Derivative Instruments and Hedging Activities

3 Months Ended

Dec. 31, 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.

Derivatives in foreign currency relationships

Woodward did not enter into any hedging transactions during the three-months ending December 31, 2011 or 2010 and was not a party to any derivative instruments as of December 31, 2011 or September 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. 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 realized on the settlement of this forward contract and was recorded in "Other (income) expense, net."

The objective of this derivative instrument, which was not designated as accounting hedge, 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 in Woodward's Condensed Consolidated Balance Sheets associated with terminated derivative instruments that were previously entered into by the Company:

	December 31,			September 30,
	2011			2011
Derivatives designated as hedging instruments	Unrecognized Gain (Loss)
Classified in accumulated other comprehensive earnings	$	(736	)	$	(781	)
Classified in current and long-term debt		—			3
	$	(736	)	$	(778	)

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

		Three-Months Ending December 31, 2011							Three-Months Ending December 31, 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
		Expense			Recognized in		from		Expense			Recognized in		from
	Location of (Gain) 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	$	(3	)	$	—	$	—	$	(19	)	$	—	$	—
Cash flow hedging relationships	Interest expense		45			—		45		59			—		59
Foreign currency relationships	Other (income) expense		—			—		—		1,612			—		—
		$	42		$	—	$	45	$	1,652		$	—	$	59

Based on the carrying value of the unrecognized gains and losses on terminated derivative instruments designated as cash flow hedges as of December 31, 2011, Woodward expects to reclassify $171 of net unrecognized losses on terminated derivative instruments from accumulated other comprehensive earnings to earnings during the next twelve months.