Derivative Instruments and Hedging Activities

12 Months Ended

Sep. 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 not does 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 minimizes this credit risk by entering into transactions with only high quality counterparties. Market risk arises from the potential adverse effects on the value of derivative and/or hedging instruments that result from a change in interest rates, commodity prices, or foreign currency exchange rates. Woodward minimizes this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

As of September 30, 2010, Woodward was a party to the forward foreign currency exchange rate contract described below. As of September 30, 2011, all previous derivative instruments into which Woodward had entered into were settled or terminated.

Derivatives in fair value hedging relationships

In 2002, Woodward entered into certain interest rate swaps that were designated as fair value hedges of its long-term debt consisting of senior notes due in October 2011. The discontinuance of these interest rate swaps resulted in gains that are recognized as a reduction of interest expense over the term of the associated debt (10 years) using the effective interest method. The unrecognized portion of the gain is presented as an adjustment to long-term debt.

Derivatives in cash flow hedging relationships

In 2001, Woodward entered into treasury lock agreements that were designated as cash flow hedges of its long-term debt. The objective of these derivatives was to hedge the risk of variability in cash flows related to future interest payments of a portion of the anticipated future debt issuances attributable to changes in the designated benchmark interest rate associated with the expected issuance of the senior notes due in October 2011. The discontinuance of these treasury lock agreements resulted in losses that are recognized as an increase of interest expense over the term of the associated debt (10 years) using the effective interest method. The unrecognized portion of the loss is recorded in accumulated other comprehensive earnings.

In September 2008, the Company entered into treasury lock agreements that qualified as cash flow hedges under authoritative guidance for derivatives and hedging. The objective of this derivative instrument was to hedge the risk of variability in cash flows related to future interest payments of a portion of the anticipated future debt issuances attributable to changes in the designated benchmark interest rate associated with the expected issuance of long-term debt to acquire MPC. The discontinuance of these treasury lock agreements resulted in a gain that is being recognized as a reduction of interest expense over a seven-year period on the hedged Series C and D Notes, which were issued on October 1, 2008, using the effective interest method. The unrecognized portion of the gain is recorded in accumulated other comprehensive earnings, net of tax.

In March 2009, Woodward entered into LIBOR lock agreements that qualified as cash flow hedges under authoritative guidance for derivatives and hedging. The objective of this derivative instrument was to hedge the risk of variability in cash flows over a seven-year period related to future interest payments of a portion of anticipated future debt issuances attributable to changes in the designated benchmark interest rate associated with the then expected issuance of long-term debt to acquire HRT. The discontinuance of the LIBOR lock agreements resulted in a loss that is being recognized as an increase of interest expense over a seven-year period on the hedged Series E and F Notes, which were issued on April 3, 2009, using the effective interest method. The unrecognized portion of the loss is recorded in accumulated other comprehensive earnings, net of tax.

Derivatives in foreign currency relationships

In September 2010, Woodward entered into a foreign currency exchange rate contract to purchase €39,000 for approximately $52,549 in early December 2010. An unrealized gain of $579 on this derivative was carried at fair market value in "Other current assets" as of September 30, 2010. In December 2010, a loss of $1,033 was recorded on the settlement of this forward contract and was recorded in "Other (income) expense, net." In September 2009, Woodward entered into a foreign currency exchange rate contract to purchase €7,900 for approximately $11,662 in early October 2009. An unrealized loss of $173 on this derivative instrument was carried at fair market value in "Accrued liabilities" as of September 30, 2009. In October 2009, a loss of $71 was realized on the settlement of this forward contract was recorded in "Other (income) expense, net."

The objective of these derivative instruments, which were not designated as accounting hedges, was to limit the risk of foreign currency exchange rate fluctuations on certain short-term intercompany loan balances.

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

	At September 30,
	2011			2010
Derivatives designated as hedging instruments	Unrecognized Gain (Loss)
Classified in accumulated other comprehensive earnings	$	(781	)	$	(1,011	)
Classified in current and long-term debt		3			70
	$	(778	)	$	(941	)
Derivatives not designated as hedging instruments	Recognized Gain (Loss)
Classified in other current assets	$	—		$	579

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

		Year Ending September 30, 2011
		Amount of			Amount of		Amount of
		(Income)			(Gain) Loss		(Gain) Loss
		Expense			Recognized		Reclassified
		Recognized			in		from
		in Earnings			Accumulated		Accumulated
	Location of (Gain) Loss	on			OCI on		OCI into
Derivatives in:	Recognized in Earnings	Derivative			Derivative		Earnings
Fair value hedging relationships	Interest expense	$	(67	)	$	—	$	—
Cash flow hedging relationships	Interest expense		229			—		229
Foreign currency relationships	Other (income) expense, net		1,612			—		—
		$	1,774		$	—	$	229
		Year Ending September 30, 2010
		Amount of			Amount of		Amount of
		(Income)			(Gain) Loss		(Gain) Loss
		Expense			Recognized		Reclassified
		Recognized			in		from
		in Earnings			Accumulated		Accumulated
	Location of (Gain) Loss	on			OCI on		OCI into
Derivatives in:	Recognized in Earnings	Derivative			Derivative		Earnings
Fair value hedging relationships	Interest expense	$	(127	)	$	—	$	—
Cash flow hedging relationships	Interest expense		282			—		282
Foreign currency relationships	Other (income) expense, net		(681	)		—		—
		$	(526	)	$	—	$	282
		Year Ending September 30, 2009
		Amount of			Amount of		Amount of
		(Income)			(Gain) Loss		(Gain) Loss
		Expense			Recognized		Reclassified
		Recognized			in		from
		in Earnings			Accumulated		Accumulated
	Location of (Gain) Loss	on			OCI on		OCI into
Derivatives in:	Recognized in Earnings	Derivative			Derivative		Earnings
Fair value hedging relationships	Interest expense	$	(184	)	$	—	$	—
Cash flow hedging relationships	Interest expense		237			1,199		237
Foreign currency relationships	Other (income) expense, net		173			—		—
		$	226		$	1,199	$	237

Based on the carrying value of the unrecognized gains and losses on terminated derivative instruments designated as cash flow hedges as of September 30, 2011, Woodward expects to reclassify $173 of net unrecognized losses on terminated derivative instruments from accumulated other comprehensive income to earnings during the next twelve months.