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.