Woodward Inc

RESULTS OFOPERATIONS

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

Other select financial data:

Net Sales

Consolidated net sales for the third quarter of fiscal year 2024 increased by $47,025, or 5.9%, compared to the same period of fiscal year 2023. Consolidated net sales for the first nine months of fiscal year 2024 increased by $332,265, or 15.5%, compared to the same period of fiscal year 2023.

Details of the changes in consolidated net sales are as follows:

In the Aerospace segment, the increase in net sales for the third quarter of fiscal year 2024 as compared to the same period of the prior fiscal year is attributable to price realization as well as increases in aftermarket sales, both commercial and defense, due to higher aircraft utilization.

The increase in net sales for the first nine months of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily attributable to price realization as well as increases in aftermarket sales, both commercial and defense, due to higher aircraft utilization, and increases in commercial OEM due to higher production rates.

In the Industrial segment, the increase in net sales for the third quarter of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily attributable to price realization as well as growth in power generation, partially offset by decreased oil and gas sales.

The increase in net sales for the first nine months of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily attributable to growth in transportation, particularly in the on-highway natural gas truck business in China, strong sales in power generation, and price realization, partially offset by a decrease in oil and gas sales.

Costs and Expenses

Cost of goods sold increased by $21,451 to $617,702 for the third quarter of fiscal year 2024, compared to $596,251, for the third quarter of fiscal year 2023. Cost of goods sold decreased to 72.9% of net sales for the third quarter of fiscal year 2024, compared to 74.5% of net sales for the third quarter of fiscal year 2023. The increase in cost of goods sold on an absolute basis in the third quarter of fiscal year 2024 compared to the same period of the prior fiscal year is primarily net inflationary impacts on material and labor costs.

Cost of goods sold increased by $151,564 to $1,801,037 for the first nine months of fiscal year 2024, compared to $1,649,473, for the first nine months of fiscal year 2023. Cost of goods sold decreased to 72.9% of net sales for the first nine months of fiscal year 2024, compared to 77.2% of net sales for the first nine months of fiscal year 2023. The increase in cost of goods sold on an absolute basis in the first nine months of fiscal year 2024 compared to the same period of the prior fiscal year is primarily due to higher sales volume and net inflationary impacts on material and labor costs.

The decrease in cost of goods sold as a percent of net sales in the third quarter and first nine months of fiscal year 2024 compared to the same periods of the prior fiscal year is primarily due to price realization.

Gross margin (as measured by net sales less cost of goods sold, divided by net sales) was 27.1% for the third quarter and first nine months of fiscal year 2024, compared to 25.5% for the third quarter of fiscal year 2023 and 22.8% for the first nine months of fiscal year 2023. The increase in gross margin for the third quarter and first nine months of fiscal year 2024 as compared to the same periods of the prior fiscal year is primarily attributable to higher sales volume and price realization, partially offset by net inflationary impacts on material and labor costs.

Selling, general, and administrative expenses increased by $8,829, or 13.6%, to $73,812 for the third quarter of fiscal year 2024, compared to $64,983 for the third quarter of fiscal year 2023. Selling, general, and administrative expenses as a percentage of net sales increased to 8.7% for the third quarter of fiscal year 2024, compared to 8.1% for the third quarter of fiscal year 2023. The increase in selling, general, and administrative expenses on an absolute basis for the third quarter of fiscal year 2024 compared to the same period of the prior fiscal year is primarily due to increased headcount and increased annual variable incentive compensation costs.

Selling, general, and administrative expenses increased by $26,022, or 12.8%, to $229,770 for the first nine months of fiscal year 2024, compared to $203,748 for the first nine months of fiscal year 2023. Selling, general, and administrative expenses as a percentage of net sales decreased to 9.3% for the first nine months of fiscal year 2024, compared to 9.5% for the first nine months of fiscal year 2023. The increase in selling, general, and administrative expenses on an absolute basis for the first nine months of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily due to increased headcount, increased annual variable incentive compensation costs, and increased expenses relating to business development activities.

Research and development costs increased by $3,695, or 10.5%, to $38,728 for the third quarter of fiscal year 2024, compared to $35,033 for the third quarter of fiscal year 2023. The increase in research and development costs for the third quarter of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily due to variability in the timing of projects and expenses. As a percentage of net sales, research and development costs increased to 4.6% for the third quarter of fiscal year 2024, as compared to 4.4% for the same period of the prior fiscal year.

Research and development costs increased by $5,953, or 6.0%, to $105,987 for the first nine months of fiscal year 2024, compared to $100,034 for the first nine months of fiscal year 2023. The increase in research and development costs for the first nine months of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily due to variability in the timing of projects and expenses. As a percentage of net sales, research and development costs decreased to 4.3% for the first nine months of fiscal year 2024, as compared to 4.7% for the first nine months of fiscal year 2023.

Our research and development activities extend across almost all of our customer base, and we anticipate ongoing variability in research and development costs due to the timing of customer business needs on current and future programs.

Interest expense decreased by $659, or 5.4%, to $11,516 for the third quarter of fiscal year 2024, compared to $12,175 for the third quarter of fiscal year 2023. Interest expense decreased by $1,680, or 4.6%, to $34,482 for the first nine months of fiscal year 2024, compared to $36,162 for the first nine months of fiscal year 2023. Interest expense as a percentage of net sales was 1.4% for each of the third quarter and first nine months of fiscal year 2024, compared to 1.5% for the third quarter of fiscal year 2023 and 1.7% for the first nine months of fiscal year 2023. The decrease in interest expense for the third quarter and first nine months of fiscal year 2024 as compared to the same periods of the prior fiscal year is primarily attributable to increased payments on our revolving credit facility during the third quarter and first nine months of fiscal year 2024. During the first six months of fiscal year 2024, we paid the entire balance of two series of private placement notes totaling $75,000.

Other income increased by $1,437 to $14,438 for the third quarter of fiscal year 2024, compared to $13,001 for the third quarter of fiscal year 2023. The increase in other income for the third quarter of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily attributable to increased earnings in our joint venture with General Electric.

Other income increased by $16,030 to $49,461 for the first nine months of fiscal year 2024, compared to $33,431 for the first nine months of fiscal year 2023. The increase in other income for the first nine months of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily attributable to increased earnings in our joint venture with General Electric and a non-recurring gain related to a previous acquisition that was recognized during the first nine months of fiscal year 2024.

Income taxes were provided at an effective rate on earnings before income taxes of 16.4% for the third quarter and 17.8% for the first nine months of fiscal year 2024, and 20.0% for the third quarter and 15.8% for the first nine months of fiscal year 2023.

The decrease in the effective tax rate for the third quarter of fiscal year 2024 compared to the same period of the prior fiscal year is primarily attributable to a larger stock-based compensation tax benefit in the current quarter. This decrease was partially offset by higher accrued future withholding taxes on unremitted foreign earnings in the current quarter.

The increase in the effective tax rate for the first nine months of fiscal year 2024 compared to the same period of the prior fiscal year is attributable to higher accrued future withholding taxes on unremitted foreign earnings in the current fiscal year. Additionally, the increase is attributable to a release of uncertain tax positions during the nine months ended June 30, 2023 that did not reoccur in fiscal year 2024. These increases were partially offset by a larger stock-based compensation tax benefit in the first nine months of fiscal year 2024.

Segment Results

The following table presents sales by segment:

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

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

Aerospace

Aerospace segment net sales increased by $37,029, or 7.7%, to $517,560 for the third quarter of fiscal year 2024, compared to $480,531 for the third quarter of fiscal year 2023. The increase in Aerospace segment net sales in the third quarter of fiscal year 2024 as compared to the same period of the prior fiscal year is attributable to price realization as well as increases in aftermarket sales, both commercial and defense, due to higher aircraft utilization.

Aerospace segment net sales increased by $162,595, or 12.4%, to $1,475,828 for the first nine months of fiscal year 2024, compared to $1,313,233 for the first nine months of fiscal year 2023. The increase in net sales for the first nine months of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily attributable to price realization as well as increases in aftermarket sales, both commercial and defense, due to higher aircraft utilization, and increases in commercial OEM due to higher production rates.

Defense OEM sales decreased in the third quarter and the first nine months of fiscal year 2024 as compared to the same periods of the prior fiscal year, primarily driven by reduced demand for fixed wing and rotorcraft platforms, partially offset by an increase in smart defense. Our defense aftermarket sales increased in the third quarter and first nine months of fiscal year 2024 compared to the same periods of the prior fiscal year, primarily driven by increased output and supply chain stabilization.

Aerospace segment earnings increased by $18,767, or 22.6%, to $101,842 for the third quarter of fiscal year 2024, compared to $83,075 for the third quarter of fiscal year 2023. Aerospace segment earnings increased by $67,472, or 31.9%, to $279,295 for the first nine months of fiscal year 2024, compared to $211,823 for the first nine months of fiscal year 2023.

The increase in Aerospace segment earnings was due to the following:

Aerospace segment earnings as a percentage of segment net sales were 19.7% for the third quarter and 18.9% for the first nine months of fiscal year 2024, compared to 17.3% for the third quarter and 16.1% for the first nine months of fiscal year 2023.

Industrial

Industrial segment net sales increased by $9,996, or 3.1%, to $330,128 for the third quarter of fiscal year 2024, compared to $320,132 for the third quarter of fiscal year 2023. The increase in Industrial segment net sales in the third quarter of fiscal year 2024 as compared to the same period of the prior fiscal year is primarily attributable to price realization as well as growth in power generation, partially offset by decreased oil and gas sales.

Industrial segment net sales increased by $169,670, or 20.6%, to $993,933 for the first nine months of fiscal year 2024, compared to $824,263 for the first nine months of fiscal year 2023. The increase in Industrial segment net sales for the first nine months of fiscal year 2024 as compared to the same period of the prior fiscal year was primarily attributable to growth in transportation, particularly in the on-highway natural gas truck business in China, as well as strong sales in power generation and price realization, partially offset by decreased oil and gas sales.

Demand for the remainder of fiscal year 2024 for on-highway natural gas trucks in China is expected to decline.

Industrial segment earnings increased by $1,520, or 2.6%, to $59,717 for the third quarter of fiscal year 2024, compared to $58,197 for the third quarter of fiscal year 2023. Segment earnings increased by $84,672, or 79.0%, to $191,842 for the first nine months of fiscal year 2024, compared to $107,170 for the first nine months of fiscal year 2023.

The increase in Industrial segment earnings was due to the following:

Industrial segment earnings as a percentage of segment net sales were 18.1% for the third quarter and 19.3% for the first nine months of fiscal year 2024, compared to 18.2% for the third quarter and 13.0% for the first nine months of fiscal year 2023. Industrial earnings in the third quarter of fiscal year 2024 remained relatively flat as compared to the same period of the prior fiscal year as a result of price realization, which was largely offset by inflation and unfavorable mix. Industrial earnings in the first nine months of fiscal year 2024 benefited significantly from increases in transportation due to increased demand for on-highway natural gas trucks in China as well as operational improvements including increased output and other efficiency gains.

Nonsegment

Nonsegment expenses increased by $5,800 to $29,675 for the third quarter of fiscal year 2024, compared to $23,875 for the third quarter of fiscal year 2023. The increase in nonsegment expenses for the third quarter of fiscal year 2024 as compared to the same period of the prior year was primarily due to increased annual variable incentive compensation costs.

Nonsegment expenses decreased by $17,784 to $88,709 for the first nine months of fiscal year 2024 compared to $106,493 for the first nine months of fiscal year 2023. The decrease in nonsegment expenses for the first nine months of fiscal year 2024 as compared to the same period of the prior year was primarily due to significant costs that occurred in the first nine months of fiscal year 2023 that did not reoccur in the first nine months of fiscal year 2024.

The significant charges that impacted nonsegment expenses are as follows:

Excluding these charges, nonsegment expenses increased $13,327 in the first nine months of fiscal year 2024 as compared to the same period of the prior fiscal year, primarily due to increased annual variable incentive compensation costs.