495		543,641
Computer Equipment and Software [Member]
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Gross	123,705		123,705		124,723
Office furniture and equipment [Member]
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Gross	27,567		27,567		24,308
Other Capitalized Property Plant and Equipment [Member]
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Gross	19,326		19,326		19,393
Construction in Progress [Member]
Property, Plant and Equipment [Line Items]
Property, Plant and Equipment, Gross	$ 87,620		$ 87,620		$ 111,910

XML

Goodwill (Goodwill) (Details) $ in Thousands	9 Months Ended
	Jun. 30, 2018 USD ($)
Goodwill [Line Items]
Goodwill, Beginning Balance	$ 556,545
Additions	269,433
Effects of Currency Translation	948
Goodwill, Ending Balance	826,926
Aerospace [Member]
Goodwill [Line Items]
Goodwill, Beginning Balance	455,423
Effects of Currency Translation	0
Goodwill, Ending Balance	455,423
Industrial [Member]
Goodwill [Line Items]
Goodwill, Beginning Balance	101,122
Additions	269,433
Effects of Currency Translation	948
Goodwill, Ending Balance	371,503
Business Acquisition, Acquiree - L'Orange [Member]
Goodwill [Line Items]
Additions	269,433
Business Acquisition, Acquiree - L'Orange [Member] | Industrial [Member]
Goodwill [Line Items]
Additions	$ 269,433

XML

Intangible Assets, Net (Schedule of Finite-Lived and Indefinite-Lived Intangible Assets by Major Class) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Sep. 30, 2017
Finite-Lived Intangible Assets [Line Items]
Intangible Assets, Gross (Excluding Goodwill), Total	$ 1,002,484		$ 1,002,484		$ 443,476
Accumulated Amortization of Finite-Lived Intangible	(294,723)		(294,723)		(271,594)
Net Carrying Amount - Finite-Lived Intangible	643,513		643,513
Intangible Assets, Net (Excluding Goodwill), Total	707,761		707,761		171,882
Amortization expense	11,360	$ 6,439	23,861	$ 19,328
Trade Names [Member]
Finite-Lived Intangible Assets [Line Items]
Indefinite-Lived Intangible Assets	64,248		64,248
Process Technology [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Value - Finite-Lived Intangible	171,589		171,589		99,555
Accumulated Amortization of Finite-Lived Intangible	(72,516)		(72,516)		(66,880)
Net Carrying Amount - Finite-Lived Intangible	99,073		99,073		32,675
Customer Relationships [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Value - Finite-Lived Intangible	704,631		704,631		323,187
Accumulated Amortization of Finite-Lived Intangible	(197,890)		(197,890)		(185,562)
Net Carrying Amount - Finite-Lived Intangible	506,741		506,741		137,625
Intellectual Property [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Value - Finite-Lived Intangible	19,480		19,480		19,422
Accumulated Amortization of Finite-Lived Intangible	(18,527)		(18,527)		(18,196)
Net Carrying Amount - Finite-Lived Intangible	953		953		1,226
Backlog [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Value - Finite-Lived Intangible	40,885		40,885
Accumulated Amortization of Finite-Lived Intangible	(4,579)		(4,579)
Net Carrying Amount - Finite-Lived Intangible	36,306		36,306
Other Intangibles [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Value - Finite-Lived Intangible	1,651		1,651		1,312
Accumulated Amortization of Finite-Lived Intangible	(1,211)		(1,211)		(956)
Net Carrying Amount - Finite-Lived Intangible	440		440		356
Aerospace [Member]
Finite-Lived Intangible Assets [Line Items]
Intangible Assets, Gross (Excluding Goodwill), Total	358,055		358,055		358,830
Accumulated Amortization of Finite-Lived Intangible	(216,069)		(216,069)		(200,279)
Intangible Assets, Net (Excluding Goodwill), Total	141,986		141,986		158,551
Aerospace [Member] | Process Technology [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Value - Finite-Lived Intangible	76,372		76,372		76,605
Accumulated Amortization of Finite-Lived Intangible	(53,377)		(53,377)		(49,124)
Net Carrying Amount - Finite-Lived Intangible	22,995		22,995		27,481
Aerospace [Member] | Customer Relationships [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Value - Finite-Lived Intangible	281,683		281,683		282,225
Accumulated Amortization of Finite-Lived Intangible	(162,692)		(162,692)		(151,155)
Net Carrying Amount - Finite-Lived Intangible	118,991		118,991		131,070
Aerospace [Member] | Intellectual Property [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Value - Finite-Lived Intangible	0		0		0
Accumulated Amortization of Finite-Lived Intangible	0		0		0
Net Carrying Amount - Finite-Lived Intangible	0		0		0
Aerospace [Member] | Other Intangibles [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Value - Finite-Lived Intangible	0		0		0
Accumulated Amortization of Finite-Lived Intangible	0		0		0
Net Carrying Amount - Finite-Lived Intangible	0		0		0
Industrial [Member]
Finite-Lived Intangible Assets [Line Items]
Intangible Assets, Gross (Excluding Goodwill), Total	644,429		644,429		84,646
Accumulated Amortization of Finite-Lived Intangible	(78,654)		(78,654)		(71,315)
Intangible Assets, Net (Excluding Goodwill), Total	565,775		565,775		13,331
Industrial [Member] | Trade Names [Member]
Finite-Lived Intangible Assets [Line Items]
Indefinite-Lived Intangible Assets	64,248		64,248
Industrial [Member] | Process Technology [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Value - Finite-Lived Intangible	95,217		95,217		22,950
Accumulated Amortization of Finite-Lived Intangible	(19,139)		(19,139)		(17,756)
Net Carrying Amount - Finite-Lived Intangible	76,078		76,078		5,194
Industrial [Member] | Customer Relationships [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Value - Finite-Lived Intangible	422,948		422,948		40,962
Accumulated Amortization of Finite-Lived Intangible	(35,198)		(35,198)		(34,407)
Net Carrying Amount - Finite-Lived Intangible	387,750		387,750		6,555
Industrial [Member] | Intellectual Property [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Value - Finite-Lived Intangible	19,480		19,480		19,422
Accumulated Amortization of Finite-Lived Intangible	(18,527)		(18,527)		(18,196)
Net Carrying Amount - Finite-Lived Intangible	953		953		1,226
Industrial [Member] | Backlog [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Value - Finite-Lived Intangible	40,885		40,885
Accumulated Amortization of Finite-Lived Intangible	(4,579)		(4,579)
Net Carrying Amount - Finite-Lived Intangible	36,306		36,306
Industrial [Member] | Other Intangibles [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Value - Finite-Lived Intangible	1,651		1,651		1,312
Accumulated Amortization of Finite-Lived Intangible	(1,211)		(1,211)		(956)
Net Carrying Amount - Finite-Lived Intangible	$ 440		$ 440		$ 356

XML

Intangible Assets, Net (Schedule of Finite-Lived Intangible Assets, Future Amortization Expense) (Details) $ in Thousands	Jun. 30, 2018 USD ($)
Intangible Assets, Net
Future Amortization Expense, Remainder of Fiscal Year	$ 20,097
2019	58,284
2020	42,879
2021	39,994
2022	38,131
Thereafter	444,128
Total Finite-Lived Intangible Assets, Net	$ 643,513

XML

Credit Facilities and Short-term Borrowings (Narrative) (Details) - USD ($)	3 Months Ended	9 Months Ended	12 Months Ended
	Mar. 31, 2018	Jun. 30, 2018	Sep. 30, 2017
Debt And Line Of Credit Facility [Line Items]
Debt financing costs		$ 1,325,000
Foreign Lines of Credit And Overdraft Facilities [Member]
Debt And Line Of Credit Facility [Line Items]
Outstanding borrowings		3,769,000	$ 0
Revolving Credit Agreement [Member]
Debt And Line Of Credit Facility [Line Items]
Maximum borrowing capacity		1,000,000,000
Option to increase maximum borrowings to this amount		$ 1,200,000,000
Line of Credit Facility, Expiration Date		Apr. 01, 2020
Variable Rate Basis	LIBOR
Credit facility effective interest rate on outstanding borrowing		2.87%	2.29%
Outstanding borrowings		$ 374,574,000	$ 32,600,000
Current portion of outstanding borrowings		$ 140,231,000	$ 32,600,000
Minimum [Member] | Revolving Credit Agreement [Member]
Debt And Line Of Credit Facility [Line Items]
Basis Spread On Variable Rate		0.85%
Maximum [Member] | Revolving Credit Agreement [Member]
Debt And Line Of Credit Facility [Line Items]
Basis Spread On Variable Rate		1.65%

XML

Long-term Debt (Narrative) (Details) € in Thousands	3 Months Ended	9 Months Ended
	Mar. 31, 2018	Jun. 30, 2018 USD ($)	Jun. 30, 2018 EUR (€)	Jun. 30, 2018 USD ($)	Sep. 30, 2017 USD ($)
Debt Instrument [Line Items]
Face Amount | €			€ 160,000
Debt financing costs		$ 1,325,000
Balance of unamortized debt issuance costs				$ 2,850,000	$ 1,794,000
The Notes [Member]
Debt Instrument [Line Items]
Balance of unamortized debt issuance costs				2,850,000	1,794,000
2013 Note Purchase Agreement [Member]
Debt Instrument [Line Items]
Issuance Date		Oct. 01, 2013
Face Amount				$ 250,000,000
Series J Notes [Member]
Debt Instrument [Line Items]
Effective interest rate			3.58%	3.58%
First Closing Notes [Member]
Debt Instrument [Line Items]
Issuance Date		Oct. 01, 2013
Second Closing Notes [Member]
Debt Instrument [Line Items]
Issuance Date		Nov. 15, 2013
Series D Notes [Member]
Debt Instrument [Line Items]
Issuance Date		Oct. 01, 2008
Series F Notes [Member]
Debt Instrument [Line Items]
Issuance Date		Apr. 01, 2009
2016 Note Purchase Agreements [Member]
Debt Instrument [Line Items]
Issuance Date		Sep. 23, 2016
Face Amount | €			€ 160,000
Series M Notes [Member]
Debt Instrument [Line Items]
Face Amount | €			40,000
Series N Notes [Member]
Debt Instrument [Line Items]
Face Amount | €			77,000
Series O Notes [Member]
Debt Instrument [Line Items]
Face Amount | €			€ 43,000
2018 Note Purchase Agreement [Member]
Debt Instrument [Line Items]
Issuance Date		May 31, 2018
Face Amount				$ 400,000,000
Prepayment, Maximum Percentage of Principal		100.00%
Prepayment, Partial Payment Minimum		$ 1,000,000
Event of Default, Interest Rate Increase			2.00%	2.00%
Series P Notes [Member]
Debt Instrument [Line Items]
Face Amount				$ 85,000,000
Interest rate			4.27%	4.27%
Maturity date		May 30, 2025
Series Q Notes [Member]
Debt Instrument [Line Items]
Face Amount				$ 85,000,000
Interest rate			4.35%	4.35%
Maturity date		May 30, 2027
Series R Notes [Member]
Debt Instrument [Line Items]
Face Amount				$ 75,000,000
Interest rate			4.41%	4.41%
Maturity date		May 30, 2029
Series S Notes [Member]
Debt Instrument [Line Items]
Face Amount				$ 75,000,000
Interest rate			4.46%	4.46%
Maturity date		May 30, 2030
Series T Notes [Member]
Debt Instrument [Line Items]
Face Amount				$ 80,000,000
Interest rate			4.61%	4.61%
Maturity date		May 30, 2033
Foreign Lines of Credit And Overdraft Facilities [Member]
Debt Instrument [Line Items]
Outstanding borrowings				$ 3,769,000	0
Revolving Credit Agreement [Member]
Debt Instrument [Line Items]
Variable Rate Basis	LIBOR
Line of Credit Facility, Expiration Date		Apr. 01, 2020
Line of Credit Facility, Maximum Borrowing Capacity				1,000,000,000
Outstanding borrowings				$ 374,574,000	$ 32,600,000
Credit facility effective interest rate on outstanding borrowing			2.87%	2.87%	2.29%
Revolving Credit Agreement [Member] | Minimum [Member]
Debt Instrument [Line Items]
Basis Spread On Variable Rate		0.85%
Revolving Credit Agreement [Member] | Maximum [Member]
Debt Instrument [Line Items]
Basis Spread On Variable Rate		1.65%
Cross Currency Interest Rate Contract [Member] | Series P Notes [Member]
Debt Instrument [Line Items]
Effective interest rate			1.82%	1.82%
Cross Currency Interest Rate Contract [Member] | Series Q Notes [Member]
Debt Instrument [Line Items]
Effective interest rate			2.15%	2.15%
Cross Currency Interest Rate Contract [Member] | Series R Notes [Member]
Debt Instrument [Line Items]
Effective interest rate			2.42%	2.42%
Cross Currency Interest Rate Contract [Member] | Series S Notes [Member]
Debt Instrument [Line Items]
Effective interest rate			2.55%	2.55%
Cross Currency Interest Rate Contract [Member] | Series T Notes [Member]
Debt Instrument [Line Items]
Effective interest rate			2.90%	2.90%

XML

Long-term Debt (Schedule of Long-term Debt) (Details) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended	12 Months Ended
	Mar. 31, 2018	Jun. 30, 2018	Sep. 30, 2017
Debt Instrument [Line Items]
Long-term Debt		$ 1,211,396	$ 580,286
Unamortized debt issuance costs		(2,850)	(1,794)
Current portion of long-term debt		0	0
Long-term debt, excluding current portion		$ 1,211,396	$ 580,286
Series P Notes [Member]
Debt Instrument [Line Items]
Interest rate		4.27%
Maturity date		May 30, 2025
Series P Notes [Member] | Notes Payable to Banks [Member]
Debt Instrument [Line Items]
Interest rate		4.27%
Maturity date		May 30, 2025
Long-term Debt		$ 85,000
Series R Notes [Member]
Debt Instrument [Line Items]
Interest rate		4.41%
Maturity date		May 30, 2029
Series R Notes [Member] | Notes Payable to Banks [Member]
Debt Instrument [Line Items]
Interest rate		4.41%
Maturity date		May 30, 2029
Long-term Debt		$ 75,000
Series S Notes [Member]
Debt Instrument [Line Items]
Interest rate		4.46%
Maturity date		May 30, 2030
Series S Notes [Member] | Notes Payable to Banks [Member]
Debt Instrument [Line Items]
Interest rate		4.46%
Maturity date		May 30, 2030
Long-term Debt		$ 75,000
Series T Notes [Member]
Debt Instrument [Line Items]
Interest rate		4.61%
Maturity date		May 30, 2033
Series T Notes [Member] | Notes Payable to Banks [Member]
Debt Instrument [Line Items]
Interest rate		4.61%
Maturity date		May 30, 2033
Long-term Debt		$ 80,000
Series D Notes [Member] | Notes Payable to Banks [Member]
Debt Instrument [Line Items]
Interest rate		6.39%	6.39%
Maturity date		Oct. 01, 2018	Oct. 01, 2018
Long-term Debt		$ 100,000	$ 100,000
Series F Notes [Member] | Notes Payable to Banks [Member]
Debt Instrument [Line Items]
Interest rate		8.24%	8.24%
Maturity date		Apr. 03, 2019	Apr. 03, 2019
Long-term Debt		$ 43,000	$ 43,000
Series J Notes [Member]
Debt Instrument [Line Items]
Variable interest rate		3.58%
Variable interest rate		3.58%
Series J Notes [Member] | Notes Payable to Banks [Member]
Debt Instrument [Line Items]
Variable Rate Basis		1.25%	1.25%
Maturity date		Nov. 15, 2020	Nov. 15, 2020
Long-term Debt		$ 50,000	$ 50,000
Series G Notes [Member] | Notes Payable to Banks [Member]
Debt Instrument [Line Items]
Interest rate		3.42%	3.42%
Maturity date		Nov. 15, 2020	Nov. 15, 2020
Long-term Debt		$ 50,000	$ 50,000
Series H Notes [Member] | Notes Payable to Banks [Member]
Debt Instrument [Line Items]
Interest rate		4.03%	4.03%
Maturity date		Nov. 15, 2023	Nov. 15, 2023
Long-term Debt		$ 25,000	$ 25,000
Series I Notes [Member] | Notes Payable to Banks [Member]
Debt Instrument [Line Items]
Interest rate		4.18%	4.18%
Maturity date		Nov. 15, 2025	Nov. 15, 2025
Long-term Debt		$ 25,000	$ 25,000
Series K Notes [Member] | Notes Payable to Banks [Member]
Debt Instrument [Line Items]
Interest rate		4.03%	4.03%
Maturity date		Nov. 15, 2023	Nov. 15, 2023
Long-term Debt		$ 50,000	$ 50,000
Series L Notes [Member] | Notes Payable to Banks [Member]
Debt Instrument [Line Items]
Interest rate		4.18%	4.18%
Maturity date		Nov. 15, 2025	Nov. 15, 2025
Long-term Debt		$ 50,000	$ 50,000
Series M Notes [Member] | Notes Payable to Banks [Member]
Debt Instrument [Line Items]
Interest rate		1.12%	1.12%
Maturity date		Sep. 23, 2026	Sep. 23, 2026
Long-term Debt		$ 46,726	$ 47,270
Series N Notes [Member] | Notes Payable to Banks [Member]
Debt Instrument [Line Items]
Interest rate		1.31%	1.31%
Maturity date		Sep. 23, 2028	Sep. 23, 2028
Long-term Debt		$ 89,947	$ 90,995
Series O Notes [Member] | Notes Payable to Banks [Member]
Debt Instrument [Line Items]
Interest rate		1.57%	1.57%
Maturity date		Sep. 23, 2031	Sep. 23, 2031
Long-term Debt		$ 50,230	$ 50,815
Series Q Notes [Member]
Debt Instrument [Line Items]
Interest rate		4.35%
Maturity date		May 30, 2027
Series Q Notes [Member] | Notes Payable to Banks [Member]
Debt Instrument [Line Items]
Interest rate		4.35%
Maturity date		May 30, 2027
Long-term Debt		$ 85,000
Revolving Credit Agreement [Member]
Debt Instrument [Line Items]
Variable Rate Basis	LIBOR
Revolving Credit Agreement [Member] | Domestic Line Of Credit [Member]
Debt Instrument [Line Items]
Long-term Debt		$ 234,343
Revolving Credit Agreement [Member] | Minimum [Member]
Debt Instrument [Line Items]
Basis Spread On Variable Rate		0.85%
Revolving Credit Agreement [Member] | Maximum [Member]
Debt Instrument [Line Items]
Basis Spread On Variable Rate		1.65%

XML

Accrued Liabilities (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Restructuring Cost and Reserve [Line Items]
Restructuring Charges	$ 0	$ 0	$ 17,013	$ 0
Loss Reserve On Contractual Lease Commitments [Member]
Restructuring Cost and Reserve [Line Items]
Non-cash adjustments		$ (2,322)		$ (2,322)
Loss reserve, noncurrent portion	$ 2,966		2,966			$ 3,927
Duarte Relocation Restructuring Charges [Member]
Restructuring Cost and Reserve [Line Items]
Restructuring Charges			12,504
Restructuring and Related Cost, Expected Cost Remaining					$ 12,000
Non-cash adjustments			0
Industrial Restructuring Charges [Member]
Restructuring Cost and Reserve [Line Items]
Restructuring Charges			4,509
Non-cash adjustments			$ 0

XML

Accrued Liabilities (Accrued Liabilities) (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2017	Jun. 30, 2017	Mar. 31, 2017	Sep. 30, 2016
Accrued Liabilities [Line Items]
Salaries and other member benefits	$ 63,743		$ 91,285
Warranties	19,802	$ 13,283	13,597	$ 14,298	$ 15,041	$ 15,993
Interest payable	8,856		9,626
Current portion of acquired performance obligations and unfavorable contracts	1,627		1,627
Accrued retirement benefits	3,529		2,413
Current portion of deferred income from JV formation (Note 4)	6,414		6,451
Deferred revenues	2,689		4,625
Taxes, other than income	18,012		14,401
Other	19,720		9,704
Accrued liabilities	162,211		155,072
Loss Reserve On Contractual Lease Commitments [Member]
Accrued Liabilities [Line Items]
Restructuring Reserve, Current	1,245		$ 1,343
Employee Severance [Member]
Accrued Liabilities [Line Items]
Restructuring Reserve, Current	$ 16,574

XML

Accrued Liabilities (Warranties) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Accrued Liabilities
Warranties, beginning of period	$ 13,283	$ 15,041	$ 13,597	$ 15,993
Warranty Expense, net of recoveries	2,696	2,746	3,000	6,808
Increases due to acquisition of L'Orange	6,045		6,045
Reductions for settling warranties	(1,838)	(3,746)	(2,670)	(8,528)
Foreign currency exchange rate changes	(384)	257	(170)	25
Warranties, end of period	$ 19,802	$ 14,298	$ 19,802	$ 14,298

XML

Accrued Liabilities (Loss Reserve Activity) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Sep. 30, 2017
Restructuring Cost and Reserve [Line Items]
Charges (gains)	$ 0	$ 0	$ 17,013	$ 0
Loss Reserve On Contractual Lease Commitments [Member]
Restructuring Cost and Reserve [Line Items]
Restructuring charges, beginning of period	4,478	8,395	5,270	9,242
Payments, net of sublease income	(267)	(382)	(1,059)	(1,229)
Non-cash adjustments		(2,322)		(2,322)
Restructuring charges, end of period	4,211	$ 5,691	4,211	$ 5,691
Loss reserve, noncurrent portion	$ 2,966		$ 2,966		$ 3,927

XML

Accrued Liabilities (Restructuring Charges Activity) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Restructuring Cost and Reserve [Line Items]
Charges (gains)	$ 0	$ 0	$ 17,013	$ 0
Employee Severance [Member]
Restructuring Cost and Reserve [Line Items]
Restructuring charges, beginning of period			0
Charges (gains)			17,013
Cash receipts (payments)			(439)
Non-cash activity			0
Restructuring charges, end of period	16,574		16,574
Duarte Relocation Restructuring Charges [Member]
Restructuring Cost and Reserve [Line Items]
Restructuring charges, beginning of period			0
Charges (gains)			12,504
Non-cash activity			0
Restructuring charges, end of period	12,504		12,504
Industrial Restructuring Charges [Member]
Restructuring Cost and Reserve [Line Items]
Restructuring charges, beginning of period			0
Charges (gains)			4,509
Cash receipts (payments)			(439)
Non-cash activity			0
Restructuring charges, end of period	$ 4,070		$ 4,070

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Other Liabilities (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Sep. 30, 2017
Other Liabilities [Line Items]
Net accrued retirement benefits, less amounts recognized within accrued liabilities	$ 92,075	$ 52,211
Noncurrent portion of deferred income from JV formation	237,724	236,896
Total unrecognized tax benefits, net of offsetting adjustments	9,910	20,949
Noncurrent income taxes payable	23,920	0
Acquired unfavorable contracts	591	2,076
Deferred economic incentives	13,422	14,574
Other	12,363	14,165
Other liabilities	416,498	344,798
Loss Reserve On Contractual Lease Commitments [Member]
Other Liabilities [Line Items]
Loss reserve, noncurrent portion	2,966	$ 3,927
Cross Currency Interest Rate Contract [Member]
Other Liabilities [Line Items]
Derivative liability	$ 23,527

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Other (Income) Expense, Net (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Other (Income) Expense, Net
Equity interest in losses (earnings) of the JV (Note 4)	$ (738)	$ 432	$ (2,340)	$ (634)
Net (gain) loss on sales of assets	50	64	(404)	(3,598)
Rent income	(28)	(53)	(99)	(196)
Net (gain) loss on investments in deferred compensation program	(257)	(523)	(957)	(1,252)
Loss on forward options derivative instrument (Note 7)	5,543		5,543
Other	(373)	(370)	(731)	(673)
Other (income) expense, net	$ 4,197	$ (450)	$ 1,012	$ (6,353)

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Income Taxes (Narrative) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended	9 Months Ended		12 Months Ended
	Jun. 30, 2018	Dec. 31, 2017	Mar. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Sep. 30, 2018	Sep. 30, 2017
Income Taxes [Line Items]
Net discrete impacts of the enactment of the Tax Act	$ 3,671		$ 14,778		$ 18,449
Total Accrued Transition Tax Liability	26,000				26,000
Current Accrued Transition Tax Liability	2,080				2,080
Noncurrent Accrued Transition Tax Liability	23,920				23,920
Noncurrent income taxes payable	23,920				23,920		$ 0
Statutory tax rate		35.00%		21.00%		24.50%
Unrecognized Tax Benefits	9,710				9,710		20,132
Estimated decrease in liability for unrecognized tax benefits	84				84
Unrecognized tax benefits that, if recognized, would affect the effective tax rate	2,741				2,741		9,677
Accrued interest and penalties	$ 255				$ 255		$ 1,123
Scenario, Forecast [Member]
Income Taxes [Line Items]
Statutory tax rate					21.00%

XML

Income Taxes (Net Discrete Impact of Tax Act) (Details) - USD ($) $ in Thousands	3 Months Ended	6 Months Ended	9 Months Ended
	Jun. 30, 2018	Mar. 31, 2018	Jun. 30, 2018
Income Taxes
Transition Tax			$ 26,000
Impact on U.S. deferred tax assets and liabilities			(16,260)
Net changes in deferred tax liability associated with anticipated repatriation taxes			5,038
Income Tax Expense (Benefit) Related to Discrete Impacts in Tax Law	$ 3,671	$ 14,778	$ 18,449

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Income Taxes (Tax Expense and Effective Tax Rate) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Income Taxes
Earnings before income taxes	$ 54,417	$ 68,687	$ 140,551	$ 165,982
Income tax expense	$ 5,300	$ 15,061	$ 34,685	$ 27,703
Effective tax rate	9.70%	21.90%	24.70%	16.70%

XML

Retirement Benefits (Narrative) (Details) - USD ($) shares in Thousands	3 Months Ended		9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017	Jun. 01, 2018
Defined Benefit Plan Disclosure [Line Items]
Value of Company Stock Contributed to Defined Contribution Benefit Plans			$ 14,741,000	$ 14,014,000
Treasury Stock Issued During Period, Shares, Employee Benefit Plans			202	199
Total stockholders equity
Defined Benefit Plan Disclosure [Line Items]
Value of Company Stock Contributed to Defined Contribution Benefit Plans			$ 14,741,000	$ 14,014,000
Treasury Stock at Cost [Member]
Defined Benefit Plan Disclosure [Line Items]
Value of Company Stock Contributed to Defined Contribution Benefit Plans			$ 7,584,000	$ 7,513,000
Treasury Stock Issued During Period, Shares, Employee Benefit Plans			202	199
Defined Benefit Pension Plan [Member]
Defined Benefit Plan Disclosure [Line Items]
Contributions paid - pensions	$ 227,000	$ 99,000	$ 658,000	$ 565,000
Net periodic retirement (benefit) cost	(626,000)	(244,000)	(2,215,000)	(729,000)
Defined Benefit Pension Plan [Member] | Business Acquisition, Acquiree - L'Orange [Member]
Defined Benefit Plan Disclosure [Line Items]
Pension obligation assumed in L'Orange aquisition			38,998,000
Current portion of pension obligation					$ 1,143,000
Contributions paid - pensions			54,000
Net periodic retirement (benefit) cost			168,000
Other Postretirement Benefit Plans [Member]
Defined Benefit Plan Disclosure [Line Items]
Net periodic retirement (benefit) cost	276,000	325,000	502,000	976,000
UNITED STATES | Defined Benefit Pension Plan [Member]
Defined Benefit Plan Disclosure [Line Items]
Contributions paid - pensions	0	0	0	0
Net periodic retirement (benefit) cost	(666,000)	(215,000)	(1,995,000)	(645,000)
Duarte Plan, Defined Benefit [Member] | Defined Benefit Pension Plan [Member]
Defined Benefit Plan Disclosure [Line Items]
Defined Benefit, Lump Sum Buyout Benefits Paid, Current Year				670,000
Defined Benefit, Lump Sum Buyout Benefits Paid, Expected			0
Foreign Plan [Member] | Defined Benefit Pension Plan [Member]
Defined Benefit Plan Disclosure [Line Items]
Contributions paid - pensions	227,000	99,000	658,000	565,000
Net periodic retirement (benefit) cost	$ 40,000	$ (29,000)	$ (220,000)	$ (84,000)

XML

Retirement Benefits (Schedule of Costs of Retirement Plans) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Retirement Benefits [Abstract]
Company Costs - Defined Contribution	$ 8,262	$ 8,039	$ 24,858	$ 23,790
Company Contributions - Multiemployer plan	$ 86	$ 73	$ 253	$ 220

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Retirement Benefits (Schedule of Net Periodic Benefit Costs) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Jun. 30, 2018	Jun. 30, 2017
Other Postretirement Benefit Plans [Member]
Defined Benefit Plan Disclosure [Line Items]
Service cost	$ 1	$ 4	$ 5	$ 11
Interest cost	291	311	874	933
Amortization of: Net (gains) losses	24	50	72	151
Amortization of: Prior service (benefit) cost	(40)	(40)	(119)	(119)
Curtailment (gain) loss			(330)
Net periodic retirement (benefit) cost	276	325	502	976
Contributions paid - other postretirement plans	595	592	1,830	2,011
Defined Benefit Pension Plan [Member]
Defined Benefit Plan Disclosure [Line Items]
Service cost	693	611	1,838	1,827
Interest cost	1,887	1,744	5,562	5,215
Expected return on plan assets	(3,607)	(3,288)	(10,817)	(9,832)
Amortization of: Net (gains) losses	224	594	670	1,774
Amortization of: Prior service (benefit) cost	177	95	532	287
Net periodic retirement (benefit) cost	(626)	(244)	(2,215)	(729)
Contributions paid - pensions	227	99	658	565
Defined Benefit Pension Plan [Member] | UNITED STATES
Defined Benefit Plan Disclosure [Line Items]
Service cost	410	419	1,232	1,256
Interest cost	1,501	1,439	4,503	4,318
Expected return on plan assets	(2,904)	(2,632)	(8,711)	(7,897)
Amortization of: Net (gains) losses	150	464	449	1,391
Amortization of: Prior service (benefit) cost	177	95	532	287
Net periodic retirement (benefit) cost	(666)	(215)	(1,995)	(645)
Contributions paid - pensions	0	0	0	0
Defined Benefit Pension Plan [Member] | Foreign Plan [Member]
Defined Benefit Plan Disclosure [Line Items]
Service cost	283	192	606	571
Interest cost	386	305	1,059	897
Expected return on plan assets	(703)	(656)	(2,106)	(1,935)
Amortization of: Net (gains) losses	74	130	221	383
Amortization of: Prior service (benefit) cost	0	0	0	0
Net periodic retirement (benefit) cost	40	(29)	(220)	(84)
Contributions paid - pensions	$ 227	$ 99	$ 658	$ 565

XML

Retirement Benefits (Schedule of estimated remaining cash contributions) (Details) $ in Thousands	Jun. 30, 2018 USD ($)
Other Postretirement Benefit Plans [Member]
Defined Benefit Plan Disclosure [Line Items]
Estimated future employer contributions in the currect fiscal year	$ 2,041
UNITED STATES | Defined Benefit Pension Plan [Member]
Defined Benefit Plan Disclosure [Line Items]
Estimated future employer contributions in the currect fiscal year	0
UNITED KINGDOM | Defined Benefit Pension Plan [Member]
Defined Benefit Plan Disclosure [Line Items]
Estimated future employer contributions in the currect fiscal year	155
JAPAN | Defined Benefit Pension Plan [Member]
Defined Benefit Plan Disclosure [Line Items]
Estimated future employer contributions in the currect fiscal year	0
GERMANY | Defined Benefit Pension Plan [Member]
Defined Benefit Plan Disclosure [Line Items]
Estimated future employer contributions in the currect fiscal year	$ 329

XML

Stockholders' Equity (Narrative) (Details) - USD ($)	3 Months Ended			6 Months Ended	9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Dec. 31, 2016	Mar. 31, 2018	Jun. 30, 2018	Jun. 30, 2017	Sep. 30, 2017
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Payments for repurchases of common stock					$ 0	$ 61,782,000
Number of shares available for future grants	1,300				1,300
Exercise prices of stock options outstanding	$ 45.20			$ 44.62	$ 45.20		$ 39.58
Total unrecognized compensation cost related to non-vested stock-based compensation arrangements	$ 10,938,000				$ 10,938,000
Unrecognized compensation cost is expected to be recognized over a weighted-average period					2 years
Forfeiture rate, Board of Directors	0.00%				0.00%
Forfeiture rate, non-Board of Directors	9.00%				9.00%
Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation award conditionally awarded date			Oct. 03, 2016
Stock-based compensation award conditionally awarded date approved			Jan. 25, 2017
Vested contractual term, in years					10 years
Vesting rate					25.00%
Employee stock-based compensation expense	$ 1,858,000	$ 1,817,000			$ 16,292,000	15,580,000
Vesting period, in years				4 years
2017 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Employee stock-based compensation expense			$ 0
2017 Authorization [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Authorized repurchase amount	$ 500,000,000				$ 500,000,000
Payments for repurchases of common stock				$ 0		$ 61,229,000
Repurchase period in years					3 years
Purchases of treasury stock, number of shares						886,000
10b5-1 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Purchases of treasury stock, number of shares						350,000
10b-18 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Purchases of treasury stock, number of shares						536,000

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Stockholders' Equity (Schedule of Assumptions Used in Estimate of Fair Value of Stock Option Awards) (Details) - $ / shares	9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Weighted-average grant date market value of Woodward stock	$ 78.91	$ 69.45
Weighted-average exercise price per share	$ 78.91	$ 62.64
Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected term	6 years 4 months 24 days	6 years
Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected term	8 years 8 months 12 days	8 years 8 months 12 days
Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Estimated dividend yield		0.70%
Stock Options [Member] | Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Estimated volatility	29.10%	31.50%
Estimated dividend yield	0.60%
Risk-free interest rate	2.10%	2.20%
Stock Options [Member] | Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Estimated volatility	32.70%	33.70%
Estimated dividend yield	0.80%
Risk-free interest rate	2.80%	2.50%

XML

Stockholders' Equity (Activity for Stock Option Awards) (Details) - $ / shares shares in Thousands	3 Months Ended	9 Months Ended
	Jun. 30, 2018	Jun. 30, 2018
Stock-Based Compensation
Number of options, beginning balance	5,880	5,236
Weighted Average Exercise Price Per Share, beginning balance	$ 44.62	$ 39.58
Options granted, Number of options		750
Options granted, Weighted Average Exercise Price Per Share		$ 78.91
Options exercised, Number of options	(158)	(255)
Options exercised, Weighted Average Exercise Price Per Share	$ 22.32	$ 27.81
Options forfeited, Number of options	(15)	(24)
Options forfeited, Weighted Average Exercise Price Per Share	$ 59.97	$ 58.27
Number of options, ending balance	5,707	5,707
Weighted Average Exercise Price Per Share, ending balance	$ 45.20	$ 45.20

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Stockholders' Equity (Changes in Nonvested Stock Options) (Details) - $ / shares shares in Thousands	3 Months Ended	9 Months Ended
	Jun. 30, 2018	Jun. 30, 2018
Stock-Based Compensation
Number of Options, beginning balance	2,022	2,072
Weighted-Average Grant Date Fair Value Per Share, beginning balance	$ 21.63	$ 18.61
Options granted, Number of options		750
Options granted, Weighted-Average Grant Date Fair Value Per Share		$ 25.66
Options vested, Number of options		(791)
Options vested, Weighted-Average Grant Date Fair Value Per Share		$ 17.57
Options forfeited, Number of options	(15)	(24)
Options forfeited, Weighted-Average Grant Date Fair Value Per Share	$ 20.85	$ 20.45
Number of Options, ending balance	2,007	2,007
Weighted-Average Grant Date Fair Value Per Share, ending balance	$ 21.64	$ 21.64

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Stockholders' Equity (Stock Options Vested, Or Expected to Vest and Are Exercisable) (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	9 Months Ended
	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2017
Stock-Based Compensation
Options outstanding, Number of options	5,707	5,880	5,236
Options outstanding, Weighted-Average Exercise Price	$ 45.20	$ 44.62	$ 39.58
Options outstanding, Weighted-Average Remaining Life in Years	5 years 9 months 18 days
Options outstanding, Aggregate Intrinsic Value	$ 182,230
Options vested and exercisable, Number of options	3,699
Options vested and exercisable, Weighted-Average Exercise Price Per Share	$ 36.25
Options vested and exercisable, Weighted-Average Remaining Life in Years	4 years 6 months
Options vested and exercisable, Aggregate Intrinsic Value	$ 150,207
Options vested and expected to vest, Number of options	5,628
Options vested and expected to vest, Weighted-Average Exercise Price Per Share	$ 44.89
Options vested and to expected vest, Weighted-Average Remaining Life in Years	5 years 8 months 12 days
Options vested and expected to vest, Aggregate Intrinsic Value	$ 181,384

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Segment Information (Narrative) (Details)	9 Months Ended
	Jun. 30, 2018 segment
Segment Information
Number of Reportable Segments	2

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Segment Information (Consolidated Net Sales and Earnings by Segment) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended	9 Months Ended
	Jun. 30, 2018	Jun. 30, 2017	Mar. 31, 2018	Jun. 30, 2018	Jun. 30, 2017
Segment Reporting Information [Line Items]
Net sales	$ 588,117	$ 548,622		$ 1,606,514	$ 1,491,897
Interest expense, net	(7,536)	(6,411)		(20,139)	(19,162)
Consolidated earnings before income taxes	54,417	68,687		140,551	165,982
Restructuring Costs			$ 17,013	17,013
Aerospace [Member]
Segment Reporting Information [Line Items]
Net sales	404,612	355,992		1,096,860	943,198
Segment earnings (loss)	82,199	67,173		198,721	172,277
Industrial [Member]
Segment Reporting Information [Line Items]
Net sales	183,505	192,630		509,654	548,699
Segment earnings (loss)	10,450	20,870		40,031	55,957
Unallocated Corporate [Member]
Segment Reporting Information [Line Items]
Segment earnings (loss)	$ (30,696)	$ (12,945)		$ (78,062)	$ (43,090)

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Segment Information (Consolidated Total Assets by Segment) (Details) - USD ($) $ in Thousands	Jun. 30, 2018	Sep. 30, 2017
Segment Reporting Information [Line Items]
Assets	$ 3,804,064	$ 2,757,109
Other unallocated assets	254,978	234,301
Property, plant and equipment, net	1,044,033	922,043
Aerospace [Member]
Segment Reporting Information [Line Items]
Assets	1,744,825	1,722,789
Industrial [Member]
Segment Reporting Information [Line Items]
Assets	1,677,724	695,264
Unallocated Corporate [Member]
Segment Reporting Information [Line Items]
Property, plant and equipment, net	$ 126,537	$ 104,755

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Subsequent Events (Narrative) (Details)	Jul. 31, 2018 $ / shares
Subsequent Events [Abstract]
Dividends Payable, Date Declared	Jul. 31, 2018
Dividends Payable, Amount Per Share	$ 0.1425
Dividends Payable, Date to be Paid	Sep. 04, 2018
Dividends Payable, Date of Record	Aug. 21, 2018

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Label	Element	Value
Revolving Credit Agreement [Member]
Debt Issuance Costs, Line of Credit Arrangements, Net	us-gaap_DebtIssuanceCostsLineOfCreditArrangementsNet	$ 2,259,000
Debt Issuance Costs, Line of Credit Arrangements, Net	us-gaap_DebtIssuanceCostsLineOfCreditArrangementsNet	$ 1,603,000