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0000950137-06-013055.txt : 20061130 0000950137-06-013055.hdr.sgml : 20061130 20061130164535 ACCESSION NUMBER: 0000950137-06-013055 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061130 DATE AS OF CHANGE: 20061130 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WOODWARD GOVERNOR CO CENTRAL INDEX KEY: 0000108312 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL INDUSTRIAL APPARATUS [3620] IRS NUMBER: 361984010 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-08408 FILM NUMBER: 061248709 BUSINESS ADDRESS: STREET 1: 5001 N SECOND ST STREET 2: P O BOX 7001 CITY: ROCKFORD STATE: IL ZIP: 61125-7001 BUSINESS PHONE: 8158777441 MAIL ADDRESS: STREET 1: 5001 N SECOND ST STREET 2: PO BOX 7001 CITY: ROCKFORD STATE: IL ZIP: 61125-7001 10-K 1 c10357e10vk.htm FORM 10-K e10vk

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K


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


		For the fiscal year ended September 30, 2006


or


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


		For the transition period from to

Commission file number 0-8408

WOODWARD GOVERNOR COMPANY

(Exact name of registrant specified in its charter)


Delaware		36-1984010
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5001 North Second Street, Rockford, Illinois (Address of principal executive offices)		61125-7001 (Zip Code)

Registrant’s telephone number, including area code:

(815)877-7441

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class:		Name of Each Exchange on Which Registered:
Common stock, par value $.002917 per share		NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The aggregate market value of the voting and non-voting common equity stock held by non-affiliates, computed by reference to the price at which the common equity was last sold, or the average bid and ask price of such common equity, as of the last business day of our most recently completed second fiscal quarter, was $967,019,000 (such aggregate market value does not include voting stock beneficially owned by directors, officers, the Woodward Governor Company Profit Sharing Trust, Woodward Governor Company Deferred Shares Trust, or the Woodward Governor Company Charitable Trust).

There were 34,142,962 shares of common stock with a par value of $.0292 per share outstanding at November 20, 2006.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our proxy statement for the 2006 annual meeting of shareholders to be held January 24, 2007, are incorporated by reference into Part III of this filing, to the extent indicated.

TABLE OF CONTENTS


			Page


PART I
	Item 1.	Business		4
	Item 1A.	Risk Factors		6
	Item 1B.	Unresolved Staff Comments		9
	Item 2.	Properties		10
	Item 3.	Legal Proceedings		10
	Item 4.	Submission of Matters to a Vote of Security Holders		10

PART II
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		11
	Item 6.	Selected Financial Data		12
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		30
	Item 8.	Financial Statements and Supplementary Data		31
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		58
	Item 9A.	Controls and Procedures		58
	Item 9B.	Other Information		59

PART III
	Item 10.	Directors and Executive Officers of the Registrant		59
	Item 11.	Executive Compensation		59
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		60
	Item 13.	Certain Relationships and Related Transactions		60
	Item 14.	Principal Accounting Fees and Services		60

PART IV
	Item 15.	Exhibits and Financial Statement Schedules		60
Signatures				62
Bylaws
Form of Transitional Compensation Agreement
Subsidiaries
Consent of Independent Registered Public Accounting Firm
Rule 13a-14(a)/15d-14(a) Certification of Thomas A. Gendron
Rule 13a-14(a)/15d-14(a) Certification of Robert F. Weber
Section 1350 Certifications

PART I


Item 1.	*Business*

Woodward Governor Company designs, manufactures, and services energy control systems and components for aircraft and industrial engines and turbines. Leading OEMs (original equipment manufacturers) throughout the world use our products and services in the power generation, aerospace, transportation, and process industries markets.

We were established in 1870 and incorporated in 1902. We serve global markets from locations worldwide and are currently headquartered in Rockford, Illinois. Our principal executive officers maintain offices in Fort Collins, Colorado, as well as Rockford, Illinois. We plan to change the designation of our corporate headquarters to Fort Collins, Colorado, effective January 1, 2007.

Our business is driven by the worldwide demand for efficient, low emission, long life, and high performance energy use in harsh and demanding environments. Energy control and optimization solutions are our strength. One of our key objectives is to accurately and precisely control energy to optimize the performance, reliability, emissions, and efficiency of our customers’ products.


	•	Strategic Focus: Energy Control and Optimization Solutions. Our key areas of focus are fluid energy, combustion control, electrical energy, and motion control.

	•	Leverage: Core Technologies. Our core technologies include valves, servo actuators, combustion sensing, digital electronics, fuel injection, electric actuation, ignition, power electronics, pumps, and AC measurement and control.

	•	Integrate: Systems. Our systems include fuel systems, combustion systems, fluid systems, actuation systems, and electronic systems.

	•	Apply: OEM and Equipment Packagers. Our OEM and equipment packager customers use our systems and components in their products, including diesel engines, turbines, gas engines, compressors, generator sets, switchgear, and industrial vehicles. Some of our customers include Caterpillar, Cummins, Doosan, Dresser-Rand, Ebara, Emerson Electric, Enginuity, GE, Guangxi Yuchai Machinery, Hyundai, Ingersoll-Rand Bobcat, Kawasaki, Mitsubishi, Rolls-Royce, Siemens, U.S. government, United Technologies/Pratt & Whitney, Wärtsilä and major airlines worldwide.

	•	Serve: Market Applications. Ultimately, our systems and components are used in products that are sold into four key markets — power generation, transportation, process industries, and aerospace.

We have two operating segments — Industrial Controls and Aircraft Engine Systems. Industrial Controls is focused on systems and components that provide energy control and optimization solutions for industrial markets, which includes power generation, transportation, and process industries. Aircraft Engine Systems is focused on systems and components that provide energy control and optimization solutions for the aerospace market.

Information about our operations in 2006 and outlook for the future, including certain segment information, is included in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operation.” Additional segment information and certain geographical information are included in the Notes to the Consolidated Financial Statements in “Item 8 — Financial Statements and Supplementary Data.” Other information about our business follows.

Industrial Controls

We provide components and integrated systems through Industrial Controls primarily to OEMs of diesel engines, industrial turbines, gas engines, compressors, generator sets, switchgear, and industrial vehicles. We also sell components as spares or replacements, and provide other related services to these customers and other customers. In 2006, our two largest customers were General Electric Company, which accounted for approximately 20% of Industrial Controls’ sales, and Caterpillar, Inc., which accounted for approximately 18% of Industrial Controls’ sales.

We generally sell Industrial Controls’ products and services directly to our OEM customers, although we also generate sales to end users through distributors, dealers, and independent service facilities, whom often serve the role of an equipment packager. We carry certain finished goods and component parts inventory to meet rapid delivery requirements of customers, primarily for aftermarket needs. We do not believe Industrial Controls’ sales are subject to significant seasonal variation.

We believe Industrial Controls has a significant competitive position within the market for components and integrated systems for diesel engines, turbines, gas engines, compressors, generator sets, and switchgears. While published information is not available in sufficient detail to enable an accurate assessment, we believe we hold a strong position among independent manufacturers for power generation, transportation, and process industries markets. We compete with as many as 10 independent manufacturers and with the in-house control operations of OEMs. Customers demand technological solutions to meet their needs for efficiency, reliability, and the ability to meet increasingly more stringent global emissions regulations. Companies compete on the basis of providing products that meet these needs, as well as on the basis of price, quality, and customer service. In our opinion, our prices are generally competitive, and our quality, customer service, and technology used in products are favorable competitive factors.

Industrial Controls’ backlog orders were approximately $140 million at October 31, 2006, approximately 93% of which we expect to fill by September 30, 2007. Last year, Industrial Controls’ backlog orders were approximately $119 million at October 31, 2005, approximately 99% of which we expected to fill by September 30, 2006. Backlog orders are not necessarily an indicator of future billing levels because of variations in lead times.

Aircraft Engine Systems

We provide components and integrated systems through Aircraft Engine Systems to OEMs of aircraft gas turbines for use in those turbines. We also sell components as spares or replacements, and provide repair and overhaul services to these customers and other customers. In 2006, our two largest customers were General Electric Company, which accounted for approximately 24% of Aircraft Engine Systems’ sales, and United Technologies, which accounted for approximately 17% of Aircraft Engine Systems’ sales.

We primarily sell Aircraft Engine Systems’ products and services directly to our customers, although we also generate some aftermarket sales through distributors, dealers, and independent service facilities. We carry certain finished goods and component parts inventory to meet rapid delivery requirements of customers, primarily for aftermarket needs. We do not believe Aircraft Engine Systems’ sales are subject to significant seasonal variation.

We believe Aircraft Engine Systems has a significant competitive position within the market for components and integrated systems for aircraft gas turbines. We compete with several other manufacturers, including divisions of OEMs of aircraft gas turbines. While published information is not available in sufficient detail to enable an accurate assessment, we do not believe any company holds a dominant competitive position. Companies compete principally on price, quality, and customer service. In our opinion, our prices are competitive, and our quality and customer service are favorable competitive factors.

Aircraft Engine Systems’ backlog orders were approximately $228 million at October 31, 2006, approximately 62% of which we expect to fill by September 30, 2007. Last year, Aircraft Engine Systems’ backlog orders were approximately $137 million at October 31, 2005, approximately 71% of which we expected to fill by September 30, 2006. Backlog orders are not necessarily an indicator of future billing levels because of variations in lead times.

Other Matters

Products for both Industrial Controls and Aircraft Engine Systems make use of several patents and trademarks of various durations that we believe are collectively important. However, we do not consider our business for either segment dependent upon any one patent or trademark.

For both segments, our products consist of mechanical, electronic, and electromagnetic components. Mechanical components are machined primarily from aluminum, iron, and steel. Generally there are numerous

sources for the raw materials and components used in our products, and they are believed to be sufficiently available to meet all requirements.

We spent approximately $60 million for company-sponsored research and development activities in 2006, $50 million in 2005 and $40 million in 2004. Both Industrial Controls and Aircraft Engine Systems incurred these expenses.

We do not believe that compliance with current Federal, State, or local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, will have any material effect on our capital expenditures, earnings, or competitive position. We are also not intending to incur material capital expenditures for environmental control facilities through September 30, 2007.

We employed about 3,700 people at October 31, 2006.

This report contains forward-looking statements and should be read with “Item 1A — Risk Factors.”

We maintain a website at www.woodward.com. Securities and Exchange Commission filings, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and proxy statements, are available on our website as soon as reasonably practicable after they are filed electronically with, or furnished to, the Securities and Exchange Commission. Shareholders may obtain, without charge, a single copy of Woodward’s 2006 annual report on Form 10-K upon written request to the Corporate Secretary, Woodward Governor Company, 5001 North Second Street, P.O. Box 7001, Rockford, Illinois, 61125-7001.


Item 1A.	*Risk Factors*

Investment in our securities involves risk. An investor or potential investor should consider the risks summarized in this section when making investment decisions regarding our securities.

Also, an investor should be aware that this annual report contains statements intended to be considered forward-looking statements and therefore entitled to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including:


	•	Projections of sales, earnings, cash flows, or other financial items;

	•	Descriptions of our plans and objectives for future operations;

	•	Forecasts of future economic performance; and

	•	Descriptions of assumptions underlying the above items.

Forward-looking statements do not reflect historical facts. Rather, they are statements about future events and conditions and often include words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “outlook,” “plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would,” or similar expressions. Such statements reflect our expectations about the future only as of the date they are made. We are not obligated to, and we might not, update our forward-looking statements to reflect changes that occur after the date they are made. Furthermore, actual results could differ materially from projections or any other forward-looking statements regardless of when they are made.

Important factors that could individually, or together with one or more other factors, affect our business, results of operations and/or financial condition include, but are not limited to, the following:

Company Risks

Customers that account for a significant portion of our sales may change suppliers, insource production, or be less successful in the marketplace.

We have fewer customers than many other companies with similar sales volumes. Two customers accounted for 33% of our sales in 2006, each individually accounting for more than 10%. Our sales could decrease significantly if a large customer were to change suppliers, insource production, or be less successful in the markets in which it participates.

Sales may not achieve the level forecast.

We use inputs from various sources in developing our sales forecast, including customer and third-party forecasts of sales volumes and purchase requirements in our markets. Each of these sources could be overstated. In addition, general business and economic conditions and industry-specific business and economic conditions change over time, potentially resulting in lower sales.

Many of our expenses may not be able to be reduced in proportion to a sales shortfall.

Many of our expenses are relatively fixed in relation to changes in sales volumes. Some of these expenses are related to past capital expenditures or business acquisitions in the form of depreciation and amortization expense. Others are related to expenditures driven by levels of business activity other than the level of sales, including manufacturing overhead. As a result, we might be unable to reduce spending quickly enough to compensate for a reduction in sales, which would adversely affect our earnings.

Suppliers may be unable to provide us with materials of sufficient quality or quantity required to meet our production needs.

We are dependent upon suppliers for parts and raw materials used in the manufacture of components that we sell to our customers. We may experience a shortage of materials for various reasons, such as financial distress, work stoppages, natural disasters, or production difficulties that may affect one or more of our suppliers. A protracted interruption of supplies for any reason may adversely affect our financial condition and results of operations.

Product development activities may not be successful or may be more costly than currently anticipated.

Our business involves a significant level of product development activities, generally in connection with our customers’ own development activities. If these activities are not as successful as currently anticipated, or if they are more costly than currently anticipated, future sales and/or earnings could be lower.

Activities necessary to integrate an acquisition may result in costs in excess of current expectations or be less successful than anticipated.

We completed a business acquisition in October 2006 and we may acquire other businesses in the future. If actual integration costs are higher than amounts assumed, or we are unable to integrate the assets and personnel acquired in an acquisition as anticipated, our future earnings may be lower than anticipated.

Changes in the estimates of fair value of reporting units or of long-lived assets may result in future impairment charges.

Over time, the fair values of long-lived assets change. We test goodwill for impairment annually, and more often if circumstances require. We also test property, plant, and equipment, and other intangibles for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Future impairment charges may occur if estimates of fair values decrease, which will reduce future earnings.

Future subsidiary results may change the amount of valuation allowances provided for deferred income tax assets.

We establish valuation allowances to reflect the estimated amount of deferred tax assets that might not be realized. The underlying analysis is performed for individual tax jurisdictions, generally at a subsidiary level. Future subsidiary results, actual or forecasted, could change the outcome of our analysis and change the amount of valuation allowances provided for deferred income tax assets.

Manufacturing activities may result in future environmental liabilities.

We use hazardous materials in our manufacturing operations. We also own facilities that were formerly owned and operated by others that used hazardous materials. The risk that a release of hazardous materials has occurred in

the past, or will occur in the future, cannot be completely eliminated. As a result, we may need to undertake future environmental remediation activities that will negatively affect our future earnings and financial position.

Amounts accrued for contingencies may be inadequate to cover the amount of loss when the matters are ultimately resolved.

Changes in the legal environment in which we operate may affect future sales and expenses.

We operate in a number of countries and are affected by a variety of laws and regulations, including employment, import, export, business acquisitions, environmental, and taxation matters, among others. Unexpected changes in the legal environment may result in lower sales or increased expenses in the future.

Operations outside the United States may be subject to additional risks.

Our principal plants include facilities in China and Germany, as well as the United States. The operations outside the United States could be disrupted by a natural disaster, war, political unrest, terrorist activity, public health concerns, or other unforeseen events that would be less likely to occur in the United States. Disruption of an overseas operation could adversely affect our business, financial condition, and results of operations.

Changes in foreign currency exchange rates may decrease margins associated with our sales.

We have situations in which sales agreements and the related cost of sales are predominately denominated in different currencies. These may involve foreign sales and domestic costs, or vice versa. Each of these situations involve the risk that the margins associated with these sales could be lower than previous sales or forecasts because of changes in foreign currency exchange rates.

Changes in assumptions may increase the amount of retirement pension and healthcare benefit obligations and related expense.

Accounting for retirement pension and healthcare benefit obligations and related expense requires the use of assumptions, including a weighted-average discount rate, an expected long-term rate of return on assets, and a net healthcare cost trend rate, among others. Benefit obligations and benefit costs are sensitive to changes in these assumptions. As a result, assumption changes could result in increases in our obligation amounts and expenses.

Industry Risks

Competitors may develop breakthrough technologies that are adopted by our customers.

Many of the components and systems we sell are used in harsh environments with difficult emissions standards. The technological expertise we have developed and maintained could become less valuable if a competitor were to develop a breakthrough technology that would allow them to match the performance of existing technologies at a lower cost. A breakthrough technology could also accelerate the rate of change in customer demands beyond what existing technologies are capable of achieving.

Changes in competitor strategies may reduce the demand for our products.

Companies compete on the basis of providing products that meet the needs of customers, as well as on the basis of price, quality, and customer service. Changes in competitive conditions, including the availability of new products and services, the introduction of new channels of distribution, and changes in OEM and aftermarket pricing, could negatively affect future sales.

Unforeseen events may occur that significantly reduce commercial airline travel.

Our Aircraft Engine Systems segment accounted for 43% of our sales in 2006, with the majority of sales tied to commercial aviation. Market demand for our components and systems would be negatively affected by reductions in commercial airline travel. Certain events have had a notable negative effect on passenger flight miles in the past, such as the terrorist actions of 2001.

Increasing emission standards that drive certain product sales may be eased or delayed.

We sell components and systems that have been designed to meet demanding emission standards, including standards that have not yet been implemented but are intended to be soon. If the demands of these emission standards are eased, our future sales could be lower as potential customers select alternative products or delay adoption of our products.

Natural gas prices may increase significantly and disproportionately to other sources of fuels used for power generation.

Commercial producers of electricity use many of our components and systems, most predominately in their power plants that use natural gas as their fuel source. Commercial producers of electricity are often in a position to manage its use of different power plant facilities and make decisions based on operating costs. If natural gas prices were to increase significantly and disproportionately to other sources of fuels, it is likely that the use of our components and systems would decrease.

The U.S. Government may reduce defense funding or the mix of programs to which such funding is allocated.

The level of U.S. defense spending is subject to periodic congressional appropriation actions, which can change. The mix of programs to which such funding is allocated is also uncertain. A portion of our sales of components and systems is to the U.S. Government, primarily in the aerospace market. If the amount of spending was to decrease, or there was a shift from certain aerospace programs to other programs, our sales could decrease.

Changes in foreign currency exchange rates or in interest rates may reduce the demand for our products.

Changes in foreign currency exchange rates or in interest rates affects demand for capital purchases. Each of the markets in which we sell operates globally and is influenced by foreign currency exchange rates. Also, capital expenditures tend to decrease as interest rates and economic uncertainty rise.

Investment Risks

The historic market price of our common stock may not be indicative of future market prices.

The market price of our common stock changes over time. The selling price of our common stock ranged from a low of $25.10 per share to a high of $38.88 per share in 2006. The causes of stock price volatility are related to many factors both within and outside management’s control. As a result, we may not be

able to maintain or increase the value of our common stock.

The typical trading volume of our common stock may affect an investor’s ability to sell significant share holdings in the future without negatively affecting share price.

We currently have approximately 35 million shares of common stock outstanding. While the level of trading activity will vary by day, the typical trading level represents only a small percentage of shares outstanding. As a result, a seller of a significant number of shares in a short period of time could negatively affect our share price.


Item 1B.	*Unresolved Staff Comments*

There are no unresolved comments from the staff of the U.S. Securities and Exchange Commission regarding the periodic or current reports that we filed under the Securities Exchange Act of 1934.


Item 2.	*Properties*

Our principal plants are as follows:

United States

Fort Collins, Colorado — Industrial Controls manufacturing and corporate offices

Loveland, Colorado — Industrial Controls manufacturing and partially leased to a third party

Niles, Illinois — Industrial Controls manufacturing Rockford, Illinois — Aircraft Engine Systems manufacturing and corporate offices

Rockton, Illinois — Aircraft Engine Systems manufacturing and repair and overhaul

Zeeland, Michigan — Aircraft Engine Systems manufacturing

Greenville, South Carolina (leased) — Industrial Controls manufacturing

Other Countries

Suzhou, Peoples’ Republic of China (leased) — Industrial Controls manufacturing

Aken, Germany (leased) — Industrial Controls manufacturing

Kempen, Germany — Industrial Controls manufacturing (acquired on October 31, 2006, subsequent to the year ended September 30, 2006)

Stuttgart, Germany (leased) — Industrial Controls manufacturing

Prestwick, Scotland, United Kingdom (leased) — Aircraft Engine Systems repair and overhaul

Our principal plants are suitable and adequate for the manufacturing and other activities performed at those plants, and we believe our utilization levels are generally high. With continuing advancements in manufacturing technology and operational improvements, we believe we can continue to increase production without additional plants.

In addition to the principal plants listed above, we own facilities in Japan, The Netherlands, and United Kingdom, and lease several facilities in locations worldwide, which are used primarily for sales and service activities. The United Kingdom facility also serves as a key development site for diesel fuel injection products.

We plan on changing the designation of our corporate headquarters from Rockford, Illinois to Fort Collins, Colorado, effective January 1, 2007. In recent years, we have maintained corporate offices for our principal executive officers in both locations. The address of our Fort Collins location is 1000 East Drake Road, Fort Collins, Colorado, 80525, and its phone number is (970) 498-5811.


Item 3.	*Legal Proceedings*

We are currently involved in pending or threatened litigation or other legal proceedings regarding employment, product liability, and contractual matters arising from the normal course of business. These matters are discussed in the Notes to the Consolidated Financial Statements in “Item 8 — Financial Statements and Supplementary Data.” We currently do not have any administrative or judicial proceedings arising under any Federal, State, or local provisions regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment.


Item 4.	*Submission of Matters to a Vote of Security Holders*

There were no matters submitted to a vote of security holders during the fourth quarter of 2006.

PART II


Item 5.	*Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities*

(a) Our common stock is listed on the NASDAQ Global Select Market and at November 17, 2006, there were approximately 1,417 holders of record. Cash dividends were declared quarterly during 2006 and 2005. The amount of cash dividends per share and the high and low sales price per share for our common stock for each fiscal quarter in 2006 and 2005 are included in the Notes to the Consolidated Financial Statements in “Item 8 — Financial Statements and Supplementary Data.”

(b) Recent Sales of Unregistered Securities

Sales of common stock issued from treasury to one of the company’s directors during 2006 consisted of the following:


	Total
	Number of
	Shares		Consideration
Date	Purchased		Received

December 2, 2005		297	$	8,019
February 1, 2006		132		4,004
May 1, 2006		180		5,990
July 31, 2006		205		6,017

The securities were sold in reliance upon the exemption contained in Section 4(2) of the Securities Act of 1933.

(c) Issuer Purchases of Equity Securities


							(d)
					(c)		Approximate Dollar
					Total Number		Value of
					of Shares		Shares That
					Purchased as		May Yet
	(a)		(b)		Part of		Be Purchased
	Total Number		Average Price		Publicly Announced		Under the
	of Shares		Paid Per		Plans or		Plans or
Period	Purchased		Share		Programs		Programs

October 1 — 31, 2005		—	$	—		—	$	22,707,455
November 1 — 30, 2005		7,500		26.62		7,500		22,507,780
December 1 — 31, 2005		78,024		28.08		30,030		21,676,711
January 1 — 31, 2006		2,409		29.90		2,409		21,604,682
February 1 — 28, 2006		—		—		—		21,604,682
March 1 — 31, 2006		1,245		33.16		—		21,604,682
April 1 — 30, 2006		11,249		33.70		11,249		21,225,295
May 1 — 31, 2006		400,446		32.67		400,446		8,141,464
June 1 — 30, 2006		1,282		32.14		—		8,141,464
July 1 — 31, 2006		10,000		29.12		10,000		49,708,821
August 1 — 31, 2006		178,015		31.12		178,015		44,169,075
September 1 — 30, 2006		34,510		33.22		33,293		43,064,045

Total		724,680	$	31.72		672,942	$	43,064,045

In addition to shares purchased as part of publicly announced plans or programs, we acquired 46,527 shares as payment for the exercise price of stock options exercised in December 2005. We also purchased shares on the open market related to the reinvestment of dividends for treasury stock held for deferred compensation of 1,467 in December 2005, 1,245 in March 2006, 1,282 in June 2006, and 1,217 in September 2006.

On July 25, 2006, the Board of Directors authorized the repurchase of up to $50 million of our outstanding shares of common stock on the open market and in private transactions over a three-year period that will end on July 25, 2009. There have been no terminations or expirations since the approval date.

On January 26, 2005, the Board of Directors authorized the repurchase of up to $30 million of our outstanding shares of common stock on the open market and in private transactions over a three-year period. This authorization was terminated on July 25, 2006, concurrent with the approval of a new stock repurchase authorization.


Item 6.	*Selected Financial Data*


	For the Year Ended September 30,
	2006		2005		2004		2003		2002
	(In thousands of dollars except per share amounts)

Net sales	$	854,515	$	827,726	$	709,805	$	586,682	$	679,991
Earnings before cumulative effect of accounting change		69,900		55,971		31,382		12,346		45,170
Earnings per share amounts:
Basic		2.03		1.64		0.93		0.37		1.33
Diluted		1.99		1.59		0.90		0.36		1.30
Cash dividends per share		0.40		0.3467		0.32		0.3175		0.31
Income taxes		14,597		23,137		17,910		7,593		25,510
Interest expense		5,089		5,814		5,332		4,635		5,109
Interest income		2,750		2,159		1,095		870		635
Depreciation expense		22,064		24,451		25,856		27,548		28,340
Amortization expense		6,953		7,087		6,905		4,870		3,748
Capital expenditures		31,713		26,615		18,698		18,802		22,898
Weighted-average basic shares outstanding in thousands		34,351		34,200		33,858		33,738		33,975
Weighted-average diluted shares outstanding in thousands		35,191		35,127		34,695		34,167		34,731


	At September 30,
	2006		2005		2004		2003		2002
	(In thousands of dollars)

Working capital	$	260,243	$	241,066	$	197,524	$	151,262	$	155,440
Total assets		735,497		705,466		654,294		615,999		582,395
Long-term debt, less current portion		58,379		72,942		88,452		89,970		78,192
Total debt		73,515		95,787		95,241		125,744		96,377
Shareholders’ equity		478,689		432,469		385,861		360,804		354,901

Worker members		3,731		3,513		3,287		3,273		3,337
Registered shareholder members		1,422		1,448		1,529		1,576		1,592

Notes:


1.		Per share amounts have been updated from amounts reported prior to February 1, 2006, to reflect the effects of a three-for-one stock split.

2.		Net earnings included a deferred tax asset valuation allowance change that increased net earnings by $13,710 in the third quarter of 2006, or $0.40 per basic share and $0.39 per diluted share.

3.		Accounting for stock-based compensation changed to the fair value method from the intrinsic value method beginning in the first quarter of 2006. The following presents a reconciliation of reported net earnings and per share information to pro forma net earnings and per share information that would have been reported if the fair value method had been used to account for stock-based employee compensation in 2001 through 2005:


	For the Year Ended September 30,
	2005		2004		2003		2002
	(In thousands of dollars except per share amounts)

Reported net earnings	$	55,971	$	31,382	$	12,346	$	42,681
Stock-based compensation expense using the fair value method, net of income tax		1,502		1,400		1,025		910

Pro forma net earnings	$	54,469	$	29,982	$	11,321	$	41,771

Reported net earnings per share amounts:
Basic	$	1.64	$	0.93	$	0.37	$	1.26
Diluted		1.59		0.90		0.36		1.23

Pro forma net earnings per share amounts:
Basic	$	1.59	$	0.89	$	0.34	$	1.23
Diluted		1.55		0.86		0.33		1.20


Item 7.	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations. This discussion should be read with the consolidated financial statements.

OVERVIEW

Woodward designs, manufactures, and services energy control systems and components for aircraft and industrial engines and turbines. Leading OEMs throughout the world use our products and services in the power generation, process industries, transportation, and aerospace markets.

Our strategic focus is Energy Control and Optimization Solutions. The control of energy — fluid energy, combustion, electrical energy, and motion — is a growing requirement in the markets we serve. Our customers look to us to optimize the efficiency, emissions, and operations of power equipment. Our core technologies leverage well across our markets and customer applications, enabling us to develop and integrate cost-effective and state-of-the-art fuel, combustion, fluid, actuation, and electronic systems. We focus primarily on OEMs and equipment packagers, partnering with them to bring superior component and system solutions to their demanding applications.

Our sales and earnings have grown over the last four years. In 2006, our sales exceeded $850 million for the first time in our history and our net earnings were just short of $70 million. Our markets have substantially recovered from the declines that occurred in 2002 and 2003 and both of our segments benefited from these factors. In addition, net earnings for 2006 benefited from a change in the valuation allowance for deferred tax assets of $13.7 million.

Improvement of Industrial Controls’ earnings was a key objective for 2006, and its earnings nearly doubled from 5.4% of sales in 2005 to 10.3% in 2006. This improvement was driven by a manufacturing consolidation in 2005 and early 2006, supply chain productivity initiatives, and market and management-initiated changes in our product mix.

Aircraft Engine Systems continued to generate earnings within our targeted range of 20 to 22% of sales in 2006, and we are continuing to invest substantial amounts in research and development activities to sustain future

growth. Company-wide, our expenditures for research and development increased 20% in 2006 over 2005, largely the result of program wins in the aerospace market over the last few years.

Subsequent to the end of 2006, we acquired a business that had sales of $60 million in calendar year 2005. This business adds dimension and range to our core technologies and product portfolio for the power generation market, including protection and comprehensive control systems for power distribution applications and power inverters for wind turbines — areas we have targeted for growth.

At September 30, 2006, our total assets exceeded $735 million, including $84 million in cash, and our total debt was less than $74 million. We are well positioned to fund expanded research and development and to explore other investment opportunities consistent with our focused strategies.

The financial statements that are filed as part of this Form 10-K reflect the effects of the three-for-one stock split that became effective during 2006. Shareholders approved the split in January 2006.

In the sections that follow, we are providing information to help you better understand our critical accounting policies and market risks, our results of operations and financial condition, and the effects of recent accounting pronouncements. However, you should be aware that this discussion contains statements intended to be considered forward-looking statements and therefore entitled to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Information about forward-looking statements, including important factors that could affect our business, results of operations and/or financial condition, are included in “Item 1A — Risk Factors.”

CRITICAL ACCOUNTING POLICIES

We consider the accounting policies used in preparing our financial statements to be critical accounting policies when they are both important to the portrayal of our financial condition and results of operations, and require us to make difficult, subjective, or complex judgments. Critical accounting policies normally result from the need to make estimates about the effect of matters that are inherently uncertain. Management has discussed the development and selection of our critical accounting policies with the audit committee of the company’s Board of Directors, and the audit committee has reviewed the disclosures that follow.

In each of the following areas, our judgments, estimates, and assumptions are impacted by conditions that change over time. As a result, in the future there could be changes in our assets and liabilities, increases or decreases in our expenses, and additional losses or gains that are material to our financial condition and results of operations.

Goodwill

Goodwill, which is included in the segment assets of both Industrial Controls and Aircraft Engine Systems, totaled $132.1 million at September 30, 2006, representing 18% of total assets. We test goodwill for impairment on an annual basis and more often if circumstances require. Impairment tests performed during the three years ended September 30, 2006, have not resulted in any impairment losses.

Estimates and assumptions, the most important of which are used to estimate the fair value of reporting units within the company, affect the results of our goodwill impairment tests. To estimate the fair value of reporting units, we estimate future cash flows, discount rates, and transaction multiples that we believe a marketplace participant would use in an arm’s length transaction.

To assess the effect on our annual impairment tests in 2006 if different assumptions had been used, we separately measured the effects of a hypothetical 20% reduction in estimated cash flows, a 20% increase in the discount rates used, and a 20% reduction in the transaction multiples used. While each of these changes would have reduced the estimated fair value of reporting units within the company, none of them individually would have resulted in an impairment loss in 2006.

Other long-lived assets

As discussed here, our other long-lived assets consist of property, plant, and equipment, and other intangibles, which are included primarily in the segment assets of both Industrial Controls and Aircraft Engine Systems. Other long-lived assets totaled $195.9 million at September 30, 2006, and represented 27% of total assets. We depreciate

or amortize long-lived assets over their estimated useful lives. Depreciation and amortization expense associated with these assets totaled $29.0 million in 2006, $31.5 million in 2005, and $32.8 million in 2004. We also test long-lived assets for recoverability whenever events or changes in circumstances indicate that the carrying values may not be recoverable.

The selection of useful lives for depreciation and amortization purposes requires judgment. If we had increased the remaining useful life of all assets being depreciated and amortized by one year, depreciation and amortization expense would have decreased, and the year-end carrying value of long-lived assets would have increased, by approximately $3.5 million in 2006. Similarly, if we had decreased the remaining useful lives by one year, depreciation and amortization expense would have increased, and the year-end carrying value of long-lived assets would have decreased, by approximately $4.6 million in 2006. (The results of this sensitivity analysis ignore the impact of individual assets that might have become fully depreciated or amortized during 2006 had these hypothetical changes been made.)

The carrying value of a long-lived asset, or related group of assets, is reduced to its fair value whenever estimates of future cash flows are insufficient to indicate the carrying value is recoverable. We form judgments as to whether recoverability should be assessed, we estimate future cash flows and, if necessary, we estimate fair value. Fair value estimates are most often based on estimated future cash flows and assumed discount rates.

Deferred income tax asset valuation allowances

Valuation allowances for deferred income tax assets totaled $2.6 million at September 30, 2006, representing 3% of deferred income tax assets before the allowances. The net changes in the valuation allowances increased total comprehensive earnings (comprised of net earnings and foreign currency translation adjustments) by $15.2 million in 2006 and $0.9 million in 2005.

Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Both positive and negative evidence are considered in forming our judgment as to whether a valuation allowance is appropriate, and more weight is given to evidence that can be objectively verified. Valuation allowances are reassessed whenever there are changes in circumstances that may cause a change in judgment. In 2006, additional objective evidence became available regarding earnings in tax jurisdictions that had unexpired net operating loss carryforwards that affected our judgment about the valuation allowance that existed at the beginning of the year. If we had made different judgments regarding the realizability of deferred tax assets, our valuation allowance and income tax expense may have been higher or lower than amounts reported.

Retirement pension and healthcare benefits

The cost of retirement pension and healthcare benefits is recognized over employee service periods using an actuarial-based attribution approach. Our net accrued benefit for these retirement benefits totaled $61.5 million at September 30, 2006, which represented 24% of total liabilities and consisted of the following (in millions):


	Pension			Healthcare

• Benefit obligation	$	76		$	52
• Fair value of plan assets		(58	)		—
• Unrecognized net losses		(16	)		(10	)
• Unamortized prior service cost		3			8
• Other items affecting the liability		6			—

The net periodic benefit cost associated with these liabilities totaled $4.4 million in 2006, which consisted of the following (in millions):


	Pension			Healthcare

• Service cost	$	2		$	—
• Interest cost		3			3
• Expected return on plan assets		(3	)		—
• Recognized losses		1			1
• Recognized prior service cost		—			(3	)

To determine our net accrued benefit and net periodic benefit cost, we form judgments about the best estimate for each assumption used in the actuarial computation. The most important assumptions that affect the computations are the discount rate, the expected long-term rate of return on plan assets, and the healthcare cost trend rate.

Our discount rate assumption is intended to reflect the rate at which the retirement benefits could be effectively settled based upon the assumed timing of the benefit payments. In the United States, we use the blended 40/60 Moody’s Baa/Aaa index, the Citigroup Pension Liability Index, and the 30-year U.S. treasury rate as benchmarks. In the United Kingdom, we use the AA corporate bond index (applicable for bonds over 15 years) and government bond yields (for bonds over 15 years) to determine a blended rate to use as the benchmark. In Japan, we use AA-rated corporate bond yields (for bonds of 12.5 years) as the benchmark. Our assumed rates do not differ significantly from any of these benchmarks.

We assumed weighted-average discount rates of 4.69% to determine our retirement pension benefit obligation at September 30, 2006, and 4.48% to determine the related service and interest costs in 2006. A 1.00% increase in these discount rates would have decreased the benefit obligation at the end of 2006 by $12.5 million and increased the total of service and interest costs by $0.7 million in 2006. Likewise, a 1.00% decrease in these discount rates would have increased the benefit obligation by $15.5 million and decreased the total of service and interest costs by $0.9 million in 2006.

We assumed weighted-average discount rates of 5.56% to determine our retirement healthcare benefit obligation at September 30, 2006, and 5.28% to determine the related service and interest costs in 2006. A 1.00% increase in these discount rates would have decreased the benefit obligation at the end of 2006 by $5.1 million and increased the total of service and interest costs by $0.1 million in 2006. Likewise, a 1.00% decrease in these discount rates would have increased the benefit obligation by $6.2 million and decreased the total of service and interest costs by $0.2 million in 2006.

The expected long-term rate of return on plan assets was based on our current asset allocations and the historical long-term performance for each asset class, as adjusted for existing market conditions. Information regarding our asset allocations is included in the Notes to Consolidated Financial Statements in “Item 8 — Financial Statements and Supplementary Data.” We assumed a weighted-average expected long-term rate of return on pension plan assets of 6.69% to determine our net periodic benefit cost in 2006. A 1.00% increase in the expected return would have decreased the net periodic benefit cost by $0.5 million in 2006. Likewise, a 1.00% decrease in the expected return would have increased the net periodic benefit cost by $0.5 million in 2006.

We assumed net healthcare cost trend rates of 10.00% in 2007, decreasing gradually to 5.00% in 2012, and remaining at 5.00% thereafter. A 1.00% increase in assumed healthcare cost trend rates would have increased the benefit obligation at the end of 2006 by $5.6 million and the total of the service and interest costs by $0.4 million in 2006. Likewise, a 1.00% decrease in the assumed healthcare cost trend rates would have decreased the benefit obligation by $4.8 million and the total of service and interest costs by $0.3 million in 2006.

Among the items affecting our net accrued retirement pension benefits were additional minimum pension liabilities necessary to reflect a liability amount at least equal to the accumulated benefit obligation on an individual plan basis. The total increase in minimum pension liabilities for 2006 was $1.6 million and was primarily reported in other comprehensive income, net of income taxes. Based on future plan asset performance and discount rates, additional adjustments to our net accrued benefit and equity may be required in the future.

MARKET RISKS

Our long-term debt is sensitive to changes in interest rates. We monitor trends in interest rates as a basis for determining whether to enter into fixed rate or variable rate debt agreements, the duration of such agreements, and whether to use hedging strategies. Our primary objective is to minimize our long-term costs of borrowing. At September 30, 2006, our long-term debt consisted of fixed rate agreements. As measured at September 30, 2006, a hypothetical 1% immediate increase in interest rates would reduce the fair value of our long-term debt by approximately $1.9 million.

Assets, liabilities, and commitments that are to be settled in cash and are denominated in foreign currencies for transaction purposes are sensitive to changes in currency exchange rates. We monitor trends in foreign currency exchange rates and our exposure to changes in those rates as a basis for determining whether to use hedging strategies. Our primary exposures are to the European Monetary Union euro and the Japanese yen. We do not have any derivative instruments associated with foreign currency exchange rates. A hypothetical 10% immediate increase in the value of the United States dollar relative to all other currencies, when applied to September 30, 2006, balances, would adversely affect our 2007 net earnings and cash flows by approximately $3.6 million. Last year, a hypothetical 10% immediate increase in the value of the United States dollar relative to all other currencies would have adversely affected our 2006 net earnings and cash flows by $2.2 million.

RESULTS OF OPERATIONS

Sales


In Thousands for the Year Ended September 30,	2006		2005		2004

External net sales:
Industrial Controls	$	540,975	$	536,937	$	439,801
Aircraft Engine Systems		313,540		290,789		270,004

Consolidated net sales	$	854,515	$	827,726	$	709,805

2006 Compared to 2005

Consolidated net sales increased 3% in 2006 compared to 2005, attributable to the following (in millions):


•	Aircraft Engine Systems’ sales volume changes	$	21
•	Price changes		15
•	Foreign currency translation rate changes		(7	)
•	Industrial Controls’ sales volume changes		(2	)

Aircraft Engine Systems’ sales volume changes: Aircraft Engine Systems’ improvement continues to reflect the effects of favorable trends in commercial aviation. Our commercial OEM sales have increased, driven by the higher production levels of narrow-body and wide-body aircraft by Boeing and Airbus, especially the A320 and Boeing 777. Orders for new aircraft by Asian airlines have been particularly strong. Regional jet production by Embraer and Bombardier was fairly similar to the prior year. Sales related to business jets were up slightly, and we anticipate additional growth in 2007 with the launches of the Cessna Mustang and Eclipse 500 jets. We also continued to see a trend toward higher revenue passenger miles experienced by commercial airlines and cargo growth, which drives aircraft usage and has a positive effect on our aftermarket sales. We estimate approximately half of Aircraft Engine Systems’ sales were aftermarket sales in 2006 and 2005. Sales for military applications in 2006 were similar to 2005 levels.

Price changes: Price changes were made primarily in response to material cost increases in Industrial Controls. The material cost increases were related to price fluctuations of commodities from which mechanical, electronic, or electromagnetic components are produced.

Industrial Controls’ sales volume changes: Overall, Industrial Controls sales volumes were near the same levels achieved a year ago. While shipment volumes increased for many of our products, we experienced lower sales of turbine combustion products used in power generation, alternative fuel systems that are sold to Chinese OEMs,

and pump sales to an Asian customer that secured an alternative source. In total, these decreases totaled approximately $38 million.

We believe the decrease in sales of turbine combustion products is related to inventory adjustments made by our largest customer. Customer inventory increased in 2004 and 2005 and was reduced in 2006. We believe their inventory is now at sustainable levels and will be replenished at approximately their rate of sales.

We have attributed the decrease in sales of alternative fuel systems for Chinese OEMs to production and ordering patterns typical in the Chinese market. Customers in China have shown a tendency to batch their orders and engine production in such a manner that results in greater variability than is typical among customers in other markets.

Increased sales of other products largely offset these decreases, including sales of process automation valves and actuators that targeted new applications for use in the process industry. The core technologies used in fluid systems, which have typically been applied to gas engines, gas and steam turbines, and compressors, can be applied to the balance of plant equipment in process automation applications. In 2006, we developed a new product for this adjacent market, generating sales of approximately $6 million.

Other increases in sales were primarily driven by increased demand for distributed power, marine, and heavy equipment applications.

2005 Compared to 2004

Consolidated net sales increased 17% in 2005 compared to 2004, attributable to the following (in millions):


•	Industrial Controls’ sales volume changes	$	89
•	Aircraft Engine Systems’ sales volume changes		19
•	Foreign currency translation rate changes		7
•	Price changes		3

Industrial Controls’ sales volume changes: Industrial Controls benefited from a broad industrial recovery that included the segment’s power generation and transportation markets. We experienced higher demand for large gas turbine fuel nozzles — the area affected most by the severe market declines of 2002 and 2003 — driven in part by power generation improvement projects in Asia and Eastern Europe. We also won a number of new programs, including one for an alternative fuel engine used in Asia, which resulted in increased sales. Use of alternative fuels has increased in Asia in recent years due to more stringent environmental emission standards and the availability of natural gas as a fuel source in the region.

Aircraft Engine Systems’ sales volume changes: Aircraft Engine Systems’ improvement reflects the effects of favorable trends in commercial aviation. We experienced modest growth in commercial OEM sales, as Boeing and Airbus ramped up their production levels for narrow- and wide-body aircraft. We also have seen a continuation of the trend toward higher revenue passenger miles experienced by commercial airlines and cargo growth, which has driven greater utilization of aircraft and higher aftermarket sales for us. We estimate approximately half of Aircraft Engine Systems’ sales were aftermarket sales in 2005 and 2004.

Costs and Expenses


In Thousands for the Year Ended September 30,	2006			2005			2004

Cost of goods sold	$	612,263		$	623,680		$	542,240
Selling, general, and administrative expenses		92,013			79,858			70,949
Research and development costs		59,861			49,996			40,057
All other expense items		12,876			14,390			12,942
Curtailment gain		—			(7,825	)		—
Interest and other income		(6,995	)		(11,481	)		(5,675	)

Consolidated costs and expenses	$	770,018		$	748,618		$	660,513

2006 Compared to 2005

Cost of goods sold decreased 2% in 2006 as compared to 2005, attributable to the following (in millions):


•	Increase in sales volume	$	15
•	Effects of the consolidation of European operations, among other less significant cost changes		(10	)
•	Foreign currency translation rate changes		(6	)
•	Lower performance-based variable compensation		(6	)
•	Changes in segment sales mix		(2	)
•	Lower workforce management costs		(2	)

The effect of increased sales volume on cost of goods sold was measured as if these costs increased in direct proportion to the sales volume increase.

Costs of goods sold benefited from the effects of Industrial Controls’ European consolidation, which we completed in March 2006. A more detailed discussion of the European consolidation is included under “Workforce Management Actions” below.

Variable compensation paid to members in direct and indirect manufacturing functions was lower in 2006 than in 2005. Each year, a portion of our members’ compensation will vary depending on performance-based factors.

The percent increase in Aircraft Engine Systems’ sales volume (7%) was greater than the percent increase in Industrial Controls’ sales volume (0%). However, Aircraft Engine Systems’ average margins are higher than those of Industrial Controls. As a result, the resulting change in segment sales mix decreased cost of goods sold in the analysis presented above.

We incurred cost of goods sold related to workforce management actions that totaled $1.7 million in 2005. These costs were largely attributable to termination benefits for members in direct and indirect manufacturing functions.

Selling, general, and administrative expenses increased 15% in 2006 as compared to 2005, attributable to the following (in millions):


•	Accruals for contingent legal matters	$	9
•	Stock-based compensation expense		3

We accrue for individual matters that we believe are likely to result in a loss when ultimately resolved using estimates of the most likely amount of loss, including accruals totaling $8.5 million in 2006. More information about contingencies is included under “Commitments and Contingencies” below.

At the beginning of 2006, we began to account for stock-based compensation using the fair value method of accounting as required under a new accounting standard. We used the intrinsic value method in previous years, under which we did not recognize compensation expense in association with options granted at or above the market price of our common stock at the date of grant. More information about the effect of this accounting change is included under “Stock-Based Compensation” below.

Research and development costs increased 20% in 2006 over 2005 attributable to the following (in millions):


•	Aircraft Engine Systems’ development activities	$	6
•	Industrial Controls’ development activities		4

Aircraft Engine Systems is developing new aircraft gas turbine programs for both commercial and military aircraft. Many of these development programs began in 2005 or earlier and were fully engaged throughout 2006. Most significantly we are developing components and an integrated fuel system for the new GEnx turbofan engine for the Boeing 787, Airbus A350, and Boeing 747-8, and components for the GE Rolls-Royce F136 engine that is one of two propulsion choices to power Lockheed’s Joint Strike Fighter aircraft, and components for the T700-GE-701D engine that will be used to upgrade the Sikorsky Black Hawk and Boeing Apache helicopters, among others.

We also increased development activities in Industrial Controls, most notably in conjunction with customers’ development programs as we work closely with our customers early in their own development and design stages, helping them by developing components and integrated systems that allow them to meet emissions requirements, increase fuel efficiency, and lower their costs. We also continue to develop products for the turbine auxiliary market. Turbine auxiliary applications offer multiple opportunities to leverage our existing hydraulic and electric actuation and valve technologies for off-engine applications.

Curtailment gain relates to an amount recognized in 2005 for the immediate effects of amendments to one of our retirement healthcare benefit plans. The amendment eliminated retirement healthcare benefits for members that did not attain age 55 and 10 years of service by January 1, 2006.

Interest and other income decreased in 2006 from 2005 primarily as a result of the 2005 sale of rights to our aircraft propeller synchronizer products to an unrelated third party, which resulted in a pre-tax gain of $3.8 million.

2005 Compared to 2004

Cost of goods sold increased 15% in 2005 as compared to 2004, attributable to the following (in millions):


•	Increase in net sales	$	90
•	Lower workforce management costs		(11	)
•	Higher performance-based variable compensation		6
•	Changes in segment sales mix		3
•	Other factors, net		(7	)

The effect of increased sales on cost of goods sold was measured as if these costs increased in direct proportion to the 17% sales increase. However, there are many factors that affected cost of goods sold other than volume, the most important of which are discussed in the paragraphs that follow.

We incurred cost of goods sold related to workforce management actions that totaled $1.7 million in 2005 and $12.4 million in 2004, netting to a decrease of $10.7 million. These costs were largely attributable to termination benefits for members in direct and indirect manufacturing functions.

Variable compensation paid to members in direct and indirect manufacturing functions was higher in 2005 than in 2004. Each year, a portion of our members’ compensation will vary depending on performance-based factors, including consolidated financial results.

The percent increase in Industrial Controls sales (22%) was greater than the percent increase in Aircraft Engine Systems sales (8%). However, Industrial Controls’ average margins are not as high as those of Aircraft Engine Systems. As a result, the resulting change in segment sales mix increased cost of goods sold in the analysis presented above.

Among the other factors affecting cost of goods sold were the favorable operating leverage effect of the increased sales versus the fixed cost components of cost of goods sold, sales mix within each segment, and changes in material costs.

Selling, general, and administrative expenses increased 13% in 2005 as compared to 2004, attributable to the following (in millions):


•	Higher performance-based variable compensation	$	3
•	Internal control assessment and audit expenses		2
•	Other factors, net		4

Variable compensation paid to members in selling and administrative functions was higher in 2005 than in 2004, driven by performance-based factors, including consolidated financial results.

In 2005, we incurred significant expense in assessing our internal control over financial reporting, as required by the Sarbanes-Oxley Act of 2002. We also incurred higher external audit fees associated with the expanded audit scope required by the Act.

Among the other factors affecting selling, general, and administrative expenses are normal variations in legal and other professional services and gains and losses related to transactions denominated in foreign currencies.

Research and development costs increased 25% in 2005 over 2004 attributable to the following (in millions):


•	Industrial Controls’ development activities	$	4
•	Aircraft Engine Systems’ development activities		3
•	Higher performance-based variable compensation		3

We increased development activities in Industrial Controls, most notably in combustion sensing technologies and in product development for the turbine auxiliary market. Turbine auxiliary applications offer multiple opportunities to leverage our existing hydraulic and electric actuation and valve technologies for off-engine applications. We also work closely with our customers early in their own development and design stages, helping them by developing components and integrated systems that allow them to meet emissions requirements, increase fuel efficiency, and lower their costs.

Aircraft Engine Systems’ development activities also increased, driven by new aircraft gas turbine programs for both commercial and military aircraft. Most significantly, we are developing components and an integrated fuel system for the new GEnx turbofan engine for the Boeing 787, Airbus A350, and Boeing 747 Advanced. We are also developing components for the GE Rolls-Royce F136 engine that is one of two propulsion choices to power Lockheed’s Joint Strike Fighter aircraft, and for the T700-GE-701D engine that will be used to upgrade the Sikorsky Black Hawk and Boeing Apache helicopters, among others.

Variable compensation paid to members that performed research and development activities was higher in 2005 than in 2004, driven by performance-based factors, including consolidated financial results.

Curtailment gain relates to an amount recognized in 2005 for the immediate effects of amendments to one of our retirement healthcare benefit plans. The amendment eliminated retirement healthcare benefits for members that will not attain age 55 and 10 years of service by January 1, 2006.

Interest and other income increased in 2005 over 2004 primarily as a result of the sale of rights to our aircraft propeller synchronizer products to an unrelated third party, which resulted in a pre-tax gain of $3.8 million. In addition, our interest income increased in 2005 over 2004 as a result of higher cash balances.

Sales associated with the aircraft propeller synchronizer products totaled approximately $2 million annually at the time we sold rights to the products to a third party.

Stock-Based Compensation

We adopted a new accounting standard for stock-based compensation beginning October 1, 2005 — Statement of Financial Accounting Standards No. 123R, “Share-Based Payment.” This standard requires us to measure employee compensation made in the form of stock-based instruments at the grant-date fair value of the stock-based award and to recognize the compensation over the requisite service period. Upon adoption, we used the modified prospective application transition method, under which prior periods are not restated in the financial statements.

Prior to October 1, 2005, we used the intrinsic value method to account for stock-based employee compensation under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and therefore we did not recognize compensation expense in association with options granted at or above the market price of our common stock at the date of grant.

The effect of adopting the new accounting standard on 2006 earnings was that earnings before income taxes were reduced by $2.9 million and net earnings were reduced by $1.8 million, or $0.05 per basic share and $0.05 per diluted share. Stock compensation is accounted for as a nonsegment expense. We expect stock compensation expense in 2007 to be at levels similar to the amount recognized in 2006, although actual amounts will depend upon a number of factors, including our common stock price at the date of grant.

If we had applied the provisions of the new accounting standard last year, our earnings before income taxes for 2005 would have been reduced by $2.4 million and our net earnings would have been reduced by $1.5 million, or $0.05 per basic share and $0.04 per diluted share.

Adoption of the new accounting standards also affected our presentation of cash flows. The change is related to tax benefits associated with tax deductions that exceed the amount of compensation expense recognized in financial statements. For 2006, cash flows from operating activities was reduced by $3.3 million and cash flow from financing activities was increased by $3.3 million from amounts that would have been reported prior to the accounting change.

At September 30, 2006, the amount of stock compensation expense that has not yet been recognized totaled $4.7 million. This amount is related to stock options that have been granted but have not yet vested.

Workforce Management Actions


In Thousands for the Year Ended September 30,	2006		2005			2004

Member termination benefits	$	70	$	2,144		$	12,151
Contractual pension termination benefits		340		—			1,800
Related costs of facility consolidation		—		1,770			—
Member termination benefits adjustments		—		(2,204	)		(1,083	)

Total costs of workforce management actions	$	410	$	1,710		$	12,868

The workforce management actions reflected in the preceding table, all of which are associated with Industrial Controls, are primarily related to the consolidation of manufacturing operations in The Netherlands and United Kingdom with existing operations in the United States and Germany. The actions also involve the consolidation of a small manufacturing operation in Japan with an existing operation in China and sales force reductions in The Netherlands. These actions were taken to streamline the organization by eliminating redundant manufacturing operations and to adjust the sales force in response to market shifts from Europe to Asia and North America. The actions were completed in March 2006. In total, approximately 250 positions were eliminated from the three locations.

Principally in 2004, we expensed a total of $15.9 million for these actions, which includes $12.0 million for member termination benefits under ongoing termination benefit plans, $2.1 million of contractual pension termination benefits, and $1.8 million for other costs primarily associated with moving equipment and inventory to other locations. With the exception of the contractual pension termination benefits, all expenses were cash expenses that were paid from available cash balances without the need for incremental borrowings.

In 2004, our expense for these actions totaled $13.8 million, which primarily consisted of member termination benefits related to ongoing termination benefit plans for member service through September 30, 2004. In addition, we expensed contractual pension termination benefits resulting from the retirement pension benefit plan provisions that provided early retirement benefits for certain plan participants in the event of a workforce management action.

Our expenses for these actions were $1.7 million in 2005 and $0.4 million in 2006, equal to the total amounts reflected in the preceding table. The expenses included member termination benefits that reflected amounts earned by members during their service periods in 2005 and 2006, additional contractual pension termination benefits for eligible participants, other costs primarily associated with moving equipment and inventory to other locations, and adjustments of amounts previously accrued for these actions. The accrual adjustments were made as a result of changes in estimates for termination benefits payable because of voluntary member resignations, the transfer of members to a third-party distributor, and more members electing early retirement options.

Although it is difficult to precisely estimate the savings that are uniquely related to these actions, we believe that current annual expense levels are $9.0 million to $11.0 million lower than they would have been prior to the actions. The lower expenses are primarily related to reductions in personnel costs, although savings in travel and other costs associated with the reduced headcount have also been realized. Of the total savings, approximately 90% affects cost of goods sold and 10% selling, general, and administrative expenses.

For 2004, the preceding table also reflects amounts related to previous actions of Industrial Controls, the most significant of which is a reduction in accrued member termination benefits of $0.7 million. This accrual reduction was a direct result of decisions to discontinue the remaining actions from the previous year given the newly-formed consolidation plans.

Earnings


In Thousands for the Year Ended September 30,	2006			2005			2004

Segment earnings:
Industrial Controls	$	55,704		$	28,821		$	6,437
Aircraft Engine Systems		63,859			64,052			59,192

Total segment earnings		119,563			92,873			65,629
Nonsegment expenses		(32,727	)		(17,935	)		(12,100	)
Curtailment gain		—			7,825			—
Interest expense and income		(2,339	)		(3,655	)		(4,237	)

Consolidated earnings before income taxes		84,497			79,108			49,292
Income taxes		14,597			23,137			17,910

Consolidated net earnings	$	69,900		$	55,971		$	31,382

2006 Compared to 2005

Industrial Controls’ segment earnings increased 93% in 2006 as compared to 2005, attributable to the following (in millions):


•	Selling price changes	$	12
•	Effects of the consolidation of European operations, among other less significant cost and expense changes		13
•	Lower performance-based variable compensation		4
•	Higher research and development costs		(4	)
•	Lower workforce management costs		2

Selling price increases were made primarily to offset certain material cost increases, which were related to price fluctuations of commodities from which mechanical, electronic, or electromagnetic components are produced. Typically, selling price increases lag material cost increases for some period of time, which varies depending upon individual circumstances.

Industrial Controls’ earnings benefited from the effects of the European consolidation that we completed in March 2006. A more detailed discussion of the European consolidation is included under workforce management actions in a previous section of this discussion and analysis.

Variable compensation paid to Industrial Controls’ members was lower in 2006 than in 2005, driven by performance-based factors.

Industrial Controls’ research and development cost increases were discussed previously as part of costs and expenses.

Industrial Controls incurred costs related to workforce management actions that totaled $1.7 million in 2005.

Aircraft Engine Systems’ segment earnings in 2006 were about the same as in 2005, attributable to the following (in millions):


•	Increase in sales volume	$	7
•	Higher research and development costs		(7	)
•	Gain on sale of product rights in 2005		(4	)
•	Lower performance-based variable compensation		3
•	Selling price changes		3
•	Other factors, net		(2	)

The effect of the increase in sales volume on Aircraft Engine Systems’ segment earnings was measured as if gross margins had increased in direct proportion to the sales volume increase without other changes. However, there are many factors that affected segment earnings other than volume, the most important of which are discussed in the paragraphs that follow.

Aircraft Engine Systems’ research and development cost increases were discussed previously as part of costs and expenses.

Aircraft Engine Systems sold the rights to its propeller synchronizer products to an unrelated third party in 2005, which resulted in a pre-tax gain of $3.8 million that year.

Variable compensation paid to Aircraft Engine Systems’ members was lower in 2006 than in 2005, driven by performance-based factors.

Nonsegment expenses increased 82% in 2006 as compared to 2005, attributable to the following (in millions):


•	Accruals for contingent legal matters	$	9
•	Stock-based compensation expense		3
•	Other factors, net		3

Among the other factors affecting nonsegment expenses are normal variations in legal and other professional services.

Curtailment gain was discussed previously as part of costs and expenses.

Income taxes were provided at an effective rate on earnings before income taxes of 17.3% in 2006 compared to 29.2% in 2005. The change in the effective tax rate was attributable to the following (as a percent of earnings before income taxes):


•	Adjustments of the beginning-of-year balance of valuation allowances for deferred tax assets	(16.2	)%
•	Change in estimates of taxes for previous periods in 2006 as compared to 2005	1.2	%
•	Research credit in 2006 as compared to 2005	0.8	%
•	Other changes, net	2.3	%

The 2006 change in the beginning-of-year valuation allowances reduced income tax expense by $13.7 million. Exclusive of this item, the effective tax rate for 2006 was 33.5%. We establish valuation allowances to reflect the estimated amount of deferred tax assets that might not be realized. Both positive and negative evidence are considered in forming our judgment as to whether a valuation allowance is appropriate, and more weight is given to evidence that can be objectively verified. Valuation allowances are reassessed whenever there are changes in circumstances that may cause a change in our judgments. In 2006, additional objective evidence became available regarding earnings in tax jurisdictions that have unexpired net operating loss carryforwards that affected our judgment about the valuation allowance.

Income taxes for both 2006 and 2005 were affected by changes in estimates of income taxes for previous years. In 2006, the changes were primarily related to the favorable resolution of certain tax matters. These changes reduced the effective tax rate for 2006 by approximately 1.3% of pretax earnings. In 2005, the changes in estimates were related to increases in the amount of certain credits claimed and changes in the amount of certain deductions

taken as compared to prior estimates. These changes reduced reported income taxes by $1.9 million in 2005, or approximately 2.5% of pretax earnings.

The effective tax rate comparison between 2006 and 2005 was affected by the expiration of the tax credit for increasing research activities, which expired on December 31, 2005.

Among the other changes in our effective tax rate were the effects of changes in the amounts of extraterritorial income exclusion and the effects of changes in the relative mix of earnings by tax jurisdiction, which affects the comparison of foreign and state income tax rates relative to the United States federal statutory rate.

2005 Compared to 2004

Industrial Controls’ segment earnings were $29 million in 2005 compared to $6 million in 2004. The change was attributable to the following (in millions):


•	Increase in sales volume	$	18
•	Workforce management actions, net		11
•	Higher performance-based variable compensation		(6	)
•	Higher research and development costs		(4	)
•	Other factors, net		3

The effect of the increase in sales volume on Industrial Controls’ segment earnings was measured as if gross margins (external net sales less external cost of goods sold) had increased in direct proportion to the sales volume increase without other changes. However, there are many factors that affected segment earnings other than volume, the most important of which are discussed in the paragraphs that follow.

Industrial Controls incurred costs related to workforce management actions that totaled $1.7 million in 2005 and $12.9 million in 2004, netting to a decrease of $11.2 million.

Variable compensation paid to Industrial Controls’ members was higher in 2005 than in 2004, driven by performance-based factors, including consolidated financial results.

Industrial Controls’ research and development cost increases were discussed previously as part of costs and expenses.

Among other factors affecting the comparison of Industrial Controls’ segment earnings between 2005 and 2004 were the favorable operating leverage effect of the increased sales versus the fixed cost components of cost of goods sold and other fixed expenses, sales mix, changes in material costs, normal variations in legal services, and losses related to transactions denominated in foreign currencies.

Aircraft Engine Systems’ segment earnings increased 8% in 2005 as compared to 2004, attributable to the following (in millions):


•	Increase in sales volume	$	6
•	Gain on sale of product rights		4
•	Higher performance-based variable compensation		(4	)
•	Higher research and development costs		(3	)
•	Other factors, net		2

Aircraft Engine Systems sold the rights to its propeller synchronizer products to an unrelated third party in 2005, which resulted in a pre-tax gain of $3.8 million.

Variable compensation paid to Aircraft Engine Systems’ members was higher in 2005 than in 2004, driven by performance-based factors, including consolidated financial results.

Aircraft Engine Systems’ research and development cost increases were discussed previously as part of costs and expenses.

Among other factors affecting the comparison of Aircraft Engine Systems’ segment earnings between 2005 and 2004 were the favorable operating leverage effect of the increased sales versus the fixed cost components of cost of goods sold and other fixed expenses.

Nonsegment expenses increased 48% in 2005 as compared to 2004, attributable to the following (in millions):


•	Internal control assessment and audit expenses	$	2
•	Higher performance-based variable compensation		2
•	Other factors, net		2

Variable compensation paid to corporate members was higher in 2005 than in 2004, driven by performance-based factors, including consolidated financial results.

Among the other factors affecting nonsegment expenses were normal variations in legal and other professional services.

Curtailment gain was discussed previously as part of costs and expenses.

Income taxes were provided at an effective rate on earnings before income taxes of 29.2% in 2005 compared to 36.3% in 2004. The change in the effective tax rate was attributable to the following (as a percent of earnings before income taxes):


•	Change in estimates of taxes in 2005 for previous periods	(2.5	)%
•	Change in effect of foreign losses on income taxes in 2005 as compared to 2004	(2.0	)%
•	Research credit in 2005 as compared to 2004	(1.7	)%
•	Other changes, net	(0.9	)%

Income taxes for 2005 were affected by changes in estimates of income taxes for previous years, which resulted from increases in the amounts of certain credits claimed and changes in the amounts of certain deductions taken. These changes reduced reported income taxes by $1.9 million, or 2.5% of earnings before income taxes.

The effects of foreign losses on income taxes increased our effective tax rate by 0.1% in 2005 compared to 2.1% in 2004. Foreign losses affect income taxes in situations in which we are unable to use the losses to offset earnings in particular tax jurisdictions, resulting in net operating loss carryforwards. In both years, we recorded a valuation allowance to reflect the estimated amount of deferred tax assets that may not be realized due to foreign net operating loss carryforwards.

The federal tax credit for 2005 for increasing research activities reduced our effective tax rate by 1.7% compared to 2004. The credit was based on the level of current year research costs relative to gross receipts and research costs in certain prior periods.

Among the other changes in our effective tax rate were the effects of changes in the relative mix of earnings by tax jurisdiction, which affected the comparison of foreign and state income tax rates relative to the United States federal statutory rate.

Subsequent Event

finalized, but is currently expected to be approximately $45 million, including the amount of outstanding borrowings assumed. The actual cost of the acquisition may be higher or lower than our current estimate based on the outcome of a purchase price adjustment procedure customary to purchase agreements and the final determination of the direct acquisition costs. SEG had sales of approximately $60 million in the year ended December 31, 2005. SEG will be part of the Industrial Controls segment, and we currently expect the acquisition to be accretive to earnings in 2007.

Outlook

Aerospace markets are on an upswing, and we currently anticipate Aircraft Engine Systems’ sales will increase 10-12% in 2007. These increases are expected for both OEM and aftermarket sales, with slightly more growth among OEMs. In relation to sales, our segment earnings are expected to remain relatively stable with 2006, between 20-22% of sales.

We expect more modest market growth in the industrial markets served by Industrial Controls. However, the business acquisition completed in October 2006 will allow Industrial Controls’ sales to exceed anticipated market growth rates. With the effects of the acquisition, we currently believe Industrial Controls’ sales will grow 13-16% in 2007. Segment earnings are expected to be between 10-12% of sales.

Overall, we anticipate company-wide sales growth of 12-15% and earnings of $2.05 to $2.15 per share in fiscal 2007, including the effects of the acquisition just completed.

FINANCIAL CONDITION

Assets


In Thousands at September 30,	2006		2005

Industrial Controls	$	360,577	$	370,220
Aircraft Engine Systems		229,269		208,140
Unallocated assets		145,651		127,106

Consolidated total assets	$	735,497	$	705,466

Industrial Controls’ segment assets at September 30, 2006, decreased over the prior year primarily as a result of lower levels of inventories and normal amortization of intangible assets.

Aircraft Engine Systems’ segment assets at September 30, 2006, increased over the prior year as a result of higher levels of business activity in 2006 and 2005, which resulted in higher accounts receivable and inventories. In addition, capital expenditures increased in 2006 to a level that exceeded depreciation expense, resulting in higher property, plant, and equipment.

Unallocated assets at September 30, 2006, increased over the prior year primarily because of changes in valuation allowances for deferred tax assets.

Other Balance Sheet Measures


In Thousands at September 30,	2006		2005

Working capital	$	260,243	$	241,066
Long-term debt, less current portion		58,739		72,942
Other liabilities		71,190		71,548
Shareholders’ equity		478,689		432,469

Working capital (total current assets less total current liabilities) at September 30, 2006, increased over the prior year primarily as a result of increases in accounts receivable and a decrease in short-term borrowings.

Long-term debt, less current portion at September 30, 2006, decreased from the prior year to reflect the amount of long-term debt paid in 2006. The current portion of long-term debt remained approximately the same.

We currently have a revolving line of credit facility with a syndicate of U.S. banks totaling $100 million, with an option to increase the amount of the line to $175 million if we choose. The line of credit facility expires on March 11, 2010. In addition, we have other line of credit facilities, which totaled $17.7 million at September 30, 2006, that are generally reviewed annually for renewal. The total amount of borrowings under all facilities was $0.5 million at September 30, 2006. The weighted-average interest rate for outstanding borrowings under these line of credit facilities, which were in Japan at rates significantly lower than those typical in the United States, was 0.5% at September 30, 2006.

Provisions of debt agreements include covenants customary to such agreements that require us to maintain specified minimum or maximum financial measures and place limitations on various investing and financing activities. The agreements also permit the lenders to accelerate repayment requirements in the event of a material adverse event. Our most restrictive covenants require us to maintain a minimum consolidated net worth, a maximum consolidated debt to consolidated operating cash flow, and a maximum consolidated debt to EBITDA, as defined in the agreements. We were in compliance with all covenants at September 30, 2006.

Commitments and contingencies at September 30, 2006, include various matters arising from the normal course of business. We are currently involved in pending or threatened litigation or other legal proceedings regarding employment, product liability, and contractual matters arising from the normal course of business. We accrued for individual matters that we believe are likely to result in a loss when ultimately resolved using estimates of the most likely amount of loss, including accruals totaling $8.5 million that were recorded in 2006. There are also individual matters that we believe the likelihood of a loss when ultimately resolved is less than likely but more than remote, which were not accrued. While it is possible that there could be additional losses that have not been accrued, we currently believe the possible additional loss in the event of an unfavorable resolution of each matter is less than $10 million in the aggregate.

Among the legal proceedings referred to in the preceding paragraph, we were a defendant in a class action lawsuit filed in the U.S. District Court for Northern District of Illinois and received findings of the U.S. Equal Employment Opportunity Commission that alleged discrimination on the basis of race, national origin, and gender in our Winnebago County, Illinois, facilities. On October 5, 2006, a U.S. District Court Judge gave preliminary approval to a proposed $5 million settlement of the class action and EEOC matters. Accruals for the amount of the settlement and related legal expenses are included in our consolidated balance sheet at September 30, 2006.

We file income tax returns in various jurisdictions worldwide, which are subject to audit. We have accrued for our estimate of the most likely amount of expense that we believe may result from income tax audit adjustments.

We do not recognize contingencies that might result in a gain until such contingencies are resolved and the related amounts are realized.

In the event of a change in control of the company, we may be required to pay termination benefits to certain executive officers.

Shareholders’ equity at September 30, 2006, increased 11% over the prior year. Increases due to net earnings, sales of treasury stock, tax benefits applicable to stock options, and stock-based compensation were partially offset by purchases of treasury stock and dividend payments.

On January 26, 2005, the Board of Directors authorized the repurchase of up to $30 million of our outstanding shares of common stock on the open market and private transactions over a three-year period. This authorization was terminated on July 25, 2006, concurrent with the approval of a new stock repurchase authorization.

On July 25, 2006, the Board of Directors authorized the repurchase of up to $50 million of our outstanding shares of common stock on the open market and private transactions over a three-year period that will end on July 25, 2009.

In 2006, we purchased $21.5 million of our common stock under these authorizations as follows:


			Number of		Average Price
(In Thousands, Except per Share Amounts)	Purchase Price		Shares		per Share

Purchased shares under the January 26, 2005 authorization	$	14,566		452	$	32.25
Purchased shares under the July 25, 2006 authorization		6,936		221		31.34

Total	$	21,502		673	$	31.95

A three-for-one stock split was approved by shareholders at the 2005 annual meeting of shareholders on January 25, 2006. This stock split became effective for shareholders at the close of business on February 1, 2006. The effects of the stock split are reflected in the financial statements filed as part of this Form 10-K. In addition, in accordance with stock option plan provisions, the terms of all outstanding stock option awards were proportionally adjusted.

Contractual Obligations


In Thousands for the Year(s) Ended September 30,	2007		2008/2009		2010/2011		Thereafter

Long-term debt principal	$	14,619	$	25,333	$	21,428	$	10,715
Operating leases		3,700		4,500		2,600		2,000
Purchase obligations		75,530		2,349		2		609

The preceding table reflects contractual obligations at September 30, 2006, but excludes future interest payments associated with long-term debt and our retirement pension and retirement healthcare obligations. Our contributions to retirement pension benefit plans totaled $3.3 million in 2006 and $1.8 million in 2005, and we currently expect our contributions for 2007 will total approximately $3.0 million. Pension contributions in future years will vary as a result of a number of factors, including actual plan asset returns and interest rates.

Our contributions to retirement healthcare benefit plans totaled $3.0 million in 2006 and $2.4 million in 2005, and we currently estimate our contributions for 2007 will total approximately $3.4 million, less the amount of federal subsidies associated with our prescription drug benefits that we receive. Retirement healthcare contributions are made on a “pay-as-you-go” basis as payments are made to healthcare providers, and such contributions will vary as a result of changes in the future cost of healthcare benefits provided for covered retirees.

More information about our retirement benefit obligations is included in the notes to the consolidated financial statements in “Item 8 — Financial Statements and Supplementary Data.”

We enter into purchase obligations with suppliers in the normal course of business, on a short-term basis.

Cash Flows


In Thousands for the Year Ended September 30,	2006			2005			2004

Net cash provided by operating activities	$	80,536		$	69,432		$	85,215
Net cash used in investing activities		(31,015	)		(22,909	)		(20,272	)
Net cash used in financing activities		(51,433	)		(10,503	)		(39,895	)

2006 Compared to 2005

Net cash flows provided by operating activities increased 16% in 2006 over 2005. Cash receipts from customers and cash payments to suppliers and employees increased proportionately with the overall increase in sales. As a result, net cash flows were higher in 2006 than in 2005 because of the operating earnings generated on sales. In addition, income tax payments for 2006 were lower than 2005.

Net cash flows used in investing activities increased by $8.1 million in 2006 as compared to 2005. This reflected an increase in capital expenditures of $5.1 million and a decrease in proceeds from the sales of property, plant, and equipment. Aircraft Engine Systems accounted for most of the increase in capital expenditures, which related to equipment and facility upgrades. Proceeds from the sale of property, plant, and equipment were higher in 2005 than in 2006 because of sales related to the consolidation of our European facilities.

Net cash flows used in financing activities increased by $40.9 million in 2006 as compared to 2005. Net payments of borrowings were $22.5 million in 2006, compared to net proceeds from borrowings of $2.0 million in 2005. In addition, we increased the amount of cash used for the purchase of our common stock by $15.0 million in 2006 over 2005 and increased cash dividends by $1.9 million.

Our 2005 and 2006 purchases of common stock were primarily made in connection with authorizations by the Board of Directors made in January 26, 2005, and July 25, 2006. The Board terminated the 2005 authorization concurrent with their approval of the 2006 authorization. The 2006 authorization provides for the repurchase of up to $50 million of our common stock on the open market and private transactions over a three-year period. Approximately $43 million remains available for repurchase under the authorization at September 30, 2006.

2005 Compared to 2004

Net cash flows provided by operating activities decreased 19% in 2005 from 2004. Both operating cash receipts and disbursements increased in 2005 over 2004 due to higher sales volume. However, cash paid to employees and suppliers increased at a greater rate than cash collected from customers, reflecting normal variations in collection and payment patterns. In addition, income tax payments increased in 2005 over 2004, resulting in an income tax receivable position at September 30, 2005, compared to a payable position at September 30, 2004.

Net cash flows used in investing activities increased by $2.6 million in 2005 as compared to 2004. This reflected an increase in capital expenditures of $7.9 million, which was partially offset by the effects of changes in proceeds from the sale of property, plant, and equipment, and net payments associated with business acquisitions that were made in 2004.

Net cash flows used in financing activities decreased by $29.5 million between 2005 and 2004, primarily as a result of changes in borrowings. Net proceeds from borrowings totaled $2.0 million in 2005 compared to net payments of borrowings of $30.4 million in 2004. In addition, both proceeds from the sale of treasury stock, which were related to the exercise of stock options, and purchases of treasury stock were higher in 2005 than in 2004. The effect of these treasury stock transactions on cash flows resulted in net use of cash of $0.6 million in 2005 and a net source of cash of $1.3 million in 2004. Our dividend payments also increased by $1.0 million in 2005 over 2004 as a result of increases in our quarterly dividend rate.

The 2005 treasury stock purchases were made in connection with a Board authorization that expired in July 2006. The 2004 treasury stock purchases were made in connection with a Board authorization that expired in November 2004.

Outlook

Future cash flows from operations and available revolving lines of credit are expected to be adequate to meet our cash requirements over the next twelve months.

Payments of our $64 million of senior notes are due over the 2007 — 2012 timeframe. Also, we have a $100 million line of credit facility that includes an option to increase the amount of the line up to $175 million that does not expire until March 11, 2010. Also, the acquisition completed on October 31, 2006, as discussed under “Subsequent Events” above, was paid from available cash balances. Despite these factors, it is possible business acquisitions could be made in the future that would require amendments to existing debt agreements and the need to obtain additional financing.

Recent Accounting Pronouncements

A discussion of recent accounting pronouncements is included in the Notes to the Consolidated Financial Statements in “Item 8 — Financial Statements and Supplementary Data.”

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Disclosures about market risk are included in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risks.”

Item 8. Financial Statements and Supplementary Data


Consolidated Statements of Earnings	WOODWARD


	Year Ended September 30,
	2006			2005			2004
	(In thousands except per share amounts)

Net sales	$	854,515		$	827,726		$	709,805

Costs and expenses:
Cost of goods sold		612,263			623,680			542,240
Selling, general, and administrative expenses		92,013			79,858			70,949
Research and development costs		59,861			49,996			40,057
Amortization of intangible assets		6,953			7,087			6,905
Curtailment gain		—			(7,825	)		—
Interest expense		5,089			5,814			5,332
Interest income		(2,750	)		(2,159	)		(1,095	)
Other income		(4,245	)		(9,322	)		(4,580	)
Other expense		834			1,489			705

Total costs and expenses		770,018			748,618			660,513

Earnings before income taxes		84,497			79,108			49,292
Income taxes		14,597			23,137			17,910

Net earnings	$	69,900		$	55,971		$	31,382

Net earnings per share:
Basic	$	2.03		$	1.64		$	0.93
Diluted		1.99			1.59			0.90

Weighted-average number of shares outstanding:
Basic		34,351			34,200			33,858
Diluted		35,191			35,127			34,695

See accompanying Notes to Consolidated Financial Statements.


Consolidated Balance Sheets	WOODWARD


	At September 30,
	2006		2005
	(In thousands except per share amounts)

ASSETS
Current assets:
Cash and cash equivalents	$	83,718	$	84,597
Accounts receivable, less allowance for losses of $2,213 for 2006 and $1,965 for 2005		117,254		107,403
Inventories		149,172		149,336
Income taxes receivable		1,787		5,330
Deferred income taxes		23,526		18,700
Other current assets		5,777		4,207

Total current assets		381,234		369,573

Property, plant, and equipment — net		124,176		114,787
Goodwill		132,084		131,035
Other intangibles — net		71,737		78,564
Deferred income taxes		16,687		2,310
Other assets		9,579		9,197

Total assets	$	735,497	$	705,466


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	517	$	8,419
Current portion of long-term debt		14,619		14,426
Accounts payable		38,978		37,015
Accrued liabilities		66,877		68,647

Total current liabilities		120,991		128,507

Long-term debt, less current portion		58,379		72,942
Deferred income taxes		6,248		—
Other liabilities		71,190		71,548
Commitments and contingencies (Note 17)
Shareholders’ equity represented by:
Preferred stock, par value $.003 per share, authorized 10,000 shares, no shares issued		—		—
Common stock, par value $.002917 per share, authorized 100,000 shares, issued 36,480 shares		106		106
Additional paid-in capital		31,960		25,854
Accumulated other comprehensive earnings		12,619		10,904
Deferred compensation		5,524		5,402
Retained earnings		481,726		425,568

		531,935		467,834
Less: Treasury stock, at cost, 2,426 shares for 2006 and 2,154 shares for 2005		47,722		29,963
Treasury stock held for deferred compensation, at cost, 415 shares for 2006 and 414 shares for 2005		5,524		5,402

Total shareholders’ equity		478,689		432,469

Total liabilities and shareholders’ equity	$	735,497	$	705,466

See accompanying Notes to Consolidated Financial Statements.


Consolidated Statements of Cash Flows	WOODWARD


	Year Ended September 30,
	2006			2005			2004
	(In thousands)

Cash flows from operating activities:
Net earnings	$	69,900		$	55,971		$	31,382

Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		29,017			31,538			32,761
Curtailment gain		—			(7,825	)		—
Contractual pension termination benefits		340			—			1,800
Net loss (gain) on sale of property, plant, and equipment		84			(68	)		319
Stock-based compensation		2,942			—			—
Excess tax benefits from stock-based compensation		(3,305	)		—			—
Deferred income taxes		(13,481	)		2,627			(1,988	)
Reclassification of unrealized losses on derivatives to earnings		286			321			300
Changes in operating assets and liabilities, net of business acquisitions:
Accounts receivable		(8,730	)		(9,213	)		(9,639	)
Inventories		1,140			(11,122	)		(10,592	)
Accounts payable and accrued liabilities		(2,514	)		6,422			26,751
Income taxes receivable		9,785			(9,270	)		6,298
Other — net		(4,928	)		10,051			7,823

Total adjustments		10,636			13,461			53,833

Net cash provided by operating activities		80,536			69,432			85,215

Cash flows from investing activities:
Payments for purchase of property, plant, and equipment		(31,713	)		(26,615	)		(18,698	)
Proceeds from sale of property, plant, and equipment		698			3,706			367
Receipts associated with business acquisition		—			—			395
Business acquisitions, net of cash acquired		—			—			(2,336	)

Net cash used in investing activities		(31,015	)		(22,909	)		(20,272	)

Cash flows from financing activities:
Cash dividends paid		(13,742	)		(11,861	)		(10,832	)
Proceeds from sales of treasury stock		4,163			6,674			2,875
Purchases of treasury stock		(22,306	)		(7,292	)		(1,547	)
Excess tax benefits from stock compensation		3,305			—			—
Net proceeds (payments) from borrowings under revolving lines		(8,025	)		2,899			(30,391	)
Payments of long-term debt		(14,510	)		(923	)		—
Other payments		(318	)		—			—

Net cash used in financing activities		(51,433	)		(10,503	)		(39,895	)

Effect of exchange rate changes on cash		1,033			(318	)		(211	)

Net change in cash and cash equivalents		(879	)		35,702			24,837
Cash and cash equivalents, beginning of year		84,597			48,895			24,058

Cash and cash equivalents, end of year	$	83,718		$	84,597		$	48,895

Supplemental cash flow information:
Interest expense paid	$	5,334		$	5,654		$	5,696
Income taxes paid		19,131			24,768			9,919
Noncash investing activities:
Liabilities assumed in business acquisitions		—			—			505

See accompanying Notes to Consolidated Financial Statements.


Consolidated Statements of Shareholders’ Equity	WOODWARD


	Year Ended September 30,
	2006			2005			2004
	(In thousands except per share amounts)

Common stock
Beginning and ending balance	$	106		$	106		$	106

Additional paid-in capital
Beginning balance	$	25,854		$	15,878		$	14,234
Sales of treasury stock		(141	)		1,894			878
Tax benefits applicable to stock options		3,305			3,403			766
Stock-based compensation		2,942			—			—
Deferred compensation transfer		—			657			—
Treasury stock cost adjustment		—			4,022			—

Ending balance	$	31,960		$	25,854		$	15,878

Accumulated other comprehensive earnings
Beginning balance	$	10,904		$	12,038		$	9,625
Foreign currency translation adjustments, net of reclassification to earnings		2,525			336			2,628
Reclassification of unrealized losses on derivatives to earnings		177			200			186
Minimum pension liability adjustment		(987	)		(1,670	)		(401	)

Ending balance	$	12,619		$	10,904		$	12,038

Deferred compensation
Beginning balance	$	5,402		$	4,461		$	4,377
Deferred compensation invested in the company’s common stock		165			984			120
Deferred compensation settled with the company’s common stock		(43	)		(43	)		(36	)

Ending balance	$	5,524		$	5,402		$	4,461

Retained earnings
Beginning balance	$	425,568		$	381,458		$	360,908
Net earnings		69,900			55,971			31,382
Cash dividends — $0.40 per common share in 2006, $0.35 per common share in 2005, and $0.32 per common share in 2004		(13,742	)		(11,861	)		(10,832	)

Ending balance	$	481,726		$	425,568		$	381,458

Treasury stock
Beginning balance	$	29,963		$	23,619		$	24,069
Purchases of treasury stock		22,820			7,292			1,547
Sales of treasury stock		(5,061	)		(4,780	)		(1,997	)
Deferred compensation transfer		—			(190	)		—
Treasury stock cost adjustment		—			4,022			—

Ending balance	$	47,722		$	29,963		$	23,619


Consolidated Statements of Shareholders’ Equity — (Continued)	WOODWARD

Year Ended September 30,

2006 2005 2004

(In thousands except per share amounts)

Treasury stock held for deferred compensation

Beginning balance
$ 5,402 $ 4,461 $ 4,377

Deferred compensation transfer
— 847 —

Share distributions
(43 ) (43 ) (36 )

Automatic dividend reinvestment
165 137 120

Ending balance
$ 5,524 $ 5,402 $ 4,461

Total shareholders’ equity

Beginning balance
$ 432,469 $ 385,861 $ 360,804

Effect of changes among components of shareholders’ equity:

Additional paid-in capital
6,106 9,976 1,644

Accumulated other comprehensive earnings
1,715 (1,134 ) 2,413

Deferred compensation
122 941 84

Retained earnings
56,158 44,110 20,550

Treasury stock
(17,759 ) (6,344 ) 450

Treasury stock held for deferred compensation
(122 ) (941 ) (84 )

Total effect of changes among components of shareholders’ equity
46,220 46,608 25,057

Ending balance
$ 478,689 $ 432,469 $ 385,861

Total comprehensive earnings

Net earnings
$ 69,900 $ 55,971 $ 31,382

Other comprehensive earnings:

Foreign currency translation adjustments, net of reclassification to earnings
2,525 336 2,628

Reclassification of unrealized losses on derivatives to earnings
177 200 186

Minimum pension liability adjustment
(987 ) (1,670 ) (401 )

Total other comprehensive earnings
1,715 (1,134 ) 2,413

Total comprehensive earnings
$ 71,615 $ 54,837 $ 33,795

Common stock, number of shares

Beginning and ending balance
36,480 36,480 36,480

Treasury stock, number of shares

Beginning balance
2,154 2,532 2,703

Purchases of treasury stock
720 273 72

Sales of treasury stock
(448 ) (615 ) (243 )

Deferred compensation transfer
— (36 ) —

Ending balance
2,426 2,154 2,532

Treasury stock held for deferred compensation, number of shares Beginning balance
414 375 372

Deferred compensation transfer
— 36 —

Share distributions
(4 ) (3 ) (3 )

Automatic dividend reinvestment
5 6 6

Ending balance
415 414 375

See accompanying Notes to Consolidated Financial Statements.

WOODWARD

Notes to Consolidated Financial Statements

(In thousands of dollars except per share amounts)


Note 1.	Significant accounting policies:

Principles of consolidation: The consolidated financial statements include the accounts of the company and its majority-owned subsidiaries. Transactions within and between these companies are eliminated. Results of joint ventures in which the company does not have a controlling financial interest are included in the financial statements using the equity method of accounting.

Stock-split: A three-for-one stock split was approved by shareholders at the 2005 annual meeting of shareholders on January 25, 2006. The stock split became effective for shareholders at the close of business on February 1, 2006. The number of shares and per share amounts reported in these consolidated financial statements have been updated from amounts reported prior to February 1, 2006, to reflect the effects of the split. In addition, in accordance with stock option plan provisions, the terms of all outstanding stock option awards were proportionally adjusted.

Use of estimates: Financial statements prepared in conformity with accounting principles generally accepted in the United States require the use of estimates and assumptions that affect amounts reported. Actual results could differ materially from our estimates.

Foreign currency translation: The assets and liabilities of substantially all subsidiaries outside the United States are translated at year-end rates of exchange, and earnings and cash flow statements are translated at weighted-average rates of exchange. Translation adjustments are accumulated with other comprehensive earnings as a separate component of shareholders’ equity and are presented net of tax effects in the consolidated statements of shareholders’ equity. The effects of changes in exchange rates on loans between consolidated subsidiaries that are not expected to be repaid in the foreseeable future are also accumulated with other comprehensive earnings.

Revenue recognition: We recognize sales when delivery of product has occurred or services have been rendered and there is persuasive evidence of a sales arrangement, selling prices are fixed or determinable, and collectibility from the customer is reasonably assured. We consider product delivery to have occurred when the customer has taken title and assumed the risks and rewards of ownership of the products. Most of our sales are made directly to customers that use our products, although we also sell products to distributors, dealers, and independent service facilities. Sales terms for distributors, dealers, and independent service facilities are identical to our sales terms for direct customers. We account for payments made to customers as a reduction of revenue unless they are made in exchange for identifiable goods or services with fair values that can be reasonably estimated. These reductions in revenues are recognized immediately to the extent that the payments cannot be attributed to expected future sales, and are recognized in future periods to the extent that the payments relate to future sales, based on the specific facts and circumstances underlying each payment.

Stock-based compensation: On October 1, 2005, we began to measure the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize the cost over the requisite service period in accordance with Statement of Financial Accounting Standards No. 123R, “Share-Based Payment.” Prior to October 1, 2005, we used the intrinsic value method to account for stock-based employee compensation under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and therefore we did not recognize compensation expense in association with options granted at or above the market price of our common stock at the date of grant. Upon adoption of the new accounting method, we used the modified prospective transition method, under which financial statements for periods prior to the date of adoption were not adjusted for the change in accounting.

As a result of adopting the new standard, earnings before income taxes for 2006 decreased by $2,942 , and net earnings decreased by $1,824 , or $0.05 per basic share and $0.05 per diluted share. These results reflect stock compensation expense of $2,942 and tax benefits of $1,118.

WOODWARD

Notes to Consolidated Financial Statements — (Continued)

(In thousands of dollars except per share amounts)

Adoption of the new standard also affected our consolidated statements of cash flows. The change is related to tax benefits associated with tax deductions that exceed the amount of compensation expense recognized in financial statements. Cash flow from operating activities was reduced by $3,305 and cash flow from financing activities was increased by $3,305 in 2006 from amounts that would have been reported if we had not adopted the new accounting standard.

Concurrent with our adoption of the new statement, we began to use the non-substantive vesting period approach for attributing stock compensation to individual periods. The nominal vesting period approach was used in determining the stock compensation expense for the pro forma 2005 and 2004 net earnings in a table that follows. The change in the attribution method will not affect the ultimate amount of stock compensation expense recognized, but it has accelerated the recognition of such expense for non-substantive vesting conditions, such as retirement eligibility provisions. Under both approaches, we elected to recognize stock compensation on a straight-line basis for options with graded vesting schedules. As a result of the change in attribution method, earnings before income taxes for 2006 were reduced by approximately $260, and net earnings were reduced by $161, which had no effect on basic and diluted earnings per share.

The following table presents a reconciliation of reported net earnings and per share information to pro forma net earnings and per share information that would have been reported if the fair value method had been used to account for stock-based employee compensation in 2005 and 2004:


Year Ended September 30,	2005			2004

Reported net earnings	$	55,971		$	31,382
Stock-based compensation expense using the fair value method, net of income tax		(1,502	)		(1,400	)

Pro forma net earnings	$	54,469		$	29,982

Reported net earnings per share amounts:
Basic	$	1.64		$	0.93
Diluted		1.59			0.90

Pro forma net earnings per share amounts:
Basic	$	1.59		$	0.89
Diluted		1.55			0.86

Research and development costs: Expenditures related to new product development activities are expensed when incurred and are separately reported in the consolidated statements of earnings.

Income taxes: Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the company’s assets and liabilities. We provide for taxes that may be payable if undistributed earnings of overseas subsidiaries were to be remitted to the United States, except for those earnings that we consider to be permanently reinvested.

Cash equivalents: Highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents.

Accounts receivable: Virtually all our sales are made on credit and result in accounts receivable, which are recorded at the amount invoiced. In the normal course of business, not all accounts receivable are collected and, therefore, we provide an allowance for losses of accounts receivable equal to the amount that we believe ultimately will not be collected. We consider customer-specific information related to delinquent accounts, past loss experience, and current economic conditions in establishing the amount of our allowance. Accounts receivable losses are deducted from the allowance and the related accounts receivable balances are written off when the

WOODWARD

Notes to Consolidated Financial Statements — (Continued)

(In thousands of dollars except per share amounts)

receivables are deemed uncollectible. Recoveries of accounts receivable previously written off are recognized when received.

Inventories: Inventories are valued at the lower of cost or market, with cost being determined on a first-in, first-out basis.

Property, plant, and equipment: Property, plant, and equipment are recorded at cost and are depreciated over the estimated useful lives of the assets, ranging from 5 to 45 years for buildings and improvements and 3 to 15 years for machinery and equipment. Assets placed in service after September 30, 1998, are depreciated using the straight-line method and assets placed in service as of and prior to September 30, 1998, are depreciated principally using accelerated methods. Assets are tested for recoverability whenever events or circumstances indicate the carrying value may not be recoverable.

Goodwill: Goodwill represents the excess of the cost of an acquired entity over the net amount assigned to assets acquired and liabilities assumed. Goodwill is tested for impairment on an annual basis (as of April 1) 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.

The goodwill impairment test is a two-step process. In the first step, we compare the fair value of a reporting unit with its carrying amount, including goodwill. The goodwill is considered potentially impaired if the carrying amount of the reporting unit exceeds its fair value. The second step is performed for all goodwill that is potentially impaired. In this step, we compare the implied fair value of the goodwill of the reporting unit to the carrying amount of that goodwill. The implied fair value of the goodwill is determined in the same manner as the amount of goodwill recognized when a business combination is determined. If the carrying amount of goodwill exceeds the implied fair value of goodwill, we would recognize an impairment loss to reduce the carrying amount to its implied fair value.

A reporting unit is the level at which goodwill is tested for impairment. A reporting unit is an operating segment or a component one level below an operating segment if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. Two or more components would be aggregated and considered a single reporting unit if the components have similar economic conditions. In our most recent impairment test, we determined our operating segments were our reporting units for purposes of our impairment tests.

Other intangibles: Other intangibles are recognized apart from goodwill whenever an acquired intangible asset arises from contractual or other legal rights, or whenever it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented, or exchanged, either individually or in combination with a related contract, asset, or liability. An intangible other than goodwill is amortized over its estimated useful life unless that life is determined to be indefinite. Currently, all of our intangibles have an estimated useful life and are being amortized.

Impairment losses are recognized if the carrying amount of an intangible exceeds its fair value.

Deferred compensation: Deferred compensation obligations will be settled either by delivery of a fixed number of shares of the company’s common stock (in accordance with certain eligible members’ irrevocable elections) or in cash. We have contributed shares of common stock of the company into a trust established for the future settlement of deferred compensation obligations that are payable in shares of the company’s common stock. Common stock held by the trust is reflected in the consolidated balance sheet as treasury stock held for deferred compensation, and the related deferred compensation obligation is reflected as a separate component of equity in amounts equal to the fair value of the common stock at the dates of contribution. These accounts are not adjusted for subsequent changes in fair value of the common stock. Deferred compensation obligations that will be settled in cash are accounted for on an accrual basis in accordance with the terms of the underlying contract and are reflected in the consolidated balance sheet as an accrued expense.

WOODWARD

Notes to Consolidated Financial Statements — (Continued)

(In thousands of dollars except per share amounts)

Derivatives: We recognize derivatives, which are used to hedge risks associated with interest rates, as assets or liabilities at fair value. These derivatives are designated as hedges of our exposure to changes in the fair value of long-term debt or as hedges of our exposure to variable cash flows of future interest payments. The gain or loss in the value of a derivative designated as a fair value hedge is recognized in earnings in the period of change together with an offsetting loss or gain on long-term debt. The effective portion of a gain or loss in the value of a derivative designated as a cash flow hedge is initially reported as a component of other comprehensive earnings and is subsequently reclassified into earnings when the future interest payments affect earnings. The ineffective portion of the gain or loss in the value of a derivative designated as a cash flow hedge is reported in earnings immediately.

New accounting standards: In June 2006, the Financial Accounting Standards Board issued FASB interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” The Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” and will be effective for our year ending September 30, 2008, although earlier application is permitted. The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Interpretation also provides guidance on the derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We are currently evaluating the effects this Interpretation will have on our financial statements.

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” Among its provisions, this Statement will require us to recognize the overfunded or underfunded status of our retirement pension benefits and retirement healthcare benefits as an asset or liability in our consolidated balance sheet. When initially adopted, any required adjustments will be recognized as an adjustment of the ending balance of accumulated other comprehensive income, net of income tax. Thereafter, changes in funded status will be accounted through comprehensive earnings, net of income taxes. These provisions become effective for us on September 30, 2007. If we had adopted the provisions at September 30, 2006, we would have increased total assets by approximately $3,200, increased total liabilities by $8,400, and decreased total equity by $5,200. The effect of adoption would not have affected our compliance with covenants under existing debt agreements.


Note 2.	Business acquisitions:

In June 2004, we acquired assets and assumed certain liabilities of Adrenaline Research, Inc., specialists in advanced combustion electronics. Our cost for this acquisition totaled $2,896, and we recognized $3,139 as other intangibles in the Industrial Controls segment. We are using an amortization period of seventeen years for these intangibles. If we had completed this acquisition on October 1, 2002, net sales and net earnings for 2004 and 2003 would not have been materially different from amounts reported in the consolidated statements of earnings.


Note 3.	Income taxes:

Income taxes consisted of the following:


Year Ended September 30,	2006			2005			2004

Current:
Federal	$	21,117		$	18,149		$	12,400
State		3,223			2,995			2,481
Foreign		3,994			(675	)		6,148
Deferred		(13,737	)		2,668			(3,119	)

	$	14,597		$	23,137		$	17,910

WOODWARD

Notes to Consolidated Financial Statements — (Continued)

(In thousands of dollars except per share amounts)

Earnings before income taxes by geographical area consisted of the following:


Year Ended September 30,	2006		2005			2004

United States	$	70,037	$	81,244		$	39,054
Other countries		14,460		(2,136	)		10,238

	$	84,497	$	79,108		$	49,292

Deferred income taxes presented in the consolidated balance sheets are related to the following:


At September 30,	2006			2005

Deferred tax assets:
Retirement healthcare and early retirement benefits	$	18,691		$	18,434
Foreign net operating loss carryforwards		16,245			18,694
Inventory		9,363			10,006
Other		30,779			24,022
Valuation allowance		(2,566	)		(17,769	)

Total deferred tax assets, net of valuation allowance		72,512			53,387

Deferred tax liabilities:
Intangibles — net		(26,294	)		(22,781	)
Other		(12,253	)		(9,596	)

Total deferred tax liabilities		(38,547	)		(32,377	)

Net deferred tax assets	$	33,965		$	21,010

The foreign net operating loss carryforwards includes $888 that expires in 2012 and $15,357 that may be carried forward indefinitely.

At September 30, 2006, we have not provided for taxes on undistributed foreign earnings of $18,270 that we consider permanently reinvested. These earnings could become subject to income taxes if they are remitted as dividends, are loaned to the company, or if we sell our stock in the subsidiaries. However, we believe that foreign tax credits would largely offset any income tax that might otherwise be due.

The changes in the valuation allowance were as follows:


Year Ended September 30,	2006			2005			2004

Beginning balance	$	(17,769	)	$	(18,629	)	$	(16,528	)
Change in valuation allowance that existed at the beginning of the year		13,710			—			—
Foreign net operating loss carryforward		1,493			860			(2,101	)

Ending balance	$	(2,566	)	$	(17,769	)	$	(18,629	)

WOODWARD

Notes to Consolidated Financial Statements — (Continued)

(In thousands of dollars except per share amounts)

Foreign net operating loss carryforward amounts in the preceding table included the translation effects of changes in foreign currency exchange rates.

The reasons for the differences between our effective income tax rate and the United States statutory federal income tax rate were as follows:


Percent of Pretax Earnings,
Year Ended September 30,	2006			2005			2004

Statutory rate		35.0			35.0			35.0
Adjustments of the beginning-of-year balance of valuation allowances for deferred tax assets		(16.2	)		—			—
State income taxes, net of federal tax benefit		2.4			2.5			3.6
Foreign loss effect		0.3			0.1			2.1
Foreign tax rate differences		1.1			(0.7	)		—
Foreign sales benefits		(2.3	)		(3.3	)		(3.4	)
ESOP dividends on allocated shares		(0.7	)		(0.8	)		(1.1	)
Research credit		(0.9	)		(1.7	)		—
Change in estimate of taxes for previous periods		(1.3	)		(2.5	)		—
Other items, net		(0.1	)		0.6			0.1

Effective rate		17.3			29.2			36.3

The changes in estimate of taxes for previous periods are primarily related to the favorable resolution of certain tax matters for 2006, and to increases in the amount of certain credits claimed and changes in the amount of certain deductions taken as compared to prior estimates for 2005.


Note 4.	Earnings per share:


Year Ended September 30,	2006		2005		2004

Net earnings(A)	$	69,900	$	55,971	$	31,382

Determination of shares, in thousands:
Weighted-average shares of common stock outstanding(B)		34,351		34,200		33,858
Assumed exercise of stock options		840		927		837

Weighted-average shares of common stock outstanding assuming dilution(C)		35,191		35,127		34,695

Net earnings per share:
Basic(A/B)	$	2.03	$	1.64	$	0.93
Diluted(A/C)		1.99		1.59		0.90

The weighted-average shares of common stock outstanding included the weighted-average shares held for deferred compensation obligations of 413,985 for 2006, 391,395 for 2005, and 374,895 for 2004.

The following outstanding stock options were not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive:


Year Ended September 30,	2006		2005		2004

Options		357,649		4,809		34,944
Weighted-average exercise price	$	27.18	$	28.27	$	23.46

WOODWARD

Notes to Consolidated Financial Statements — (Continued)

(In thousands of dollars except per share amounts)

Note 5. Inventories:


At September 30,	2006		2005

Raw materials	$	5,495	$	4,876
Component parts		91,644		97,429
Work in process		30,124		28,326
Finished goods		21,909		18,705

	$	149,172	$	149,336


Note 6.	Property, plant, and equipment:


At September 30,	2006		2005

Land	$	9,800	$	9,766
Buildings and improvements		158,276		153,567
Machinery and equipment		248,907		238,550
Construction in progress		11,181		4,905

		428,164		406,788
Less accumulated depreciation		303,988		292,001

Property, plant, and equipment — net	$	124,176	$	114,787

Depreciation expense totaled $22,064 in 2006, $24,451 in 2005, and $25,856 in 2004.


Note 7.	Goodwill:


Year Ended September 30,	2006		2005

Industrial Controls:
Beginning balance	$	68,913	$	69,420
Foreign currency exchange rate changes		1,049		(507	)

Ending balance	$	69,962	$	68,913

Aircraft Engine Systems:
Beginning and ending balance	$	62,122	$	62,122

Consolidated:
Beginning balance	$	131,035	$	131,542
Foreign currency exchange rate changes		1,049		(507	)

Ending balance	$	132,084	$	131,035

WOODWARD

Notes to Consolidated Financial Statements — (Continued)

(In thousands of dollars except per share amounts)

Note 8. Other intangibles — net:


At September 30,	2006			2005

Industrial Controls:
Customer relationships:
Amount acquired	$	37,387		$	37,387
Accumulated amortization		(11,414	)		(8,814	)

		25,973			28,573

Other:
Amount acquired		31,072			31,207
Accumulated amortization		(12,739	)		(10,194	)

		18,333			21,013

Total	$	44,306		$	49,586

Aircraft Engine Systems:
Customer relationships:
Amount acquired	$	28,547		$	28,547
Accumulated amortization		(7,930	)		(6,979	)

		20,617			21,568

Other:
Amount acquired		11,785			11,785
Accumulated amortization		(4,971	)		(4,375	)

		6,814			7,410

Total	$	27,431		$	28,978

Consolidated:
Customer relationships:
Amount acquired	$	65,934		$	65,934
Accumulated amortization		(19,344	)		(15,793	)

		46,590			50,141

Other:
Amount acquired		42,857			42,992
Accumulated amortization		(17,710	)		(14,569	)

		25,147			28,423

Total	$	71,737		$	78,564

Amortization expense associated with current intangibles is expected to be approximately $6,700 for 2007, $5,900 for 2008, $5,500 for 2009, $5,400 for 2010, and $5,300 for 2011.


Note 9.	Short-term borrowings:

Short-term borrowings reflect borrowings under certain bank lines of credit. The total amount available under these lines of credit, including outstanding borrowings, totaled $17,691 at September 30, 2006, and $25,695 at

WOODWARD

Notes to Consolidated Financial Statements — (Continued)

(In thousands of dollars except per share amounts)

September 30, 2005. Interest on borrowings under the lines of credit is based on various short-term rates. Several of the lines assess commitment fees. The lines are generally reviewed annually for renewal and are subject to the usual terms and conditions applied by the banks. The weighted-average interest rate for outstanding borrowings was 0.5% at September 30, 2006, 2.3% at September 30, 2005, and 2.8% at September 30, 2004. For all three years, and in particular 2006, the rates were lower than is typical in the United States because of borrowings in foreign countries.


Note 10.	Long-term debt:


At September 30,	2006		2005

Senior notes — 6.39%	$	64,286	$	75,000
Term note — 5.19%		7,809		11,135
Fair value hedge adjustment for unrecognized discontinued hedge gains		903		1,233

		72,998		87,368
Less current portion		14,619		14,426

	$	58,379	$	72,942

The senior notes, which are held by multiple institutions, and the term note, which is held by a bank in Germany, are uncollateralized. Required future principal payments of the senior notes and the term note at September 30, 2006, are $14,619 in 2007, $14,619 in 2008, $10,714 in 2009, $10,714 in 2010, $10,714 in 2011, and $10,715 thereafter.

We also have a $100,000 revolving line of credit facility that involves uncollateralized financing arrangements with a syndicate of U.S. banks. There is an option to increase the amount of the line to $175,000. This line of credit expires March 11, 2010. Interest rates on borrowings under the line vary with LIBOR, the money market rate, or the prime rate. At September 30, 2006, there are no borrowings against the line.

Previously, we discontinued certain interest rate swaps that were designated as fair value hedges of long-term debt. These actions resulted in gains that are recognized as a reduction of interest expense over the term of the associated hedged debt using the effective interest method. The unrecognized portion of the gain was presented as an adjustment to long-term debt in the preceding table.

Provisions of the debt agreements include covenants customary to such agreements that require us to maintain specified minimum or maximum financial measures and place limitations on various investing and financing activities. The agreements also permit the lenders to accelerate repayment requirements in the event of a material adverse event. Our most restrictive covenants require us to maintain a minimum consolidated net worth, a maximum consolidated debt to consolidated operating cash flow, and a maximum consolidated debt to EBITDA, as defined in the agreements.


Note 11.	Accrued liabilities:


At September 30,	2006		2005

Salaries and other member benefits	$	28,673	$	40,629
Warranties		5,832		5,692
Contingent legal matters		8,500		—
Taxes, other than on income		4,391		4,828
Other items		19,481		17,498

	$	66,877	$	68,647

WOODWARD

Notes to Consolidated Financial Statements — (Continued)

(In thousands of dollars except per share amounts)

Salaries and other member benefits included accrued termination benefits totaling $4,935 at September 30, 2005, which were related to the Industrial Controls segment. Changes in accrued termination benefits were as follows:


Year Ended September 30,	2006			2005

Beginning balance	$	4,935		$	12,000
Expense:
Cost of goods sold		69			2,066
Selling, general, and administrative expenses		1			78
Payments and other settlements		(4,916	)		(7,041	)
Accrual adjustments		—			(2,204	)
Foreign currency exchange rate changes		(89	)		36

Ending balance	$	—		$	4,935

The termination benefits that were expensed and accrued during 2005 and 2006 were primarily related to the consolidation of two European manufacturing operations with existing operations. This action was taken to streamline the organization by eliminating redundant manufacturing operations and was completed in 2006. The total expense for this action was $15,920, which included $12,010 for termination benefits, $2,140 for contractual pension termination benefits, and other costs primarily associated with moving equipment and inventory to other locations totaling $1,770.

Provisions of our sales agreements include product warranties customary to such agreements. We establish accruals for specifically identified warranty issues that are probable to result in future costs. We also accrue for warranty costs on a non-specific basis whenever past experience indicates a normal and predictable pattern exists. Changes in accrued product warranties were as follows:


Year Ended September 30,	2006			2005

Beginning balance	$	5,692		$	6,401
Accruals related to warranties issued during the period		6,107			5,761
Accruals related to pre-existing warranties		(1,372	)		(1,543	)
Settlements of amounts accrued		(4,647	)		(4,876	)
Foreign currency exchange rate changes		52			(51	)

Ending balance	$	5,832		$	5,692


Note 12.	Other liabilities:


Year Ended September 30,	2006		2005

Net accrued retirement benefits, less amounts recognized with accrued liabilities	$	55,075	$	57,680
Other items		16,115		13,868

	$	71,190	$	71,548


Note 13.	Retirement benefits:

We provide various benefits to eligible members of our company, including contributions to various defined contribution plans, pension benefits associated with defined benefit plans, and retirement healthcare benefits. The amount of expense associated with defined contribution plans totaled $13,684 in 2006, $12,705 in 2005, and

WOODWARD

Notes to Consolidated Financial Statements — (Continued)

(In thousands of dollars except per share amounts)

$11,785 in 2004. The amount of contributions associated with multiemployer plans totaled $635 in 2006, $867 in 2005, and $903 in 2004. Information regarding our retirement pension benefits and retirement healthcare benefits, using a September 30 measurement date, is provided in the tables and paragraphs that follow.


	Retirement Pension Benefits												Retirement Healthcare
At or for the Year	United States						Other Countries						Benefits
Ended September 30,	2006			2005			2006			2005			2006			2005

Changes in benefit obligation:
Benefit obligation at beginning of year	$	21,764		$	18,855		$	53,918		$	48,967		$	57,374		$	82,725
Service cost		—			—			1,360			2,008			381			1,708
Interest cost		1,142			1,082			2,200			2,102			2,753			3,761
Contribution by plan participants		—			—			139			224			2,675			2,962
Net actuarial (gains)/losses		(318	)		2,237			1,531			3,506			(6,082	)		2,916
Foreign currency exchange rate changes		—			—			1,834			(1,340	)		170			(82	)
Benefits paid		(457	)		(410	)		(4,196	)		(1,549	)		(5,714	)		(5,389	)
Plan amendments		(3,415	)		—			—			—			—			(11,249	)
Curtailment gain		—			—			(54	)		—			—			(19,978	)
Contractual termination benefits		—			—			340			—			—			—

Benefit obligation at end of year		18,716			21,764			57,072			53,918			51,557			57,374

Changes in plan assets:
Fair value of plan assets at beginning of year		14,961			13,826			37,888			32,816			—			—
Actual return on plan assets		1,205			1,545			3,534			5,579			—			—
Foreign currency exchange rate changes		—			—			1,194			(981	)		—			—
Contributions by the company		1,000			—			2,253			1,799			3,039			2,427
Contributions by plan participants		—			—			139			224			2,675			2,962
Benefits paid		(457	)		(410	)		(4,196	)		(1,549	)		(5,714	)		(5,389	)

Fair value of plan assets at end of year		16,709			14,961			40,812			37,888			—			—

Funded status		(2,007	)		(6,803	)		(16,260	)		(16,030	)		(51,557	)		(57,374	)
Unamortized prior service cost		(3,409	)		6			(62	)		(74	)		(7,938	)		(10,458	)
Unrecognized net losses		5,078			5,674			10,392			10,354			10,381			17,633
Unamortized transition obligation		—			—			359			467			—			—
Intangible asset		—			—			—			(226	)		—			—
Accumulated other comprehensive income		(1,669	)		(2,626	)		(4,777	)		(2,235	)		—			—

Net accrued benefit	$	(2,007	)	$	(3,749	)	$	(10,348	)	$	(7,744	)	$	(49,114	)	$	(50,199	)

Accumulated benefit obligation	$	18,716		$	18,710		$	50,374		$	45,632

WOODWARD

Notes to Consolidated Financial Statements — (Continued)

(In thousands of dollars except per share amounts)

Retirement Pension Benefits Retirement

United States Other Countries Healthcare Benefits

Year Ended September 30,
2006 2005 2004 2006 2005 2004 2006 2005 2004

Components of net periodic benefit cost:

Service cost
$ — $ — $ — $ 1,360 $ 2,008 $ 1,694 $ 381 $ 1,708 $ 2,206

Interest cost
1,142 1,082 1,070 2,200 2,102 1,835 2,753 3,761 4,204

Expected return on plan assets
(1,180 ) (1,090 ) (942 ) (1,998 ) (2,069 ) (1,641 ) — — —

Amortization of unrecognized transition obligation
— — — 91 99 98 — — —

Recognized losses
251 148 170 402 553 533 1,198 1,550 1,343

Recognized prior service cost
1 1 1 (8 ) (9 ) (9 ) (2,520 ) (1,346 ) (508 )

Contractual termination benefits
— — — 340 — 1,800 — — —

Curtailment gain
— — — — — — — (7,825 ) —

Net periodic benefit cost
$ 214 $ 141 $ 299 $ 2,387 $ 2,684 $ 4,310 $ 1,812 $ (2,152 ) $ 7,245

Increase (decrease) in minimum pension liability adjustment included in other comprehensive earnings
$ (950 ) $ 1,113 $ 240 $ 2,542 $ 1,553 $ 390 $ — $ — $ —

Weighted-average assumptions used to determine benefit obligation at September 30:

Discount rate
5.60 % 5.30 % 5.80 % 4.39 % 4.08 % 4.36 % 5.56 % 5.28 % 5.79 %

Rate of compensation increase
4.50 % 4.50 % 5.00 % 3.44 % 3.16 % 3.02 % — — —

Weighted-average assumptions used to determine net periodic benefit cost for years ended September 30:

Discount rate
5.30 % 5.80 % 6.00 % 4.08 % 4.36 % 4.06 % 5.28 % 5.79 % 6.00 %

Rate of compensation increase
4.50 % 5.00 % 5.00 % 3.16 % 3.02 % 2.91 % — — —

Expected long-term rate of return on plan assets
8.00 % 8.00 % 8.25 % 5.57 % 6.04 % 5.44 % — — —

An amendment was made to one of our retirement pension benefit plans in 2006 that modified the amount of pension benefits payable to participants retiring after January 1, 2007. Amendments were also made to one of our retirement healthcare benefit plans in 2005 that reduced the number of individuals who will qualify for retirement healthcare benefits in future periods. The effects of the amendments were presented in the preceding tables under the captions “plan amendments” and “curtailment gain.”

Contractual pension termination benefits were associated with workforce reductions of members covered by one of our retirement pension benefit plans. The workforce reductions were related to the consolidation of manufacturing operations that were initially accrued for in 2004. The expense was recognized in the Industrial Controls segment.

As part of our retirement healthcare benefits, we provide a prescription drug benefit that is at least actuarially equivalent to Medicare Part D. As a result, we are entitled to a federal subsidy that was introduced by the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The effect of the subsidy reduced our accumulated postretirement benefit obligation by $7,934 at January 1, 2004, which was the date the Act became effective. It also reduced our net periodic postretirement benefit cost for 2004 by $843, which consisted of $189 for service cost, $356 for interest cost, and $298 for recognized actuarial gains. In 2006, we paid prescription drug benefits of $2,336. We did not receive a federal subsidy in 2006, but we currently expect to receive $517 in 2007.

WOODWARD

Notes to Consolidated Financial Statements — (Continued)

(In thousands of dollars except per share amounts)

Estimated benefit payments to be made over the next ten years, with retirement healthcare benefit payments presented net of estimated participant contributions are as follows:


	Retirement
	Pension Benefits				Retirement Healthcare
Year Ending September 30,	United States		Other Countries		Benefits

2007	$	502	$	2,222	$	3,397
2008		535		1,912		3,579
2009		592		1,964		3,795
2010		647		2,119		3,968
2011		753		2,856		4,123
2012 - 2016		5,588		14,740		21,852

We expect contributions by the company for retirement pension benefits will be $0 in the United States and $2,997 in other countries in 2007. We also expect contributions by the company for retirement healthcare benefits will be $3,397 in 2007, less amounts received as federal subsidies.

For retirement healthcare benefits, we assumed net healthcare cost trend rates of 10.00% in 2007, decreasing gradually to 5.00% in 2012, and remaining at 5.00% thereafter. A 1.00% increase in assumed healthcare cost trend rates would have increased the total of the service and interest cost components by $364 and increased the benefit obligation at the end of the year by $5,554 in 2006. Likewise, a 1.00% decrease in the assumed rates would have decreased the total of service and interest cost components by $311 and decreased the benefit obligation by $4,763 in 2006.

Our investment policies and strategies for plan assets focus on maintaining diversified investment portfolios that provide for growth while minimizing risk to principal. The target allocation ranges for our plan assets in the United States are 40-60% for United States equity securities, 10-15% for foreign equity securities, and 35-45% for debt securities. The target allocation ranges for our plan assets in the United Kingdom, which represented about 75% of total foreign plan assets at September 30, 2006, are 47-57% for debt securities, 23-27% for United Kingdom equity securities, and 23-27% for non-United Kingdom equity securities. The remaining foreign plan assets are in Japan, and our investment manager uses asset allocations that are customary in that country. The expected long-term rates of return on plan assets were based on our current asset allocations and the historical long-term performance for each asset class, as adjusted for existing market conditions.

The actual percentage of the fair value of total plan assets were as follows:


	United States						Other Countries
At September 30,	2006			2005			2006			2005

Equity securities		60	%		60	%		48	%		55	%
Debt securities		40	%		40	%		40	%		34	%
Insurance contracts		—			—			10	%		10	%
Other		—			—			2	%		1	%

		100	%		100	%		100	%		100	%


Note 14.	Stock options:

We have granted stock options to key management members and directors of the company. These options are generally granted with an exercise price equal to the market price of our stock at the date of grant, a four year graded

WOODWARD

Notes to Consolidated Financial Statements — (Continued)

(In thousands of dollars except per share amounts)

vesting schedule, and a term of ten years. Vesting would be accelerated in the event of retirement, disability, or death of a participant, or change in control of the company.

Provisions governing our stock option grants are included in the 2006 Omnibus Incentive Plan and the 2002 Stock Option Plan. The 2006 Plan was approved by shareholders and became effective on January 25, 2006. No grants were issued in January 2006, and no further grants will be made under the 2002 Plan. The 2006 Plan made 3,705,000 shares available for grants made on or after January 25, 2006, to members and directors of the company, subject to annual award limits as specified in the Plan.

The fair value of options granted during 2006, 2005, and 2004 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions by grant year:


Year Ended September 30,	2006			2005			2004

Expected term		7 years			7 years			7 years
Expected volatility:
Range used		37	%		37% - 38	%		37	%
Weighted-average		37	%		37.7	%		37	%
Expected dividend yield:
Range used		1.73	%		1.65% - 1.73	%		2.61	%
Weighted-average		1.73	%		1.70	%		2.61	%
Risk-free interest rate:
Range used		4.48% - 4.57	%		3.98% - 4.18	%		3.67% - 3.78	%

Historical company information was the primary basis for selection of the expected term, expected volatility, and expected dividend yield assumptions. The risk-free interest rate was selected based on yields from U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the options being valued.

Changes in outstanding stock options were as follows:


				Weighted-Average Exercise
	Number			Price

Balance at September 30, 2003		3,014,286		$	11.44
Options granted		507,000			15.65
Options exercised		(243,744	)		11.67
Options forfeited		(15,750	)		16.42
Options expired		(9,000	)		18.58

Balance at September 30, 2004		3,252,792			12.04
Options granted		430,500			24.27
Options exercised		(614,361	)		10.52
Options forfeited		(61,125	)		17.33
Options expired		(8,937	)		24.57

Balance at September 30, 2005		2,998,869			13.96
Options granted		367,400			27.03
Options exercised		(459,601	)		10.33
Options forfeited		(2,250	)		15.62

Balance at September 30, 2006		2,904,418		$	16.18

WOODWARD

Notes to Consolidated Financial Statements — (Continued)

(In thousands of dollars except per share amounts)

At September 30, 2006, there was $4,706 of unrecognized compensation cost related to nonvested awards, which we expect to recognize over a weighted-average period of 1.4 years. Information about stock options that are vested, or are expected to vest, and that are exercisable at September 30, 2006, follows:

Weighted-

Average

Weighted-

Remaining

Average

Life

Aggregate

Exercise

Intrinsic

Number

Price

Years

Value

Options vested or expected to vest

2,810,837

15.94

5.2

49,469

Options exercisable

1,964,017

13.06

3.8

40,232

The weighted-average grant date fair value of options granted was $10.45 for 2006, $9.40 for 2005, and $5.23 for 2004. Other information follows:


Year Ended September 30,	2006		2005		2004

Total fair value of shares vested	$	2,668	$	2,072	$	1,862
Total intrinsic value of options exercised		9,056		9,115		2,131
Cash received from exercises of stock options		4,139		6,468		2,844
Tax benefit realized from exercise of stock options		3,406		3,435		291


Note 15.	Accumulated other comprehensive earnings:

Accumulated other comprehensive earnings, which totaled $12,619 at September 30, 2006, and $10,904 at September 30, 2005, consisted of the following items:


Year Ended September 30,	2006			2005

Accumulated foreign currency translation adjustments:
Beginning balance	$	14,575		$	14,239
Translation adjustments		4,073			(1,391	)
Taxes associated with translation adjustments		(1,548	)		1,727

Ending balance	$	17,100		$	14,575

Accumulated unrealized derivative losses:
Beginning balance	$	(661	)	$	(861	)
Reclassification to interest expense		285			321
Taxes associated with interest reclassification		(108	)		(121	)

Ending balance	$	(484	)	$	(661	)

Accumulated minimum pension liability adjustments:
Beginning balance	$	(3,010	)	$	(1,340	)
Minimum pension liability adjustment		(1,585	)		(2,666	)
Taxes associated with minimum pension liability adjustments		598			996

Ending balance	$	(3,997	)	$	(3,010	)

WOODWARD

Notes to Consolidated Financial Statements — (Continued)

(In thousands of dollars except per share amounts)

Note 16. Leases:

We have entered into operating leases for certain facilities and equipment with terms in excess of one year. Future minimum rental payments required under these leases are approximately $3,700 in 2007, $2,500 in 2008, $2,000 in 2009, $1,700 in 2010, $900 in 2011, and $2,000 thereafter. Rent expense for all operating leases totaled $4,610 in 2006, $4,557 in 2005, and $4,239 in 2004.


Note 17.	Contingencies:

We are currently involved in pending or threatened litigation or other legal proceedings regarding employment, product liability, and contractual matters arising from the normal course of business. We accrued for individual matters that we believe are likely to result in a loss when ultimately resolved using estimates of the most likely amount of loss, including accruals totaling $8,500 that were made in 2006. There are also individual matters that we believe the likelihood of a loss when ultimately resolved is less than likely but more than remote, which were not accrued. While it is possible that there could be additional losses that have not been accrued, we currently believe the possible additional loss in the event of an unfavorable resolution of each matter is less than $10,000 in the aggregate.

Among the legal proceedings referred to in the preceding paragraph, we were a defendant in a class action lawsuit filed in the U.S. District Court for Northern District of Illinois and received findings of the U.S. Equal Employment Opportunity Commission that alleged discrimination on the basis of race, national origin, and gender in our Winnebago County, Illinois, facilities. On October 5, 2006, a U.S. District Court Judge gave preliminary approval to a proposed $5,000 settlement of the class action and EEOC matters. Accruals for the amount of the settlement and related legal expenses are included in our consolidated balance sheet at September 30, 2006.

We do not recognize contingencies that might result in a gain until such contingencies are resolved and the related amounts are realized.

In the event of a change in control of the company, we may be required to pay termination benefits to certain executive officers.


Note 18.	Financial instruments:

The estimated fair values of our financial instruments were as follows:


At September 30,	2006			2005

Cash and cash equivalents	$	83,718		$	84,597
Short-term borrowings		(517	)		(8,419	)
Long-term debt, including current portion		(74,617	)		(89,433	)

The fair values of cash and cash equivalents and short-term borrowings at variable interest rates were assumed to be equal to their carrying amounts. Cash and cash equivalents have short-term maturities and short-term borrowings have short-term maturities and market interest rates. The fair value of long-term debt at fixed interest rates 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 year for similar debt of the same maturity. The weighted-average interest rates used to estimate the fair value of long-term debt at fixed interest rates were 5.38% at September 30, 2006, and 4.90% at September 30, 2005.

We hold cash and cash equivalents at financial institutions in excess of amounts covered by federal depository insurance.

WOODWARD

Notes to Consolidated Financial Statements — (Continued)

(In thousands of dollars except per share amounts)

Note 19. Segment information:

Our operations are organized based on the market application of our products and related services and consist of two operating segments — Industrial Controls and Aircraft Engine Systems. Industrial Controls is focused on systems and components that provide energy control and optimization solutions for industrial markets, which includes power generation, transportation, and process industries. Aircraft Engine Systems is focused on systems and components that provide energy control and optimization solutions for the aerospace market.

The accounting policies of the segments are the same as those described in Note 1. Intersegment sales and transfers are made at established intersegment selling prices generally intended to approximate selling prices to unrelated parties. Our determination of segment earnings does not reflect allocations of certain corporate expenses, which we designate as nonsegment expenses, and is before curtailment gain, interest expense, interest income, and income taxes.

Segment assets consist of accounts receivable, inventories, property, plant, and equipment — net, goodwill, and other intangibles — net. Summarized financial information for our segments follows:


At or for the Year Ended September 30,	2006		2005		2004

Industrial Controls:
External net sales	$	540,975	$	536,937	$	439,801
Intersegment sales		1,849		1,118		849
Segment earnings		55,704		28,821		6,437
Segment assets		360,577		370,220		364,584
Depreciation and amortization		18,054		20,566		21,341
Capital expenditures		13,659		13,844		13,564

Aircraft Engine Systems:
External net sales	$	313,540	$	290,789	$	270,004
Intersegment sales		4,871		4,385		2,193
Segment earnings		63,859		64,052		59,192
Segment assets		229,269		208,140		205,580
Depreciation and amortization		9,729		9,736		10,276
Capital expenditures		15,056		11,205		4,281

The differences between the total of segment amounts and the consolidated financial statements were as follows:


Year Ended September 30,	2006			2005			2004

Total segment net sales and intersegment sales	$	861,235		$	833,229		$	712,847
Elimination of intersegment sales		(6,720	)		(5,503	)		(3,042	)

Consolidated net sales	$	854,515		$	827,726		$	709,805

Total segment earnings	$	119,563		$	92,873		$	65,629
Nonsegment expenses		(32,727	)		(17,935	)		(12,100	)
Curtailment gain		—			7,825			—
Interest expense and income, net		(2,339	)		(3,655	)		(4,237	)

Consolidated earnings before income taxes	$	84,497		$	79,108		$	49,292

WOODWARD

Notes to Consolidated Financial Statements — (Continued)

(In thousands of dollars except per share amounts)

At September 30,
2006 2005 2004

Total segment assets
$ 589,846 $ 578,360 $ 570,164

Unallocated corporate property, plant, and equipment — net
4,577 2,765 2,384

Other unallocated assets
141,074 124,341 81,746

Consolidated total assets
$ 735,497 $ 705,466 $ 654,294

Differences between total depreciation and amortization and capital expenditures of our segments and the corresponding consolidated amounts reported in the consolidated statements of cash flows are due to unallocated corporate amounts.

Two customers individually accounted for more than 10% of consolidated net sales in each of the years 2004 through 2006. Sales to the first customer were made by both of our segments and totaled approximately $186,000 in 2006, $189,000 in 2005, and $156,000 in 2004. Sales to the second customer were made by Industrial Controls and totaled approximately $98,000 in 2006, $105,000 in 2005, and $83,000 in 2004.

External net sales by geographical area, as determined by the location of the customer invoiced, were as follows:


Year Ended September 30,	2006		2005		2004

United States	$	449,617	$	446,318	$	413,901
Other countries		404,898		381,408		295,904

	$	854,515	$	827,726	$	709,805

Property, plant, and equipment — net by geographical area, as determined by the physical location of the assets, were as follows:


At September 30,	2006		2005

United States	$	93,340	$	85,595
Other countries		30,836		29,192

	$	124,176	$	114,787


Note 20.	Subsequent event:

On October 31, 2006, we acquired 100 percent of the stock of SEG Schaltanlagen-Elektronik-Geräte GmbH & Co. KG (SEG) and a related receivable from SEG that was held by one of the sellers. Headquartered in Kempen, Germany, SEG is focused on the design and manufacture of a wide range of protection and comprehensive control systems for power generation and distribution applications, power inverters for wind turbines, and complete electrical systems for gas and diesel engine based power stations. The cost of this acquisition has not yet been finalized, but is currently expected to be approximately $45 million, including the amount of outstanding borrowings assumed. The actual cost of the acquisition may be higher or lower than our current estimate based on the outcome of a purchase price adjustment procedure customary to purchase agreements and the final determination of the direct acquisition costs. SEG had sales of approximately $60 million in the year ended December 31, 2005.

WOODWARD

Notes to Consolidated Financial Statements — (Continued)

(In thousands of dollars except per share amounts)

Note 21. Unaudited quarterly financial information:


	2006 Fiscal Quarters
	First		Second		Third		Fourth

Net sales	$	195,634	$	208,917	$	217,053	$	232,911
Gross profit		53,695		56,890		62,964		68,703
Earnings before income taxes		19,119		17,177		21,579		26,622
Net earnings		12,427		11,466		28,918		17,089
Net earnings per share:
Basic		0.36		0.33		0.84		0.50
Diluted		0.35		0.32		0.82		0.49
Cash dividends per share		0.10		0.10		0.10		0.10
Common share price per share:
High		29.30		33.95		38.88		34.07
Low		25.10		28.34		27.53		27.45
Close		28.67		33.25		30.51		33.54


	2005 Fiscal Quarters
	First		Second		Third		Fourth

Net sales	$	189,325	$	210,619	$	210,252	$	217,530
Gross profit		46,052		53,099		51,385		53,510
Earnings before income taxes		19,040		20,290		25,488		14,290
Net earnings		11,995		12,979		19,746		11,251
Net earnings per share:
Basic		0.35		0.38		0.58		0.33
Diluted		0.34		0.37		0.56		0.32
Cash dividends per share		0.08		0.0833		0.0833		0.10
Common share price per share:
High		24.65		24.99		29.23		30.00
Low		19.50		22.01		20.08		25.26
Close		23.87		23.90		28.01		28.35

Notes:


1.		Gross profit represents net sales less cost of goods sold.

2.		Per share amounts have been updated from amounts reported prior to February 1, 2006, to reflect the effects of a three-for-one stock split.

3.		Net earnings included a deferred tax asset valuation allowance change that increased net earnings by $13,710 in the third quarter of 2006.

4.		Earnings before income taxes included a curtailment gain associated with an amendment to a retiree healthcare benefit plan of $7,825 in the third fiscal quarter of 2005.

5.		Accounting for stock-based compensation changed to the fair value method from the intrinsic value method beginning in the first quarter of 2006. The following presents a reconciliation of reported net earnings and per share information to pro forma net earnings and per share information that would have been reported if the fair value method had been used to account for stock-based employee compensation last year:

WOODWARD

Notes to Consolidated Financial Statements — (Continued)

(In thousands of dollars except per share amounts)

2005 Fiscal Quarters

First Second Third Fourth

Reported net earnings
$ 11,995 $ 12,979 $ 19,746 $ 11,251

Stock-based compensation expense using the fair value method, net of income tax
(344 ) (359 ) (377 ) (462 )

Pro forma net earnings
$ 11,651 $ 12,620 $ 19,369 $ 10,789

Reported net earnings per share amounts:

Basic
$ 0.35 $ 0.38 $ 0.58 $ 0.33

Diluted
0.34 0.37 0.56 0.32

Pro forma net earnings per share amounts:

Basic
$ 0.34 $ 0.37 $ 0.57 $ 0.31

Diluted
0.33 0.36 0.55 0.31

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

of Woodward Governor Company:

We have completed integrated audits of Woodward Governor Company’s 2006 and 2005 consolidated financial statements and of its internal control over financial reporting as of September 30, 2006, and an audit of its 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Woodward Governor Company and its subsidiaries at September 30, 2006 and September 30, 2005, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the consolidated financial statements, effective October 1, 2005, the Company changed its method of accounting for share-based payments.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of September 30, 2006 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2006, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,

accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Chicago, Illinois

November 29, 2006

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

PricewaterhouseCoopers LLP was engaged as the principal registered public accounting firm to perform an integrated audit of our consolidated financial statements and internal control over financial reporting during our two most recent fiscal years, and no other accountant was engaged during this period on whom they expressed reliance in their report.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), which are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’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, president and chief executive officer) and principal financial officer (Robert F. Weber, Jr., chief financial officer and treasurer), as appropriate to allow timely decisions regarding required disclosures.

Thomas A. Gendron, our president and chief executive officer, and Robert F. Weber, Jr., our chief financial officer and treasurer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-K. Based on their evaluation, they concluded that our disclosure controls and procedures were effective in achieving the objectives for which they were designed as described in the preceding paragraph.

Management’s Annual Report on Internal Control Over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting for the company. We have evaluated the effectiveness of internal control over financial reporting using the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and, based on that evaluation, have concluded that the company’s internal control over financial reporting was effective as of September 30, 2006, the end of the company’s most recent fiscal year.

PricewaterhouseCoopers LLP, an independent registered public accounting firm, conducted an integrated audit of the company’s 2006 consolidated financial statements and of the company’s internal control over financial reporting as of September 30, 2006, as stated in their report included in “Item 8 — Financial Statements and Supplementary Data.”

Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by our board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:


	•	Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

	•	Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorization of management and directors of the company; and

	•	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during the fourth fiscal quarter covered by this Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

There is no information required to be disclosed in a report on Form 8-K during the fourth quarter of 2006 that was not reported on Form 8-K.

PART III

Item 10. Directors and Executive Officers of the Registrant

Executive Officers:

Thomas A. Gendron, age 45 — president and chief executive officer since July 2005; president and chief operating officer September 2002 through June 2005; vice president and general manager of Industrial Controls June 2001 through September 2002; vice president of Industrial Controls April 2000 through May 2001; director of global marketing and Industrial Controls’ business development February 1999 through March 2000.

Robert F. Weber, Jr., age 52 — chief financial officer and treasurer since August 2005. Prior to August 2005, Mr. Weber was employed at Motorola, Inc. for 17 years, where he held various positions, including corporate vice president and general manager — EMEA Auto, corporate vice president and director — strategy, corporate vice president and finance director — IESS, and other financial roles from business controller up through a sector finance director. Mr. Weber also held the position in the corporate finance department at Motorola as the senior manager responsible for all financial reporting at the corporate level — annual report, SEC filings, internal reporting, and special filings. In addition, Mr. Weber served as the senior manager responsible for corporate internal audit at Motorola with global audit responsibility.

Carol J. Manning, age 57 — secretary since June 1991.

All executive officers were elected to their current positions to serve until the January 24, 2007, Board of Directors meeting, or until their successors have been elected. The Board of Directors elected the executive officers to their current positions on January 25, 2006.

We have adopted a code of ethics for senior financial officers and other finance members that applies to Thomas A. Gendron, our principal executive officer, and Robert F. Weber, Jr., our principal financial and accounting officer. This code of ethics, which is listed in Exhibit 14 in “Item 15 — Exhibits and Financial Statement Schedules,” is incorporated here by reference.

Other information regarding our directors and executive officers is under the captions “Board of Directors,” “Board Meetings and Committees — Audit Committee” (including information with respect to audit committee financial experts), “Share Ownership of Management,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our proxy statement for the 2006 annual meeting of shareholders to be held January 24, 2007, incorporated here by reference.

Item 11. Executive Compensation

Information regarding executive compensation is under the captions “Board Meetings and Committees — Director Compensation,” “Executive Compensation,” “Stock Options,” and “Long-Term Management Incentive Compensation Plan Awards” in our proxy statement for the 2006 annual meeting of shareholders to be held January 24, 2007, incorporated here by reference.


Item 12.	*Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*

Information regarding security ownership of certain beneficial owners and management and related stockholder matters is under the tables captioned “Share Ownership of Management,” “Persons Owning More than Five Percent of Woodward Stock,” and “Stock Options — Equity Compensation Plan Information (as of September 30, 2006),” in our proxy statement for the 2006 annual meeting of shareholders to be held January 24, 2007, incorporated here by reference.

Item 13. Certain Relationships and Related Transactions

There are no relationships, transactions, or other information to be reported under this item.

Item 14. Principal Accounting Fees and Services

Information regarding principal accounting fees and services is under the captions “Audit Committee Report to Shareholders — Audit Committee’s Policy on Pre-Approval of Services Provided by Independent Registered Public Accounting Firm and Fees Paid by PricewaterhouseCoopers LLP” in our proxy statement for the 2006 annual meeting of shareholders to be held January 24, 2007, incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)(1) Consolidated Financial Statements:


	Page Number
	in Form 10-K

Consolidated Statements of Earnings for the years ended September 30, 2006, 2005, and 2004		31
Consolidated Balance Sheets at September 30, 2006 and 2005		32
Consolidated Statements of Cash Flows for the years ended September 30, 2006, 2005, and 2004		33
Consolidated Statements of Shareholders’ Equity for the years ended September 30, 2006, 2005, and 2004		34
Notes to Consolidated Financial Statements		36
Report of Independent Registered Public Accounting Firm		56

(a)(2) Consolidated Financial Statement Schedules


Valuation and Qualifying Accounts			63

Financial statements and schedules other than those listed above are omitted for the reason that they are not applicable, are not required, or the information is included in the financial statements or the footnotes.

(a)(3) Exhibits Filed as Part of This Report


3	(i)	Restated Certificate of Incorporation filed as Exhibit 3(i) to Form 10-Q for the three months ended June 30, 2006, incorporated here by reference.
3	(ii)	Bylaws, filed as an exhibit.
4	.1	Note Purchase Agreement dated October 15, 2001, filed as Exhibit 4 to Form 10-Q for the three months ended December 31, 2001, incorporated here by reference.
4	.2	Credit Agreement dated March 11, 2005, filed as Exhibit 4 to Form 10-Q for the three months ended March 31, 2005, incorporated here by reference.
10	.1	Long-Term Management Incentive Compensation Plan, filed as Exhibit 10(c) to Form 10-K for the year ended September 30, 2000, incorporated here by reference.


10	.2	Annual Management Incentive Compensation Plan, filed as Exhibit 10(d) to Form 10-K for the year ended September 30, 2000, incorporated here by reference.
10	.3	2002 Stock Option Plan, effective January 1, 2002 filed as Exhibit 10 (iii) to Form 10-Q for the three months ended March 31, 2002, incorporated here by reference.
10	.4	Executive Benefit Plan (non-qualified deferred compensation plan), filed as Exhibit 10(e) to Form 10-K for the year ended September 30, 2002, incorporated here by reference.
10	.5	Form of Outside Director Stock Purchase Agreement with James L. Rulseh, filed as Exhibit 10(j) to Form 10-K for the year ended September 30, 2002, incorporated here by reference.
10	.6	Form of Transitional Compensation Agreement with Thomas A. Gendron filed as Exhibit 10 to Form 10-Q for the three months ended December 31, 2002, incorporated here by reference.
10	.7	Summary of non-employee director meeting fees and compensation, filed as Exhibit 99.1 to Form 8-K filed November 3, 2006, incorporated here by reference.
10	.8	Material Definitive Agreement with Thomas A. Gendron, filed on Form 8-K filed August 1, 2005, incorporated here by reference.
10	.9	Material Definitive Agreement with Robert F. Weber, Jr., filed on Form 8-K filed August 24, 2005, incorporated here by reference.
10	.10	2006 Omnibus Incentive Plan, effective January 25, 2006, filed as Exhibit 4.1 to Registration Statement on Form S-8 effective April 28, 2006, incorporated here by reference.
10	.11	Form of Transitional Compensation Agreement with Robert F. Weber, Jr., dated August 22, 2005, filed as an exhibit.
11		Statement on computation of earnings per share, included in Note 4 of Notes to Consolidated Financial Statements.
14		Code of Ethics filed as Exhibit 14 to Form 10-K for the year ended September 30, 2003, incorporated here by reference.
21		Subsidiaries, filed as an exhibit.
23		Consent of Independent Registered Public Accounting Firm, filed as an exhibit.
31	(i)	Rule 13a-14(a)/15d-14(a) certification of Thomas A. Gendron, filed as an exhibit.
31	(ii)	Rule 13a-14(a)/15d-14(a) certification of Robert F. Weber, Jr., filed as an exhibit.
32	(i)	Section 1350 certifications, filed as an exhibit.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 Governor Company

/s/ Thomas A. Gendron

Thomas A. Gendron

President, Chief Executive Officer

(Principal Executive Officer)

Date: November 30, 2006

/s/ Robert F. Weber, Jr.

Robert F. Weber, Jr.

Chief Financial Officer, Treasurer

(Principal Financial and Accounting Officer)

Date: November 30, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Signature	Title	Date




/s/ John D. Cohn John D. Cohn	Director	November 24, 2006



/s/ Paul Donovan Paul Donovan	Director	November 27, 2006



/s/ Thomas A. Gendron Thomas A. Gendron	Director	November 30, 2006



/s/ John A. Halbrook John A. Halbrook	Chairman of the Board and Director	November 24, 2006



/s/ Michael H. Joyce Michael H. Joyce	Director	November 24, 2006



/s/ Mary L. Petrovich Mary L. Petrovich	Director	November 24, 2006



/s/ Larry E. Rittenberg Larry E. Rittenberg	Director	November 24, 2006



/s/ James R. Rulseh James R. Rulseh	Director	November 22, 2006



/s/ Michael T. Yonker Michael T. Yonker	Director	November 24, 2006

WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the years ended September 30, 2006, 2005, and 2004
(in thousands of dollars)


	Column		Column C								Column
	B		Additions								E
	Balance		Charged								Balance
	at		to			Charged					at
Column	Beginning		Costs			to		Column			End
A	of		and			Other		D			of
Description	Year		Expenses			Accounts(a)		Deductions(b)			Year

Allowance for doubtful accounts
2006	$	1,965	$	249		$	363	$	(364	)	$	2,213

2005	$	2,836	$	(98	)	$	281	$	(1,054	)	$	1,965

2004	$	2,601	$	462		$	718	$	945		$	2,836

Notes:


(a)		Includes recoveries of accounts previously written off.

(b)		Represents accounts written off and foreign currency translation adjustments. Currency translation adjustments resulted in decreases in the reserve of $22 in 2005, and increases in the reserve of $43 in 2006 and $45 in 2004.

EX-3.(II) 2 c10357exv3wxiiy.htm BYLAWS exv3wxiiy

Exhibit 3(ii)
Woodward Governor Company
Bylaws

BYLAWS

WOODWARD GOVERNOR COMPANY

as amended through November 28, 2006


BYLAWS OF
WOODWARD GOVERNOR COMPANY

Page 1 of 12

ARTICLE I
Offices

SECTION 1.1. REGISTERED OFFICE

The registered office shall be established and maintained as prescribed in the Certificate of Incorporation of the Corporation.

SECTION 1.2. OTHER OFFICES

The corporation may have other offices, either within or outside of the State of Delaware, at such place or places as the Board of Directors may from time to time appoint or the business of the corporation may require.

ARTICLE II
Meetings of Stockholders

SECTION 2.1. PLACE OF MEETINGS

All meetings of the stockholders for the election of directors shall be held at such place as may be fixed from time to time by the Board of Directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof.

SECTION 2.2. ANNUAL MEETING OF STOCKHOLDERS

The annual meeting of stockholders for the election of directors and for such other business as may be stated in the notice of the meeting shall be held, in each year, commencing in 1999, by the third Wednesday following January 2 at 10:00 A.M., local time, or such other date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting.

SECTION 2.3. VOTING

Each stockholder entitled to vote in accordance with the terms of the Certificate of Incorporation and in accordance with the provisions of these bylaws shall, except as otherwise provided by the Certificate of Incorporation, be entitled to one vote, in person or by proxy, for each share of stock entitled to vote held by such stockholder, but no proxy shall be voted after three years from its date unless such proxy provides for a longer period.

SECTION 2.4. LIST OF STOCKHOLDERS

The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.

SECTION 2.5. QUORUM

The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.


BYLAWS OF
WOODWARD GOVERNOR COMPANY

Page 2 of 12

SECTION 2.6. SPECIAL MEETINGS

Special meetings of the stockholders for any proper purpose or purposes may be called by the Board of Directors or by the Chairman of the Board of Directors, and shall be called upon a request in writing therefore stating the purpose or purposes thereof signed by the holders of two-thirds of the outstanding shares of Common Stock of the Corporation.

SECTION 2.7. NOTICE OF MEETINGS

Except as otherwise provided by law, written notice, stating the place, date and time of the meeting, and the general nature of the business to be considered, shall be given to each stockholder entitled to vote thereat at his address as it appears on the records of the corporation either personally or by mail, not less than ten nor more than sixty days before the date of the meeting. If mailed, such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. No business other than that stated in the notice shall be transacted at any meeting without the unanimous consent of all the stockholders entitled to vote thereat.

SECTION 2.8. NOMINATIONS FOR DIRECTOR

Nominations for election to the Board of Directors may be made by the Board of Directors or by any stockholder entitled to vote for the election of directors. Nominations other than those made by the Board of Directors shall be made by notice in writing, delivered or mailed by registered or certified United States mail, return receipt requested, postage prepaid, to the Secretary of the Corporation, not less than 20 days nor more than 50 days prior to any meeting of stockholders called for the election of directors; provided, however, if less than 21 days’ notice of the meeting is given to stockholders, such written notice shall be delivered or mailed, as prescribed, not later than the close of business on the seventh day following the day on which the notice of meeting was mailed to the stockholders. Each such written notice shall contain the following information: (a) The name and residence address of the stockholder making the nomination; (b) Such information regarding each nominee as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated by the Board of Directors; and (c) The signed consent of each nominee to serve as a member of the Board of Directors if elected, and the signed agreement of each nominee that if elected he or she will be guided by the philosophy and concepts of human and industrial association of the Corporation as expressed in its Constitution in connection with the nominee’s service as a member of the Board of Directors.

Unless otherwise determined by the Chairman of the Board of Directors or by a majority of the directors then in office, any nomination which is not made in accordance with the foregoing procedure shall be defective, and any votes which may be cast for the defective nominee shall be disregarded.

ARTICLE III
Directors

SECTION 3.1. GENERAL POWERS

The business and affairs of the corporation shall be managed by or under the direction of its Board of Directors. The Board of Directors shall exercise all of the powers of the corporation except such as are by law, or by the Certificate of Incorporation of the corporation or by these bylaws conferred upon or reserved to the stockholders.

SECTION 3.2. NUMBER AND TERM

The Board of Directors shall be divided into three classes, Class I, Class II and Class III, which shall be as nearly equal in number as possible. The number of directors which shall constitute the whole Board of Directors shall be not less than six, the exact number of directors and the exact number of directors in each class to be determined from time to time by the Board of Directors. Except as provided in Section 3.4 hereof, each director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which such director was elected; provided, however, that each initial director in Class I shall hold office until the annual meeting of stockholders next ensuing, each initial director in Class II shall hold office until the annual meeting of stockholders one year thereafter, and each initial director in Class III shall hold office until the annual meeting of stockholders two years thereafter. If the number of directors is changed, any increase or decrease shall be apportioned among the three classes so as to maintain the number of directors in each class as nearly equal as possible. In no case will a decrease in the number of directors shorten the term of any incumbent director.


BYLAWS OF
WOODWARD GOVERNOR COMPANY

Page 3 of 12

SECTION 3.3. VACANCIES

Vacancies in the Board of Directors and newly created directorships resulting from any increase in the authorized number of directors shall be filled by a majority of the directors then in office, although less than a quorum, or by the sole remaining director. Except as provided in Section 3.4 hereof, any director elected to fill a vacancy shall hold office for the remaining term of the class in which the vacancy shall have occurred or shall have been created.

SECTION 3.4. QUALIFICATIONS

Unless otherwise determined by the Board of Directors, the term of any director shall end on September 30th next following said director’s seventieth birthday. No person may serve as a director unless such person agrees in writing that in connection with such service he or she will be guided by the philosophy and concepts of human and industrial association of the corporation as expressed in its Constitution.

SECTION 3.5. DIRECTOR EMERITUS

Any director who requests that he be appointed a director emeritus and any director who is not re-elected by the stockholders may, with the approval of the Board of Directors, be a director emeritus until the next annual meeting of the Board of Directors. A director emeritus may attend directors’ meetings and counsel the directors but will not be a member of the Board of Directors and will not have the voting rights of a director.

SECTION 3.6. INCREASE OR DECREASE OF NUMBER

The number of directors may be increased or decreased from time to time by resolution of the Board of Directors.

SECTION 3.7. REMOVAL

Any director or the entire Board of Directors may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of two-thirds of the outstanding shares of Common Stock of the Corporation.

SECTION 3.8. REGULAR MEETINGS

The first regular meeting of each newly elected Board of Directors shall be held immediately after, and at the same place as, the Annual Meeting of Stockholders. Thereafter regular meetings of the Board of Directors shall be held at such times as the Board of Directors may from time to time establish. Regular meetings shall be held at such place as may be fixed from time to time by the Board of Directors and stated in the notice of the meeting. Regular meetings of the Board of Directors will be held without other notice than this bylaw. Any such regular meeting other than the first regular meeting may be cancelled by the person or persons authorized to call special meetings of the Board of Directors. Any such cancellation shall be accomplished by giving notice in accordance with Section 3.11 of these bylaws.

SECTION 3.9. SPECIAL MEETINGS

Special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board of Directors or any two directors. The person or persons authorized to call special meetings of the Board of Directors may fix the place of any meeting called by such person or persons.

SECTION 3.10. MINIMUM SCHEDULE OF MEETINGS

During each calendar quarter, the Board of Directors shall conduct at least one meeting. Each regular meeting and each special meeting shall be regarded as one meeting. For the purposes of this Section 3.10, action without meeting pursuant to Section 3.15 of these bylaws shall not be regarded as a meeting.

SECTION 3.11. NOTICE

Notice of any special meeting or the cancellation of any regular meeting shall be given to each director by letter delivered at least two days before the meeting, or by telegram delivered at least one day before the meeting, or by such shorter telephone or other notice as the person or persons calling or canceling the meeting may deem appropriate in the circumstances. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail in a sealed envelope with postage thereon prepaid. If notice be given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. Neither the business to be transacted at nor the purpose of any special meeting need be specified in the notice thereof.


BYLAWS OF
WOODWARD GOVERNOR COMPANY

Page 4 of 12

SECTION 3.12. PRESIDING OFFICER

Meetings of the stockholders and the Board of Directors shall be presided over by the Chairman of the Board of Directors, or if he is not present, by the Vice Chairman of the Board of Directors, or if he is not present, by the President, or if he is not present, by a Vice President, or if neither the Chairman of the Board of Directors, nor the Vice Chairman of the Board of Directors, nor the President, nor a Vice President is present, then by a presiding officer to be chosen by a majority of the directors present.

SECTION 3.13. QUORUM

A majority of the directors shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute. If at any meeting of the board there shall be less than a quorum present, a majority of these present may adjourn the meeting from time to time until a quorum is obtained, and no further notice thereof need be given other than by announcement at the meeting which shall be so adjourned.

SECTION 3.14. COMPENSATION

The Board of Directors shall have authority to fix the compensation of all directors and directors emeritus. By resolution of the Board of Directors expenses of attendance, if any, may be allowed for attendance by each director and director emeritus at each regular or special meeting of the Board of Directors. Nothing herein shall be construed to preclude any director or director emeritus from serving the corporation in any other capacity and receiving compensation therefor.

SECTION 3.15. ACTION WITHOUT MEETING

Any action required or permitted to be taken at any meeting of the Board of Directors, may be taken without a meeting if all members of the board consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board.

SECTION 3.16. MEETINGS BY CONFERENCE TELEPHONE

Members of the Board of Directors may participate in a meeting of such board by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such meetings shall constitute presence in person at such meeting.

ARTICLE IV
Committees of the Board of Directors

SECTION 4.1. COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors shall designate an Executive Committee, an Audit Committee, a Compensation Committee, a Nominating and Governance Committee, and a Management Operations Committee, each of which shall have and may exercise the powers and authority of the Board of Directors to the extent hereinafter provided. The Board of Directors may designate one or more additional committees of the Board of Directors with such powers and authority and shall be specified in the resolution of the Board of Directors. Each committee shall consist of such number of directors as shall be determined from time to time by resolution of the Board of Directors. The Chairman of the Board of Directors shall be ex-officio a member of all committees of the Board of Directors other than the Audit Committee and the Compensation Committee, and he shall be chairman of the Executive Committee. All actions of the Board of Directors designating committees, or electing or removing members of such committees, shall be taken by a resolution passed by a majority of the whole Board of Directors. Each committee shall keep a written record of all action taken by it. All action taken by a committee shall be reported to the Board of Directors at its meeting next succeeding such action and shall be subject to approval and revision by the Board of Directors, provided that no legal rights of third parties, including the rights of any participant under an award pursuant to an employee benefit plan, can be impaired by any such failure to approve or shall be affected by any such revisions, and in no event shall the Board of Directors take any action with respect to the Compensation Committee which would cause the Woodward Governor Company 2006 Omnibus Incentive Plan (the “2006 Omnibus Incentive Plan”) to fail to comply with Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or cause the members of the Compensation Committee not to qualify as “non-employee directors” under said Rule 16b-3.


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SECTION 4.2. ELECTION OF COMMITTEE MEMBERS

The members of each committee shall be elected by the Board of Directors and shall serve until the first meeting of the Board of Directors after the annual meeting of stockholders and until their successors are elected and qualified or until their earlier resignation or removal. The Board of Directors may designate the chairman of each committee other than the Executive Committee and may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member and all alternate members who may serve in the place and stead of such member, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member.

SECTION 4.3. COMMITTEE RULES AND PROCEDURES

The Chairman of the Board of Directors, the chairman of any committee, or a majority of the members of any committee, may call a meeting of that committee. Unless the Board of Directors otherwise provides, each committee may make, alter and repeal rules and procedures for the conduct of its business. In the absence of such rules and procedures, each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article III of these bylaws, except that a quorum of the Management Operations Committee for the transaction of business shall consist of one member so long as such committee consists of two members.

SECTION 4.4. EXECUTIVE COMMITTEE

During the intervals between meetings of the Board of Directors, the Executive Committee shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation upon any matter which in the opinion of the Chairman of the Board of Directors should not be postponed until the next previously scheduled meeting of the Board of Directors. The Executive Committee shall have the power and authority to declare cash dividends. Notwithstanding the foregoing, as provided by law the Executive Committee shall not have power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation’s property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending these bylaws.

SECTION 4.5. AUDIT COMMITTEE

The Audit Committee shall have the power to recommend to the Board of Directors the selection and engagement of independent accountants to audit the books and accounts of the corporation and the discharge of the independent accountants. The Audit Committee shall review the scope and approach of the annual audit as recommended by the independent accountants, the scope and approach of internal audits of the corporation, the system of internal accounting controls of the corporation, and shall review the reports to the Audit Committee of the independent accountants and the internal auditors.

SECTION 4.6. COMPENSATION COMMITTEE

The Compensation Committee shall have the power to recommend to the Board of Directors the compensation of the officers and key personnel of the corporation, to administer the Corporation’s 2006 Omnibus Incentive Plan in accordance with the terms of the 2006 Omnibus Incentive Plan, and to make all determinations and to take all such actions in connection therewith or in relation thereto as it deems necessary or advisable, including the granting of all incentives to eligible worker members in accordance with the terms of the 2006 Omnibus Incentive Plan.

SECTION 4.7. NOMINATING AND GOVERNANCE COMMITTEE

The Nominating and Governance Committee shall have the power to recommend to the Board of Directors candidates for election to the Board of Directors.

SECTION 4.8. MANAGEMENT OPERATIONS COMMITTEE

The Management Operations Committee shall have the power to authorize and approve such routine matters arising in the ordinary course of business of the corporation as the Board of Directors shall establish from time to time by resolution. The Management Operations Committee shall have no power or authority to declare cash dividends and shall have no power denied to the Executive Committee in Section 4.4 hereof.


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ARTICLE V
Officers

SECTION 5.1. OFFICERS

The officers of the corporation shall be a President, one or more Vice Presidents (the number thereof to be determined by the Board of Directors), a Treasurer and a Secretary, all of whom shall be elected by the Board of Directors. The Board of Directors may elect the Chairman of the Board of Directors as an officer of the corporation, provided that the Chairman shall not be regarded as an officer of the corporation unless the Board of Directors so determines at the time of election in accordance with Section 5.6 of these bylaws. In addition, the Board of Directors may elect one or more Assistant Treasurers and Assistant Secretaries, and may elect a Vice Chairman of the Board of Directors.

SECTION 5.2. OTHER OFFICERS AND AGENTS

The Board of Directors may appoint such other officers and agents as it may deem advisable, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board.

SECTION 5.3. QUALIFICATIONS

Unless otherwise determined by the Board of Directors, each officer of the corporation shall be under the age of 65 at the time of election. None of the officers of the corporation, except the Chairman of the Board of Directors, if also an officer of the corporation, and the Vice Chairman of the Board of Directors, need be a Director.

SECTION 5.4. ELECTION AND TERM OF OFFICE

The officers of the corporation shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as conveniently may be. Vacancies may be filled or new offices created and filled at any meeting of the Board of Directors. Each officer shall hold office until his successor shall have been duly elected and shall have qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided.

SECTION 5.5. REMOVAL

Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed.

SECTION 5.6. CHAIRMAN

The Chairman of the Board of Directors shall be elected from among the members of the Board of Directors. At the time of such election, the Board shall determine whether the Chairman shall also be elected an officer of the corporation. He shall have such duties and powers as shall be assigned to him by the Board of Directors. The Chairman of the Board of Directors shall preside at all meetings of the stockholders and all meetings of the Board of Directors and shall advise and consult with the President and Chief Executive Officer concerning the management of the business and affairs of the corporation.

SECTION 5.7. VICE CHAIRMAN

The Board of Directors may from time to time elect a Vice Chairman of the Board of Directors. Such Vice Chairman shall be a director and shall serve as Vice Chairman until his term of office as director concludes, or until his successor as Vice Chairman shall have been elected and qualified, whichever event shall first occur. The Vice Chairman shall perform the duties and exercise all the powers of the Chairman of the Board of Directors, when, and for so long as the Chairman of the Board of Directors so directs in writing. The Vice Chairman shall perform such other duties as may from time to time be assigned to him by the Board of Directors.


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SECTION 5.8. PRESIDENT

The President shall be the chief executive officer of the corporation and shall have general supervision of the business affairs and property of the corporation and over its several officers, subject, however, to the control of the Board of Directors. He shall, subject to the direction and control of the Board of Directors, be its representative and medium of communication; he shall, to the best of his ability, see that the acts of the officers conform to the policies of the corporation as determined by the Board of Directors, and shall perform such duties as may from time to time be assigned to him by the Board of Directors.

SECTION 5.9. VICE PRESIDENTS

Each Vice President shall have such duties and powers as shall be assigned to him or her by the President or by the Board of Directors.

SECTION 5.10. TREASURER

If required by the Board of Directors, the Treasurer shall give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the Board of Directors shall determine. He shall: (a) have charge and custody of and be responsible for all funds and securities of the corporation; receive and give receipts for monies due and payable to the corporation from any source whatsoever, and deposit all such monies in the name of the corporation in such banks, trust companies, or other depositories as shall be selected by the Board of Directors; and (b) in general perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the President or by the Board of Directors.

SECTION 5.11. SECRETARY

The Secretary shall: (a) keep the minutes of the meetings of the stockholders and of the Board of Directors in one or more books provided for the purpose; (b) see that all notices are duly given in accordance with the provisions of these bylaws or as required by law; (c) be custodian of the corporate records and of the seal of the corporation and see that the seal of the corporation is affixed to all certificates for shares prior to the issue thereof and to all documents, the execution of which on behalf of the corporation under its seal is duly authorized in accordance with the provisions of these bylaws; (d) keep a register of the post office address of each stockholder which shall be furnished to the secretary by such stockholder; (e) sign with the Chairman or Vice Chairman of the Board of Directors, the President, or a Vice President, certificates for shares of the corporation, the issue of which shall have been authorized by resolution of the Board of Directors; (f) have general charge of the stock transfer books of the corporation; (g) in general perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the President or by the Board of Directors.

SECTION 5.12. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES

The Assistant Treasurers shall respectively, if required by the Board of Directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of Directors shall determine. The Assistant Secretaries, as thereunto authorized by the Board of Directors, may sign with the Chairman or Vice Chairman of the Board of Directors, the President or a Vice President certificates for shares of the corporation, the issue of which shall have been authorized by a resolution of the Board of Directors. The Assistant Treasurers and Assistant Secretaries, in general, shall perform such duties as shall be assigned to them by the Treasurer or the Secretary respectively, or by the President or the Board of Directors.

SECTION 5.13. SALARIES

The salaries of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the corporation.


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ARTICLE VI
Stock

SECTION 6.1. CERTIFICATES OF STOCK

Every holder of stock in the corporation shall be entitled to have a certificate signed by, or in the name of the corporation, by the Chairman or the Vice Chairman of the Board of Directors, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the corporation, certifying the number of shares owned by him in the corporation. Any of or all the signatures on the certificate and the seal of the corporation if one be used may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue.

SECTION 6.2. TRANSFER OF STOCK

Transfer of shares of the corporation shall be made only on the books of the corporation by the registered holder thereof, by his attorney thereunto authorized, by power of attorney duly executed and filed with the Secretary of the corporation, and on surrender for cancellation of the certificate for such shares properly endorsed and with all taxes thereon paid. The person in whose name shares stand on the books of the corporation shall be deemed the owner thereof for all purposes as regards the corporation. However, if any transfer of shares is made only for the purpose of furnishing collateral security and such fact is made known to the Secretary of the corporation, or to the corporation’s transfer clerk or transfer agent, the entry of the transfer shall record such fact.

SECTION 6.3. TRANSFER AGENT AND REGISTRAR

The Board of Directors may appoint one or more transfer agents and registrars, and thereafter it may require all stock certificates to bear the signature of a transfer agent and a registrar or a facsimile thereof.

SECTION 6.4. RULES OF TRANSFER

The Board of Directors shall have the power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for the shares of the corporation.

SECTION 6.5. LOST CERTIFICATE

Any person claiming a certificate for shares of the corporation to have been lost, stolen, or destroyed shall make an affidavit of the fact and lodge such affidavit with the Secretary of the corporation, accompanied by a signed application for a new certificate. Any such person shall give the corporation a bond of indemnity with one or more sureties satisfactory to the Board of Directors and in an amount which in its judgment, shall be sufficient to save the corporation from loss, and thereupon, the proper officers may cause to be issued a new certificate of like tenor with the one alleged to have been lost, stolen, or destroyed, but the Board of Directors may refuse the issuance of such new certificate.

SECTION 6.6. DIVIDENDS

Subject to the provisions of the Certificate of Incorporation, the Board of Directors may, out of funds legally available therefor, at any regular or special meeting, declare dividends upon the capital stock of the corporation as and when it deems expedient. Before declaring any dividend there may be set apart out of any funds of the corporation available for dividends, such sum or sums as the directors from time to time in their discretion deem proper for working capital or as a reserve fund to meet contingencies or for equalizing dividends or for such other purposes as the directors shall deem conducive to the interests of the corporation.


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ARTICLE VII
Indemnification

SECTION 7.1.

(a) The corporation shall indemnify, subject to the requirements of subsection (d) of this Section, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), by reason of the fact that he is or was a director, officer, employee, or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee, fiduciary or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys’ fees), judgments, fines, penalties, taxes and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.

(b) The corporation shall indemnify, subject to the requirements of subsection (d) of this Section, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee, fiduciary or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery of the State of Delaware or such other court shall deem proper.

(c) To the extent that a director, officer, employee or agent of the corporation, or a director, officer, employee, fiduciary or agent of any other enterprise serving at the request of the corporation, has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this Section, or in defense of any claim, issue or matter therein, the corporation shall indemnify him against expenses (including attorneys’ fees) actually and reasonably incurred by him in connection therewith.

(d) Any indemnification under subsections (a) and (b) of this Section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee, fiduciary or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b) of this Section. Such determination shall be made (1) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders.

(e) Expenses (including attorney’s fees) incurred by a director, officer, employee, fiduciary or agent in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee, fiduciary or agent to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Section.

(f) The indemnification and advancement of expenses provided by, or granted pursuant to the other subsections of this Section shall not limit the corporation from providing any other indemnification permitted by law nor shall it be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office.


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(g) The provisions of this Section shall be applicable to all actions, suits or proceedings pending at the time or commenced after the adoption of this Section, whether arising from acts or omissions to act occurring, or based on claims asserted, before or after the adoption of this Section. A finding that any provision of this Section is invalid or of limited application shall not affect any other provision of this Section nor shall a finding that any portion of any provision of this Section is invalid or of limited application affect the balance of such provision. The adoption of this Section shall not impair the rights any person may have had under Article XII of the bylaws of Woodward Governor Company, an Illinois corporation, so that if such person is not entitled to the benefit of the provisions of this Section with respect to any action, suit or proceeding, he shall continue to be entitled to the benefit of the provisions of Article XII of the bylaws of Woodward Governor Company, an Illinois corporation, with respect to such action, suit or proceeding.

(h) The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee, fiduciary or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Section.

(i) For the purposes of this Section, references to “the corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, fiduciary or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of this Section with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued.

(j) The indemnification and advancement of expenses provided by, or granted pursuant to, this Section shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

ARTICLE VIII
Contracts, Loans, Checks, and Deposits

SECTION 8.1. CONTRACTS

The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances.

SECTION 8.2. LOANS

No loans shall be contracted on behalf of the corporation and no evidence of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances.

SECTION 8.3. CHECKS

All checks, drafts, or other orders for payment of money, notes, or other evidences of indebtedness issued in the name of the corporation, shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors.

SECTION 8.4. DEPOSITS

All funds of the corporation not otherwise employed shall be deposited from time to time to the credit of the corporation in such banks, trust companies, or other depositories as the Board of Directors may select.


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ARTICLE IX
General Provisions

SECTION 9.1. SEAL

The corporate seal of the corporation shall be circular in form and shall contain the name of the corporation and the words: “Rockford, Illinois. Incorporated June 1902.” Said seal may be used by causing it or a facsimile thereof to be impressed, affixed, or reproduced.

SECTION 9.2. FISCAL YEAR

The fiscal year of the corporation shall commence on the first day of October and shall end of the thirtieth day of September in each year.

SECTION 9.3. RESIGNATIONS

Any director or officer may resign at any time. Such resignation shall be made in writing and shall take effect at the time specified therein, and if no time be specified, at the time of its receipt by the Chairman of the Board of Directors, the Vice Chairman of the Board of Directors, the President, or the Secretary. The acceptance of a resignation shall not be necessary to make it effective.

SECTION 9.4. WAIVER OF NOTICE

Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these bylaws, a written waiver thereof, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any written waiver of notice.

ARTICLE X
Amendments

SECTION 10.1. BYLAW AMENDMENTS

The Board of Directors shall have concurrent power with the stockholders to adopt, amend or repeal these bylaws; provided, however, that (i) these bylaws shall not be adopted, amended or repealed by the stockholders except by the affirmative vote of the holders of two-thirds of the outstanding shares of Common Stock of the Corporation, and (ii) no bylaw may be adopted by the stockholders which shall impair or impede the power of the Board of Directors under paragraph A of Article SEVENTH of the Certificate of Incorporation of the Corporation.

EX-10.11 3 c10357exv10w11.htm FORM OF TRANSITIONAL COMPENSATION AGREEMENT exv10w11

Exhibit 10.11
Woodward Governor Company
Form of Transitional Compensation Agreement

TRANSITIONAL COMPENSATION AGREEMENT

THIS AGREEMENT, made and entered into as of August 22, 2005 by and between Woodward Governor Company, a Delaware corporation, (hereinafter called the “Corporation”) and Robert F. Weber, Jr. (hereinafter called the “Executive”).

WITNESSETH THAT:

WHEREAS, the Board of Directors of the Corporation (the “Board”) has determined that it is in the best interests of the Corporation and its shareholders to assure that the Corporation will have the continued dedication of the Executive, despite the possibility, threat or occurrence of a Change in Control (as defined below) of the Corporation; and

WHEREAS, the Board believes that it is imperative to diminish the inevitable distraction of the Executive which would result from the personal uncertainties and risks created by a threatened or pending Change in Control and to encourage the Executive’s full attention and dedication to the business of the Corporation currently and in the event of any threatened or pending Change in Control and to provide the Executive with appropriate compensation and benefit protection upon a Change in Control;

NOW, THEREFORE, the Corporation and the Executive, each intending to be legally bound, hereby mutually covenant and agree as follows:

1. Term. This Agreement shall become effective upon the occurrence of a Change in Control (as defined in Paragraph 4(d), below) (hereinafter called the “Effective Date”) and shall remain in effect for a term continuing until the end of the twenty-fourth (24th) calendar month following the month in which the Effective Date occurs; provided, however, that, anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and if the Executive’s employment with the Corporation was terminated prior to the date on which the Change in Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (a) was at the request of a third party who was taking steps reasonably calculated to effect a Change in Control or (b) otherwise arose in connection with or anticipation of a Change in Control, then

for all purposes of this Agreement the “Effective Date” shall mean the date immediately prior to the date of such termination of employment.

2. Employment. After the Effective Date, the Corporation shall employ the Executive to, and the Executive shall, exercise such authority and perform such executive duties as are commensurate with the authority being exercised and performed by the Executive during the ninety-day period immediately prior to the Effective Date, which services shall be performed at the location where the Executive was employed immediately prior to the Effective Date. The Executive shall also continue to serve as a member of the Board of Directors of the Corporation, if serving as such as of the Effective Date. The Executive shall devote substantially his entire time during reasonable business hours (reasonable sick leave and vacations excepted) and reasonable best efforts to fulfill faithfully and responsibly his duties hereunder. During the period of employment after the Effective Date, it shall not be a violation of this Agreement for the Executive to serve on corporate, civic or charitable boards or committees, or be involved in civic, charitable or educational endeavors, or manage personal investments, so long as such activities do not significantly interfere with the performance of Executive’s responsibilities as an employee of the Corporation hereunder. It is expressly agreed and understood that to the extent any such activities were conducted by the Executive prior to the Effective Date, the continued conduct of such or similar activities subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive’s responsibilities to the Corporation.

3. Compensation and Benefits. For the Executive’s employment with the Corporation after the Effective Date, the Executive shall be compensated as follows:

(a) The Executive shall receive an annual base salary at a rate not less than the highest aggregate annual base salary and seniority-based vacation plan amount paid or payable to the Executive by the Corporation during the 24 month period immediately prior to the Effective Date, to be paid in accordance the Corporation’s regular payroll practices. Such amount, or such greater annual base salary rate which may be paid or payable to the Executive after the Effective Date, is hereinafter referred to as the “Annual Base Salary.”

(b) The Executive shall be eligible to participate on a reasonable basis in the Corporation’s bonus and incentive compensation plans and programs which provide opportunities to receive compensation which are not less than opportunities provided by the Corporation for executives with comparable annual base salary.

(c) The Executive shall be entitled to receive executive and employee benefits and perquisites which are not less than the executive and employee benefits and perquisites provided by the Corporation to executives with comparable duties or annual base salary.

4. Termination. Unless earlier terminated in accordance with the following provisions of this Paragraph 4, the Corporation shall continue to employ the Executive and the Executive shall remain employed by the Corporation from the Effective Date through the end of the term of this Agreement as set forth in Paragraph 1, above. Paragraph 6 hereof sets forth certain obligations of the Corporation in the event that the Executive’s employment hereunder is terminated prior to the expiration of such term. Certain capitalized terms used in this Paragraph 4 and in Paragraphs 5 and 6 hereof are defined in Paragraph 4(d), below.

(a) Death or Disability. The Executive’s employment shall terminate immediately as of the Date of Termination in the event of the Executive’s death or in the event that the Executive becomes disabled. The Executive will be deemed to be disabled upon the earlier of (i) the end of a six (6)-consecutive month period during which, by reason of physical or mental injury or disease, the Executive has been unable to perform substantially all of his usual and customary duties under this Agreement or (ii) the date that a reputable physician selected by the Board, and as to whom the Executive has no reasonable objection, determines in writing that the Executive will, by reason of physical or mental injury or disease, be unable to perform substantially all of the Executive’s usual and customary duties under this Agreement for a period of at least six (6) consecutive months. If any question arises as to whether the Executive is disabled, upon reasonable request therefor by the Board, the Executive shall submit to reasonable medical examination for the purpose of determining the existence, nature and extent of any such disability. The Board

shall promptly give the Executive written notice of any such determination of the Executive’s disability and of any decision of the Board to terminate the Executive’s employment by reason thereof. Until the Date of Termination for disability, the base salary payable to the Executive shall be reduced dollar-for-dollar by the amount of any disability benefits paid to the Executive in accordance with any disability policy or program of the Corporation.

(b) Discharge for Cause. In accordance with the procedures hereinafter set forth, the Board may discharge the Executive from his employment hereunder for Cause. Any discharge of the Executive for Cause shall be communicated by a Notice of Termination to the Executive given in accordance with Paragraph 14 of this Agreement. For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated and (iii) specifies the termination date, which may be as early as the date of the giving of such notice. No purported termination of the Executive’s employment for Cause shall be effective without a Notice of Termination.

(c) Termination for Other Reasons. The Corporation may discharge the Executive without Cause by giving written notice to the Executive in accordance with Paragraph 14 at least fifteen (15) days prior to the Date of Termination. The Executive may resign from his employment, without liability to the Corporation, by giving written notice to the Corporation in accordance with Paragraph 14 at least fifteen (15) days prior to the Date of Termination.

(d) Definitions. For purposes of this Agreement, the following capitalized terms shall have the meanings set forth below:

(i) “Accrued Obligations” shall mean, as of the Date of Termination, the sum of (A) the Executive’s base salary through the Date of Termination to the extent not theretofore paid, (B) the amount of any bonus, incentive compensation, deferred compensation and other cash compensation accrued by the Executive as of the Date of Termination to the extent not theretofore paid and (C) any vacation pay, expense

reimbursements and other cash entitlements accrued by the Executive as of the Date of Termination to the extent not theretofore paid. For the purpose of this Paragraph 4(d)(i), amounts shall be deemed to accrue ratably over the period during which they are earned, but no discretionary compensation shall be deemed earned or accrued until it is specifically approved by the Board or the Compensation Committee in accordance with the applicable plan, program or policy.

(ii) “Cause” shall mean: (A) the Executive’s commission of an act materially and demonstrably detrimental to the financial condition and/or goodwill of the Corporation or any of its subsidiaries, which act constitutes gross negligence or willful misconduct by the Executive in the performance of his material duties to the Corporation or any of its subsidiaries, or (B) the Executive’s commission of any material act of dishonesty or breach of trust resulting or intended to result in material personal gain or enrichment of the Executive at the expense of the Corporation or any of its subsidiaries, or (C) the Executive’s conviction of a felony involving moral turpitude, but specifically excluding any conviction based entirely on vicarious liability. No act or failure to act will be considered “willful” unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that his action or omission was in the best interests of the Corporation. In addition, no act or omission will constitute Cause unless (A) a resolution finding that Cause exists has been approved by a majority of all of the members of the Board at a meeting at which the Executive is allowed to appear with his legal counsel and (B) the Corporation has given detailed written notice thereof to the Executive and, where remedial action is feasible, he then fails to remedy the act or omission within a reasonable time after receiving such notice.

(iii) A “Change in Control” shall be deemed to have occurred if:

(A) Any “person” (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), excluding for this purpose the Corporation or any subsidiary of the Corporation, or any employee benefit plan of the Corporation or any subsidiary of the Corporation, or any person or entity organized, appointed or established by the Corporation for or pursuant to the terms of such plan which acquires beneficial ownership of voting securities of the Corporation, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Corporation representing fifteen percent (15%) or more of the combined voting power of the Corporation’s then outstanding securities; provided, however, that no Change in Control shall be deemed to have occurred (1) as the result of an acquisition of securities of the Corporation by the Corporation which, by reducing the number of voting securities outstanding, increases the direct or indirect beneficial ownership interest of any person to fifteen percent (15%) or more of the combined voting power of the Corporation’s then outstanding securities, but any subsequent increase in the direct or indirect beneficial ownership interest of such a person in the Corporation shall be deemed a Change in Control, or (2) as a result of the acquisition directly from the Corporation of securities of the Corporation representing less than 50% of the voting power of the Corporation, or (3) if the Board of Directors of the Corporation determines in good faith that a person who has become the beneficial owner directly or indirectly of securities of the Corporation representing fifteen percent (15%) or more of the combined voting power of the Corporation’s then outstanding securities has inadvertently reached that level of ownership interest, and if such person divests as promptly as practicable a sufficient amount of securities of the Corporation so that the person no longer has a direct or indirect beneficial ownership interest in fifteen percent (15%) or more of the combined voting power of the Corporation’s then outstanding securities; or

(B) During any period of two (2) consecutive years (not including any period prior to the Effective Date of this Agreement), individuals who at the beginning of such two-year period constitute the Board of

Directors of the Corporation and any new director or directors (except for any director designated by a person who has entered into an agreement with the Corporation to effect a transaction described in subparagraph (A), above, or subparagraph (C), below) whose election by the Board or nomination for election by the Corporation’s shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board (such individuals and any such new directors being referred to as the “Incumbent Board”); or

(C) Consummation of (1) an agreement for the sale or disposition of the Corporation or all or substantially all of the Corporation’s assets, (2) a plan of merger or consolidation of the Corporation with any other corporation, or (3) a similar transaction or series of transactions involving the Corporation (any transaction described in parts (1) through (3) of this subparagraph (C) being referred to as a “Business Combination”), in each case unless after such a Business Combination (x) the shareholders of the Corporation immediately prior to the Business Combination continue to own, directly or indirectly, more than fifty-one percent (51%) of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the new (or continued) entity (including, but not by way of limitation, an entity which as a result of such transaction owns the Corporation or all or substantially all of the Corporation’s former assets either directly or through one or more subsidiaries) immediately after such Business Combination, in substantially the same proportion as their ownership of the Corporation immediately prior to such Business Combination, and (y) at least a majority of the members of the board of directors of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

(D) Approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation.

(iv) “Date of Termination” shall mean (A) in the event of a discharge of the Executive by the Board for Cause,

the date specified in such Notice of Termination, (B) in the event of a discharge of the Executive without Cause or a resignation by the Executive, the date specified in the written notice to the Executive (in the case of discharge) or the Corporation (in the case of resignation), which date shall be no less than fifteen (15) days from the date of such written notice, (C) in the event of the Executive’s death, the date of the Executive’s death, and (D) in the event of termination of the Executive’s employment by reason of disability pursuant to Paragraph 4(a), the date the Executive receives written notice of such termination.

(v) “Good Reason” shall mean any of the following without the written consent of the Executive: (A)(1) assignment of duties inconsistent with the Executive’s position, authority, duties or responsibilities referred to in Paragraph 2, or any action by the Corporation which results in a substantial diminution of such position, authority, duties or responsibilities, other than an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, or (2) if applicable, removal or other failure to continue Executive as a member of the Board as required by Paragraph 2, (B) any reduction in Executive’s Annual Base Salary, or bonus or incentive opportunities from those referred to in Paragraph 3(a) or 3(b), other than an isolated, insubstantial and inadvertent reduction not made in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, or (C) a relocation of Executive to an office location more than 30 miles from the location referred to in Paragraph 2, or (D) failure by the Corporation to provide Executive with the executive or employee benefits and perquisities referred to in Paragraph 3(c), other than an isolated, insubstantial and inadvertent reduction not made in bad faith and which is remedied by the Corporation promptly after receipt of notice thereof given by the Executive, or (E) failure by any successor to enter into the assumption of and agreement to perform this Agreement referred to in Paragraph 13. For purposes of this Paragraph 4(d)(v), any good faith determination by the Executive that one of the foregoing events has occurred shall be conclusive. In addition, resignation for any reason by the Executive, which resignation is to be effective at any time during the 30 day period beginning twelve (12) months after the Effective Date shall constitute a resignation for Good Reason; provided, further, that if the

Executive dies after the execution of a definitive agreement for a transaction which will constitute a Change in Control but before the expiration of such 30-day period, then the Executive shall be deemed to have terminated employment for Good Reason on the later of (1) the effective date of the Change in Control or (2) the date of the Executive’s death or termination of employment due to disability.

(vi) “Qualifying Termination” shall mean termination of the Executive’s employment after the Effective Date and during the term of this Agreement as described in Paragraph 1, above, (A) by reason of the discharge of the Executive by the Corporation other than for Cause or disability or (B) by reason of the resignation of the Executive for Good Reason within six (6) months after an event constituting Good Reason or (C) in accordance with the last sentence of the definition of Good Reason in subparagraph (v), above.

5. Vesting of Equity Awards Upon a Change in Control. Immediately upon a Change in Control, all stock options, restricted stock and other equity awards to the Executive which are not otherwise vested shall vest in full, and all options shall remain exercisable for the period provided for in the applicable plan or award agreement.

6. Obligations of the Corporation Upon Termination. The following provisions describe certain obligations of the Corporation to the Executive under this Agreement upon termination of his employment. However, except as explicitly provided in this Agreement, nothing in this Agreement shall limit or otherwise adversely affect any rights which the Executive may have under applicable law, under any other agreement with the Corporation or any of its subsidiaries, or under any compensation or benefit plan, program, policy or practice of the Corporation or any of its subsidiaries.

(a) Death, Disability, Discharge for Cause, or Resignation Without Good Reason. In the event the Executive’s employment terminates by reason of the death or disability of the Executive (other than in circumstances which constitute a Qualifying Terminiation under Paragraph 4(d)(vi)(C)), or by reason of the discharge of the Executive by the Corporation for Cause, or by reason of the resignation of the Executive other than for Good Reason, the Corporation shall pay to the Executive, or his designated beneficiaries, heirs or estate, in

the event of the Executive’s death, all Accrued Obligations in a lump sum within thirty (30) days after the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation, or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive. In addition, if the Executive’s employment is terminated by death, disability or retirement under a retirement plan of the Corporation or by resignation of the Executive other than for Good Reason, the Executive may, in the discretion of the Compensation Committee, be awarded a pro rata cash bonus for the year in which the Date of Termination occurs.

(b) Qualifying Termination. In the event of a Qualifying Termination, the Executive shall receive the following benefits:

(i) Payment of all Accrued Obligations in a lump sum on the Date of Termination; provided, however, that any portion of the Accrued Obligations which consists of bonus, deferred compensation or incentive compensation shall be determined and paid in accordance with the terms of the relevant plan as applicable to the Executive,

(ii) A pro rata cash bonus for the year in which the Date of Termination occurs, determined and paid in accordance with the terms of the then current annual bonus plan applicable to the Executive,

(iii) Payment in a lump sum on the Date of Termination of a salary replacement amount equal to three hundred percent (300%) of the annual base salary required to be paid to Executive pursuant to Paragraph 3(a) above, or if greater, the rate of annual salary as in effect immediately prior to the Date of Termination,

(iv) Payment in a lump sum on the Date of Termination of a bonus replacement amount equal to three hundred percent (300%) of the highest of the annual bonus paid or payable to the Executive for the three (3) years preceding the year in which the Date of Termination occurs or, if greater, the Executive’s target bonus for year in which the Date of Termination occurs,

(v) Payment in a lump sum on the Date of Termination of a retirement replacement amount equal to 300% of the sum of the Member Investment and Stock Ownership Plan, Retirement Income Plan and Unfunded Deferred Compensation Plan contributions made or credited by the Corporation for the benefit of the Executive for the plan year of each such plan during which the Date of Termination occurs or, if greater, for the plan year of each such plan (or any successor or replacement plan) immediately preceding the plan year in which the Effective Date occurs,

(vi) Continuation, for a period of three (3) years after the Date of Termination, of the following employee benefits on terms at least as favorable to the Executive as those which would have been provided if the Executive’s employment had continued for that time pursuant to this Agreement, with the cost of such benefits to be paid by the Corporation: medical and dental benefits, life and disability insurance, and executive physical examinations. To the extent the Corporation is unable to provide comparable insurance for reasons other than cost, the Corporation may provide a lesser level or no coverage and compensate the Executive for the difference in coverage through a cash lump sum payment grossed up for taxes. This payment will be tied to the cost of an individual insurance policy if it were assumed to be available. Upon the expiration of the coverage provided under this paragraph (vi), the Executive and Executive’s dependents will be entitled to elect COBRA continuation coverage on the same basis as would be extended with respect to an employee whose employment terminated at the time of such expiration.

(vii) Outplacement services, at the expense of the Corporation, from a provider reasonably selected by the Executive, and

(viii) Tax preparation services for the Executive’s taxable year in which the Date of Termination occurs, provided at the expense of the Corporation, on the same basis as provided to Executive immediately prior to the Effective Date.

7. Certain Additional Payments by the Corporation. The Corporation agrees that:

(a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Corporation to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Paragraph 7) (a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, (the “Code”) or if any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, being hereinafter collectively referred to as the “Excise Tax”), then the Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that, after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payment.

(b) Subject to the provisions of paragraph (c), below, all determinations required to be made under this Paragraph 7, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the accounting firm which is then serving as the auditors for the Corporation (the “Accounting Firm”), which shall provide detailed supporting calculations both to the Corporation and the Executive within fifteen (15) business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Corporation. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Corporation. Any Gross-Up Payment, as determined pursuant to this Paragraph 7, shall be paid by the Corporation to the Executive within five (5) days of the receipt of the Accounting Firm’s determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the

Executive with a written opinion that failure to report the Excise Tax on the Executive’s applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any good faith determination by the Accounting Firm shall be binding upon the Corporation and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Corporation should have been made (“Underpayment”), consistent with the calculations required to be made hereunder. In the event that the Corporation exhausts its remedies pursuant to paragraph (c), below, and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Corporation to or for the benefit of the Executive.

(c) The Executive shall notify the Corporation in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Corporation of a Gross-Up Payment. Such notification shall be given as soon as practicable but no later than fifteen (15) business days after the Executive is informed in writing of such claim and shall apprise the Corporation of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the thirty (30)-day period following the date on which Executive gives such notice to the Corporation (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Corporation notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:

(i) Give the Corporation any information reasonably requested by the Corporation relating to such claim,

(ii) Take such action in connection with contesting such claim as the Corporation shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Corporation,

(iii) Cooperate with the Corporation in good faith in order effectively to contest such claim, and

(iv) Permit the Corporation to participate in any proceedings relating to such claim;

provided, however, that the Corporation shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for all taxes (including interest and penalties with respect thereto), including without limitation any Excise Tax and income tax (including interest and penalties with respect thereto), imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing provisions of this paragraph (c), the Corporation shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner; and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Corporation shall determine; provided, however, that if the Corporation directs the Executive to pay such claim and sue for a refund, the Corporation shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, for all taxes (including interest and penalties with respect thereto), including without limitation any Excise Tax and income tax (including interest or penalties with respect thereto), imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Corporation’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

(d) If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to paragraph (c),

above, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Corporation’s complying with the requirements of said paragraph (c)) promptly pay to the Corporation the amount of such refund (together with any interest paid or credited thereon, after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Corporation pursuant to said paragraph (c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Corporation does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determination, then such advance shall be forgiven and shall not be required to be repaid; and the amount of such advance shall offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid.

8. Deferral; Grantor Trust. The Corporation shall provide Executive the opportunity to defer the receipt of any amounts payable under Paragraph 6(b)(i), (ii), (iii), (iv) and (v) hereunder and under the Unfunded Deferred Compensation Plan to such dates or dates as are reasonably chosen by the Executive, such deferred amounts to appreciate at an annual rate equivalent to 120% of the Moody’s Long Term Corporate Bond Yield Average for the twelve month period ending on September 30 of the calendar year preceding the calendar year in which such rate shall be used. The election to so defer shall be made by Executive no later than one year prior to the date such payments would otherwise due or such shorter period as the Corporation and the Executive shall reasonably agree upon. The amounts deferred shall be distributed as elected by the Executivbe from distributions options simialar to those available under the Unfunded Deferred Compensation Plan as in effect immediately prior to the Effective Date of this Agreement. In the event the Executive shall make an election to defer receipt of amounts described in this Paragraph 8, the Corporation shall deposit into a grantor trust that meets the requirements of Rev. Proc. 92-64, 1992-2 C.B. 422, solely for the benefit of Executive, on terms reasonably acceptable to the Executive, an amount equal to 110% of the amount so deferred. Such deposit shall be made on the date such deferred amount would otherwise have been paid to Executive. On each anniversary of the Date of Termination, the Corporation shall deposit into the trust an amount sufficient so that, as of such anniversary, the value of the assets of the

trust are not less than the obligations of the Corporation to the Executive under this Agreement.

9. No Set-Off or Mitigation. The Corporation’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Corporation may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment.

10. Payment of Certain Expenses. The Corporation shall pay the reasonable legal fees and expenses incurred by the Executive in connection with the negotiation and preparation of this Agreement. In addition, the Corporation shall pay promptly as incurred, to the fullest extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest by the Corporation, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest initiated by the Executive about the amount of any payment due pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable federal rate provided for in Section 7872(f)(2)(A) of the Code, plus an additional amount such that after payment by the Executive of all taxes imposed on such additional amount, the Executive shall retain an amount equal to the total taxes imposed on the Executive due to the payment by the Corporation, to or for the Executive, of legal fees and expenses with respect to any such contest; provided, however, that the Corporation shall not be obligated to make such payment with respect to any contest in which the Corporation prevails over the Executive.

11. Indemnification. To the full extent permitted by law, the Corporation shall, both during and after the term of the Executive’s employment, indemnify the Executive (including the advancement of expenses) for any judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys’ fees, incurred by the Executive in connection with the defense of any lawsuit or other claim to which he is made a party by reason of being (or having been) an officer, director or

employee of the Corporation or any of its subsidiaries. In addition, the Executive shall be covered, both during and after the term of the Executive’s employment, by director and officer liability insurance to the maximum extent that such insurance covers any officer or director (or former officer or director) of the Corporation.

12. Confidentiality. During and after the period of employment with the Corporation, the Executive shall not, without prior written consent from the Chief Executive Officer or the General Counsel of the Corporation, directly or indirectly disclose to any individual, corporation or other entity, other than to the Corporation or any subsidiary or affiliate thereof or their officers, directors or employees entitled to such information or any other person or entity to whom such information is disclosed in the normal course of the business of the Corporation) or use for the Executive’s own benefit or for the benefit of any such individual, corporation or other entity, any Confidential Information of the Corporation. For purposes of this Agreement, “Confidential Information” is information relating to the business of the Corporation or its subsidiaries or affiliates (a) which is not generally known to the public or in the industry, (b) which has been treated by the Corporation and its subsidiaries and affiliates as confidential or proprietary, (c) which provides the Corporation or its subsidiaries or affiliates with a competitive advantage, and (d) in the confidentiality of which the Corporation has a legally protectable interest. Confidential Information which becomes generally known to the public or in the industry, or in the confidentiality of which the Corporation and its subsidiaries and affiliates cease to have a legally protectable interest, shall cease to be subject to the restrictions of this Paragraph 12.

13. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the heirs and representatives of the Executive and the successors and assigns of the Corporation. Amounts payable under this Agreement upon the Executive’s death shall be paid to his beneficiaries, if any, designated in writing and filed with the Corporate Secretary, and in the absence of such designation, shall be paid to his heirs by will or laws of descent and distribution. The Corporation shall require any successor (whether direct or indirect, by purchase, merger, reorganization, consolidation, acquisition of property or stock, liquidation, or otherwise) to all or a substantial

portion of its assets, by agreement in form and substance reasonably satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform this Agreement if no such succession had taken place. Regardless of whether such an agreement is executed, this Agreement shall be binding upon any successor of the Corporation in accordance with the operation of law, and such successor shall be deemed the “Corporation” for purposes of this Agreement.

14. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered by hand or by recognized commercial delivery service or on the third business day after being mailed within the continental United States by first class certified mail, return receipt requested, postage prepaid, addressed as follows:

(a) If to the Board or the Corporation, to:

Woodward Governor Company
5001 North Second Street
P.O. Box 7001
Rockford, Illinois 61125
Attn: Corporate Secretary

(b) If to the Executive, to:

Robert F. Weber, Jr.
6477 Apache Drive
Indian Head Park, IL 60525

Such addresses may be changed by written notice sent to the other party at the last recorded address of that party.

15. Tax Withholding. The Corporation shall provide for the withholding of any taxes required to be withheld by federal, state, or local law with respect to any payment in cash, shares of stock and/or other property made by or on behalf of the Corporation to or for the benefit of the Executive under this Agreement or otherwise. The Corporation may, at its option: (a) withhold such taxes from any cash payments owing from the Corporation to the Executive, (b) require the Executive to pay to the Corporation in cash such amount as may be required to

satisfy such withholding obligations and/or (c) make other satisfactory arrangements with the Executive to satisfy such withholding obligations.

16. Arbitration. Any dispute or controversy between the Corporation and the Executive arising out of or relating to this Agreement or the breach of this Agreement shall be settled by arbitration administered by the American Arbitration Association (“AAA”) in accordance with its Commercial Arbitration Rules then in effect, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Any arbitration shall be held before a single arbitrator who shall be selected by the mutual agreement of the Corporation and the Executive, unless the parties are unable to agree to an arbitrator, in which case the arbitrator will be selected under the procedures of the AAA. The arbitrator shall have the authority to award any remedy or relief that a court of competent jurisdiction could order or grant, including, without limitation, the issuance of an injunction. However, either party may, without inconsistency with this arbitration provision, apply to any court otherwise having jurisdiction over such dispute or controversy and seek interim provisional, injunctive or other equitable relief until the arbitration award is rendered or the controversy is otherwise resolved. Except as necessary in court proceedings to enforce this arbitration provision or an award rendered hereunder, or to obtain interim relief, neither a party nor an arbitrator may disclose the existence, content or results of any arbitration hereunder without the prior written consent of the Corporation and the Executive. The Corporation and the Executive acknowledge that this Agreement evidences a transaction involving interstate commerce. Notwithstanding any choice of law provision included in this Agreement, the United States Federal Arbitration Act shall govern the interpretation and enforcement of this arbitration provision. The arbitration proceeding shall be conducted in Rockford, Illinois or such other location to which the parties may agree. The Corporation shall pay the costs of any arbitrator appointed hereunder.

17. No Assignment. Except as otherwise expressly provided herein, this Agreement is not assignable by any party and no payment to be made hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or other charge.

18. Execution in Counterparts. This Agreement may be executed by the parties hereto in two (2) or more counterparts, each of which shall be deemed to be an original, but all such counterparts shall constitute one and the same instrument, and all signatures need not appear on any one counterpart.

19. Jurisdiction and Governing Law. This Agreement shall be construed and interpreted in accordance with and governed by the laws of the State of Illinois, other than the conflict of laws provisions of such laws.

20. Severability. If any provision of this Agreement shall be adjudged by any court of competent jurisdiction to be invalid or unenforceable for any reason, such judgment shall not affect, impair or invalidate the remainder of this Agreement. Furthermore, if the scope of any restriction or requirement contained in this Agreement is too broad to permit enforcement of such restriction or requirement to its full extent, then such restriction or requirement shall be enforced to the maximum extent permitted by law, and the Executive consents and agrees that any court of competent jurisdiction may so modify such scope in any proceeding brought to enforce such restriction or requirement.

21. Prior Understandings. This Agreement embodies the entire understanding of the parties hereto and supersedes all other oral or written agreements or understandings between them regarding the subject matter hereof. No change, alteration or modification hereof may be made except in a writing, signed by each of the parties hereto. The headings in this Agreement are for convenience of reference only and shall not be construed as part of this Agreement or to limit or otherwise affect the meaning hereof.

IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written.



Attest:		WOODWARD GOVERNOR COMPANY


		By:

		Title: President and CEO

		[EXECUTIVE]

EX-21 4 c10357exv21.htm SUBSIDIARIES exv21

Exhibit 21
Woodward Governor Company
Subsidiaries of the Registrant

Baker Electrical Products, Inc.
Delaware, USA

Woodward FST, Inc.
Delaware, USA

Woodward Controls, Inc.
Delaware, USA

Woodward International, Inc.
Delaware, USA

Woodward (Tianjin) Controls Company Limited
Tianjin, China

Woodward Governor de Mexico S.A. de C.V.
Mexico City, Mexico

Woodward Governor France S.A.R.L.
Venissieux, France

Woodward Governor Germany GmbH
Aken, Germany

Woodward Governor GmbH
Lucerne, Switzerland

Woodward Governor India LTD.
New Delhi, India

Woodward Governor Nederland B.V.
Hoofddorp, The Netherlands

Woodward Governor (Japan) Ltd.
Tomisato, Japan

Woodward Governor Poland Sp.Zo.o
Krakow, Poland

Woodward Governor (Quebec) Inc.
Quebec, Canada

Woodward Governor (Reguladores) Limitada
Sao Paulo, Brazil

Woodward Governor Company Leonhard-Reglerbau GmbH
Stuttgart, Germany

Woodward Controls (Suzhou) Co., Ltd.
Suzhou, China

Woodward Controls International Trading (Shanghai) Co. Ltd.
Shanghai, China

EX-23 5 c10357exv23.htm CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM exv23

Exhibit 23
Woodward Governor Company
Consent of Independent Registered Public Accounting Firm

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to incorporation by reference in the Registration Statements on Form S-8 (Numbers 333-10409, 333-66422, 333-82302, 333-112521, and 333-133640) of Woodward Governor Company of our report dated November 29, 2006 relating to the financial statements, financial statement schedule, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

PricewaterhouseCoopers LLP
Chicago, Illinois
November 30, 2006

EX-31.(I) 6 c10357exv31wxiy.htm RULE 13A-14(A)/15D-14(A) CERTIFICATION OF THOMAS A. GENDRON exv31wxiy

Exhibit 31(i)
Woodward Governor Company
Rule 13a-14(a)/15d-14(a) certification

CERTIFICATION

I, Thomas A. Gendron, certify that:

1.		I have reviewed this annual report on Form 10-K for the year ended September 30, 2006, of Woodward Governor Company;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and we have:

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: November 30, 2006

/s/ THOMAS A. GENDRON


Thomas A. Gendron
President and Chief Executive Officer

A signed original of this written statement required by Rule 13a-14(a)/15d-14(a), or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Rule 13a-14(a)/15d-14(a), has been provided to Woodward and will be retained by Woodward and furnished to the Securities and Exchange Commission or its staff upon request.

EX-31.(II) 7 c10357exv31wxiiy.htm RULE 13A-14(A)/15D-14(A) CERTIFICATION OF ROBERT F. WEBER exv31wxiiy

Exhibit 31(ii)
Woodward Governor Company
Rule 13a-14(a)/15d-14(a) certification

CERTIFICATION

I, Robert F. Weber, Jr., certify that:

1.		I have reviewed this annual report on Form 10-K for the year ended September 30, 2006, of Woodward Governor Company;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and we have:

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: November 30, 2006

/s/ Robert F. Weber Jr.

Robert F. Weber Jr.
Chief Financial Officer and Treasurer

A signed original of this written statement required by Rule 13a-14(a)/15d-14(a), or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Rule 13a-14(a) /15d-14(a), has been provided to Woodward and will be retained by Woodward and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.(I) 8 c10357exv32wxiy.htm SECTION 1350 CERTIFICATIONS exv32wxiy

Exhibit 32(i)
Woodward Governor Company
Section 1350 certifications

We hereby certify that the annual report on Form 10-K for the year ended September 30, 2006, of Woodward Governor Company, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the annual report fairly presents, in all material respects, the financial condition and results of operations of Woodward Governor Company.


Date:	November 30, 2006	November 30, 2006

	/s/ Thomas A. Gendron Thomas A. Gendron	/s/ Robert F. Weber, Jr. Robert F. Weber, Jr.
	President and Chief Executive Officer	Chief Financial Officer and Treasurer

A signed original of this written statement required by 18 U.S.C. 1350, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by 18 U.S.C. 1350, has been provided to Woodward and will be retained by Woodward and furnished to the Securities and Exchange Commission or its staff upon request.

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