Derivative Instruments and Hedging Activities

9 Months Ended

Jun. 30, 2011

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Note 6. Derivative instruments and hedging activities

Woodward is exposed to global market risks, including the effect of changes in interest rates, foreign currency exchange rates, changes in certain commodity prices and fluctuations in various producer indices. From time to time, Woodward enters into derivative instruments for risk management purposes only, including derivatives designated as accounting hedges and/or those utilized as economic hedges. Woodward uses interest rate related derivative instruments to manage its exposure to fluctuations of interest rates. Woodward does not enter into or issue derivatives for trading or speculative purposes.

By using derivative and/or hedging instruments to manage its risk exposure, Woodward is subject, from time to time, to credit risk and market risk on those derivative instruments. Credit risk arises from the potential failure of the counterparty to perform under the terms of the derivative and/or hedging instrument. When the fair value of a derivative contract is positive, the counterparty owes Woodward, which creates credit risk for Woodward. Woodward mitigates this credit risk by entering into transactions with only credit worthy counterparties. Market risk arises from the potential adverse effects on the value of derivative and/or hedging instruments that result from a change in interest rates, commodity prices, or foreign currency exchange rates. Woodward mitigates this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

Woodward did not enter into any hedging transactions during the three or nine-months ending June 30, 2011 and was not a party to any derivative instruments as of June 30, 2011.

In September 2010, Woodward entered into a foreign currency exchange rate contract to purchase €39,000 for approximately $52,549 in early December 2010. The objective of this derivative instrument, which was not designated as an accounting hedge, was to limit the risk of foreign currency exchange rate fluctuations on a short-term intercompany loan balance. At September 30, 2010, an unrealized gain of $579 was recorded in Woodward's Condensed Consolidated Balance Sheet under the caption "Other current assets" reflecting an adjustment to fair market value for the related foreign currency exchange rate contract. In December 2010, a loss of $1,033 was realized on the settlement of this forward contract and was recorded in "Other (income) expense, net." The resulting correlated foreign currency gain realized on the repayment of the short-term intercompany loan balance was recorded in Woodward's Condensed Consolidated Statement of Earnings in "Selling, general and administrative expenses."

The following table discloses the remaining unrecognized gains and losses and recognized gains associated with derivative instruments in Woodward's Condensed Consolidated Balance Sheets:

	June 30,			September 30,
	2011			2010
Derivatives designated as hedging instruments	Unrecognized Gain (Loss)
Classified in accumulated other comprehensive earnings	$	(839	)	$	(1,011	)
Classified in current and long-term debt		19			70
	$	(820	)	$	(941	)
Derivatives not designated as hedging instruments	Recognized Gain
Classified in other current assets	$	—		$	579

The following tables disclose the impact of derivative instruments on Woodward's Condensed Consolidated Statements of Earnings:

		Three-Months Ending June 30, 2011							Three-Months Ending June 30, 2010
							Amount of							Amount of
		Amount of			Amount of		(Gain) Loss		Amount of			Amount of		(Gain) Loss
		(Income)			(Gain) Loss		Reclassified		(Income)			(Gain) Loss		Reclassified
	Location of (Gain)	Expense			Recognized in		from		Expense			Recognized in		from
	Loss	Recognized in			Accumulated		Accumulated		Recognized in			Accumulated		Accumulated
	Recognized in	Earnings on			OCI on		OCI into		Earnings on			OCI on		OCI into
Derivatives in:	Earnings	Derivative			Derivative		Earnings		Derivative			Derivative		Earnings
Fair value hedging relationships	Interest expense	$	(17	)	$	—	$	—	$	(31	)	$	—	$	—
Cash flow hedging relationships	Interest expense		57			—		57		70			—		70
Foreign currency relationships	Other (income) expense		—			—		—		—			—		—
		$	40		$	—	$	57	$	39		$	—	$	70
		Nine-Months Ending June 30, 2011							Nine-Months Ending June 30, 2010
							Amount of							Amount of
		Amount of			Amount of		(Gain) Loss		Amount of			Amount of		(Gain) Loss
		(Income)			(Gain) Loss		Reclassified		(Income)			(Gain) Loss		Reclassified
	Location of (Gain)	Expense			Recognized in		from		Expense			Recognized in		from
	Loss	Recognized in			Accumulated		Accumulated		Recognized in			Accumulated		Accumulated
	Recognized in	Earnings on			OCI on		OCI into		Earnings on			OCI on		OCI into
Derivatives in:	Earnings	Derivative			Derivative		Earnings		Derivative			Derivative		Earnings
Fair value hedging relationships	Interest expense	$	(51	)	$	—	$	—	$	(95	)	$	—	$	—
Cash flow hedging relationships	Interest expense		172			—		172		211			—		211
Foreign currency relationships	Other (income) expense		1,612			—		—		(102	)		—		—
		$	1,733		$	—	$	172	$	14		$	—	$	211

Based on the carrying value of the unrecognized gains and losses on terminated derivative instruments designated as cash flow hedges as of June 30, 2011, Woodward expects to reclassify $188 of net unrecognized losses on terminated derivative instruments from accumulated other comprehensive earnings to earnings during the next twelve months.