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Derivative Instruments and Hedging Activities
 6 Months Ended
Mar. 31, 2012
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 or six-months ending March 31, 2012 and was not a party to any derivative instruments as of March 31, 2012 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 an 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:

 

                 
     March 31,     September 30,  
     2012     2011  

Derivatives designated as hedging instruments

    Unrecognized Gain (Loss)  

Classified in accumulated other comprehensive earnings

    $ (693 )    $ (781 ) 

Classified in current and long-term debt

      —          3   
    

 

 

    

 

 

  
     $ (693 )    $ (778 ) 
    

 

 

    

 

 

  

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

 

                                                     
          Three-Months Ending March 31, 2012      Three-Months Ending March 31, 2011  

Derivatives in:

   

Location of (Gain) Loss
Recognized in
Earnings

    Amount of
(Income)
Expense
Recognized in
Earnings on
Derivative		      Amount of
(Gain) Loss
Recognized in
Accumulated
OCI on
Derivative		      Amount of
(Gain) Loss
Reclassified
from
Accumulated
OCI into
Earnings		      Amount of
(Income)
Expense
Recognized in
Earnings on
Derivative		     Amount of
(Gain) Loss
Recognized in
Accumulated
OCI on
Derivative		      Amount of
(Gain) Loss
Reclassified
from
Accumulated
OCI into
Earnings		  

Fair value hedging relationships

    Interest expense    $ —         $ —         $ —         $ (15 )    $ —         $ —     

Cash flow hedging relationships

    Interest expense      43         —           43         56        —           56   
         

 

 

     

 

 

     

 

 

     

 

 

    

 

 

     

 

 

  
          $ 43       $ —         $ 43       $ 41      $ —         $ 56   
         

 

 

     

 

 

     

 

 

     

 

 

    

 

 

     

 

 

  

 

                                                     
          Six-Months Ending March 31, 2012      Six-Months Ending March 31, 2011  

Derivatives in:

   

Location of (Gain) Loss
Recognized in

Earnings

    Amount of
(Income)
Expense
Recognized in
Earnings on
Derivative		     Amount of
(Gain) Loss
Recognized in
Accumulated
OCI on
Derivative		      Amount of
(Gain) Loss
Reclassified
from
Accumulated
OCI into
Earnings		      Amount of
(Income)
Expense
Recognized in
Earnings on
Derivative		     Amount of
(Gain) Loss
Recognized in
Accumulated
OCI on
Derivative		      Amount of
(Gain) Loss
Reclassified
from
Accumulated
OCI into
Earnings		  

Fair value hedging relationships

    Interest expense    $ (3 )    $ —         $ —         $ (34 )    $ —         $ —     

Cash flow hedging relationships

    Interest expense      88        —           88         115        —           115   

Foreign currency relationships

    Other (income) expense      —          —           —           1,612        —           —     
         

 

 

    

 

 

     

 

 

     

 

 

    

 

 

     

 

 

  
          $ 85      $ —         $ 88       $ 1,693      $ —         $ 115   
         

 

 

    

 

 

     

 

 

     

 

 

    

 

 

     

 

 

  

Based on the carrying value of the unrecognized gains and losses on terminated derivative instruments designated as cash flow hedges as of March 31, 2012, 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.