Woodward, Inc. (Form: 10-Q, Received: 01/25/2017 13:31:22)

Three-Months Ended

December 31,

Weighted-average treasury stock shares held for deferred compensation obligations

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 December 31, 2016 and for the three-months ended December 31, 2016 and December 31, 2015, 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 December 31, 2016, 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-months ended December 31, 2016 are not necessarily indicative of the operating results to be expected for other interim periods or for the full fiscal year. Dollar and share amounts contained in these Condensed Consolidated Financial Statements are in thousands, except per share amounts.

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

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

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

Note 2. New accounting standards

From time to time, the Financial Accounting Standards Board (“FASB”) or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an Accounting Standards Update (“ASU”).

In October 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.” ASU 2016-16 eliminates the current U.S. GAAP exception deferring the tax effects of intercompany asset transfers (other than inventory) until the transferred asset is sold to a third party or otherwise recovered through use. After adoption of ASU 2016-16, Woodward will recognize the tax consequences of intercompany asset transfers in the buyer’s and seller’s tax jurisdictions when the transfer occurs, even though the pre-tax effects of these transactions are eliminated in consolidation. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017 (fiscal year 2019 for Woodward), including interim periods within the year of adoption. Early adoption is allowed only in the first quarter of fiscal year 2017 or the first quarter of fiscal year 2018. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. Woodward is currently assessing the impact this guidance may have on its Condensed Consolidated Financial Statements.

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

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

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” and has subsequently issued several supplemental and/or clarifying ASUs (collectively “ASC 606”). ASC 606 prescribes a single common revenue standard that replaces most existing U.S. GAAP revenue recognition guidance. ASC 606 outlines a five-step model, under which Woodward will recognize revenue as performance obligations within a c ustomer 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, whic h 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 perio ds within the reporting period. Woodward may elect to adopt ASC 606 in fiscal year 2018 , but does not expect to do so. Upon adoption, Woodward must elect to adopt either retrospectively to each prior reporting period presented or using the cumulative effect transition method with the cumulative effect of initial adoption recognized at t he date of initial application. Woodward has not determined what transition method it will use.

Woodward is currently assessing the impact that the future adoption of ASC 606 may have on its Consolidated Financial Statements by analyzing its current portfolio of customer contracts, including a review of historical accounting policies and practices to identify potential differences in applying the guidance of ASC 606. Based on Woodward’s preliminary review of its customer contracts, Woodward expects that revenue on the majority of its customer contracts will continue to be recognized at a point in time, generally upon shipment of products, consistent with Woodward’s current revenue recognition model. Upon adoption of ASC 606, however, Woodward also believes some of its revenue s from sales of products and services to customers will be recognized over time, rather than at a point in time , due to the terms of certain customer contracts . Related to recognizing some revenue over time, inventory levels and accounts receivable balances will be impacted . As such, Woodward believes the adoption of ASC 606 may have an impact on both the timing of revenue recognition and various line items within the Consolidated Balance Sheet.

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
	December 31,
	2016		2015
Numerator:
Net earnings	$	46,548	$	25,820
Denominator:
Basic shares outstanding		61,559		63,054
Dilutive effect of stock options and restricted stock		2,112		1,398
Diluted shares outstanding		63,671		64,452
Income per common share:
Basic earnings per share	$	0.76	$	0.41
Diluted earnings per share	$	0.73	$	0.40

There were no stock option grants outstanding during the three-months ended December 3 1 , 2016 or 2015 that were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive .

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:

Note 4. Joint venture

On January 4, 2016, Woodward and General Electric Company (“GE”), acting through its GE Aviation business unit, consummated the formation of a strategic joint venture between Woodward and GE (the “JV”). The JV designs, develops and sources the fuel system 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 has 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 beginning January 4, 2017 subject to certain claw-back conditions. Neither Woodward nor GE contributed any tangible assets to the JV.

Woodward determined that the JV formation was not the culmination of an earnings event because Woodward has significant performance obligations to support the future operations of the JV. Therefore, Woodward recorded the $250,000 consideration received from GE , in January of 2016, for its purchase of a 50% equity interest in the JV as deferred income. The $250,000 deferred income will be recognized as an increase to net sales in proportion to revenue realized on sales of applicable fuel systems within the scope of the JV in a particular period as a percentage of total revenue expected to be realized by Woodward over the estimated remaining lives of the underlying commercial aircraft engine programs assigned to the JV. Unamortized deferred income realized upon the JV formation included accrued liabilities of $6,452 as of December 31, 2016 and $6,552 as of September 30, 2016 , and other liabilities of $236,791 as of December 31, 2016 and $238,187 as of September 30, 2016. Amortization of the deferred income recognized as an increase to sales was $1,496 for the three-months ended December 31, 2016.

Woodward and GE jointly manage the JV and any significant decisions and/or actions of the JV require the mutual consent of both parties. Neither Woodward nor GE has a controlling financial interest in the JV, but both Woodward and GE 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 $68 4 for the three -months ended December 3 1 , 2016 related to Woodward’s equity interest in the earnings of the JV. During the three -months ended December 31 , 2016, Woodward received no cash distributions from the JV . Woodward’s net investment in the JV , which is included in other assets, was $6,888 as of December 3 1 , 2016.

During the three -months ended December 3 1 , 2016, Woodward ’s n et sales include $15,302 of sales to the JV and a reduction to sales of $5,403 related to royalties paid to the JV by Woodward on sales by Woodward directly to third party aftermarket customers. The Condensed Consolidated Balance Sheets , included “Accounts receivable” of $5,145 a t December 3 1, 2016 and $5,326 at September 30, 2016 related to amounts the JV owed Woodward , and included “Accounts payable” of $5,012 at December 31, 2016 and $3,926 at September 30, 2016 related to amounts Woodward owed the JV.

Note 5. Financial instruments and fair value measurements

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

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

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

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

The table below presents information about Woodward’s financial assets that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques Woodward utilized to determine such fair value. Woodward had no financial liabilities required to be measured at fair value on a recurring basis as of December 3 1 , 2016 or September 30, 201 6 .



	At December 31, 2016								At September 30, 2016
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Financial assets:
Cash	$	71,894	$	-	$	-	$	71,894	$	80,959	$	-	$	-	$	80,959
Investments in money market funds		-		-		-		-		48		-		-		48
Investments in reverse repurchase agreements		313		-		-		313		83		-		-		83
Investments in term deposits with foreign banks		8,678		-		-		8,678		7,136		-		-		7,136
Equity securities		14,603		-		-		14,603		12,491		-		-		12,491
Total financial assets	$	95,488	$	-	$	-	$	95,488	$	100,717	$	-	$	-	$	100,717

Investments in money market funds: Woodward sometimes invests excess cash in money market funds not insured by the Federal Depository Insurance Corporation (“FDIC”). Woodward believes that the investments in money market funds are on deposit with creditworthy financial institutions and that the funds are highly liquid. The investments in money market funds are reported in “Cash and cash equivalents” at fair value, with realized gains from interest income recognized in earnings . 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.” 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 wit h creditworthy financial institutions. Such investments are reported in “Cash and cash equivalents” at fair value, with realized gains from inter est 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 .

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 (income) expense, net.” The trading securities are included in “Other assets.” 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.

Accounts receivable, accounts payable, the current portion of long-term debt, and short-term debt 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 December 31, 2016				At September 30, 2016
	Fair Value Hierarchy Level	Estimated Fair Value		Carrying Cost		Estimated Fair Value		Carrying Cost
Assets:
Notes receivable from municipalities	2	$	16,201	$	15,229	$	17,501	$	15,849
Investments in short-term time deposits	2		4,065		4,084		4,882		4,918
Liabilities:
Short-term borrowings	2		(150,000)		(150,000)		(150,000)		(150,000)
Long-term debt, excluding current portion	2	$	(590,556)	$	(571,852)	$	(617,857)	$	(579,244)

In fiscal years 2014 and 2013, Woodward received lon g-term notes from municipalities within the state s 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 2.9 % at December 31, 2016 and 2.2% at September 30, 2016.

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 fo r similar short-term time deposits of similar maturity. This is determined to be a level 2 input as defined by the U.S. GAAP fair valu e hierarchy. The interest rate used to estimate the fair value of the short-term time deposits was 6.6% at December 31, 2016 and 6.9 % at September 30, 2016 .

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 2.4 % at December 31, 2016 and 1.9% at September 30, 2016 .

Note 6. 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 creditworthy counterparties. 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.

Woodward did not enter into any derivatives or hedging transactions during the three-months ended December 31, 2016.

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 other comprehensive ( losses ) earnings (“accumulated OCI”), were net gains of $272 as of December 3 1 , 2016 and $290 as of September 30, 2016 .

The following table discloses the impact of derivative instruments in cash flow hedging relationships on Woodward’s Condensed Consolidated Statements of Earnings, recognized in interest expense:



	Three-Months Ended December 31,
	2016		2015
Amount of (income) expense recognized in earnings on derivative	$	(18)	$	29
Amount of (gain) loss recognized in accumulated OCI on derivative		-		-
Amount of (gain) loss reclassified from accumulated OCI into earnings		(18)		29

Based on the carrying value of the realized but unrecognized gains on terminated derivative instruments designated as cash flow hedges as of December 3 1 , 2016, Woodward expects to reclassify $ 72 of net unrecognized gains on terminated derivative instruments from accumulated other comprehensive (losses) earnings to earnings during the next twelve months.

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 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 aggregate principal amount of Woodward’s Series M Senior Notes due September 23, 2026. Woodward designated the €40,000 Series M Notes as a hedge of a foreign currency exposure of Woodward’s net investment in its Euro denominated functional currency subsidiaries. A foreign exchange gain on the Series M Notes of $2,814 for the three-months ended December 31, 2016 is included in foreign currency translation adjustments within total comprehensive (losses) earnings.

In June 2015, Woodward designated an intercompany loan of 160,000 Renminbi (“ RMB ”) between two wholly owned subsidiaries as a hedge of a foreign currency exposure of the net investment of the borrower in the lender. Unrealized foreign exchange gains on the loan of $862 is included in foreign currency translation adjustments within total comprehensive earnings for the three-months ended December 31, 2015. In June 2016, the intercompany loan was repaid .

In July 2016, Woodward designated a new intercompany loan of 160,000 RMB between two wholly owned subsidiaries as a hedge of a foreign currency exposure of the net investment of the borrower in the lender. Unrealized f oreign exchange gains on the loan of $1,016 for the three-months ended December 3 1 , 2016 are included in foreign currency translation adjustments within total comprehensive (losses) earnings.

Note 7. Supplemental statement of cash flows information



	Three-Months Ended December 31,
	2016		2015
Interest paid, net of amounts capitalized	$	10,317	$	14,878
Income taxes paid		6,047		3,667
Income tax refunds received		59		913
Non-cash activities:
Purchases of property, plant and equipment on account		6,130		26,666
Common shares issued from treasury to settle employee liabilities		1,767		-

Note 8 . Inventories



	December 31,		September 30,
	2016		2016
Raw materials	$	58,064	$	54,246
Work in progress		111,908		109,756
Component parts (1)		269,456		249,307
Finished goods		54,336		48,374
	$	493,764	$	461,683

(1)

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

Note 9. Property, plant, and equipment



	December 31,		September 30,
	2016		2016
Land and land improvements	$	87,294	$	87,696
Buildings and building improvements		525,710		527,704
Leasehold improvements		14,662		15,213
Machinery and production equipment		481,041		484,315
Computer equipment and software		122,418		117,984
Office furniture and equipment		29,133		29,344
Other		19,121		18,969
Construction in progress		92,516		88,909
		1,371,895		1,370,134
Less accumulated depreciation		(494,818)		(493,784)
Property, plant, and equipment, net	$	877,077	$	876,350

I ncluded in “Office furniture and equipment” and “Other” is $1,653 at December 31, 2016 and September 30, 2016, of gross a ssets acquired on capital leases, and accumulated depreciation included $425 at December 31, 2016 and $322 at September 30, 2016 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 in anticipation of beginning serial production of new narrow-body product lines beginning in fiscal year 2017 for its Aerospace segment. This campus is intended to support Woodward’s expected growth in its Aerospace segment over the next ten years and beyond, required 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 $34,207 at December 3 1 , 201 6 and $26,741 at September 30, 2016 associated with new equipment purchases for the second campus.

For the three-months ended December 3 1 , 2016 and 201 5 , Woodward had depreciation expense as follows:

F or the three-months ended December 3 1 , 2016 and 201 5 , Woodward capitalized interest that would have otherwise been included in interest expense of the following:

Note 1 0 . Goodwill



	September 30, 2016		Effects of Foreign Currency Translation		December 31, 2016
Aerospace	$	455,423	$	-	$	455,423
Industrial		100,261		(2,384)		97,877
Consolidated	$	555,684	$	(2,384)	$	553,300

Woodward tests goodwill for impairment at the reporting unit level on an annual basis and more often if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Woodward completed its annual goodwill imp airment test as of July 31, 2016 during the quarter e nded September 30, 2016. Woodward determined it was appropriate to aggregate certain components of the same operating segment into a single reporting unit. The fair value of each of Woodward’s reporting units was determined using a discounted cash flow method. This method represents a level 3 input and incorporates various estimates and assumptions, the most significant being projected revenue growth rates, earnings margins, future tax rates, and the present value, based on an estimated weighted-average cost of capital (or the discount rate) and terminal growth rate, of forecasted cash flows. Management projects revenue growth rates, earnings margins and cash flows based on each reporting unit’s current operational results, expected performance and operational strategies over a ten-year period. These projections are adjusted to reflect current economic conditions and demand for certain products, and require considerable management judgment.

Forecasted cash flows used in the July 31, 2016 impairment test were discounted using weighted-average cost of capital assumptions ranging from 8.91% to 11.49% . The terminal values of the forecasted cash flows were calculated using the Gordon Growth Model and assumed an annual compound growth rate after ten years of 3.71% . These inputs, which are unobservable in the market, represent management’s best estimate of what market participants would use in determining the present value of the Company’s forecasted cash flows. Changes in these estimates and assumptions can have a significant impact on the fair value of forecasted cash flows. Woodward evaluated the reasonableness of the reporting units’ resulting fair values utilizing a market multiple method.

The results of Woodward’s goodwill impairment tests performed as of July 31, 2016 did not indicate impairment of any of Woodward’s reporting units.

Note 11 . Intangible assets, net



	December 31, 2016						September 30, 2016
	Gross Carrying Value		Accumulated Amortization		Net Carrying Amount		Gross Carrying Value		Accumulated Amortization		Net Carrying Amount
Customer relationships and contracts:
Aerospace	$	282,225	$	(138,408)	$	143,817	$	282,225	$	(134,158)	$	148,067
Industrial		40,693		(33,530)		7,163		40,969		(33,509)		7,460
Total	$	322,918	$	(171,938)	$	150,980	$	323,194	$	(167,667)	$	155,527

Intellectual property:
Aerospace	$	-	$	-	$	-	$	-	$	-	$	-
Industrial		19,156		(17,734)		1,422		19,435		(17,876)		1,559
Total	$	19,156	$	(17,734)	$	1,422	$	19,435	$	(17,876)	$	1,559

Process technology:
Aerospace	$	76,605	$	(44,703)	$	31,902	$	76,605	$	(43,229)	$	33,376
Industrial		22,596		(16,344)		6,252		22,965		(16,200)		6,765
Total	$	99,201	$	(61,047)	$	38,154	$	99,570	$	(59,429)	$	40,141

Other intangibles:
Aerospace	$	-	$	-	$	-	$	-	$	-	$	-
Industrial		1,168		(791)		377		1,246		(823)		423
Total	$	1,168	$	(791)	$	377	$	1,246	$	(823)	$	423

Total intangibles:
Aerospace	$	358,830	$	(183,111)	$	175,719	$	358,830	$	(177,387)	$	181,443
Industrial		83,613		(68,399)		15,214		84,615		(68,408)		16,207
Consolidated Total	$	442,443	$	(251,510)	$	190,933	$	443,445	$	(245,795)	$	197,650

For the three-months ended December 31, 2016 and 2015, Woodward recorded amortization expense associated with intangibles of the following:



	Three-Months Ended
	December 31,
	2016		2015
Amortization expense	$	6,458	$	6,946

Future amortization expense associated with intangibles is expected to be:



Year Ending September 30:
2017 (remaining)	$	19,279
2018		24,907
2019		23,071
2020		20,332
2021		18,393
Thereafter		84,951
	$	190,933

Note 12. 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 to up to $1,200,000 , subject to lenders’ participation. Borrowings under the Revolving Credit Agreement 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 $160,550 in principal amount of borrowings outstanding as of December 3 1 , 2016, at an effective interest rate of 1.66% and $156,700 in principal amount of borrowings outstanding as of September 3 0 , 201 6 , at an effective interest rate of 1.77% . As of December 3 1 , 2016, $150,000 of the borrowings under the Revolving Credit Agreement were classified as short-term based on Woodward’s intent and ability to pay this amount in the next twelve months.

Short-term borrowings

As of December 31, 2016 , a Chinese subsidiary of Woodward has a local uncommitted credit facility with the Hong Kong and Shanghai Banking Company under which it has the ability to borrow up to either $22,700 , or the local currency equivalent of $22,700 , up to the amount of a parent guarantee from Woodward. The Chinese subsidiary may utilize the local facility for cash borrowings to support its operating cash needs. Local currency borrowings on the Chinese credit facility are charged interest at the prevailing interest rate offered by the People’s Bank of China on the date of borrowing, plus a margin equal to 15% of that prevailing rate . U.S. dollar borrowings on the credit facility are charged interest at the lender’s cost of borrowing rate at the date of borrowing, plus 3% . The Chinese subsidiary had no outstanding cash borrowings against the local credit facility at December 31, 2016 and September 30, 2016.

A s of December 31, 2016, the Brazilian s ubsidiary of Woodward had a local uncommitted credit facility with the Banco J.P . Morgan S.A. under which it had the ability to borrow up to 52,000 Brazilian Real. Any cash borrowings under the local Brazilian credit facility are secured by a parent guarantee from Woodward. The Brazilian subsidiary may utilize the local facility to support its operating cash needs. Local currency borrowings on the Brazilian credit facility are charged interest at the lender’s cost of borrowing rate at the date of borrowing, plus 1.75%. On January 5, 2017, the Brazilian subsidiary of Woodward entered into an amendment to the original credit facility to extend the maturity date until July 14, 2017 and decrease the maximum borrowing capacity to 1,000 Brazilian Real. The Brazilian subsidiary had no outstanding cash borrowings against the local credit facility at December 31, 2016 and September 30, 2016.

Woodward also 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. There were no borrowings outstanding as of December 31, 2016 and September 30, 2016 on Woodward’s other foreign lines of credit and foreign overdraft facilities.

Long-term debt



	December 31,		September 30,
	2016		2016
Revolving credit facility - Floating rate (LIBOR plus 0.85% - 1.65%), due April 2020, unsecured	$	160,550	$	156,700
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		42,076		44,886
Series N notes – 1.31% due September 2028; unsecured		80,995		86,406
Series O notes – 1.57% due September 2031; unsecured		45,231		48,252
Total debt		721,852		729,244
Less: Current portion of long-term debt		(150,000)		(150,000)
Unamortized debt issuance costs		(1,974)		(2,091)
Long-term debt, less current portion	$	569,878	$	577,153

The Notes

In October 2008 , Woodward entered into a note purchase agreement relating to the Series D Notes (the “2008 Notes”). In April 2009 , Woodward entered into a note purchase agreement relating to the Series F Notes (the “2009 Notes”).

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 pr ivate 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” , and together with the 2008 Notes, 2009 Notes and the First Closing Notes, the “USD 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 aggregate principal amount of Woodward’s Series M Senior Notes (the “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 USD Notes, collectively, the “Notes”).

Interest on the 2008 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 2009 Notes is payable semi-annually on April 15 and October 15 of each year until all principal is paid. Interest on the 2016 Notes will be payable semi-annually on March 23 and September 23 of each year, commencing on March 23, 2017, 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 al l principal is paid. As of December 3 1 , 2016, the Series J Notes bore interest at an effective rate of 2.16% .

Debt Issuance Costs

Unamortized debt issuance costs associated with the Notes of $1,974 as of December 31, 2016 and $2,091 as of September 30, 2016 were recorded as a reduction in “Long-term debt, less current portion” in the Condensed Consolidated Balance Sheets. Unamortized debt issuance costs of $2,915 associated with the Revolving Credit Agreement as of December 31, 2016 and $3,134 as of September 30, 2016 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.

Note 1 3 . Accrued liabilities



	December 31,		September 30,
	2016		2016
Salaries and other member benefits	$	47,677	$	87,197
Warranties		15,528		15,993
Interest payable		5,789		9,071
Current portion of acquired performance obligations and unfavorable contracts (1)		2,910		2,910
Accrued retirement benefits		2,503		2,505
Current portion of loss reserve on contractual lease commitments		1,840		1,840
Current portion of deferred income from JV formation (Note 4)		6,452		6,552
Deferred revenues		7,577		5,779
Taxes, other than income		9,289		14,580
Other		16,258		10,200
	$	115,823	$	156,627

(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.

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 December 31,
		2016		2015
Warranties, beginning of period	$	15,993	$	13,741
Expense, net of recoveries		1,923		3,236
Reductions for settling warranties		(2,032)		(3,469)
Foreign currency exchange rate changes		(356)		(138)
Warranties, end of period	$	15,528	$	13,370

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. During the first quarter of fiscal year 2016 Woodward fully vacated the Skokie facility and therefore recorded a charge of $8,165 to recognize a loss reserve against the estimated remaining contractual lease commitments, less anticipated sublease income.

The summary for the activity in the loss reserve during the three -months ended December 3 1 , 2016 is as follows:



	Three-Months Ended December 31,
		2016		2015
Loss reserve on contractual lease commitments, beginning of period	$	9,242	$	2,464
Additions		-		8,165
Payments		(402)		-
Loss reserve on contractual lease commitments, end of period	$	8,840	$	10,629

Other liabilities included $7,000 of accrued loss reserve on contractual lease commitments that are not expected to be settled or paid within twelve months as of December 3 1 , 2016.

Note 14 . Other liabilities



	December 31,		September 30,
	2016		2016
Net accrued retirement benefits, less amounts recognized within accrued liabilities	$	70,549	$	70,479
Noncurrent portion of deferred income from JV formation (1)		236,791		238,187
Total unrecognized tax benefits, net of offsetting adjustments (Note 16)		12,541		17,239
Acquired unfavorable contracts (2)		2,859		3,148
Deferred economic incentives (3)		15,685		16,196
Loss reserve on contractual lease commitments (4)		7,000		7,402
Other		13,004		15,573
	$	358,429	$	368,224

(1)

See Note 4, Joint venture for more information on the deferred income from JV formation.

(2)

In connection with the Duarte business 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.

(3)

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.

(4)

See Note 13, Accrued liabilit i es for more information on the loss reserve on contractual lease commitments.

Note 15 . Other (income) expense, net



	Three-Months Ended
	December 31,
	2016		2015
Equity interest in the earnings of the JV (Note 4)	$	(684)	$	-
Net gain on sales of assets		(3,699)		(1,602)
Rent income		(73)		(101)
Net gains on investments in deferred compensation program		(24)		(304)
Other		(108)		(2)
	$	(4,588)	$	(2,009)

Note 1 6 . Income taxes

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.

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.

On December 7, 2016, the U.S. Treasury issued regulations under Internal Revenue Code Section 9 87 (“Section 987 Regulations”) which clarify how companies calculate foreign currency translation gains and losses for income tax purposes for branches whose accounting records are kept in a currency other than the currency of the company . The issuance of these Section 987 Regulations had no significant impact on Woodward’s Condensed Consolidated Financial Statements for the three months ended December 31, 2016.

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



	Three-Months Ended
	December 31,
	2016		2015
Earnings before income taxes	$	47,059	$	27,956
Income tax expense		511		2,136
Effective tax rate		1.1%		7.6%

The decrease in the year-over-year effective tax rate for the three-months ended December 31, 2016 is primarily attributable to the impact in the quarter of the repatriation to the U.S. of certain net foreign profits and losses. The U.S. foreign tax credits available as a result of the repatriation of the foreign net earnings is greater than the U.S. taxes payable on these net foreign earnings. The excess U.S. foreign tax credits are expected to be used to offset U.S. taxes on other foreign source income.

The decrease in the year-over-year effective tax rate caused by the repatriated earnings was partially offset by the retroactive benefit of the U.S. research and experimentation credit (“R&E credit”) pursuant to the December 18, 2015 enactment of the Protecting Americans from Tax Hikes (PATH) Act of 2015, which was included in the effective tax rate for the first quarter of fiscal year 2016 but did not repeat in the first quarter of fiscal year 2017.

Gross unrecognized tax benefits were $18,579 as of December 31, 2016, and $23,526 as of September 30, 2016. Included in the balance of unrecognized tax benefits were $11,460 as of December 31, 2016 and $11,426 as of September 30, 2016 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 $3,373 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 $1,460 as of December 31, 2016 and $1,273 as of September 30, 2016.

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 in the United States include fiscal years 2013 and thereafter . Woodward is currently under examination by the Internal Revenue Service for fiscal year 2014 . Woodward has concluded U.S. federal income tax examinations through fiscal year 2012. Woodward is generally subject to U.S. state income tax examinations for fiscal years 2012 and the periods thereafter.

Note 1 7 . 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 foreign plans.

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

Defined benefit plans

Woodward has defined benefit plans that provide pension benefits for certain retired employees in the United States, the United Kingdom, and Japan. 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. Life insurance 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.

U.S. GAAP requires that, for obligations outstanding as of September 30, 2016, 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 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 may 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 quarter of fiscal year 2017. Woodward expects to make 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 December 31,
	United States				Other Countries				Total
	2016		2015		2016		2015		2016		2015
Service cost	$	419	$	674	$	192	$	186	$	611	$	860
Interest cost		1,439		1,317		296		435		1,735		1,752
Expected return on plan assets		(2,632)		(2,542)		(641)		(697)		(3,273)		(3,239)
Amortization of:
Net actuarial loss		464		323		127		65		591		388
Prior service cost		96		96		-		-		96		96
Net periodic retirement pension benefit	$	(214)	$	(132)	$	(26)	$	(11)	$	(240)	$	(143)
Contributions paid	$	-	$	-	$	365	$	389	$	365	$	389

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



	Three-Months Ended
	December 31,
	2016		2015
Service cost	$	4	$	5
Interest cost		311		262
Amortization of:
Net actuarial loss		50		39
Prior service benefit		(40)		(40)
Net periodic other postretirement cost	$	325	$	266
Contributions paid	$	615	$	381

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 2017 may differ from the current estimate. Woodward estimates its remaining cash contributions in fiscal year 2017 will be as follows:



Retirement pension benefits:
United States	$	-
United Kingdom		323
Japan		-
Other postretirement benefits		3,424

Multiemployer defined benefit plans

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

Note 18 . Stockholders’ equity

Stock repurchase program

common stock on the open market or in privately negotiated transactions over a three -year period that will end in 2019 (the “2016 Authorization”). Under the 2016 Authorization, i n the first quarter of fiscal year 2017, Woodward purchased 350 shares of its common stock for $24,004 pursuant to a 10b5-1 plan.

In the first quarter of fiscal year 2016, Woodward executed a 10b5-1 plan to repurchase up to $125,000 of its common stock for a period that ended on April 20, 2016. During the first quarter of fiscal year 2016, Woodward purchased 624 shares of its common stock for $30,712 pursuant to the 10b5-1 plan under the prior stock repurchase program, which was terminated in November 2016 .

Stock -based compensation

Provisions governing outstanding stock option awards are included in 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. The 2006 Plan, which was approved by Woodward’s stockholders and became effective January 25, 2006, expired in fiscal year 2016. No further grants will be made under either the 2002 Plan or the 2006 Plan.

Woodward’s stockholders approved a successor plan to the 2006 Plan (the “2017 Plan”) at the January 25, 2017 Annual Stockholder Meeting. As of September 14, 2016 , the effective date of the 2017 Plan, Board of Directors delegated authority to administer the 2017 Plan to the compensation committee of the board (the “Committee”), including, but not limited to, the power to determine the recipients of awards and the terms of those awards. The Committee approved issuance of options under the 2017 Plan, with an award date of October 3, 2016 conditional 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 was recognized on these stock options during the three months ended December 31, 2016. As of December 31, 2016, 773 stock options awards were approved but not granted.

Stock options

Woodward granted no stock options in the first quarter of fiscal year 2017. Previous stock options granted under the 2006 Plan were granted with an exercise price equal to the market price of Woodward’s stock at the date of grant, a ten -year term, and generally a four -year vesting schedule at a rate of 25 % per year.

The following is a summary of the activity for stock option awards during the three-months ended December 3 1 , 2016:



	Three-Months Ended
	December 31, 2016
	Number of options		Weighted-Average Exercise Price per Share
Options, beginning balance		4,944	$	35.35
Options granted		-		n/a
Options exercised		(139)		34.83
Options forfeited		(13)		42.19
Options, ending balance		4,792		35.35

Changes in non-vested stock options during the three-months ended December 3 1 , 2016 were as follows:



	Three-Months Ended
	December 31, 2016
	Number of options		Weighted-Average Grant Date Fair Value Per Share
Options outstanding, beginning balance		2,075	$	14.90
Options granted		-		n/a
Options vested		(758)		15.24
Options forfeited		(13)		14.47
Options outstanding, ending balance		1,304		14.70

Information about stock options that have vested, or are expected to vest, and are exercisable at December 31 , 2016 was as follows:



	Number		Weighted- Average Exercise Price		Weighted- Average Remaining Life in Years		Aggregate Intrinsic Value
Options outstanding		4,792	$	35.35		5.9	$	161,511
Options vested and exercisable		3,488		32.83		5.0		126,348
Options vested and expected to vest		4,719		35.25		5.8		159,525

Restricted Stock

In the first quarter of fiscal year 2014, Woodward granted an award of 24 shares of restricted stock to its Chief Executive Officer and President, Thomas A. Gendron. Subject to Mr. Gendron’s continued employment by the Company, 100% of these shares of restricted stock will vest following the end of the Company’s fiscal year 2017 if a specified cumulative earnings per share (“EPS”) target is met or exceeded for fiscal years 2014 through 2017 . If this EPS target is not met, all shares of restricted stock will be forfeited by Mr. Gendron. The shares of restricted stock were awarded to Mr. Gendron pursuant to a form restricted stock agreement approved by Woodward’s Compensation Committee of the Board of Directors.

A summary of the activity for restricted stock awards in the three-months ended December 3 1 , 2016 follows:



	Three-Months Ended
	December 31, 2016
		Number		Fair Value per Share
Beginning balance		24	$	39.43
Shares granted		-		n/a
Shares vested		-		n/a
Shares forfeited		-		n/a
Ending balance		24		39.43

Stock-based compensation cost

Woodward recognizes stock compensation expense on a straight-line basis over the requisite service period. Pursuant to form stock option agreements used by the Company, 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 on the date of grant.

At December 31 , 2016, there was approximately $6,820 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements, both stock options and restricted stock awards, granted under the 2002 Plan and the 2006 Plan (for which no further grants will be made under either plan). The pre-vesting forfeiture rates for purposes of determining stock-based compensation cost 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 2.1 years.

Note 19. 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 where it believes that it is probable the matter will result in a loss when ultimately resolved using estimates of the most likely amount of loss.

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 these 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 such officers.

Note 20 . Segment information

Woodward serves the aerospace, industrial and energy 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.

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 costs, 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
	December 31,
	2016		2015
Segment external net sales:
Aerospace	$	266,680	$	268,599
Industrial		176,214		176,511
Total consolidated net sales	$	442,894	$	445,110
Segment earnings:
Aerospace	$	46,877	$	43,486
Industrial		17,998		21,551
Total segment earnings		64,875		65,037
Nonsegment expenses		(11,381)		(30,620)
Interest expense, net		(6,435)		(6,461)
Consolidated earnings before income taxes	$	47,059	$	27,956

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:



	December 31, 2016		September 30, 2016
Segment assets:
Aerospace	$	1,611,306	$	1,637,522
Industrial		663,886		705,169
Total segment assets		2,275,192		2,342,691
Unallocated corporate property, plant and equipment, net		89,990		89,988
Other unallocated assets		211,033		209,683
Consolidated total assets	$	2,576,215	$	2,642,362

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:

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

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 level 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; and

pension and other postretirement plan assumptions and future contributions.

Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including:

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

global economic uncertainty and instability in the financial markets;

our ability to 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;

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

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, 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 pol itical 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;

our operations may be adversely affected by information systems interruptions or intrusions; and

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

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

Unless we have indicated otherwise or the context otherwise requires, references in this Quarterly Report on Form 10-Q (this “Form 10-Q”) to “Woodward,” “the Company,” “we,” “us,” and “our” refer to Woodward, Inc. and its consolidated subsidiaries.

Except where we have otherwise indicated or the context otherwise requires, amounts presented in this Form 10-Q are in thousands, except per share amounts.

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

O VERV IEW

Operational Highlights

Net sales for the first quarter of fiscal year 2017 were $442,894, a decrease of 0.5% from $445,110 for the prior year first quarter. Aerospace segment sales for the first quarter of fiscal year 2017 were down 0.7% to $266,680, compared to $268,599 for the first quarter of the prior fiscal year. Industrial segment sales for the first quarter of fiscal year 2017 were down 0.2% to $176,214, compared to $176,511 for the first quarter of the prior fiscal year.

Net earnings for the first quarter of fiscal year 2017 were $46,548, or $0.73 per diluted share, compared to $25,820, or $0.40 per diluted share, for the first quarter of fiscal year 2016. Net earnings for the first quarter of fiscal year 2016 included approximately $16,100 of special charges related to our efforts to consolidate facilities, reduce costs and address current market conditions, which was equal to approximately $9,900 net of tax. The effective tax rate in the first quarter of fiscal year 2017 was 1.1% compared to 7.6% for the first quarter of the prior fiscal year.

Earnings before interest and taxes (“EBIT”) for the first quarter of fiscal year 2017 was $53,494, up 55.4% from $34,417 in the first quarter of fiscal year 2016. Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the first quarter of fiscal year 2017 was $72,407, up 40.7% from $51,479 for the first quarter of fiscal year 2016. EBIT and EBITDA for the first quarter of fiscal year 2016 included the special charges of approximately $16,100 discussed above.

Aerospace segment earnings as a percent of segment net sales increased to 17.6% in the first quarter of fiscal year 2017 from 16.2% in the first quarter of the prior fiscal year. Industrial segment earnings as a percent of segment net sales decreased to 10.2% in the first quarter of fiscal year 2017 from 12.2% in the first quarter of the prior fiscal year.

Liquidity Highlights

Net cash provided by operating activities f or the first quarter of fiscal year 2017 was $52,351 , compared to $ 37,360 for the first quarter of fiscal year 201 6 . The increase in net cash provided by operating activities is primarily attributable to higher earnings.

For the first quarter of fiscal year 2017, f ree cash fl ow, which we define as net cash flows provided by operating activities less payments for property, plant and equipment, was $31,293 , compared to $4,229 for the first quarter of fiscal year 2016. The increase is primarily attributable to higher earnings and lower payments for property, plant and equipment in the first quarter of fiscal year 2017 as compared to the first quarter of fiscal year 2016.

At December 3 1 , 201 6 , we held $ 80,885 in cash and cash equivalents, and had total outstanding debt of $ 721,852 with additional borrowing availability of $ 830,589 , net of outstanding letters of credit, under our revolving credit agreement. At December 31, 2016, we had additional borrowing capacity of $ 43,505 under various foreign lines of credit and foreign overdraft facilities.

RESULTS OF OP ERATIONS

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



	Three-Months Ended
	December 31, 2016		% of Net Sales		December 31, 2015		% of Net Sales
Net sales	$	442,894	100	%	$	445,110	100	%
Costs and expenses:
Cost of goods sold		327,194	73.9			333,377	74.9
Selling, general, and administrative expenses		33,796	7.6			40,782	9.2
Research and development costs		26,540	6.0			31,597	7.1
Amortization of intangible assets		6,458	1.5			6,946	1.6
Interest expense		6,840	1.5			6,908	1.6
Interest income		(405)	(0.1)			(447)	(0.1)
Other (income) expense, net		(4,588)	(1.0)			(2,009)	(0.5)
Total costs and expenses		395,835	89.4			417,154	93.7
Earnings before income taxes		47,059	10.6			27,956	6.3
Income tax expense		511	0.1			2,136	0.5
Net earnings	$	46,548	10.5		$	25,820	5.8

Other select financial data:



	December 31,		September 30,
	2016		2016
Working capital	$	468,319	$	463,811
Short-term borrowings and current portion of long-term debt		150,000		150,000
Total debt, net of unamortized debt issuance costs		719,878		727,153
Total stockholders' equity		1,222,368		1,212,595

Net Sales

Consolidated net sales for the first quarter of fiscal year 2017 decreased by $2,216, or 0.5%, compared to the same period of fiscal year 2016. Details of the changes in consolidated net sales are as follows:



Consolidated net sales for the period ended December 31, 2015	$	445,110
Aerospace volume		(4,337)
Industrial volume		2,183
Effects of changes in price and sales mix		109
Effects of changes in foreign currency rates		(171)
Consolidated net sales for the period ended December 31, 2016	$	442,894

The decrease in net sales for the first quarter of fiscal year 2017 was primarily attributable to commercial aftermarket being down relative to strong comparable commercial aftermarket sales in the prior year’s first quarter in the Aerospace segment, which was partially offset by increased heavy frame gas turbine aftermarket sales in the Industrial segment during the first quarter of fiscal year 2017 as compared to the first quarter of fiscal year 2016.

Costs and Expenses

Costs and expenses for the first quarter of fiscal year 2016 include d special charges totaling approximately $16,100 ($13,300 included in cost of goods sold, $1,700 included in selling, general and administrative expenses, and $1,100 included

in research and development costs) related to our efforts to consolidate facilities, reduce costs and address current market conditions in fiscal year 2016. There were no comparable costs and expenses recorded in the first quarter of fiscal year 2017.

Cost of goods sold de creased by $6,183 to $327,194, or 73.9% of net sales, for the first quarter of fiscal year 2017 from $333,377, or 74.9% of net sales, for the first quarter of fiscal year 2016. The decrease in cost of goods sold is primarily attributable to the inclusion in the first quarter of fiscal year 2016 of approximately $13,300 of special charges, as described above. This decrease was partially offset by increased cost of goods sold due to planned facility ramp-up costs in our Aerospace segment and planned new facility expenses for our new Colorado facilities.

G ross margin (as measured by net sales less cost of goods sold, divided by net sales) was 26.1% for the first quarter of fiscal year 2017, compared to 25.1% for the first quarter of fiscal year 2016. Gross margin for the first quarter of fiscal year 2017 was higher compared to the first quarter of fiscal year 2016, primarily related to the inclusion in cost of goods sold of approximately $13,300 of special charges in the first quarter of fiscal year 2016, partially offset by planned facility ramp-up costs in both our Aerospace and Industrial segment s .

Selling, general, and administrative expenses decreased by $6,986, or 17.1%, to $33,796 for the first quarter of fiscal year 2017 as compared to $40,782 for the first quarter of fiscal year 2016. Selling, general, and administrative expenses as a percentage of net sales was 7.6% for the first quarter of fiscal year 2017 as compared to 9.2% for the first quarter of fiscal year 2016. The decrease in selling, general and administrative expenses for the first quarter of fiscal year 2017 was primarily due to the timing of certain expenses . In addition, the first quarter of fiscal year 2016 included special charges of approximately $1,700 described above.

Research and development costs decreased by $5,057, or 16.0%, to $26,540 for the first quarter of fiscal year 2017, as compared to $31,597 for the first quarter of fiscal year 2016. Research and development costs decreased as a percentage of net sales to 6.0% for the first quarter of fiscal year 2017 as compared to 7.1% for the first quarter of fiscal year 2016. Research and development costs in the first quarter of fiscal year 2017 were lower due to less spen t on Aerospace programs as well as variability in the timing of projects and expenses. In addition, the first quarter of fiscal year 2016 included the special charges of approximately $1,100 described above. 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

Amortization of intangible assets decreased to $6,458 for the first quarter of fiscal year 2017, compared to $6,946 for the first quarter of fiscal year 2016. As a percentage of net sales, amortization of intangible assets were 1.5% for the first quarter of fiscal year 2017 as compared to 1.6% for the first quarter of fiscal year 2016. The decrease in amortization expense was primarily related to certain intangible assets becoming fully amortized during fiscal year 2016.

Interest expense was $6,840, or 1.5% of net sales, for the first quarter of fiscal year 2017, comparable to $6,908, or 1.6% of net sales, for the first quarter of fiscal year 2016. Interest expense was down slightly primarily attributable to a decrease in higher interest debt due to the retirement of $57,000 of 7.81% Series E notes in fiscal year 2016, partially offset by lower amounts of capitalized interest in the first quarter of fiscal year 2017 as compared to the first quarter of fiscal year 2016, as capital projects have been completed.

Income taxes were provided at an effective rate on earnings before income taxes of 1.1% for the first quarter of fiscal year 2017, compared to 7.6% for the first quarter of fiscal year 2016. The changes in components of our effective tax rate (as a percentage of earnings before income taxes) were attributable to the following:



	Three-Month
	Period
Effective tax rate for the period ended December 31, 2015	7.6	%
Retroactive benefit of research and experimentation credit	20.7
State and local taxes	(0.1)
Adjustment of prior period tax items	0.2
Taxes on international activities	(26.5)
Net excess income tax benefit from stock-based compensation	(1.1)
Other	0.3
Effective tax rate for the period ended December 31, 2016	1.1	%

these net foreign earnings. The excess U.S. foreign tax credits are expected to be used to offset U.S. taxes on other foreign source income.

Segment Results

The following table presents sales by segment:



	Three-Months Ended December 31,
	2016				2015
Net sales:
Aerospace	$	266,680	60.2	%	$	268,599	60.3	%
Industrial		176,214	39.8			176,511	39.7
Consolidated net sales	$	442,894	100.0	%	$	445,110	100.0	%

The following table presents earnings by segment:



	Three-Months Ended December 31,
	2016		2015
Aerospace	$	46,877	$	43,486
Industrial		17,998		21,551
Total segment earnings		64,875		65,037
Nonsegment expenses		(11,381)		(30,620)
Interest expense, net		(6,435)		(6,461)
Consolidated earnings before income taxes		47,059		27,956
Income tax expense		(511)		(2,136)
Consolidated net earnings	$	46,548	$	25,820

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



	Three-Months Ended December 31,
		2016	2015
Aerospace		17.6%	16.2%
Industrial		10.2%	12.2%

Aerospace

Aerospace segment net sales were $266,680 for the first quarter of fiscal year 2017, down 0.7% compared to $268,599 for the first quarter of fiscal year 2016. The decrease in segment net sales for the first quarter of fiscal year 2017 as compared to the first quarter of fiscal year 2016 was driven primarily by decreased commercial aftermarket sales in the first quarter of fiscal year 2017 relative to strong commercial af t ermarket sales in the prior fiscal year first quarter, partially offset by increased defense sales for aftermarket and or i ginal equipment manufacturer (“OEM”), and slightly increased commercial OEM sales in the current period. However, c ommercial aftermarket sales in the first quarter of fiscal year 2017 did benefit 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 sales, for both aftermarket and OEM, continued to increase in the first quarter of fiscal year 2017. Sales of smart weapons remain strong on increased customer demand in the first quarter of fiscal year 2017.

Commercial OEM sales were up slightly for the first quarter of fiscal year 2017 as compared to the first quarter of fiscal year 2016 due to next generation aircraft programs driving strong commercial OEM sales, partially offset by continuing weakness in business jets and rotorcraft.

Aerospace segment earnings increased by $3,391, or 7.8%, to $46,877 for the first quarter of fiscal year 2017, compared to $43,486 for the first quarter of fiscal year 2016. The net increase in Aerospace segment earnings for the first quarter of fiscal year 2017 was due to the following:



	Three-Month
	Period
Earnings for the period ended December 31, 2015	$	43,486
Sales volume		(2,128)
Price, sales mix and productivity		793
Decrease in research and development expenses		3,496
Other, net		1,230
Earnings for the period ended December 31, 2016	$	46,877

Aerospace segment earnings as a percentage of sales were 17.6% for the first quarter of fiscal year 2017, compared to 16.2% for the first quarter of fiscal year 2016. The increase was primarily attributable to decreased research and development expenses.

Industrial

Industrial segment net sales decreased by 0.2% to $176,214 for the first quarter of fiscal year 2017, compared to $176,511 for the first quarter of fiscal year 2016. Industrial sales continued to stabilize in the quarter. Increased heavy frame gas turbine sales for aftermarket programs were offset predominantly by lower wind turbine converter sales.

Industrial segment earnings d ecreased by $3,553, or 16.5%, to $17,998 for the first quarter of fiscal year 2017, compared to $21,551 for the first quarter of fiscal year 2016. The net decrease in Industrial segment earnings for the first quarter of fiscal year 2017 was due to the following:



	Three-Month
	Period
Earnings for the period ended December 31, 2015	$	21,551
Sales volume		631
Price, sales mix and productivity		(3,981)
Savings from fiscal year 2016 reorganization		2,862
New facility costs		(2,395)
Other, net		(670)
Earnings for the period ended December 31, 2016	$	17,998

Industrial segment earnings as a percentage of sales were 10.2% for the first quarter of fiscal year 2017, compared to 12.2% for the first quarter of fiscal year 2016. The decrease in segment earnings for the first quarter of fiscal year 2017 as compared to the first quarter of fiscal year 2016 was driven by the impact of unfavorable product mix. Savings from prior year cost reductions initiatives were offset by costs associated with our new facility in Colorado.

Nonsegment expenses

Nonsegment expenses decreased to $11,381 for the first quarter of fiscal year 2017, compared to $30,620 for the first quarter of fiscal year 2016. As a percent of sales, nonsegment expenses decreased to 2.6% of net sales for the first quarter of fiscal year 2017, compared to 6.9% of net sales for the first quarter of fiscal year 2016. The decrease in nonsegment expenses in the first quarter of fiscal year 2017 as compared to the first quarter of fiscal year 2016 is due to special charges taken in the first quarter of fiscal year 2016 totaling approximately $16,100 related to our efforts to consolidate facilities, reduce costs and address market conditions, which did not recur in the first quarter of fiscal year 2017, and timing differences in the recognition of certain expenses .

LIQUIDI TY 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 borrowing s under our credit facilities. Historically, we have also issued debt to supplement our cash needs or repay our other indebtedness.

We expect that cash generated from our operating activities, together with borrowings under our revolving credit facility, will be sufficient to fund our continuing operating needs, including capital expansion funding for the foreseeable future.

Our aggregate cash and cash equivalents were $ 80,885 at December 3 1 , 201 6 and $ 81,090 at September 30, 2016 , and our working capital was $468,319 at December 3 1 , 2016 and $ 463,811 at September 30, 2016. Of the $ 80,885 of cash and cash equivalents held at December 3 1 , 2016, $ 80,671 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 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.

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. 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. In addition, we have various foreign credit facilities, some of which are tied to net amounts on deposit at certain foreign financial institutions. These foreign credit facilities are reviewed annually for renewal. We use borrowings under these foreign credit facilities to finance certain local operations on a periodic basis. For further discussion of our $1,000,000 revolving credit facility and our other credit facilities, see Note 12, 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 December 3 1 , 201 6 , we had total outstanding debt of $ 721,852 consisting of amounts borrowed under our revolving credit facility and various series of unsecured notes due between 2018 and 2031 , with additional borrowing availability of $ 830,589 under our revolving credit facility, net of outstanding letters of credit, and additional borrowing availability of $ 43,505 under various foreign credit facilities. During January 2016, we amended a foreign credit facility to align with current business needs, which reduced our foreign borrowing capacity by approximately $16,000. For further discussion of our notes, see Note 12, 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 December 3 1 , 2016, we had $ 160,550 of borrowings outstanding under our revolving credit facility, of which $ 150,000 was classified as short-term and the remainder was classified as long-term. Revolving credit facility and short-term borrowing activity during the three-months ended December 3 1 , 2016 were as follows:



Maximum daily balance during the period	$	317,700
Average daily balance during the period	$	270,098
Weighted average interest rate on average daily balance		1.73%

We believe we were in compliance with all our debt covenants as of December 3 1 , 2016. 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, 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.

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, 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 2019 (the “2016 Authorization”). In the first quarter of fiscal year 2017, Woodward purchased 350 shares of its common stock for $24,004 under the 2016 Authorization, including $23,997 under a 10b5-1 plan.

For our Aerospace segment, in fiscal year 2015 we completed construction of a manufacturing and office building on a second campus in the greater-Rockford, Illinois area. This campus is intended to support the expected growth in our

Aerospace segment over the next ten years and beyond, as a result of our being awarded a substantial number of new system platforms, particularly on narrow-body aircraft. We have been purchasing production equipment for the second campus and anticipate continuing such purchases as new aircraft platforms ramp up to full production volumes.

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 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


	Three-Months Ended
	December 31,
	2016		2015
Net cash provided by operating activities	$	52,351	$	37,360
Net cash used in investing activities		(16,618)		(31,279)
Net cash used in financing activities		(22,192)		(1,379)
Effect of exchange rate changes on cash and cash equivalents		(13,746)		(2,482)
Net change in cash and cash equivalents		(205)		2,220
Cash and cash equivalents at beginning of year		81,090		82,202
Cash and cash equivalents at end of period	$	80,885	$	84,422

Net cash flows provided by operating activities for the first quarter of fiscal year 201 7 was $ 52,351 , compared to $ 37,360 in the first quarter of fiscal year 201 6 . The increase in net cash provided by operating activities is primarily attributable to increased net earnings.

Net cash flows used in investing activities for the first quarter of fiscal year 201 7 was $ 16,618 , compared to $ 31,279 in the first quarter of fiscal year 201 6 . The decrease in cash used in investing activities compared to the same period of the prior fiscal year is due to decreased payments for capital expenditures . Payments for property, plant and equipment decreased by $ 12,073 to $ 21,058 in the first quarter of fiscal year 201 7 as compared to $ 33,131 in the first quarter of fiscal year 201 6 related mainly to lower equipment purchases associated with the facilitization of our aerospace segment facility in the g reater-Rockford, Illinois area and completion of our industrial segment facility in Fort Collins, Colorado .

Net cash flows used in financing activities for the first quarter of fiscal year 201 7 was $ 22,192 , compared to $1,379 in the first quarter of fiscal year 201 6 . During the first quarter of fiscal year 201 7 , we had net debt borrowings of $ 3,748 compared to net debt borrowings of $ 34,402 in the first quarter of fiscal year 201 6 . We utilized $ 24,004 to repurchase 350 shares of our common stock in the first quarter of fiscal year 201 7 under the 2016 Authorization , compared to $ 30,712 to repurchase 624 shares of our common stock , under the then existing stock repurchase program, in the first quarter of fiscal year 201 6 .

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 quarter of fiscal year 201 7 .

NON-GAAP MEASURES

EBIT , EBITDA, and free cash flow are financial measures not prepared and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). 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.

Earnings based non-U.S. GAAP financial measures

Management uses EBIT to evaluate Woodward’s performance without financing and tax related considerations, as these elements may not fluctuate with operating results. Management uses EBITDA in evaluating Woodward’s operating

performance, making business decisions, including developing budgets, managing expenditures, forecasting future periods, and evaluating capital structure impacts of various strategic scenarios. Securities analysts, investors and others frequently use EBIT and EBITDA in their evaluation of companies, particularly those with significant property, plant, and equipment, and intangible assets subject to amortization.

EBIT and EBITDA for the three-months ended December 31, 2016 and December 31, 2015 were as follows:



	Three-Months Ended December 31,
	2016		2015
Net earnings (U.S. GAAP)	$	46,548	$	25,820
Income tax expense		511		2,136
Interest expense		6,840		6,908
Interest income		(405)		(447)
EBIT (Non-U.S. GAAP)		53,494		34,417
Amortization of intangible assets		6,458		6,946
Depreciation expense		12,455		10,116
EBITDA (Non-U.S. GAAP)	$	72,407	$	51,479

The use of these non-U.S. GAAP financial measures is not intended to be considered in isolation of, or as a substitute for, the financial information prepared and presented in accordance with U.S. GAAP. As EBIT and EBITDA exclude certain financial information compared with net earnings, the most comparable U.S. GAAP financial measure, users of this financial information should consider the information that is excluded. Our calculations of EBIT and EBITDA may differ from similarly titled measures used by other companies, limiting their usefulness as comparative measures.

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

Management uses free cash flow, which is defined by the Company as net cash flows provided by operating activities less payments for property, plant and equipment , in reviewing the financial performance of Woodward’s various business groups and evaluating cash levels. In addition, s ecurities 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. F ree cash flow does not necessarily represent funds available for discretionary use , and is not n ecessarily 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 three-months ended December 31 , 201 6 and December 31 , 201 5 were as follows:



	Three-Months Ended December 31,
	2016		2015
Net cash provided by operating activities (U.S. GAAP)	$	52,351	$	37,360
Payments for property, plant and equipment		(21,058)		(33,131)
Free cash flow (Non-U.S. GAAP)	$	31,293	$	4,229

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.

New Accounting Standards

From time to time, the Financial Accounting Standards Board (“FASB”) or other standards-setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification are communicated through issuance of an Accounting Standards Update. Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Condensed Consolidated Financial Statements upon adoption.

To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 2, New accounting standards , in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Off-Balance Sheet Arrangements

As of December 3 1 , 2016, 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. Quant itative and Quali tative 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.

These 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. These market risks have not materially changed since the date our most recent Form 10-K was filed with the SEC.

Item 4. Con trols 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 December 31, 2016.

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.

PART II – OT HER 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. We accrue for known individual matters where we believe that it is probable the matter will result in a loss when ultimately resolved using estimates of the most likely amount of loss.

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 when making investment decisions regarding our securities. 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.

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

S ales 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)
October 1, 2016 through October 31, 2016 (2)	290	$	69.05	-	$	50,000
November 1, 2016 through November 30, 2016 (2)	127,862		68.07	109,000		492,599
December 1, 2016 through December 31, 2016 (2)	247,978		68.90	241,000		475,996

(1)

In November 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 $ 5 00,000 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 201 9.

(2)

Under a trust established for the purposes of administering the Woodward Executive Benefit Plan, 290 shares of common stock were acquired in October 2016, 18,613 shares of common stock were acquired in November 2016 and 6,978 shares of common stock were acquired in December 2016, each 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, 249 shares of common stock were acquired on the open market related to the reinvestment of dividends for shares of treasury stock held for deferred compensation in November 2016. Shares owned by the trust, which is a separate legal entity, are included in "Treasury stock held for deferred compensation" in the Consolidated Balance Sheets

Item

Item 5. Oth er Information

Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers

As described below, on January 25, 2017, the stockholders of Woodward, Inc. (the “Company”) approved the Company’s 2017 Omnibus Incentive 2017 Plan (the “2017 Plan ”), which replaced the 2006 Omnibus Incentive Plan . The 2017 Plan permits the Company to grant various types of incentive awards, including: (1) stock options, (2) stock appreciation rights, (3) restricted stock, (4) performance units, (5) performance shares, (6) restricted stock units, (7) other stock-based awards, (8) annual incentive awards, and (9) cash-based awards (collectively, “awards”). A total of 2,000,000 shares of common stock of the Company are reserved for issuance under the 2017 Plan, but only 200,000 shares may be issued as “full value awards” (for example, restricted stock, performance shares and restricted stock units). Under the 2017

Plan, employees, non-employee directors and consultants are eligible to be selected to receive awards, as determined by a committee of the Company’s board of directors.

As of September 14, 2016, the effective date of the 2017 Plan, the compensation committee of the board (the “Committee”) was delegated authority to administer the 2017 Plan, including but not limited to, the power to determine the recipients of awards and the terms of those awards. The Committee approved grants of options under the 2017 Plan, with an award date of October 3, 2016, to the Company’s officers, including but not limited to: Thomas A. Gendron, Chairman, Chief Executive Officer and President (who received 181,200 options); Robert F. Weber, Jr., Vice Chairman, Chief Financial Officer and Treasurer (37,700 options); Martin V. Glass, President, Airframe Systems (23,300 options); Sagar A. Patel, President, Aircraft Turbine Systems (25,400 options); and A. Christopher Fawzy, Corporate Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer (24,700 options). These same options also were described in the proxy statement for the Company’s 2016 Annual Meeting of Stockholders (the “2016 Annual Meeting”) held on January 25, 2017 and were subject to stockholder approval at the 2016 Annual Meeting. Had stockholders not approved the 2017 Plan, these options would have been cancelled. The options have an exercise price of $62.57 (which was the closing price of the Company’s shares on NASDAQ on the grant date) and a maximum term of 10 years, and are scheduled to vest over four years at the rate of 25% per year, subject to continued status as a service provider to the Company.

On November 15, 2016, the Committee granted cash-based target cash incentive opportunities under the 2017 Plan to these same officers as follows: Mr. Gendron ($925,000 under the Company’s Variable Incentive Plan (“WVIP”) and $462,500 under the Company’s Long-Term Incentive Plan (“LTIP”)); Mr. Weber ($378,750 under the WVIP and $202,000 under the LTIP); Mr. Glass ($284,050 under the WVIP and $152,950 under the LTIP); Mr. Patel ($305,500 under the WVIP and $164,500 under the LTIP); and Mr. Fawzy ($266,500 under the WVIP and $102,500 under the LTIP). These awards also were shown in the proxy statement for the 2016 Annual Meeting and would have been cancelled had the stockholders not approved the 2017 Plan. Payment of the WVIP and LTIP awards are not guaranteed, and the actual amount paid (if any) will depend on the achievement of performance goals previously set by the Committee. For the WVIP, the goals relate to net earnings of the Company, adjusted EPS, adjusted EBITDA margin, business group adjusted OEAB margin, and strategic performance measures. For the LTIP, the goals pertain to relative earnings per share and return on capital.

Item 6. Ex hi bits

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

SIGN ATURES

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: January 25 , 201 7			/s/ Thomas A. Gendron
			Thomas A. Gendron
			Chairman of the Board, Chief Executive Officer, and President (Principal Executive Officer)

Date: January 25 , 201 7			/s/ Robert F. Weber, Jr.
			Robert F. Weber, Jr.
			Vice Chairman, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

WOODWARD, INC.

EXHIBIT INDEX


	Exhibit Number		Description
*	10.1		2017 Omnibus Incentive Plan
*	10.2		Form of Nonqualified Stock Option Agreement under the 2017 Omnibus Incentive Plan
*	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 December 31, 2016, 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

WOODWARD, INC.

201 7 OMNIBUS INCENTIVE PLAN

Section 1
Background

1.1 General . The Plan permits the grant of Incentive Stock Options, Non qualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards , Restricted Stock Units, Performance Shares, Performance Units, Covered Employee Annual Incentive Awards, Cash-Based Awards and/or Other Stock-Based Awards.

1.2 Effective Date . The Plan is effective as of the Effective Date , provided that the Plan is approved by an affirmative vote of the holders of a majority of the Shares that are present in person or by proxy and entitled to vote at the 2016 Annual Meeting of Stockholders of the Company. Awards may be granted before the receipt of such approval , but such Awards will be null and void if such approval is not in fact received.

1.3 Purpose s . The purposes of the Plan are to (a) attract and retain the best available individuals for positions of substantial responsibility, (b) provide additional incentive to such individuals, and (c) promote the success of the Company’s business. The Plan also is designed to encourage stock ownership by Participants, thereby aligning their interests with those of the Company’s shareholders and to permit the payment of compensation that qualifies as performance-based compensation under Section 162(m) of the Code.

Section 2
Definitions

The following words and phrases will have the following meanings unless a different meaning is plain l y required by the context :

2.1 “ Administrator ” means the Board or any Committee that administer s the Plan in accordance with Section 4 .

2.2 “ Applicable Laws ” mean the legal and regulatory requirements relating to the administration of equity or cash -based awards , including but not limited to , under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which Shares are listed or quoted and the applicable laws of any foreign country or jurisdiction where Awards are, or will be, granted.

2.3 “ Award ” means, individually or collectively, a grant under the Plan of Options, Stock Appreciation Rights, Restricted Stock Awards , Restricted Stock Units, Performance Shares , Performance Units, Covered Employee Annual Incentive Awards, Cash-Based Awards and/or Other Stock-Based Awards .

2.4 “ Award Agreement ” means , with respect to each Award, the written or electronic agreement setting forth the terms and conditions of the Award, which will comply with and be subject to the terms and conditions of the Plan.

2.5 “ Board ” means the Board of Directors of the Company.

2.6 “ Cash-Based Award ” means an Award granted pursuant to Section 13 , which is denominated in cash and specifies a payment amount or payment range (which may be expressed as a percentage of the Participant’s base salary, a dollar amount or a result of a formula or other matrix) .

2.7 “ Cash Flow ” means cash generated from business activities (including, but not by way of limitation, Operating Cash Flow) .

2.8 “ Change in Control ” means the occurrence of any of the following events:

(a) A change in the ownership of the Company that occurs on the date that any one person, or more than one person acting as a group (“Person”), acquires ownership of the stock of the Company that, together with the stock held by such Person, constitutes more than fifty percent (50%) of the total voting power of the stock of the Company; provided, however, that for purposes of this subsection , the acquisition of additional stock by any one Person, who is considered to own more than fifty percent (50%) of the total voting power of the stock of the Company will not be considered a Change in Control . Further, if the stockholders of the Company immediately before such change in ownership continue to retain, immediately after the change in ownership, in substantially the same proportions as their ownership of shares of the Company’s voting stock immediately prior to the change in ownership, direct or indirect beneficial ownership of fifty percent (50%) or more of the total voting power of the s tock of the Company or of the ultimate parent entity of the Company, such event will not be considered a Change in Control under this subsection ;

(b) A change in the effective control of the Company that occurs on the date that a majority of Directors is replaced during any twelve (12) month period by Directors whose appointment or election is not endorsed by a majority of the Directors prior to the date of the appointment or election. For purposes of this subsection , if any Person is considered to be in effective control of the Company, the acquisition of additional control of the Company by the same Person will not be considered a Change in Control; or

(c) A change in the ownership of a substantial portion of the Company’s assets that occurs on the date that any Person acquires (or has acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than fifty percent (50%) of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions. For purposes of this subsection, “ gross fair market value ” means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.

For purposes of this Section 2. 8 , persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the Company.

- 2 -

Notwithstanding the foregoing, a transaction will not be deemed a Change in Control unless the transaction qualifies as a “ change in control event ” within the meaning of Section 409A.

Further and for the avoidance of doubt, a transaction will not constitute a Change in Control if its primary purpose is to : ( A ) change the jurisdiction of the Company’s incorporation, or ( B ) cr eate a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction.

2.9 “ Code ” means the U.S. Internal Revenue Code of 1986, as amended. Any r eference to a specific section of the Code will includ e such section and any valid regulation or other applicable guidance that has been promulgated under such section and is in effect .

2.10 “ Committee ” means a committee of Directors or of other individuals satisfying Applicable Laws who have been appointed by the Board, or a duly authorized committee of the Board , as set forth i n Section 4 .

2.11 “ Common Stock ” means the common stock of the Company.

2.12 “ Company ” means Woodward, Inc. , a Delaware corporation, or any successor thereto.

2.13 “ Consolidated Operating Earnings ” mean the consolidated earnings before income taxes of the Company, computed in accordance with generally accepted accounting principles, but shall exclude the effects of Extraordinary Items.

2.14 “ Consultant ” means any consultant, independent contractor or advisor who has been engaged by an Employer to render bona fide services to the Employer , but who is not an Employee or Director, provided that a Consultant will include only those person s to whom the issuance of Shares may be registered under Form S-8 promulgated under the Securities Act or any successor registration statement .

2.15 “ Covered Employee ” means any Employee who would be considered a “covered employee” within the meaning of Section 162(m).

2.16 “ Covered Employee Annual Incentive Award ” means an Award granted to a Covered Employee pursuant to Section 12 .

2.17 “ Determination Date ” means the latest possible date that will not jeopardize the qualification of an Award as “performance-based compensation” under Section 162(m).

2.18 “ Director ” means a member of the Board.

2.19 “ Disability ” means a “p ermanent and total disability ” within the meaning of Section 22(e)(3) of the Code, provided that in the case of Awards other than Incentive Stock Options, the Administrator may, in its discretion , determine whether a permanent and total disability exists in accordance with uniform and non-discriminatory standards adopted by the Administrator from time to time.

2.20 “ Earnings ” mean net earnings (including, but not by way of limitation, Consolidated Operating Earnings) .

- 3 -

2.21 “ Effective Date ” means September 14 , 2016.

2.22 “ Employee ” means any person , including an Officer and/or Director, who provides services as an employee of an Employer . Neither service as a Director nor payment of a director’s fee by the Company will be sufficient to constitute “employment” by the Company.

2.23 “ Employer ” means, with respect to a Service Provider , the Company or the Company’s Parent or Subsidiary for which the Participant performs services as an Employee, Consultant or Director .

2.24 “ Exchange Act ” means the U.S. Securities Exchange Act of 1934, as amended. Any reference to a specific section of the Exchange Act includes such section and any valid regulation , rule or other applicable guidance that has been promulgated under such section and is in effect.

2.25 “ Exchange Program ” means a program under which ( i ) outstanding Awards are surrendered or cancelled in exchange for awards of the same type (which may have higher or lower Exercise Prices and different terms), awards of a different type, and/or cash, ( ii ) Participants would have the opportunity to transfer any outstanding Awards to a financial institution or other person or entity selected by the Administrator, and/or ( iii ) the Exercise Price of an outstanding Option or Stock Appreciatio n Right is reduced. For the avoidance of doubt, (a) actions permitted under Section 14 do not constitute an Exchange Program, and (b) as set forth in Section 5.5 , the Administrator may not implement any Exchange Program.

2.26 “ Exercise Price ” means , with respect to an Option or Stock Appreciation Right, the price at which a Share may be purchased by the Participant pursuant to the exercise thereof.

2.27 “ Extraordinary Items ” mean ( a ) extraordinary, unusual, and/or nonrecurring items of gain or loss; ( b ) gains or losses on the disposition of a business; ( c ) changes in tax or accounting regulations or laws; or ( d ) the effect of a merger or acquisition, all of which must be identified in the audited financial statements, including footnotes, or Management Discussion and Analysis section of the Company’s annual report.

2.28 “ Fair Market Value ” means, as of any date, the value of Common Stock determined as follows:

(a) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation , the New York Stock Exchange, the NASDAQ Global Select Market, the NASDAQ Global Market or the NASDAQ Capital Market of The NASDAQ Stock Market, its Fair Market Value will be the closing sales price for the Common Stock as quoted on such exchange or system on the day of determination (or, if no closing sales price was reported on that date, as applicable, on the last trading date such closing sales price was reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(b) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share will be the mean between the high bid and low asked prices for the Common Stock on the day of determination (or, if no bids and asks were reported on that date, as applicable, on the last trading date such bids and asks were reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or

- 4 -

(c) In the absence of an established market for the Common Stock, the Fair Market Value will be determined in good faith by the Administrator.

Notwithstanding the foregoing under this Section, for federal, state and local income tax reporting purposes, F air M arket V alue will be determined by the Administrator in accordance with uniform and nondiscriminatory standards adopted by it from time to time.

2.29 “ Fiscal Quarter ” means a fiscal quarter within a Fiscal Year.

2.30 “ Fiscal Year ” means the fiscal year of the Company.

2.31 “ Full Value Award s ” mean Awards other than in the form of an Option or Stock Appreciation Right, and which is settled by the issuance of Shares .

2.32 “ Grant Date ” means, with respect to an Award, the date on which the Administrator makes the determination granting such Award, or such other later date as is determined by the Administrator. The Grant Date of an Award will in no event be earlier than the date the Award is approved by the Administrator.

2.33 “ Incentive Stock Option ” means a n Option that by its terms qualifies and otherwise is intended to qualify as an “ incentive stock option ” within the meaning of Section 422 of the Code.

2.34 “ Net Income ” means consolidated net income before taxes for a determination period , as reported in the Company’s annual report to shareholders or as otherwise reported to the Company’s shareholders.

2.35 “ Non qualified Stock Option ” means a n Option that by its terms does not qualify or is not intended to qualify as an Incentive Stock Option.

2.36 “ Officer ” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act.

2.37 “ Operating Cash Flow ” means cash flow from operating activities as defined in FASB Accounting Standards Codification Topic 230, Statement of Cash Flow s , or its successor .

2.38 “ Option ” means a stock option to purchase Shares granted pursuant to Section 6 . An Option’s Award Agreement will specify whether the Option is an Incentive Stock Option or a Nonqualified Stock Option .

2.39 “ Other Stock-Based Award ” means an Award granted pursuant to Section 13 , which is payable in, value d in whole or in part by reference to, or otherwise based on or related to Shares, including, but not limited to, Shares granted purely as a bonus and not subject to any restrictions or conditions, but excluding an y Option, Stock Appreciation Right, Restricted Stock Award, Restricted Stock Unit, Performance Share or Performance Unit.

2.40 “ Outside Director ” means a Director who is not an Employee.

2.41 “ Parent ” means a “parent corporation,” as defined in Section 424(e) of the Code.

2.42 “ Participant ” means a Service Provider to whom an Award has been granted .

- 5 -

2.43 “ Performance Goals ” will have the meaning set forth in Section 11 .

2.44 “ Performance Period ” means any Fiscal Year or such other period longer or shorter than a Fiscal Year but, in any case, not shorter than one (1) Fiscal Quarter or longer than twenty ( 20 ) Fiscal Quarters , as dete rmined by the Administrator in its sole discretion.

2.45 “ Performance Share ” means an Award denominated in Shares , which may be earned in whole or in part upon attainment of P erformance G oals or other vesting or performance criteria as the Administrator may determine , as provided in Section 10 .

2.46 “ Performance Unit ” means an Award denominated in units, which may be earned in whole or in part upon a ttainment of P erformance G oals or other vesting or performance criteria as the Administrator may determine and which may be settled for cash, Shares or other securities or a combination of the foregoing , as provided in Section 10 .

2.47 “ Period of Restriction ” means the period during which Restricted S hares are subject to a substantial risk of forfeiture ( based on the passage of time, continued status as a Service Provider , the achievement of target levels of performance, the achievement of Performance Goals, or the occurrence of other events as determined by the Administrator ), as provided in Section 7 .

2.48 “ Plan ” means this 201 7 Omnibus Incentive Plan , as hereafter amended from time to time .

2.49 “ Product and Operational Metrics ” mean objective and measurable goals for the quality, design, creation , introduction , manufacture or delivery of products , including, b ut not by way of limitation, with respect to design specifications or requirements, market penetration and/or that do not exceed specified defect levels.

2.50 “ Restricted S hares ” means Shares issu ed pursuant to a Restricted Stock A ward or pursuant to the early exercise of an Option.

2.51 “ Restricted Stock Award ” means an Award granted pursuant to Section 7 .

2.52 “ Restricted Stock Unit ” means a bookkeeping entry representing an amount equal to the Fair Market Value of one Share, granted pursuant to Section 8 . Each Restricted Stock Unit represents an unfunded and unsecured obligation of the Company.

2.53 “ Revenue ” means net revenue .

2.54 “ Rule 16b-3 ” means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.

2.55 “ Section 16(b) ” means Section 16(b) of the Exchange Act.

2.56 “ Section 162(m) ” means Section 162(m) of the Code.

2.57 “ Section 409A ” means Section 409A of the Code.

- 6 -

2.58 “ Securities Act ” means the U.S. Securities Act of 1933, as amended. Any reference to a specific section of the Securities Act includes such section and any valid regulation , rule or other guidance that has been promulgated under such section and is in effect .

2.59 “ Service Provider ” means an Employee, Director or Consultant.

2.60 “ Share ” mean a s hare of C ommon S tock .

2.61 “ Stock Appreciation Right ” means an Award, granted alone or in connection with an Option, pursuant to Section 9 .

2.62 “ Subsidiary ” means a “subsidiary corporation , ” as defined in Section 424(f) of the Code.

2.63 “ Tax Obligations ” means the tax, social insurance and /or social security liability obligations and requirements in connection with an Award, including, without limitation, (i) all federal, state, and local income, employment and any other taxes (including the Participant’s Federal Insurance Contributions Act (FICA) obligation) that are required to be withheld by the Employer , (ii) the Participant’s and, to the extent required by the Employer , the Employer ’s fringe benefit tax liability, if any, associated with the grant, vesting, or exercise of the Award or sale of Shares issued under the Award, and (iii) any other taxes , social insurance and/ or social security liabilities or premium the responsibility for which the Participant has, or has agreed to bear, with respect to such Award (or exercise thereof or issuance of Shares or other consideration thereunder).

2.64 “ Total Shareholder Return ” means the total return (change in price, including treatment of dividends, if any, as determined by the Administrator) of a Share.

Section 3
SHARES Subject to the Plan

3.1 General . Subject to adjustment as provided in Section 14 , the total number of Shares that may be issued under the Plan is 2,000,000 Shares (the “Share Authorization”) . The Shares issuable under the Plan may be authorized, but unissued, or reacquired Common Stock.

3.2 Lapsed Awards . If an Option or Stock Appreciation Right expires or becomes unexercisable without having been exercised in full, then the unexercised Shares subject thereto will become available for future grant or sale under the Plan (unless the Plan has terminated). If a Full Value Award is forfeited or repurchased by the Company due to a failure to vest, then the forfeited or repurchased Shares subject thereto will become available for future grant or sale under the Plan (unless the Plan has terminated). Upon exercise of a Stock Appreciation Right settled in Shares, the gross number of Shares covered by the portion of the Award so exercised will cease to be available under the Plan. Shares that have been issued under the Plan pursuant to an y Award will not be returned to the Plan and will not become available for future grant or sale under the Plan ; provided, however, that if unvested Shares of Full Value Awards are repurchased by the Company or are forfeited to the Company, such Shares will become available for future grant or sale under the Plan (unless the Plan is terminated). Shares used to pay the E xercise Price or purchase price of an Award and/or used to satisfy the Tax Obligations related to the Award will cease to be available for future grant or sale under the Plan. To the extent an Award is paid out in cash rather than Shares, such cash payment will not result in reducing the number of Shares available for issuance under the Plan. For

- 7 -

purposes of clarification, no Shares purchased by the Company with proceeds received from the exercise of an Option will become available for issuance under th e Plan. Notwithstanding the foregoing and, subject to adjustment as provided in Section 14 , the maximum number of Shares that may be issued upon the exercise of Incentive Stock Options will equal the aggregate Share number stated in Section 3.1 , plus, to the extent allowable under Section 422 of the Code, any Shares that become available for issuance under the Plan pursuant to this S ection 3.2 .

3.3 Full Value Awards . Notwithstanding any contrary Plan provision, no more than 200,000 Shares of the Share Authorization may be granted as Full Value Awards.

3.4 Share Reserve . The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as will be sufficient to satisfy the requirements of the Plan.

Section 4
Administration of the Plan

4.1 Procedure .

4.1.1 Multiple Administrative Bodies Permitted . Different Committees with respect to different groups of Service Providers may administer the Plan.

4.1.2 Section 162(m) . To the extent that the Administrator determines it to be desirable to qualify Awards as “performance-based compensation” within the meaning of Section 162(m), the Plan will be administered by a Committee of two (2) or more “outside directors” within the meaning of Section 162(m).

4.1.3 Rule 16b-3 . To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder will be structured to satisfy the requirements for exemption under Rule 16b-3.

4.1.4 Other Administration . Other than as provided above, the Plan will be administered by ( a ) the Board or ( b ) a Committee, which committee will be constituted to satisfy Applicable Laws.

4.1.5 Delegation of Authority for Day-to-Day Administration . Except to the extent prohibited by Applicable Laws, the Administrator may delegate to one or more individuals the day-to-day administration of the Plan and any of the functions assigned to the Administrator in the Plan. Any such delegation may be revoked by the Administrator at any time.

4.2 Powers of the Administrator . Subject to the other provisions of the Plan, and in the case of a Committee, subject to the specific duties delegated by the Board to such Committee, the Administrator will have the authority, in its discretion:

(a) to determine Fair Market Value;

(b) to select the Service Providers to whom Awards may be granted;

- 8 -

(d) to approve forms of Award Agreements for use under the Plan;

(e) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award. Such terms and conditions include, but are not limited to, the E xercise P rice, the time or times when Awards may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or the Shares relating thereto, based in each case on such factors as the Administrator will determine;

(f) to construe and interpret the terms of the Plan and Awards;

(g) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations relating to sub-plans established for the purpose of satisfying applicable foreign laws or for qualifying for favorable tax treatment under applicable foreign laws;

(h) to modify or amend each Award, including , but not limited to , the discretionary authority to accelerate the vesting of Awards, to extend the post-termination exercisability period of Awards , and to extend the term of an Option (subject to the maximum term permitted under the Plan) ;

(i) to allow Participants to satisfy T ax O bligations in such manner as prescribed in Section 16 ;

(j) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously granted by the Administrator;

(k) to allow a Participant , in compliance with Applicable Laws including, but not limited to, Section 409A, to defer the receipt of the payment of cash or the issuance of Shares that would otherwise be due to such Participant under an Award; and

(l) to impose such restrictions, conditions or limitations as it determines appropriate as to the timing and manner of any resales by a Participant or other subsequent transfers by the Participant of any Shares issued as a result of or under an Award, including without limitation, ( i ) restrictions under an insider trading policy, ( ii ) restrictions as to the use of a specified brokerage firm for such resales or other transfers , and (iii) requirements for holding Shares in order to comply with Share ownership policies or guidelines adopted by the Company from time to time ;

(m) to require that the Participant’s rights, payments and benefits with respect to an Award (including amounts received upon the settlement or exercise of an Award) will be subject to reduction, cancellation, forfeiture or recoupment upon the occurrence of certain specified events, in addition to any otherwise applicable vesting or performance conditions of an Award, as may be specified in an Award Agreement at the time of grant, or later if ( i ) Applicable Laws require the Company to adopt a policy requiring such reduction, cancellation, forfeiture or recoupment, or ( ii ) pursuant to an amendment of an outstanding Award; and

(n) to make all other determinations deemed necessary or advisable for administering the Plan.

- 9 -

4.3 Binding E ffect of Administrator’s Decision s . The Administrator’s decisions, determinations and interpretations with respect to the Plan or Awards will be final and binding on all Participants and any other holders of Awards , and will be given the maximum possible deference permitted by law .

Section 5
Limits

5.1 General Share Limits . Notwithstanding any contrary Plan provision, f or so long as the Company is a “publicly held corporation” within the meaning of Section 162(m) and the deduction limitations of Section 162(m) are applicable to the Company’s Covered Employees, then, subject to adjustment as provided in Section 14 , the limits specified in this Section 5.1 will apply to any grants of the following types of Awards:

5.1.1 Fiscal Year Limit on Options and /or SARs . No Participant may be granted , during any Fiscal Year, Options and/or SARs covering more than a total of 600,000 Shares ; provided, however , that during the Fiscal Year in which a Participant first becomes an Employee (the “Fiscal Year of Hire”) , the Participant may be granted Options and/or SARs covering up to a total of a n additional 900 ,000 Shares .

5.1.2 Fiscal Year Limit on Full Value Awards . No Participant may be granted, during any Fiscal Year, Full Value Awards covering more than a total of 150,000 Shares; provided, however, that during the Fiscal Year of Hire , the Participant may be granted Full Value Awards covering up to a total of an additional 50,000 Shares.

5.1.3 Fiscal Year Limit on Cash-Based Awards . The maximum amount that may be paid for all Performance Periods ending during a Fiscal Year) wi th respect to Cash-Based Awards is $ 10 ,000,000 . As an example for illustration purposes only, if a Participant has two Performance Periods that end during a single Fiscal Year (for example, an annual Performance Period and a multi-year Performance Period), the total combined amount that the Participant may be paid for those two Performance Periods is $10 million. For this purpose, an amount that is paid to a Participant in a Fiscal Year that is after the Fiscal Year in which the applicable Performance Period ended (for example, but not by way of limitation, early in the next Fiscal Year following certification of actual results versus the applicable Performance Goals or because it is deferred under a deferred compensation arrangement) will be considered paid for the Fiscal Year in which the applicable Performance Period ended. To the extent permitted under Section 162(m), subsequent increases in the value of the deferred amount pursuant to the deferred compensation arrangement will not count against the limit in this Section 5.1.3.

5.1.4 Fiscal Year Limit on Covered Employee Annual Incentive Awards . The total amount that may be awarded or credited in any Fiscal Year with respect to a Covered Employee Annual Incentive Award will be determined in Section 12 .

5.2 Fiscal Year Limit on Outside Director Awards and Other Compensation . No Outside Director may be granted, in any Fiscal Year, Awards (the value of which will be based on their G rant D ate fair value determined in accordance with generally accepted accounting principles) which , in the aggregate, exceed $ 3 0 0,000 , provided that such amount is increased to $ 450 ,000 in the Fiscal Year of his or her initial service as an Outside Director . Any Awards or other compensation provided to an individual for his or her services as an Employee, or for his or her services as a

- 10 -

Consultant other than as an Outside Director, will be excluded for purposes of the limitations in this Section 5.2 .

5.3 Minimum V esting Requiremen t for Full Value Awards . No Full Value Award will vest ea rlier than the one (1) year anniversary of the Grant Date of such Award , subject to the other provisions of the Plan. N otwithstanding the foregoing, Full Value Awards that result in the issuance of an aggregate of up to five percent ( 5% ) of the Share Authorization (as defined in Section 3.1) may be granted to Service Providers, or such outstanding Awards modified, to the extent otherwise permissible under the Plan, without regard to such one (1) year minimum vesting requirement .

5.4 Incentive Stock Option Limit s .

5.4.1 $100,000 Limitation . N otwithstanding any designation of an Option as an Incentive Stock Option in an Award Agreement , to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Participant during any calendar year (under all plans of any Employer ) exceeds one hundred thousand dollars ($100,000), the portion of the Options falling within such limit will be Incentive Stock Options and the excess Options will be treated as Non qualified Stock Options. For these purposes, Incentive Stock Options will be taken into account in the order in which they were granted. The Fair Market Value of the Shares will be determined as of the time the Option with respect to such Shares is granted.

5.4.2 Maximum Term . I n the case of an Incentive Stock Option granted to a n Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of any Employer , the term of the Incentive Stock Option will be five (5) years from its Grant D ate or such shorter term as may be provided by the Administrator and set forth in the Award Agreement.

5.4.3 Exercise Price . In the case of an Incentive Stock Option granted to an Employee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the any Employer , the Exercise Price of the Option will be no less than one hundred ten percent (110%) of the Fair Market Value per Share on the Grant Date . In the case of a n Incentive Stock Option granted to any Employee other than an Employee described in immediately preceding sentence, the E xercise P rice of the Option will be no less than one hundred percent (100%) of the Fair Market Value per Share on the Grant D ate.

5.4.4 Employee Only Eligibility . Incentive Stock Options may be granted only to Employees.

5.5 No Exchange Progra m Permitted . The Administrator may not implement any Exchange Program.

Section 6
Options

6.1 Grant of Options . Subject to the limits of Section 5 and the other terms and conditions of the Plan, the Administrator, a t any time and from time to time , may grant Options to Service Providers in such amounts as the Administrator, in its sole discretion, determines.

- 11 -

6.2 Award Agreement . Each Option will be evidenced by an Award Agreement that will specify the Exercise Price of the Option , the maximum term of the Option, the number of Shares covered by the Option, any conditions to exercise the Option, and such other terms and conditions of the Option as the Administrator , in its discretion, determines, provided that such terms and conditions are otherwise consistent with the terms and conditions of the Plan. The Award Agreement also will specify whether the Option is intended to be an In centive Stock Option or a Non qualified Stock Option.

6.3 Maximum T erm of Option . The maximum term of each Option will be ten (10) years from its Grant Date or such shorter term as may be provided by the Administrator and set forth in the Award Agreement, subject to Section 5.4.2 .

6.4 Exercise Price and Consideration .

6.4.1 Exercise Price . The Exercise Price of each Option will be determined by the Administrator and set forth in the Award Agreement ; provided, however, that such Exercise Price may not be less than one hundred percent (100%) of the Fair Market Value of a Share on the Grant Date , subject to Section 5.4.3 . Notwithstanding the foregoing, Options may be granted with a n Exercise Price of less than one hundred percent (100%) of the Fair Market Value per Share on the Grant D ate pursuant to a transaction described in, and in a manner consistent with, Section 424(a) of the Code.

6.4.2 Form of Consideration . The Administrator will determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator will determine the acceptable form of consideration at the time of grant. Such consideration may consist entirely of: ( a ) cash; ( b ) check; ( c ) promissory note, to the extent permitted by Applicable Laws ; ( d ) other Shares, provided that such Shares have a Fair Market Value on the date of surrender equal to the aggregate E xercise P rice for the Shares with respect to which such Option will be exercised and provided that accepting such Shares will not result in any adverse accounting consequences to the Company, as the Administrator determines in its sole discretion; ( e ) consideration received by the Company under a broker-assisted (or other) cashless exercise program (whether through a broker or otherwise) implemented by the Company in connection with the Plan; ( f ) by net exercise; ( g ) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws; or ( h ) any combination of the foregoing methods of payment.

6.5 Exercise of Option .

6.5.1 Procedure for Exercise; Rights as a Stockholder . Each Option will be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Award Agreement. An Option may not be exercised for a fraction of a Share.

An Option will be deemed exercised when the Company receives: ( a ) a notice of exercise (in such form as the Administrator may specify from time to time) from the person entitled to exercise the Option, and ( b ) full payment of the Exercise Price for the Shares with respect to which the Option is exercised ( including satisfaction of all Tax Obligations with respect thereto ). Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Award Agreement and the Plan. Shares issued upon exercise of an Option will be

- 12 -

issued in the name of the Participant or, if requested by the Participant, in the name of the Participant and his or her legal spouse. Until such Shares are issued and delivered (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder will exist with respect to the Shares, notwithstanding the exercise of the Option. The Company will issue and deliver (or cause to be issued and delivered ) such Shares promptly after the Option is exercised. No adjustment will be made for a ny dividend or other right for which the record date is prior to the date the Shares are issued and delivered , except as provided in Section 14 .

Exercising an Option in any manner will decrease the number of Shares thereafter available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised.

6.5.2 Termination of Relationship as a Service Provider . If a Participant ceases to be a Service Provider, other than as the result of the Participant’s death or Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the extent that the Option is vested on the date of termination of Participant’s status as a Service Provider (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option will remain exercisable for three (3) months following the termination of Participant’s status as a Service Provider , but in no event later than the expiration of the term of such Option as set forth in the Award Agreement .

6.5.3 Disability of Participant . If a Participant ceases to be a Service Provider as a result of the Participant’s Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the extent the Option is vested on the date of Disability (but in no event may the Option be exercised later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option will remain exercisable for twelve (12) months following termination of Participant’s status as a Service Provider due to Disability , but in no event later than the expiration of the term of such Option as set forth in the Award Agreement.

6.5.4 Death of Participant . If a Participant dies while he or she is a Service Provider, the Option may be exercised following the Participant’s death within such period of time as is specified in the Award Agreement to the extent the Option is vested on the date of the Participant’s death (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement) , by the Participant’s designated beneficiary under the Plan, provided such beneficiary has been properly designated prior to Participant’s death in a form acceptable to the Administrator and to the extent permitted by Applicable Laws. In the absence of such beneficiary designation (or to the extent not permitted by Applicable Laws), then such Option may be exercised by the personal representative of the Participant’s estate or by the person(s) to whom the Option is transferred pursuant to the Participant’s will or in accordance with the laws of descent and distribution . In the absence of a specified time in the Award Agreement, the Option will remain exercisable for twelve (12) months following termination of Participant’s status as a Service Provider due to death , but in no event later than the expiration of the term of such Option as set forth in the Award Agreement.

- 13 -

Section 7
Restricted Stock Awards

7.1 Grant of Restricted Stock Awards . Subject to the limits of Section 5 and the other terms and conditions o f the Plan, the Administrator, at any time and from time to time, may grant R estricted Stock Awards to Service Providers in such amounts as the Administrator, in its sole discretion, determine s .

7.2 Award Agreement . Each Restricted Stock Award will be evidenced by an Award Agreement that will specify the Period of Restriction (if any) , the number of Restricted Shares subject to the Award , and such other terms and conditions of the Award as the Administrator, in its sole discretion, determine s, provided that such terms and conditions are otherwise consistent with the terms and conditions of the Plan . Unless the Administrator determines otherwise, the Company as escrow agent will hold the Restricted Shares until the restrictions on such Shares have lapsed.

7.3 Transferability . Except as provided in this Section 7 or the Award Agreement, Restricted Shares may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction.

7.4 Other Restrictions . The Administrator, in its sole discretion, may impose such other restrictions on Restricted Shares as it may deem advisable or appropriate.

7.5 Legend on Certificates . The Administrator, in its sole discretion, may require that a legend be placed on any certificates representing Restricted Shares to give appropriate notice of the applicable restrictions on such Shares.

7.6 Removal of Restrictions . Except as otherwise provided in this Section 7 , Restricted Shares will be released from escrow as soon as practicable after the last day of the applicable Period of Restriction or at such other time as the Administrator may determine (including after satisfaction of all Tax Obligations with respect thereto) . Subject to vest ing limitations in Section 5.3 , t he Administrator, in its discretion, may accelerate the time at which any restrictions will lapse or be removed.

7.7 Voting Rights . During the Period of Restriction, Service Providers holding Restricted Shares m ay exercise full voting rights with respect to those Shares, unless the Administrator determines otherwise.

7.8 Dividends and Other Distributions . During the Period of Restriction, Service Providers holding Restricted Shares w ill be entitled to receive a ny dividends and /or other distributions paid with respect to such Shares, unless the Administrator provides otherwise. If any such dividends or distributions are paid in Shares, such Shares will be subject to the same restrictions on transferability and forfeitability as the Restricted Shares with respect to which they were paid.

7.9 Section 162(m) Performance Restrictions For purposes of qualifying grants of Restricted Stock Awards as “performance-based compensation” under Section 162(m), the Administrator, in its discretion, may set restrictions based upon the achievement of Performance Goal ( s ) . The Performance Goal ( s ) will be set by the Administrator on or before the Determination Date. In granting Restricted Stock Awards that are intended to qualify under Section 162(m), the

- 14 -

Administrator will follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Award under Section 162(m) (e.g., in determining the Performance Goal ( s ) ).

Section 8
Restricted Stock Units

8.1 Grant of Restricted Stock Units . Subject to the limits of Section 5 and the other terms and conditions of the Plan, the Administrator, at any time and from time , may grant Restricted Stock Units to Service Providers in such amounts as the Administrator, in its sole discretion, determines.

8.2 Award Agreement . Each Award of Restricted Stock Unit s will be evidenced by an Award Agreement that will specify the number of Restricted Stock Units , the vesting criteria of the Award, the form of payout of the Award , which, subject to Section 8.5 , may be left to the discretion of the Administrator , and such other terms and conditions of the Award as the Administrator, in its sole discretion, determines, provided that such terms and conditions are otherwise consistent with the terms and conditions of the Plan.

8.3 Vesting Criteria and Other Terms . The Administrator will set vesting criteria in its discretion, which, depending on the extent to which the criteria are met, will determine the number of Restricted Stock Units that will be paid out to the Participant. The Administrator may set vesting criteria based upon the achievement of Company-wide, divisional, business unit, or individual goals (including, but not limited to, continued status as a Service Provider ), applicable federal or state securities laws or any other basis determined by the Administrator in its sole discretion.

8.4 Earning Restricted Stock Units . Upon meeting the applicable vesting criteria, the Participant will be entitled to receive a payout as determined by the Administrator. Notwithstanding the foregoing, subject to the vesting limitations in Section 5.3 , at any time after the grant of Restricted Stock Units, the Administrator, in its sole discretion, may reduce or waive any vesting criteria that must be met to receive a payout.

8.5 Form and Timing of Payment . Payment of earned Restricted Stock Units will be made as soon as practicable after the date(s) determined by the Administrator and set forth in the Award Agreement (including after satisfaction of all Tax Obligations with respect thereto) . The Administrator, in its sole discretion, may pay earned Restricted Stock Units in cash, Shares, or a combination of both.

8.6 Cancellation . On the date set forth in the Award Agreement, all unearned Restricted Stock Units will be forfeited to the Company.

8.7 Section 162(m) Performance Restrictions . For purposes of qualifying grants of Restricted Stock Units as “performance-based compensation” under Section 162(m), the Administrator, in its discretion, may set restrictions based upon the achievement of Performance Goal ( s ) . The Performance Goal ( s ) will be set by the Administrator on or before the Determination Date. In granting Restricted Stock Units which are intended to qualify under Section 162(m), the Administrator will follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Award under Section 162(m) (e.g., in determining the Performance Goal ( s ) ) .

- 15 -

Section 9
Stock Appreciation Rights

9.1 Grant of Stock Appreciation Rights . Subject to the limits of Section 5 and the other terms and conditions of the Plan, the Administrator, at any time and from time to time , may grant Stock Appreciation Rights to Service Providers in such amounts as the Administrator, in its sole discretion, determines.

9.2 Award Agreement . Each Stock Appreciation Right grant will be evidenced by an Award Agreement that will specify the Exercise Price of the Stock Appreciation Right, the term of the Stock Appreciation Right, any conditions to exercise the Stock Appreciation Right, and such other terms and conditions of the Award as the Administrator, in its discretion, determines, provided that such terms and conditions are otherwise consistent with the terms and conditions of the Plan.

9.3 Exercise Price and Other Terms . The E xercise P rice of each Stock Appreciation Right will be determined by the Administrator and set forth in the Award Agreement; provided, however, that such Exercise Price may not be less than one hundred percent (100%) of the Fair Market Value per Share on the Grant Date . Notwithstanding the foregoing, Stock Appreciation Rights may be granted with an Exercise Price of less than one hundred percent (100%) of the Fair Market Value per Share on the Grant Date pursuant to a transaction described in, and in a manner consistent with, Section 424(a) of the Code.

9.4 Expiration of Stock Appreciation Rights . A Stock Appreciation Right will expire on the date determined by the Administrator, in its sole discretion, and set forth in the Award Agreement. Notwithstanding the foregoing, the rules of Section 6.3 relating to the maximum term and Section 6.5 relating to exercise also will apply to Stock Appreciation Rights.

9.5 Payment of Stock Appreciation Right Amount . Upon exercise of a Stock Appreciation Right (including satisfaction of all Tax Obligations with respect thereto) , a Participant will be entitled to receive payment from the Company in an amount determined by multiplying:

(a) The difference between the Fair Market Value of a Share on the date of exercise over the E xercise P rice; times

(b) The number of Shares with respect to which the Stock Appreciation Right is exercised.

At the discretion of the Administrator, the payment upon any Stock Appreciation Right exercise may be in cash, in Shares of equivalent value, or in some combination thereof. No adjustment will be made for any dividend or other right for which the record date is prior to the date the Shares, if applicable, are issued and delivered, except as provided in Section 14 .

Section 10
Performance Units and Performance Shares

10.1 Grant of Performance Units/Shares . Subject to the limits of Section 5 and the other terms and conditions of the Plan, the Administrator, at any time and from time to time, may grant Performance Units and /or Performance Shares t o Service Providers in such amounts as t he Administrator, in its sole discretion , determines .

- 16 -

10.2 Value of Performance Units/Shares . Each Performance Unit will have an initial value that is established by the Administrator on or before the Grant Date. Each Performance Share will have an initial value equal to the Fair Market Value of a Share on the Grant D ate.

10.3 Performance Objectives and Other Terms . The Administrator will set performance objectives or other vesting provisions (including, without limitation, continued status as a Service Provider) in its discretion which, depending on the extent to which they are met, will determine the number or value of Performance Units/Shares that will be paid out to the Participant . Each Award of Performance Units/Shares will be evidenced by an Award Agreement that will specify the Performance Period and such other terms and conditions as the Administrator, in its sole discretion, determine s, provided that such terms and conditions are otherwise consistent with the terms and conditions of the Plan . The Administrator may set performance objectives based upon the achievement of Company-wide, divisional, business unit or individual goals (including, but not limited to, continued status as a Service Provider ) , applicable federal or state securities laws, or any other basis determined by the Administrator in its discretion.

10.4 Earning of Performance Units/Shares . After the applicable Performance Period has ended, the holder of Performance Units/Shares will be entitled to receive a payout of the number of Performance Units/Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding performance objectives or other vesting provisions have been achieved. After the grant of a Performance Unit/Share, subject to the vesting limitations under Section 5.3 , the Administrator, in its sole discretion, may reduce or waive any performance objectives or other vesting provisions for such Performance Unit/Share.

10.5 Form and Timing of Payment of Performance Units/Shares . Payment of earned Performance Units/Shares will be made as soon as practicable after the expiration of the applicable Performance Period (including after satisfaction of all Tax Obligations with respect thereto) . The Administrator, in its sole discretion, may pay earned Performance Units/Shares in the form of cash, in Shares (which have an aggregate Fair Market Value equal to the value of the earned Performance Units/Shares at the close of the applicable Performance Period) or in a combination thereof.

10.6 Cancellation of Performance Units/Shares . On the date set forth in the Award Agreement, all unearned or unvested Performance Units/Shares will be forfeited to the Company.

10.7 Section 162(m) Performance Restrictions . For purposes of qualifying grants of Performance Units/Shares as “performance-based compensation” under Section 162(m), the Administrator, in its discretion, may set restrictions based upon the achievement of Performance Goal ( s ) . The Performance Goal ( s ) will be set by the Administrator on or before the Determination Date. In granting Performance Units/Shares which are intended to qualify under Section 162(m), the Administrator will follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Award under Section 162(m) (e.g., in determining the Performance Goal ( s ) ).

Section 11
Performance-based Compensation Under Section 162(m)

11.1 General . If the Administrator, in its discretion, decides to grant an Award intended to qualify as “performance-based compensation” under Section 162(m), the provisions of this Section 11 will control over any contrary provision in the Plan; provided, however, that the Administrator in

- 17 -

its discretion may grant Awards that are not intended to qualify as “performance-based compensation” under Section 162(m) to such Participants that are based on Performance Goal ( s ) or other specific criteria or goals but that do not satisfy the requirements of this Section.

11.2 Performance Goals . The granting and/or vesting of Restricted Stock Awards , Restricted Stock Units, Performance Shares , Performance Units and other incentives under the Plan may be made subject to the attainment of performance goals relating to one or more business criteria within the meaning of Section 162(m) and may provide for a targeted level or levels of achievement (“Performance Goals”) including ( a) Cash Flow ; (b) E arnings; (c) Product and Operational Metrics ; (d) Revenue ; and (e) Total Shareholder R eturn.

Any Performance Goal used may be measured ( i ) in absolute terms, ( ii ) in combination with another Performance Goal or Goals (for example, but not by way of limitation, as a ratio or matrix), ( iii ) in relative terms (including, but not limited to, as compared to results for other periods of time, against other objective metrics, and/or against another company, companies or an index or indices), ( iv ) with respect to equity, assets or human resources of the Company, (including, for example, on a per-share or per-capita basis), ( v ) against the performance of the Company as a whole or a specific business unit(s) (including acquired business units), business segment(s) or product(s) of the Company, ( vi ) on a pre-tax or after-tax basis , and/or ( vii ) on a GAAP (generally accepted accounting principles) or non-GAAP basis. For example, but not by way of limitation, the Administrator could determine that Restricted Stock Units will be earned for a Performance Period for the achievement of goals for Earnings calculated before interest, taxes, depreciation and amortization. As another example, the Administrator could determine that Restricted Stock Units will be earned for a Performance Period for the achievement of goals for Earnings divided by the number of Shares that are outstanding (in other words, Earnings per Share).

Performance Goals may differ from Participant to Participant and from Award to Award. Prior to the Determination Date, the Administrator, in its discretion, will determine whether any significant element(s) or item(s) will be included in or excluded from the calculation of any Performance Goal with respect to any Participants. As determined in the discretion of the Administrator prior to the Determination Date, achievement of Performance Goals for a particular Award may be calculated in accordance with the Company’s financial statements, prepared in accordance with GAAP, or as adjusted for certain costs, expenses, gains and losses to provide non-GAAP measures of operating results

11.3 Procedures . To the extent necessary to comply with the performance-based compensation provisions of Section 162(m), with respect to any Award granted subject to Performance Goal ( s ) , within the first twenty-five percent (25%) of the Performance Period, but in no event more than ninety (90) days following the commencement of any Performance Period (or such other time as may be required or permitted by S ection 162(m)), the Administrator will, in writing, ( a ) designate one or more Participants to whom an Award will be made, ( b ) select the Performance Goal ( s ) applicable to the Performance Period, ( c ) establish the Performance Goal(s) , and amounts of such Awards, as applicable, which may be earned for such Performance Period, and ( d ) specify the relati onship between Performance Goal(s) and the amounts of such Awards, as applicable, to be earned by each Participant for such Performance Period. Following the completion of each Performance Period, the Administrator will certify in writing whether the applicable Performance Goal(s) have been achieved for such Performance Period. In determining the amounts earned by a Participant, the Administrator will have the right to reduce or eliminate (but not to increase) the amount payable at a given level of performance to take into account additional factors that the

- 18 -

Administrator may deem relevant to the assessment of individual or corporate performance for the Performance Period. A Participant will be eligible to receive payment pursuant to an Award for a Performance Peri od only if the Performance Goal(s) for such period are achieved (and all Tax Obligations with respect thereto are satisfied) .

11.4 Additional Limitations . Notwithstanding any other provision of the Plan, any Award that is granted to a Participant and is intended to constitute qualified performance based compensation under Section 162(m) will be subject to any additional limitations set forth in the Code (including any amendment to Section 162(m)) or any regulations and ruling s issued thereunder that are requirements for qualification as qualified performance-based compensation as described in Section 162(m), and the Plan will be deemed amended to the extent necessary to conform to such requirements.

Section 12
Covered Employee Annual Incentive Awards

12.1 Establishment of Incentive Pool . The Committee may designate Covered Employees who are eligible to receive a monetary payment with respect to a Fiscal Year based on a percentage of an incentive pool equal to the greater of: ( a ) three percent ( 3 %) of the Company’s Consolidated Operating Earnings for the Fiscal Year, ( b ) two percent ( 2 %) of the Company’s Operating Cash Flow for the Fiscal Year, or ( c ) five percent ( 5 %) of the Company’s Net Income for the Fiscal Year. The Administrator will allocate an incentive pool percentage to each designated Covered Employee for each Fiscal Year. In no event may ( i ) the incentive pool percentage for any one Covered Employee exceed fifty percent ( 50 %) of the total pool, and ( ii ) the sum of the incentive pool percentages for all Covered Employees cannot exceed one hundred percent (100%) of the total pool.

12.2 Determination of Covered Employees’ Portions . As soon as possible after the determination of the incentive pool for a Fiscal Year, the Administrator will calculate each Covered Employee’s allocated portion of the incentive pool based upon the percentage established at the beginning of the Fiscal Year. Each Covered Employee’s incentive award then will be determined by the Administrator based on the Covered Employee’s allocated portion of the incentive pool subject to adjustment in the sole discretion of the Administrator. In no event may the portion of the incentive pool allocated to a Covered Employee be increased in any way, including as a result of the reduction of any other Covered Employee’s allocated portion. The Administrator will retain the discretion to adjust such Awards downward.

Section 13
Cash-Based Awards and Other Stock-Based Awards

13.1 Grant of Cash-Based Awards . Subject to the limits of Section 5 and the other terms and conditions of the Plan, the Administrator, at any time and from time to time, may grant Cash-Based Awards in such amounts and upon such terms and conditions as the Administrator, in its sole discretion, determines , provided that such terms and conditions are otherwise consistent with the terms and conditions of the Plan .

13.2 Grant of Other Stock-Based Awards . Subject to the limits of Section 5 and the other terms and conditions of the Plan, the Administrator, at any time and from time to time, may grant Other Stock-Based Awards not otherwise described by the terms of the Plan (including the grant or offer for sale of unrestricted Shares) in such amounts and upon such terms and conditions as the

- 19 -

Administrator, in its sole discretion, determines , provided that such terms and conditions are otherwise consistent with the terms and conditions of the Plan . Such Awards may involve the transfer of actual Shares to Participants, or the payment in cash or otherwise of amounts based on the value of Shares and may include, without limitation, Awards designed to comply with or take advantage of the applicable local laws of jurisdictions other than the United States.

13.3 Value of Cash-Based and Other Stock-Based Awards . Each Cash-Based Award will specify a payment amount or payment range (which may be expressed as a percentage of the Participant’s base salary, a dollar amount or a result of a formula or other matrix) , as determined by the Administrator . Each Other Stock-Based Award will be expressed in terms of Shares or units based on Shares, as determined by the Administrator . The Administrator may establish performance or vesting criteria in its discretion. If the Administrator exercises its discretion to establish such criteria , the number and/or value of Cash-Based Awards or Other Stock-Based Awards that will be paid out to the Participant will depend on the extent to which the criteria are met.

13.4 Payment of Cash-Based and Other Stock-Based Awards . Payment, if any, with respect to a Cash-Based Award or Other Stock-Based Award, will be made in accordance with the terms of the Award, in cash or Shares as the Administrator determines.

13.5 Termination . The Administrator will determine the extent to which the Participant will have the right to receive Cash-Based Awards or Other Stock-Based Awards following termination of the Participant’s status as a Service Provider. Such provisions will be determined in the sole discretion of the Administrator, may be included in an agreement entered into with each Participant, but need not be uniform among all Awards of Cash-Based Awards or Other Stock-Based Awards, and may reflect distinctions based on the reasons for termination.

Section 14
Adjustments; Dissolution or Liquidation; Merger or Change in Control

14.1 Adjustments . In the event that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), recapitalization, stock split, reverse stock split, reorganization, reincorporation, reclassification, merger, consolidation, split-up, spin-off, combination, repurchase, or exchange of Shares or other securities of the Company, or other change in the corporate structure of the Company affecting the Shares occurs, the Administrator, in order to prevent diminution or enlargement of the benefits or potential benefits intended to be made available under the Plan, will adjust the number and class of s hares of stock that may be issued under the Plan and/or the number, class, and price of s hares of stock covered by each outstanding Award, and the numerical Share limits in Sections 3 and 5 .

14.2 Dissolution or Liquidation . In the event of the proposed dissolution or liquidation of the Company, the Administrator will notify each Participant holding an outstanding Award as soon as practicable prior to the effective date of such proposed transaction. To the extent it has not been previously exercised, an Award will terminate immediately prior to the consummation of such proposed action.

- 20 -

14.3 Change in Control . In the event of a Change in Control :

(a) E ach then- outstanding Award will be treated as the Administrator determines (subject to the provisions of the following paragraph) without a Participant’s consent , including, without limitation, that ( i ) Awards will be assumed , or substantially equivalent awards will be s ubstituted , by the acquiring or succeeding corporation ( or a n affiliate thereof) with appropriate adjustments as to the number and kind of shares and prices; ( ii ) u pon written notice to a Participant, that the Participant’s Awards will terminate upon or immediately prior to the Change in Control; ( iii ) outstanding Awards will vest and become exercisable, realizable, or payable, or restrictions applicable to an Award will lapse, in whole or in part upon the Change in Control, and, to the extent the Administrator determines, terminate upon or immediately prior to the Change in Control; ( iv ) ( A ) an Award will terminate in exchange for an amount of cash and/or property, if any, equal to the amount that would have been attained upon the exercise of such Award or realization of the Participant’s rights as of the date of the Change in Control (and, for the avoidance of doubt, if as of the date of the Change in Control the Administrator determines in good faith that no amount would have been attained upon the exercise of such Award or realization of the Participant’s rights, then such Award may be terminated by the Company, without payment), or ( B ) an Award will be replaced with other rights or property selected by the Administrator in its sole discretion; or ( v ) any combination of the foregoing. In taking any of the actions permitted under this Section 14.3 , the Administrator will not be obligated to treat all Awards , all Awards held by a Participant or other holder, or all Awards of the same type, similarly.

(b) I f the successor corporation does not assume or substitute for an outstanding Award or portion thereof , as described in subsection (a)(i), and, for the avoidance of doubt, notwithstanding the minimum vesting requirement set forth in Section 5.3, ( i ) the Participant will fully vest in and have the right to exercise any such outstanding Option or Stock Appreciation Right, including Shares as to which such Award would not otherwise be vested or exercisable, ( ii ) all time-based vesting restrictions on any s uch Award will lapse, and (iii) the payout level attainable under any such A ward with performance-based vesting restrictions will be deemed to have been earned as of the date of the Change in Control based on either (A) the actual level of achievement of all relevant performance criteria against the applicable “target” level(s) measured as of the date of the Change in Control, or (B) the deemed achievement of all relevant performance criter ia against the applicable “target” level(s) m easured as of the date of the Change in Control , with a pro rata payout based on the number of days within the applicable Performance Period that has elapsed before the Change in Control , as determined by the Administrator, and , in each such case , all other applicable vesting criteria and other terms and conditions of the Award will be deemed to have been satisfied , unless specifically provided otherwise in the applicable Award Agreement or other written agreement between the Participant and the Company or other Employer . The treatment of any other Awards will be determined by the Administrator in connection with the grant thereof, as reflected in the applicable Award Agreement. In addition, if an Option or Stock Appreciation Right is not assumed or substituted in the event of a Change in Control, the Administrator will notify the Participant in writing or electronically that such Option or Stock Appreciation Right will be exercisable for a period of time determined by the Administrator in its sole discretion, and the Option or Stock Appreciation Right will terminate upon the expiration of such period.

For the purposes of this Section 14.3 , an Award will be considered assumed if, following the Change in Control, the Award confers the right to purchase or receive, for each Share subject to the Award immediately prior to the Change in Control, the consideration (whether stock, cash, or other

- 21 -

securities or property) received in the Change in Control by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the Change in Control is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of an Option or Stock Appreciation Right or upon the payout of a Restricted Stock Unit, Performance Unit , Performance Share or Other Stock-Based Award , for each Share subject to such Award, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the Change in Control.

Notwithstanding anything in this Section 14.3 to the contrary, and unless otherwise provided in an Award Agreement, an Award that vests, is earned or paid out upon the satisfaction of one or more P erformance G oals or other performance criteria will not be considered assumed if the Company or its successor modifies any of such goals or criteria without the Participant’s consent; provided, however, that a modification to such goals or criteria only to reflect the successor corporation’s post-Change in Control corporate structure will not be deemed to invalidate an otherwise valid Award assumption.

Notwithstanding anything in this Section to the contrary, if a payment under an Award Agreement is subject to Section 409A and if the change in control definition contained in the Award Agreement does not comply with the definition of “change in control event ” for purposes of a distribution under Section 409A, then any payment of an amount that otherwise is accelerated under this Section will be delayed until the earliest time that such payment would be permissible under Section 409A without triggering any penalties applicable under Section 409A .

14.4 Outside Director Awards . With respect to Awards granted to an Outside Director that are assumed or substituted for, if on the date of or following such assumption or substitution, the Participant’s status as a Director or a director of the successor corporation, as applicable, is terminated other than upon a voluntary resignation by the Participant (unless such resignation is at the request of the acquirer), then the Participant will fully vest in and have the right to exercise Options and/or Stock Appreciation Rights as to all of the Shares underlying such Award, including those Shares which would not otherwise be vested or exercisable, all restrictions on Restricted Stock Awards, Restricted Stock Units and Other Stock-Based Awards will lapse, and, with respect to Awards with performance-based vesting, all performance or other vesting criteria will be deemed achieved at one hundred percent (100%) of target levels and all other terms and conditions met, unless specifically provided otherwise under the applicable Award Agreement or other written agreement between the Participant and the Company or other Employer .

Section 15
ADDITIONAL PROVISIONS OF AWARDS

15.1 Legal Compliance Required . In no event will Shares be issued or delivered pursuant to the exercise or settlement of an Award unless such exercise or settlement and the issuance and delivery of such Shares complies or will comply with Applicable Laws, as determined by the Administrator, with such determination subject to the further approval of counsel for the Company.

15.2 Section 409A . Awards will be designed and operated in such a manner that they are either exempt from the application of, or comply with, the requirements of Section 409A such that

- 22 -

the grant, payment, settlement or deferral thereof, as applicable, will not be subject to the additional tax or interest applicable under Section 409A, except as otherwise determined in the sole discretion of the Administrator. The Plan and each Award Agreement is intended to meet the requirements of Section 409A, to the extent applicable, and will be construed and interpreted in accordance with such intent, except as otherwise determined in the sole discretion of the Administrator. To the extent that an Award or payment, or the settlement or deferral thereof, is subject to Section 409A, the Award will be granted, paid, settled or deferred in a manner that will meet the requirements of Section 409A, such that the grant, payment, settlement or deferral will not be subject to the additional tax or interest applicable under Section 409A. In no event will the Company or other Employer have any obligation under the Plan to reimburse a Participant for any taxes or other costs that may be imposed on the Participant as a result of Section 409A.

15.3 Investment Representations . As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.

15.4 Inability to Obtain Authority . The inability of the Company to obtain authority from any regulatory body having jurisdiction or to complete or comply with the requirements of any registration or other qualification of the Shares under any state, federal or foreign law or under the rules and regulations of the U.S. Securities and Exchange Commission, the stock exchange on which Shares of the same class are then listed, or any other governmental or regulatory body, which authority, registration, qualification or rule compliance is deemed by the Company’s counsel to be necessary or advisable for the issuance and sale of any Shares hereunder, will relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority, registration, qualification or rule compliance will not have been obtaine d.

15.5 Forfeiture Events . The Administrator may specify in an Award Agreement that the Participant's rights, payments, and benefits with respect to an Award will be subject to the reduction, cancellation, forfeiture, or recoupment upon the occurrence of certain specified events, in addition to any otherwise applicable vesting or performance conditions of the Award. Notwithstanding any contrary provision of the Plan, an Award will be subject to the Company's clawback policy or other compensation recoupment policy as may be established and/or amended from time to time (the “Clawback Policy”). The Administrator may require a Participant to forfeit, return or reimburse the Company all or a portion of the Award and any amounts paid thereunder pursuant to the terms of the Clawback Policy or as necessary or appropriate to comply with Applicable Laws.

15.6 Leaves of Absence or Transfers Between Locations . Unless the Administrator provides otherwise, as set forth in the applicable Award Agreement, the vesting of an Award will be suspended during any unpaid leave of absence. A Service Provider will not cease to be an Employee or Director in the case of (a) any leave of absence approved by the Employer or (b) transfers between locations of the Company , between the Company and an other Employer or between an Employer and another Employer . For purposes of Incentive Stock Options, no leave of absence may exceed three (3) months, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Employer is not so guaranteed, then six (6) months following the first (1st) day of such leave any Incentive Stock Option held by the Participant will cease to be treated as an Incentive Stock Option and will be treated for tax purposes as a Non qualified Stock Option.

- 23 -

15.7 Limited Transferability of Awards . Unless determined otherwise by the Administrator, as set forth in the applicable Award Agreement, an Award may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Participant, only by the Participant. If the Administrator makes an Award transferable, the related Award Agreement will contain such additional terms and conditions as the Administrator deems appropriates.

15.8 In demnification . Subject to the requirements of Delaware law, each individual who is or has been a member of the Board and/or any Committee, or who is an Employee to whom authority was delegated in accordance with Section 3 (an “Indemnitee”), will be indemnified and held harmless by the Company against and from (a) any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by the Indemnitee in connection with or resulting from any claim, action, suit, or proceeding to which the Indemnitee may be a party or in which the Indemnitee may be involved by reason of any action taken or failure to act under the Plan or any Award Agreement, and (b) any and all amounts paid by the Indemnitee in settlement thereof, with the Company’s approval, or paid by the Indemnitee in satisfaction of any judgment in any such claim, action, suit, or proceeding against the Indemnitee, provided the Indemnitee gives the Company an opportunity, at its own expense, to handle and defend the same before the Indemnitee undertakes to handle and defend it on the Indemnitee’s own behalf, unless such loss, cost, liability or expense is a result of the Indemnitee’s gross negligence or willful misconduct or except as expressly provided by statute. The foregoing r ight of indemnification, if any, will not be exclusive of any other rights of indemnification to which the Indemnitee may be entitled under the Company’s Certificate of Incorporation or Bylaws, by contract, as a matter of law, or otherwise, or under any power that the Company may have to indemnify or hold harmless the Indemnitee.

15.9 No Effect on Employment or Service . Neither the Plan nor any Award will confer upon a Participant any right with respect to continuing the Participant’s relationship as a Service Provider with the Employer, nor will they interfere in any way with the Participant’s right or the right of the Employer to terminate such relationship at any time, with or without cause, to the extent permitted by law.

15.10 Participation . No Service Provider will have the right to be selected to receive an Award or, having been so selected, to be selected to receive any future Award.

Section 16
Ta X WITHOLDING

16.1 General Requirements . Prior to the issuance of any Shares or cash pursuant to an Award (or exercise thereof) or such earlier time as any Tax Obligations with respect to the Award are due, the Company and/or other Employer, as applicable, will have the power and the right to deduct or withhold, or require a Participant to remit to the Company or other Employer , as applicable, an amount sufficient to satisfy all Tax Obligations with respect to the Award (or exercise thereof).

16.2 Withholding or Remittance Arrangements . The Administrator, in its sole discretion and pursuant to such procedures as it may specify from time to time, may require or permit a Participant to satisfy such Tax Obligation s , in whole or in part , by (without limitation) : (a) paying cash, check or other cash equivalents, (b) electing to have the Company (or other Employer, as applicable) withhold otherwise deliverable cash or Shares having a Fair Market Value equal to the

- 24 -

minimum statutory amount required to be withheld or remitted, or such greater amount as the Administrator may determine if such amount w ill not cause adverse accounting consequences , as the Administrator determines, in its sole discretion (the “ Applicable Withholding Amount”), (c) delivering to the Company already-owned Shares having a Fair Market Value equal to the Applicable W ithholding Amount , provided that the delivery of such Shares will not result in any adverse accounting consequences, as the Administrator determines, in its sole discretion, (d) selling a sufficient number of Shares otherwise deliverable to the Participant through such means as the Administrator may determine in its sole discretion (whether through a broker or otherwise) equal to the amount required to be withheld or remitted , (e) any other means that the Administrator, in its sole discretion, determines to both comply with Applicable Laws and to be consistent with the purposes of the Plan, or (f) any combination of the foregoing arrangements . Unless otherwise specifically determined by the Administrator, the withholding arrangements approved by the Administrator under this Section 16.2 shall be intended to avoid the applicable Award being subject to liability accounting under ASC 718. The Fair Market Value of the Shares to be withheld or delivered will be determined as of the date that the Tax Obligations are required to be withheld or remitted .

Section 17
Amendment , Termination and duration of plan

17.1 Amendment, Suspension or Termination Authority . Except as otherwise specified in this Section, t he Company, by action of the Board (or its authorized delegate), may at any time and for any reason amend, alter, suspend or terminate the Plan , or any part thereof . The Company will obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws. Any amendment, alteration, suspension or termination of the Plan will not impair in any material way the rights or obligations of any Participant under any Award that is outstanding as of the effective date of the Plan amendment, alteration, suspension of termination, without the written consent of the Participant. However, a termination of the Plan will not affect the Administrator’s ability to exercise its authority under the Plan with respect to any Awards that are outstanding as of the effective date of the termination. No Award may be granted during any period of suspension or after termination of the Plan.

17.2 Duration of Plan . The Plan is effective as of the Effective Date, and subject to Section 17 , will remain in effect thereafter, provided that the Plan is ratified by an affirmative vote of the holders of a majority of the Shares that are present in person or by proxy and entitled to vote at the 2016 Annual Meeting of Stockholders of the Company. Notwithstanding the foregoing, without further stockholder approval, no Incentive Stock Option may be granted under the Plan after September 13, 2026 .

Section 18
LEGAL CONSTRUCTION

18.1 Governing Law . The Plan and each Award Agreement will be governed by the laws of the State of Delaware, excluding any conflicts or choice of law rule or principle that might other otherwise refer construction or interpretation of the Plan to the substantive law of another jurisdiction . Unless otherwise provided in the applicable Award Agreement, a Participant is deemed to submit to the exclusive jurisdiction and venue of the federal or state courts of Delaware, to resolve any and all issues that may arise out of or relate to the Plan or the Award Agreement.

- 25 -

18.2 Severability . In the event any provision of the Plan is held illegal or invalid for any reason, such illegality or invalidity will not affect the remaining parts of the Plan, and the Plan will be construed and enforced as if the illegal or invalid provision had not been included.

18.3 Captions . Captions in the Plan are provided for convenience only, and will not serve as a basis for the interpretation or construction of the Plan.

- 26 -




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)



	Three-Months Ended
	December 31,
	2016		2015

Net earnings	$	46,548	$	25,820

Other comprehensive earnings:
Foreign currency translation adjustments		(18,635)		(10,254)
Gain on foreign currency transactions designated as hedges of net investments in foreign subsidiaries (Note 6)		3,830		862
Taxes on changes in foreign currency translation adjustments		(306)		306
Foreign currency translation and transactions adjustments, net of tax		(15,111)		(9,086)

Reclassification of net realized (gains) losses on derivatives to earnings (Note 6)		(18)		29
Taxes on changes in derivative transactions		7		(11)
Derivative adjustments, net of tax		(11)		18

Amortization of:
Net prior service cost		56		56
Net loss		641		427
Foreign currency exchange rate changes on minimum retirement benefit liabilities		1,255		284
Taxes on changes in minimum retirement liability adjustments, net of foreign currency exchange rate changes		(693)		(286)
Pension and other postretirement benefit plan adjustments, net of tax		1,259		481
Total comprehensive earnings	$	32,685	$	17,233



	December 31,		September 30,
	2016		2016
ASSETS
Current assets:
Cash and cash equivalents	$	80,885	$	81,090
Accounts receivable, less allowance for uncollectible amounts of $2,641 and $2,540, respectively		252,761		343,768
Inventories		493,764		461,683
Income taxes receivable		23,129		20,358
Other current assets		34,257		37,525
Total current assets		884,796		944,424
Property, plant and equipment, net		877,077		876,350
Goodwill		553,300		555,684
Intangible assets, net		190,933		197,650
Deferred income tax assets		18,963		20,194
Other assets		51,146		48,060
Total assets	$	2,576,215	$	2,642,362
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt	$	150,000	$	150,000
Accounts payable		149,280		169,439
Income taxes payable		1,374		4,547
Accrued liabilities		115,823		156,627
Total current liabilities		416,477		480,613
Long-term debt, less current portion		569,878		577,153
Deferred income tax liabilities		9,063		3,777
Other liabilities		358,429		368,224
Total liabilities		1,353,847		1,429,767
Commitments and contingencies (Note 19)
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		142,664		141,570
Accumulated other comprehensive losses		(79,568)		(65,705)
Deferred compensation		6,889		5,089
Retained earnings		1,689,275		1,649,506
		1,759,366		1,730,566
Treasury stock at cost, 11,559 s hares and 11,374 shares, respectively		(530,109)		(512,882)
Treasury stock held for deferred compensation, at cost , 183 shares and 157 shares, respectively		(6,889)		(5,089)
Total stockholders' equity		1,222,368		1,212,595
Total liabilities and stockholders' equity	$	2,576,215	$	2,642,362



	Three-Months Ended December 31,
	2016		2015
Cash flows from operating activities:
Net earnings	$	46,548	$	25,820
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		18,913		17,062
Net gain on sales of assets		(3,699)		(1,602)
Stock-based compensation		1,261		8,451
Deferred income taxes		4,777		9,768
(Gain) loss on derivatives reclassified from accumulated comprehensive earnings into earnings		(18)		29
Changes in operating assets and liabilities:
Accounts receivable		87,615		74,717
Inventories		(37,632)		(25,091)
Accounts payable and accrued liabilities		(54,563)		(56,816)
Current income taxes		(5,731)		(10,517)
Retirement benefit obligations		(897)		(874)
Other		(4,223)		(3,587)
Net cash provided by operating activities		52,351		37,360
Cash flows from investing activities:
Payments for purchase of property, plant, and equipment		(21,058)		(33,131)
Net proceeds from sale of assets		3,682		1,852
Proceeds from sales of short-term investments		758		-
Net cash used in investing activities		(16,618)		(31,279)
Cash flows from financing activities:
Cash dividends paid		(6,779)		(6,321)
Proceeds from sales of treasury stock		4,843		1,252
Payments for repurchases of common stock		(24,004)		(30,712)
Borrowings on revolving lines of credit and short-term borrowings		316,650		220,000
Payments on revolving lines of credit and short-term borrowings		(312,800)		(135,598)
Payments of long-term debt and capital lease obligations		(102)		(50,000)
Net cash used in financing activities		(22,192)		(1,379)
Effect of exchange rate changes on cash and cash equivalents		(13,746)		(2,482)
Net change in cash and cash equivalents		(205)		2,220
Cash and cash equivalents at beginning of year		81,090		82,202
Cash and cash equivalents at end of period	$	80,885	$	84,422



	Number of shares				Stockholders' equity
									Accumulated other comprehensive (loss) earnings
	Preferred stock	Common stock	Treasury stock	Treasury stock held for deferred compensation	Common stock		Additional paid-in capital		Foreign currency translation adjustments		Unrealized derivative gains (losses)		Minimum retirement benefit liability adjustments		Total accumulated other comprehensive (loss) earnings		Deferred compensation		Retained earnings		Treasury stock at cost		Treasury stock held for deferred compensation		Total stockholders' equity

Balances as of October 1, 2015	-	72,960	(9,763)	(173)	$	106	$	131,231	$	(21,610)	$	166	$	(30,014)	$	(51,458)	$	4,322	$	1,495,274	$	(422,049)	$	(4,322)	$	1,153,104
Net earnings	-	-	-	-		-		-		-		-		-		-		-		25,820		-		-		25,820
Other comprehensive income (loss), net of tax	-	-	-	-		-		-		(9,086)		18		481		(8,587)		-		-		-		-		(8,587)
Cash dividends paid ($0.10 per share)	-	-	-	-		-		-		-		-		-		-		-		(6,321)		-		-		(6,321)
Purchases of treasury stock	-	-	(624)	-		-		-		-		-		-		-		-		-		(30,712)		-		(30,712)
Sales of treasury stock	-	-	49	-		-		(406)		-		-		-		-		-		-		1,658		-		1,252
Stock-based compensation	-	-	-	-		-		8,451		-		-		-		-		-		-		-		-		8,451
Purchases of stock by deferred compensation plan	-	-	-	(21)		-		-		-		-		-		-		1,027		-		-		(1,027)		-
Distribution of stock from deferred compensation plan	-	-	-	(1)		-		-		-		-		-		-		(4)		-		-		4		-
Balances as of December 31, 2015	-	72,960	(10,338)	(195)	$	106	$	139,276	$	(30,696)	$	184	$	(29,533)	$	(60,045)	$	5,345	$	1,514,773	$	(451,103)	$	(5,345)	$	1,143,007

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	-	-	-	-		-		-		-		-		-		-		-		46,548		-		-		46,548
Other comprehensive income (loss), net of tax	-	-	-	-		-		-		(15,111)		(11)		1,259		(13,863)		-		-		-		-		(13,863)
Cash dividends paid ($0.11 per share)	-	-	-	-		-		-		-		-		-		-		-		(6,779)		-		-		(6,779)
Purchases of treasury stock	-	-	(350)	-		-		-		-		-		-		-		-		-		(24,004)		-		(24,004)
Sales of treasury stock	-	-	139	-		-		(907)		-		-		-		-		-		-		5,750		-		4,843
Common shares issued from treasury stock to settle employee liabilities	-	-	26	(26)		-		740		-		-		-		-		1,767		-		1,027		(1,767)		1,767
Stock-based compensation	-	-	-	-		-		1,261		-		-		-		-		-		-		-		-		1,261
Purchases and transfers of stock by/to deferred compensation plan	-	-	-	-		-		-		-		-		-		-		37		-		-		(37)		-
Distribution of stock from deferred compensation plan	-	-	-	-		-		-		-		-		-		-		(4)		-		-		4		-
Balances as of December 31, 2016	-	72,960	(11,559)	(183)	$	106	$	142,664	$	(41,082)	$	168	$	(38,654)	$	(79,568)	$	6,889	$	1,689,275	$	(530,109)	$	(6,889)	$	1,222,368


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	26
	Forward Looking Statements	26
	Overview	28
	Results of Operations	29
	Liquidity and Capital Resources	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 5.	Other Information	37
Item 6.	Exhibits	38
	Signatures	39


		Page
Section 1 Background		1
1.1	General	1
1.2	Effective Date	1
1.3	Purposes	1
Section 2 Definitions		1
Section 3 SHARES Subject to the Plan		7
3.1	General	7
3.2	Lapsed Awards	7
3.3	Full Value Awards	8
3.4	Share Reserve	8
Section 4 Administration of the Plan		8
4.1	Procedure	8
4.2	Powers of the Administrator	8
4.3	Binding Effect of Administrator’s Decisions	10
Section 5 Limits		10
5.1	General Share Limits	10
5.2	Fiscal Year Limit on Outside Director Awards and Other Compensation	10
5.3	Minimum Vesting Requirement for Full Value Awards	11
5.4	Incentive Stock Option Limits	11
5.5	No Exchange Program Permitted	11
Section 6 Options		11
6.1	Grant of Options	11
6.2	Award Agreement	12
6.3	Maximum Term of Option	12
6.4	Exercise Price and Consideration	12
6.5	Exercise of Option	12
Section 7 Restricted Stock Awards		14
7.1	Grant of Restricted Stock Awards	14
7.2	Award Agreement	14
7.3	Transferability	14
7.4	Other Restrictions	14
7.5	Legend on Certificates	14
7.6	Removal of Restrictions	14
7.7	Voting Rights	14
7.8	Dividends and Other Distributions	14
7.9	Section 162(m) Performance Restrictions	14

		Page
Section 8 Restricted Stock Units		15
8.1	Grant of Restricted Stock Units	15
8.2	Award Agreement	15
8.3	Vesting Criteria and Other Terms	15
8.4	Earning Restricted Stock Units	15
8.5	Form and Timing of Payment	15
8.6	Cancellation	15
8.7	Section 162(m) Performance Restrictions	15
Section 9 Stock Appreciation Rights		16
9.1	Grant of Stock Appreciation Rights	16
9.2	Award Agreement	16
9.3	Exercise Price and Other Terms	16
9.4	Expiration of Stock Appreciation Rights	16
9.5	Payment of Stock Appreciation Right Amount	16
Section 10 Performance Units and Performance Shares		16
10.1	Grant of Performance Units/Shares	16
10.2	Value of Performance Units/Shares	17
10.3	Performance Objectives and Other Terms	17
10.4	Earning of Performance Units/Shares	17
10.5	Form and Timing of Payment of Performance Units/Shares	17
10.6	Cancellation of Performance Units/Shares	17
10.7	Section 162(m) Performance Restrictions	17
Section 11 Performance -based Compensation Under Section 162(m)		17
11.1	General	17
11.2	Performance Goals	18
11.3	Procedures	18
11.4	Additional Limitations	19
Section 12 Covered Employee Annual Incentive Awards		19
12.1	Establishment of Incentive Pool	19
12.2	Determination of Covered Employees’ Portions	19
Section 13 Cash-Based Awards and Other Stock-Based Awards		19
13.1	Grant of Cash-Based Awards	19
13.2	Grant of Other Stock-Based Awards	19
13.3	Value of Cash-Based and Other Stock-Based Awards	20
13.4	Payment of Cash-Based and Other Stock-Based Awards	20
13.5	Termination	20

		Page
Section 14 Adjustments ; Dissolution or Liquidation; Merger or Change in Control		20
14.1	Adjustments	20
14.2	Dissolution or Liquidation	20
14.3	Change in Control	21
14.4	Outside Director Awards	22
Section 15 ADDITIONAL PROVISIONS OF AWARDS		22
15.1	Legal Compliance Required	22
15.2	Section 409A	22
15.3	Investment Representations	23
15.4	Inability to Obtain Authority	23
15.5	Forfeiture Events	23
15.6	Leaves of Absence or Transfers Between Locations	23
15.7	Limited Transferability of Awards	24
15.8	Indemnification	24
15.9	No Effect on Employment or Service	24
15.1 0	Participation	24
Section 16 TaX WITHOLDING		24
16.1	General Requirements	24
16.2	Withholding or Remittance Arrangements	24
Section 17 Amendment , Termination and duration of plan		25
17.1	Amendment, Suspension or Termination Authority	25
17.2	Duration of Plan	25
Section 18 LEGAL CONSTRUCTION		25
18.1	Governing Law	25
18.2	Severability	26
18.3	Captions	26


Date: Janua r y 2 5 , 2017			/s/ Thomas A. Gendron
			Thomas A. Gendron
			Chairman of the Board, Chief Executive Officer, and President (Principal Executive Officer)


Date: January 2 5 , 201 7			/s/ Robert F. Weber, Jr.
			Robert F. Weber, Jr.
			Vice Chairman, Chief Financial Officer, and Treasurer (Principal Financial and Accounting Officer)



Date:	January 2 5 , 201 7	/s/ Thomas A. Gendron Thomas A. Gendron Chairman of the Board, Chief Executive Officer , and President
Date:	January 2 5 , 201 7	/s/ Robert F. Weber, Jr. Robert F. Weber, Jr. Vice Chairman, Chief Financial Officer, and Treasurer