Woodward
Annual Report 2008

Plain-text annual report

CONTrOLLING the power of ENErGy Woodward Governor Company | 2008 Annual Report Energy is a catalyst for global economic growth. Woodward’s technologies, through systems and components, focus on Energy Control and Optimization Solutions for the aerospace, power and process industries, and transportation markets that we serve. Our systems manage energy in: • fLuidS—complete fuel, hydraulic, and air management systems • mOTiOn—electric and hydraulic actuation systems • ELECTriCiTy— generation, distribution, protection and control, plus wind turbine and other renewable power conversion • COmbuSTiOn—precise fuel injection, ignition, and sensing technologies We provide systems that maximize energy output while minimizing environmental impact— controlling the power of energy, whatever the source. the POwEr of wOODwArD Financial Highlights (In thousands except per share amounts and other year-end data) Operating results Net sales Net earnings Basic per share amount Diluted per share amount CasH dividends per sHare Year-end FinanCial pOsitiOn Working capital Total assets Long-term debt, less current portion Shareholders’ equity OtHer Year-end data 0 350 Fiscal year ended September 30, 2008 2007 2006 2005 2004 $ 1,258,204 $ 1,042,337 $ 854,515 $ 827,726 $ 709,805 121,880 98,157 69,900 55,971 31,382 1.80 1.75 0.235 369,211 927,017 33,337 629,628 700 1.43 1.39 1.02 0.99 0.82 0.80 0.46 0.45 0.215 0.200 0.175 0.160 275,611 260,243 241,066 197,524 829,767 735,497 705,466 654,294 45,150 58,379 72,942 88,452 544,431 478,689 432,469 385,861 1050 1400 Worker members 4,476 4,248 3,731 3,513 3,287 NET SALES (in millions) ’08 ’07 ’06 ’05 ’04 0 250 500 750 1000 1250 0 $350 $700 $1,050 $1,400 NET EARNINGS (in millions) ’08 ’07 ’06 ’05 ’04 0 $25 $50 $75 $100 $125 page 1 Woodward Governor Company | 2008 Annual Report page 2 Woodward Governor Company | 2008 Annual Report genx™ Fuel system The FMU (fuel metering unit) is one of eleven components Woodward integrates into the fuel system we supply to General Electric for the GEnx engine. OH and Mi systems Woodward’s OH and MI systems consist of up to 15 components and provide total emissions and performance control on natural gas and propane-fuel engines used in alternative-fuel vehicles. Woodward understands the value of integrated systems. Woodward delivers complete control systems to our customers by combining our technologies and component capabilities with those of our partners and suppliers. Our systems reliably and efficiently control complicated processes, reducing required resources for the customer. As a fuel system integrator for General Electric, Woodward offers a single point of contact for the fuel system, simplifying logistics and lowering costs. Our fuel and ignition systems on the Pratt & Whitney Canada PW610 and PW615 reflect an optimized approach to complex systems requirements for the aerospace market. In industrial markets, our systems significantly reduce emissions and improve performance in marine, mining, and power generation applications. Woodward’s OH gas engine control system minimizes harmful exhaust emissions and improves fuel efficiency and performance on natural gas buses, trucks, and other alternative-fuel vehicles. Finally, by applying a complete systems approach for power generation and distribution applications, our protection, metering, control, and communication technologies and products enhance the design of integrated “smart” electrical grids. the pOWer of sYsteMs page 3 Woodward Governor Company | 2008 Annual Report page 4 Woodward Governor Company | 2008 Annual Report COnCYCle® Wind turbine inverter systems CONCYCLE provides ideal integration of variable speed wind turbine generators with electrical utility systems. ion sensing technology Ion sensing technology will be used to control the combustion process to reduce emissions and increase stability. Our markets depend on leading-edge technology. Woodward engineers solve complex problems by applying scientific principles to create innovative designs. With emission regulations driving the need for more controls, we work seamlessly with customers to offer superior solutions that reduce emissions, improve fuel efficiency, and enhance performance. Woodward has leveraged technologies and capabilities across the company to develop aftertreatment control systems that will enable diesel engines to meet future emission regulations. Woodward is progressing toward commercialization of ion sensing technology, which will offer improved dynamic performance at a lower cost than current sensors used in aftertreatment and industrial turbine markets. In the area of renewable energy, our CONCYCLE wind turbine inverter enables large-scale wind integration on the electrical grid, meeting local and regional interconnection requirements through the use of highly efficient patented technology. the pOWer of innOvatiOn page 5 Woodward Governor Company | 2008 Annual Report page 6 Woodward Governor Company | 2008 Annual Report utC supplier gold award United Technologies Corporation/Pratt & Whitney awarded our facility in Zeeland, MI Supplier Gold recognition for outstanding achievement in delivery, quality, lean, and customer satisfaction. dla award The DLA (Defense Logistics Agency) awarded our Rockford, IL plant the bronze award from both the Richmond, VA and Columbus, OH supply centers for excellence in delivery and quality. delivering high-quality products on time is critical to customer satisfaction. We use standardized processes worldwide to ensure that our global customers receive the highest-quality products for the best value and on time. We are implementing BTO (Build-To-Order) Lean throughout our organization to ensure we continue to provide outstanding customer satisfaction. Pratt & Whitney awarded Woodward’s Zeeland, MI facility the UTC Supplier Gold Award, which recognizes suppliers currently functioning with the highest operational performance levels through lean processes. Woodward is one of only fifteen UTC suppliers to earn this award. Additionally, for over a decade, Woodward’s Rockford, IL plant has consistently received various Gold, Silver, and Bronze United States Defense Logistics Agency/Defense Supply Center Supplier Awards for excellence in delivery and quality. Recognition such as this creates opportunities for Woodward to compete for future business. At Woodward, the power of excellence extends from our technologies to operations, to sales and service, and to our members, who make customer satisfaction their top priority. the pOWer of exCellenCe page 7 Woodward Governor Company | 2008 Annual Report the pOWer of presenCe page 8 Woodward Governor Company | 2008 Annual Report Our plants, offices, and service centers span the globe. Our customers are global, and so are their needs. Woodward knows our customers need to locate in growth areas, so we are right there with them— designing, manufacturing, and servicing our products. We continue to expand in Poland, China, Korea, and India, and are establishing offices in the Middle East and Russia. Our global presence allows us to respond quickly with solutions tailored to the local demands of our customers. Careful consideration of environmental and cultural differences is key to establishing Woodward as a concerned global citizen. Our internal teams are comprised of members from multiple locations as well—encouraging fresh ideas, offering a variety of views on how to meet new challenges, and providing members the opportunity to have a worldwide impact. page 9 Woodward Governor Company | 2008 Annual Report the pOWer of COMMitMent page 10 Woodward Governor Company | 2008 Annual Report We help our customers maintain sound environmental practices. Woodward products enable customer solutions to reduce environmental impact. We believe we must all do our part toward developing long-term solutions for energy availability and sustainability while maintaining the quality of the environment. Environmental regulations are becoming increasingly restrictive, and rightly so. Woodward remains committed to designing and manufacturing products that minimize emissions, increase efficiency, and improve reliability. From development of aftertreatment control systems to the conversion of wind energy, to safe and dependable electrical power, Woodward is working to protect the environment by providing our customers with products unmatched in the marketplace. Woodward is committed to investing in research and development, as well as other opportunities, in an effort to continue to introduce environmentally sound products. page 11 Woodward Governor Company | 2008 Annual Report gerhard lauffer Group Vice President dennis Benning Group Vice President Bob Weber Chief Financial Officer & Treasurer Marty glass Group Vice President tom gendron Chairman & Chief Executive Officer page 12 Woodward Governor Company | 2008 Annual Report Dear Shareholders: For the past five years, our sales and earnings While our sales and earnings remain strong, we growth has steadily improved—a direct result of realize these are uncertain times. We will continue successfully executing our long-range strategic looking for opportunities to grow and further position initiatives in our strong core markets of aerospace, Woodward to capitalize on the increasing global power and process industries, and transportation. demand for energy and environmental concerns. Once again, we closed our fiscal year with record sales and earnings. Sales were up 21 percent over last year to $1.26 billion and net earnings were $122 We will achieve our goals by continuing to introduce systems and components for equipment that supports global infrastructure development. million or $1.75 per diluted share. We are confident in our balanced portfolio, global Our balance sheet and cash flow remained healthy. We significantly invested in our business to return value for our shareholders. We raised our dividend, repurchased over one million shares against our three-year $200,000,000 stock repurchase program authorized in September 2007, and executed a two- for-one stock split. footprint, and strong aftermarket presence. Whether the economy is in an upward or downward cycle, we are always mindful of managing our business to mitigate risks. KeY aCCOMplisHMents Our robust strategies, which focus on attractive, long-term markets, remain on target. By continually renewing our product portfolio and making strategic the pOWer of teaMWOrK page 13 Woodward Governor Company | 2008 Annual Report acquisitions, we are able to deliver more complete Dreamliner and the control system for the Pratt & systems and offer broader support to our global Whitney Canada PW600 engine family for the Cessna customers. In this fiscal year, we signed numerous long-term supply agreements with our customers that Citation Mustang and Eclipse 500 business jets. Both programs will contribute to our growth for many years to come. extended existing business and expanded our In this fiscal year, our sales to existing and new Asian market share. These agreements demonstrate customers increased significantly for our on-highway strength with our foundational customers and CNG (compressed natural gas) systems. Also, we position us to continue winning programs that will were awarded a contract for diesel fuel injection sustain our future. equipment from a customer in India and introduced An agreement with Pratt & Whitney (P&W) secured our position to supply fuel nozzles on the P&W PurePower™ engine family, which includes the new products that enhance the reliability and improve the performance of steam turbines used in the power and process industries. PW1000G Geared Turbofan™ and PW800F In the face of uncertain fossil fuel prices and the advanced turbofan engines. This advanced engine increased demand for clean energy, the wind turbine family will deliver exceptional economic and market has continued to grow at a remarkable rate. environmental benefits for the next generation We added a major Chinese wind turbine manufacturer commercial aircraft and large business jets. to our customer base, which contributed to the Additionally, we entered into a long-term supplier agreement with a key electrical equipment customer to provide protective relays for the power generation and distribution market. With growing customer concern for power quality and security, doubling of our wind turbine inverter sales. To support our customers in their expansion plans in North America and Asia, we announced that we will build wind turbine inverters in Colorado and enlarge our operations in China. the demand is escalating for Woodward power We delivered our first fuel control system to General management controls. Electric for the Fighter Engine Team F136 engine, one We transitioned successfully from development to production on several aircraft programs, which included the GEnx™ fuel system for the Boeing 787 of two engines that will power the F-35 Lightning II. The P&W F135-PW-600 STOVL propulsion system with Woodward fuel nozzles powered the F-35B during its first flight test this year. We anticipate page 14 Woodward Governor Company | 2008 Annual Report significant production over the next three decades, We are well situated to respond to economic making this next generation multi-role strike fighter uncertainties, and we anticipate continued solid program an important part of our future. performance for the next fiscal year. In 2009, we Our strategic plan incorporates growth through acquisitions. We made the largest acquisition in will concentrate on: • Delivering sales growth rates above the market our history when we purchased MPC Products • Leveraging our infrastructure to yield enhanced Corporation on October 1, 2008. MPC is an industry margins leader in the manufacture of high-performance • Pursuing acquisitions that enhance our energy electromechanical motion control systems primarily control strategy for aerospace applications. Woodward MPC gives us the opportunity to focus on airframe applications and forms the basis of a fourth Woodward business segment—Airframe Systems. Furthermore, at the start of fiscal year 2009, we acquired MotoTron Corporation. MotoTron, which will be integrated into our Engine Systems business segment, specializes in software tools and processes • Managing our balance sheet to improve shareholder returns • Expanding our portfolio with targeted products and services • Enhancing our system capabilities • Integrating MPC and MotoTron into the Woodward organization for control systems in marine, power generation, • Executing key business processes to improve industrial, and other engine equipment applications. customer satisfaction and operational efficiency This acquisition particularly strengthens our offerings I want to thank our Board of Directors for their to the transportation and power generation markets. continued guidance and to welcome Dr. Ronald Sega a Clear visiOn to our board. Also, I want to thank our talented and motivated members, who are the foundation of our As a company with strong fundamentals, we have a business and experts in their fields. I am confident clear vision and carefully planned long-term strategies. in our ability to continue executing our strategies By remaining focused on our core competencies and to deliver excellent performance in our dynamic looking to the future by investing in research and markets. development, we are positioned to introduce the next generation of systems and components that will exceed emission regulations, significantly improve efficiency, and enhance reliability. thomas a. gendron Chairman & Chief Executive Officer page 15 Woodward Governor Company | 2008 Annual Report 600 500 400 300 200 100 0 -30 -20 -10 0 10 20 12-MONTH STOCK COMPARISON 10/1/07 to 9/30/08 S&P 500: (23.7%) NASDAQ: (22.9%) Dow Jones: (21.9%) Woodward 13.0% -30% -20% -10% 0 10% 20% 5-YEAR STOCK PERFORMANCE $600 $500 $400 $300 $200 $100 0 9/03 9/04 9/05 9/06 9/07 9/08 Woodward Governor Company S&P Small Cap 600 S&P Industrial Machine FisCal 2008 MarKet segMent sales 33% Aerospace 18% Transportation 49% Power & Process Industries page 16 Woodward Governor Company | 2008 Annual Report the Power of Performance Woodward Governor Company | 2008 Form 10-K UNITEDSTATESSECURITIESANDEXCHANGECOMMISSIONWashington,D.C.20549Form10-K¥ANNUALREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934ForthefiscalyearendedSeptember30,2008ornTRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESANDEXCHANGEACTOF1934ForthetransitionperiodfromtoCommissionfilenumber0-8408WOODWARDGOVERNORCOMPANY(Exactnameofregistrantasspecifiedinitscharter)Delaware36-1984010(Stateorotherjurisdictionofincorporationororganization)(I.R.S.EmployerIdentificationNo.)1000EastDrakeRoad,FortCollins,Colorado80525(ZipCode)(Addressofprincipalexecutiveoffices)Registrant’stelephonenumber,includingareacode:(970)482-5811SecuritiesregisteredpursuanttoSection12(b)oftheAct:TitleofEachClass:NameofEachExchangeonWhichRegistered:Commonstock,parvalue$.001455pershareNASDAQGlobalSelectMarketSecuritiesregisteredpursuanttoSection12(g)oftheAct:NoneIndicatebycheckmarkiftheregistrantisawell-knownseasonedissuer,asdefinedinRule405oftheSecuritiesAct.Yes¥NonIndicatebycheckmarkiftheregistrantisnotrequiredtofilereportspursuanttoSection13orSection15(d)oftheAct.YesnNo¥Indicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.Yes¥NonIndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-Kisnotcontainedherein,andwillnotbecontained,tothebestofregistrant’sknowledge,indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-KoranyamendmenttothisForm10-K.nIndicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfiler,orasmallerreportingcompany.Seethedefinitionsof“largeacceleratedfiler,”“acceleratedfiler”and“smallerreportingcompany”inRule12b-2oftheExchangeAct.(Checkone):Largeacceleratedfiler¥AcceleratedfilernNon-acceleratedfilernSmallerreportingcompanyn(Donotcheckifasmallerreportingcompany)Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2oftheAct).YesnNo¥Aggregatemarketvalueofregistrant’scommonstockheldbynon-affiliatesoftheregistrant,basedupontheclosingpriceofashareoftheregistrant’scommonstockonMarch31,2008asreportedonTheNASDAQGlobalSelectMarketonthatdate:$1,550,848,000.Forpurposesofthiscalculation,sharesofcommonstockheldby(i)personsholdingmorethan5%oftheoutstandingsharesofstock,(ii)officersanddirectorsoftheregistrant,and(iii)theWoodwardGovernorCompanyProfitSharingTrust,WoodwardGovernorCompanyDeferredSharesTrust,ortheWoodwardGovernorCompanyCharitableTrust,asofMarch31,2008,areexcludedinthatsuchpersonsmaybedeemedtobeaffiliates.Thisdeterminationisnotnecessarilyconclusiveofaffiliatestatus.Numberofsharesoftheregistrant’scommonstockoutstandingasofNovember17,2008:67,789,021.DOCUMENTSINCORPORATEDBYREFERENCEPortionsofourproxystatementforthe2008AnnualMeetingofStockholderstobeheldJanuary22,2009,areincorporatedbyreferenceintoPartsIIandIIIofthisForm10-K,totheextentindicated.TABLEOFCONTENTSPagePARTIForwardLookingStatement.........................................................2Item1.Business...............................................................3Item1A.RiskFactors............................................................9Item1B.UnresolvedStaffComments.................................................16Item2.Properties..............................................................17Item3.LegalProceedings........................................................18Item4.SubmissionofMatterstoaVoteofSecurityHolders..............................18PARTIIItem5.MarketforRegistrant’sCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquitySecurities.......................................................19Item6.SelectedFinancialData....................................................20Item7.Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations...22Item7A.QuantitativeandQualitativeDisclosuresAboutMarketRisk.........................43Item8.FinancialStatementsandSupplementaryData...................................45Item9.ChangesinandDisagreementswithAccountantsonAccountingandFinancialDisclosure...87Item9A.ControlsandProcedures...................................................87Item9B.OtherInformation........................................................90PARTIIIItem10.Directors,ExecutiveOfficersandCorporateGovernance............................90Item11.ExecutiveCompensation...................................................90Item12.SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholderMatters................................................................90Item13.CertainRelationshipsandRelatedTransactions,andDirectorIndependence.............91Item14.PrincipalAccountingFeesandServices........................................91PARTIVItem15.ExhibitsandFinancialStatementSchedules.....................................92Signatures......................................................................951PARTIForwardLookingStatementThisAnnualReportonForm10-K,including“Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations,”containsforward-lookingstatementsregardingfutureeventsandourfutureresultswithinthemeaningofthePrivateSecuritiesLitigationReformActof1995.Allstatementsotherthanstatementsofhistoricalfactarestatementsthataredeemedforward-lookingstatements.Thesestatementsarebasedoncurrentexpectations,estimates,forecasts,andprojectionsabouttheindustriesinwhichweoperateandthebeliefsandassumptionsofmanagement.Wordssuchas“anticipate,”“believe,”“estimate,”“seek,”“goal,”“expect,”“forecasts,”“intend,”“continue,”“outlook,”“plan,”“project,”“target,”“can,”“could,”“may,”“should,”“will,”“would,”variationsofsuchwords,andsimilarexpressionsareintendedtoidentifysuchforward-lookingstatements.Inaddition,anystatementsthatrefertoprojectionsofourfuturefinancialperformance,ouranticipatedgrowthandtrendsinourbusinesses,andothercharacteristicsoffutureeventsorcircumstancesareforward-lookingstatements.Forward-lookingstatementsmayinclude,amongothers,statementsrelatingto:•Futuresales,earnings,cashflow,usesofcash,andothermeasuresoffinancialperformance;•Descriptionofourplansandexpectationsforfutureoperations;•Theeffectofeconomicdownturnsorgrowthinparticularregions;•Theeffectofchangesinthelevelofactivityinparticularindustriesormarkets;•Theavailabilityandcostofmaterials,components,services,andsupplies;•Thescope,nature,orimpactofacquisitionactivityandintegrationintoourbusinesses;•Thedevelopment,production,andsupportofadvancedtechnologiesandnewproductsandservices;•Newbusinessopportunities;•Restructuringcostsandsavings;•Theoutcomeofcontingencies;•Futurerepurchasesofcommonstock;•Futurelevelsofindebtednessandcapitalspending;and•Pensionplanassumptionsandfuturecontributions.Readersarecautionedthattheseforward-lookingstatementsareonlypredictionsandaresubjecttorisks,uncertainties,andassumptionsthataredifficulttopredict,including:•Adeclineinbusinesswithoursignificantcustomers;•Ourabilitytoforecastfuturesalesandearnings;•Therecentinstabilityofthecreditmarketsandotheradverseeconomicandindustryconditions;•FinesorsanctionsresultingfromtheoutcomeoftheinvestigationbytheU.S.DepartmentofJustice(the“DOJ”)regardingcertainpricingpracticesofMPCProductsCorporation,oneofourwholly-ownedsubsidiariespriorto2006;•Ourabilitytosuccessfullymanagecompetitivefactors,includingprices,promotionalincentives,industryconsolidation,andcommodityandotherinputcostincreases;•Ourabilitytoreduceourexpensesinproportiontoanysalesshortfalls;•Theabilityofoursupplierstoprovideuswithmaterialsofsufficientqualityorquantityrequiredtomeetourproductionneedsatfavorablepricesoratall;•Thesuccessoforexpensesassociatedwithourproductdevelopmentactivities;2•Ourabilitytointegrateacquisitionsandcostsrelatedthereto;•Ourabilitytooperateourbusinessandpursuebusinessstrategiesinthelightofcertainrestrictivecovenantsinouroutstandingdebtdocuments;•Futureimpairmentchargesresultingfromchangesintheestimatesoffairvalueofreportingunitsoroflong-livedassets;•Changesindomesticorinternationaltaxstatutesandfuturesubsidiaryresults;•Environmentalliabilitiesrelatedtomanufacturingactivities;•Ourcontinuedaccesstoastableworkforceandfavorablelaborrelationswithouremployees;•Ourabilitytosuccessfullymanageregulatory,taxandlegalmatters(includingproductliability,patentandintellectualpropertymatters);and•Risksfromoperatinginternationally,includingtheimpactonreportedearningsfromfluctuationsinforeigncurrencyexchangerates.Thesefactorsarerepresentativeoftherisks,uncertainties,andassumptionsthatcouldcauseactualoutcomesandresultstodiffermateriallyfromwhatisexpressedorforecastinourforward-lookingstatements.Otherfactorsarediscussedunder“RiskFactors”inourSECfilingsareincorporatedbyreference.Therefore,actualresultscoulddiffermateriallyandadverselyfromthoseexpressedinanyforward-lookingstatements.Foradditionalinformationregardingfactorsthatmayaffectouractualfinancialconditionandresultsofoperations,seetheinformationunderthecaption“Item1A.RiskFactors”beginningonpage8ofthisAnnualReportonForm10-KfortheyearendedSeptember30,2008.Weundertakenoobligationtoreviseorupdateanyforward-lookingstatementsforanyreason.Item1.BusinessGeneralWoodwardGovernorCompany(“Woodward,”the“Company,”“we,”“our,”or“us”)designs,manufactures,andservicesenergycontrolsystemsandcomponentsforcommercialandmilitaryaircraft,turbines,reciprocatingengines,andelectricalpowersystemequipment.Ourinnovativefluidenergy,combustioncontrol,electricalenergy,andmotioncontrolsystemshelpcustomersoffercleaner,morereliable,andmorecost-effectiveequipment.Leadingoriginalequipmentmanufacturersuseourproductsandservicesinaerospace,powerandprocessindustries,andtransportation.OurstrategicfocusisEnergyControlandOptimizationSolutions.Thecontrolofenergy—fluidenergy,combustion,electricalenergy,andmotion—isagrowingrequirementinthemarketsweserve.Ourcustomerslooktoustooptimizetheefficiency,emissions,andoperationsofpowerequipment.Ourcoretechnologiesleveragewellacrossourmarketsandcustomerapplications,enablingustodevelopandintegratecost-effectiveandstate-of-the-artfuel,combustion,fluid,actuation,andelectronicsystems.WefocusprimarilyonOEMsandequipmentpackagers,partneringwiththemtobringsuperiorcomponentandsystemsolutionstotheirdemandingapplications.WoodwardisheadquarteredinFortCollins,Colorado,andservesglobalmarketsfromlocationsworldwide.Themailingaddressforourheadquartersis1000EastDrakeRoad,FortCollins,Colorado80525.Ourtelephoneatthatlocationis(970)482-5811,andourwebsiteiswww.woodward.com.ProductsandServicesWoodwardstrivestobetheundisputedleaderintheaerospace,powerandprocessindustries,andtranspor-tationmarketsthatweserve.Wehelpmeetglobalneedsforreliable,efficient,low-emission,andhigh-performanceenergyfordiverseapplicationsinchallengingenvironments.WeremainfocusedonEnergyControlandOptimizationSolutionsforaerospace,powerandprocessindustries,andtransportationmarketsthatweserve.Wedesignsystemsthatmanagetheenergyoffluidmovement,3motion,andelectricity.Wealsoconvertwindenergyintoreliableandsafeelectricalpowerthroughinvertersystems.Webelieveallofourbusinesssegmentshaveasignificantcompetitivepositionwithintheirmarketsforcomponentsandintegratedsystems.Wecompetewithseveralothermanufacturers,includingthein-houseoperationsofcertainoriginalequipmentmanufacturers(“OEMs”).Webelieveourprices,technology,quality,andcustomerservicearehighlycompetitive.PrincipalLinesofBusinessWoodwardoperatesinthefollowingfourbusinesssegments:•TurbineSystemsisfocusedondevelopingandmanufacturingsystemsandcomponentsthatprovideenergycontrolandoptimizationsolutionsfortheaircraftandindustrialgasturbinemarkets.•EngineSystemsisfocusedondevelopingandmanufacturingsystemsandcomponentsthatprovideenergycontrolandoptimizationsolutionsfortheindustrialengineandsteamturbinemarkets,whichincludepowergeneration,transportation,andprocessindustries.•ElectricalPowerSystemsisfocusedondevelopingandmanufacturingsystemsandcomponentsthatprovidepowersensingandenergycontrolsystemsthatimprovethesecurity,quality,reliability,andavailabilityofelectricalpowernetworksforindustrialmarkets,whichincludepowergeneration,powerdistribution,transportation,andprocessindustries.•AirframeSystemswasaddedOctober1,2008uponWoodward’sacquisitionofalloftheoutstandingsharesofstockofTechni-Core,Inc.(“Techni-Core”)andalloftheoutstandingsharesofstockofMPCProductsCorporation(“MPCProducts”and,togetherwithTechni-Core,“MPC”).MPCistheleaderintheman-ufactureofhigh-performanceelectromechanicalmotioncontrolsystemsprimarilyforaerospaceapplica-tions.Theircorecompetenciesinsensing,motors,actuationsystems,andelectronicswillalsobeappliedtoWoodward’saircraftturbinemarket,industrialturbinemarket,aswellasotherindustrialmarkets.Informationaboutouroperationsin2008andoutlookforthefuture,includingcertainsegmentinformation,isincludedin“Item7—Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations.”AdditionalsegmentinformationandcertaingeographicalinformationareincludedinNote20totheConsolidatedFinancialStatementsin“Item8—FinancialStatementsandSupplementaryData.”AdditionalinformationaboutAirframeSystemsandtheacquisitionisincludedinNote22totheConsolidatedFinancialStatementsin“Item8—FinancialStatementsandSupplementaryData.”Otherinformationaboutourbusinessfollows.TurbineSystemsWeprovideintegratedcontrolsystemsandcontrolcomponentssuchaselectronics,actuators,valves,fuelsystems,andcombustionsystemsthroughtheTurbineSystemssegmenttoOEMsthatmanufacturegasturbinesforuseinaerospaceandindustrialpowermarkets.Wealsosellcomponentsassparesorreplacementsandproviderepairandoverhaulservicestotheseandothercustomers.WeprimarilysellTurbineSystems’productsandservicesdirectlytomanufacturers,althoughwealsogeneratesomeaftermarketsalesthroughdistributors,dealers,andindependentservicefacilities.Infiscal2008,customersexceeding10%ofnetexternalsalesintheTurbineSystemssegmentwereGeneralElectricCompany(approximately35%),UnitedTechnologies(approximately16%),andtheU.S.government(approximately10%).EngineSystemsWeprovideintegratedcontrolsystemsandcontrolcomponents,suchaselectronics,actuators,valves,pumps,injectors,andignitionsystemsthroughtheEngineSystemssegmentprimarilytoOEMsthatmanufacturedieselengines,gasengines,steamturbines,anddistributorsforuseinpowergeneration,marine,transportation,and4processapplications.WealsosellcomponentsassparesorreplacementsandproviderepairandoverhaulservicestoOEMcustomersandequipmentoperators.WeprimarilysellEngineSystems’productsandservicesdirectlytoourOEMcustomers.Wealsosellthroughourglobalchannelpartners(distributors,dealers,andindependentservicefacilities)tosupportourOEMs’customersandendusers.Infiscal2008,Caterpillarexceeded10%ofnetexternalsalesintheEngineSystemssegment,accountingforapproximately26%ofEngineSystems’netexternalsales.ElectricalPowerSystemsWeprovideintegratedcontrolsystemsandelectroniccontrolandprotectionmodulesthroughtheElectricalPowerSystemssegmentprimarilytoOEMsthatmanufactureelectricalpowergeneration,distribution,conversion(predominantlywindpower),andgridrelatedqualityequipmentusingdigitalcontrolsandinvertertechnologies.SalesaremadeprimarilytoOEMsthatmanufacturegeneratorsets,windturbines,andswitchgearequipment.Wesellcomponentsassparesorreplacements,andprovideotherrelatedservicestotheseOEMandothercustomers.WealsoproviderepairandoverhaulservicestoOEMcustomersandequipmentoperatorsaspartofthewindpowersideofourbusiness.WegenerallysellElectricalPowerSystems’productsandservicesdirectlytoourOEMcustomers,althoughwealsogeneratesalestoendusersthroughdistributors.Ourcustomersdemandtechnologicalsolutionstomeettheirneedsforsecurity,quality,reliability,andavailabilityofelectricalpowernetworks.Infiscal2008,customersexceeding10%ofnetexternalsalesintheElectricalPowerSystemssegmentwereREpowerSystemsAG(approximately24%),Caterpillar(approximately12%),andEcotècnia(approximately10%).AirframeSystemsOnOctober1,2008,weaddedafourthbusinesssegment,AirframeSystems,upontheacquisitionofMPC.AirframeSystemsprovideshigh-performanceelectromechanicalmotioncontrolsystems,includingsensors,primarilyforaerospaceapplications.Theprimaryproductlinesincludehighperformanceelectricmotorsandsensors,analoganddigitalcontrolelectronics,rotaryandlinearactuationsystems,andflightdeckandfly-by-wiresystemsforcommercialandmilitaryaerospaceprograms.SalesaremadeprimarilyOEMsandtotier-oneprimecontractors.AdditionalinformationaboutAirframeSystemsandtheacquisitionisincludedinNote22totheConsolidatedFinancialStatementsin“Item8—FinancialStatementsandSupplementaryData.”CustomersOurcustomersincludeCaterpillar,Ecotècnia,GeneralElectric,REpowerSystemsAG,RollsRoyce,theU.S.government,andUnitedTechnologies.Twocustomersindividuallyaccountedformorethan10%ofconsolidatednetsalesineachoftheyearsendedSeptember30,2008,2007,and2006.SalestoGeneralElectricweremadebyallofoursegmentsandtotaledapproximately17%infiscal2008,approximately20%infiscal2007,andapproximately22%infiscal2006.SalestoCaterpillarweremadebyallofoursegmentsandnetsalestotaledapproximately10%infiscal2008,approximately10%infiscal2007,andapproximately11%infiscal2006.5BacklogOurbacklogasofOctober31,2008and2007bysegmentwasasfollows(inthousands):October31,2008%ExpectedtobeFilledbySeptember30,2009October31,2007TurbineSystems................................$165,41382%$150,000EngineSystems................................107,95392103,895ElectricalPowerSystems.........................100,85655104,063AirframeSystems...............................1,78952N/A$376,01177%$357,958TurbineSystem’sbacklogatOctober31,2007isestimated.Inpreviousyears,ourdisclosureofTurbineSystems’reportedbacklogincludedforecastsofcertainsalesassociatedwithcustomeragreementsinadditiontofirmsalesorders.Ourcurrentestimateofthebacklogisbasedontypicallyassumedrelationshipsbetweenthetimingoffirmordersandsubsequentsales.Backlogordersarenotnecessarilyanindicatoroffuturesaleslevelsbecauseofvariationsinleadtimesandcustomerproductiondemandpullsystems.SeasonalityWedonotbelievesalesaresubjecttosignificantseasonalvariation.GovernmentContractsandRegulationOurbusinessesareheavilyregulatedinmanyofourfieldsofendeavor.WedealwithnumerousU.S.governmentagenciesandentities,includingallofthebranchesoftheU.S.military,theNationalAeronauticsandSpaceAdministration(“NASA”),andtheDepartmentsofDefense,HomelandSecurity,andTransportation.Similargovernmentauthoritiesexistwithrespecttoourinternationalefforts.TheU.S.government,andothergovernments,mayterminateanyofourgovernmentcontracts(and,ingeneral,subcontracts)attheirconvenience,aswellasfordefaultbasedonspecifiedperformancemeasurements.Ifanyofourgovernmentcontractsweretobeterminatedforconvenience,wegenerallywouldbeentitledtoreceivepaymentforworkcompletedandallowableterminationorcancellationcosts.Ifanyofourgovernmentcontractsweretobeterminatedfordefault,theU.S.governmentgenerallywouldpayonlyfortheworkaccepted,andcouldrequireustopaythedifferencebetweentheoriginalcontractpriceandthecosttore-procurethecontractitems,netoftheworkacceptedfromtheoriginalcontract.TheU.S.governmentcouldalsoholdusliablefordamagesresultingfromthedefault.Wemustcomplywith,andareaffectedby,lawsandregulationsrelatingtotheformation,administration,andperformanceofU.S.governmentcontracts.Theselawsandregulations,amongotherthings:•requirecertificationanddisclosureofallcostorpricingdatainconnectionwithcertaincontractnegotiations;•imposespecificanduniquecostaccountingpracticesthatmaydifferfromaccountingprinciplesgenerallyacceptedintheU.S.(“U.S.GAAP”)andthereforerequirereconciliation;•imposeacquisitionregulationsthatdefineallowableandunallowablecostsandotherwisegovernourrighttoreimbursementundercertaincost-basedU.S.governmentcontracts;and•restricttheuseanddisseminationofinformationclassifiedfornationalsecuritypurposesandtheexportofcertainproductsandtechnicaldata.ResearchandDevelopmentWeconductresearchanddevelopmentactivitiesundercustomer-fundedcontractsandwithourowninde-pendentresearchanddevelopmentfunds.Ourresearchanddevelopmentcostsincludebasicresearch,applied6research,development,systemsandotherconceptformulationstudies,andbidandproposaleffortsrelatedtogovernmentproductsandservices.Costsrelatedtocustomer-fundedcontractsaregenerallyallocatedamongallcontractsandprogramsinprogressbasedonthecontractualarrangements.Company-sponsoredproductdevel-opmentcostsnototherwiseallocablearechargedtoexpenseswhenincurred.Undercertainarrangementsinwhichacustomersharesinproductdevelopmentcosts,ourportionoftheunreimbursedcostsisgenerallyexpensedasincurred.Acrossalloursegments,totalresearchanddevelopmentcosts,includingcostsrelatedtobidandproposalefforts,totaled$73.4millioninfiscal2008,$65.3millioninfiscal2007,and$60.0millioninfiscal2006.See“Researchanddevelopmentcosts”inNote1totheConsolidatedFinancialStatementsin“Item8—FinancialStatementsandSupplementaryData.”ManufacturingForoursegments,ourproductsconsistofmechanical,electronic,andelectromagneticcomponents.Mechan-icalcomponentsaremachinedprimarilyfromaluminum,iron,andsteel.Generallytherearenumeroussourcesfortherawmaterialsandcomponentsusedinourproducts,andtheyarebelievedtobesufficientlyavailabletomeetexpectedrequirements.Wecarrycertainfinishedgoodsandcomponentpartsinventorytomeetrapiddeliveryrequirementsofcustomers,primarilyforaftermarketneeds.EmployeesAsofOctober31,2008,weemployed5,823full-timeemployeesofwhich1,626werelocatedoutsideoftheU.S.Weconsidertherelationshipswithouremployeestobepositive.Approximately1,285joinedWoodwardinconnectionwiththeacquisitionofMPCand75employeesinconnectionwiththeacquisitionofMotoTronCorporation(“MotoTron”)inOctober2008.AdditionalinformationaboutouracquisitionsisincludedinNote22totheConsolidatedFinancialStatementsin“Item8—FinancialStatementsandSupplementaryData.”IntheU.S.,asofOctober31,2008,allofouremployeesareat-willemployees,exceptcertainMPCemployeeswhoarenotexecutiveofficersofWoodwardandeitherhadpre-existingemploymentagreementswithMPCpriortotheMPCacquisitionorweremembersoftheMPCEmployeesRepresentativeUnion.Ourat-willemployeesarenotsubjecttoanytypeofemploymentcontractoragreement.OurChiefExecutiveOfficerandPresidentandourChiefFinancialOfficerandTreasurereachhaveaChangeinControlTransitionAgreement.OutsideoftheU.S.,weenterintoemploymentcontractsandagreementsinthosecountriesinwhichsuchrelationshipsaremandatoryorcustomary.Theprovisionsoftheseagreementscorrespondineachcasewiththerequiredorcustomarytermsinthesubjectjurisdiction.Patents,IntellectualProperty,andLicensingProductsforoursegmentsmakeuseofseveralpatentsandtrademarksofvariousdurationsthatwebelievearecollectivelyimportant.However,wedonotconsideranyonepatentortrademarkmaterialtoourbusiness.ExecutiveOfficersoftheRegistrantSetforthbelowiscertaininformationwithrespecttothecurrentexecutiveofficers.Therearenofamilyrelationshipsbetweenanyoftheexecutiveofficerslistedbelow.ThomasA.Gendron,Age47.ChairmanoftheBoardsinceJanuary2008;ChiefExecutiveOfficer,President,andDirectorsinceJuly2005;ChiefOperatingOfficerandPresidentfromSeptember2002throughJune2005;VicePresidentandGeneralManagerofIndustrialControlsJune2001throughSeptember2002;VicePresidentofIndustrialControlsApril2000throughMay2001;DirectorofGlobalMarketingandIndustrialControls’BusinessDevelopmentFebruary1999throughMarch2000.RobertF.Weber,Jr.,Age54.ChiefFinancialOfficerandTreasurersinceAugust2005.PriortoAugust2005,Mr.WeberwasemployedatMotorola,Inc.for17years,whereheheldvariouspositions,includingCorporate7VicePresidentandGeneralManager—EMEAAuto.Priortothisrole,Mr.WeberservedinavarietyoffinancialpositionsatbothacorporateandoperatingunitlevelwithMotorola.MartinV.Glass,Age51.GroupVicePresident,TurbineSystemssinceSeptember2007;VicePresidentoftheAircraftEngineSystemsCustomerBusinessSegmentDecember2002throughAugust2007;DirectorofSales,Marketing,andEngineeringFebruary2000throughDecember2002.DennisBenning,Age67.GroupVicePresident,AirframeSystemssinceOctober2008;GroupVicePresident,EngineSystemsSeptember2007throughSeptember2008;VicePresident,CenterofExcellenceIndustrialControlsDecember2002throughAugust2007;GeneralManager,CenterofExcellenceIndustrialControlsJuly2002throughNovember2002;DirectorofOperations,AircraftEngineSystemsJanuary2002throughJune2002.GerhardLauffer,Age47.GroupVicePresident,ElectricalPowerSystemssinceSeptember2007;VicePresidentandGeneralManagerElectronicControlsMarch2002throughAugust2007;ManagingDirectorLeonhard-ReglerbauGmbH1991throughMarch2002whenitwasacquiredbyWoodward.ChadPreiss,Age43.GroupVicePresident,EngineSystemssinceOctober2008;VicePresident,Sales,Service,andMarketing,EngineSystemsDecember2007throughSeptember2008;andVicePresident,IndustrialControlsSeptember2004throughDecember2007.Priortothisrole,Mr.Preissservedinavarietyofengineeringandmarketing/salesmanagementroles,includingDirectorofBusinessDevelopment,sincejoiningWoodwardin1988.A.ChristopherFawzy,Age39.VicePresident,GeneralCounselandCorporateSecretarysinceJune2007.PriortojoiningWoodward,Mr.FawzywasemployedbyMentorCorporation,aglobalmedicaldevicecompany.HejoinedMentorin2001andservedasCorporateCounsel,thenGeneralCounselin2003,andwasappointedVicePresident,GeneralCounselandSecretaryin2004.InformationavailableonWoodward’sWebsiteThroughalinkontheInvestorInformationsectionofourWebsite,wemakeavailablethefollowingfilingsassoonasreasonablypracticableaftertheyareelectronicallyfiledorfurnishedtotheSecuritiesandExchangeCommission(“SEC”):ourAnnualReportonForm10-K,QuarterlyReportsonForm10-Q,CurrentReportsonForm8-K,ProxyStatements,andanyamendmentstothosereportsfiledorfurnishedpursuanttoSection13(a)or15(d)oftheSecuritiesExchangeActof1934.Stockholdersmayobtain,withoutcharge,asinglecopyofWoodward’s2008AnnualReportonForm10-KuponwrittenrequesttotheCorporateSecretary,WoodwardGovernorCompany,1000EastDrakeRoad,FortCollins,Colorado80525.8Item1A.RiskFactorsInvestmentinoursecuritiesinvolvesrisk.Aninvestororpotentialinvestorshouldconsidertheriskssummarizedinthissectionwhenmakinginvestmentdecisionsregardingoursecurities.Importantfactorsthatcouldindividually,ortogetherwithoneormoreotherfactors,affectourbusiness,resultsofoperations,financialcondition,and/orcashflowsinclude,butarenotlimitedto,thefollowing:CompanyRisksAdeclineinbusinesswithoursignificantcustomerscoulddecreaseourconsolidatednetsalesandhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows.Wehavefewercustomersthanmanyothercompanieswithsimilarsalesvolumes.FortheyearendedSeptember30,2008,approximately43%ofourconsolidatednetsalesweremadetoourfivelargestcustomers.Salestoourfivelargestcustomersrepresentedapproximately47%ofourconsolidatednetsalesfortheyearendedSeptember30,2007.Twoofthosecustomersindividuallyaccountedformorethan10%ofconsolidatednetsalesineachoftheyearsendedSeptember30,2008,2007,and2006.TurbineSystems,EngineSystems,andElectricalPowerSystemsmadesalestoGeneralElectricCompany,andthosesalestotaledapproximately17%infiscal2008,approximately20%infiscal2007,andapproximately22%infiscal2006ofourconsolidatednetsales.TurbineSystems,EngineSystems,andElectricalPowerSystemsalsomadesalestoCaterpillarInc.andthosesalestotaledapproximately10%infiscal2008,approximately10%infiscal2007,andapproximately11%infiscal2006ofourconsolidatednetsales.Ifanyofoursignificantcustomersweretochangesuppliers,in-sourceproduction,experiencedifficultiesinthemarketsinwhichtheyparticipate,orotherwisereducepurchasesfromus,ourconsolidatednetsalescoulddecreasesignificantly,whichcouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows.Ourfuturesalesandearningscouldvarymateriallyfromourprojections.Oursalesforecastisbasedonmanagement’sbestestimateofvariousfactorsandinformationdeemedrelevant,including,amongothers,customerandthird-partyforecastsofsalesvolumesandpurchaserequirementsinourmarkets.Eachofthesefactorsissubjectiveandcouldbeoverstated.Inaddition,generalbusinessandeconomicconditionsandindustry-specificbusinessandeconomicconditions,includingacontinuationofthecurrenteconomicslowdownorfurtherdeteriorationofeconomicconditionsintheU.S.andinternationally,couldresultinsalesthatarelowerthanforecast.Accordingly,ourabilitytoforecastthetimingandamountofspecificsalesislimited,andourfuturesalesandearningscouldvarymateriallyfromourprojections.Thedifficultyinforecastingdemandincreasesthechallengeinanticipatingourinventoryrequirements,whichmaycauseustoover-producefinishedgoodsandcouldresultininventorywrite-offs,orcouldcauseustounder-producefinishedgoods.Anysuchover-productionorunder-productioncouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows.Therecentinstabilityofthefinancialmarketsandadverseeconomicconditionscouldhaveamaterialadverseeffectontheabilityofourcustomerstoperformtheirobligationstousandondemandforourproductsandservices.Recently,therehasbeenwidespreadconcernovertheinstabilityofthefinancialmarketsandtheirinfluenceontheglobaleconomy.Asaresultofthecreditmarketcrisisandothereconomicchallengescurrentlyaffectingtheglobaleconomy,ourcurrentorpotentialfuturecustomersmayexperienceseriouscashflowproblemsandasaresult,maymodify,delay,orcancelplanstopurchaseourproducts.Additionally,ifcustomersarenotsuccessfulingeneratingsufficientrevenueorareprecludedfromsecuringfinancing,theymaynotbeabletopay,ormaydelaypaymentof,accountsreceivablethatareowedtous.Anyinabilityofcurrentand/orpotentialcustomerstopayusforourproductsmayadverselyaffectourearningsandcashflows.Inaddition,demandforourproductsandservicesissignificantlyaffectedbythegeneraleconomicenvi-ronment.Duringperiodsofslowingeconomicactivity,suchastherecenttighteningofthecreditmarkets,aglobalslowdowninspendingoninfrastructuredevelopmentmayoccurinthemarketsinwhichweoperate,andcustomers9mayreducetheirpurchasesofourproductsandservices.Asaresult,anysignificanteconomicdownturn,includingthecurrenteconomicdownturnandtheadverseconditionsinthecreditmarkets,couldhaveamaterialadverseeffectoncustomerdemand.TherecanbenoassurancethatthecurrenteconomicslowdownorfurtherdeteriorationofeconomicconditionsintheU.S.aswellasinternationallywillnothaveamaterialadverseeffectourbusiness,financialcondition,resultsofoperations,andcashflows.Iffundingisnotavailabletouswhenneeded,orisavailableonlyonunfavorableterms,wemaybeunabletoimplementourbusinessplans,completeacquisitions,orotherwisetakeadvantageofbusinessopportunitiesorrespondtocompetitivepressures.Globalfinancialmarketsandeconomicconditionshavebeen,andcontinuetobe,disruptedandvolatile.Thedebtandequitycapitalmarketshavebeendistressed.Theseissues,alongwithsignificantwrite-offsinthefinancialservicessector,therepricingofcreditrisk,andthecurrentweakeconomicconditionshavemade,andwilllikelycontinuetomake,itdifficulttoobtainfunding.Inaddition,asaresultofconcernsaboutthestabilityoffinancialmarketsgenerallyandthesolvencyofcounterpartiesspecifically,thecostofobtainingmoneyfromthecreditmarketshasgenerallyincreasedasmanylendersandinstitutionalinvestorshaveincreasedinterestrates,enactedtighterlendingstandards,refusedtorefinanceexistingdebtatmaturityeitheratallorontermssimilartoourcurrentdebtandreducedand,insomecases,ceasedtoprovidefundingtoborrowers.Duetothesefactors,wecannotbecertainthatfundingwillbeavailableifneededandtotheextentrequired,onacceptableterms.Iffundingisnotavailablewhenneeded,orisavailableonlyonunfavorableterms,wemaybeunabletoimplementourbusinessplans,completeacquisitions,orotherwisetakeadvantageofbusinessopportunitiesorrespondtocompetitivepressures,anyofwhichcouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows.Manyofourexpensesmaynotbeabletobereducedinproportiontoasalesshortfall.Someofourexpensesarerelativelyfixedinrelationtochangesinsalesvolumesandaredifficulttoadjustintheshortterm.Someoftheseexpensesarerelatedtopastcapitalexpendituresorbusinessacquisitionsintheformofdepreciationandamortizationexpense.Othersarerelatedtoexpendituresdrivenbylevelsofbusinessactivityotherthanthelevelofsales,includingmanufacturingoverhead.Asaresult,wemightbeunabletoreduceexpensesinatimelymannertocompensateforareductioninsales,whichcouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows.Suppliersmaybeunabletoprovideuswithmaterialsofsufficientqualityorquantityrequiredtomeetourproductionneedsatfavorablepricesoratall.Wearedependentuponsuppliersforpartsandrawmaterialsusedinthemanufactureofcomponentsthatweselltoourcustomers.Wemayexperienceanincreaseincostsforpartsormaterialsthatwesourcefromoursuppliers,orwemayexperienceashortageofmaterialsforvariousreasons,suchasthelossofasignificantsupplier,highoveralldemandcreatingshortagesinpartsandsuppliesweuse,orfinancialdistress,workstoppages,naturaldisasters,orproductiondifficultiesthatmayaffectoneormoreofoursuppliers.Ourcustomersrelyonustoprovideon-timedeliveryandhavecertainrightsifourdeliverystandardsarenotmaintained.Asignificantincreaseinoursupplycosts,oraprotractedinterruptionofsuppliesforanyreason,couldresultinthedelayofoneormoreofourcustomercontractsorcoulddamageourreputationandrelationshipswithcustomers.Anyoftheseeventscouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows.Subcontractorsmayfailtoperformcontractualobligations.Wefrequentlysubcontractportionsofworkdueundercontractswithourcustomersandaredependentonthecontinuedavailabilityandsatisfactoryperformancebythesesubcontractors.Nonperformanceorunderperformancebysubcontractorsmaymateriallyimpactourabilitytoperformobligationstoourcustomers.Asubcontractor’sfailuretoperformcouldresultinacustomerterminatingourcontractfordefault,exposeustoliability,andsubstantiallyimpairourabilitytocompeteforfuturecontractsandorders,andwemaynotbeabletoenforcefully10allofourrightsundertheseagreements,includinganyrightstoindemnification.Anyoftheseeventscouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows.Ourproductdevelopmentactivitiesmaynotbesuccessfulormaybemorecostlythancurrentlyanticipated.Ourbusinessinvolvesasignificantlevelofproductdevelopmentactivities,generallyinconnectionwithourcustomers’owndevelopmentactivities.Industrystandards,customerexpectations,orotherproductsmayemergethatcouldrenderoneormoreofourproductsorserviceslessdesirableorobsolete.Maintainingourmarketpositionwillrequirecontinuedinvestmentinresearchanddevelopment.Duringaneconomicdownturn,includingthecurrentone,wemayneedtomaintainourinvestmentinresearchanddevelopment,whichmaylimitourabilitytoreducetheseexpensesinproportiontoasalesshortfall.Iftheseactivitiesarenotassuccessfulascurrentlyanticipated,oriftheyaremorecostlythancurrentlyanticipated,futuresalesand/orearningscouldbelowerthanexpected,whichcouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows.Activitiesnecessarytointegrateacquisitionsmayresultincostsinexcessofcurrentexpectationsorbelesssuccessfulthananticipated.WecompletedtwobusinessacquisitionsinOctober2008,andwemayacquireotherbusinessesinthefuture.Thesuccessofthesetransactionswilldepend,amongotherthings,onourabilitytointegrateassetsandpersonnelacquiredinthesetransactionsandtoapplyourinternalcontrolsprocessestotheseacquiredbusinesses.Theintegrationoftheseacquisitionsmayrequiresignificantattentionfromourmanagement,andthediversionofmanagement’sattentionandresourcescouldhaveamaterialadverseeffectonourabilitytomanageourbusiness.Furthermore,wemaynotrealizethedegreeortimingofbenefitsweanticipatewhenwefirstenterintoatransaction.Ifactualintegrationcostsarehigherthanamountsassumedorweareunabletointegratetheassetsandpersonnelacquiredinanacquisitionasanticipated,orifweareunabletofullybenefitfromanticipatedsynergies,ourbusiness,financialcondition,resultsofoperations,andcashflowscouldbemateriallyadverselyaffected.Certainrestrictivecovenantslimitourabilitytooperateourbusinessandtopursueourbusinessstrategies,andifwefailtocomplywiththesecovenants,itcouldresultinanaccelerationofpaymentsforouroutstandingindebtedness.Ourexistingtermloancreditagreement,revolvingcreditagreement,andnotepurchaseagreementsgoverningouroutstandingseniornotescontaincovenantsthatlimitorrestrictourabilitytofinancefutureoperationsorcapitalneeds,torespondtochangingbusinessandeconomicconditions,ortoengageinothertransactionsorbusinessactivitiesthatmayimpactourgrowthorotherwisebeimportanttous.Theseagreementslimitorrestrict,amongotherthings,ourabilityandtheabilityofoursubsidiariesto:•incuradditionalindebtedness;•paydividendsormakedistributionsonourcapitalstockorcertainotherrestrictedpaymentsorinvestments;•purchaseorredeemstock;•issuestockofoursubsidiaries;•makeinvestmentsandextendcredit;•engageintransactionswithaffiliates;•transferandsellassets;•effectaconsolidationormergerorsell,transfer,lease,orotherwisedisposeofallorsubstantiallyallofourassets;and•createliensonourassetstosecuredebt.11Theagreementsalsoimposefinancialcovenantsonusandoursubsidiariesthatrequireustomaintaincertainleverageratiosandminimumlevelsofconsolidatednetworth.Inaddition,certainoftheseagreementsrequireustorepayoutstandingborrowingswithportionsoftheproceedswereceivefromcertainsalesofpropertyorassetsandspecifiedfuturedebtofferings.Ourabilitytocomplywiththeseprovisionsmaybeaffectedbyeventsbeyondourcontrol.Anybreachofthesecovenantscouldcauseadefaultundertheseagreementsandotherdebt,whichcouldrestrictourabilitytoborrowundertherevolvingcreditagreement.Iftherewereaneventofdefaultundercertainprovisionsofourdebtinstrumentsthatwasnotcuredorwaived,theholdersofthedefaulteddebtwouldbeabletocauseallamountsoutstandingwithrespecttothedebtinstrumenttobedueandpayableimmediately.Ourassetsandcashflowmaynotbesufficienttofullyrepayborrowingsunderouroutstandingdebtinstrumentsifaccelerateduponaneventofdefault.Ifweareunabletorepay,refinance,orrestructureourindebtednessasrequired,oramendthecovenantscontainedintheseagreements,thelendersornoteholdersmaybeentitledtoinstituteforeclosureproceedingsagainstourassets.Anyoftheseeventscouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows.Changesintheestimatesoffairvalueofreportingunitsoroflong-livedassetsmayresultinfutureimpairmentcharges,whichcouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows.Overtime,thefairvaluesoflong-livedassetschange.Wetestgoodwillforimpairmentatleastannually,andmoreoftenifcircumstancesrequire.Futuregoodwillimpairmentchargesmayoccurifestimatesoffairvaluesdecrease,whichwouldreducefutureearnings.Wealsotestproperty,plant,andequipmentandotherintangiblesforimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingvaluemaynotberecoverable.Futureassetimpairmentchargesmayoccurifassetutilizationdeclines,ifcustomerdemanddecreases,orforanumberofotherreasons,whichwouldreducefutureearnings.Anysuchimpairmentchargescouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows.Futuresubsidiaryresultsorchangesindomesticorinternationaltaxstatutesmaychangetheamountofvaluationallowancesprovidedfordeferredincometaxassets.Weestablishvaluationallowancestoreflecttheestimatedamountofdeferredtaxassetsthatmightnotberealized.Theunderlyinganalysisisperformedforindividualtaxjurisdictions,generallyatasubsidiarylevel.Futuresubsidiaryresults,actualorforecasted,aswellaschangestotherelevanttaxstatutes,couldchangetheoutcomeofouranalysisandchangetheamountofvaluationallowancesprovidedfordeferredincometaxassets,whichcouldhaveamaterialadverseeffectonourfinancialcondition,resultsofoperations,andcashflows.Manufacturingactivitiesmayresultinfutureenvironmentalliabilities.Weusehazardousmaterialsand/orregulatedmaterialsinourmanufacturingoperations.Wealsoownandmayacquirefacilitiesthatwereformerlyownedandoperatedbyothersthatusedsuchmaterials.Theriskthatasignificantreleaseofregulatedmaterialshasoccurredinthepastorwilloccurinthefuturecannotbecompletelyeliminatedorprevented.Asaresult,wearesubjecttoasubstantialnumberofcostlyregulations.Inparticular,wearerequiredtocomplywithincreasinglystringentrequirementsoffederal,state,andlocalenvironmental,occupationalhealthandsafetylawsandregulationsintheU.S.,theEuropeanUnion,andotherterritories,includingthosegoverningemissionstoair,dischargestowater,noiseandodoremissions,thegeneration,handling,storage,transportation,treatmentanddisposalofwastematerials,andthecleanupofcontaminatedpropertiesandhumanhealthandsafety.Compliancewiththeselawsandregulationsresultsinongoingcosts.Wecannotbecertainthatwehavebeen,orwillatalltimesbe,incompletecompliancewithallenvironmentalrequirements,orthatwewillnotincuradditionalmaterialcostsorliabilitiesinconnectionwiththeserequirements.Asaresult,wemayincurmaterialcostsorliabilitiesorberequiredtoneedtoundertakefutureenvironmentalremediationactivitiesthatcouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows.12Ourperformancedependsoncontinuedaccesstoastableworkforceandonfavorablelaborrelationswithouremployees.Competitionfortechnicalpersonnelintheindustryinwhichwecompeteisintense.Ourfuturesuccessdependsinpartonourcontinuedabilitytohire,train,assimilate,andretainqualifiedpersonnel.Thereisnoassurancethatwewillcontinuetobesuccessfulinrecruitingqualifiedemployeesinthefuture.Inaddition,laborunrestatacustomerfacilitycancauseareductionindemandoradeferraloforders.Anysignificantincreasesinlaborcosts,deteriorationofemployeerelations,slowdownsorworkstoppagesatanyofourlocations,whetherduetoemployeeturnover,changesinavailabilityofqualifiedtechnicalpersonnel,orotherwise,couldhaveamaterialadverseeffectonourbusiness,ourrelationshipswithcustomers,andourfinancialcondition,resultsofoperations,andcashflows.Ourintellectualpropertyrightsmaynotbesufficienttoprotectallourproductsortechnologies.Oursuccessdependsinpartonourabilitytoobtainpatentsorrightstopatents,protecttradesecrets,operatewithoutinfringingupontheproprietaryrightsofothers,andpreventothersfrominfringingonourpatents,trademarks,andotherintellectualpropertyrights.Wewillbeabletoprotectourintellectualpropertyfromunauthorizedusebythirdpartiesonlytotheextentthatitiscoveredbyvalidandenforceablepatents,trademarks,orlicenses.Patentprotectiongenerallyinvolvescomplexlegalandfactualquestionsand,therefore,enforceabilityofpatentrightscannotbepredictedwithcertainty;thus,anypatentsthatweownorlicensefromothersmaynotprovideuswithadequateprotectionagainstcompetitors.Moreover,thelawsofcertainforeigncountriesdonotrecognizeintellectualpropertyrightsorprotectthemtothesameextentasdothelawsoftheU.S.Ifweinfringeontheproprietaryrightsofothersorifweareunabletosufficientlyprotectourproprietaryrights,ourbusiness,financialcondition,resultsofoperations,andcashflowscouldbemateriallyadverselyaffected.Ifthirdpartiesclaimweareinfringingtheirintellectualpropertyrights,wecouldfacesignificantlitigation,indemnification,orlicensingexpensesorbepreventedfrommarketingourproducts.Ourcommercialsuccessdependssignificantlyonourabilitytooperatewithoutinfringingthepatentsandotherproprietaryrightsofothers.However,regardlessofourintent,ourcurrentorfuturetechnologiesmayinfringeuponthepatentsorviolateotherproprietaryrightsofthirdparties.Intheeventofsuchinfringementorviolation,wemayfaceexpensivelitigationorindemnificationobligationsandmaybepreventedfromsellingexistingproductsandpursuingproductdevelopmentorcommercialization,whichcouldhaveanadverseaffectonourbusiness,financialcondition,resultsofoperations,andcashflows.Productliabilityclaims,productrecallsorotherliabilitiesassociatedwiththeproductsandservicesweprovidemayforceustopaysubstantialdamageawardsandotherexpensesthatcouldexceedouraccru-alsandinsurancecoverage.Themanufactureandsaleofourproductsandtheservicesweprovideexposeustoriskofproductliabilityandothertortclaims.Bothcurrentlyandinthepast,wehavehadanumberofproductliabilityclaimsrelatingtoourproducts,andwewilllikelybesubjecttoadditionalproductliabilityclaimsinthefutureforbothpastandcurrentproducts,someofwhichmayhaveamaterialadverseeffectonourbusiness,financialcondition,andresultsofoperations.Wealsoprovidecertainservicestoourcustomersandaresubjecttoclaimswithrespecttotheservicesprovided.Inprovidingsuchservices,wemayrelyonsubcontractorstoperformalloraportionofthecontractedservices.Itispossiblethatwecouldbeliabletoourcustomersforworkperformedbyasubcontractor.Whilewebelievethatwehaveappropriateinsurancecoverageavailabletousrelatedtoanysuchclaims,ourinsurancemaynotcoverallliabilitiesorbeavailableinthefutureatacostacceptabletous.Ifaproductliabilityorotherclaimorseriesofclaims,includingclassactionclaims,isbroughtagainstusforliabilitiesthatarenotcoveredbyinsuranceorforwhichthird-partyindemnificationisnotavailable,suchclaimcouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows.13FinesorsanctionsresultingfromtheinvestigationbytheDOJregardingMPCpricingpoliciescouldhaveamaterialadverseeffectonWoodward.MPC,oneofournewlyacquiredsubsidiaries,issubjecttoaninvestigationbytheDOJregardingcertainofitspricingpracticespriorto2006relatedtogovernmentcontracts.MPCandtheU.S.AttorneyfortheNorthernDistrictofIllinoishavereachedasettlementinprincipleandareintheprocessoffinalizingandobtainingapprovalswithintheDOJ.FinaldispositionwillbesubjecttoacceptanceandapprovalbytheU.S.DistrictCourt.ItisanticipatedthatanysettlementofthematterwouldinvolvethepaymentofmonetaryfinesandotheramountsbyMPC.MPCisalsointheprocessofworkingwiththeU.S.DepartmentofDefensetoresolveanyadministrativemattersthatmayariseoutoftheinvestigation.Therecanbenoassuranceastotheresolutionofthesematters.ThepurchasepriceforMPCreflectstheamountagreedtoinprinciplebyMPCwiththeU.S.Attorney.Anyresultingfinesorothersanctionsbeyondthisamountcouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows.Amountsaccruedforcontingenciesmaybeinadequatetocovertheamountoflosswhenthemattersareultimatelyresolved.Inadditiontointellectualpropertyandproductliabilitymatters,wearecurrentlyinvolvedormaybecomeinvolvedinpendingorthreatenedlitigationorotherlegalproceedingsregardingemploymentorothercontractualmattersarisingintheordinarycourseofbusiness.Weaccrueforknownindividualmattersthatwebelievearelikelytoresultinalosswhenultimatelyresolvedusingestimatesofthemostlikelyamountofloss.Theremaybeadditionallossesthathavenotbeenaccrued,whichcouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows.Changesinthelegalenvironmentinwhichweoperatemayaffectfuturesalesandexpenses.Weoperateinanumberofcountriesandareaffectedbyavarietyoflawsandregulations,includingforeigninvestment,employment,import,export,businessacquisitions,environmentalandtaxationmatters,landuserights,property,andothermatters.Ourabilitytooperateinthesecountriesmaybemateriallyadverselyaffectedbyunexpectedchangesinsuchlawsandregulations.Operationsandsuppliersmaybesubjecttophysicalandotherrisksthatcoulddisruptproduction.OuroperationsincludeprincipalfacilitiesinChina,Germany,Scotland,andPolandaswellastheU.S.Inaddition,weoperatesalesandservicefacilitiesinBrazil,India,Japan,theNetherlands,andtheUnitedKingdom.WealsohavesuppliersformaterialsandpartsinsideandoutsidetheU.S.Ouroperationsandsourcesofsupplycouldbedisruptedbyanaturaldisaster,war,politicalunrest,terroristactivity,publichealthconcerns,orotherunforeseenevents,whichcouldcausesignificantdelaysintheshipmentofproductsandtheprovisionofservicesandcouldcausethelossofsalesandcustomers.Accordingly,disruptionofouroperationsortheoperationsofasignificantsuppliercouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows.Wehavesignificantinvestmentsinforeignentitiesandhavesignificantsalesandpurchasesinforeigndenominatedcurrenciescreatingexposuretoforeigncurrencyexchangeratefluctuations.WehavesignificantinvestmentsoutsidetheU.S.Further,wehavesalesandpurchasesofrawmaterialsandfinishedgoodsinforeigndenominatedcurrencies.Accordingly,wehaveexposuretofluctuationsinforeigncurrencyexchangeratesrelativetotheU.S.dollar.Foreigncurrencyexchangerateriskisreducedthroughseveralmeans,includingthemaintenanceoflocalproductionfacilitiesinthemarketsserved,invoicingofcustomersinthesamecurrencyasthesourceoftheproducts,promptsettlementofinter-companybalancesutilizingaglobalnettingsystem,andlimiteduseofforeigncurrencydenominateddebt.Despitethesemeasures,foreigncurrencyratefluctuationscouldhaveamaterialadverseeffectonourinternationaloperationsoronourbusiness,financialcondition,resultsofoperations,andcashflows.14Changesinassumptionsmayincreasetheamountofretirementpensionandhealthcarebenefitobliga-tionsandrelatedexpense.Accountingforretirementpensionandhealthcarebenefitobligationsandrelatedexpenserequirestheuseofassumptions,includingaweighted-averagediscountrate,anexpectedlong-termrateofreturnonassets,andanethealthcarecosttrendrate,amongothers.Benefitobligationsandbenefitcostsaresensitivetochangesintheseassumptions.Asaresult,assumptionchangescouldresultinincreasesinourobligationamountsandexpenses.Significantincreasesintheamountofretirementpensionandhealthcarebenefitobligationsandrelatedexpensecouldhaveamaterialadverseaffectonourbusiness,financialcondition,resultsofoperations,andcashflows.IndustryRisksCompetitorsmaydevelopbreakthroughtechnologiesthatareadoptedbyourcustomers.Manyofthecomponentsandsystemswesellareusedinharshenvironmentswithstringentemissionsstandards.Thetechnologicalexpertisewehavedevelopedandmaintainedcouldbecomelessvaluableifacompetitorweretodevelopabreakthroughtechnologythatwouldallowthemtomatchorexceedtheperformanceofexistingtechnologiesatalowercost.Ifweareunabletodevelopcompetitivetechnologies,futuresalesorearningscouldbelowerthanexpected,whichcouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows.Industryconsolidationtrendscouldreduceoursalesopportunities,decreasesalesprices,anddrivedowndemandforourproduct.Therehasbeenconsolidationandtheremaybefurtherconsolidationintheaerospace,power,andprocessindustries.Theconsolidationintheseindustrieshasresultedincustomerswithverticallyintegratedoperations,includingincreasedin-sourcingcapabilities,whichmayresultineconomiesofscaleforthosecompanies.Ifourcustomerscontinuetoseektocontrolmoreaspectsofverticallyintegratedprojects,costpressuresresultinginfurtherintegrationorindustryconsolidationcouldreduceoursalesopportunities,decreasesalesprices,anddrivedowndemandforourproducts,whichcouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows.Changesincompetitorstrategiesmayreducethedemandforourproducts.Companiescompeteonthebasisofprovidingproductsthatmeettheneedsofcustomers,aswellasonthebasisofprice,quality,andcustomerservice.Changesincompetitiveconditions,includingtheavailabilityofnewproductsandservices,theintroductionofnewchannelsofdistribution,andchangesinOEMandaftermarketpricing,couldadverselyaffectfuturesales,whichcouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows.Unforeseeneventsmayoccurthatsignificantlyreducecommercialairlinetravel.OurTurbineSystemssegmentaccountedfor46%ofourexternalsalesin2008,withthemajorityofsalestiedtocommercialaviation.Certainevents,suchastheterroristactionsof2001,havehadanotablenegativeeffectonpassengerflightmilesinthepastandtheairlines’revenues.Currently,increasesinfuelcosts,highlaborcosts,andheightenedcompetitionfromlowcostcarriershaveadverselyaffectedthefinancialconditionofsomecommercialairlines.Inaddition,thecurrenteconomicdownturnhasledtoageneralreductioninairtravel,andanyfurtherdeteriorationofeconomicconditionsintheU.S.andinternationallycouldleadtoadditionalreductionsinairtravel.Marketdemandforourcomponentsandsystemscouldbemateriallyadverselyaffectedbysuchreductionsincommercialairlinetravelandcommercialairlines’financialdifficulties,whichcouldhaveamaterialadverseaffectonourbusiness,financialcondition,resultsofoperations,andcashflows.Increasingemissionstandardsthatdrivecertainproductsalesmaybeeasedordelayed.Wesellcomponentsandsystemsthathavebeendesignedtomeetdemandingemissionstandards,includingstandardsthathavenotyetbeenimplementedbutareintendedtobesoon.Iftheseemissionstandardsareeased,ourfuturesalescouldbeloweraspotentialcustomersselectalternativeproductsordelayadoptionofourproducts,whichwouldhaveamaterialadverseaffectonourbusiness,financialcondition,resultsofoperations,andcashflows.15Naturalgaspricesmayincreasesignificantlyanddisproportionatelytoothersourcesoffuelsusedforpowergeneration.Commercialproducersofelectricityusemanyofourcomponentsandsystems,mostpredominatelyintheirpowerplantsthatusenaturalgasastheirfuelsource.Commercialproducersofelectricityareofteninapositiontomanagetheuseofdifferentpowerplantfacilitiesandmakedecisionsbasedonoperatingcosts.Comparedtoothersourcesoffuelsusedforpowergeneration,naturalgaspriceshaveincreasedslowerthanfueloil,butaboutthesameascoal.Thisincreaseinnaturalgaspricesandanyfutureincreasescoulddecreasetheuseofourcomponentsandsystems,whichcouldhaveamaterialadverseaffectonourbusiness,financialcondition,resultsofoperations,andcashflows.TheU.S.governmentmayreducedefensefundingorthemixofprogramstowhichsuchfundingisallocated.AportionofoursalesofcomponentsandsystemsistotheU.S.government,primarilyintheaerospacemarket.ThelevelofU.S.defensespendingissubjecttoperiodiccongressionalappropriationactions,whichissubjecttochangeatanytime.Themixofprogramstowhichsuchfundingisallocatedisalsouncertain,andwecanprovidenoassurancethatanincreaseindefensespendingwillbeallocatedtoprogramsthatwouldbenefitourbusiness.Iftheamountofspendingwastodecrease,ortherewasashiftfromcertainaerospaceprogramstootherprograms,oursalescoulddecrease,whichcouldhaveamaterialadverseeffectonourbusiness,financialcondition,resultsofoperations,andcashflows.Changesinforeigncurrencyexchangeratesorininterestratesmayreducethedemandforourproducts.AsignificantportionofourbusinessisconductedincurrenciesotherthantheU.S.dollarwhichexposesustomovementsinforeigncurrencyexchangerates.Theseexposuresmaychangeovertimeasourbusinessandbusinesspracticesevolve,andtheycouldhaveamaterialadverseeffectonourfinancialresultsandcashflows.AnincreaseinthevalueoftheU.S.dollarcouldincreasetherealcosttoourcustomersofourproductsinthosemarketsoutsidetheU.S.wherewesellindollars,andaweakeneddollarcouldincreasethecostoflocaloperatingexpensesandprocurementofrawmaterialstotheextentthatwemustpurchasecomponentsinforeigncurrencies.Continuedinstabilityintheworldwidefinancialmarketscouldimpactourabilitytoeffectivelymanageourforeigncurrencyexchangeratefluctuationrisk,whichcouldnegativelyimpactourbusiness,financialcondition,resultsofoperations,andcashflows.InvestmentRisksThehistoricmarketpriceofourcommonstockmaynotbeindicativeoffuturemarketprices.Themarketpriceofourcommonstockchangesovertime.Stockmarketsingeneralhaveexperiencedsignificantpriceandvolumevolatilityoverthepastyear.Thetradingpriceofourcommonstockrangedfromalowof$24.50persharetoahighof$48.62pershareinfiscal2008.Themarketpriceandvolumeoftradingofourcommonstockmaycontinuetobesubjecttosignificantfluctuationsduenotonlytogeneralstockmarketconditions,butalsotofactorssuchasgeneralconditionsintheaerospaceindustryorachangeinsentimentinthemarketregardingouroperationsorbusinessprospects.Asaresult,themarketpriceofourcommonstockmayfluctuateordeclinesignificantlyinthefuture.Thetypicaltradingvolumeofourcommonstockmayaffectaninvestor’sabilitytosellsignificantstockholdingsinthefuturewithoutnegativelyaffectingstockprice.Wecurrentlyhaveapproximately68millionsharesofcommonstockoutstanding.Whiletheleveloftradingactivitywillvarybyday,thetypicaltradinglevelrepresentsonlyasmallpercentageoftotalsharesofstockoutstanding.Asaresult,asellerwhoasignificantnumberofsharesofstockinashortperiodoftimecouldnegativelyaffectourshareprice.Item1B.UnresolvedStaffCommentsNone.16Item2.PropertiesOurprincipalplantsareasfollows:UnitedStatesFortCollins,Colorado—TurbineSystems,EngineSystems,andElectricalPowerSystemsmanufacturing,engineering,andcorporateheadquartersLoveland,Colorado—TurbineSystemsandEngineSystemsmanufacturingandpartiallyleasedtoathirdpartyRockford,Illinois—TurbineSystemsmanufacturingandengineeringRockton,Illinois—TurbineSystemsmanufacturingandrepairandoverhaulZeeland,Michigan—TurbineSystemsmanufacturingandengineeringGreenville,SouthCarolina(leased)—TurbineSystemsmanufacturingandengineeringOtherCountriesSuzhou,Peoples’RepublicofChina(leased)—EngineSystemsmanufacturingAken,Germany(leased)—EngineSystemsmanufacturingandengineeringKempen,Germany—ElectricalPowerSystemsmanufacturingandengineeringStuttgart,Germany(leased)—ElectricalPowerSystemsmanufacturingandengineeringPrestwick,Scotland,UnitedKingdom(leased)—TurbineSystemsrepairandoverhaulTianjin,Peoples’RepublicofChina(leased)—EngineSystemsmanufacturingKrakow,Poland(leased)—ElectricalPowerSystemsmanufacturingandengineeringInconnectionwiththeMPCacquisition,Woodwardassumedleasesonapproximately450,000squarefeetofmanufacturingandofficespaceinSkokieandNiles,Illinois.InconnectionwiththeacquisitionofMotoTron,WoodwardassumedofficeleasesinAnnArbor,MichiganandColumbus,IndianaandestablishedaleaseforanofficefacilityinOshkosh,Wisconsin.AdditionalinformationabouttheseacquisitionsisincludedinNote22totheConsolidatedFinancialStatementsin“Item8—FinancialStatementsandSupplementaryData.”Inadditiontotheprincipalplantslistedabove,weownorleaseotherfacilitiesinBrazil,India,Japan,theNetherlands,andtheUnitedKingdomwhichareusedprimarilyforsalesandserviceactivities.Ourprincipalplantsaresuitableandadequateforthemanufacturingandotheractivitiesperformedatthoseplants,andwebelieveourutilizationlevelsaregenerallyhigh.However,withcontinuingadvancementsinmanufacturingtechnologyandoperationalimprovements,webelievewecancontinuetoincreaseproductionwithoutsignificantcapitalexpendituresforexpansion,retooling,oracquisitionofadditionalplants.Weanticipategrowthincapacityinthefollowinglocationsduringfiscal2009:Loveland,Colorado,Tianjin,China,andKrakow,Poland.17Item3.LegalProceedingsWearecurrentlyinvolvedinpendingorthreatenedlitigationorotherlegalproceedingsregardingemploy-ment,productliability,andcontractualmattersarisingfromthenormalcourseofbusiness.Wehaveaccruedforindividualmattersthatwebelievearelikelytoresultinalosswhenultimatelyresolvedusingestimatesofthemostlikelyamountofloss.Therearealsoindividualmatterswheremanagementbelievesthelikelihoodofalosswhenultimatelyresolvedislessthanlikelybutmorethanremote,whichwerenotaccrued.Whileitispossiblethattherecouldbeadditionallossesthathavenotbeenaccrued,wecurrentlybelievethepossibleadditionallossintheeventofanunfavorableresolutionofeachmatterislessthan$10,000intheaggregate.Specifically,MPC,oneofournewlyacquiredsubsidiaries,issubjecttoaninvestigationbytheDOJregardingcertainofitspricingpracticesrelatedtogovernmentcontractspriorto2006.MPCandtheU.S.AttorneyfortheNorthernDistrictofIllinoishavereachedasettlementinprincipleandareintheprocessoffinalizingandobtainingapprovalswithintheDOJ.FinaldispositionwillbesubjecttoacceptanceandapprovalbytheU.S.DistrictCourt.ItisanticipatedthatanysettlementofthematterwouldinvolvethepaymentofmonetaryfinesandotheramountsbyMPC.MPCisalsointheprocessofworkingwiththeU.S.DepartmentofDefensetoresolveanyadministrativemattersthatmayariseoutoftheinvestigation.Therecanbenoassuranceastotheresolutionofthesematters.ThepurchasepriceforMPCreflectstheamountagreedtoinprinciplebyMPCwiththeU.S.Attorney.AnyresultingfinesorothersanctionsbeyondthisamountcouldhaveamaterialnegativeimpactonWoodward.WecurrentlydonothaveanyadministrativeorjudicialproceedingsarisingunderanyFederal,State,orlocalprovisionsregulatingthedischargeofmaterialsintotheenvironmentorprimarilyforthepurposeofprotectingtheenvironment.Woodwarddoesnotrecognizecontingenciesthatmightresultinagainuntilsuchcontingenciesareresolvedandtherelatedamountsarerealized.IntheeventofachangeincontroloftheCompany,Woodwardmayberequiredtopayterminationbenefitstocertainexecutiveofficers.Item4.SubmissionofMatterstoaVoteofSecurityHoldersTherewerenomatterssubmittedtoavoteofsecurityholdersduringthefourthquarteroffiscal2008.18PARTIIItem5.MarketforRegistrant’sCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquitySecuritiesOurcommonstockislistedonTheNASDAQGlobalSelectMarketandatNovember17,2008,therewereapproximately1,380holdersofrecord.Cashdividendsweredeclaredquarterlyduring2008and2007.Theamountofcashdividendspershareandthehighandlowsalespricepershareforourcommonstockforeachfiscalquarterin2008and2007areincludedintheNote21totheConsolidatedFinancialStatementsin“Item8—FinancialStatementsandSupplementaryData.”(a)RecentSalesofUnregisteredSecuritiesSalesofcommonstockissuedfromtreasurystocktooneofthecompany’sdirectorsduringthefourthquarterof2008consistedofthefollowing(dollarsinthousands):TotalSharesPurchasedConsiderationReceivedJuly1,2008throughJuly31,2008..............................209$9August1,2008throughAugust31,2008.........................——September1,2008throughSeptember30,2008....................——ThesecuritiesweresoldinrelianceupontheexemptioncontainedinSection4(2)oftheSecuritiesActof1933.(b)IssuerPurchasesofEquitySecuritiesPeriodTotalNumberofSharesPurchasedAveragePricePaidPerShareTotalNumberofSharesPurchasedasPartofPubliclyAnnouncedPlansorProgramsMaximumNumber(orApproximateDollarValue)ofSharesthatMayYetBePurchasedUnderthePlansorPrograms(1)(Dollarsinthousands)July1,2008throughJuly31,2008..................—$——$168,075August1,2008throughAugust31,2008(2).......—$——$168,075September1,2008throughSeptember30,2008(3)(4)..554$43.30—$168,075(1)DuringSeptember2007,theBoardofDirectorsauthorizedastockrepurchaseprogramofupto$200millionofouroutstandingsharesofcommonstockontheopenmarketorprivatelynegotiatedtransactionsoverathree-yearperiodthatwillendinOctober2010.Duringthefirsthalfoffiscalyear2008,$31,925wasspentfromthisallocatedpoolforrepurchaseofstock.(2)Doesnotinclude21,265sharesacquiredaspartoftheexerciseofstockoptionsinAugust2008.(3)Doesnotinclude2,677sharesacquiredaspartoftheexerciseofstockoptionsinSeptember2008.(4)Wepurchased554sharesontheopenmarketrelatedtothereinvestmentofdividendsforsharesoftreasurystockheldfordeferredcompensationinSeptember2008.Theinformationrequiredbythisitemrelatingtosecuritiesauthorizedforissuanceunderequityplansisincludedunderthecaption“ExecutiveCompensation—EquityCompensationPlanInformation”inourProxyStatementforthe2008AnnualMeetingofStockholderstobeheldJanuary22,2009andisincorporatedhereinbyreference.19Item6.SelectedFinancialDataThefollowingselectedfinancialdatashouldbereadinconjunctionwiththeConsolidatedFinancialState-mentsandrelatednoteswhichappearin“Item8—FinancialStatementsandSupplementaryData”ofthisAnnualReport.20082007200620052004YearEndedSeptember30,(Inthousandsexceptpershareamounts)Netsales.............................$1,258,2041,042,337854,515827,726709,805NetEarnings(1)(2)(4)..................$121,88098,15769,90055,97131,382Earningspershare(3):Basic..............................$1.801.431.020.820.46Diluted............................$1.751.390.990.800.45Cashdividendspershare...............$0.2350.2150.2000.1750.160Incometaxes..........................$60,03033,83114,59723,13717,910Interestexpense........................$3,8344,5275,0895,8145,332Interestincome........................$2,1203,6042,7502,1591,095Depreciationexpense....................$28,62025,42822,06424,45125,856Amortizationexpense...................$6,8307,4966,9537,0876,905Capitalexpenditures....................$41,09931,98431,71326,61518,698Weighted-averagesharesoutstanding:Basicsharesoutstanding...............67,56468,48968,70268,40067,716Dilutedsharesoutstanding..............69,56070,48770,38270,25469,39020082007200620052004AtSeptember30,(Dollarsinthousands)Workingcapital........................$369,211275,611260,243241,066197,524Totalassets...........................$927,017829,767735,497705,466654,294Long-termdebt,lesscurrentportion.........$33,33745,15058,37972,94288,452Totaldebt............................$48,92866,58673,51595,78795,241Totalliabilities........................$297,389285,336256,808272,997268,433Stockholders’equity....................$629,628544,431478,689432,469385,861Full-timeworkermembers................4,4764,2483,7313,5133,287Registeredstockholdermembers...........1,3581,2291,4421,4481,529Notes:1.Netearningsforfiscal2007includedtwotaxadjustments,afavorableresolutionofissueswithtaxauthoritiesresultinginareductionofnettaxexpenseof$13.3millionandareductionindeferredtaxassetsresultinginataxexpenseof$3.0millionduetoadecreaseintheGermanstatutoryincometaxrate.Theseadjustmentsincreasednetearningsby$10.3million,or$0.15perbasicshareand$0.15perdilutedshare.2.Netearningsforfiscal2006includedadeferredtaxassetvaluationallowancechangethatincreasednetearningsby$13.7million,or$0.20perbasicshareand$0.19perdilutedshare.3.PershareamountshavebeenupdatedfromamountsreportedpriortoFebruary1,2008toreflecttheeffectofatwo-for-onestocksplitandpriortoFebruary1,2006toreflecttheeffectofathree-for-onestocksplit.4.Accountingforstock-basedcompensationchangedtothefairvaluemethodfromtheintrinsicvaluemethodbeginninginthefirstquarteroffiscal2006,concurrentwiththeadoptiononOctober1,2005ofStatementofFinancialAccountingStandards123R,“Share-BasedPayments.”Thefollowingpresentsareconciliationofreportednetearningsandpershareinformationtoproformanetearningsandpershareinformationthatwould20havebeenreportedifthefairvaluemethodhadbeenusedtoaccountforstock-basedemployeecompensationinfiscal2004andfiscal2005:20052004YearEndedSeptember30,(Inthousandsexceptpershareamounts)Reportednetearnings...........................................$55,971$31,382Stockbasedcompensationexpenseusingfairvaluemethod,netoftax.......1,5021,400Proformanetearnings..........................................$54,469$29,982Reportednetearningspershare:Basic.....................................................$0.82$0.46Diluted....................................................$0.80$0.45Proformanetearningspershare:Basic.....................................................$0.80$0.44Diluted....................................................$0.78$0.4321Item7.Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperationsOVERVIEWWoodwarddesigns,manufactures,andservicesenergycontrolsystemsandcomponentsforcommercialandmilitaryaircraft,turbines,reciprocatingengines,andelectricalpowersystemequipment.Ourinnovativefluidenergy,combustioncontrol,electricalenergy,andmotioncontrolsystemshelpcustomersoffercleaner,morereliable,andmorecost-effectiveequipment.Leadingoriginalequipmentmanufacturersuseourproductsandservicesinaerospace,powerandprocessindustries,andtransportation.OurstrategicfocusisEnergyControlandOptimizationSolutions.Thecontrolofenergy—fluidenergy,combustion,electricalenergy,andmotion—isagrowingrequirementinthemarketsweserve.Ourcustomerslooktoustooptimizetheefficiency,emissions,andoperationsofpowerequipment.Ourcoretechnologiesleveragewellacrossourmarketsandcustomerapplications,enablingustodevelopandintegratecost-effectiveandstate-of-the-artfuel,combustion,fluid,actuation,andelectronicsystems.WefocusprimarilyonOEMsandequipmentpackagers,partneringwiththemtobringsuperiorcomponentandsystemsolutionstotheirdemandingapplications.Wehavethreebusinesssegments—TurbineSystems,EngineSystems,andElectricalPowerSystems.TurbineSystemsisfocusedonsystemsandcomponentsthatprovideenergycontrolandoptimizationsolutionsfortheaircraftandindustrialgasturbinemarkets.EngineSystemsisfocusedonsystemsandcomponentsthatprovideenergycontrolandoptimizationsolutionsfortheindustrialengineandsteamturbinemarkets,whichincludepowergeneration,transportation,andprocessindustries.ElectricalPowerSystemsisfocusedonsystemsandcomponentsthatprovidepowersensingandenergycontrolsystemstoimprovethesecurity,quality,reliability,andavailabilityofelectricalpowernetworksforindustrialmarkets,whichincludepowergeneration,powerdistribution,transportation,andprocessindustries.OnOctober1,2008,weacquiredMPCinatransactionvaluedatapproximately$383million.MPCisaprivately-heldcompanyheadquarteredinSkokie,Illinois.MPC’sproductsincludehighperformancemotorsandsensors,analoganddigitalcontrolelectronics,rotaryandlinearactuationsystems,andflightdeckandfly-by-wiresystems.MPC’sproductsareusedinbothcommercialandmilitaryaerospaceprograms.MPC’scustomerlistincludesairframerssuchasBoeingandAirbus,aswellastier-onesuppliers,suchasRaytheonandHoneywell.MPCwillformourfourthbusinesssegment,AirframeSystems.ThissegmentallowsustofocusontheairframeapplicationsofbothMPC’sandWoodward’stechnologiesandproducts.WearealsoevaluatingopportunitiestoleverageMPC’scompetenciesintoourtraditionalmarketniches.AdditionalinformationaboutAirframeSystemsandtheacquisitionisincludedinNote22totheConsolidatedFinancialStatementsin“Item8—FinancialStatementsandSupplementaryData.”Weusesegmentinformationinternallytoassesstheperformanceofeachsegmentandtomakedecisionsontheallocationofresources.Oursaleshaveincreasedatanannualrateof15%fromfiscal2004tofiscal2008.Ourearningshaveincreasedatanannualrateof40%fromfiscal2004tofiscal2008.In2008,weachievedrecordsalesof$1.26billionandournetearningswere$121.9million.Ourmarketsshowedcontinuedstrengththroughfiscal2008andwewerewellpositionedtocapturetheopportunitiespresentedineachofoursegments.Wetookadvantageoftwocontinuingtrendsinourmarkets—theincreasingglobalneedforbothenergyefficiencyandemissionsreductions,whereourproductsmeetcustomerexpectationsbyprovidingsuperiorperformance.AtSeptember30,2008,ourtotalassetswereapproximately$927.0million,including$109.9millionincash,andourtotaldebtwasapproximately$48.9million.AsdiscussedinNote22totheConsolidatedFinancialStatementsin“Item8—FinancialStatementsandSupplementaryData,”anaggregate$400.0millionofadditionaldebtwasissuedonOctober1,2008andOctober30,2008,asubstantialportionofwhichwasusedtofinancetheMPCacquisition.Wearewellpositionedtofundexpandedresearchanddevelopmentandtoexploreotherinvestmentopportunitiesconsistentwithourfocusedstrategies.Inthesectionsthatfollow,weareprovidinginformationtohelpyoubetterunderstandourcriticalaccountingestimatesandmarketrisks,ourresultsofoperationsandfinancialcondition,andtheeffectsofrecentaccountingpronouncements.22CRITICALACCOUNTINGESTIMATESThepreparationoffinancialstatementsandrelateddisclosuresinconformitywithaccountingprinciplesgenerallyacceptedintheU.S.(“U.S.GAAP”)requiresustomakejudgments,assumptions,andestimatesthataffecttheamountsreportedintheConsolidatedFinancialStatementsandaccompanyingnotes.Note1totheConsolidatedFinancialStatementsdescribesthesignificantaccountingpoliciesandmethodsusedinthepreparationoftheConsolidatedFinancialStatements.Theaccountingpositionsdescribedbelowaresignificantlyaffectedbycriticalaccountingestimates.Suchaccountingpositionsrequiresignificantjudgments,assumptions,andestimatestobeusedinthepreparationoftheConsolidatedFinancialStatements,andactualresultscoulddiffermateriallyfromtheamountsreportedbasedonvariabilityinfactorsaffectingtheseestimates.Ourmanagementhasdiscussedthedevelopmentandselectionofthesecriticalaccountingestimateswiththeauditcommitteeofourboardofdirectors,andtheauditcommitteehasreviewedourdisclosurestoitinthisManagement’sDiscussionandAnalysis.InventoryInventoriesarevaluedatthelowerofcostormarket,withcostbeingdeterminedonafirst-in,first-outbasis.Customer-specificinformationandcontractualtermsareconsideredwhenevaluatinglowerofcostormarketconsiderations.ThecarryingvalueofinventoryasofSeptember30,2008was$208.3million.Ifeconomicconditionsorotherfactorssignificantlyreducefuturecustomerdemandforourproductsfromforecastlevels,thenfutureadjustmentstothecarryingvalueofinventorymaybecomenecessary.Weattempttomaintaininventoryquantitiestolevelsconsiderednecessarytofillexpectedordersinareasonabletimeframe,whichwebelievemitigatesourexposuretofutureinventorycarryingcostadjustments.Post-retirementbenefitsTheCompanyprovidesvariousbenefitstocertainemployeesthroughdefinedbenefitplansandretirementhealthcarebenefitplans.Forfinancialreportingpurposes,netperiodicbenefitsexpenseandrelatedobligationsarecalculatedusinganumberofsignificantactuarialassumptions,includinganticipateddiscountrates,ratesofcompensationincreases,long-termreturnondefinedbenefitplaninvestments,andanticipatedhealthcarecostincreases.Changesinnetperiodicexpensemayoccurinthefutureduetochangesintheseassumptions.Estimatesofthevalueofpost-retirementbenefitobligations,andrelatednetperiodicbenefitsexpense,aredependentonactuarialassumptionsincludingfutureinterestrates,compensationrates,healthcarecosttrends,andreturnsondefinedbenefitplaninvestments.Variancesfromouryearendestimatesforthesevariablescouldmateriallyaffectourrecognizedpost-retirementbenefitobligationliabilities.Onanear-termbasis,suchchangesareunlikelytohaveamaterialimpactonreportedearnings,sincesuchadjustmentsarerecordedtoothercomprehensiveincomeandrecognizedintoexpenseoveranumberofyears.Significantchangesinestimatescould,however,materiallyaffectthecarryingamountsofprojectedbenefitobligationliabilities,whichcouldaffectloancovenantcomplianceandfutureborrowingcapacity.AsofSeptember30,2008,theprojectedbenefitobligationofallofourpost-retirementbenefitplanswas$101.1million.Inlightofrecentglobaleconomicinstability,managementconsidersthelikelihoodthatsuchassumptionsmaychangesignificantlyinfutureperiodstobegreaterthaninrecentyears.ReviewsforimpairmentofgoodwillAtSeptember30,2008,wehad$139.6millionofgoodwill,or15%oftotalassets.Wetestgoodwillforimpairmentatleastannually,duringthesecondquarter,andwhenevereventsoccurorcircumstanceschangethatindicatetheremaybeanimpairment.Theseeventsorcircumstancescouldincludeasignificantadversechangeinthebusinessclimate,poorindicatorsofoperatingperformance,orasaleordispositionofasignificantreportingunit.Wetestgoodwillforimpairmentatthereportingunitlevel.Ourreportingunitsareouroperatingsegments.Testinggoodwillforimpairmentrequiresustodeterminetheamountofgoodwillassociatedwithreportingunits,estimatefairvaluesofthosereportingunits,anddeterminetheircarryingvalues.Theseprocessesaresubjectiveand23requiresignificantestimates.Theseestimatesincludejudgmentsaboutfuturecashflowsthataredependentoninternalforecasts,long-termgrowthrates,allocationsofcommonlysharedassets,andestimatesofweighted-averagecostofcapitalusedtodiscountfuturecashflows.Changesintheseestimatesandassumptionscouldmateriallyaffecttheresultsofourreviewsforimpairmentofgoodwill.Ourimpairmentanalysisispartiallydependentuponfuturecashflowprojectionsforouroperatingsegments,discountedatappropriateinterestrates.Iffuturesalesaresignificantlyimpactedbychangesintheoveralleconomy,negativelyaffectingfuturecashflows,orifinterestrateschangesignificantlyfromcurrentlevels,thentheimpairmentassessmentcouldbeeffected,whichcouldmateriallyimpactourresultsofoperationsandfinancialposition.Managementbelievesthatchangesinfuturecashflowsand/orinterestratesofsignificantmagnitudetoresultinafutureimpairmentchargeagainstgoodwillrecordedasofSeptember30,2008areunlikely.IncometaxesWearesubjecttoincometaxesintheU.S.andnumerousforeignjurisdictions.Significantjudgmentisrequiredinevaluatingourtaxpositionsanddeterminingourprovisionforincometaxes.Duringtheordinarycourseofbusiness,therearemanytransactionsandcalculationsforwhichtheultimatetaxdeterminationisuncertain.Weestablishreservesfortax-relateduncertaintiesbasedonestimatesofwhether,andtheextenttowhich,additionaltaxeswillbedue.Thereservesareestablishedwhenwebelievethatcertainpositionsarelikelytobechallengedandmaynotbefullysustainedonreviewbytaxauthorities.Weadjustthesereservesinlightofchangingfactsandcircumstances,suchastheclosingofataxauditorrefinementofanestimate.Althoughwebelieveourreservesarereasonable,noassurancecanbegiventhatthefinaloutcomeofthesematterswillnotbedifferentfromthatwhichisreflectedinourhistoricalincometaxprovisionsandaccruals.Totheextentthatthefinaltaxoutcomeofthesemattersisdifferentthantheamountsrecorded,suchdifferenceswillimpacttheprovisionforincometaxes.Theprovisionforincometaxesincludestheimpactofreserveprovisionsandchangestoreservesthatareconsideredappropriate.AsofSeptember30,2008,unrecognizednettaxbenefitsforwhichrecognitionhasbeendeferredfollowingtheguidanceofFIN48was$22.6million.Significantjudgmentisalsorequiredindetermininganyvaluationallowancerecordedagainstdeferredtaxassets.Inassessingtheneedforavaluationallowance,weconsiderallavailableevidenceincludingpastoperatingresults,estimatesoffuturetaxableincome,andthefeasibilityoftaxplanningstrategies.Intheeventthatwechangeourdeterminationastotheamountofdeferredtaxassetsthatcanberealized,wewilladjustourvaluationallowancewithacorrespondingimpacttotheprovisionforincometaxesintheperiodinwhichsuchdeterminationismade.AsofSeptember30,2008,ourvaluationallowancewas$0.1million.Oureffectivetaxratesdifferfromthestatutoryrateprimarilyduetothetaximpactofforeignoperations,adjustmentsofvaluationallowances,researchtaxcredits,statetaxes,andtaxauditsettlements.Ourprovisionforincometaxesissubjecttovolatilityandcouldbeaffectedbythefollowing:earningsthataredifferentthananticipatedincountrieswhichhavelowerorhighertaxrates;changesinthevaluationofourdeferredtaxassetsandliabilities;transferpricingadjustments;taxeffectsofstock-basedcompensation;costsorbenefitsrelatedtointercompanyrestructurings;orchangesintaxlaws,regulations,andaccountingprinciples,includingaccountingforuncertaintaxpositions,orinterpretationsthereof.Inaddition,wearesubjecttoexaminationofourincometaxreturnsbytheInternalRevenueServiceandothertaxauthorities.Weregularlyassessthelikelihoodofadverseoutcomesresultingfromtheseexaminationstodeterminetheadequacyofourprovisionforincometaxes.Therecanbenoassurancethattheoutcomesfromtheseexaminationswillnothaveaneffectonouroperatingresultsandfinancialcondition.24RESULTSOFOPERATIONSSalesThefollowingtablepresentsthebreakdownofconsolidatednetexternalsalesbysegment(inthousands):YearEndedSeptember30,200820072006SegmentnetsalesTurbineSystems...............$595,77447%$523,84250%$458,92354%EngineSystems...............499,31840455,20044430,44850ElectricalPowerSystems........289,29423181,3661776,1869Totalsegmentnetsales...........1,384,3861101,160,408111965,557113LessintersegmentnetsalesTurbineSystems...............(18,470)(2)(21,285)(2)(20,197)(2)EngineSystems...............(41,141)(3)(41,124)(4)(39,829)(5)ElectricalPowerSystems........(66,571)(5)(55,662)(5)(51,016)(6)Consolidatednetexternalsales......$1,258,204100%$1,042,337100%$854,515100%Intersegmentsalesprimarilyreflectcontract-manufacturingactivityacrossbusinesssegments.TurbineSystemsandEngineSystemssellelectroniccontrolsmanufacturedbyElectricalPowerSystemsaspartoftheirsystemofferings.TheseintersegmentactivitieshavebeenincreasingasaresultofourTurbineandEngineSystems’segmentsgrowingtheirrespectiveexternalsales.2008Comparedto2007Consolidatednetexternalsalesincreased21%fromfiscal2007tofiscal2008.Theincreasewasattributabletothefollowing(inthousands):•ConsolidatednetexternalsalesforyearendedSeptember30,2007.............$1,042,337•TurbineSystemsvolumechanges......................................58,688•EngineSystemsvolumechanges.......................................19,743•ElectricalPowerSystemsvolumechanges................................76,856•Pricechanges.....................................................13,613•Foreigncurrencytranslation..........................................46,967•ConsolidatednetexternalsalesforyearendedSeptember30,2008.............$1,258,204TurbineSystems’salesvolumechanges:TurbineSystems’salesperformancereflectedgenerallystrongdemandforourOEMofferingsintheindustrialandaerospaceturbinemarkets,includingourrecentlyintroducedcontrolsystemsforbusinessjetsandpowergenerationOEMandthegovernmentformilitaryapplications.ThismixofaerospacegrowthwasconsistentwithourexpectationsandreflectsthehighvolumeofordersfornewaircraftwithenginescontainingincreasedWoodwardcontent.EngineSystems’salesvolumechanges:TheprimarydriversofthegrowthinsalesvolumeforEngineSystemsareincreasedproductioninthemarineandalternativefuelmarketsaswellasgrowthindemandinthepowerandprocessmarkets.EngineSystems’saleswereboostedbydemandforourcontrolsystemsforlarge,naturalgas-poweredon-highwayvehicles,andourofferingsinthemarinemarket.ElectricalPowerSystems’salesvolumechanges:DemandinboththepowergenerationanddistributionandwindinverterturbinemarketscontinuestodrivegrowthinsalesofElectricalPowerSystems.Thegrowthinwindturbineinverterdemandhasbeenstrong.TheincreaseinElectricalPowerSystems’intercompanysalesistheresultofhigherexternalsalesinTurbinesSystemsandEngineSystemsofproductsthatincorporateelectroniccontrolsmanufacturedbyElectricalPowerSystems.25Pricechanges:SellingpriceincreaseswereacrossmostproductsinTurbineSystemsandEngineSystemsimpactingsparesandcomponentsusedintheaerospaceaftermarket.Thesesellingpricechangeswereinresponseprevailingmarketconditionsaspricesfluctuatedforcommoditiesusedtoproducemechanical,electrical,orelectromagneticcomponents.Foreigncurrencytranslation:OurworldwidesalesactivitiesareprimarilydenominatedinU.S.dollar(“USD”),EuropeanMonetaryUnitEuro(the“Euro”),andGreatBritainpound(“GBP”).Asthesecurrenciesfluctuateagainsteachotherandothercurrencies,weareexposedtogainsorlossesonsalestransactions.Duringfiscal2008,approximately22%oftheincreaseinnetexternalsaleswasduetochangesintheforeigncurrencyexchangerates.2007Comparedto2006Consolidatednetexternalsalesincreased22%fromfiscal2006tofiscal2007.Theincreasewasattributabletothefollowing(inthousands):•ConsolidatednetexternalsalesforyearendedSeptember30,2006.............$854,515•TurbineSystemsvolumechanges......................................54,687•EngineSystemsvolumechanges.......................................9,018•ElectricalPowerSystemsvolumechanges................................5,082•Schaltanlagen-Elektronik-Gera¨teGmbH&Co.KG(“SEG”)relatedrevenue......92,776•Pricechanges.....................................................11,327•Foreigncurrencytranslation..........................................14,932•ConsolidatednetexternalsalesforyearendedSeptember30,2007.............$1,042,337TurbineSystems’salesvolumechanges:TurbineSystems’improvementreflectsthefavorabletrendsinallsegmentsofaerospacebusiness.Wesawstronggrowthinthebusinessandregionalaviationmarketswithorderbacklogsanddeliveriessignificantlyhigherthan2006levels.Overallfleetgrowthandincreasedutilizationresultedinstrongdemandforrepairandrelatedaftermarketservice.OursignificantdevelopmenteffortsontheGEnxfuelsystemfortheBoeingDreamliner,theGP7200fuelsystemcomponentsfortheA380andthePW600controlsystemfortheMustangandtheEclipseweremakingthetransitionfromresearchtoproduction.Wesawatrendtowardhigherrevenuepassengermilesincurredbycommercialairlinesandcargogrowth,whichdroveaircraftusageandhadapositiveeffectonouraftermarketsales.Weestimateapproximately40%ofTurbineSystems’saleswereaftermarketforfiscal2007andfiscal2006.EngineSystems’salesvolumechanges:Demandforpowergeneration,suchaslargegasanddieselengines,grewwiththesignificantincreaseinglobaldemandforelectricity,particularlyindistributedpowerapplications.GrowinginfrastructureneedsinIndia,ChinaandtherestofAsiaplayedakeyroleinthisgrowth.Withinthetransportationmarket,themarinesegmentwasrobust.ElectricalPowerSystems’salesvolumechanges:Aspartofourchanneldevelopment,wegainednewcustomersinthepowergenerationanddistributionmarket.ElectricalPowerSystems’salesgrowthof60%fortheyearconsistedof55%organicgrowthand5%inorganic.Pricechanges:PricechangesweremadeprimarilyinresponsetomaterialcostincreasesinTurbineSystemsandEngineSystems.Thematerialcostincreaseswererelatedtopricefluctuationsofcommoditiesfromwhichmechanical,electronic,orelectromagneticcomponentsareproduced.SEGrelatedrevenue:OnOctober31,2006,weacquired100%ofthestockofSEG.Theacquisitionprovideduswithtechnologiesandproductsthatcomplementedourpowergenerationsystemsolutions.TheresultsofSEG’soperationswereincludedinfiscal2007netsalesfromthebeginningofNovember2006.26CostsandExpensesThefollowingtablepresentscostsandexpenses(inthousands):YearEndedSeptember30,2008%ofNetSales2007%ofNetSales2006%ofNetSalesNetSales..................$1,258,204100.0%$1,042,337100.0%$854,515100.0%Costofgoodssold...........$882,99670.2%$728,82069.9%$612,26371.6%Selling,general,andadministrativeexpenses.....115,3999.2111,29710.792,01310.8Researchanddevelopmentcosts...................73,4145.865,2946.359,8617.0Amortizationofintangibleassets...................6,8300.57,4960.76,9530.8Interestandotherincome......(6,805)(0.5)(7,790)(0.8)(6,995)(0.8)Interestandotherexpenses.....4,4600.35,2320.55,9230.7Consolidatedcostsandexpenses................$1,076,29485.5%$910,34987.3%$770,01890.1%2008Comparedto2007Costofgoodssoldincreased21%attributabletothefollowing(inthousands):•CostofgoodssoldfortheyearendedSeptember30,2007.....................$728,820•Increaseinsalesvolume..............................................96,314•Foreigncurrencytranslation............................................32,393•Changesinproductmix...............................................13,628•Increasednon-volumerelatedfreightandproductexpeditingcosts...............4,809•Other............................................................7,032•CostofgoodssoldfortheyearendedSeptember30,2008.....................$882,996Grossmarginswereapproximatelyflatat29.8%fortheyearendedSeptember30,2008comparedto30.1%fortheyearendedSeptember30,2007.Thesmalldecreaseingrossmarginsreflectsachangeinproductmixandincreasedoperatingcostsassociatedwithproductivityenhancementsandsupplychainconstraints.OurforeignlocationspurchasegoodsprimarilyinEuroandGBP.ThechangeintheforeigncurrencyexchangeratestoUSDresultedinincreasedcostsduringfiscal2008ascomparedtofiscal2007.Selling,general,andadministrativeexpensesincreased4%,attributabletothefollowing(inthousands):•SG&AfortheyearendedSeptember30,2007..............................$111,297•Accrualsforlegalandarbitrationmatters..................................(4,429)•Variablecompensation................................................2,070•Stock-basedcompensationexpense......................................628•Foreigncurrencytranslation............................................4,205•Other............................................................1,628•SG&AfortheyearendedSeptember30,2008..............................$115,399Weaccrueforindividuallegalmattersthatwebelievearelikelytoresultinalosswhenultimatelyresolvedusingestimatesofthemostlikelyamountofloss.27Selling,general,andadministrativeexpensesincreasedprimarilyfromincreasesinforeigncurrencytrans-lationrates,increasedvariablecompensation,andcostsincurredtoopennewlocations,partiallyoffsetbyareductionincostsrelatedtolegalandarbitrationmatters.Selling,general,andadministrativeexpensesdecreasedasapercentofsalesyear-to-yearfrom10.7%infiscal2007to9.2%infiscal2008.Researchanddevelopmentcostsincreased12%,attributabletothefollowing(inthousands):•ResearchanddevelopmentfortheyearendedSeptember30,2007................$65,294•TurbineSystemsdevelopmentactivities....................................2,401•EngineSystemsdevelopmentactivities....................................2,828•ElectricalPowerSystemsdevelopmentactivities.............................2,891•ResearchanddevelopmentfortheyearendedSeptember30,2008................$73,414ResearchanddevelopmentcostsincreasedintheyearendedSeptember30,2008,ascomparedtotheyearendedSeptember30,2007,reflectinghigherlevelsofdevelopmentactivity.Researchanddevelopmentcostsdecreasedasapercentofsalesyear-to-yearfrom6.3%infiscal2007to5.8%infiscal2008.IntheTurbineSystemssegment,wecontinuetoworkcloselywithourcustomersearlyintheirtechnologydevelopmentandpreliminarydesignstages.Wehelpourcustomersbyinvestinginresearchandtechnologydevelopmentprogramsthatimprovefuelefficiency,reduceemissions,andlowertotalcostofownership,benefitingbothoperatorsandthegeneralpublic.TheresultofrecentinvestmentscanbeseeninourintegratedfuelsystemselectedbyGEAviationfortheirGEnxturbofanengine,poweringtheBoeing787DreamlinerandBoeing747-8airliner,andthefuelandcombustioncomponentswesupplyforthePratt&WhitneyF135andGERolls-RoyceF136enginespoweringtheLockheed-MartinJointStrikeFighter.WearealsodevelopingcomponentsfortheT700-GE-701DenginethatwillbeusedfortheupgradestotheSikorskyBlackHawkandBoeingApachehelicopters,componentsforthePratt&Whitney600family,thePratt&WhitneygearedturbofanforboththeMitsubishiRegionalJetandtheBombardierCSeries,andtheCF34-10andSAM146turboengineprogramstobeusedforglobalregionaljetsintheChineseandRussianmarkets,amongothers.Withintheindustrialmarkets,Woodwardfuelsystems,controls,andcombustionsystemsareusedontheworld’smostadvancedindustrialgasturbinepowerplants,oilandgasproductionfacilities,andmilitarymarineapplications.Mostrecently,wehaveexpandedourcollaborationwithkeycustomersbysigningjointtechnologydemonstrationorproductioncontractswithGEAviationandPratt&WhitneyfortheirnextgenerationofcommercialaircraftenginesandwithGEEnergyandPratt&WhitneyPowerSystemsfortheirnextgenerationofindustrialgasturbineapplications.EngineSystemscontinuestodevelopcomponentsandintegratedsystemsthatallowourcustomerstomeetdevelopedcountries’futureemissionsregulations,everincreasingfuelefficiencydemands,andsupportthegrowinginfrastructureneedsinIndia,China,andtherestofAsia.DevelopmentprojectsincludecomponentsforourmarketleadingCompressedNaturalGas(CNG)systemsforbusesandtrucks,nextgenerationinjectorsandpumpsfordieselfuelsystemsusedinshipping,constructionequipment,andpowergenerationmarkets,anewlineofsteamturbinecontrolproducts,andcontrolsystemsforthenewandgrowingdieselparticulatefiltermarket.ElectricalPowerSystemsisdevelopinganewgridconnectedinverterplatformthatenableslargescalewindturbinepowerintegrationandalsosupportslocalgridcodesforHigh/LowVoltageRideThrough,aswellaselectricalprotectionandmeteringdevicesthatprovidesafeandmorereliableelectricalpowerdistributiontocommercialandindustrialusersandutilitiesinanetworkedenvironment.Inaddition,wecontinuetodevelopproductsforDistributedEnergyResourceintegrationbasedonourlatestpowergenerationcontrolsplatform.282007Comparedto2006Costofgoodssoldincreased19%,attributabletothefollowing(inthousands):•CostofgoodssoldfortheyearendedSeptember30,2006.....................$612,263•Increaseinsalesvolume..............................................31,219•EffectsofconsolidationofEuropeanoperationsandother.....................(2,327)•Foreigncurrencytranslation............................................12,692•SEGrelatedproductioncosts...........................................65,963•Other............................................................9,010•CostofgoodssoldfortheyearendedSeptember30,2007.....................$728,820CostsofgoodssoldbenefitedfromtheeffectsofEngineSystems’Europeanconsolidation,whichwecompletedinMarch2006.Variablecompensationpaidtomembersindirectandindirectmanufacturingfunctionswashigherin2007thanin2006.Eachyear,aportionofourmembers’compensationwillvarydependingonperformance-basedfactors.Selling,general,andadministrativeexpensesincreased21%,attributabletothefollowing(inthousands):•SG&AfortheyearendedSeptember30,2006..............................$92,013•Accrualsforlegalandarbitrationmatters..................................(5,557)•SEGrelatedSG&Aexpenses...........................................11,307•Variablecompensation................................................5,430•SEGintegrationcosts................................................3,000•Stock-basedcompensationexpense......................................774•Other............................................................4,330•SG&AfortheyearendedSeptember30,2007..............................$111,297Weaccrueforindividuallegalmattersthatwebelievearelikelytoresultinalosswhenultimatelyresolvedusingestimatesofthemostlikelyamountofloss.Variablecompensationpaidtomemberswashigherin2007thanin2006.Eachyear,aportionofourmembers’compensationwillvarydependingonperformance-basedfactors.WeincurredexpensesrelatedtocompletingtheacquisitionofSEGincludingdedicatedstaffing,travel,andtelephonecosts.Researchanddevelopmentcostsincreased9%,attributabletothefollowing(inthousands):•ResearchanddevelopmentfortheyearendedSeptember30,2006................$59,861•TurbineSystemsdevelopmentactivities....................................(170)•EngineSystemsdevelopmentactivities....................................1,544•ElectricalPowerSystemsdevelopmentactivities.............................(841)•SEGdevelopmentprojects..............................................4,900•ResearchanddevelopmentfortheyearendedSeptember30,2007................$65,294Duringfiscalyear2007,wemadeconsiderableprogressonanewdieselpumpinEngineSystems,whichwillpowernextgenerationenginesbeingreleasedintothemarketinthenearfuture.Thispumpwillsustainhigherpressures,temperatures,andspeedsthanpreviousmodels.TheSEGacquisition,whichisincludedintheElectricalPowerSystemssegment,addeddevelopmentactivitiesrelatedtopowerprotectionandwindinvertertechnologies.29EarningsYearEndedSeptember30,200820072006(Inthousands)TurbineSystems....................................$116,196$87,353$67,584EngineSystems....................................56,47156,98440,829ElectricalPowerSystems.............................42,30320,2944,475Totalsegmentearnings...............................214,970164,631112,888Nonsegmentexpense................................(31,346)(31,720)(26,052)Interestexpenseandincome,net........................(1,714)(923)(2,339)Consolidatedearningsbeforeincometaxes................181,910131,98884,497Incometaxexpense.................................(60,030)(33,831)(14,597)Consolidatednetearnings.............................$121,880$98,157$69,9002008Comparedto2007TurbineSystemssegmentearningsincreased33%,attributabletothefollowing(inthousands):•EarningsfortheyearendedSeptember30,2007............................$87,353•Volumechanges....................................................18,661•Sellingpricechanges.................................................8,726•Salesmix.........................................................(5,993)•Foreignexchangeratechanges..........................................731•Other,net.........................................................6,718•EarningsfortheyearendedSeptember30,2008............................$116,196TheearningsincreaseinTurbineSystemswasprincipallytheresultofleverageonmodestincreasesinsalesvolumeoverlastyear,andreflectsastrongermixofOEMaerospaceproductscomparedtorecentquarters.SalesvolumeincreasedduetohigherdemandforOEM,military,commercialaftermarket,andindustrialturbineproducts.Sellingpriceincreasesprimarilyaffectedsparesandcomponentsusedintheaerospaceaftermarket.TurbineSystemsalsoexperiencedanunfavorableproductmixcomparedtotheprioryearwhichnegativelyimpactedearnings,duetogreatergrowthofOEMsalesrelativetoaftermarketsales.RecentprogramwinsandstrongermarketconditionsforourOEMcustomershaveresultedinfastergrowthtoOEMsascomparedtoouraftermarketcustomers.OuraftermarketpricingcatalogisinGBPwhilemuchofourcostsareinUSD.Earningsincreased1%asaresultofchangesinGBPduringfiscal2008.EngineSystemssegmentearningsdecreased1%,attributabletothefollowing(inthousands):•EarningsfortheyearendedSeptember30,2007.............................$56,984•Volumechanges.....................................................9,240•Sellingpricechanges..................................................3,391•Salesmix..........................................................(5,525)•Foreignexchangeratechanges...........................................562•Increasednon-volumerelatedfreightandproductexpeditingcosts................(4,809)•Other,net..........................................................(3,372)•EarningsfortheyearendedSeptember30,2008.............................$56,471Salesvolumeincreaseswereprimarilyinthepowergenerationandmarinemarkets.Sellingpriceincreaseswereacrossmostproductstooffsetincreasedmaterialcosts.EngineSystemsalsoexperiencedanunfavorablesalesmixcomparedtotheprioryear.EngineSystemssells,manufacturesandpurchasesproductinseveralforeigncurrenciesincludingUSD,Euro,CNY,Yen,andGBP.Thepercentageofsalesinaparticularforeigncurrencymay30besignificantlydifferentfromthepercentageofcostsincurredinthatcurrency.AsaresultofEngineSystems’significantinternationalfootprint,changesinforeigncurrencycanhavealargeimpactonitsearnings.Duringfiscal2008,thechangesinforeigncurrencyratesresultedina1%netincreaseinearnings.Theincreasedfreightcostsweretheresultofincreasedexpeditingcostsassociatedwithsupplychainconstraints,productlinemoves,andfuelsurchargesrelatedtoincreasedglobalfuelcosts.GlobalfuelcostshavedeclinedsignificantlysinceSeptember30,2008.Futurevolatilityinfuelcostsmayimpactfutureearningsresults.ElectricalPowerSystemssegmentearningsincreased108%,attributabletothefollowing(inthousands):EarningsfortheyearendedSeptember30,2007................................$20,294•Volumechanges.....................................................19,118•Sellingpricechanges..................................................1,496•Salesmix..........................................................(2,110)•Foreignexchangeratechanges...........................................5,883•Other,net..........................................................(2,378)•EarningsfortheyearendedSeptember30,2008.............................$42,303TheimprovementinearningsreflectstheintegrationofouracquisitioninOctober2006ofSEG.Salesvolumeishigherduetoinverterproductssoldintowindpowerapplications.Achangeinsalesmixandchangesintheexternalmarketputpressureonmargins.ForeigncurrencytranslationearningsincreasedprimarilyasaresultofthechangeintheEuroagainsttheUSDduringfiscal2008.AsignificantportionofElectricalPowerSystems’salesandmanycostsaretransactedinEurowhichisthentranslatedintoUSDforfinancialstatementpurposes.Also,asignificantportionofElectricalPowerSystems’productcostsareincurredinUSDwhichcontributedtoincreasedmarginsonsalesdenominatedinEuros.Duringfiscal2008,thefavorablechangesintheeuroresultedina29%netincreaseinearnings.Nonsegmentexpensesdecreased1%in2008ascomparedto2007,attributabletothefollowing(inthousands):NonsegmentexpensesfortheyearendedSeptember30,2007......................$31,720•Accrualsforalegalmattersandarbitration.................................(4,376)•Stock-basedcompensationexpense.......................................739•Other.............................................................3,263•NonsegmentexpensesfortheyearendedSeptember30,2008...................$31,346Amongtheotherfactorsaffectingnonsegmentexpensesarenormalvariationsinlegalandotherprofessionalservices.Weaccrueforindividuallegalmattersthatwebelievearelikelytoresultinalosswhenultimatelyresolvedusingestimatesofthemostlikelyamountofloss.Formoreinformationaboutcontingencies,seeNote18totheConsolidatedFinancialStatementsin“Item8,FinancialStatementsandSupplementaryFinancialData.”31Incometaxeswereprovidedataneffectiverateonearningsbeforeincometaxesof33.0%infiscal2008comparedto25.6%infiscal2007.Thechangeintheeffectivetaxratewasattributabletothefollowing(asapercentofearningsbeforeincometaxes):•EffectivetaxratefortheyearendedSeptember30,2007..........................25.6%•Adjustmentsofthebeginning-of-yearbalanceofvaluationallowancesfordeferredtaxassets..............................................................(1.5)•Changeinestimatesoftaxesforpreviousperiodsandauditsettlementsin2008ascomparedto2007.....................................................9.0•Researchcreditin2008ascomparedto2007..................................2.1•Germantaxlawchanges..................................................(2.3)•Otherchanges,net......................................................0.1•EffectivetaxratefortheyearendedSeptember30,2008..........................33.0%Thefiscal2008changeinthebeginning-of-yearvaluationallowancesreducedincometaxexpenseby$2.7million.Weestablishvaluationallowancestoreflecttheestimatedamountofdeferredtaxassetsthatmightnotberealized.Bothpositiveandnegativeevidenceareconsideredinformingourjudgmentastowhetheravaluationallowanceisappropriate,andmoreweightisgiventoevidencethatcanbeobjectivelyverified.Valuationallowancesarereassessedwhenevertherearechangesincircumstancesthatmaycauseachangeinourjudgments.Infiscal2008,additionalobjectiveevidencebecameavailableregardingearningsintaxjurisdictionsthathaveunexpirednetoperatinglosscarryforwardsthataffectedourjudgmentaboutthevaluationallowance.Incometaxesforbothfiscal2008andfiscal2007wereaffectedbychangesinestimatesofincometaxesforpreviousyears.Inbothyears,thechangeswereprimarilyrelatedtosettlementsandresolutionsofincometaxmatters.Thesechangesreducedtheeffectivetaxrateforfiscal2008byapproximately1.2%andforfiscal2007approximately10.2%ofpretaxearnings.Theeffectivetaxratecomparisonbetweenfiscal2008andfiscal2007wasalsoaffectedbytheretroactiveextensionofthetaxcreditforincreasingresearchactivitiesavailableinfiscal2007butnotinfiscal2008.ThiscreditexpiredonDecember31,2007.AnotherretroactiveextensionwasapprovedinOctober2008thatwillbenefitoureffectivetaxrateinfiscal2009.Amongtheotherchangesinoureffectivetaxrateweretheeffectsofchangesintherelativemixofearningsbytaxjurisdiction.2007Comparedto2006TurbineSystemssegmentearningsincreased29%,attributabletothefollowing(inthousands):•EarningsfortheyearendedSeptember30,2006.............................$67,584•Volumechanges.....................................................15,843•Sellingpricechanges..................................................6,775•Variablecompensation.................................................(6,421)•Other,net..........................................................3,572•EarningsfortheyearendedSeptember30,2007.............................$87,353Salesvolumechangesarediscussedaboveaspartofthediscussionofthechangesinnetexternalsales.SellingpriceincreasesprimarilyaffectedindustrialOEMproductsandsparesandcomponentsusedintheaerospaceaftermarket.VariablecompensationpaidtoTurbineSystems’memberswashigherin2007thanin2006,drivenbyperformance-basedfactors.32EngineSystemssegmentearningsincreased40%,attributabletothefollowing(inthousands):•EarningsfortheyearendedSeptember30,2006.............................$40,829•Volumechanges.....................................................10,591•Sellingpricechanges..................................................4,552•Marginchanges......................................................5,687•Reducedcostsrelatedto2006restructuring.................................2,327•Reductioninotherselling,generalandadministrativeexpenses,includingexchangerategains/(loss).....................................................1,200•Variablecompensation.................................................(4,596)•Other.............................................................(3,606)•EarningsfortheyearendedSeptember30,2007.............................$56,984Afterflatsalesinfiscal2006,manyofEngineSystems’domesticandinternationalmarketsbeganexperi-encinggrowthinfiscal2007.Salesvolumesincreasedandwerematchedwithamodestpriceincrease.Improve-mentsingrossmarginsweretheresultofproductivitygainsandafavorableproductshipmentmix.Qualityimprovementsreducedwarrantyandscrapexpenses.Otherselling,general,andadministrativeexpensesdecreasedduetoreducedcurrencylossesassociatedwithEngineSystems’non-U.S.locations.Thestrongersalesenvironment,improvedmargins,andincreasedprofitabilityresultedinhigherperformance-basedvariablecompensationexpensesinfiscal2007.ElectricalPowerSystemssegmentearningsincreased353%,attributabletothefollowing(inthousands):•EarningsfortheyearendedSeptember30,2006.............................$4,475•Salesvolume........................................................4,769•Improvementsinmaterialcosts..........................................2,853•AcquisitionofSEG...................................................13,041•Variablecompensation.................................................(998)•Researchanddevelopmentcosts,excludingSEG.............................841•Increaseinselling,generalandadministrativeexpenses........................(1,245)•Other.............................................................(3,442)•EarningsfortheyearendedSeptember30,2007.............................$20,294OnOctober31,2006,weacquired100%ofthestockofSEG.SEGhadsalesofapproximately$60.0millionincalendaryear2005.Thisbusinessaddsdimensionandrangetoourcoretechnologiesandproductportfolioforthepowergenerationmarket,includingprotectionandcomprehensivecontrolsystemsforpowerdistributionappli-cations,andpowerinvertersforwindturbines—areaswehavetargetedforgrowth.Nonsegmentexpensesincreased22%,attributabletothefollowing(inthousands):•NonsegmentexpensesfortheyearendedSeptember30,2006...................$26,052•Accrualsforalegalmatter.............................................(3,171)•Stock-basedcompensationexpense.......................................911•Variablecompensation.................................................3,332•Other.............................................................4,596•NonsegmentexpensesfortheyearendedSeptember30,2007...................$31,720Weaccrueforindividuallegalmattersthatwebelievearelikelytoresultinalosswhenultimatelyresolvedusingestimatesofthemostlikelyamountofloss.Amongtheotherfactorsaffectingnonsegmentexpensesarenormalvariationsinlegalandotherprofessionalservices.33Incometaxeswereprovidedataneffectiverateonearningsbeforeincometaxesof25.6%infiscal2007comparedto17.3%in2006.Thechangeintheeffectivetaxratewasattributabletothefollowing(asapercentofearningsbeforeincometaxes):•EffectivetaxratefortheyearendedSeptember30,2006..........................17.3%•Adjustmentsofthebeginning-of-yearbalanceofvaluationallowancesfordeferredtaxassets..............................................................16.2•Changeinestimatesoftaxesforpreviousperiodsandauditsettlementsin2007ascomparedto2006.....................................................(8.9)•Researchcreditin2007ascomparedto2006..................................(1.5)•ChangeinGermanincometaxrate..........................................2.3•Otherchanges,net......................................................0.2•EffectivetaxratefortheyearendedSeptember30,2007..........................25.6%Thefiscal2006changeinthebeginning-of-yearvaluationallowancesreducedincometaxexpenseby$13.7million.Exclusiveofthisitem,theeffectivetaxrateforfiscal2006was33.5%.Weestablishvaluationallowancestoreflecttheestimatedamountofdeferredtaxassetsthatmightnotberealized.Bothpositiveandnegativeevidenceareconsideredinformingourjudgmentastowhetheravaluationallowanceisappropriate,andmoreweightisgiventoevidencethatcanbeobjectivelyverified.Valuationallowancesarereassessedwhenevertherearechangesincircumstancesthatmaycauseachangeinourjudgments.Infiscal2006andfiscal2007,additionalobjectiveevidencebecameavailableregardingearningsintaxjurisdictionsthathaveunexpirednetoperatinglosscarryforwardsthataffectedourjudgmentaboutthevaluationallowance.Incometaxesforbothfiscal2007andfiscal2006wereaffectedbychangesinestimatesofincometaxesforpreviousyears.In2007,thechangeswereprimarilyrelatedtothesettlementofincometaxaudits.Thesechangesreducedtheeffectivetaxrateforfiscal2007byapproximately10.2%ofpretaxearnings.Infiscal2006,thechangeswereprimarilyrelatedtothefavorableresolutionofcertaintaxmatters.Thesechangesreducedtheeffectivetaxrateforfiscal2006byapproximately1.3%ofpretaxearnings.Theeffectivetaxratecomparisonbetweenfiscal2007andfiscal2006wasalsoaffectedbytheextensionofthetaxcreditforincreasingresearchactivities.ThiscreditexpiredonDecember31,2005butwasretroactivelyreinstatedinDecember2006,andwerecognizedabenefittooureffectivetaxrateforfiscal2007reflectingtheextension.Amongtheotherchangesinoureffectivetaxrateweretheeffectsofchangesintheamountsofextraterritorialincomeexclusionandtheeffectsofchangesintherelativemixofearningsbytaxjurisdiction.OutlookTheeconomyoverthelastseveralmonthshasbeensignificantlyimpactedbyfinancialinstitutioncreditcrisesultimatelyimpactingthebroadercreditmarketsandthefinancingavailabletomanycompanies,bothintheU.S.andabroad.MoresignificantlytoWoodward,atthemoment,therapidweakeningoftheEuroandtheGBPcoupledwithourcontinuinggrowthinEuropeishavingapronouncedimpactonouroutlookfor2009.PreparationfortheimpactsofmarketfluctuationshasbeenastrategicobjectiveforanumberofyearsandWoodwardiswellpositionedtomaintainliquidityandrelativeprofitabilityintheeventofpotentialsalesdeclines.Wehavebeeninvestingmorebroadlybothregionallyandacrossourmarketstoreducespecificriskwithrespecttoanyoneeconomyormarket.Ourfocusonenergycontrolandoptimizationacrossawiderangeofapplicationsandresourcesmitigatesfluctuationsinanyonearea.Further,ourproductsarekeycomponentsofcriticalinfrastructureprojectswheregovernmentfundingmaysupplementprivatefinancing.Wearefocusingonourcorecompetenciestobetterserveourcustomers,drivingimprovementsinthecashconversioncycle,reducingoperatingcostsinmanyareas,andhavelockedinfavorablelong-termfinancing.Atthistime,ourordervolumesindicateamodestincreaseinsalesvolumesin2009.However,thesignificanteffectsofrapidlyweakenedEuropeancurrenciesmayoffsetthisincreaseandwenowanticipateorganicsalestobeflattoslightlyup.34FINANCIALCONDITION,LIQUIDITY,ANDCAPITALRESOURCESAssets(InThousands)atSeptember30,20082007TurbineSystems.............................................$371,275$330,969EngineSystems..............................................242,350250,908ElectricalPowerSystems.......................................133,928109,674Nonsegmentassets...........................................179,464138,216Consolidatedtotalassets.......................................$927,017$829,767TurbineSystemssegmentassetsincreasedprimarilyduetoincreasesinaccountsreceivableandinventoryinresponsetoincreasesinsalesvolume.Inaddition,property,plant,andequipmentincreasedduetoequipmentpurchasesandthemodernizationofthesegment’slargestmanufacturingfacility.Weplantobeginconstructionofastate-of-the-arttestfacilityforaircraftenginefuelandcontrolsystemsinRockford,Illinois,onwhichweexpecttoinvestapproximately$25.0millionwithinthenexttwoyears.EngineSystemssegmentassetsdecreasedprimarilyduetodecreasesinaccountsreceivable,property,plantandequipment,andintangibleassets.Accountsreceivabledecreasedasaresultofanimprovementinthemanagementofaccountsreceivable.Thedecreasesinproperty,plant,andequipmentandintangibleassetswereduetonormaldepreciationandamortization,aswellastransferofcertainassetstoothersegmentsornonsegmentuse.Thesedecreaseswereoffsetbyanincreaseininventoryinresponsetoincreasesinsalesvolume.ElectricalPowerSystemssegmentassetsincreasedprimarilyasaresultofincreasesinaccountsreceivableandinventoryinresponsetoincreasesinsalesvolumeandpurchasesofproperty,plant,andequipment.Nonsegmentassetsincreasedprimarilybecauseofanincreaseincashandcashequivalentsrelatedtoincreasesinsalesvolumeoffsetbytherepurchaseofcommonstock.ChangesincasharediscussedmorefullyinaseparatesectionofthisManagement’sDiscussionandAnalysis.OtherBalanceSheetMeasures(InThousands)atSeptember30,20082007Workingcapital..............................................$369,211$275,611Long-termdebt,lesscurrentportion...............................33,33745,150Otherliabilities..............................................67,69557,404Stockholders’equity..........................................629,628544,431Workingcapital(currentassetslesscurrentliabilities)increasedatSeptember30,2008fromSeptember30,2007primarilyasaresultofanincreaseinsalesvolumewhichledtoanincreaseininventoriesandaccountsreceivable,andadecreaseinshort-termborrowings,partiallyoffsetbyanincreaseinaccountspayableandaccruedliabilities.AsdiscussedinNote22totheConsolidatedFinancialStatementsin“Item8—FinancialStatementsandSupplementaryData,”onOctober1,2008,wecompletedtheacquisitionofMPCinatransactionvaluedatapproximately$383.0million.OnOctober6,2008,wecompletedtheacquisitionoftheoutstandingcapitalstockofMotoTronandtheintellectualpropertyassetsownedbyitsparentcompany,BrunswickCorporation,thatareusedinconnectionwiththeMotoTronbusinessforapproximately$17.0million.TheOctober2008acquisitionsofMPCandMotoTron,includingtherepaymentofcertainobligationsassociatedwiththeseacquisitions,wereprimarilyfinancedwithatotalof$400.0millionofdebtissuedonOctober1,2008andOctober30,2008,asdiscussedbelow.Long-termdebt,lesscurrentportiondecreasedasaresultofpaymentsmadeduringtheperiod.AsofSeptember30,2008,wehadarevolvinglineofcreditfacilitywithasyndicateofU.S.bankstotaling$225.0million,35withanoptiontoincreasetheamountofthelineto$350.0million.Inaddition,wehaveotherlineofcreditfacilities,whicharegenerallyreviewedannuallyforrenewal,whichtotaled$19.9millionatbothSeptember30,2008and2007.Also,wehaveadditionalshort-termborrowingcapabilitiestiedtonetamountsondepositatcertainforeignfinancialinstitutionsunderwhich$4.0millionhadbeenadvancedasofSeptember30,2008and$5.5millionhadbeenadvancedasofSeptember30,2007.Thetotalamountofborrowingsunderallfacilitieswas$4.0millionatSeptember30,2008and$5.5millionatSeptember30,2007.Theweighted-averageinterestrateforoutstandingborrowingsundertheselineofcreditfacilities,whichwereatratessignificantlylowerthanthosetypicalintheU.S.,was3.0%September30,2008and3.8%atSeptember30,2007.Provisionsofdebtagreementsincludecovenantscustomarytosuchagreementsthatrequireustomaintainspecifiedminimumormaximumfinancialmeasuresandplacelimitationsonvariousinvestingandfinancingactivities.Theagreementsalsopermitthelenderstoacceleraterepaymentrequirementsintheeventofamaterialadverseevent.Ourmostrestrictivecovenantsrequireustomaintainaminimumconsolidatednetworth,amaximumconsolidateddebttoconsolidatedoperatingcashflowratio,andamaximumconsolidateddebttoearningsbeforeincometaxes,depreciation,andamortization(“EBITDA”)ratio,asdefinedintheagreements.WewereincompliancewithallcovenantsatSeptember30,2008.TermLoanCreditAgreementAsdiscussedinNote22totheConsolidatedFinancialStatementsin“Item8—FinancialStatementsandSupplementaryData,”OnOctober1,2008,weenteredintoaTermLoanCreditAgreement(the“TermLoanCreditAgreement”).TheTermLoanCreditAgreementprovidesfora$150.0millionunsecuredtermloanfacility,andmaybeexpandedbyupto$50.0millionofadditionalindebtednessfromtimetotime,subjecttotheourcompliancewithcertainconditionsandthelenders’participation.TheTermLoanCreditAgreementgenerallybearsinterestatLIBORplus1.00%to2.25%,requiresquarterlyprincipalpaymentsof$1,875beginninginMarch,2009,andmaturesinOctober2013.TheTermLoanCreditAgreementcontainscustomarytermsandconditions,including,amongothers,covenantsthatplacelimitsonourabilitytoincurliensonassets,incuradditionaldebt(includingaleverageorcoveragebasedmaintenancetest),transferorsellourassets,mergeorconsolidatewithotherpersons,makecapitalexpenditures,makecertaininvestments,makecertainrestrictedpaymentsandenterintomaterialtransactionswithaffiliates.TheTermLoanCreditAgreementcontainsfinancialcovenantsrequiringthat(a)ourratioofconsolidatednetdebttoEBITDAnotexceed3.5to1.0and(b)wehaveaminimumconsolidatednetworthof$400.0millionplus50%ofnetincomeforanyfiscalyearand50%ofthenetproceedsofcertainissuancesofcapitalstock,ineachcaseonarollingfourquarterbasis.TheTermLoanCreditAgreementalsocontainseventsofdefaultcustomaryforsuchfinancings,theoccurrenceofwhichwouldpermitthelenderstoacceleratetheamountsdue.OurobligationsundertheTermLoanCreditAgreementareguaranteedbyWoodwardFST,Inc.,ourwhollyownedsubsidiary(“WoodwardFST”).AportionoftheproceedsfromtheTermLoanCreditAgreementwasusedtofinancetheMPCacquisition.NotePurchaseAgreementOnOctober1,2008,weenteredintoaNotePurchaseAgreement(the“NotePurchaseAgreement”)relatingtothesalebyWoodwardofanaggregateprincipalamountof$250.0millioncomprisedof(a)$100.0millionaggregateprincipalamountofSeriesBSeniorNotesdueOctober1,2013(the“SeriesBNotes”),(b)$50.0millionaggregateprincipalamountofSeriesCSeniorNotesdueOctober1,2015(the“SeriesCNotes”)and(c)$100.0mil-lionaggregateprincipalamountofSeriesDSeniorNotesdueOctober1,2018(the“SeriesDNotes”and,togetherwiththeSeriesBNotesandSeriesCNotes,the“Notes”)inaseriesofprivateplacementtransactions.OnOctober1,2008,$200.0millionaggregateprincipalamountofNotesweresold,comprisedof$80.0millionaggregateprincipalamountoftheSeriesBNotes,$40.0millionaggregateprincipalamountoftheSeriesCNotesand$80.0millionaggregateprincipalamountoftheSeriesDNotes.InconnectionwiththeNotePurchaseAgreemententeredintoonOctober1,2008,weissuedanadditional$50.0millionaggregateprincipalamountofNoteswith36similarmaturitiesandinterestratesonOctober30,2008.TheNotesissuedintheprivateplacementhavenotbeenregisteredundertheSecuritiesActof1933andmaynotbeofferedorsoldintheU.S.absentregistrationoranapplicableexemptionfromregistrationrequirements.TheSeriesBNoteshaveamaturitydateofOctober1,2013andgenerallybearinterestatarateof5.63%perannum.TheSeriesCNoteshaveamaturitydateofOctober1,2015andgenerallybearinterestatarateof5.92%perannum.TheSeriesDNoteshaveamaturitydateofOctober1,2018andgenerallybearinterestatarateof6.39%perannum.Undercertaincircumstances,theinterestrateoneachseriesofNotesissubjecttoincreaseifourleverageratioofconsolidatednetdebttoconsolidatedEBITDAincreasesbeyond3.5to1.0.InterestontheNotesispayablesemi-annuallyonApril1andOctober1ofeachyearuntilallprincipalispaid.InterestpaymentscommenceonApril1,2009.OurobligationsundertheNotePurchaseAgreementandtheNotesrankequalinrightofpaymentwithallofourotherunsecuredunsubordinateddebt,includingouroutstandingdebtundertheTermLoanCreditAgreement.TheNotePurchaseAgreementcontainsrestrictivecovenantscustomaryforsuchfinancings,including,amongotherthings,covenantsthatplacelimitsonourabilitytoincurliensonassets,incuradditionaldebt(includingaleverageorcoveragebasedmaintenancetest),transferorsellourassets,mergeorconsolidatewithotherpersons,andenterintomaterialtransactionswithaffiliates.TheNotePurchaseAgreementalsocontainseventsofdefaultcustomaryforsuchfinancings,theoccurrenceofwhichwouldpermitthePurchasersoftheNotestoacceleratetheamountsdue.TheNotePurchaseAgreementcontainsfinancialcovenantsrequiringthatour(a)ratioofconsolidatednetdebttoconsolidatedEBITDAnotexceed4.0to1.0duringanymaterialacquisitionperiod,or3.5to1.0atanyothertimeonarollingfourquarterbasis,and(b)consolidatednetworthatanytimeequalorexceed$425.0millionplus50%ofconsolidatednetearningsforeachfiscalyearbeginningwiththefiscalyearendingSeptember30,2008.Additionally,undertheNotePurchaseAgreement,wemaynotpermittheaggregateamountofprioritydebttoatanytimeexceed20%ofourconsolidatednetworthattheendofthethenmostrecentlyendedfiscalquarter.Wearepermittedatanytime,atouroption,toprepayall—anypartof—thethenoutstandingprincipalamountofanyseriesoftheNotesat100%oftheprincipalamountoftheseriesofNotestobeprepaid(but,inthecaseofpartialprepayment,notlessthan$1.0million),togetherwithinterestaccruedonsuchamounttobeprepaidtothedateofpayment,plusanyapplicablemake-wholeamount.Themake-wholeamountiscomputedbydiscountingtheremainingscheduledpaymentsofinterestandprincipaloftheNotesbeingprepaidatadiscountrateequaltothesumof50basispointsandtheyieldtomaturityofU.S.treasurysecuritieshavingamaturityequaltotheremainingaveragelifeoftheNotesbeingprepaid.AportionoftheproceedsfromtheissuanceoftheNoteswasusedtofinancetheMPCacquisition.CommitmentsandcontingenciesatSeptember30,2008,includevariousmattersarisingfromthenormalcourseofbusiness.SeepreviousdiscussioninItem3.“LegalProceedings”andNote18totheConsolidatedFinancialStatementsinItem8—“FinancialStatementsandSupplementaryData.”Stockholders’equityatSeptember30,2008,increased16%overthepriorfiscalyear.Increasesduetonetearnings,salesoftreasurystock,andincometaxbenefitsfromtheexerciseofstockoptionsbyemployeesduringfiscal2008werepartiallyoffsetbycashdividendpaymentsandpurchasesoftreasurystock.InJuly2006,theBoardofDirectorsauthorizedtherepurchaseofupto$50.0millionofouroutstandingsharesofcommonstockontheopenmarketorinprivatelynegotiatedtransactionsoverathree-yearperiod(the“2006Authorization”).Duringfiscalyear2007,wepurchased$38.6millionofourcommonstockunderthe2006Authorization.Pursuanttothe2006Authorization,inAugust2007,weenteredintoanagreementwithJ.P.MorganChaseBankwherebywepurchasedapproximately989,000commonstocksharesinexchangefor$31.1millionatanaveragepriceof$31.47percommonshare.ThisarrangementwithJ.P.MorganChaseBankcompletedthestockrepurchaseprogrampreviouslyauthorizedinJuly2006.DuringSeptember2007,theBoardofDirectorsauthorizedanewstockrepurchaseofupto$200.0millionofouroutstandingsharesofcommonstockontheopenmarketorinprivatelynegotiatedtransactionsoverathree-yearperiodthatwillendinOctober2010(the“2007Authorization”).37Duringfiscal2008,wepurchasedatotalof$31.9millionofourcommonstockunderthe2007Authorizationatanaveragepriceof$29.94pershare.Atwo-for-onestocksplitwasapprovedbystockholdersatthe2007annualmeetingofstockholdersonJanuary23,2008.ThisstocksplitbecameeffectiveforstockholdersatthecloseofbusinessonFebruary1,2008.TheeffectsofthestocksplitarereflectedinthefinancialstatementsfiledaspartofthisForm10-K.Inaddition,inaccordancewithstockoptionplanprovisions,thetermsofalloutstandingstockoptionawardswereproportionatelyadjusted.CashFlowsYearEndedSeptember30,200820072006(Inthousands)Netcashprovidedbyoperatingactivities..................$125,354$117,718$80,536Netcashusedininvestingactivities.....................(35,909)(67,048)(31,015)Netcashusedinfinancingactivities.....................(48,904)(66,496)(51,433)Effectofexchangerateonchanges......................(2,343)3,7431,033Netincrease(decrease)incashandcashequivalents.........38,198(12,083)(879)Cashandcashequivalentsatbeginningoftheyear..........71,63583,71884,597Cashandcashequivalentsattheendoftheyear............$109,833$71,635$83,7182008Comparedto2007Netcashflowsprovidedbyoperatingactivitiesincreasedby$7.6millioncomparedtofiscal2007,primarilyduetoanincreaseinnetearningsandcollectionsofincometaxrefunds,partiallyoffsetbyanincreaseinworkingcapitaltosupportourgrowingbusiness.Netcashflowsusedininvestingactivitiesdecreasedby$31.1millioncomparedtofiscal2007,primarilyasaresultofabusinessacquisitionduringfiscal2007.Capitalexpendituresincreasedby$9.1millioninfiscal2008comparedtofiscal2007.Wearecurrentlyplanningtobeginconstructionofastate-of-the-arttestfacilityforaircraftenginefuelandcontrolsystemsinRockford,Illinois.Weexpecttoinvestapproximately$25.0millionforthistestfacilitywithinthenexttwoyears,approximately$9.0milliontomodernizeandupgradeotherRockfordfacilities,andthebalanceforvariousotherprojectsincludingsystemstestcapabilityexpansionsinColoradoandanewfacilityinPoland.Wecontinuetosupportouradvancedtestfacilitiesandcoremanufacturingprocessimprovements.Increasesincapitalexpendituresareexpectedtobefundedthroughcashflowsfromoperationsandavailablerevolvinglinesofcredit.Netcashflowsusedinfinancingactivitiesdecreasedby$17.6millionfromfiscal2007,primarilyasaresultofreducedrepurchasesoftreasurystockinfiscal2008andincreasesinexcesstaxbenefitsfromstockcompensationcomparedtofiscal2007.Overall,cashandcashequivalentsincreasedby$38.2millionduringfiscal2008to$109.8millionatyearend.Webelievecashonhandandavailableshort-termborrowingsatyearendshouldcontinuetoprovideuswithsignificantliquiditytofundon-goingoperations.Thedebttototalcapitalizationratiowas7.2%asofSeptember30,2008,comparedto10.9%asofSeptember30,2007.Sharepurchasesoftreasurystocktotaledto$39.8millioninfiscal2008and$51.0millioninfiscal2007.ThebalanceremainingatSeptember30,2008ontheSeptember2007authorizationis$168.1million.2007Comparedto2006Netcashflowsprovidedbyoperatingactivitiesincreasedby$37.2millionduringfiscal2007ascomparedtofiscal2006primarilyduetoanincreaseinnetearningsanddeferredincometaxes,partiallyoffsetbyanincreaseinworkingcapital.38Netcashflowsusedininvestingactivitiesincreasedby$36.0millionduringfiscal2007ascomparedtofiscal2006primarilyasaresultofabusinessacquisition.Netcashflowsusedinfinancingactivitiesincreasedby$15.1millionduringfiscal2007ascomparedtofiscal2006primarilyasaresultofanincreaseinthepurchaseoftreasurystockandpaymentsonourborrowingundertherevolvinglinesofcredit,partiallyoffsetbyincreasedsalesoftreasurystock.InAugust2007,theCompanyenteredintoanacceleratedstockrepurchaseagreement.SeeNote1totheConsolidatedFinancialStatementsin“Item8—FinancialStatementsandSupplementaryData”forfurtherdiscussion.Off-BalanceSheetArrangementsandContractualObligationsContractualObligationsAsummaryofourconsolidatedcontractualobligationsandcommitmentsasofSeptember30,2008isasfollows:YearEndingSeptember30,20092010201120122013Thereafter(Inthousands)Long-termdebtprincipal.............$11,377$11,197$11,064$10,878$—$—Interestondebtobligations...........2,4731,7551,047347——Operatingleases...................4,4003,8003,1002,9002,5003,100Rebates.........................3,0003,0001,200———Purchaseobligations................132,9972,222————Other...........................530————22,046Total...........................$154,777$21,974$16,411$14,125$2,500$25,146Purchaseobligationsincludeamountscommittedunderlegallyenforceablecontractsorpurchaseordersforgoodsandserviceswithdefinedtermsastoprice,quantity,delivery,andterminationliability.Interestobligationsonfloatingratedebtinstrumentsarecalculatedforfutureperiodsusinginterestratesineffectattheendoffiscal2008.SeeNote11totheConsolidatedFinancialStatementsin“Item8—FinancialStatementsandSupplementaryData”forfurtherdetailsonourlong-termdebt.Rebatesreflectcontractuallyrequiredpaymentstocustomers,whichmaybesubsequentlyrecovered,andexcludepaymentsoffuturerebateobligationstocustomersthatwilllikelybepaidinconnectionwithfuturesalesactivity.Theotherobligationsamountrepresentsourbestreasonableestimateforuncertaintaxpositionsatthistimeandmaychangeinfutureperiods,asthetimingofthepaymentsandwhethersuchpaymentswillactuallyberequiredcannotbereasonableestimated.Theabovetabledoesnotreflectthefollowingitems:•Contributionstoourretirementpensionbenefitplanswhichweestimatewilltotalapproximately$2.4mil-lionin2009.Pensioncontributionsinfutureyearswillvaryasaresultofanumberoffactors,includingactualplanassetreturnsandinterestrates.•Contributionstoourhealthcarebenefitplanswhichweestimatewilltotal$2.8millionin2009,lesstheamountoffederalsubsidiesassociatedwithourprescriptiondrugbenefitsthatwereceiveestimatedtobe$0.5million.Retirementhealthcarecontributionsaremadeona“pay-as-you-go”basisaspaymentsaremadetohealthcareproviders,andsuchcontributionswillvaryasaresultofchangesinthefuturecostofhealthcarebenefitsprovidedforcoveredretirees.Guaranteesandlettersofcredittotalingapproximately$8.2millionwereoutstandingasofSeptember30,2008,someofwhichweresecuredbycashandcashequivalentsatfinancialinstitutionsorbyWoodwardlineofcreditfacilities.39AsdiscussedinNote22totheConsolidatedFinancialStatementsin“Item8—FinancialStatementsandSupplementaryData,”anaggregate$400.0millionofadditionaldebtwasissuedonOctober1,2008andOctober30,2008,asubstantialportionofwhichwasusedtofinancetheMPCacquisition.Scheduledfutureprincipalpaymentsonthe$400.0millionofdebtissuedinOctober2008,andassociatedinterestexpense,estimatedbasedonratesineffectatOctober31,2008,areasfollows(inthousands):YearEndingSeptember30,PrincipalInterest2009......................................................$5,625$23,0782010......................................................7,50022,9492011......................................................7,50022,5272012......................................................7,50022,1252013......................................................7,50021,682Thereafter..................................................364,37537,888Total......................................................$400,000150,249RecentlyAdoptedandIssuedButNotYetEffectiveAccountingStandardsA.Accountingchangesandrecentlyadoptedaccountingstandards:IncometaxesFIN48:InJuly2006,theFinancialAccountingStandardsBoard(“FASB”)issuedFinancialInterpretationNo.48,“AccountingforUncertaintyinIncomeTaxes-aninterpretationofFASBStatementNo.109”(“FIN48”)whichprovidesguidanceonthefinancialstatementrecognition,measurement,reporting,anddisclosureofuncertaintaxpositionstakenorexpectedtobetakeninataxreturn.FIN48addressesthedeterminationofwhethertaxbenefits,eitherpermanentortemporary,shouldberecordedinthefinancialstatements.Forthosetaxbenefitstoberecognized,ataxpositionmustbemore-likely-than-nottobesustaineduponexaminationbythetaxingauthorities.Theamountrecognizedismeasuredasthelargestamountofbenefitthatisgreaterthan50%likelyofbeingrealizeduponultimatesettlement.WoodwardadoptedtheprovisionsofFIN48onOctober1,2007,asrequired.ThechangeinmeasurementcriteriacausedWoodwardtorecognizeadecreaseintheretainedearningscomponentofstockholders’equityof$7,702.Foradditionalinformation,seeNote4,“IncomeTaxes”totheConsolidatedFinancialStatementsinItem8—“FinancialStatementsandSupplementaryData.”B.Issuedbutnotyeteffectiveaccountingstandards:SFAS157:InSeptember2006,theFASBissuedSFASNo.157,“FairValueMeasurements”(“SFAS157”),whichdefinesfairvalue,establishesaframeworkformeasuringfairvalue,andrequiresadditionaldisclosuresaboutaCompany’sfinancialassetsandliabilitiesthataremeasuredatfairvalue.SFAS157doesnotchangeexistingguidanceonwhetherornotaninstrumentiscarriedatfairvalue.SFAS157iseffectiveforfinancialstatementsissuedforfiscalyearsbeginningafterNovember15,2007,andinterimperiodswithinthosefiscalyears.InFebruary2008,theFASBissuedFASBStaffPosition(“FSP”)No.FAS157-1,“ApplicationofFASBStatementNo.157toFASBStatementNo.13andOtherAccountingPronouncementsThatAddressFairValueMeasurementsforPurposesofLeaseClassificationorMeasurementunderStatement13”(“FSPFAS157-1”)whichexcludesSFASNo.13,“AccountingforLeases”andcertainotheraccountingpronouncementsthataddressfairvaluemeasurements,fromthescopeofSFAS157.InFebruary2008,theFASBissuedFSPNo.FAS157-2,“EffectiveDateofFASBStatementNo.157”(“FSPFAS157-2”)whichprovidesaone-yeardelayedapplicationofSFAS157fornonfinancialassetsandliabilities,exceptforitemsthatarerecognizedordisclosedatfairvalueinthefinancialstatementsonarecurringbasis(atleastannually).WearerequiredtoadoptSFAS157asamendedbyFSPFAS157-1andFSPFAS157-2onOctober1,2008,thebeginningoffiscal2009.Theadoptionisnotexpectedtohaveamaterialimpactonourconsolidatedfinancialstatements.InOctober2008,theFASBissuedFSPNo.FAS157-3,“DeterminingtheFairValueofaFinancialAssetinaMarketThatIsNotActive”(“FSPFAS157-3”),whichclarifiestheapplicationofSFAS157whenthemarketfora40financialassetisinactive.Specifically,FSPFAS157-3clarifieshow(1)management’sinternalassumptionsshouldbeconsideredinmeasuringfairvaluewhenobservabledataarenotpresent,(2)observablemarketinformationfromaninactivemarketshouldbetakenintoaccount,and(3)theuseofbrokerquotesorpricingservicesshouldbeconsideredinassessingtherelevanceofobservableandunobservabledatatomeasurefairvalue.TheguidanceinFSPFAS157-3iseffectiveimmediatelyandwillapplytousuponadoptionofSFAS157.SFAS159:InFebruary2007,theFASBissuedSFASNo.159,“TheFairValueOptionforFinancialAssetsandFinancialLiabilities—IncludinganAmendmentofFASBStatementNo.115”(“SFAS159”).SFAS159isexpectedtoexpandtheuseoffairvalueaccountingbutdoesnotaffectexistingstandardswhichrequirecertainassetsorliabilitiestobecarriedatfairvalue.TheobjectiveofSFAS159istoimprovefinancialreportingbyprovidingcompanieswiththeopportunitytomitigatevolatilityinreportedearningscausedbymeasuringrelatedassetsandliabilitiesdifferentlywithouthavingtoapplycomplexhedgeaccountingprovisions.UnderSFAS159,acompanymaychoose,atspecifiedelectiondates,tomeasureeligibleitemsatfairvalueandreportunrealizedgainsandlossesonitemsforwhichthefairvalueoptionhasbeenelectedinearningsateachsubsequentreportingdate.SFAS159iseffectiveforfinancialstatementsissuedforfiscalyearsbeginningafterNovember15,2007,andinterimperiodswithinthosefiscalyears.Asaresult,SFAS159iseffectiveforusinthefirstquarteroffiscal2009.WedonotplantoapplySFAS159.EITF07-3:InJune2007,theEmergingIssuesTaskForce(“EITF”)issuedEITF07-3,“AccountingforNonrefundableAdvancePaymentsforGoodsorServicestoBeUsedinFutureResearchandDevelopmentActivities”(“EITF07-3”).EITF07-3addressesthediversitythatexistswithrespecttotheaccountingforthenon-refundableportionofapaymentmadebyaresearchanddevelopmententityforfutureresearchanddevelopmentactivities.TheEITFconcludedthatanentitymustdeferandcapitalizenon-refundableadvancepaymentsmadeforresearchanddevelopmentactivities,andexpensetheseamountsastherelatedgoodsaredeliveredortherelatedservicesareperformed.EITF07-3iseffectiveforinterimorannualreportingperiodsinfiscalyearsbeginningafterDecember15,2007(fiscal2009forus).WedonotexpecttheadoptionofEITF07-03tohaveamaterialimpactonourconsolidatedfinancialstatements.EITF07-1:InNovember2007,theEITFissuedEITF07-1,“AccountingforCollaborativeArrangements”(“EITF07-1”).EITF07-1,whichwillbeappliedretrospectively,requiresexpandeddisclosuresforcontractualarrangementswiththirdpartiesthatinvolvejointoperatingactivitiesandmayrequirereclassificationstopreviouslyissuedfinancialstatements.EITF07-1iseffectiveforinterimorannualreportingperiodsbeginningafterDecember15,2008(fiscal2010forus).WearecurrentlyevaluatingtheimpactEITF07-1mayhaveonourconsolidatedfinancialstatements.SFAS141(R):InDecember2007,theFASBissuedSFASNo.141(Revised)“BusinessCombinations”(“SFAS141(R)”).SFAS141(R)isintendedtoimprove,simplify,andconvergeinternationallytheaccountingforbusinesscombinations.UnderSFAS141(R),anacquiringentityinabusinesscombinationmustrecognizetheassetsacquired,liabilitiesassumed,andanynoncontrollinginterestintheacquiredentityattheacquisitiondatefairvalues,withlimitedexceptions.Inaddition,SFAS141(R)requirestheacquirertodiscloseallinformationthatinvestorsandotherusersneedtoevaluateandunderstandthenatureandfinancialimpactofthebusinesscombination.SFAS141(R)appliesprospectivelytobusinesscombinationsforwhichtheacquisitiondateisonorafterthebeginningofthefirstannualreportingperiodonorafterDecember15,2008.Earlieradoptionisprohibited.Accordingly,wewillrecordanddisclosebusinesscombinationsundertherevisedstandardbeginningOctober1,2009.SFAS160:InDecember2007,theFASBissuedSFASNo.160,“NoncontrollingInterestsinConsolidatedFinancialStatements—anAmendmentofAccountingResearchBulletin(“ARB”)51,”(“SFAS160”).ThisstatementamendsARB51toestablishaccountingandreportingstandardsforthenoncontrollinginterest(minorityinterest)inasubsidiaryandforthedeconsolidationofasubsidiary.SFAS160establishesaccountingandreportingstandardsthatrequire(i)noncontrollingintereststobereportedasacomponentofequity,(ii)changesinaparent’sownershipinterestwhiletheparentretainsitscontrollinginterestbeaccountedforasequitytransactions,and(iii)anyretainednoncontrollingequityinvestmentuponthedeconsolidationofasubsidiarybeinitiallymeasuredatfairvalue.SFAS160istobeappliedprospectivelytobusinesscombinationsconsummatedonorafterthebeginningofthefirstannualreportingperiodonorafterDecember15,2008.SFAS160iseffectiveforfiscalyearsbeginning41afterDecember15,2008.Asaresult,SFAS160iseffectiveforusinthefirstquarteroffiscal2010.WearecurrentlyevaluatingtheimpactSFAS160mayhaveonourconsolidatedfinancialstatements.SFAS161:InMarch2008,theFASBissuedSFASNo.161,“DisclosuresAboutDerivativeInstrumentsandHedgingActivities”(“SFAS161”).SFAS161isintendedtoimprovefinancialreportingaboutderivativeinstrumentsandhedgingactivitiesbyrequiringenhanceddisclosurestoenableinvestorstobetterunderstandtheireffectsonanentity’sfinancialposition,financialperformance,andcashflows.ThenewstandardiseffectiveforfinancialstatementsissuedforfiscalyearsandinterimperiodsbeginningafterNovember15,2008(fiscal2010forus).WearecurrentlyassessingtheimpactthatSFAS161mayhaveonourconsolidatedfinancialstatements.FSPFAS142-3:InApril2008,theFASBissuedFSPNo.FAS142-3,“DeterminationoftheUsefulLifeofIntangibleAssets”(“FSPFAS142-3”),whichimprovestheconsistencyoftheusefullifeofarecognizedintangibleassetamongvariouspronouncements.FSPFAS142-3iseffectiveforfiscalyearsbeginningafterDecember15,2008(fiscal2010forus).WearecurrentlyassessingtheimpactthatFSPFAS142-3mayhaveonconsolidatedfinancialstatements.SFAS162:InMay2008,theFASBissuedSFASNo.162,“TheHierarchyofGenerallyAcceptedAccountingPrinciples”(“SFAS162”).Thenewstandardisintendedtoimprovefinancialreportingbyidentifyingaconsistentframework,orhierarchy,forselectingaccountingprinciplestobeusedinpreparingfinancialstatementsthatarepresentedinconformitywithU.S.GAAPfornongovernmentalentities.Thenewstandardiseffective60daysfollowingtheSecurityandExchangeCommission’sapprovalofthePublicCompanyAccountingOversightBoardamendmentstoAUSection411,“TheMeaningofPresentFairlyinConformitywithGenerallyAcceptedAccountingPrinciples.”WearecurrentlyassessingtheimpactthatSFAS162mayhaveonourconsolidatedfinancialstatements.FSPEITF03-6-1:InJune2008,theFASBissuedFASBStaffPositionNo.EITF03-6-1,“DeterminingWhetherInstrumentsGrantedinStock-BasedPaymentTransactionsareParticipatingSecurities”(“FSPEITF03-6-1”).TheFSPaddresseswhetherinstrumentsgrantedinstock-basedpaymenttransactionsareparticipatingsecuritiespriortovestingand,therefore,needtobeincludedintheearningsallocationincomputingearningspershareunderthetwo-classmethoddescribedinparagraphs60and61ofSFASNo.128,“EarningsPerShare.”ThenewFSPiseffectiveforfinancialstatementsissuedforfiscalyearsbeginningafterDecember15,2008andinterimperiodswithinthoseyears(fiscal2010forus).Earlyapplicationisnotpermitted.Ourunvestedoptionsarenoteligibletoreceivedividends;therefore,FSPEITF03-06-1willnothaveanyimpactonourconsolidatedfinancialstatements.FSPFAS133-1:InSeptember2008,theFASBissuedFSPNo.FAS133-1“DisclosuresaboutCreditDerivativesandCertainGuarantees:AnAmendmentofFASBStatementNo.133(“FSPFAS133-1”)andFASBInterpretationNo.45;andClarificationoftheEffectiveDateofFASBStatementNo.161.”ThisFSPamendsSFASNo.133torequiredisclosuresbysellersofcreditderivatives,includingcreditderivativesembeddedinahybridinstrument.ThisFSPalsoamendsFINNo.45torequireanadditionaldisclosureaboutthecurrentstatusofthepayment/performanceriskofaguarantee.Further,thisFSPclarifiestheFASB’sintentabouttheeffectivedateofSFASNo.161.ThisFSPiseffectiveforfiscalyearsendingafterNovember15,2008.WeexpecttoadoptthisFSPforperiodsendingonandafterDecember31,2008.WearecurrentlyassessingtheimpactthatFSPFAS133-1mayhaveonourconsolidatedfinancialstatements.RecentMarketEventsCurrentmarketconditionsandeconomiceventshavesignificantlyimpactedthefinancialcondition,liquidityandoutlookforawiderangeofcompanies,includingmanycompaniesoutsidethefinancialservicessectors.Wehaveconsideredthepotentialimpactofsuchconditionsandeventsasitrelatestocurrentlyreportedfinancialresultsofoperationsandliquidity,includingconsiderationofthepossibleimpactofotherthantemporaryimpairment,auctionratesecurities,andcounterpartycreditriskandhedgeaccounting.Wedonotbelievethatcurrentmarketconditionsandeconomiceventshavesignificantlyimpactedourresultsofoperationsorcurrentliquidity,nordowebelievethat,basedonourcurrentinvestmentpoliciesandcontractualrelationships,wearesubjecttogreaterriskfromsuchfactorsthanappliestoothercompaniesofsimilarsizeandmarketbreadth.42FinancingArrangementsPaymentsonourseniornotesoutstandingasofSeptember30,2008,totaling$44.5million,areduefromfiscal2009throughfiscal2012.PaymentsonourseniornotesissuedonOctober1andOctober30,2008aredueinfiscal2009throughfiscal2019.Also,wehavea$225.0millionlineofcreditfacilitythatincludesanoptiontoincreasetheamountofthelineupto$350.0million,subjecttoourcompliancewithcertainconditionsandtheparticipationofthelendersthatdoesnotexpireuntilOctober2012.AsdescribedinNote22totheConsolidatedFinancialStatementsin“Item8—FinancialStatementsandSupplementaryData,”weenteredintoaTermLoanCreditAgreementonOctober1,2008thatprovidesfora$150.0millionunsecuredtermloanfacility,andmaybeexpandedbyupto$50.0millionofadditionalindebtedness,subjecttoourcompliancewithcertainconditionsandtheparticipationofthelenders.OnOctober1,2008,wealsoenteredintoaNotePurchaseAgreementrelatingtooursaleofanaggregateprincipalamountof$250.0millioncomprisedof(a)$100.0millionaggregateprincipalamountofSeriesBNotesdueOctober1,2013,(b)$50.0millionaggregateprincipalamountofSeriesCNotesdueOctober1,2015and(c)$100.0millionaggregateprincipalamountofSeriesDNotesdueOctober1,2018.OnOctober1,2008,$200.0millionaggregateprincipalamountofNotesweresold,comprisedof$80.0millionaggregateprincipalamountoftheSeriesBNotes,$40.0millionaggregateprincipalamountoftheSeriesCNotes,and$80.0millionaggregateprincipalamountoftheSeriesDNotes.OnOctober30,2008,weissuedanadditional$50.0millionaggregateprincipalamountofNoteswithsimilarmaturitiesandinterestrates.Itispossiblethatbusinessacquisitionscouldbemadeinthefuturethatwouldrequireamendmentstoexistingdebtagreementsandtheneedtoobtainadditionalfinancing.OutlookTheeconomyoverthelastseveralmonthshasbeenbuffetedwithfinancialinstitutioncreditcrisesultimatelyimpactingthebroadercreditmarketsandthefinancingavailabletomanycompanies,bothintheU.S.andabroad.PreparationfortheimpactsofmarketfluctuationshasbeenastrategicobjectiveforanumberofyearsandWoodwardisbetterpositionedatthistimetomaintainliquidityandrelativeprofitabilityinthefaceofpotentialsalesdeclinesthaninthepast.Futurecashflowsfromoperationsandavailablerevolvinglinesofcreditareexpectedtobeadequatetomeetourcashrequirementsoverthenexttwelvemonths.Item7A.QuantitativeandQualitativeDisclosuresAboutMarketRiskMarketRiskandRiskManagementInthenormalcourseofbusiness,wehaveexposurestointerestrateriskfromourlong-termdebt,foreignexchangerateriskrelatedtoourforeignoperations,andforeigncurrencytransactions.Wearealsoexposedtovariousmarketrisksthatarisefromtransactionsenteredintointhenormalcourseofbusinessrelatedtoitemssuchasthecostofrawmaterialsandchangesininflation.Certaincontractualrelationshipswithcustomersandvendorsmitigaterisksfromchangesinrawmaterialcostsandcurrencyexchangeratechangesthatarisefromnormalpurchasingandnormalsalesactivities.InterestRateExposureDerivativeinstrumentsutilizedbyusareviewedasriskmanagementtools,involvelittlecomplexity,andarenotusedfortradingorspeculativepurposes.Tomanageinterestrateriskrelatedtothe$400millionoflong-termdebtissuedinOctober2008,weusedatreasurylockwhichlockedininterestratesonfuturedebt.ThetreasurylockagreementwasdesignatedasacashflowhedgeagainstinterestrateriskonaportionofthedebtissuedinOctober2008.Aportionofourlong-termdebtissensitivetochangesininterestrates.Wemonitortrendsininterestratesasabasisfordeterminingwhethertoenterintofixedrateorvariableratedebtagreements,thedurationofsuchagreements,andwhethertousehedgingstrategies.Ourprimaryobjectiveistominimizeourlong-termcostsofborrowing.AtSeptember30,2008,ourlong-termdebtconsistedofvariableandfixedrateagreements.As43measuredatSeptember30,2008,ahypothetical1%immediateincreaseininterestrateswouldreducethefairvalueofourlong-termdebtbyapproximately$0.8million.Theactuarialassumptionsusedtocalculatethefundingstatusofourpost-retirementbenefitplansandfuturereturnsonassociatedplanassetsaresensitivetochangesininterestrates.Thefollowinginformationillustratesthesensitivityofthenetperiodicbenefitcostandtheprojectedbenefitobligationtoachangeinthediscountrateandinthereturnonbenefitplanassets.AmountsrelatingtoforeignplansaretranslatedatthespotrateonSeptember30,2008.ThesensitivitiesreflecttheimpactofchangingoneassumptionatatimeandarespecifictobaseconditionsatSeptember30,2008.Itshouldbenotedthateconomicfactorsandconditionsoftenaffectmultipleassumptionssimultaneouslyandtheeffectsofchangesinassumptionsarenotnecessarilylinear.AssumptionChange2009NetPeriodicBenefitCost2008ProjectedServiceandInterestCostsAccumulatedPostRetirementBenefitObligationIncrease/(Decrease)in(Inthousands)RetirementPensionBenefits:Changeindiscountrate.........1%increase$(107)$(122)$(3,680)1%decrease1143304,693RetirementHealthcareBenefits:Changeindiscountrate.........1%increaseN/AN/A(3,162)1%decreaseN/AN/A3,705Changeinhealthcarecosttrendrate......................1%increase3,939275N/A1%decrease(3,411)(240)N/AForeignCurrencyExposureWeareimpactedbychangesinforeigncurrencyratesthroughsalesandpurchasingtransactionswhenwesellproductinfunctionalcurrenciesdifferentfromthecurrencyinwhichproductandmanufacturingcostswereincurred.ThefunctionalcurrenciesofourworldwidefacilitiesprimarilyincludetheUSD,theEuro,andtheGBP.OurpurchasingandsalesactivitiesareprimarilydenominatedintheUSD,theEuro,andtheGBP.Wemaybeimpactedbychangesintherelativebuyingpowerofourcustomers,whichmayimpactsalesvolumeseitherpositivelyornegatively.Asthesecurrenciesfluctuateagainsteachother,andothercurrencies,weareexposedtoforeigncurrencyriskonsales,purchasingtransactions,andlabor.Ourreportedfinancialresultsofoperations,includingthereportedvalueofourassetsandliabilities,arealsoimpactedbychangesinforeigncurrencyrates.TheassetsandliabilitiesofsubstantiallyallofoursubsidiariesoutsidetheU.S.aretranslatedatperiodendratesofexchangeforeachreportingperiod.Earningsandcashflowstatementsaretranslatedatweighted-averageratesofexchange.Althoughthesetranslationchangeshavenoimmediatecashimpact,thetranslationchangesmayimpactfutureborrowingcapacity,debtcovenants,andoverallvalueofournetassets.CurrencyexchangeratesvarydailyandoftenonecurrencystrengthensagainsttheUSDwhileanothercurrencyweakens.Becauseofthecomplexinterrelationshipoftheworldwidesupplychainsanddistributionchannels,itisdifficulttoquantifytheimpactofaparticularchangeinexchangerates.Weestimatethata10%increase(ordecrease)inthepurchasingpoweroftheUSDagainstallothercurrenciesforoneyearwouldincrease(ordecrease)netsalesbylessthan5%.Theimpactonpretaxearningswouldbeminimal.44Item8.FinancialStatementsandSupplementaryDataREPORTOFINDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRMTotheBoardofDirectorsandStockholdersofWoodwardGovernorCompanyFortCollins,ColoradoWehaveauditedtheaccompanyingconsolidatedbalancesheetofWoodwardGovernorCompanyandsubsidiaries(the“Company”)asofSeptember30,2008andtherelatedconsolidatedstatementsofearnings,stockholders’equity,andcashflowsfortheyearthenended.OurauditalsoincludedthefinancialstatementschedulelistedintheIndexatItem15.ThesefinancialstatementsaretheresponsibilityoftheCompany’smanagement.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsbasedonouraudit.TheconsolidatedfinancialstatementsoftheCompanyfortheyearsendedSeptember30,2007and2006wereauditedbyotherauditorswhosereport,datedNovember29,2007,expressedanunqualifiedopiniononthosestatementsandincludedanexplanatoryparagraphconcerningachangeinaccountingforshare-basedpaymentseffectiveOctober1,2005andachangeinthemannertheCompanypresentedobligationsassociatedwithdefinedbenefitpensionandotherpostretirementplanseffectiveSeptember30,2007.WeconductedourauditinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements.Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditprovidesareasonablebasisforouropinion.Inouropinion,such2008consolidatedfinancialstatementsreferredtoabovepresentfairly,inallmaterialrespects,thefinancialpositionofWoodwardGovernorCompanyandsubsidiariesasofSeptember30,2008,andtheresultsoftheiroperationsandtheircashflowsfortheyearthenended,inconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.Also,inouropinion,suchfinancialstatementschedule,whenconsideredinrelationtothebasicconsolidatedfinancialstatementstakenasawhole,presentsfairly,inallmaterialrespects,theinformationsetforththerein.AsdiscussedinNote2totheconsolidatedfinancialstatements,theCompanychangeditsmethodofaccountingforuncertaintaxpositionsonOctober1,2007inaccordancewiththeFinancialAccountingStandardsBoard’sInterpretationNo.48,AccountingforUncertaintyinIncomeTaxes.Wehavealsoauditedtheadjustmentstothe2007and2006consolidatedfinancialstatementstoretrospectivelyapplythetwo-for-onestocksplitasdiscussedinNote1totheconsolidatedfinancialstatements.Ourproceduresincluded(1)comparingtheamountsshownintheearningspersharedisclosuresfor2007and2006totheCompany’sunderlyingaccountinganalysis,(2)comparingthepreviouslyreportedsharesoutstandingandstatementofearningsamountspertheCompany’saccountinganalysistothepreviouslyissuedconsolidatedfinancialstatements,and(3)recalculatingtheadditionalsharestogiveeffecttothestocksplitandtestingthemathematicalaccuracyoftheunderlyinganalysis.Inouropinion,suchretrospectiveadjustmentsareappropriateandhavebeenproperlyapplied.However,wewerenotengagedtoaudit,review,orapplyanyprocedurestothe2007and2006consolidatedfinancialstatementsoftheCompanyotherthanwithrespecttotheretrospectiveadjustmentsand,accordingly,wedonotexpressanopinionoranyotherformofassuranceonthe2007and2006consolidatedfinancialstatementstakenasawhole.Wehavealsoaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),theCompany’sinternalcontroloverfinancialreportingasofSeptember30,2008,basedonthecriteriaestablishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrga-nizationsoftheTreadwayCommissionandourreportdatedNovember19,2008expressedanunqualifiedopinionontheCompany’sinternalcontroloverfinancialreporting.Deloitte&ToucheLLPDenver,ColoradoNovember19,200845REPORTOFINDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRMTotheBoardofDirectorsandStockholdersofWoodwardGovernorCompanyInouropinion,theconsolidatedbalancesheetasofSeptember30,2007andtherelatedconsolidatedstatementsofearnings,stockholders’equityandcashflowsforeachoftwoyearsintheperiodendedSeptember30,2007,beforetheeffectsoftheadjustmentstoretrospectivelyreflectthetwo-for-onestocksplitdescribedinNote1B,presentfairly,inallmaterialrespects,thefinancialpositionofWoodwardGovernorCompanyanditssubsidiariesatSeptember30,2007,andtheresultsoftheiroperationsandtheircashflowsforeachofthetwoyearsintheperiodendedSeptember30,2007,inconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica(the2007financialstatementsbeforetheeffectsoftheadjustmentsdiscussedinNote1Barenotpresentedherein).Inaddition,inouropinion,thefinancialstatementschedulefortheeachofthetwoyearsintheperiodendedSeptember30,2007presentsfairly,inallmaterialrespects,theinformationsetforththereinwhenreadinconjunctionwiththerelatedconsolidatedfinancialstatementsbeforetheeffectsoftheadjustmentsdescribedabove.ThesefinancialstatementsandfinancialstatementschedulearetheresponsibilityoftheCompany’smanagement.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsandfinancialstatementschedulebasedonouraudits.Weconductedouraudits,beforetheeffectsoftheadjustmentsdescribedabove,ofthesestatementsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements,assessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,andevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.Wewerenotengagedtoaudit,review,orapplyanyprocedurestotheadjustmentstoretrospectivelyreflectthetwo-for-onestocksplitdescribedinNote1Bandaccordingly,wedonotexpressanopinionoranyotherformofassuranceaboutwhethersuchadjustmentsareappropriateandhaveproperlyapplied.Thoseadjustmentswereauditedbyotherauditors.PricewaterhouseCoopersLLPChicago,IllinoisNovember29,200746ConsolidatedStatementsofEarningsWOODWARDGOVERNORCOMPANY200820072006YearEndedSeptember30,(Inthousands,exceptpershareamounts)Netsales.............................................$1,258,204$1,042,337$854,515Costsandexpenses:Costofgoodssold.....................................882,996728,820612,263Selling,general,andadministrativeexpenses.................115,399111,29792,013Researchanddevelopmentscosts..........................73,41465,29459,861Amortizationofintangibleassets..........................6,8307,4966,953Interestexpense.......................................3,8344,5275,089Interestincome.......................................(2,120)(3,604)(2,750)Otherincome........................................(4,685)(4,186)(4,245)Otherexpense........................................626705834Totalcostsandexpenses................................1,076,294910,349770,018Earningsbeforeincometaxes..............................181,910131,98884,497Incometaxes...........................................(60,030)(33,831)(14,597)Netearnings..........................................$121,880$98,157$69,900Earningspershare:Basic................................................$1.80$1.43$1.02Diluted...............................................$1.75$1.39$0.99Weighted-averagecommonsharesoutstanding:Basic................................................67,56468,48968,702Diluted...............................................69,56070,48770,382SeeaccompanyingNotestoConsolidatedFinancialStatements.47ConsolidatedBalanceSheetsWOODWARDGOVERNORCOMPANY20082007AtSeptember30,(Inthousands,exceptpershareamounts)ASSETSCurrentassets:Cashandcashequivalents...........................................$109,833$71,635Accountsreceivable,lessallowanceforlossesof$1,648and$1,886,respectively..178,128152,826Inventories......................................................208,317172,500Incometaxesreceivable............................................—9,461Deferredincometaxassets..........................................25,12823,754Othercurrentassets................................................16,6498,429Totalcurrentassets................................................538,055438,605Property,plantandequipment,net......................................168,651158,998Goodwill.........................................................139,577141,215Otherintangibles,net................................................66,10673,018Deferredincometaxassets............................................6,20811,250Otherassets.......................................................8,4206,681Totalassets.......................................................$927,017$829,767LIABILITIESANDSTOCKHOLDERS’EQUITYCurrentliabilities:Short-termborrowings..............................................$4,031$5,496Currentportionoflong-termdebt.....................................11,56015,940Accountspayable.................................................65,42757,668Incometaxespayable..............................................2,235—Accruedliabilities.................................................85,59183,890Totalcurrentliabilities.............................................168,844162,994Long-termdebt,lesscurrentportion.....................................33,33745,150Deferredincometaxliabilities.........................................27,51319,788Otherliabilities.....................................................67,69557,404Totalliabilities....................................................297,389285,336Commitmentsandcontingencies(Notes4,14,17,and18)Stockholders’Equity:Preferredstock,parvalue$0.003pershare,10,000sharesauthorized,nosharesissued........................................................——Commonstock,parvalue$0.001455pershare,150,000and100,000sharesauthorized,72,960sharesissuedandoutstanding........................106106Additionalpaid-incapital...........................................68,52048,641Accumulatedothercomprehensiveincome...............................20,31923,010Deferredcompensation.............................................5,2834,752Retainedearnings...................................................663,442565,136757,670641,645Less:Treasurystockatcost,5,261sharesand5,231shares,respectively..........(122,759)(92,462)Treasurystockheldfordeferredcompensation,atcost,404sharesand430shares,respectively.........................................(5,283)(4,752)Totalstockholders’equity...........................................629,628544,431Totalliabilitiesandstockholders’equity................................$927,017$829,767SeeaccompanyingNotestoConsolidatedFinancialStatements.48ConsolidatedStatementsofCashFlowWOODWARDGOVERNORCOMPANY200820072006YearEndedSeptember30,(Inthousands)Cashflowsfromoperatingactivities:Netearnings.................................................$121,880$98,157$69,900Adjustmentstoreconcilenetearningstonetcashprovidedbyoperatingactivities:Depreciationandamortization...................................35,45032,92429,017Postretirementsettlementgain..................................—(871)—Contractualpensionterminationbenefit............................—715340Netloss(gain)onsaleofproperty,plantandequipment................1,229(199)84Stock-basedcompensation.....................................4,5883,8492,942Excesstaxbenefitsfromstock-basedcompensation...................(15,355)(9,787)(3,305)Deferredincometaxes........................................10,96012,473(13,481)Reclassificationofunrealizedgainsandlossesonderivativestoearnings....204247286Changesinoperatingassetsandliabilities,netofbusinessacquisition:Accountsreceivable........................................(26,470)(20,765)(8,730)Inventories...............................................(36,661)(8,592)1,140Accountspayableandaccruedliabilities.........................6,07816,962(2,514)Currentincometaxes.......................................27,0892,9529,785Other...................................................(3,638)(10,347)(4,928)Netcashprovidedbyoperatingactivities............................125,354117,71880,536Cashflowsfrominvestingactivities:Paymentsforpurchaseofproperty,plantandequipment..................(37,516)(31,984)(31,713)Proceedsfromsaleofproperty,plantandequipment....................1,607225698Businessacquisition,netofcashacquired............................—(35,289)—Netcashusedininvestingactivities................................(35,909)(67,048)(31,015)Cashflowsfromfinancingactivities:Cashdividendspaid............................................(15,872)(14,747)(13,742)Proceedsfromsalesoftreasurystockasaresultofexerciseofstockoptions...9,4407,8564,163Purchasesoftreasurystock......................................(39,801)(50,952)(22,306)Excesstaxbenefitsfromstockcompensation..........................15,3559,7883,305Netpaymentsfromborrowingsunderrevolvinglinesofcredit.............(1,465)(2,760)(8,025)Paymentsoflong-termdebt......................................(16,257)(15,681)(14,510)Proceedsfromcashflowhedge...................................108——Debtfinancingcosts...........................................(412)——Otherpayments...............................................——(318)Netcashusedinfinancingactivities................................(48,904)(66,496)(51,433)Effectofexchangeratechangesoncashandcashequivalents..............(2,343)3,7431,033Netchangeincashandcashequivalents.............................38,198(12,083)(879)Cashandcashequivalentsatbeginningofperiod.......................71,63583,71884,597Cashandcashequivalentsatendofperiod...........................$109,833$71,635$83,718Supplementalcashflowinformation:Interestexpensepaid.........................................$4,216$4,870$5,334Incometaxespaid...........................................33,73521,16919,131Incometaxrefundsreceived....................................13,579——Non-cashinvestingactivities:Long-termdebtassumedinbusinessacquisition......................—10,319—Purchasesofproperty,plantandequipmentonaccount.................3,583——Salesofassetsonaccount.....................................433——SeeaccompanyingNotestoConsolidatedFinancialStatements.49ConsolidatedStatementsofStockholders’EquityWOODWARDGOVERNORCOMPANY200820072006YearEndedSeptember30,(Inthousands,exceptpershareamounts)Commonstock:Beginningandendingbalance...............................$106$106$106Additionalpaid-incapital:Beginningbalance........................................$48,641$31,960$25,854(Gain)lossonsalesoftreasurystock..........................(628)1,957(141)Taxbenefitsapplicabletoexerciseofstockoptions...............15,3559,7873,305Stock-basedcompensation..................................4,5883,8492,942Deferredcompensationtransfer..............................5641,088—Endingbalance..........................................$68,520$48,641$31,960Accumulatedothercomprehensiveincome:Beginningbalance........................................$23,010$12,619$10,904Foreigncurrencytranslationadjustments,net....................(4,071)10,5142,525Reclassificationofunrealizedlossesonderivativestoearnings,net....127153177Proceedsfromcashflowhedge,net...........................67——ImpactofimplementingSFAS158,net........................—(980)—Minimumpost-retirementbenefitsliabilityadjustments,net.........1,186704(987)Endingbalance..........................................$20,319$23,010$12,619Deferredcompensation:Beginningbalance........................................$4,752$5,524$5,402Deferredcompensationinvestedinthecompany’scommonstock.....8412,006165Deferredcompensationsettledwiththecompany’scommonstock....(310)(2,778)(43)Endingbalance..........................................$5,283$4,752$5,524Retainedearnings:Beginningbalance........................................$565,136$481,726$425,568Netearnings............................................121,88098,15769,900ImpactofimplementingFIN48..............................(7,702)——Cashdividends—$0.235,$0.215and$0.20percommonshare,respectively...........................................(15,872)(14,747)(13,742)Endingbalance..........................................$663,442$565,136$481,726Treasurystock:Beginningbalance........................................$92,462$47,722$29,963Purchasesoftreasurystock.................................39,80150,95222,820Salesoftreasurystock....................................(9,323)(5,900)(5,061)Deferredcompensationtransfer..............................(181)(312)—Endingbalance..........................................$122,759$92,462$47,722Treasurystockheldfordeferredcompensation:Beginningbalance........................................$4,752$5,524$5,402Deferredcompensationtransfer..............................7451,875—Stockdistributions.......................................(310)(2,778)(43)Automaticdividendreinvestment.............................96131165Endingbalance..........................................$5,283$4,752$5,524SeeaccompanyingNotestoConsolidatedFinancialStatements.50ConsolidatedStatementsofStockholders’Equity—(Continued)WOODWARDGOVERNORCOMPANY200820072006YearEndedSeptember30,(Inthousands,exceptpershareamounts)Totalstockholders’equity:Beginningbalance........................................$544,431$478,689$432,469Effectofchangesamongcomponentsofstockholders’equityAdditionalpaid-incapital................................19,87916,6816,106Accumulatedothercomprehensiveearnings...................(2,691)10,3911,715Deferredcompensation..................................531772122Retainedearnings......................................98,30683,41056,158Treasurystock.........................................(30,297)(44,740)(17,759)Treasurystockheldfordeferredcompensation.................(531)(772)(122)Totaleffectofchangesamongcomponentsofstockholders’equity....85,19765,74246,220Endingbalance..........................................$629,628$544,431$478,689Totalcomprehensiveearnings:Netearnings............................................$121,880$98,157$69,900Othercomprehensiveearnings:Foreigncurrencytranslationadjustments,net..................(4,071)10,5142,525Reclassificationofunrealizedlossesonderivativestoearnings,net..127153177Gainoncashflowhedge,net..............................67——Post-retirementbenefitadjustments,net......................1,186704(987)Totalothercomprehensiveearnings.........................(2,691)11,3711,715Totalcomprehensiveearnings...............................$119,189$109,528$71,615Commonstock,numberofshares:Beginningandendingbalance...............................72,96072,96072,960Treasurystock,numberofshares:Beginningbalance........................................5,2314,8524,308Purchasesoftreasurystock.................................1,3841,6801,440Salesoftreasurystock....................................(1,330)(1,233)(896)Deferredcompensationtransfer..............................(24)(68)—Endingbalance..........................................5,2615,2314,852Treasurystockheldfordeferredcompensation,numberofshares:Beginningbalance........................................430830828Deferredcompensationtransfer..............................2468—Stockdistributions.......................................(53)(474)(8)Automaticdividendreinvestment.............................3610Endingbalance..........................................404430830SeeaccompanyingNotestoConsolidatedFinancialStatements.51WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements(amountsinthousands,exceptpershare)Note1.OperationsandsummaryofsignificantaccountingpoliciesA.NatureofoperationsWoodwardGovernorCompany(“Woodward”orthe“Company”)isanindependentdesigner,manufacturer,andserviceproviderofenergycontrolandoptimizationsolutionsforcommercialandmilitaryaircraft,turbines,reciprocatingengines,andelectricalpowersystemequipment.Woodward’sinnovativefluidenergy,combustioncontrol,electricalenergy,andmotioncontrolsystemshelpcustomersoffercleaner,morereliable,andmorecost-effectiveequipment.LeadingoriginalequipmentmanufacturersuseWoodward’sproductsandservicesinaero-space,powerandprocessindustries,andtransportation.Woodwardwasestablishedin1870andincorporatedin1902.WoodwardservesglobalmarketsandisheadquarteredinFortCollins,Colorado.Woodward’sprincipalplantsarelocatedintheU.S.,China,Germany,andPoland.TheCompanyoperatesotherfacilitiesinBrazil,India,Japan,theNetherlands,andtheUnitedKingdom,whichareusedprimarilyforsalesandserviceactivities.Duringfiscalyears2008,2007,and2006,Woodwardoperatedinthefollowingthreebusinesssegments:•TurbineSystemsisfocusedondevelopingandmanufacturingsystemsandcomponentsthatprovideenergycontrolandoptimizationsolutionsfortheaircraftandindustrialgasturbinemarkets.•EngineSystemsisfocusedondevelopingandmanufacturingsystemsandcomponentsthatprovideenergycontrolandoptimizationsolutionsfortheindustrialengineandsteamturbinemarkets,whichincludespowergeneration,transportation,andprocessindustries.•ElectricalPowerSystemsisfocusedondevelopingandmanufacturingsystemsandcomponentsthatprovidepowersensingandenergycontrolsystemsthatimprovethesecurity,quality,reliability,andavailabilityofelectricalpowernetworksforindustrialmarkets,whichincludespowergeneration,powerdistribution,transportation,andprocessindustries.B.SummaryofsignificantaccountingpoliciesPrinciplesofconsolidation:TheConsolidatedFinancialStatementsarepreparedinaccordancewithaccountingprinciplesgenerallyacceptedintheU.S.(“U.S.GAAP”)andincludetheaccountsofWoodwardanditsmajority-ownedsubsidiaries.Transactionswithinandbetweenthesecompaniesareeliminated.ResultsofjointventuresinwhichWoodwarddoesnothaveacontrollingfinancialinterestareincludedinthefinancialstatementsusingtheequitymethodofaccounting.Stock-split:Atwo-for-onestocksplitwasapprovedbystockholdersatthe2007annualmeetingofstockholdersonJanuary23,2008.ThestocksplitbecameeffectiveforstockholdersatthecloseofbusinessonFebruary1,2008.ThenumberofsharesandpershareamountsreportedintheConsolidatedFinancialStatementshasbeenupdatedfromamountsreportedpriortoFebruary1,2008,toreflecttheeffectsofthesplit.Inaddition,inaccordancewithstockoptionplanprovisions,thetermsofalloutstandingstockoptionawardswereproportionallyadjusted.Useofestimates:ThepreparationoffinancialstatementspreparedinconformitywithU.S.GAAPrequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesatthedateofthefinancialstatementsandthereportedamountsofrevenuesandexpensesrecognizedduringthereportingperiod.ActualresultscoulddiffermateriallyfromWoodward’sestimates.Reclassifications:Certainreclassificationshavebeenmadetoprioryearbalancesinordertoconformtothecurrentyear’spresentation.52Foreigncurrency:TheassetsandliabilitiesofsubstantiallyallsubsidiariesoutsidetheU.S.aretranslatedatyear-endratesofexchange,andearningsandcashflowstatementsaretranslatedatweighted-averageratesofexchange.Translationadjustmentsareaccumulatedwithothercomprehensiveearningsasaseparatecomponentofstockholders’equityandarepresentednetoftaxeffectsintheConsolidatedStatementsofStockholders’Equity.Theeffectsofchangesinexchangeratesonloansbetweenconsolidatedsubsidiariesthatarenotexpectedtoberepaidintheforeseeablefuturearealsoaccumulatedwithothercomprehensiveearnings.TheCompanyisexposedtomarketrisksrelatedtofluctuationsinforeignexchangeratesbecausesomesalestransactions,andtheassetsandliabilitiesofitsdomesticandforeignsubsidiaries,aredenominatedinforeigncurrencies.Selling,general,andadministrativeexpensesincludenetforeigncurrencytransactionlossesof$1,454in2008,$249in2007and$903in2006.Revenuerecognition:TheprovisionsofStaffAccountingBulletinNo.104andallotherrelatedinterpre-tationshavebeenapplied.Salesaregenerallyrecognizedwhendeliveryofproducthasoccurredorserviceshavebeenrenderedandthereispersuasiveevidenceofasalesarrangement,sellingpricesarefixedordeterminable,andcollectabilityfromthecustomerisreasonablyassured.Revenuefromsalesarrangementswithmultipledeliverablesarerecognizedwhenthereispervasiveevidenceofasalesarrangementforeachindividualdeliverable.Productdeliveryisgenerallyconsideredtohaveoccurredwhenthecustomerhastakentitleandassumedtherisksandrewardsofownershipoftheproducts.Incountrieswhoselawsprovideforretentionofsomeformoftitlebysellersenablingrecoveryofgoodsintheeventofcustomerdefaultonpayment,productdeliveryisconsideredtohaveoccurredwhenthecustomerhasassumedtherisksandrewardsofownershipoftheproducts.MostofthesalesaremadedirectlytocustomersthatuseWoodwardproducts,althoughproductsarealsosoldtodistributors,dealers,andindependentservicefacilities.Salestermsfordistributors,dealers,andindependentservicefacilitiesaresubstantiallysimilartoWoodward’ssalestermsfordirectcustomers.CustomerRebates:Woodwardsometimesagreestomakerebatepaymentstocustomersrelatedtoantic-ipatedsalesactivity.Paymentsmadetocustomersareaccountedforasareductionofrevenueunlesstheyaremadeinexchangeforidentifiablegoodsorserviceswithfairvaluesthatcanbereasonablyestimated.Thesereductionsinrevenuesarerecognizedimmediatelytotheextentthatthepaymentscannotbeattributedtoanticipatedfuturesales,andarerecognizedinfutureperiodstotheextentthatthepaymentsrelatetofuturesales,basedonthespecificfactsandcircumstancesunderlyingeachpayment.Paymentsthatareprobableandcanbereasonablyestimatedareaccruedatexpectedratesbasedonanticipatedsaleactivity.Stock-basedcompensation:TheprovisionsofStatementofFinancialAccountingStandards(“SFAS”)No.123R,“Share-BasedPayment”(“SFAS123R”)requiringthatcompensationcostrelatingtostock-basedpaymentawardsmadetoemployeesanddirectorsberecognizedinthefinancialstatementshavebeenapplied.Non-qualifiedstockoptionawardsareissuedunderWoodward’sstock-basedcompensationplans.Thecostforsuchawardsismeasuredatthegrantdatebasedonthefairvalueoftheaward.Historicalcompanyinformationistheprimarybasisforselectionoftheexpectedterm,expectedvolatility,andexpecteddividendyieldassumptionsusedtoestimatethefairvalueoftheoptionsonthedateofgrant.Theportionoftheawardthatisultimatelyexpectedtovestisrecognizedasexpenseovertherequisiteserviceperiods,whichisgenerallythevestingperiodoftheawards.SFAS123Rrequiresforfeiturestobeestimatedatthetimeofthegrantinordertoestimatetheportionoftheawardthatwillultimatelyvest.TheestimateisbasedonWoodward’shistoricalratesofforfeituresandisupdatedperiodically.Researchanddevelopmentcosts:ExpendituresrelatedtonewproductdevelopmentactivitiesareexpensedwhenincurredandareseparatelyreportedintheConsolidatedStatementsofEarnings.53WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Incometaxes:DeferredincometaxesareprovidedforthetemporarydifferencesbetweenthefinancialreportingbasisandthetaxbasisofWoodward’sassetsandliabilities.WoodwardprovidesfortaxesthatmaybepayableifundistributedearningsofoverseassubsidiariesweretoberemittedtotheU.S.,exceptforthoseearningsthatitconsiderstobepermanentlyreinvested.Cashequivalents:Highlyliquidinvestmentspurchasedwithanoriginalmaturityofthreemonthsorlessareconsideredtobecashequivalents.Cashandcashequivalentsaremaintainedwithseveralfinancialinstitutions.Generally,thesedepositsmayberedeemedupondemandandaremaintainedwithfinancialinstitutionswithreputablecreditandthereforebearminimalcreditrisk.Woodwardholdscashandcashequivalentsatfinancialinstitutionsinexcessofamountscoveredbyfederaldepositoryinsurance.Accountsreceivable:VirtuallyallWoodward’ssalesaremadeoncreditandresultinaccountsreceivable,whicharerecordedattheamountinvoiced.Inthenormalcourseofbusiness,notallaccountsreceivablearecollectedand,therefore,anallowanceforlossesofaccountsreceivableisprovidedequaltotheamountthatWoodwardbelievesultimatelywillnotbecollected.Customer-specificinformationisconsideredrelatedtodelinquentaccounts,pastlossexperience,andcurrenteconomicconditionsinestablishingtheamountofitsallowance.Accountsreceivablelossesaredeductedfromtheallowanceandtherelatedaccountsreceivablebalancesarewrittenoffwhenthereceivablesaredeemeduncollectible.Recoveriesofaccountsreceivablepreviouslywrittenoffarerecognizedwhenreceived.Inventories:Inventoriesarevaluedatthelowerofcostormarket,withcostbeingdeterminedonafirst-in,first-outbasis.Componentpartsincludeitemsthatcanbesoldseparatelyasfinishedgoodsorincludedinthemanufactureofotherproducts.Property,plant,andequipment:Property,plant,andequipmentarerecordedatcostandaredepreciatedovertheestimatedusefullivesoftheassets,rangingfromfiveto40yearsforbuildingsandimprovementsandthreetofifteenyearsformachineryandequipment.Assetsaredepreciatedusingthestraight-linemethod.Assetsaretestedforrecoverabilitywhenevereventsorcircumstancesindicatethecarryingvaluemaynotberecoverable.PurchaseAccounting:TheprovisionsofSFASNo.141,“BusinessCombinations”andrelatedinterpreta-tionshavebeenapplied.Businesscombinationsareaccountedforusingthepurchasemethodofaccounting.Underthepurchasemethod,assetsandliabilitiesarerecordedattheirfairvaluesasoftheacquisitiondate,includingintangibleassets.Acquisitioncostsinexcessofamountsassignedtoassetsacquiredandliabilitiesassumedarerecordedasgoodwill.Goodwill:Woodwardtestsgoodwillonthereportingunitlevelonanannualbasisandmoreoftenifaneventoccursorcircumstanceschangethatwouldmorelikelythannotreducethefairvalueofareportingunitbelowitscarryingamount.Theimpairmenttestconsistofcomparingthefairvalueofthereportingunit,determinedusingdiscountedcashflows,withitscarryingamountincludinggoodwill,and,ifthecarryingamountofthereportingunitexceedsitsfairvalue,comparingtheimpliedvalueofgoodwillwithitscarryingamount.Ifthecarryingamountofgoodwillexceedstheimpliedfairvalueofgoodwill,animpairmentlosswouldberecognizedtoreducethecarryingamounttoitsimpliedfairvalue.Therewasnoimpairmentchargerecordedinfiscal2008,fiscal2007,orfiscal2006.Otherintangibles:Otherintangiblesarerecognizedapartfromgoodwillwheneveranacquiredintangibleassetarisesfromcontractualorotherlegalrights,orwheneveritiscapableofbeingseparatedordividedfromtheacquiredentityandsold,transferred,licensed,rented,orexchanged,eitherindividuallyorincombinationwitharelatedcontract,asset,orliability.AllofWoodward’sintangibleshaveanestimatedusefullifeandarebeingamortized.Impairmentlossesarerecognizedifthecarryingamountofanintangibleexceedsitsfairvalue.54WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Estimatedlivesoverwhichintangibleassetsareamortized,onastraightlinebasis,atSeptember30,2008wereasfollows:Customerrelationships...............................................10-30yearsIntellectualproperty.................................................15yearsProcesstechnology..................................................8-30yearsPatents...........................................................10-14yearsOtherintangibles...................................................15yearsDeferredcompensation:DeferredcompensationobligationswillbesettledeitherbydeliveryofafixednumberofsharesofWoodward’scommonstock(inaccordancewithcertaineligiblemembers’irrevocableelections)orincash.WoodwardhascontributedsharesofitscommonstockintoatrustestablishedforthefuturesettlementofdeferredcompensationobligationsthatarepayableinsharesofWoodward’scommonstock.CommonstockheldbythetrustisreflectedintheConsolidatedBalanceSheetastreasurystockheldfordeferredcompensationandtherelateddeferredcompensationobligationisreflectedasaseparatecomponentofequityinamountsequaltothefairvalueofthecommonstockatthedatesofcontribution.Theseaccountsarenotadjustedforsubsequentchangesinfairvalueofthecommonstock.DeferredcompensationobligationsthatwillbesettledincashareaccountedforonanaccrualbasisinaccordancewiththetermsoftheunderlyingcontractandarereflectedintheConsolidatedBalanceSheetasanaccruedliability.Investments:Woodwardholdsmarketableequitysecuritiesrelatedtoitsdeferredcompensationprogram.InaccordancewithSFASNo.115,“AccountingforCertainInvestmentsinDebtandEquitySecurities”andbasedonWoodward’sintentionsregardingtheseinstruments,marketableequitysecuritiesareclassifiedastradingsecurities.Thetradingsecuritiesarereportedatfairvalue,withrealizedgainsandlossesrecognizedinearnings.Thetradingsecuritiesareincludedin“Othercurrentassets.”Theassociatedobligationtoprovidebenefitsisincludedin“Otherliabilities.”Derivatives:TheCompanyisexposedtovariousmarketrisksthatarisefromtransactionsenteredintointhenormalcourseofbusiness.TheCompanyutilizesderivativeinstrumentssuchastreasurylockagreementstolockinfixedratesonfuturedebtissuancesthatqualifyascashfloworfairvaluehedgestomitigatetheriskofvariabilityincashflowsrelatedtofutureinterestpaymentsattributabletochangesinthedesignatedbenchmarkrate.TheCompanycomplieswithSFASNos.133,137,138and149(collectively“SFAS133”)pertainingtotheaccountingforthesederivativesandhedgingactivitieswhichrequireallsuchinterestratehedgeinstrumentstoberecordedonthebalancesheetatfairvalue.CashflowsrelatedtotheinstrumentdesignatedasaqualifyinghedgearereflectedintheaccompanyingConsolidatedStatementsofCashFlowsinthesamecategoriesasthecashflowsfromtheitemsbeinghedged.Accordingly,cashflowsrelatingtothesettlementofinterestratederivativeshedgingtheforecastedissuanceofdebthavebeenreflecteduponsettlementasacomponentoffinancingcashflows.Theresultinggainorlossfromsuchsettlementisdeferredtoothercomprehensiveincomeandreclassifiedtointerestexpenseoverthetermoftheunderlyingdebt.Thisreclassificationofthedeferredgainsandlossesimpactstheinterestexpenserecognizedontheunderlyingdebtthatwashedgedandisthereforereflectedasacomponentofoperatingcashflowsinperiodssubsequenttosettlement.Theperiodicsettlementofinterestratederivativeshedgingoutstandingvariableratedebtisrecordedasanadjustmenttointerestexpenseandisthereforereflectedasacomponentofoperatingcashflows.Post-retirementbenefits:TheCompanyprovidesvariousbenefitstocertainemployeesthroughdefinedbenefitplansandretirementhealthcarebenefitplans.Forfinancialreportingpurposes,netperiodicbenefitsexpenseandrelatedobligationsarecalculatedusinganumberofsignificantactuarialassumptions.Changesinnetperiodicexpensemayoccurinthefutureduetochangesintheseassumptions.55WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Theweightedaverageactuarialassumptionsusedinmeasuringthenetperiodicbenefitcostandplanobligationsofretirementpensionbenefitswereasfollows:200820072006200820072006UnitedStatesOtherCountriesYearEndedSeptember30,Weighted-averageassumptionsusedtodeterminebenefitobligationatSeptember30:Discountrate......................................6.5%6.1%5.6%4.7%4.8%4.4%Rateofcompensationincrease..........................N/AN/A4.53.73.83.4Weighted-averageassumptionsusedtodeterminenetperiodicbenefitcostforyearsendedSeptember30:Discountrate......................................6.15.65.35.74.44.1Rateofcompensationincrease..........................N/AN/A4.53.73.83.2Long-termrateofreturnonplanassets....................7.58.08.05.65.85.6Thediscountrateassumptionisintendedtoreflecttherateatwhichtheretirementbenefitscouldbeeffectivelysettledbasedupontheassumedtimingofthebenefitpayments.IntheU.S.,Woodwardusedabondportfoliomatchinganalysisbasedonrecentlytraded,non-callablebondsratedAA-orbetterbyStandard&Poors,whichhaveatleast$25.0millionoutstanding.IntheUnitedKingdom,WoodwardusedtheAAcorporatebondindex(applicableforbondsover15years)andgovernmentbondyields(forbondsover15years)todetermineablendedratetouseasthebenchmark.InJapan,WoodwardusedAA-ratedcorporatebondyields(forbondsof12.5years)asthebenchmark.Woodward’sassumedratesdonotdiffersignificantlyfromanyofthesebenchmarks.Theinvestmentobjectivesforthepensionplanassetsaredesignedtogeneratereturnsthatwillenablethepensionplanstomeettheirfutureobligations.Thepreciseamountforwhichtheseobligationswillbesettleddependsonfutureevents,includingthelifeexpectancyoftheplanparticipants.Theseobligationsareestimatedusingactuarialassumptions,basedonthecurrenteconomicenvironment.Thestrategybalancestherequirementstogeneratereturns,usingthehigher-returningassetssuchasequitysecuritieswiththeneedtocontrolriskinthepensionplanwithlessvolatileassets,suchasfixed-incomesecurities.Risksinclude,amongothers,thelikelihoodofthepensionplansbecomingunderfunded,therebyincreasingtheirdependenceoncontributionsfromWoodward.Theassetsaremanagedbyprofessionalinvestmentfirmsandperformanceisevaluatedagainstspecificbench-marks.IntheU.S.,assetsareprimarilyinvestedinbroadlydiversifiedpassivevehicles.Theweightedaverageactuarialassumptionsusedinmeasuringthenetperiodicbenefitcostandplanobligationsofretirementhealthcarebenefitsfollows:200820072006YearEndedSeptember30,Weighted-averagediscountrateassumptionsusedtodeterminebenefitobligationatSeptember30.....................................................6.5%6.1%5.6%Weighted-averagediscountrateassumptionsusedtodeterminenetperiodicbenefitcostforyearsendedSeptember30.........................................6.1%5.6%5.3%Thediscountrateassumptionisintendedtoreflecttherateatwhichtheretirementbenefitscouldbeeffectivelysettledbasedupontheassumedtimingofthebenefitpayments.IntheU.S.,Woodwardusedabondportfoliomatchinganalysisbasedonrecentlytraded,non-callablebondsratedAA-orbetterbyStandard&Poors,whichhaveatleast$25.0millionoutstanding.IntheUnitedKingdom,WoodwardusedtheAAcorporatebondindex(applicableforbondsover15years)andgovernmentbondyields(forbondsover15years)todetermineablendedratetouseasthebenchmark.Woodward’sassumedratesdonotdiffersignificantlyfromanyofthesebenchmarks.56WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Forretirementhealthcarebenefits,Woodwardassumednethealthcarecosttrendratesof8.0%in2009,decreasinggraduallyto5.0%in2011,andremainingat5.0%thereafter.A1.0%increaseinassumedhealthcarecosttrendrateswouldhaveincreasedthetotaloftheserviceandinterestcostcomponentsbyapproximately$275andincreasedthebenefitobligationattheendoftheyearbyapproximately$3,939in2008.Likewise,a1.0%decreaseintheassumedrateswouldhavedecreasedthetotalofserviceandinterestcostcomponentsby$240anddecreasedthebenefitobligationbyapproximately$3,411in2008.Stockholders’equity:InJuly2006,theBoardofDirectorsauthorizedtherepurchaseofupto$50,000ofWoodward’soutstandingsharesofcommonstockontheopenmarketorinprivatelynegotiatedtransactionsoverathree-yearperiod(the“2006Authorization”).Duringfiscal2007,Woodwardpurchased$38,649ofitscommonstockunderthe2006Authorization.The2006Authorizationisclosed.InSeptember2007,theBoardofDirectorsauthorizedanewstockrepurchaseofupto$200,000ofWoodward’soutstandingsharesofcommonstockontheopenmarketorinprivatelynegotiatedtransactionsoverathree-yearperiodthatwillendinOctober2010(the“2007Authorization”).Duringfiscal2008,Woodwardpurchasedatotalof$31,925ofitscommonstockunderthe2007Authorization.AdvertisingCosts:Woodwardexpensesalladvertisingcostsasincurredandtheyareclassifiedwithinselling,general,andadministrativeexpenses.Advertisingcostswerenotmaterialforallyearspresented.ShippingandHandlingCosts:Productfreightcostsareincludedincostofgoodssold.Note2.RecentlyadoptedandissuedbutnotyeteffectiveaccountingstandardsA.Accountingchangesandrecentlyadoptedaccountingstandards:IncometaxesFIN48:InJuly2006,theFinancialAccountingStandardsBoard(“FASB”)issuedFinancialInterpretationNo.48,“AccountingforUncertaintyinIncomeTaxes-aninterpretationofFASBStatementNo.109”(“FIN48”)whichprovidesguidanceonthefinancialstatementrecognition,measurement,reporting,anddisclosureofuncertaintaxpositionstakenorexpectedtobetakeninataxreturn.FIN48addressesthedeterminationofwhethertaxbenefits,eitherpermanentortemporary,shouldberecordedinthefinancialstatements.Forthosetaxbenefitstoberecognized,ataxpositionmustbemore-likely-than-nottobesustaineduponexaminationbythetaxingauthorities.Theamountrecognizedismeasuredasthelargestamountofbenefitthatisgreaterthan50%likelyofbeingrealizeduponultimatesettlement.WoodwardadoptedtheprovisionsofFIN48onOctober1,2007,asrequired.ThechangeinmeasurementcriteriacausedWoodwardtorecognizeadecreaseintheretainedearningscomponentofstockholders’equityof$7,702.Foradditionalinformation,seeNote4,“IncomeTaxes.”B.Issuedbutnotyeteffectiveaccountingstandards:SFAS157:InSeptember2006,theFASBissuedSFASNo.157,“FairValueMeasurements”(“SFAS157”),whichdefinesfairvalue,establishesaframeworkformeasuringfairvalue,andrequiresadditionaldisclosuresaboutaCompany’sfinancialassetsandliabilitiesthataremeasuredatfairvalue.SFAS157doesnotchangeexistingguidanceonwhetherornotaninstrumentiscarriedatfairvalue.SFAS157iseffectiveforfinancialstatementsissuedforfiscalyearsbeginningafterNovember15,2007,andinterimperiodswithinthosefiscalyears.InFebruary2008,theFASBissuedFASBStaffPosition(“FSP”)No.FAS157-1,“ApplicationofFASBStatementNo.157toFASBStatementNo.13andOtherAccountingPronouncementsThatAddressFairValueMeasurementsforPurposesofLeaseClassificationorMeasurementunderStatement13”(“FSPFAS157-1”)whichexcludesSFASNo.13,“AccountingforLeases”andcertainotheraccountingpronouncementsthataddressfairvaluemeasurements,fromthescopeofSFAS157.InFebruary2008,theFASBissuedFSPNo.FAS157-2,“Effective57WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)DateofFASBStatementNo.157”(“FSPFAS157-2”)whichprovidesaone-yeardelayedapplicationofSFAS157fornonfinancialassetsandliabilities,exceptforitemsthatarerecognizedordisclosedatfairvalueinthefinancialstatementsonarecurringbasis(atleastannually).WoodwardisrequiredtoadoptSFAS157asamendedbyFSPFAS157-1andFSPFAS157-2onOctober1,2008,thebeginningoffiscal2009.Theadoptionisnotexpectedtohaveamaterialimpactontheconsolidatedfinancialstatements.InOctober2008,theFASBissuedFSPNo.FAS157-3,“DeterminingtheFairValueofaFinancialAssetinaMarketThatIsNotActive”(“FSPFAS157-3”),whichclarifiestheapplicationofSFAS157whenthemarketforafinancialassetisinactive.Specifically,FSPFAS157-3clarifieshow(1)management’sinternalassumptionsshouldbeconsideredinmeasuringfairvaluewhenobservabledataarenotpresent,(2)observablemarketinformationfromaninactivemarketshouldbetakenintoaccount,and(3)theuseofbrokerquotesorpricingservicesshouldbeconsideredinassessingtherelevanceofobservableandunobservabledatatomeasurefairvalue.TheguidanceinFSPFAS157-3iseffectiveimmediatelyandwillapplytotheCompanyuponadoptionofSFAS157.SFAS159:InFebruary2007,theFASBissuedSFASNo.159,“TheFairValueOptionforFinancialAssetsandFinancialLiabilities—IncludinganAmendmentofFASBStatementNo.115”(“SFAS159”).SFAS159isexpectedtoexpandtheuseoffairvalueaccountingbutdoesnotaffectexistingstandardsthatrequirecertainassetsorliabilitiestobecarriedatfairvalue.TheobjectiveofSFAS159istoimprovefinancialreportingbyprovidingcompanieswiththeopportunitytomitigatevolatilityinreportedearningscausedbymeasuringrelatedassetsandliabilitiesdifferentlywithouthavingtoapplycomplexhedgeaccountingprovisions.UnderSFAS159,acompanymaychoose,atspecifiedelectiondates,tomeasureeligibleitemsatfairvalueandreportunrealizedgainsandlossesonitemsforwhichthefairvalueoptionhasbeenelectedinearningsateachsubsequentreportingdate.SFAS159iseffectiveforfinancialstatementsissuedforfiscalyearsbeginningafterNovember15,2007,andinterimperiodswithinthosefiscalyears.Asaresult,SFAS159iseffectiveforWoodwardinthefirstquarteroffiscal2009.WoodwarddoesnotplantoapplySFAS159.EITF07-3:InJune2007,theEmergingIssuesTaskForce(“EITF”)issuedEITF07-3,“AccountingforNonrefundableAdvancePaymentsforGoodsorServicestoBeUsedinFutureResearchandDevelopmentActivities”(“EITF07-3”).EITF07-3addressesthediversitythatexistswithrespecttotheaccountingforthenon-refundableportionofapaymentmadebyaresearchanddevelopmententityforfutureresearchanddevelopmentactivities.TheEITFconcludedthatanentitymustdeferandcapitalizenon-refundableadvancepaymentsmadeforresearchanddevelopmentactivities,andexpensetheseamountsastherelatedgoodsaredeliveredortherelatedservicesareperformed.EITF07-3iseffectiveforinterimorannualreportingperiodsinfiscalyearsbeginningafterDecember15,2007(fiscal2009forWoodward).WoodwarddoesnotexpecttheadoptionofEITF07-03tohaveamaterialimpactonitsconsolidatedfinancialstatements.EITF07-1:InNovember2007,theEITFissuedEITF07-1,“AccountingforCollaborativeArrangements”(“EITF07-1”).EITF07-1,whichwillbeappliedretrospectively,requiresexpandeddisclosuresforcontractualarrangementswiththirdpartiesthatinvolvejointoperatingactivitiesandmayrequirereclassificationstopreviouslyissuedfinancialstatements.EITF07-1iseffectiveforinterimorannualreportingperiodsbeginningafterDecember15,2008(fiscal2010forWoodward).WoodwardiscurrentlyevaluatingtheimpactEITF07-1mayhaveonconsolidatedfinancialstatements.SFAS141(R):InDecember2007,theFASBissuedSFASNo.141(Revised)“BusinessCombinations”(“SFAS141(R)”).SFAS141(R)isintendedtoimprove,simplify,andconvergeinternationallytheaccountingforbusinesscombinations.UnderSFAS141(R),anacquiringentityinabusinesscombinationmustrecognizetheassetsacquired,liabilitiesassumed,andanynoncontrollinginterestintheacquiredentityattheacquisitiondatefairvalues,withlimitedexceptions.Inaddition,SFAS141(R)requirestheacquirertodiscloseallinformationthatinvestorsandotherusersneedtoevaluateandunderstandthenatureandfinancialimpactofthebusinesscombination.SFAS141(R)appliesprospectivelytobusinesscombinationsforwhichtheacquisitiondateisonorafterthebeginningofthefirstannualreportingperiodonorafterDecember15,2008.Earlieradoptionis58WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)prohibited.Accordingly,WoodwardwillrecordanddisclosebusinesscombinationsundertherevisedstandardbeginningOctober1,2009.SFAS160:InDecember2007,theFASBissuedSFASNo.160,“NoncontrollingInterestsinConsolidatedFinancialStatements—anAmendmentofAccountingResearchBulletin(“ARB”)51,”(“SFAS160”).ThisstatementamendsARB51toestablishaccountingandreportingstandardsforthenoncontrollinginterest(minorityinterest)inasubsidiaryandforthedeconsolidationofasubsidiary.SFAS160establishesaccountingandreportingstandardsthatrequire(i)noncontrollingintereststobereportedasacomponentofequity,(ii)changesinaparent’sownershipinterestwhiletheparentretainsitscontrollinginterestbeaccountedforasequitytransactions,and(iii)anyretainednoncontrollingequityinvestmentuponthedeconsolidationofasubsidiarybeinitiallymeasuredatfairvalue.SFAS160istobeappliedprospectivelytobusinesscombinationsconsummatedonorafterthebeginningofthefirstannualreportingperiodonorafterDecember15,2008.SFAS160iseffectiveforfiscalyearsbeginningafterDecember15,2008.Asaresult,SFAS160iseffectiveforWoodwardinthefirstquarteroffiscal2010.WoodwardiscurrentlyevaluatingtheimpactSFAS160mayhaveonitsconsolidatedfinancialstatements.SFAS161:InMarch2008,theFASBissuedSFASNo.161,“DisclosuresAboutDerivativeInstrumentsandHedgingActivities”(“SFAS161”).SFAS161isintendedtoimprovefinancialreportingaboutderivativeinstrumentsandhedgingactivitiesbyrequiringenhanceddisclosurestoenableinvestorstobetterunderstandtheireffectsonanentity’sfinancialposition,financialperformance,andcashflows.ThenewstandardiseffectiveforfinancialstatementsissuedforfiscalyearsandinterimperiodsbeginningafterNovember15,2008(fiscal2010forWoodward).WoodwardiscurrentlyassessingtheimpactthatSFAS161mayhaveonitsconsolidatedfinancialstatements.FSPFAS142-3:InApril2008,theFASBissuedFSPNo.FAS142-3,“DeterminationoftheUsefulLifeofIntangibleAssets”(“FSPFAS142-3”),whichimprovestheconsistencyoftheusefullifeofarecognizedintangibleassetamongvariouspronouncements.FSPFAS142-3iseffectiveforfiscalyearsbeginningafterDecember15,2008(fiscal2010forWoodward).WoodwardiscurrentlyassessingtheimpactthatFSPFAS142-3mayhaveonitsconsolidatedfinancialstatements.SFAS162:InMay2008,theFASBissuedSFASNo.162,“TheHierarchyofGenerallyAcceptedAccountingPrinciples”(“SFAS162”).Thenewstandardisintendedtoimprovefinancialreportingbyidentifyingaconsistentframework,orhierarchy,forselectingaccountingprinciplestobeusedinpreparingfinancialstatementsthatarepresentedinconformitywithU.S.GAAPfornongovernmentalentities.Thenewstandardiseffective60daysfollowingtheSecurityandExchangeCommission’sapprovalofthePublicCompanyAccountingOversightBoardamendmentstoAUSection411,“TheMeaningofPresentFairlyinConformitywithGenerallyAcceptedAccountingPrinciples.”WoodwardiscurrentlyassessingtheimpactthatSFAS162mayhaveonitsconsolidatedfinancialstatements.FSPEITF03-6-1:InJune2008,theFASBissuedFASBStaffPositionNo.EITF03-6-1,“DeterminingWhetherInstrumentsGrantedinShare-BasedPaymentTransactionsareParticipatingSecurities”(“FSPEITF03-6-1”).TheFSPaddresseswhetherinstrumentsgrantedinstock-basedpaymenttransactionsarepartic-ipatingsecuritiespriortovestingand,therefore,needtobeincludedintheearningsallocationincomputingearningspershareunderthetwo-classmethoddescribedinparagraphs60and61ofSFASNo.128,“EarningsPerShare.”ThenewFSPiseffectiveforfinancialstatementsissuedforfiscalyearsbeginningafterDecember15,2008andinterimperiodswithinthoseyears(fiscal2010forWoodward).Earlyapplicationisnotpermitted.Woodward’sunvestedoptionsarenoteligibletoreceivedividends;therefore,FSPEITF03-06-1willnothaveanyimpactonitsconsolidatedfinancialstatements.FSPSFAS133-1:InSeptember2008,theFASBissuedFSPNo.FAS133-1“DisclosuresaboutCreditDerivativesandCertainGuarantees:AnAmendmentofFASBStatementNo.133(“FSPFAS133-1”)andFASBInterpretationNo.45;andClarificationoftheEffectiveDateofFASBStatementNo.161”.ThisFSPamends59WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)SFASNo.133torequiredisclosuresbysellersofcreditderivatives,includingcreditderivativesembeddedinahybridinstrument.ThisFSPalsoamendsFINNo.45torequireanadditionaldisclosureaboutthecurrentstatusofthepayment/performanceriskofaguarantee.Further,thisFSPclarifiestheFASB’sintentabouttheeffectivedateofSFASNo.161.ThisFSPiseffectiveforfiscalyearsendingafterNovember15,2008.WoodwardexpectstoadoptthisFSPforperiodsendingonandafterDecember31,2008.WoodwardiscurrentlyassessingtheimpactthatFSPNo.FAS133-1mayhaveonitsconsolidatedfinancialstatements.Note3.BusinessacquisitionsOnOctober31,2006,Woodwardacquired100percentofthestockofSchaltanlagen-Elektronik-Gera¨teGmbH&Co.KG(“SEG”),andarelatedreceivablefromSEGthatwasheldbyoneofthesellers,for$35,289,including$10,319ofassumeddebtobligations.Thetransactionwasfinancedwithavailablecash.TheacquisitionprovidesWoodwardwithtechnologiesandproductsthatcomplementitspowergenerationsystemsolutions.HeadquarteredinKempen,Germany,SEGdesignsandmanufacturesawiderangeofprotectionandcomprehensivecontrolsystemsforpowergenerationanddistributionapplications,powerinvertersforwindturbines,andcompleteelectricalsystemsforgasanddieselenginebasedpowerstations.Aspartoftheacquisition,Woodwardimplementedaplantoexitfromaproject-basedsegmentofthebusiness.Costsrelatedtoexitingthislineofbusinesshavebeenaccruedasbusinessterminationcosts,includinginvoluntaryemployeeterminationbenefitsandrelocationcosts.Duetochangesinthemarket,Woodwardnolongerexpectstoexitfromtheproject-basedsegmentofthebusiness.Woodwardestimatesthattheimplementationoftheremainingrestructuringtothisbusinesswillbecompletedinfiscalyear2009.Accruedterminationcosts,October1,2006....................................$1,753Payments..............................................................(448)Foreigncurrencytranslation................................................218Accruedterminationcosts,September30,2007.................................1,523Payments..............................................................(128)Changesinestimates.....................................................(599)Foreigncurrencytranslation................................................5Accruedterminationcosts,September30,2008.................................$801TheresultsofSEG’soperationsareincludedinWoodward’sConsolidatedStatementsofEarningsfromthebeginningofNovember2006.IftheacquisitionhadbeencompletedonOctober1,2006,Woodward’snetsalesandnetearningsforthefiscalyearendedSeptember30,2007wouldnothavebeenmateriallydifferentfromamountsreportedintheConsolidatedStatementsofEarnings.Note4.IncometaxesIncometaxesconsistedofthefollowing:YearEndedSeptember30,200820072006Current:Federal...........................................$26,689$6,204$21,117State.............................................4,0803,4163,223Foreign...........................................17,58310,4653,994Deferred............................................11,67813,746(13,737)$60,030$33,831$14,59760WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Earningsbeforeincometaxesbygeographicalareaconsistedofthefollowing:YearEndedSeptember30,200820072006UnitedStates.......................................$96,934$93,818$70,037Germany..........................................46,23922,0125,991Othercountries.....................................38,73716,1588,469$181,910$131,988$84,497DeferredincometaxespresentedintheConsolidatedBalanceSheetsarerelatedtothefollowing:AtSeptember30,20082007Deferredtaxassets:Retirementhealthcareandearlyretirementbenefits..................$14,528$16,913Foreignnetoperatinglosscarryforwards..........................4,57911,007Inventory.................................................14,82814,491Other....................................................20,63723,744Valuationallowance.........................................(129)(2,596)Totaldeferredtaxassets,netofvaluationallowance.................54,44363,559Deferredtaxliabilities:Intangibles—net...........................................(33,354)(29,761)Other....................................................(17,266)(18,582)Totaldeferredtaxliabilities....................................(50,620)(48,343)Netdeferredtaxassets.........................................$3,823$15,216TheforeignnetoperatinglosscarryforwardsasofSeptember30,2008maybecarriedforwardindefinitely.AtSeptember30,2008,Woodwardhasnotprovidedfortaxesonundistributedforeignearningsof$32,642thatitconsiderspermanentlyreinvested.Theseearningscouldbecomesubjecttoincometaxesiftheyareremittedasdividends,areloanedtoWoodward,orifitsellsitsstockinthesubsidiaries.However,theCompanybelievesthatforeigntaxcreditswouldlargelyoffsetanyincometaxthatmightotherwisebedue.Thechangesinthevaluationallowancewereasfollows:YearEndedSeptember30,200820072006Beginningbalance.....................................$(2,596)$(2,566)$(17,769)Changeinvaluationallowancethatexistedatthebeginningoftheyear..............................................2,689(116)13,710Currentactivityrelatedtodeferreditems....................(222)(302)—Foreignnetoperatinglosscarryforward.....................—3881,493Endingbalance.......................................$(129)$(2,596)$(2,566)Deferredtaxassetsarereducedbyavaluationallowanceif,basedontheweightofavailableevidence,itismorelikelythannotthatsomeportionorallofthedeferredtaxassetswillnotberealized.BothpositiveandnegativeevidenceareconsideredinformingWoodward’sjudgmentastowhetheravaluationallowanceisappropriate,andmoreweightisgiventoevidencethatcanbeobjectivelyverified.Valuationallowancesarereassessedwhenevertherearechangesincircumstancesthatmaycauseachangeinjudgment.Infiscal2008,2007,61WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)and2006,additionalobjectiveevidencebecameavailableregardingearningsintaxjurisdictionsthathadunexpirednetoperatinglosscarryforwardsthataffectedWoodward’sjudgmentaboutthevaluationallowancethatexistedatthebeginningoftheyear.Foreignnetoperatinglosscarryforwardamountsintheprecedingtableincludedthetranslationeffectsofchangesinforeigncurrencyexchangerates.ThereasonsforthedifferencesbetweenWoodward’seffectiveincometaxrateandtheU.S.statutoryfederalincometaxratewereasfollows:PercentofpretaxEarningsYearEndedSeptember30,200820072006Statutoryrate..............................................35.0%35.0%35.0%Adjustmentsofthebeginning-of-yearbalanceofvaluationallowancesfordeferredtaxassets........................................(1.5)—(16.2)Stateincometaxes,netoffederaltaxbenefit......................1.52.02.4Foreignlosseffect..........................................——0.3Foreigntaxratedifferences...................................—0.11.1Foreignsalesbenefits........................................—(0.4)(2.3)Germantaxlawchanges.....................................—2.3—ESOPdividendsonallocatedstockshares.........................(0.4)(0.5)(0.7)Researchcredit............................................(0.3)(2.4)(0.9)Retroactiveextensionofresearchcredit..........................—(0.9)—Changeinestimateoftaxesforpreviousperiodsandauditsettlements...(1.2)(10.2)(1.3)Otheritems,net............................................(0.1)0.6(0.1)Effectiverate..............................................33.0%25.6%17.3%Thechangesinestimateoftaxesforpreviousperiodsareprimarilyrelatedtothefavorableresolutionofcertaintaxmattersfor2008and2007,andtoincreasesintheamountofcertaincreditsclaimedandchangesintheamountofcertaindeductionstakenascomparedtopriorestimatesfor2006.InJune2006,theFASBissuedFASBInterpretationNo.48“AccountingforUncertaintyinIncomeTaxes—anInterpretationofFASBStatement109”(“FIN48”),whichprovidesguidanceonthefinancialstatementrecognition,measurement,reportinganddisclosureofuncertaintaxpositionstakenorexpectedtobetakeninataxreturn.FIN48addressesthedeterminationofwhethertaxbenefits,eitherpermanentortemporary,shouldberecordedinthefinancialstatements.Forthosetaxbenefitstoberecognized,ataxpositionmustbemore-likely-than-nottobesustaineduponexaminationbythetaxingauthorities.Theamountrecognizedismeasuredasthelargestamountofbenefitthatisgreaterthan50%likelyofbeingrealizeduponultimatesettlement.WoodwardadoptedtheprovisionsofFIN48onOctober1,2007,asrequired.ThechangeinmeasurementcriteriacausedWoodwardtorecognizeadecreaseintheretainedearningscomponentofstockholders’equityof$7,702.62WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Areconciliationofthebeginningandendingamountsofgrossunrecognizedtaxbenefitsisasfollows:BalanceatOctober1,2007...............................................$20,509Taxpositionsrelatedtothecurrentyear......................................5,819Taxpositionsrelatedtoprioryears..........................................(74)Lapseofapplicablestatuteoflimitations.....................................(3,678)BalanceatSeptember30,2008.............................................$22,576AtSeptember30,2008,theamountofunrecognizedtaxbenefitsthatwouldimpactWoodward’seffectivetaxrate,ifrecognized,was$17,086.Atthistime,Woodwardestimatesthatitisreasonablypossiblethattheliabilityforunrecognizedtaxbenefitswilldecreasebyupto$8,308inthenexttwelvemonthsthroughcompletionofreviewsbyvariousworldwidetaxauthorities.Woodwardrecognizesinterestandpenaltiesrelatedtounrecognizedtaxbenefitsintaxexpense.Woodwardhadaccruedinterestandpenaltiesof$5,956and$4,396asofSeptember30,2008,andOctober1,2007,respectively.Woodward’staxreturnsareauditedbyU.S.,state,andforeigntaxauthoritiesandtheseauditsareatvariousstagesofcompletionatanygiventime.Fiscalyearsremainingopentoexaminationinsignificantforeignjurisdictionsinclude2002andforward.WoodwardissubjecttoU.S.andstateincometaxexaminationsforfiscalyears2003andforward.63WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Note5.EarningspershareNetearningspershare—basiciscomputedbydividingnetearningsavailabletocommonstockholdersbytheweightedaveragenumberofsharesofcommonstockoutstandingfortheperiod.Netearningspershare—dilutedreflectthepotentialdilutionthatcouldoccurifoptionswereexercised.Theaveragesharesoutstandingdecreasedduringfiscal2008asaresultofsharesrepurchasedunderWoodward’songoingstockrepurchaseprogram.(SeeNote1.“Operationsandsummaryofsignificantaccountingpolicies.”)Woodwardrepurchasescommonstockattimesmanagementdeemsappropriate,givencurrentmarketvaluations.Thefollowingisareconciliationofnetearningstonetearningspershare—basicandnetearningspershare—diluted:YearEndedSeptember30,200820072006Numerator:Netearnings......................................$121,880$98,157$69,900Denominator:Basic..........................................67,56468,48968,702Assumedexerciseofstockoptions....................1,9961,9981,680Diluted.........................................69,56070,48770,382Incomepercommonshare:Basic..........................................$1.80$1.43$1.02Diluted.........................................$1.75$1.39$0.99Theweighted-averagesharesofcommonstockoutstandingforbasicearningspershareincludedtheweighted-averagetreasurystocksharesheldfordeferredcompensationobligationsof417,558,and828forfiscal2008,2007,and2006,respectively.Thefollowingoutstandingstockoptionswerenotincludedinthecomputationofdilutedearningspersharebecausetheirinclusionwouldhavebeenanti-dilutive:YearEndedSeptember30,200820072006Options................................................398636716Weighted-averageoptionprice...............................$32.68$18.54$13.59Note6.InventoriesAtSeptember30,20082007Rawmaterials...............................................$16,221$10,808Componentparts.............................................118,24892,737Workinprogress.............................................41,04736,220Finishedgoods..............................................32,80132,735$208,317$172,50064WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Note7.Property,plant,andequipmentAtSeptember30,20082007Land....................................................$13,343$12,469Buildingsandequipment......................................188,359182,765Machineryandequipment.....................................286,074277,100Constructioninprogress......................................16,52415,749504,300488,083Lessaccumulateddepreciation.................................(335,649)(329,085)Property,plant,andequipment,net..............................$168,651$158,998Depreciationexpensetotaled$28,620infiscal2008,$25,428infiscal2007,and$22,064infiscal2006.Note8.GoodwillSeptember30,2007Additions/AdjustmentsTranslationGains/(Losses)September30,2008TurbineSystems..................$86,565$—$—$86,565EngineSystems...................37,736(675)(1,430)35,631ElectricalPowerSystems............16,914675(208)17,381Consolidated.....................$141,215$—$(1,638)$139,577September30,2006Additions/AdjustmentsTranslationGains/(Losses)September30,2007TurbineSystems..................$86,565$—$—$86,565EngineSystems...................36,703—1,03337,736ElectricalPowerSystems............8,8166,2961,80216,914Consolidated.....................$132,084$6,296$2,835$141,21565WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Note9.Otherintangibles—netGrossCarryingValueAccumulatedAmortizationNetCarryingAmountGrossCarryingValueAccumulatedAmortizationNetCarryingAmountSeptember30,2008September30,2007Customerrelationships:TurbineSystems.........$44,327$(15,268)$29,059$44,327$(13,791)$30,536EngineSystems..........20,607(9,877)10,73020,607(8,003)12,604ElectricalPowerSystems...2,190(386)1,8042,609(424)2,185Total..................$67,124$(25,531)$41,593$67,543$(22,218)$45,325Intellectualproperty:TurbineSystems.........$—$—$—$—$—$—EngineSystems..........12,705(5,408)7,29716,163(6,175)9,988ElectricalPowerSystems...2,790(1,220)1,5704,564(4,374)190Total..................$15,495$(6,628)$8,867$20,727$(10,549)$10,178Processtechnology:TurbineSystems.........$11,941$(4,113)$7,828$11,941$(3,715)$8,226EngineSystems..........5,350(2,853)2,4975,350(2,318)3,032ElectricalPowerSystems...1,338(1,129)2091,351(971)380Total..................$18,629$(8,095)$10,534$18,642$(7,004)$11,638Patents:TurbineSystems.........$—$—$—$3,056$(2,852)$204EngineSystems..........——————ElectricalPowerSystems...4,442(693)3,7494,486(335)4,151Total..................$4,442$(693)$3,749$7,542$(3,187)$4,355Otherintangibles:TurbineSystems.........$—$—$—$—$—$—EngineSystems..........———315(275)40ElectricalPowerSystems...1,563(200)1,3631,578(96)1,482Total..................$1,563$(200)$1,363$1,893$(371)$1,522Consolidated............$107,253$(41,147)$66,106$116,347$(43,329)$73,018Amortizationexpensetotaled$6,830infiscal2008,$7,496infiscal2007,and$6,953infiscal2006.66WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Amortizationexpenseassociatedwithcurrentintangiblesisexpectedtobe:YearEndingSeptember30:2009................................................................$6,1842010................................................................6,0592011................................................................6,0172012................................................................6,0172013................................................................5,839Thereafter............................................................35,990$66,106Note10.Short-termborrowingsShort-termborrowingsreflectinterestbearingadvancessubjecttoacashpoolingagreementoncertainforeignbankaccountsandarecollateralizedbytheassociatedbankaccountbalances.Totalborrowingcapacityvariesdailyinrelationtonetamountsondepositintheassociatedbankaccounts.Theweighted-averageinterestrateforoutstandingborrowingswas3.0%and3.8%,atSeptember30,2008and2007,respectively.TherateswerelowerthanistypicalintheU.S.becauseofborrowingratesavailableinforeigncountries.Note11.Long-termdebtandlineofcreditfacilitiesLong-termdebtconsistedofthefollowing:AtSeptember30,20082007Seniornotes—6.39%,dueOctober2011;unsecured...................$42,857$53,572Termnote—5.19%,dueJuly2008;unsecured.......................—4,375Termnote—4.25%—6.95%,dueMay2009toSeptember2012,securedbylandandbuildings..........................................1,6592,526Fairvaluehedgeadjustmentforunrecognizeddiscontinuedhedgegains.....38161744,89761,090Less:currentportion...........................................(11,560)(15,940)Long-termdebt,lesscurrentportion...............................$33,337$45,150Theseniornotesareheldbymultipleinstitutions.ThetermnotesareheldbybanksinGermany.Thecurrentportionoflong-termdebtatSeptember30,2008includes$183relatedtothefairvaluehedgeadjustmentforunrecognizeddiscontinuedhedgegains.Requiredfutureprincipalpaymentsoftheseniornotesandthetermnotesareasfollows:YearEndingSeptember30,2009................................................................$11,3772010................................................................11,1972011................................................................11,0642012................................................................10,878PriortotheissuanceofSFASNo.133,“AccountingforDerivativeInstrumentsandHedgingActivities”(“SFAS133”)Woodwardenteredintocertaininterestrateswapsthatweredesignatedasfairvaluehedgesofitslong-termdebt.Thediscontinuanceoftheseinterestrateswapsresultedingainsthatarerecognizedasareduction67WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)ofinterestexpenseoverthetermoftheassociateddebtusingtheeffectiveinterestmethod.Theunrecognizedportionofthegainispresentedasanadjustmenttolong-termdebtbasedontheaccountingguidanceineffectatthetimetheinterestrateswapswerediscontinued.IfSFAS133hadbeenissuedandadoptedwhentheseinterestrateswapswereenteredinto,theunrecognizedpotionofthegainwouldbepresentedinaccumulatedothercompre-hensiveincomeratherthanasanadjustmenttolong-termdebt.InSeptember2008,theCompanyenteredintotreasurylockagreementswithanotionalamounttotaling$100,000thatqualifiedascashflowhedgesunderSFAS133.Theobjectiveofthisderivativeinstrumentwastohedgetheriskofvariabilityincashflowsrelatedtofutureinterestpaymentsofaportionoftheanticipatedfuturedebtissuancesattributabletochangesinthedesignatedbenchmarkinterestrate.Thehedgeswereclosed-outpriortoSeptember30,2008resultinginagainofapproximately$108andthegainisrecordedinaccumulatedothercomprehensiveincomeasofSeptember30,2008.Thegainontheclose-outofthetreasurylockagreementswillberecognizedasareductionofinterestexpenseoverthescheduledtermofthehedgeddebt(sevenyears)issuedonOctober1,2008usingtheeffectiveinterestmethod.Provisionsofthedebtagreements,includingthe$225,000revolvinglineofcreditfacilitydescribedbelow,includecovenantscustomarytosuchagreementsthatrequireWoodwardtomaintainspecifiedminimumormaximumfinancialmeasuresandplacelimitationsonvariousinvestingandfinancingactivities.Theagreementsalsopermitthelenderstoacceleraterepaymentrequirementsintheeventofamaterialadverseevent.Themostrestrictivecovenantsrequirethemaintenanceofaminimumconsolidatednetworth,amaximumratioofconsolidateddebttoconsolidatedoperatingcashflow,andamaximumratioofconsolidateddebttoearningsbeforeinterest,taxes,depreciation,andamortization(“EBITDA”),asdefinedintheagreements.Woodwardisincompliancewithallcovenants.AsofSeptember30,2008,Woodwardhada$225,000revolvinglineofcreditfacilitythatinvolvedunsecuredfinancingarrangementswithasyndicateofU.S.banks.Theagreementprovidedforanoptiontoincreasetheamountofthelineto$350,000andhasanexpirationdateofOctober2012.InterestratesonborrowingsundertheagreementvarywithLIBOR,thefederalfundsrate,ortheprimerate.Woodwardalsohadvariousforeignlinesofcredit.Thelinesaregenerallyreviewedannuallyforrenewalandaresubjecttotheusualtermsandconditionsappliedbythebanks.Severalofthelinesassesscommitmentfees.Borrowingcapacityunderlinesofcreditconsistedofthefollowing:AtSeptember30,20082007U.S.revolvinglineofcreditfacility...............................$225,000$100,000Variousforeignlinesofcredit...................................19,90319,867Totalborrowingcapacityunderrevolvinglinesofcredit................244,903119,867Less:borrowingsoutstanding....................................(—)(—)Availablelineofcreditborrowingcapacity.........................$244,903$119,86768WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Note12.AccruedliabilitiesAtSeptember30,20082007Salariesandothermemberbenefits.................................$51,773$47,578Warranties...................................................7,2325,675Taxes,otherthanincome.........................................6,9086,682Accruedretirementbenefits.......................................5,8656,132Other.......................................................13,81317,823$85,591$83,890Provisionsofthesalesagreementsincludeproductwarrantiescustomarytosuchagreements.Accrualsareestablishedforspecificallyidentifiedwarrantyissuesthatareprobabletoresultinfuturecosts.Warrantycostsareaccruedonanon-specificbasiswheneverpastexperienceindicatesanormalandpredictablepatternexists.Changesinaccruedproductwarrantieswereasfollows:AtSeptember30,20082007Warranties,beginningofperiod....................................$5,675$5,832Increasestoaccruals............................................7,4774,911Settlementsofamountsaccrued....................................(5,800)(5,715)Foreigncurrencyexchangeratechanges..............................(120)647Warranties,endofperiod.........................................$7,232$5,675Note13.OtherliabilitiesAtSeptember30,20082007Netaccruedretirementbenefits,lessamountsrecognizedwithaccruedliabilities...................................................$42,103$46,145Other.......................................................25,59211,259$67,695$57,404Note14.RetirementbenefitsWoodwardprovidesvariousbenefitstoeligiblemembersoftheCompany,includingcontributionstovariousdefinedcontributionplans,pensionbenefitsassociatedwithdefinedbenefitplans,andretirementhealthcarebenefits.Eligibilityrequirementsandbenefitlevelsvarydependingonemployeelocation.Woodwardprovideshealth-careandlifeinsurancebenefitstocertainretiredemployeesandtheircovereddependentsandbeneficiaries.Generally,employeeswhohaveattainedage55andhaverendered10ormoreyearsofserviceareeligibleforthesepostretirementbenefits.Certainretireesarerequiredtocontributetoplansinordertomaintaincoverage.OnSeptember30,2007,WoodwardadoptedSFASNo.158,“Employers’AccountingforDefinedBenefitPensionandOtherPostretirementPlans”(“SFAS158”),whichrequirestherecognitionofthefundedstatusofdefinedpensionandpostretirementplansinthestatementoffinancialposition.Thefundedstatusismeasuredasthedifferencebetweenthefairmarketvalueoftheplanassetsandthebenefitobligation.Foradefinedbenefitpensionplan,thebenefitobligationistheprojectedbenefitobligation;foranyotherdefinedbenefitpostretirementplan,suchasaretireehealthcareplan,thebenefitobligationistheaccumulatedpostretirementbenefitobligation.Anyover-fundedstatusshouldberecognizedasanassetandanyunderfundedstatusshouldberecognizedasaliability.69WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Aspartoftheinitialrecognitionofthefundedstatus,anytransitionalasset/(liability),priorservicecost/(credit)oractuarialgain/(loss)thathasnotyetbeenrecognizedasacomponentofnetperiodiccostshouldberecognizedintheAccumulatedOtherComprehensiveIncomesectionoftheConsolidatedStatementsofStockholders’Equity,netoftax.AccumulatedOtherComprehensiveIncomewillbeadjustedastheseamountsaresubsequentlyrecognizedasacomponentofnetperiodicbenefitcostsinfutureperiods.TherecognitionofthefundedstatusrequirementandcertaindisclosureprovisionsofSFAS158wereeffectiveforWoodwardasoftheendoffiscal2007.RetrospectiveapplicationofSFAS158wasnotpermitted.TheinitialincrementalrecognitionofthefundedstatusunderSFAS158thatisreflecteduponadoptionintheAccumulatedOtherComprehensiveIncomesectionofConsolidatedStatementsofStockholders’Equitywasanaftertaxdecreasetoequityof$980.TheimpactofadoptingtheprovisionsofSFAS158onthecomponentsoftheConsolidatedBalanceSheetasofSeptember30,2007isasfollows:BeforeApplicationofSFAS158AdjustmentIncreases/(Decreases)AfterApplicationofSFAS158RetirementPensionBenefits:Deferredtaxasset.........................$1,980$816$2,796Totalassets..............................1,9808162,796Pensionobligation........................(4,674)(2,916)(7,590)Accumulatedothercomprehensiveincome,netoftaxes.................................3,2932,1005,393Totalstockholders’equity...................3,2932,1005,393Totalliabilitiesandequity...................(1,381)(816)(2,197)RetirementHealthcareBenefits:Deferredtaxliability.......................—(687)(687)Pensionobligation........................(46,494)1,807(44,687)Accumulatedothercomprehensiveincome,netoftaxes.................................—(1,120)(1,120)Totalstockholders’equity...................—(1,120)(1,120)A.DefinedContributionPlansSubstantiallyallU.S.employeesareeligibletoparticipateintheU.S.definedcontributionplan.Certainforeignemployeesalsoareeligibletoparticipateinforeignplans.Theamountofexpenseassociatedwithdefinedcontributionplanstotaled$14,877infiscal2008,$13,487infiscal2007,and$13,684infiscal2006.Theamountofcontributionsassociatedwiththemultiemployerplantotaled$613infiscal2008,$572infiscal2007,and$635infiscal2006.B.PensionbenefitsassociatedwithdefinedbenefitplansWoodwardhasdefinedbenefitplanswhichprovidepensionbenefitsforcertainretiredemployeesintheU.S.,theUnitedKingdom,andJapan.Approximately575currentemployeesmayreceivefuturebenefitsundertheplans.ThedefinedbenefitplansintheU.S.werefrozeninJanuary2007andnoadditionalemployeesmayparticipateintheU.S.plansandnoadditionalservicecostswillbeincurred.ASeptember30measurementdateisutilizedtovalueplanassetsandobligationsforallofWoodward’sdefinedbenefitpensionplans.70WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Woodward’sinvestmentpoliciesandstrategiesforplanassetsfocusonmaintainingdiversifiedinvestmentportfoliosthatprovideforgrowthwhileminimizingrisktoprincipal.ThetargetallocationrangesforplanassetsintheU.S.andintheUnitedKingdom,whichrepresentedabout81%oftotalforeignplanassetsatSeptember30,2008,are50%forequitysecuritiesand50%fordebtsecurities.TheremainingforeignplanassetsareinJapan,andWoodward’sinvestmentmanagerusesassetallocationsthatarecustomaryinthatcountry.Theexpectedlong-termratesofreturnonplanassetswerebasedonWoodward’scurrentassetallocationsandthehistoricallong-termperformanceforeachassetclass,asadjustedforexistingmarketconditions.Salaryincreaseassumptionsarebaseduponhistoricalexperienceandanticipatedfuturemanagementactions.Indeterminingthelong-termrateofreturnonplanassets,Woodwardassumesthatthehistoricallong-termcompoundgrowthratesofequityandfixed-incomesecuritieswillpredictthefuturereturnsofsimilarinvestmentsintheplanportfolio.Investmentmanagementandotherfeespaidoutoftheplanassetsarefactoredintothedeterminationofassetreturnassumptions.NetperiodicbenefitcostsconsistsofthefollowingcomponentsreflectedasexpenseinWoodward’sConsolidatedStatementsofEarnings:YearEndedSeptember30,200820072006200820072006UnitedStatesOtherCountriesComponentsofnetperiodicbenefitcost:Servicecost.........................$—$—$—$945$1,294$1,360Interestcost.........................1,1221,0341,1422,8142,5542,200Expectedreturnonplanassets...........(1,362)(1,317)(1,180)(3,005)(2,424)(1,998)Amortizationof:Unrecognizedtransitionobligation........———998991Unrecognizedlosses...................118244251181360402Recognizedpriorservicecost(benefit).....(260)(259)1(10)(8)(8)Contractualterminationbenefits..........————715340Netperiodicbenefitcost(benefit).........$(382)$(298)$214$1,024$2,580$2,387AnamendmentwasmadetooneofWoodward’sretirementpensionbenefitplansin2006thatmodifiedtheamountofpensionbenefitspayabletoparticipantsretiringafterJanuary1,2007.ContractualpensionterminationbenefitswereassociatedwithworkforcereductionsofmemberscoveredbyoneofWoodward’sretirementpensionbenefitplans.Theworkforcereductionswererelatedtotheconsolidationofmanufacturingoperationsthatwereinitiallyaccruedforin2004.TheexpensewasrecognizedintheEngineSystemssegment.TheamountsexpectedtobeamortizedfromAccumulatedOtherComprehensiveIncomeandreportedasacomponentofnetperiodicbenefitcostduringfiscal2009isasfollows:UnitedStatesOtherCountriesNettransitionobligation..................................$—$(74)Priorservicecost(benefit).................................(260)7Netactuariallosses(gains)................................118(124)71WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Thefollowingtableprovidesareconciliationofthechangesintheprojectedbenefitobligationandfairvalueofassetsfortheretirementpensionplans:AtorfortheYearEndedSeptember30,2008200720082007UnitedStatesOtherCountriesChangesinprojectedbenefitobligation:Projectedbenefitobligationatbeginningofyear...........$18,676$18,716$59,628$57,072Servicecost......................................——9451,294Interestcost......................................1,1221,0342,8142,554Contributionbyparticipants...........................——69122Netactuarialgains.................................(1,299)(547)(8,989)(2,775)Foreigncurrencyexchangeratechanges..................——(3,798)3,958Benefitspaid......................................(543)(527)(3,384)(3,312)Curtailmentgain...................................——(13)—Contractualterminationcost(benefits)...................——(1,630)715Projectedbenefitobligationatendofyear..................$17,956$18,676$45,642$59,628Changesinfairvalueofplanassets:Fairvalueofplanassetsatbeginningofyear..............$18,438$16,709$52,276$40,812Actualreturnonplanassets...........................(2,549)2,256(4,284)2,504Foreigncurrencyexchangeratechanges..................——(3,794)3,431Contributionsbythecompany.........................——2,5828,719Contributionsbyplanparticipants......................——69122Settlements.......................................——(1,631)—Benefitspaid......................................(543)(527)(3,384)(3,312)Fairvalueofplanassetsatendofyear.................$15,346$18,438$41,834$52,276Reconciliationofaccruedobligationandtotalamountsrecognized:Fundedstatusatendofyear..........................$(2,610)$(238)$(3,808)$(7,352)Unrecognizedpriorservicecost(benefit)...............(2,890)(3,149)37(56)Unrecognizednetlosses(gains)........................5,8423,348198,046Unrecognizedtransitionobligation......................——(145)—Netamountsrecognized............................$342$(39)$(3,897)$638Accruedbenefitliability...........................$(2,610)$(238)$(3,808)$(7,352)Deferredtaxes...................................1,122769862,720Accumulatedothercomprehensiveincome(loss)...........1,830123(1,075)5,270Netamountsrecognized............................$342$(39)$(3,897)$638Theunderfundedstatusoftheplansdeclinedfrom$7,590infiscal2007to$6,418infiscal2008,primarilyduetoactuarialgainsresulting,inpart,fromtheincreaseinthediscountrateandcontributionsmadeduringtheyear.Woodwardmakesperiodiccashcontributionstoitsdefinedpensionplans.72WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Theaccumulatedbenefitobligationisthepresentvalueofpensionbenefits(whethervestedorunvested)attributedtoemployeeservicerenderedbeforethemeasurementdateandbasedonemployeeserviceandcompensationpriortothatdate.Theaccumulatedbenefitobligationdiffersfromtheprojectedbenefitobligationinthatitincludesnoassumptionaboutfuturecompensationlevels.Theprojectedbenefitobligation,accumulatedbenefitobligationandfairvalueofplanassetsforpensionplanswithaccumulatedbenefitobligationsinexcessofplanassetswereasfollow,atorfortheyearendedSeptember30:2008200720082007UnitedStatesOtherCountriesProjectedbenefitobligation...................$(17,956)$(18,676)$(45,642)$(59,628)Accumulatedbenefitobligation................(17,956)(18,676)(43,497)(56,097)Fairvalueofplanassets.....................15,34618,43841,83452,276TheallocationofpensionplanassetsasoftherespectivemeasurementdatesisasfollowsatSeptember30:2008200720082007UnitedStatesOtherCountriesEquitysecurities..........................................52%60%42%44%Debtsecurities...........................................48%40%58%38%Insurancecontracts........................................———5%Other..................................................———13%100%100%100%100%PensionassetsatSeptember30,2008and2007donotincludeanydirectinvestmentinWoodward’sequitysecurities.Substantiallyallpensionbenefitpaymentsaremadefromassetsofthepensionplans.UsingforeignexchangeratesasofSeptember30,2008andexpectedfutureservice,itisanticipatedthatthefuturebenefitpaymentswillbeasfollows:YearEndingSeptember30,UnitedStatesOtherCountries2009.....................................................$604$2,8232010.....................................................6562,9222011.....................................................7373,1552012.....................................................8293,0322013.....................................................9223,2282014-2018................................................6,24017,043Woodwardexpectsitscontributionsforretirementpensionbenefitswillbe$0intheUnitedStatesand$2,426inothercountriesin2009.C.RetirementhealthcarebenefitplansWoodwardhasretirementhealthcarebenefitplansintheU.S.andtheUnitedKingdomthatprovideshealthcarebenefitsforapproximately1,100retiredemployeesandmayprovidefuturebenefitstoapproximately140activeemployees,uponretirement.Benefitsincludetheoptiontoelectcompanyprovidedhealthcareinsurancebenefitstoage65andaMedicaresupplementalplanafterage65.Theretirementhealthcarebenefitplanswere73WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)frozeninJanuary2007andnoadditionalemployeesmayparticipateintheplans.ASeptember30measurementdateisutilizedtovalueplanassetsandobligationsforallofWoodward’sretirementhealthcarebenefitplans.NetperiodicbenefitcostsconsistsofthefollowingcomponentsreflectedasexpenseinWoodward’sConsolidatedStatementsofEarnings:YearEndedSeptember30,200820072006Componentsofnetperiodicbenefitcost:Servicecost...........................................$242$297$381Interestcost...........................................2,4522,4742,753Recognizedlosses......................................1922591,198Recognizedpriorservicecost.............................(2,520)(2,520)(2,520)Costofbuyoutevents...................................—(871)—Netperiodiccost(benefit)................................$366$(361)$1,812Duringfiscal2007,Woodwardprovidedanoptionforcertainretireestoreceiveacashsettlementinlieuoffuturepayments.Theexpenserelatedtoretireeswhoacceptedtheofferisincludedinthe“costofbuyoutevents.”Aspartofourretirementhealthcarebenefits,WoodwardprovidesaprescriptiondrugbenefitthatisatleastactuariallyequivalenttoMedicarePartD.Asaresult,WoodwardisentitledtoafederalsubsidythatwasintroducedbytheMedicarePrescriptionDrug,Improvement,andModernizationActof2003.Subsidiesreceivedareasfollows:YearEndedSeptember30,200820072006Prescriptiondrugbenefitspaid...............................$3,180$2,318$2,336Federalsubsidyreceived...................................166924—74WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)ThefollowingtableprovidesareconciliationofthechangesintheprojectedbenefitobligationandfairvalueofassetsfortheretirementhealthcarebenefitsfortheyearsendedSeptember30:20082007Changesinprojectedbenefitobligation:Benefitobligationatbeginningofyear...........................$44,687$51,557Servicecost...............................................242297Interestcost...............................................2,4532,475Contributionbyparticipants...................................2,4072,663Netactuarialgain...........................................(3,493)(5,896)Foreigncurrencyexchangeratechanges..........................(88)188Benefitspaid..............................................(6,342)(5,237)Settlementgain.............................................—(2,284)Planamendments...........................................(2,531)—PartDMedicarereimbursement................................166924Benefitobligationatendofyear............................$37,501$44,687Changesinfairvalueofplanassets:Fairvalueofplanassetsatbeginningofyear.......................$—$—Specialterminationbenefitcost.................................—(737)Contributionsbythecompany..................................3,9353,310Contributionsbyplanparticipants...............................2,4072,663Benefitspaid..............................................(6,342)(5,236)Fairvalueofplanassetsatendofyear........................$—$—Reconciliationofaccruedobligationandtotalamountsrecognized:Fundedstatusatendofyear...................................$(37,501)$(44,687)Unrecognizedpriorservicecost.................................(5,426)(5,418)Unrecognizednet(gain)loss...................................(90)3,611Netamountsrecognized....................................$(43,017)$(46,494)Accruedbenefitliability....................................$(37,501)$(44,687)Deferredtaxes.............................................(2,100)(687)Accumulatedothercomprehensiveincome.........................(3,416)(1,120)Netamountsrecognized.................................$(43,017)$(46,494)Theaccumulatedbenefitobligationisthepresentvalueofhealthcarebenefits(whethervestedorunvested)attributedtoemployeeservicerenderedbeforethemeasurementdateandbasedonemployeeserviceandcompensationpriortothatdate.Theaccumulatedbenefitobligationdiffersfromtheprojectedbenefitobligationinthatitincludesnoassumptionaboutfuturecompensationlevels.Theprojectedbenefitobligationandaccu-mulatedbenefitobligationwereasfollows:YearEndedSeptember30,20082007Projectedbenefitobligation/Accumulatedpostretirementbenefitobligation..$(37,501)$(44,687)75WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Forretirementhealthcarebenefits,Woodwardassumednethealthcarecosttrendratesof8.0%in2009,decreasinggraduallyto5.0%in2011,andremainingat5.0%thereafter.A1.0%increaseinassumedhealthcarecosttrendrateswouldhaveincreasedthetotaloftheserviceandinterestcostcomponentsbyapproximately$275andincreasedthebenefitobligationattheendoftheyearbyapproximately$3,939in2008.Likewise,a1.0%decreaseintheassumedrateswouldhavedecreasedthetotalofserviceandinterestcostcomponentsby$240anddecreasedthebenefitobligationbyapproximately$3,411in2008.UsingforeignexchangeratesasofSeptember30,2008andexpectedfutureservice,itisanticipatedthatthefuturebenefitpaymentswillbeasfollows:YearEndingSeptember30,2009................................................................$2,7562010................................................................2,9242011................................................................3,0122012................................................................3,0792013................................................................3,1372014-2018...........................................................16,216Woodwardexpectsitscontributionsforretirementhealthcarebenefitswillbeapproximately$2,783infiscal2009,lessamountsreceivedasfederalsubsidiesexpectedtobe$473.Note15.StockoptionsStockoptionsaregrantedtokeymanagementmembersanddirectorsoftheCompany.TheseoptionsaregrantedwithanexercisepriceequaltothemarketpriceofWoodward’sstockatthedateofgrant,andgenerallywithafour-yeargradedvestingscheduleandatermof10years.Vestingwouldbeacceleratedintheeventofretirement,disability,ordeathofaparticipant,orchangeincontroloftheCompany,asdefined.Woodwardrecognizesstockcompensationonastraight-linebasisovertherequisiteserviceperiodoftheentireawardforoptionswithgradedvestingschedules.Stockforexercisedstockoptionsisissuedfromtreasurystockshares.Provisionsgoverningthestockoptiongrantsareincludedinthe2006OmnibusIncentivePlan(the“2006Plan”)andthe2002StockOptionPlan(the“2002Plan”).The2006PlanwasapprovedbystockholdersandbecameeffectiveonJanuary25,2006.Nofurthergrantswillbemadeunderthe2002Plan.The2006Planmade7,410stocksharesavailableforgrantsmadeonorafterJanuary25,2006,tomembersanddirectorsofthecompany,subjecttoannualawardlimitsasspecifiedinthePlan,ofwhich6,222wereavailableforfuturegrantsasofSeptember30,2008.ThefairvalueofoptionsgrantedduringthefiscalyearsendedSeptember30,2008,2007,and2006wasestimatedonthedateofgrantusingtheBlack-Scholes-Mertonoption-pricingmodelwiththefollowingassump-tionsbygrantyear:YearEndedSeptember30,200820072006Expectedterm..................................7years7years7yearsExpectedvolatility..............................37.0%37.0%37.0%Expecteddividendyield..........................1.7%1.7%1.7%Risk-freeinterestraterangeused....................3.73%4.4%-5.0%4.5%-4.6%Therisk-freeinterestratewasselectedbasedonyieldsfromU.S.Treasuryzero-couponissueswitharemainingtermequaltotheexpectedtermoftheoptionsbeingvalued.76WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Changesinoutstandingstockoptionswereasfollows:NumberWeighted-AverageExercisePriceBalanceatSeptember30,2005...............................5,998$6.98Optionsgranted.........................................73413.52Optionsexercised.......................................(920)5.16Optionsforfeited........................................(4)7.81BalanceatSeptember30,2006...............................5,8088.09Optionsgranted.........................................77418.78Optionsexercised.......................................(1,208)6.40Optionsforfeited........................................(98)13.74BalanceatSeptember30,2007...............................5,2769.94Optionsgranted.........................................44632.74Optionsexercised.......................................(1,329)6.52Optionsforfeited........................................(6)18.49BalanceatSeptember30,2008...............................4,38713.29Changesinnonvestedstockoptionsduring2008wereasfollows:NumberWeighted-AverageExercisePriceBalanceatSeptember30,2007...............................1,74714.90Optionsgranted.........................................44632.74Optionsvested..........................................(748)13.45Optionsforfeited........................................(6)18.49BalanceatSeptember30,2008...............................1,43921.17AtSeptember30,2008,therewas$6,440ofunrecognizedcompensationcostrelatedtononvestedawards,whichWoodwardexpectstorecognizeoveraweighted-averageperiodof1.2years.Informationaboutstockoptionsthathavevested,orareexpectedtovest,andareexercisableatSeptember30,2008,wereasfollows:NumberWeighted-AverageExercisePriceWeighted-AverageRemainingLifeinYearsAggregateIntrinsicValueOptionsvestedorexpectedtovest...............3,694$12.045.0$85,807Optionsexercisable..........................2,9489.444.276,150Stock-basedexpenserecognizedunderSFAS123(R)wasasfollows(inthousands):YearEndedSeptember30,200820072006Employeestock-basedcompensationexpense....................$4,588$3,849$2,942Theweighted-averagegrantdatefairvalueofoptionsgrantedwas$13.09for2008,$7.36for2007,and$5.22for2006.77WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Otherinformationfollows:YearEndedSeptember30,200820072006Totalfairvalueofstockoptionsvested......................$3,841$3,114$2,668Totalintrinsicvalueofoptionsexercised.....................40,31619,2479,056Cashreceivedfromexercisesofstockoptions.................5,2165,8754,139Taxbenefitrealizedfromexerciseofstockoptions..............15,3559,7873,406Note16.AccumulatedothercomprehensiveearningsAccumulatedothercomprehensiveearningsconsistedofthefollowingitems:YearEndedSeptember30,20082007Accumulatedforeigncurrencytranslationadjustments:Beginningbalance............................................$27,614$17,100Translationadjustments,netofreclassificationtoearnings..............(6,135)16,874Taxesassociatedwithtranslationadjustments........................2,064(6,360)Endingbalance..............................................23,54327,614Accumulatedunrealizedderivativelosses:Beginningbalance............................................(331)(484)Proceedsfromcashflowhedge,netoftaxes........................67—Reclassificationtointerestexpense...............................205247Taxesassociatedwithinterestreclassification........................(78)(94)Endingbalance..............................................(137)(331)Accumulatedminimumpost-retirementbenefitliabilityadjustments:Beginningbalance............................................(4,273)(3,997)Minimumbenefitliabilityadjustment..............................3,1253,789Taxesassociatedwithbenefitadjustments..........................(1,939)(3,085)ImplementationofSFAS158,netoftaxes..........................—(980)Endingbalance..............................................(3,087)(4,273)Totalaccumulatedothercomprehensiveincome........................$20,319$23,01078WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Note17.CommitmentsandguaranteesWoodwardhasenteredintooperatingleasesforcertainfacilitiesandequipmentwithtermsinexcessofoneyearunderagreementsthatexpireatvariousdates.Someleasesrequirethepaymentofpropertytaxes,insurance,andmaintenancecostsinadditiontorentalpayments.Futureminimumrentalpaymentsrequiredundertheseleasesareasfollows:YearEndingSeptember30,2009.................................................................$4,4002010.................................................................3,8002011.................................................................3,1002012.................................................................2,9002013.................................................................2,500Thereafter.............................................................3,100Rentexpenseforalloperatingleasestotaled$6,503infiscal2008,$5,524infiscal2007,and$4,610infiscal2006.Woodwardentersintounconditionalpurchaseobligationarrangements(i.e.,issuanceofpurchaseorders,obligationstotransferfundsinthefutureforfixedorminimumquantitiesofgoodsorservicesatfixedorminimumprices,suchas“take-or-pay”contracts)inthenormalcourseofbusinesstoensurethatadequatelevelsofsourcedproductareavailabletoWoodward.Futureminimumunconditionalpurchaseobligationsareasfollows:YearEndingSeptember30,2009...............................................................$132,9772010...............................................................2,222Guaranteesandlettersofcredittotalingapproximately$8,200wereoutstandingasofSeptember30,2008,someofwhichweresecuredbycashandcashequivalentsatfinancialinstitutionsorbyWoodwardlineofcreditfacilities.Note18.ContingenciesWoodwardiscurrentlyinvolvedinpendingorthreatenedlitigationorotherlegalproceedingsregardingemployment,productliability,andcontractualmattersarisingfromthenormalcourseofbusiness.TheCompanyhasaccruedforindividualmattersthatitbelievesarelikelytoresultinalosswhenultimatelyresolvedusingestimatesofthemostlikelyamountofloss.Therearealsoindividualmattersthatmanagementbelievesthelikelihoodofalosswhenultimatelyresolvedislessthanlikelybutmorethanremote,whichwerenotaccrued.Whileitispossiblethattherecouldbeadditionallossesthathavenotbeenaccrued,managementcurrentlybelievesthepossibleadditionallossintheeventofanunfavorableresolutionofeachmatterislessthan$10.0millionintheaggregate.MPCProductsCorporation(“MPC”),whichwasacquiredbyWoodwardonOctober1,2008,asdescribedinNote22,“SubsequentEvents,”issubjecttoaninvestigationbytheU.S.DepartmentofJustice(the“DOJ”)regardingcertainofitspricingpracticespriorto2006relatedtogovernmentcontracts.MPCandtheU.S.AttorneyfortheNorthernDistrictofIllinoishavereachedasettlementinprincipleandareintheprocessoffinalizingandobtainingapprovalswithintheDOJ.FinaldispositionwillbesubjecttoacceptanceandapprovalbytheU.S.DistrictCourt.ItisanticipatedthatanysettlementofthematterwouldinvolvethepaymentofmonetaryfinesandotheramountsbyMPC.MPCisalsointheprocessofworkingwiththeU.S.DepartmentofDefensetoresolveanyadministrativemattersthatmayariseoutoftheinvestigation.Therecanbenoassuranceastotheresolutionofthesematters.ThepurchasepriceforMPCreflectstheamountagreedtoinprinciplebyMPCwiththeU.S.Attorney.AnyresultingfinesorothersanctionsbeyondthisamountcouldhaveamaterialnegativeimpactonWoodward.79WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)WoodwardcurrentlydoesnothaveanyadministrativeorjudicialproceedingsarisingunderanyFederal,State,orlocalprovisionsregulatingthedischargeofmaterialsintotheenvironmentorprimarilyforthepurposeofprotectingtheenvironment.Woodwarddoesnotrecognizecontingenciesthatmightresultinagainuntilsuchcontingenciesareresolvedandtherelatedamountsarerealized.IntheeventofachangeincontroloftheCompany,Woodwardmayberequiredtopayterminationbenefitstocertainexecutiveofficers.Note19.FinancialinstrumentsTheestimatedfairvaluesofWoodward’sfinancialinstrumentswereasfollows:EstimatedFairValueCarryingCostEstimatedFairValueCarryingCost20082007AtSeptember30,Cashandcashequivalents...................$109,833$109,833$71,635$71,635Investmentsindeferredcompensationprogram....3,9313,931——Short-termborrowings......................(4,031)(4,031)(5,496)(5,496)Long-termdebt,includingcurrentportion........(44,836)(44,516)(60,473)(60,473)Obligationsfordeferredcompensationprogram...(3,931)(3,931)——Thefairvaluesofcashandcashequivalentsandshort-termborrowingsatvariableinterestratesareassumedtobeequaltotheircarryingamounts.Cashandcashequivalentshaveshort-termmaturitiesandshort-termborrowingshaveshort-termmaturitiesandmarketinterestrates.Investmentsandobligationsrelatedtothedeferredcompensationprogramusedtoprovidedeferredcom-pensationbenefitstocertainemployeesareassumedtobeequaltotheircarryingamountssinceboththeassetandtheliabilityaremarkedtomarketvalueeachreportingperiod.Thefairvalueoflong-termdebtatfixedinterestrateswasestimatedbasedonamodelthatdiscountedfutureprincipalandinterestpaymentsatinterestratesavailabletotheCompanyattheendoftheyearforsimilardebtofthesamematurity.Theweighted-averageinterestratesusedtoestimatethefairvalueoflong-termdebtatfixedinterestrateswere6.0%atSeptember30,2008,and6.3%atSeptember30,2007.Note20.Segmentinformation:Duringfiscalyears2008,2007and2006,Woodwardoperatedinthefollowingthreebusinesssegments:•TurbineSystemsisfocusedondevelopingandmanufacturingsystemsandcomponentsthatprovideenergycontrolandoptimizationsolutionsfortheaircraftandindustrialgasturbinemarkets.•EngineSystemsisfocusedondevelopingandmanufacturingsystemsandcomponentsthatprovideenergycontrolandoptimizationsolutionsforindustrialmarkets,whichincludespowergeneration,transportation,andprocessindustries.•ElectricalPowerSystemsisfocusedondevelopingandmanufacturingsystemsandcomponentsthatprovidepowersensingandenergycontrolsystemsthatimprovethesecurity,quality,reliability,andavailabilityofelectricalpowernetworksforindustrialmarkets,whichincludespowergeneration,powerdistribution,transportation,andprocessindustries.80WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)OnOctober1,2008,WoodwardcompletedtheacquisitionofMPCandTechni-Core,Inc.(“Techni-Core”)whichformedthebasisforitsfourthbusinesssegment—AirframeSystems.AdditionalinformationaboutAirframeSystemsandtheacquisitionisincludedinNote22,“SubsequentEvents.”•AirframeSystemsisfocusedisfocusedondevelopingandmanufacturinghigh-performanceelectrome-chanicalmotioncontrolsystems,includingsensors,primarilyforaerospaceapplications.TheaccountingpoliciesofthesegmentsarethesameasthosedescribedinNote1,“Operationsandsummaryofsignificantaccountingpolicies.”Intersegmentsalesandtransfersaremadeatestablishedintersegmentsellingpricesgenerallyintendedtoapproximatesellingpricestounrelatedparties.Thedeterminationofsegmentearningsdoesnotreflectallocationsofcertaincorporateexpenses,whicharedesignatedasnonsegmentexpenses,andisbeforeinterestexpense,interestincome,andincometaxes.Segmentassetsconsistofaccountsreceivable,inventories,property,plant,andequipment—net,goodwill,andotherintangibles—net.SummarizedfinancialinformationforWoodward’ssegmentsfollows:AtorfortheYearEndedSeptember30,200820072006Segmentnetsales:TurbineSystemsExternalnetsales............................$577,304$502,557$438,726Intersegmentsales............................18,47021,28520,197Totalsegmentnetsales........................595,774523,842458,923EngineSystemsExternalnetsales............................458,177414,076390,619Intersegmentsales............................41,14141,12439,829Totalsegmentnetsales........................499,318455,200430,448ElectricalPowerSystemsExternalnetsales............................222,723125,70425,170Intersegmentsales............................66,57155,66251,016Totalsegmentnetsales........................289,294181,36676,186ConsolidatedExternalnetsales............................1,258,2041,042,337854,515Intersegmentsales............................126,182118,071111,042Totalsegmentnetsales........................$1,384,386$1,160,408$965,557Segmentearnings:TurbineSystems...............................$116,196$87,353$67,584EngineSystems...............................56,47156,98440,829ElectricalPowerSystems........................42,30320,2944,475Totalsegmentearnings..........................214,970164,631112,888Nonsegmentexpenses...........................(31,346)(31,720)(26,052)Interestexpenseandincome,net...................(1,714)(923)(2,339)Consolidatedearningsbeforeincometaxes...........$181,910$131,988$84,49781WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)AtorfortheYearEndedSeptember30,200820072006Segmentassets:TurbineSystems...............................$371,275$330,969$317,688EngineSystems...............................242,350250,908231,485ElectricalPowerSystems........................133,928109,67440,672Totalsegmentassets............................747,553691,551589,845Unallocatedcorporateproperty,plantandequipment,net.......................................13,2266,6514,577Otherunallocatedassets.........................166,238131,565141,075Consolidatedtotalassets.........................$927,017$829,767$735,497Segmentdepreciationandamortization:TurbineSystems...............................$14,586$12,133$14,764EngineSystems...............................13,03414,27112,148ElectricalPowerSystems........................6,0025,5721,455Totalsegmentdepreciationandamortization..........33,62231,97628,367Unallocatedcorporateamounts....................1,828948650Consolidateddepreciationandamortization...........$35,450$32,924$29,017Segmentcapitalexpenditures:TurbineSystems...............................$17,710$12,490$14,540EngineSystems...............................14,81713,16414,098ElectricalPowerSystems........................4,5315,1242,098Totalsegmentcapitalexpenditures..................37,05830,77830,736Unallocatedcorporateamounts....................4,0411,206977Consolidatedcapitalexpenditures..................$41,099$31,984$31,713Twocustomersindividuallyaccountedformorethan10%ofconsolidatednetsalesineachofthefiscalyears2006through2008.SalestothefirstcustomerweremadebyallofWoodward’ssegmentsandtotaledapproximately17%,20%,and22%ofsalesduringtheyearsendedSeptember30,2008,2007,and2006,respectively.SalestothesecondcustomerweremadebyallofWoodward’ssegmentsandtotaledapproximately10%,10%,and11%ofsalesduringtheyearsendedSeptember30,2008,2007,and2006,respectively.Onecustomeraccountedformorethan10%ofaccountsreceivableasofSeptember30,2008and2007.Accountsreceivablefromthiscustomertotaledapproximately20%and21%ofaccountsreceivableatSeptem-ber30,2008and2007,respectively.82WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Externalnetsalesbygeographicalarea,asdeterminedbythelocationofthecustomerinvoiced,wereasfollows:YearEndedSeptember30,200820072006Externalnetsales:UnitedStates...................................$528,318$494,237$449,617Europe........................................433,101340,292226,039Asia..........................................198,086133,738123,639Othercountries..................................98,69974,07055,220Consolidatedexternalnetsales......................$1,258,204$1,042,337$854,515Property,plant,andequipment—netbygeographicalarea,asdeterminedbythephysicallocationoftheassets,wereasfollows:AtSeptember30,20082007UnitedStates................................................$108,897$100,336Germany...................................................37,42736,544Othercountries..............................................22,32722,118Consolidatedtotalproperty,plant,andequipment,net.................$168,651$158,998Note21.Supplementaryfinancialdata(Unaudited)FirstSecondThirdFourth2008FiscalQuartersNetsales................................$272,063$305,753$329,847$350,541Grossprofit(1)...........................81,23395,37697,892100,707Earningsbeforeincometaxes................38,48843,64849,09650,678Netearnings.............................25,32529,71432,41434,427Earningspershare:Basic................................0.370.440.480.51Diluted...............................0.360.430.470.50Cashdividendspershare....................0.0550.0600.0600.060Commonstockpricepershare(2):High.................................36.2234.5242.7748.62Low.................................29.6924.5026.2733.00Close................................33.9826.7235.6635.2783WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)FirstSecondThirdFourth2007FiscalQuartersNetsales................................$226,248$256,298$269,026$290,765Grossprofit(1)...........................68,50480,12682,97181,916Earningsbeforeincometaxes................26,65231,41037,14036,786Netearnings(3)...........................17,88720,26223,97436,034Netearningspershare:Basic................................0.260.300.350.53Diluted...............................0.260.290.340.51Cashdividendspershare....................0.0500.0550.0550.055Commonstockpricepershare(2):High.................................20.4722.5529.5033.14Low.................................16.3319.1820.3326.81Close................................19.8620.5926.8431.20Notes:1.Grossprofitrepresentsnetsaleslesscostofgoodssold.2.PershareamountshavebeenupdatedfromamountsreportedpriortoFebruary1,2008,toreflecttheeffectsofatwo-for-onestocksplit.3.Netearningsincludednettaxadjustmentsof$10,293inthefourthquarteroffiscal2007.Theseadjustmentsincludedabenefitof$13,286fromthefavorableresolutionofissueswithtaxauthoritiesandachargeof$2,993fortheadjustmentofdeferredtaxesasaresultofastatutorytaxratechangeinGermany.Note22.SubsequentEventsA.FinancingactivitiesTermLoanCreditAgreement—OnOctober1,2008,theWoodwardenteredintoaTermLoanCreditAgreement(the“TermLoanCreditAgreement”),byandamongtheCompany,theinstitutionsfromtimetotimepartiesthereto,aslenders,andJPMorganChaseBank,NationalAssociation,asadministrativeagent.TheTermLoanCreditAgreementprovidesfora$150.0millionunsecuredtermloanfacility,andmaybeexpandedbyupto$50.0millionofadditionalindebtednessfromtimetotime,subjecttotheCompany’scompliancewithcertainconditionsandthelenders’participation.TheTermLoanCreditAgreementgenerallybearsinterestatLIBORplus1.00%to2.25%,requiresquarterlyprincipalpaymentsof$1,875beginninginMarch2009,andmaturesinOctober2013.TheTermLoanCreditAgreementcontainscustomarytermsandconditions,including,amongothers,covenantsthatplacelimitsontheCompany’sabilitytoincurliensonassets,incuradditionaldebt(includingaleverageorcoveragebasedmaintenancetest),transferorselltheCompany’sassets,mergeorconsolidatewithotherpersons,makecapitalexpenditures,makecertaininvestments,makecertainrestrictedpayments,andenterintomaterialtransactionswithaffiliates.TheTermLoanCreditAgreementcontainsfinancialcovenantsrequiringthat(a)theCompany’sratioofconsolidatednetdebttoEBITDAnotexceed3.5to1.0and(b)theCompanyhaveaminimumconsolidatednetworthof$400,000plus50%ofnetincomeforanyfiscalyearand50%ofthenetproceedsofcertainissuancesofcapitalstock,ineachcaseonarollingfourquarterbasis.TheTermLoanCreditAgreementalsocontainseventsofdefaultcustomaryforsuchfinancings,theoccurrenceofwhichwouldpermitthelenderstoacceleratetheamountsdue.84WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)TheCompany’sobligationsundertheTermLoanCreditAgreementareguaranteedbyWoodwardFST,Inc.,awhollyownedsubsidiaryoftheCompany.NotePurchaseAgreement—AlsoonOctober1,2008,WoodwardenteredintoaNotePurchaseAgreement(the“NotePurchaseAgreement”)relatingtothesalebyWoodwardofanaggregateprincipalamountof$250.0millioncomprisedof(a)$100.0millionaggregateprincipalamountofSeriesBSeniorNotesdueOctober1,2013(the“SeriesBNotes”),(b)$50.0millionaggregateprincipalamountofSeriesCSeniorNotesdueOctober1,2015(the“SeriesCNotes”)and(c)$100.0millionaggregateprincipalamountofSeriesDSeniorNotesdueOctober1,2018(the“SeriesDNotes”and,togetherwiththeSeriesBNotesandSeriesCNotes,the“Notes”)inaseriesofprivateplacementtransactions.OnOctober1,2008,$200.0millionaggregateprincipalamountofNotesweresold,comprisedof$80.0millionaggregateprincipalamountoftheSeriesBNotes,$40.0millionaggregateprincipalamountoftheSeriesCNotesand$80.0millionaggregateprincipalamountoftheSeriesDNotes.InconnectionwiththeNotePurchaseAgreement,onOctober30,2008,Woodwardsoldanadditional$50.0millionaggregateprincipalamountofNotescomprisedof(a)$20.0millionaggregateprincipalamountofSeriesBNotes,(b)$10.0millionaggregateprincipalamountofSeriesCNotes,and(c)$20.0millionaggregateprincipalamountofSeriesDNotesinanotherseriesofprivateplacementtransactions.TheNotesissuedintheprivateplacementshavenotbeenregisteredundertheSecuritiesActof1933andmaynotbeofferedorsoldintheU.S.absentregistrationoranapplicableexemptionfromregistrationrequirements.TheSeriesBNoteshaveamaturitydateofOctober1,2013andgenerallybearinterestatarateof5.63%perannum.TheSeriesCNoteshaveamaturitydateofOctober1,2015andgenerallybearinterestatarateof5.92%perannum.TheSeriesDNoteshaveamaturitydateofOctober1,2018andgenerallybearinterestatarateof6.39%perannum.Undercertaincircumstances,theinterestrateoneachseriesofNotesissubjecttoincreaseifWoodward’sleverageratioofconsolidatednetdebttoconsolidatedEBITDAincreasesbeyond3.5to1.0.InterestontheNotesispayablesemi-annuallyonApril1andOctober1ofeachyearuntilallprincipalispaid.InterestpaymentscommenceonApril1,2009.TheobligationsundertheNotePurchaseAgreementandtheNotesrankequalinrightofpaymentwithallofWoodward’sotherunsecuredunsubordinateddebt,includingitsoutstandingdebtundertheTermLoanCreditAgreement.TheNotePurchaseAgreementcontainsrestrictivecovenantscustomaryforsuchfinancings,including,amongotherthings,covenantsthatplacelimitsonWoodward’sabilitytoincurliensonassets,incuradditionaldebt(includingaleverageorcoveragebasedmaintenancetest),transferorsellitsassets,mergeorconsolidatewithotherpersons,andenterintomaterialtransactionswithaffiliates.TheNotePurchaseAgreementalsocontainseventsofdefaultcustomaryforsuchfinancings,theoccurrenceofwhichwouldpermitthePurchasersoftheNotestoacceleratetheamountsdue.TheNotePurchaseAgreementcontainsfinancialcovenantsrequiringthatWoodward’s(a)ratioofconsol-idatednetdebttoconsolidatedEBITDAnotexceed4.0to1.0duringanymaterialacquisitionperiod,or3.5to1.0atanyothertimeonarollingfourquarterbasis,and(b)consolidatednetworthatanytimeequalorexceed$425.0millionplus50%ofconsolidatednetearningsforeachfiscalyearbeginningwiththefiscalyearendingSeptember30,2008.Additionally,undertheNotePurchaseAgreement,Woodwardmaynotpermittheaggregateamountofprioritydebttoatanytimeexceed20%ofitsconsolidatednetworthattheendofthethenmostrecentlyendedfiscalquarter.Woodwardispermittedatanytime,atitsoption,toprepayall,orfromtimetotimetoprepayanypartof,thethenoutstandingprincipalamountofanyseriesoftheNotesat100%oftheprincipalamountoftheseriesofNotestobeprepaid(but,inthecaseofpartialprepayment,notlessthan$1.0million),togetherwithinterestaccruedonsuchamounttobeprepaidtothedateofpayment,plusanyapplicablemake-wholeamount.Themake-whole85WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)amountiscomputedbydiscountingtheremainingscheduledpaymentsofinterestandprincipaloftheNotesbeingprepaidatadiscountrateequaltothesumof50basispointsandtheyieldtomaturityofU.S.treasurysecuritieshavingamaturityequaltotheremainingaveragelifeoftheNotesbeingprepaid.AportionoftheproceedsfromtheissuancesinconnectionwithTermLoanPurchaseAgreementandtheNotePurchaseAgreementwasusedtofinancetheMPCacquisition.Requiredfutureprincipalpaymentsofseniorandtermnotesoutstandingattheendof2008andthe$400,000seniornotesissuedinOctober2008areasfollows:YearEndingSeptember30,2009...............................................................$17,0022010...............................................................18,6972011...............................................................18,5642012...............................................................18,3782013...............................................................7,500Thereafter...........................................................364,375B.MPCacquisitionOnOctober1,2008,WoodwardacquiredalloftheoutstandingstockofTechni-CoreandalloftheoutstandingstockofMPCnotheldbyTechni-Coreforapproximately$383.0million.TheCompanypaidcashatclosingofapproximately$334.7million,aportionofwhichwasusedbytheCompanytorepaytheoutstandingdebtofMPCinanaggregateamountequaltoapproximately$18.6million.MPCisanindustryleaderinthemanufactureofhigh-performanceelectromechanicalmotioncontrolsystemsprimarilyforaerospaceapplications.Themainproductlinesincludehighperformanceelectricmotorsandsensors,analoganddigitalcontrolelectronics,rotaryandlinearactuationsystems,andflightdeckandfly-by-wiresystemsforcommercialandmilitaryaerospaceprograms.MPCwillformthebasisofafourthWoodwardbusinesssegment,AirframeSystemsbeginninginfiscal2009.Thecostoftheacquisitionmayincreaseordecreasebasedontheoutcomeofapurchasepriceadjustmentprocedurecustomarytopurchaseagreementsandthefinaldeterminationofthedirectacquisitioncosts.Woodwardisintheprocessoffinalizingvaluationsofproperty,plant,andequipment,otherintangibles,andestimatesofliabilitiesassociatedwiththeacquisition.C.MotoTronacquisitionOnOctober6,2008,WoodwardacquiredalloftheoutstandingcapitalstockofMotoTronCorporation(“MotoTron”)andtheintellectualpropertyassetsownedbyitsparentcompany,BrunswickCorporation,thatareusedinconnectionwiththeMotoTronbusinessforapproximately$17.0millionincash,subjecttocertainadjustments.MotoTronspecializesinsoftwaretoolsandprocessesusedtorapidlydevelopcontrolsystemsformarine,powergeneration,industrialandotherengineequipmentapplications.MotoTronisexpectedtobeintegratedintotheEngineSystemsbusinesssegment.Thecostofthisacquisitionhasnotbeenfinalized.Thecostoftheacquisitionmayincreaseordecreasebasedontheoutcomeofapurchasepriceadjustmentprocedurecustomarytopurchaseagreementsandthefinaldeterminationofthedirectacquisitioncosts.Woodwardisintheprocessoffinalizingvaluationsofproperty,plant,andequipment,otherintangibles,andestimatesofliabilitiesassociatedwiththeacquisition.86WOODWARDGOVERNORCOMPANYNotestoConsolidatedFinancialStatements—(Continued)(amountsinthousands,exceptpershare)Item9.ChangesinandDisagreementswithAccountantsonAccountingandFinancialDisclosureOnDecember6,2007,theAuditCommitteeoftheBoardofDirectors(the“AuditCommittee”)recommendedandapprovedthedismissalofPricewaterhouseCoopersLLP(“PwC”)astheCompany’sindependentregisteredpublicaccountingfirm.Onthatsameday,theAuditCommitteeappointedDeloitte&Touche,LLP(“Deloitte”)astheCompany’sindependentregisteredpublicaccountingfirm.DetailsoftheeventswerefiledunderItem4.01ofForm8-KonDecember11,2007.TherehavebeennodisagreementsoranyreportableeventsrequiringdisclosureunderItem304(b)ofRegulationS-K.Item9A.ControlsandProceduresEvaluationofDisclosureControlsandProceduresWehaveestablisheddisclosurecontrolsandprocedures,asdefinedinRule13a-15(e)undertheSecuritiesExchangeActof1934(the“ExchangeAct”),whicharedesignedtoensurethatinformationrequiredtobedisclosedinreportsfiledorsubmittedundertheExchangeActisrecorded,processed,summarized,andreported,withinthetimeperiodsspecifiedintheSecuritiesandExchangeCommission’srulesandforms.Thesedisclosurecontrolsandproceduresinclude,withoutlimitation,controlsandproceduresdesignedtoensurethatinformationrequiredtobedisclosedinthereportsthatwefileorsubmitundertheExchangeActisaccumulatedandcommunicatedtomanagement,includingourprincipalexecutiveofficer(ThomasA.Gendron,chiefexecutiveofficerandpresident)andprincipalfinancialofficer(RobertF.Weber,Jr.,chieffinancialofficerandtreasurer),asappropriate,toallowtimelydecisionsregardingrequireddisclosures.ThomasA.Gendron,ourchiefexecutiveofficerandpresidentandRobertF.Weber,Jr.,ourchieffinancialofficerandtreasurer,evaluatedtheeffectivenessofourdisclosurecontrolsandproceduresasoftheendoftheperiodcoveredbythisForm10-K.Basedon,andasofthedateof,theirevaluation,theyconcludedthatourdisclosurecontrolsandprocedureswereeffective.Management’sAnnualReportonInternalControlOverFinancialReportingWeareresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancialreportingforthecompany.WehaveevaluatedtheeffectivenessofinternalcontroloverfinancialreportingusingthecriteriaestablishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO)and,basedonthatevaluation,haveconcludedthatthecompany’sinternalcontroloverfinancialreportingwaseffectiveasofSeptember30,2008,theendofthecompany’smostrecentfiscalyear.Deloitte&Touche,LLP,anindependentregisteredpublicaccountingfirm,conductedanintegratedauditofWoodward’sinternalcontroloverfinancialreportingasofSeptember30,2008,asstatedintheirreportincludedin“Item9a—ControlsandProcedures.”Internalcontroloverfinancialreportingisaprocessdesignedby,orunderthesupervisionof,ourprincipalexecutiveandprincipalfinancialofficers,orpersonsperformingsimilarfunctions,andeffectedbyourboardofdirectors,management,andotherpersonnel,toprovidereasonableassuranceregardingthereliabilityofourfinancialreportingandthepreparationofourfinancialstatementsforexternalpurposesinaccordancewith87generallyacceptedaccountingprinciples.Internalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat:•Pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsoftheCompany;•Providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresoftheCompanyarebeingmadeonlyinaccordancewithauthorizationofmanagementanddirectorsofthecompany;and•Providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,useordispositionoftheCompany’sassetsthatcouldhaveamaterialeffectonthefinancialstatements.ChangesinInternalControlOverFinancialReportingTherehasbeennochangeinourinternalcontroloverfinancialreportingduringthefourthfiscalquartercoveredbythisForm10-Kthathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,ourinternalcontroloverfinancialreporting.88REPORTOFINDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRMTotheBoardofDirectorsandStockholdersofWoodwardGovernorCompanyFortCollins,ColoradoWehaveauditedtheinternalcontroloverfinancialreportingofWoodwardGovernorCompanyandsubsid-iaries(the“Company”)asofSeptember30,2008,basedoncriteriaestablishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission.TheCompany’smanagementisresponsibleformaintainingeffectiveinternalcontroloverfinancialreportingandforitsassessmentoftheeffectivenessofinternalcontroloverfinancialreporting,includedintheaccompanyingManagement’sAnnualReportonInternalControlOverFinancialReporting.OurresponsibilityistoexpressanopinionontheCompany’sinternalcontroloverfinancialreportingbasedonouraudit.WeconductedourauditinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects.Ourauditincludedobtaininganunderstandingofinternalcontroloverfinancialreporting,assessingtheriskthatamaterialweaknessexists,testingandevaluatingthedesignandoperatingeffectivenessofinternalcontrolbasedontheassessedrisk,andperformingsuchotherproceduresasweconsiderednecessaryinthecircumstances.Webelievethatourauditprovidesareasonablebasisforouropinion.Acompany’sinternalcontroloverfinancialreportingisaprocessdesignedby,orunderthesupervisionof,thecompany’sprincipalexecutiveandprincipalfinancialofficers,orpersonsperformingsimilarfunctions,andeffectedbythecompany’sboardofdirectors,management,andotherpersonneltoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples.Acompany’sinternalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat(1)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsofthecompany;(2)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresofthecompanyarebeingmadeonlyinaccordancewithauthorizationsofmanagementanddirectorsofthecompany;and(3)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofthecompany’sassetsthatcouldhaveamaterialeffectonthefinancialstatements.Becauseoftheinherentlimitationsofinternalcontroloverfinancialreporting,includingthepossibilityofcollusionorimpropermanagementoverrideofcontrols,materialmisstatementsduetoerrororfraudmaynotbepreventedordetectedonatimelybasis.Also,projectionsofanyevaluationoftheeffectivenessoftheinternalcontroloverfinancialreportingtofutureperiodsaresubjecttotheriskthatthecontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.Inouropinion,theCompanymaintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofSeptember30,2008,basedonthecriteriaestablishedinInternalControl—IntegratedFrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission.Wehavealsoaudited,inaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates),theconsolidatedfinancialstatementsandfinancialstatementscheduleasofandfortheyearendedSeptember30,2008oftheCompanyandourreportdatedNovember19,2008expressedanunqualifiedopiniononthosefinancialstatementsandfinancialstatementscheduleandincludedanexplanatoryparagraphregardingtheCompany’sadoptionoftheFinancialAccountingStandardsBoard’sInterpretationNo.48,AccountingforUncertaintyinIncomeTaxes.Deloitte&Touche,LLPDenver,ColoradoNovember19,200889Item9B.OtherInformationThereisnoinformationrequiredtobedisclosedinareportonForm8-Kduringthefourthquarterof2008thatwasnotreportedonForm8-K.PARTIIIItem10.Directors,ExecutiveOfficersandCorporateGovernanceTheinformationrequiredbythisitemrelatingtoourdirectorsandnominees,regardingcompliancewithSection16(a)oftheSecuritiesActof1934,andregardingourAuditCommitteeisincludedunderthecaptions“BoardofDirectors,”“BoardMeetingsandCommittees—AuditCommittee”(includinginformationwithrespecttoauditcommitteefinancialexperts),“StockOwnershipofManagement,”and“Section16(a)BeneficialOwn-ershipReportingCompliance”inourProxyStatementrelatedtothe2008AnnualMeetingofStockholderstobeheldJanuary22,2009andisincorporatedhereinbyreference.Theinformationrequiredbythisitemrelatingtoourexecutiveofficersisincludedunderthecaption“ExecutiveOfficersoftheRegistrant”inItem1ofthisreport.Wehaveadoptedacodeofethicsthatappliestoourprincipalexecutiveofficerandourprincipalfinancialandaccountingofficer.ThiscodeofethicsispostedonourWebsite.TheInternetaddressforourWebsiteiswww.woodward.com,andthecodeofethicsmaybefoundfromourmainWebpagebyclickingfirston“InvestorInformation”andthenon“CorporateGovernance,”andfinallyon“WoodwardCodesofBusinessConductandEthics.”WeintendtosatisfyanydisclosurerequirementunderItem5.05ofForm8-Kregardinganamendmentto,orwaiverfrom,aprovisionofthiscodeofethicsbypostingsuchinformationtoourWebsite,attheaddressandlocationspecifiedabove.Item11.ExecutiveCompensationInformationregardingexecutivecompensationisunderthecaptions“BoardMeetingsandCommittees—DirectorCompensation,”“CompensationCommitteeReportonCompensationDiscussionandAnalysis,”“Com-pensationCommitteeInterlocksandInsiderParticipation,”and“ExecutiveCompensation”inourProxyStatementforthe2008AnnualMeetingofStockholderstobeheldJanuary22,2009,andisincorporatedhereinbyreference,exceptthesectioncaptioned“CompensationCommitteeReportonCompensationDiscussionandAnalysis”ishereby“furnished”andnot“filed”withthisannualreportonForm10-K.Item12.SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholderMattersInformationregardingsecurityownershipofcertainbeneficialownersandmanagementandrelatedstock-holdermattersisunderthetablescaptioned“StockOwnershipofManagement,”“PersonsOwningMorethanFivePercentofWoodwardStock,”and“ExecutiveCompensation—EquityCompensationPlanInformation(asofSeptember30,2008),”inourProxyStatementforthe2008AnnualMeetingofStockholderstobeheldJanuary22,2009,andisincorporatedhereinbyreference.90Item13.CertainRelationshipsandRelatedTransactions,andDirectorIndependenceTheinformationsetforthunder“BoardMeetingsandCommittees—RelatedPersonTransactionsPoliciesandProcedures,”“BoardofDirectors”and“AuditCommitteeReporttoStockholders”inourProxyStatementforthe2008AnnualMeetingoftheStockholderstobeheldJanuary22,2009isincorporatedhereinbyreferenceexceptthesectioncaptioned“AuditCommitteeReport”ishereby“furnished”andnot“filed”withthisannualreportonForm10-K.Item14.PrincipalAccountingFeesandServicesInformationregardingprincipalaccountingfeesandservicesisunderthecaptions“AuditCommitteeReporttoStockholders—AuditCommittee’sPolicyonPre-ApprovalofServicesProvidedbyIndependentRegisteredPublicAccountingFirmand—FeesPaidtoDeloitteandTouche,LLPandPricewaterhouseCoopersLLP”inourProxyStatementforthe2008AnnualMeetingofStockholderstobeheldJanuary22,2009,andisincorporatedhereinbyreference.91PARTIVItem15.ExhibitsandFinancialStatementSchedules(a)(1)ConsolidatedFinancialStatements:PageNumberinForm10-KReportofIndependentRegisteredPublicAccountingFirm...................45ConsolidatedStatementsofEarningsfortheyearsendedSeptember30,2008,2007,and2006......................................................47ConsolidatedBalanceSheetsatSeptember30,2008and2007.................48ConsolidatedStatementsofCashFlowsfortheyearsendedSeptember30,2008,2007,and2006.................................................49ConsolidatedStatementsofStockholders’EquityfortheyearsendedSeptember30,2008,2007,and2006.............................................50NotestoConsolidatedFinancialStatements..............................52(a)(2)ConsolidatedFinancialStatementSchedules—ValuationandQualifyingAccounts...................................97Financialstatementsandschedulesotherthanthoselistedaboveareomittedforthereasonthattheyarenotapplicable,arenotrequired,ortheinformationisincludedinthefinancialstatementsorthefootnotes.(a)(3)ExhibitsFiledasPartofThisReport:2.1StockPurchaseAgreement,datedAugust19,2008,byandamongWoodwardGovernorCompany,MPCProductsCorporation,Techni-Core,Inc.,TheSuccessorTrusteesoftheJosephM.RobertiRevocableTrustdatedDecember29,1992,MaribethGentry,asSuccessorTrusteeoftheVincentV.RobertiRevocableTrustdatedApril4,1991andtheindividualsandentitiesnamedinScheduleItheretofiledasanExhibit10.1toCurrentReportonForm8-K,datedAugust21,2008andincorporatedhereinbyreference.2.2AmendmentNo.1,datedOctober1,2008,totheStockPurchaseAgreement,datedAugust19,2008,byandamongWoodwardGovernorCompany,MPCProductsCorporation,Techni-Core,Inc.,TheSuccessorTrusteesoftheJosephM.RobertiRevocableTrustdatedDecember29,1992,MaribethGentry,asSuccessorTrusteeoftheVincentV.RobertiRevocableTrustdatedApril4,1991andtheindividualsandentitiesnamedinScheduleIthereto,filedasExhibit10.6toCurrentReportonForm8-KfiledOctober7,2008andincorporatedhereinbyreference.3(i)(a)RestatedCertificateofIncorporation,asamendedOctober3,2007,filedasanexhibit3(i)(b)RestatedCertificateofIncorporation,asamendedJanuary23,2008,filedasanexhibit3(ii)AmendedandRestatedBylaws,filedasanExhibit3.1toCurrentReportonForm8-K,datedJanuary29,2008andincorporatedhereinbyreference4.1NotePurchaseAgreementdatedOctober15,2001,filedasExhibit4toForm10-QforthethreemonthsendedDecember31,2001andincorporatedhereinbyreference10.1Long-TermManagementIncentiveCompensationPlan,filedasExhibit10(c)toForm10-KfortheyearendedSeptember30,2000andincorporatedhereinbyreference10.2AnnualManagementIncentiveCompensationPlan,filedasExhibit10(d)toForm10-KfortheyearendedSeptember30,2000andincorporatedhereinbyreference10.32002StockOptionPlan,effectiveJanuary1,2002filedasExhibit10(iii)toForm10-QforthethreemonthsendedMarch31,2002andincorporatedhereinbyreference10.4ExecutiveBenefitPlan(non-qualifieddeferredcompensationplan),filedasExhibit10(e)toForm10-KfortheyearendedSeptember30,2002andincorporatedhereinbyreference10.5FormofOutsideDirectorStockPurchaseAgreementwithJamesL.Rulseh,filedasExhibit10(j)toForm10-KfortheyearendedSeptember30,2002andincorporatedhereinbyreference9210.6FormofTransitionalCompensationAgreementwithThomasA.GendronfiledasExhibit10toForm10-QforthethreemonthsendedDecember31,2002andincorporatedhereinbyreference10.7SummaryofNon-EmployeeDirectorMeetingFeesandCompensation,filedasanexhibit10.8MaterialDefinitiveAgreementwithThomasA.Gendron,filedonForm8-KfiledAugust1,2005andincorporatedhereinbyreference10.9MaterialDefinitiveAgreementwithRobertF.Weber,Jr.,filedonForm8-KfiledAugust24,2005andincorporatedhereinbyreference10.102006OmnibusIncentivePlan,effectiveJanuary25,2006,filedasExhibit4.1toRegistrationStatementonFormS-8effectiveApril28,2006andincorporatedhereinbyreference10.11FormofTransitionalCompensationAgreementwithRobertF.Weber,Jr.,datedAugust22,2005,filedasexhibit10.11toForm10-KfortheyearendedSeptember30,2005andincorporatedhereinbyreference10.12MaterialDefinitiveAgreementwithA.ChristopherFawzy,filedasExhibit10.12toForm10-QfortheninemonthsendedJune30,2007andincorporatedhereinbyreference10.13AmendedExecutiveBenefitPlan,filedasExhibit10.13toForm10-KfortheyearendedSeptember30,2007andincorporatedhereinbyreference10.14FormofNon-QualifiedStockOptionAgreementfiledasExhibit99.2toCurrentReportonForm8-K,datedNovember16,2007andincorporatedhereinbyreference10.15SecondAmendedandRestatedCreditAgreement,filedasExhibit99.1toCurrentReportonForm8-K,datedOctober25,2007andincorporatedhereinbyreference10.16SummaryofExecutiveOfficerCompensation,filedasanexhibit10.17DennisBenningPostRetirementRelocationAgreement,filedasExhibit10.17toForm10-KfortheyearendedSeptember30,2007andincorporatedhereinbyreference10.18DennisBenningPromotionLetterdatedOctober1,2008,filedasanexhibit10.19ChadPreissPromotionLetterdatedOctober1,2008,filedasanexhibit10.20TermLoanCreditAgreement,datedOctober1,2008,byandamongWoodwardGovernorCompany,theinstitutionsfromtimetotimepartiestheretoaslendersandJPMorganChaseBank,NationalAssociation,asadministrativeagent,filedasExhibit10.1toCurrentReportonForm8-KfiledOctober7,2008andincorporatedhereinbyreference.10.21NotePurchaseAgreement,datedOctober1,2008,byandamongWoodwardGovernorCompanyandthepurchasersnamedtherein,filedasExhibit10.2toCurrentReportonForm8-KfiledOctober7,2008andincorporatedhereinbyreference.10.22AmendmentNo.1,datedOctober1,2008,totheNotePurchaseAgreement,datedasofOctober15,2001byandamongWoodwardGovernorCompanyandthepurchasersnamedtherein,filedasExhibit10.3toCurrentReportonForm8-KfiledOctober7,2008andincorporatedhereinbyreference.10.23AmendmentNo.2andConsent,datedOctober1,2008,totheSecondAmendedandRestatedCreditAgreement,datedasofOctober25,2007,byandamongWoodwardGovernorCompany,certainforeignsubsidiaryborrowersofWoodwardGovernorCompanyfromtimetotimepartiesthereto,theinstitutionsfromtimetotimepartiesthereto,aslenders,JPMorganChaseBank,NationalAssociation,asadministrativeagent,WachoviaBankN.A.andWellsFargoBankN.A.,assyndicationagents,andDeutscheBankSecuritiesInc.,asdocumentationagent,filedasExhibit10.4toCurrentReportonForm8-KfiledOctober7,2008andincorporatedhereinbyreference.11Statementoncomputationofearningspershare,includedinNote5ofNotestoConsolidatedFinancialStatements14CodeofEthicsfiledasExhibit14toForm10-KfortheyearendedSeptember30,2003andincorporatedhereinbyreference21Subsidiaries,filedasanexhibit23(i)ConsentofcurrentIndependentRegisteredPublicAccountingFirm,filedasanexhibit9323(ii)ConsentofpriorIndependentRegisteredPublicAccountingFirm,filedasanexhibit31(i)Rule13a-14(a)/15d-14(a)certificationofThomasA.Gendron,filedasanexhibit31(ii)Rule13a-14(a)/15d-14(a)certificationofRobertF.Weber,Jr.,filedasanexhibit32(i)Section1350certifications,filedasanexhibit94SIGNATURESPursuanttotherequirementsofSection13or15(d)oftheSecuritiesExchangeActof1934,theregistranthasdulycausedthisreporttobesignedonitsbehalfbytheundersigned,thereuntodulyauthorized.WOODWARDGOVERNORCOMPANY/s/THOMASA.GENDRONThomasA.GendronChairmanoftheBoard,ChiefExecutiveOfficer,andPresident(PrincipalExecutiveOfficer)Date:November19,2008/s/ROBERTF.WEBER,JR.RobertF.Weber,Jr.ChiefFinancialOfficer,Treasurer(PrincipalFinancialandAccountingOfficer)Date:November19,2008PursuanttotherequirementsoftheSecuritiesExchangeActof1934,thisreporthasbeensignedbelowbythefollowingpersonsonbehalfoftheregistrantandinthecapacitiesandonthedatesindicated.SignatureTitleDate/s/JOHND.COHNJohnD.CohnDirectorNovember19,2008/s/PAULDONOVANPaulDonovanDirectorNovember19,2008/s/THOMASA.GENDRONThomasA.GendronChairmanoftheBoardandDirectorNovember19,2008/s/JOHNA.HALBROOKJohnA.HalbrookDirectorNovember19,2008/s/MICHAELH.JOYCEMichaelH.JoyceDirectorNovember19,2008/s/MARYL.PETROVICHMaryL.PetrovichDirectorNovember19,2008/s/LARRYE.RITTENBERGLarryE.RittenbergDirectorNovember19,200895SignatureTitleDate/s/JAMESR.RULSEHJamesR.RulsehDirectorNovember19,2008/s/DR.RONALDSEGADr.RonaldSegaDirectorNovember19,2008/s/MICHAELT.YONKERMichaelT.YonkerDirectorNovember19,200896WOODWARDGOVERNORCOMPANYANDSUBSIDIARIESSCHEDULEII—VALUATIONANDQUALIFYINGACCOUNTSFortheYearsEndedSeptember30,2008,2007,and2006(Inthousands)DescriptionBalanceatBeginningofYearChargedtoCostsandExpensesChargedtoOtherAccounts(a)Deductions(b)BalanceatEndofYearAdditionsColumnAColumnBColumnCColumnDColumnEAllowancefordoubtfulaccounts:2008..........................$1,886$415$71$(724)$1,6482007..........................2,213167(331)(163)1,8862006..........................1,965249363(364)2,213Notes:(a)Includesrecoveriesofaccountspreviouslywrittenoff.(b)Representsaccountswrittenoffandforeigncurrencytranslationadjustments.Currencytranslationadjust-mentsresultedinadecreaseinthereserveof$48infiscal2008andincreasesinthereserveof$187infiscal2007and$43infiscal2006.97OFFICEr AND INVESTOr INFOrMATION DIrECTOrS JOhn d. COhn Senior Vice President, Strategic Development and Communications rockwell automation, inc. PauL dOnOVan Retired Executive Vice President and Chief Financial Officer Wisconsin Energy Corporation ThOmaS a. GEndrOn Chairman of the Board, Chief Executive Officer, and President Woodward Governor Company JOhn a. haLbrOOk Retired Chief Executive Officer Woodward Governor Company JamES r. ruLSEh Regional Vice President Americas modine manufacturing Company miChaEL h. JOyCE Retired President and Chief Operating Officer Twin disc, inc. mary L. PETrOViCh Chief Executive Officer axleTech international Larry E. riTTEnbErG Ernst & Young Professor of Accounting & Information Systems university of Wisconsin dr. rOnaLd m. SEGa Vice President, Energy, Environment, and Applied Research Colorado State university research foundation miChaEL T. yOnkEr Retired President and Chief Executive Officer, Portec, inc. OFFICErS ThOmaS a. GEndrOn Chairman of the Board, Chief Executive Officer, and President marTin V. GLaSS Group Vice President, Turbine Systems rObErT f. WEbEr, Jr. Chief Financial Officer and Treasurer dEnniS m. bEnninG Group Vice President, Airframe Systems (Prior to October 1, 2008, Group Vice President, Engine Systems) GErhard LauffEr Group Vice President, Electrical Power Systems Chad r. PrEiSS Group Vice President, Engine Systems (Prior to October 1, 2008, Vice President, Sales, Service and Marketing, Engine Systems) a. ChriSTOPhEr faWzy Vice President, General Counsel and Corporate Secretary STEVEn J. mEyEr Vice President, Human Resources INVESTOr INFOrMATION WOOdWard GOVErnOr COmPany Corporate headquarters 1000 East drake road P.O. box 1519 fort Collins, CO 80522-1519 1-970-482-5811 www.woodward.com TranSfEr aGEnT and rEGiSTrar american Stock Transfer & Trust Company Shareholder Services 59 maiden Lane Plaza Level new york, ny 10038 1-800-937-5449 SharEhOLdEr aCCOunT aSSiSTanCE Shareholders who wish to change the address or ownership of stock, report lost certificates, eliminate duplicate mailings, or for other account registration m o c . s r o n n o c - n a r r u c . w w w / . c n I , s r o n n o C & n a r r u C y b d e n g i s e D procedures and assistance, should contact the Transfer agent at the address or phone number listed. diVidEnd rEinVESTmEnT PLan and dirECT dEPOSiT Of diVidEndS Woodward offers shareholders of record a convenient dividend reinvestment and direct Stock Purchase and Sale Plan. Through this Plan, shareholders have options to purchase or sell shares of Woodward stock, have their dividends automatically reinvested in Woodward common stock, and to make periodic supplemental cash payments to purchase additional shares. for further information and an authorization form, contact the Transfer agent at the address or phone number on this page. annuaL mEETinG January 22, 2009, at 1:00 p.m. hilton university Park 425 W. Prospect road fort Collins, CO 80526 STOCk ExChanGE nasdaq national market Ticker Symbol: WGOV SEC filings are available on our website at www.woodward.com EquaL OPPOrTuniTy EmPLOyEr STaTEmEnT it is Woodward’s policy to provide equal employment opportunity for all qualified members and applicants without regard to race, color, religion, age, sex, national origin, disability, veteran’s or marital status, or other protected class, and to base all employment decisions so as to further this principle of equal employment opportunity.. Our Vision Woodward sets the global standard for Energy Control and Optimization Solutions. Our success is enabled by our members and measured by the satisfaction of our customers and the return to our shareholders. Business Description Woodward is an independent designer, manufacturer, and service provider of energy control and optimization solutions for commercial and military aircraft, turbines, reciprocating engines, and electrical power system equipment. The company’s innovative fluid energy, combustion control, electrical energy, and motion control systems help customers offer cleaner, more reliable, and more cost-effective equipment. Leading original equipment manufacturers use our products and services in aerospace, power and process industries, and transportation. Woodward Governor Company 1000 East Drake Road P.O. Box 1519 Fort Collins, Colorado 80522-1519 USA 970-482-5811 www.woodward.com 

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