Business Acquisitions

6 Months Ended

Mar. 31, 2013

Business Combinations

Business Acquisitions

Note 4.  Business acquisitions

Duarte Business Acquisition

On December 27, 2012, Woodward entered into a definitive asset purchase agreement (the “Asset Purchase Agreement”) with GE Aviation Systems LLC (the “Seller”) and General Electric Company for the acquisition of substantially all of the assets and certain liabilities related to the Seller’s thrust reverser actuation systems business located in Duarte, California (the “Duarte Business”) for an aggregate purchase price of $200,000.  The sale was completed on December 28, 2012 and based on customary purchase price adjustments, Woodward paid cash at closing in the amount of $198,900.  The purchase price remains subject to certain additional customary post-closing adjustments. 

The Duarte Business develops and manufactures motion control technologies and platforms, more specifically thrust reverser actuation systems.  The Duarte Business serves customers such as Airbus, Boeing, General Electric, Safran and the U.S. Government.  Its products are used primarily on commercial aircraft such as the Boeing 737, 747 and 777, and the Airbus A320.  The Duarte Business is being integrated into Woodward’s Aerospace segment. 

The Duarte Business employs approximately 350 people, of which approximately 65% are union employees.  The collective bargaining agreements with Woodward’s union employees are generally renewed through contract renegotiations prior to the contract expiration date.  The International Union, United Automobile, Aerospace and Agricultural Implement Workers of America and Local No. 509 contract, which covers the unionized Duarte Business employees, expires May 25, 2013 and is in the process of being renegotiated.

The Company believes the Duarte Business provides it with expanded motion control technologies and platforms, and that there will be operating synergies and significant opportunities to share technologies and leverage the customer base.  Goodwill recorded in connection with the acquisition of the Duarte Business, which is deductible for income tax purposes, represents the estimated value of such future opportunities, the value of potential expansion with new customers, the opportunity to further develop sales opportunities with new and acquired Duarte Business customers, and other synergies expected to be achieved through the integration of the Duarte Business into Woodward’s Aerospace segment.

The preliminary purchase price of the Duarte Business is as follows:

Cash paid to Seller	$	198,900
Less cash acquired		(40)
Total preliminary purchase price	$	198,860

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

Woodward is currently working with the Seller to finalize purchase price adjustments customary to these types of transactions and, therefore, has not finalized the valuations of all assets acquired and liabilities assumed.  

The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition of the Duarte Business:

Accounts receivable	$	15,916
Inventories		30,149
Other current assets		10,369
Property, plant, and equipment		14,647
Goodwill		87,719
Intangible assets		79,300
Other noncurrent assets		18,097
Total assets acquired		256,197
Other current liabilities		28,739
Other noncurrent liabilities		28,598
Total liabilities assumed		57,337
Net assets acquired	$	198,860

Assumed liabilities include $4,758 and $15,383 of current and long-term performance obligations, respectively, for contractual commitments that are expected to result in future economic losses. 

The Asset Purchase Agreement included commitments for the Duarte Business to continue to provide services to the Seller unrelated to the core business acquired, for which Woodward will be paid by the Seller. Assumed liabilities include $12,985 and $13,215 of current and long-term performance obligations, respectively, for services to be provided to the Seller, offset by $8,103 and $18,097of current and long-term assets, respectively, related to contractual payments due from the Seller.

In connection with the acquisition of the Duarte Business, Woodward did not assume the postretirement benefit obligations of the Duarte Business’ defined benefit pension plan.  Under the terms of the Asset Purchase Agreement, Woodward is obligated to establish a new defined benefit pension plan for the Duarte Business employees who were beneficiaries of the Seller’s defined benefit pension plan.  Woodward’s new defined benefit pension plan will provide for similar benefits as those provided by the Seller.  Woodward is in the process of establishing the new defined benefit pension plan.

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

	Estimated Amounts		Weighted-Average Useful Life		Amortization Method
Customer relationships and contracts	$	67,000	20	years	Straight-line
Process technology		4,600	25	years	Straight-line
Backlog		7,700	3	years	Accelerated
Total	$	79,300

Future amortization expense associated with the acquired intangibles is expected to be:

Year Ending September 30:
2013 (remaining)	$	4,316
2014		5,588
2015		4,003
2016		3,663
2017		3,663
Thereafter		55,910
	$	77,143

Net sales and segment earnings for the Duarte Businesssubsequent to the date it was acquired by Woodward for the three and six-months ended March 31, 2013 were as follows.  Segment earnings exclude interest income, interest expense and income tax expense.

	Three-Months Ended		Six-Months Ended
	March 31, 2013		March 31, 2013
Net sales	$	35,090	$	35,090
Segment earnings		1,312		1,312

Pro forma results for Woodward giving effect to the acquisition of the Duarte Business

The following unaudited pro forma financial information presents the combined results of operations of Woodward and the Duarte Business as if the acquisition had occurred as of October 1, 2011, the beginning of fiscal 2012. The pro forma information is presented for information purposes only and is not indicative of the results of operations that would have been achieved if the acquisition and the borrowings used to finance it had taken place at the beginning of fiscal 2012. The pro forma information combines the historical results of Woodward with the historical results of the Duarte Business for that period.

Prior to the acquisition of the Duarte Business,  the Duarte Business was a wholly owned business of the Seller, and as such was not a stand-alone entity for financial reporting purposes. Accordingly, the historical operating results of the Duarte Business may not be indicative of the results that might have been achieved, historically or in the future, if the Duarte Business had been a stand-alone entity. The unaudited pro forma results for the three and six-month periods ended March 31, 2013 and March 31, 2012 include amortization charges for acquired intangible assets, adjustments for depreciation expense for property, plant and equipment, transaction costs incurred, adjustments to interest expense, and related tax effects.

The unaudited pro forma results for the three and six-month periods ended March 31, 2013 and March 31, 2012, compared to the actual results reported in these Condensed Consolidated Financial Statements, follow:

	Three-Months Ended March 31, 2013				Three-Months Ended March 31, 2012
	As reported		Pro forma		As reported		Pro forma
Net sales	$	485,513	$	485,513	$	468,793	$	498,168
Net earnings		42,446		45,673		38,751		36,108
Earnings per share:
Basic earnings per share	$	0.62	$	0.66	$	0.56	$	0.52
Diluted earnings per share		0.61		0.65		0.55		0.51

	Six-Months Ended March 31, 2013				Six-Months Ended March 31, 2012
	As reported		Pro forma		As reported		Pro forma
Net sales	$	893,852	$	924,252	$	876,689	$	930,182
Net earnings		69,814		74,235		67,168		60,686
Earnings per share:
Basic earnings per share	$	1.02	$	1.08	$	0.97	$	0.88
Diluted earnings per share		1.00		1.06		0.95		0.86

These pro forma results do not reflect the favorable impact of various long-term agreements with customers of the Duarte Business that were recently renegotiated by the Sellerprior to the acquisition and effective on or before January 1, 2013. Collectively, the renegotiation of the agreements would have had a significant positive impact on prior operating results of the Duarte Business if implemented earlier.

The Company incurred transaction costs of $1,707 for the three and six-months ended March 31, 2013, which are included in “Selling, general and administrative expenses” in the Condensed Consolidated Statements of Earnings.