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 acquisition was completed on December 28, 2012 and, based on customary purchase price adjustments, Woodward paid cash at closing in the amount of $198,900. Woodward and the Seller have not agreed on any contractual adjustments based on the customary post-closing provisions of the Asset Purchase Agreement. Woodward believes any such adjustments would not be material.

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 has been integrated into Woodward’s Aerospace segment.

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 purchase price of the Duarte Business is as follows:



Cash paid to Seller	$	198,900
Less cash acquired		(40)
Total 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. Woodward’s allocation was based on an evaluation of the appropriate fair values and represents management’s best estimate based on available data.

During the three-months ended December 31, 2013, Woodward completed its purchase accounting valuation estimates and, as a result, retrospectively adjusted the valuations of certain liabilities with a corresponding increase to goodwill and intangible assets as of the acquisition date. The retrospective adjustments amounted to approximately $12,800 and primarily relate to long-term performance obligations and other accrued liabilities. Changes since the acquisition date to the valuations of the assets and liabilities acquired resulted in insignificant changes to Woodward’s previously reported earnings and therefore prior reported earnings have not been restated. The allocation of the purchase price to the assets and liabilities assumed was finalized as of December 27, 2013.

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



Accounts receivable	$	14,245
Inventories		30,149
Other current assets		10,370
Property, plant, and equipment		11,804
Goodwill		98,310
Intangible assets		89,700
Other noncurrent assets		18,097
Total assets acquired		272,675
Other current liabilities		32,509
Other noncurrent liabilities		41,306
Total liabilities assumed		73,815
Net assets acquired	$	198,860

Assumed liabilities include $4,758 and $17,939 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 continue to be paid by the Seller. Assumed liabilities include $12,985 and $23,215 of current and long-term performance obligations, respectively, for services to be provided to the Seller, offset by $8,103 and $18,097 of 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 was 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 completed the establishment of the new defined benefit pension plan during the third quarter of fiscal year 2013. For more information about the new defined benefit pension plan for the Duarte Business, see Note 17, Retirement benefits.

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



	Estimated Amounts		Weighted-Average Useful Life		Amortization Method
Customer relationships and contracts	$	77,000	20	years	Straight-line
Process technology		5,000	25	years	Straight-line
Backlog		7,700	3	years	Accelerated
Total	$	89,700

Net sales for the Duarte Business subsequent to the date it was acquired by Woodward were $31,432 for the three-months ended December 31, 2013. Earnings of the Duarte Business subsequent to the date it was acquired by Woodward for the three-months ended December 31, 2013 were slightly accretive to the consolidated net earnings of Woodward. Due to the timing of the acquisition, there were no net sales or operating expenses from the Duarte Business included in the Condensed Consolidated Statements of Earnings for the three-months ended December 31, 2012.

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 year 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 year 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-months ended December 31, 2013 and December 31, 2012 include amortization charges for acquired intangible assets, eliminations of intercompany transactions, adjustments for depreciation expense for property, plant and equipment, adjustments for acquired performance obligations, transaction costs incurred, adjustments to interest expense, and related tax effects.

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



	Three-Months Ended December 31, 2013				Three-Months Ended December 31, 2012
	As reported		Pro forma		As reported		Pro forma
Net sales	$	429,042	$	429,042	$	408,339	$	438,739
Net earnings		23,383		23,632		27,368		28,438
Earnings per share:
Basic earnings per share	$	0.35	$	0.35	$	0.40	$	0.42
Diluted earnings per share		0.34		0.34		0.39		0.41

These pro forma results do not reflect the favorable impact of various long-term agreements with customers of the Duarte Business that were renegotiated by the Seller prior 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-months ended December 31, 2012, which are included in “Selling, general and administrative expenses” in the Condensed Consolidated Statements of Earnings. No additional transaction costs were incurred in the three-months ended December 31, 2013.