UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

Commission file number 0-8408

WOODWARD GOVERNOR COMPANY

(Exact name of registrant as specified in its charter)

Delaware		36-1984010
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1000 East Drake Road, Fort Collins, Colorado		80525
(Address of principal executive offices)		(Zip Code)

(970) 482-5811

Title of each class:		Name of each exchange on which registered:
Common stock, par value $.001455 per share		NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

Aggregate market value of registrant’s common stock held by non-affiliates of the registrant, based upon the closing price of a share of the registrant’s common stock on March 31, 2010 as reported on The NASDAQ Global Select Market on that date: $1,792,991,448. For purposes of this calculation, shares of common stock held by (i) persons holding more than 5% of the outstanding shares of stock, (ii) officers and directors of the registrant, and (iii) the Woodward Governor Company Profit Sharing Trust, Woodward Governor Company Deferred Shares Trust, or the Woodward Governor Company Charitable Trust, as of March 31, 2010, are excluded in that such persons may be deemed to be affiliates. This determination is not necessarily conclusive of affiliate status.

Number of shares of the registrant’s common stock outstanding as of November 15, 2010: 68,922,623.

Portions of our proxy statement for the Annual Meeting of Stockholders to be held January 26, 2011, are incorporated by reference into Parts II and III of this Form 10-K, to the extent indicated.

 

 

TABLE OF CONTENTS

		Page
PART I
Forward Looking Statements			3
Item 1. Business			4
Item 1A. Risk Factors			15
Item 1B. Unresolved Staff Comments			23
Item 2. Properties			23
Item 3. Legal Proceedings			24
Item 4. Removed and Reserved			24
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			25
Item 6. Selected Financial Data			27
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk			59
Item 8. Financial Statements and Supplementary Data			61
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			115
Item 9A. Controls and Procedures			115
Item 9B. Other Information			117
PART III
Item 10. Directors, Executive Officers and Corporate Governance			117
Item 11. Executive Compensation			118
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			118
Item 13. Certain Relationships and Related Transactions, and Director Independence			118
Item 14. Principal Accountant Fees and Services			118
PART IV
Item 15. Exhibits and Financial Statement Schedules			119
SIGNATURES			122
Exhibit 10.2
Exhibit 10.27
Exhibit 10.28
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I

Forward Looking Statements

This Annual Report on Form 10-K, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are statements that are deemed forward-looking statements. These statements are based on current expectations, estimates, forecasts, and projections about the industries in which we operate and the beliefs and assumptions of management. Words such as “anticipate,” “believe,” “estimate,” “seek,” “goal,” “expect,” “forecasts,” “intend,” “continue,” “outlook,” “plan,” “project,” “target,” “strive,” “can,” “could,” “may,” “should,” “will,” “would,” variations of such words, and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characteristics of future events or circumstances are forward-looking statements. Forward-looking statements may include, among others, statements relating to:

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future sales, earnings, cash flow, uses of cash, and other measures of financial performance;

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description of our plans and expectations for future operations;

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the effect of economic downturns or growth in particular regions;

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the effect of changes in the level of activity in particular industries or markets;

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the availability and cost of materials, components, services, and supplies;

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the scope, nature, or impact of acquisition activity and integration into our businesses;

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the development, production, and support of advanced technologies and new products and services;

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new business opportunities;

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restructuring costs and savings;

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our plans, objectives, expectations and intentions with respect to recent acquisitions and expected business opportunities that may be available to us;

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the outcome of contingencies;

	•		future repurchases of common stock;
	•		future levels of indebtedness and capital spending; and

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pension plan assumptions and future contributions.

Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties, and assumptions that are difficult to predict, including:

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a decline in business with, or financial distress of, our significant customers;

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the instability in the financial markets and prolonged unfavorable economic and other industry conditions;

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our ability to obtain financing, on acceptable terms or at all, to implement our business plans, complete acquisitions, or otherwise take advantage of business opportunities or respond to business pressures;

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the long sales cycle, customer evaluation process, and implementation period of some of our products and services;

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our ability to implement, and realize the intended effects of, our restructuring efforts;

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our ability to successfully manage competitive factors, including prices, promotional incentives, industry consolidation, and commodity and other input cost increases;

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our ability to manage our expenses while responding to sales increases or decreases;

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the ability of our subcontractors to perform contractual obligations and our suppliers to provide us with materials of sufficient quality or quantity required to meet our production needs at favorable prices or at all;

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the success of, or expenses associated with, our product development activities;

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our ability to integrate acquisitions and manage costs related thereto;

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our debt obligations, our debt service requirements, and our ability to operate our business, pursue business strategies and incur additional debt in light of covenants contained in our outstanding debt agreements;

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risks related to our U. S. Government contracting activities;

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future impairment charges resulting from changes in the estimates of fair value of reporting units or of long-lived assets;

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future subsidiary results or changes in domestic or international tax statutes;

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environmental liabilities related to manufacturing activities;

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our continued access to a stable workforce and favorable labor relations with our employees;

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the geographical location of a significant portion of our Airframe Systems business in California, which historically has been susceptible to natural disasters;

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our ability to successfully manage regulatory, tax, and legal matters (including product liability, patent, and intellectual property matters);

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liabilities resulting from legal and regulatory proceedings, inquiries, or investigations by private or U.S. Government persons or entities;

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risks from operating internationally, including the impact on reported earnings from fluctuations in foreign currency exchange rates, and changes in the legal and regulatory environments of countries in which we operate;

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fair value of defined benefit plan assets and assumptions used in determining our retirement pension and other postretirement benefit obligations and related expenses including, among others, discount rates and investment return on pension assets; and

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certain provisions of our charter documents and Delaware law that could discourage or prevent others from acquiring our company.

These factors are representative of the risks, uncertainties, and assumptions that could cause actual outcomes and results to differ materially from what is expressed or forecast in our forward-looking statements. Other factors are discussed under “Risk Factors” in our Securities and Exchange Commission (“SEC”) filings and are incorporated herein by reference.

Therefore, actual results could differ materially and adversely from those expressed in any forward-looking statements. For additional information regarding factors that may affect our actual financial condition and results of operations, see the information under the caption “Risk Factors” in Item 1A in this Annual Report on Form 10-K for the fiscal year ended September 30, 2010 (this “Form 10-K”). We undertake no obligation to revise or update any forward-looking statements for any reason.

Unless we have indicated otherwise or the context otherwise requires, references in this Form 10-K to “Woodward,” “the Company,” “we,” “us,” and “our” refer to Woodward Governor Company and its consolidated subsidiaries.

Amounts presented in this Form 10-K are in thousands except per share amounts.

Item 1.		Business

General

We are an independent designer, manufacturer, and service provider of energy control and optimization solutions. We design, produce and service reliable, efficient, low-emission, and high-performance energy control products for diverse applications in challenging environments. We have significant production and assembly facilities in the United States, Europe and Asia, and promote our products and services through our worldwide locations.

Our strategic focus is energy control and optimization solutions. The precise and efficient control of energy, including fluid and electrical energy, combustion and motion, is a growing requirement in the markets we serve. Our customers look to us to optimize the efficiency, emissions and operation of power equipment in both commercial and military operations. Our core technologies leverage well across our markets and customer applications, enabling us to develop and integrate cost-effective and state-of-the-art fuel, combustion, fluid, actuation and electronic systems. We focus primarily on original equipment manufacturers (“OEMs”) and equipment packagers, partnering with them to bring superior component and system solutions to their demanding applications. We also provide aftermarket repair, replacement and other service support for our installed products.

Our components and integrated systems optimize performance of commercial aircraft, military aircraft, ground vehicles and other equipment, gas and steam turbines, wind turbines, including converters and power grid related equipment, industrial diesel, gas and alternative fuel reciprocating engines, and electrical power systems. Our innovative fluid energy, combustion control, electrical energy, and motion control systems help customers offer more cost-effective, cleaner, and more reliable equipment. Our customers include leading OEMs and end users of their products.

We were established in 1870, incorporated in 1902, and are headquartered in Fort Collins, Colorado. The mailing address of our world headquarters is 1000 East Drake Road, Fort Collins, Colorado 80525. Our telephone number at that location is (970) 482-5811, and our website is www.woodward.com.

Products, Services and Principal Lines of Business

We are a global leader in energy control within the aerospace & defense and energy markets that we serve. We design, produce and service components and integrated systems that manage and control the energy of fluid movement, motion, combustion and electricity. Our prices, technology, quality, and customer service allow us to compete effectively within dozens of unique aerospace, defense and energy market niches and against various other manufacturers, including the in-house operations of certain OEMs. Examples of our market niches include motors for moving aircraft flight surfaces, fuel pumps for large diesel engines, and fuel nozzles for industrial gas turbines. We believe we have a significant position in the markets for fuel systems for aircraft and inverters for wind turbines.

We serve two significant markets — the aerospace & defense market and the energy market — through our four operating business segments: Turbine Systems, Airframe Systems, Electrical Power Systems, and Engine Systems. We use segment information internally to manage our business, including the assessment of business segment performance and making decisions on the allocation of resources between segments.

Turbine Systems

Our Turbine Systems segment develops and manufactures systems and components that provide energy control and optimization solutions for commercial and military aircraft propulsion applications, including fuel and combustion systems for turbine engines in our aerospace & defense markets, and for the industrial gas and steam turbines in our energy markets.

We provide integrated fuel control and combustion systems comprised of components such as electronic controls, fuel pumps, metering units, actuators, valves and fuel nozzles. Our OEM customers manufacture turbines for use in aerospace propulsion and both gas and steam turbines for power generation, industrial process, and large marine propulsion applications. Our customers also include end users of those applications and third party repair facilities.

Turbine Systems revenues from the aerospace & defense markets are generated primarily from the sale of components and integrated systems directly to OEMs and through aftermarket sales of components as provisioning spares or replacements. We also provide aftermarket repair, overhaul and other services to commercial airlines, turbine OEM repair facilities, military depots, third party repair shops, and end users. We have content on some of the world’s most popular and newest commercial and business jet airframes, including the Airbus A320, the Boeing 777, and the Boeing 787.

Turbine Systems’ revenues in the energy market are generated primarily from the sale of industrial products directly to OEM manufacturers, although we also generate some aftermarket sales through distributors, dealers and independent service facilities.

Airframe Systems

Our Airframe Systems segment develops and manufactures high-performance cockpit, electromechanical and hydraulic motion control systems, and mission-critical actuation systems and controls, including actuators, hydraulic motors, gears and sensors. These systems and controls are used in commercial and military fixed wing and rotary aircraft, combat vehicles and weapons systems, including guided weapons, and electro-optical targeting and motion suppression systems programs for combat vehicles, including the M1A1 Abrams tank.

Airframe Systems revenues from the aerospace & defense markets are generated primarily by sales to OEMs and tier-one prime contractors. We also generate some aftermarket sales through distributors, dealers and independent service facilities.

Airframe Systems was formed in fiscal year 2009 when we acquired MPC Products Corporation (“MPC”) and also includes our subsequent acquisition of HR Textron Inc. (“HRT”). Additional information about the acquisitions of MPC and HRT is included in Note 4, Business acquisitions and dispositions, to the Consolidated Financial Statements, in “Item 8 — Financial Statements and Supplementary Data.”

Electrical Power Systems

Our Electrical Power Systems segment develops and manufactures systems and components that provide power sensing and energy control management. These systems and components improve the security, quality, reliability and availability of power generation and electrical power networks for industrial markets, which include the power generation, power distribution, and power conversion industries.

We design, produce and service power converters for wind turbines, and integrated control systems and electronic control devices that measure, communicate and protect energy flows for low and medium voltage distribution systems through the Electrical Power Systems segment. Power converters are a critical component for delivering stable, high-quality power to the grid by controlling the voltage and power from the wind turbine generator, so that distributed voltage and frequency are constant and independent of the variable rotation speed of the wind turbine.

Electrical Power Systems revenues from the energy market are generated primarily from sales to OEMs that manufacture diesel or gas powered power stations, generator sets, wind turbines, and switchgear equipment. We also sell components as aftermarket spares or replacements, and provide other related services to these OEMs and, in some cases, directly to end users or other distributors. We also provide repair, overhaul and other services to end customers, OEM customers, and equipment operators as part of the wind power and power station side of our business.

Our customers demand technological solutions to meet their needs for security, quality, reliability and availability of electrical power networks.

Engine Systems

Our Engine Systems segment develops and manufactures systems and components that provide energy control and optimization solutions for the industrial reciprocating engine markets, which include power generation, transportation and process industries.

Engine Systems provides integrated control systems and control components, such as electronics, governors, actuators, valves, pumps, injectors, solenoids and ignition systems through the Engine Systems segment primarily to OEMs that manufacture diesel, gas and alternative fuel reciprocating engines. Engine Systems also sells to distributors for resale into power generation, transportation and process applications. Our products are used in end products ranging from forklifts to heavy industrial mining vehicles, as well as large marine engines and industrial power generators.

Engine Systems also sells components as spares or replacements and provide repair, overhaul and other services to OEM customers and equipment operators.

To support our OEMs’ customers and end users, Engine Systems sells components and services through our global channel partners (distributors, independent service facilities, and control system retrofit partners).

Markets

We serve the aerospace & defense and energy markets through our four business segments.

Our aerospace & defense products are primarily used to provide energy and motion control in both commercial and military fixed wing and rotary aircraft and in various other defense platforms, including guided weapon systems and combat vehicles.

Our energy products are used in global power generation and distribution, and to control energy in industrial, mobile and marine equipment.

Sales by market segment of our four operating business segments follows:

		Aerospace
		& Defense				Energy				Total
Fiscal year ended September 30, 2010
Turbine Systems		$	381,556			$	219,820			$	601,376
Airframe Systems			376,182				—				376,182
Electrical Power Systems			248				186,543				186,791
Engine Systems			631				292,050				292,681
Total net external sales		$	758,617			$	698,413			$	1,457,030
Percentage of total net sales			52	%			48	%			100	%
Fiscal year ended September 30, 2009
Turbine Systems		$	377,157			$	240,793			$	617,950
Airframe Systems			319,009				—				319,009
Electrical Power Systems			105				194,895				195,000
Engine Systems			1,725				296,441				298,166
Total net external sales		$	697,996			$	732,129			$	1,430,125
Percentage of total net sales			49	%			51	%			100	%

Additional information about our operations in 2010 and outlook for the future, including certain segment information, is included in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Additional information about our business segments and certain geographical information are included in Note 20, Segment information and Note 21, Supplemental quarterly financial data (Unaudited), to the Consolidated Financial Statements in “Item 8 — Financial Statements and Supplementary Data.”

Sales Order Backlog

Our backlog of unshipped sales orders as of October 31, 2010 and 2009 by segment was as follows:

						% Expected to be
		October 31,				filled by September 30,				October 31,
		2010				2011				2009
Turbine Systems		$	184,438				90	%		$	175,053
Airframe Systems			387,639				67				424,823
Electrical Power Systems			84,198				58				56,943
Engine Systems			81,420				94				70,283
		$	737,695				74	%		$	727,102

Our current estimate of the sales order backlog is based on unshipped sales orders that are open in our order entry systems. Unshipped orders are not necessarily an indicator of future sales levels because of variations in lead times and customer production demand pull systems.

Seasonality

We do not believe that our sales, in total or in any business segment, are subject to significant seasonal variation. However, our sales have generally been lower in the first quarter of our fiscal year and higher in the final three quarters of our fiscal year. The first fiscal quarter of each year includes fewer working days due to the observance of various holidays and scheduled plant shut-downs for annual maintenance.

Customers

For the fiscal year ended September 30, 2010, approximately 39% of our consolidated net sales were made to our five largest customers. Sales to our five largest customers represented approximately 38% and 43% of our consolidated net sales for the fiscal years ended September 30, 2009 and September 30, 2008, respectively.

Sales to one of our customers, General Electric, accounted for approximately 15%, 17%, and 17% of consolidated net sales in each of the fiscal years ended September 30, 2010, 2009 and 2008, respectively. Sales to another customer, Caterpillar, accounted for approximately 5%, 5%, and 10% of consolidated net sales in each of the fiscal years ended September 30, 2010, 2009 and 2008, respectively. No other customers represented 10% or more of our sales in fiscal year 2010, fiscal year 2009 or fiscal year 2008.

Our accounts receivable from General Electric represented approximately 14% of total accounts receivable as of September 30, 2010 and 15% as of September 30, 2009. We believe General Electric and our other significant customers are creditworthy and will be able to satisfy their credit obligations to us.

The customers who account for approximately 10% or more of sales to our business segments for the fiscal year ended September 30, 2010 follow:

		Customer
Turbine Systems		General Electric; United Technologies
Airframe Systems		Boeing; General Dynamics
Electrical Power Systems		REpower Systems; Nordex Energy
Engine Systems		Caterpillar; Cummins

Government Contracts and Regulation

Portions of our businesses, particularly in our Turbine Systems and Airframe Systems segments, are heavily regulated. We contract with numerous U.S. Government agencies and entities, including all of the branches of the U.S. military, the National Aeronautics and Space Administration (“NASA”), and the Department of Defense, Homeland Security, and Transportation. We contract with similar government authorities outside the United States with respect to our international efforts.

The U.S. Government, and other governments, may terminate any of our government contracts (and, in general, subcontracts) at their convenience, as well as for default based on specified performance measurements. If any of our government contracts were to be terminated for convenience, we generally would be entitled to receive payment for work completed and allowable termination or cancellation costs. If any of our government contracts were to be terminated for default, the U.S. Government generally would pay only for the work accepted, and could require us to pay the difference between the original contract price and the cost to re-procure the contract items, net of the work accepted from the original contract. The U.S. Government could also hold us liable for damages resulting from the default.

We must comply with, and are affected by, laws and regulations relating to the formation, administration and performance of U.S. Government contracts. These laws and regulations, among other things:

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require accurate, complete and current disclosure and certification of cost and pricing data in connection with certain contracts;

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impose specific and unique cost accounting practices that may differ from accounting principles generally accepted in the United States (“U.S. GAAP”) and therefore require reconciliation;

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impose acquisition regulations that define allowable and unallowable costs and otherwise govern our right to reimbursement under certain cost-based U.S. Government contracts;

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impose manufacture, specifications and other quality standards that may be further restrictive than for non-government business activities; and

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restrict the use and dissemination of information classified for national security purposes and with respect to both the U.S. Government and the governments of foreign countries regulations pertaining to the export of certain products and technical data.

Sales made directly to U.S. Government agencies and entities, or indirectly through third party manufacturers utilizing Woodward parts and subassemblies, collectively represent 23% of our sales. The level of U.S. spending for defense, alternative energy, and other programs is subject to periodic congressional appropriation actions, which are subject to change at any time, including the mix of programs to which such funding is allocated.

U.S. government related sales for our business segments for fiscal year 2010 and fiscal year 2009 follows:

		Direct U.S.				Indirect U.S.
		Government				Government				Commercial
		Sales				Sales				Sales				Total
Fiscal year ended September 30, 2010
Turbine Systems		$	49,589			$	49,996			$	501,791			$	601,376
Airframe Systems			15,175				212,588				148,419				376,182
Electrical Power Systems			248				66				186,477				186,791
Engine Systems			630				359				291,692				292,681
Total net external sales		$	65,642			$	263,009			$	1,128,379			$	1,457,030
Percentage of total net sales			5	%			18	%			77	%			100	%
Fiscal year ended September 30, 2009
Turbine Systems		$	51,770			$	48,588			$	517,592			$	617,950
Airframe Systems			20,684				159,084				139,241				319,009
Electrical Power Systems			105				180				194,715				195,000
Engine Systems			1,725				1,106				295,335				298,166
Total net external sales		$	74,284			$	208,958			$	1,146,883			$	1,430,125
Percentage of total net sales			5	%			15	%			80	%			100	%

Manufacturing

We operate manufacturing and assembly plants in the United States, Europe and Asia. Our products consist of mechanical, electronic and electromagnetic components.

Aluminum, iron and steel are the primary raw materials used to produce our mechanical components. Other commodities, such as gold and nickel, are also used in the production of our products, although in much smaller quantities. We purchase various goods, including component parts and services used in production, logistics and product development processes from third parties. Generally there are numerous sources for the raw materials and components used in our products, which we believe are sufficiently available to meet current requirements.

We maintain global strategic sourcing models to meet our global facilities’ production needs while building long-term supplier relationships and efficiently managing our overall supply costs. We expect our suppliers to maintain adequate levels of quality raw materials and component parts, and to deliver such parts on a timely basis to support production of our various products. We use a variety of agreements with suppliers intended to protect our intellectual property and processes and to monitor and mitigate risks of disruption in our supply base that could cause a business disruption to our production schedules or to our customers. The risks monitored include supplier financial viability, business continuity, quality and delivery.

Our customers expect us to maintain adequate levels of certain finished goods and certain component parts to support our warranty commitments and sales to our aftermarket customers, and to deliver such parts on a timely basis to support our customers’ standard and customary needs. We carry certain finished goods and component parts in inventory to meet these rapid delivery requirements of our customers.

Research and Development

We conduct research and development activities with our own independent research and development funds, and through customer funding. Our research and development costs include basic research, applied research, development, systems and other concept formulation studies. We also conduct internal research and development activities aimed at improving our manufacturing processes.

Turbine Systems is developing components and systems that we believe will be instrumental in helping our customers achieve their objectives of lower fuel consumption, lower weight, reduced emissions, and improved operating economics. We collaborate closely with our customers early in their technology development and preliminary design stages to provide products that deliver the necessary component and system performance for commercial launch. Some technology development programs begin years before an expected entry to service, such as those for next-generation commercial aircraft engines and the next generation of industrial gas and steam turbine applications.

Other development programs result in nearer-term commercial launches associated with new OEM offerings, product upgrades, or product replacements on existing turbine programs. These nearer-term programs frequently provide opportunities for us to advance our technological capabilities as we provide technologies to assist customers in satisfying increasingly stringent turbine requirements for both aircraft and industrial markets. Our development efforts support a wide range of turbine applications, including both commercial and military engines of various thrust classes in the aircraft market and industrial turbine power plants, oil and gas production facilities, and military marine applications. As a result of these investments, our products are represented in many of the world’s significant recent turbine launches and high-profile turbine development programs.

Airframe Systems is developing highly integrated and advanced cockpit control and actuation systems and components for motion control and sensing in the aerospace, weapons and defense markets. The aerospace industry has moved toward more electric (“fly-by-wire”), lighter weight aircraft, while demanding increased reliability and redundancy. Airframe Systems invests in development programs to address the anticipated requirements of the industry and our customers. These development programs include integrated electromechanical sensor and actuation solutions to support the more electric aircraft effort, technology to use composites for weight reductions in large hydraulic actuation systems, and technologies to provide fault tolerant capabilities for component, sensor and actuation systems. In addition, Airframe Systems is developing an expanded family of intelligent cockpit control products (including throttle and rudder controls) with both conventional and fly-by-wire technology.

Electrical Power Systems is developing power converters for multi-megawatt (“MW”) class wind turbines in the power range of 1 MW to 6MW, both for on-shore and off-shore-applications for wind power turbines. Modular product platforms are being extended to various customer applications and world regions. New research and development projects are focusing on full-scale converters for applications with permanent magnet generators. The power generation division is focusing on extending the product portfolio of distributed generator system (“Genset”) controls for the parallel and non-parallel market and switchgear controls. Various product derivatives have been launched in an effort to meet customer needs in the different world regions. Electrical Power Systems is also finalizing the new generation of protection and control relays for medium-voltage applications and is modernizing the self powered protection relay line.

Engine Systems develops more efficient, cleaner technologies, including integrated control systems and system components that we believe will allow our OEM customers to cost-effectively meet mandated exhaust emissions regulations, ever increasing fuel efficiency demands, maximize fuel flexibility, and support global infrastructure requirements. Our clean technology development efforts include controls for diesel, natural gas, and alternative fuel engines. Major development projects, including diesel common rail systems, air and gaseous fuel systems, and automated diesel particulate regeneration systems are targeted for future global emissions regulations for the year 2015 and beyond. We believe that our technologies make marine, power generation, and alternative fueled bus, truck and ship engines operate cleaner, more efficiently, and more reliably.

Company-sponsored independent research and development costs are charged to expenses when incurred. Costs related to specific customer development programs are potentially inventoried and charged to costs depending on the specifics of the contractual arrangements. Under certain arrangements in which a customer shares in product development costs, our portion of the unreimbursed costs is generally expensed as incurred. Across all our segments, total research and development costs totaled $82,560 in fiscal year 2010, $78,536 in fiscal year 2009, and $73,414 in fiscal year 2008. Research and development costs were 5.7% of consolidated net sales in fiscal year 2010 compared to 5.5% in fiscal year 2009 and 5.8% in fiscal year 2008. See “Research and development costs” in Note 1, Operations and summary of significant accounting policies, to the Consolidated Financial Statements in “Item 8 — Financial Statements and Supplementary Data.”

Competitive Environment

Our products and product support services are sold worldwide into a variety of competitive markets. In all markets, we compete on the basis of differentiated technology and design, product performance, and conformity with customer specifications, customer service and support, including on-time delivery and customer partnering, product quality, price, reputation and local presence. Each of our segments operates in a uniquely competitive environment.

We believe that new competitors face significant barriers to entry into many of our markets, including various government mandated certification requirements to compete in the aerospace & defense markets in which we participate.

Turbine Systems competes with numerous companies around the world that specialize in fuel and air management, combustion, and electronic control products in many segments of the aerospace and industrial turbine markets. Also, many of our OEM customers are capable of developing and manufacturing these same products internally. The principal points of competition within this market are product performance and conformity with customer specifications as well as product quality and reliability, on-time delivery, pricing, and joint development capabilities with our customers.

Our competitors offer a broad range of turbine engine control and combustion management technologies, including actuators, electronic controls, fuel injection equipment, and engine emissions controls. We compete in part by establishing relationships with our customers’ engineering organizations, and by offering innovative solutions to their market problems.

Industrial turbine competitors include Young and Franklyn, Whittaker, PECC, Parker Hannifin, Goodrich Aerospace, Triconex, Compress Controls Corporation, Allen Bradley and Rexroth. OEMs with internal capabilities for similar products include Caterpillar, and Cummins. Aircraft turbine competitors include Goodrich Aerospace, Parker Hannifin, Honeywell Aerospace, and Hamilton Sundstrand (a division of United Technology Corporation). Service competition is addressed with responsiveness, short turn times, and geographical presence.

Airframe Systems operates in the aerospace and defense industry. The aerospace and defense industry requires suppliers to comply with significant product certification requirements, which forms a basis for competition as well as a barrier to entry. While the industry competes on the basis of all of these factors, technological innovation and design, product performance and conformity with customer specifications, and product quality are of significant importance in the aerospace and defense industry.

Our customers include airframe OEM manufacturers, and suppliers to these manufacturers. We supply these customers with technologically innovative components and system solutions. We align our technology roadmaps with our customers, and focus on responding to needs for cost, weight, and reliability improvements. We believe we have developed efficient manufacturing and assembly processes. Our products achieve high levels of field reliability, which we believe offers an advantage in life-cycle cost. Our competitors in aerospace and defense include divisions of Goodrich, Hamilton Sundstrand, Honeywell, Moog and Parker Hannifin.

In both the Turbine Systems and Airframe Systems segments, several competitors are also customers for our products, such as Hamilton Sundstrand, Parker Hannifin, and Honeywell. Some of our customers are affiliated with our competitors through ownership or joint venture agreements. We compete in part by establishing relationships with our customers’ engineering organizations, and by offering innovative solutions to their market problems.

Electrical Power Systems is a leading OEM supplier offering components for the power generation and distribution industry with a global network of sales and support services. Our power generation and distribution competitors range from many small to medium sized regional companies to global competitors such as GE Multilin, ABB, Siemens, Schweitzer Electric, and Areva. We are developing new platforms that meet customer regional requirements and are intended to provide optimum balance between price and performance. On a global scale, we are a leader in providing products that we believe meet the increasing complexities of the market while maintaining superior quality, competitive price, and reliable support.

In the power conversion business, we are a leader in developing converter technology for on-shore and off-shore wind turbines ranging in capacity from 1MW to 6MW. Our wind turbine inverter business has competition from both wind turbine OEMs with converter capabilities and from independent converter manufacturers. Independent converter manufacturing competitors include ABB, Converteam and Ingeteam. We believe we are a market leader in providing our customers advanced technology and superior product performance at a competitive price. Our electrical power systems segment assists in the development of, and provides contract manufacturing for, our other segments.

The global market for renewable wind energy technology is immature and changing rapidly. Delays in wind turbine installation caused by the recent economic downturn have led to over-capacity with manufacturers within the wind turbine industry. Management believes it is likely that market consolidation may lead to price becoming more important within the wind turbine converter market.

Engine Systems operates in the global markets for industrial engine management systems, including emissions control, fuel and air management, combustion, and electronic control products.

We compete with numerous companies who specialize in various engine management products, and our OEM customers are often capable of developing and manufacturing some of these same products internally. Competitors include Heinzmann GmbH & Co., Robert Bosch AG, L’Orange GmbH, and Hoerbiger. OEM customers with internal capabilities for similar products include General Electric, Caterpillar, Wartsila and Cummins.

Engine Systems strongly focuses on close relationships with its OEM customers’ engineering teams. Competitive success is based on the development of innovative components and systems that are aligned with the OEM’s engine technology roadmaps to achieve future engine emission, efficiency, and fuel flexibility targets. The major OEMs are large global players requiring suppliers to be able to support them around the globe and to meet increasingly higher requirements in terms of quality, delivery, reliability and cost improvements.

Employees

As of October 31, 2010, we employed 5,452 full-time employees of which 1,393 were located outside of the U.S. We consider the relationships with our employees to be positive.

Approximately 13% of our total full-time workforce was union employees as of October 31, 2010, all of whom work for our Airframe Systems business segment. The collective bargaining agreements with our union employees are generally renewed through contract renegotiation near the contract expiration dates. The MPC Employees Representative Union contract, which covers 368 employees as of October 31, 2010, expires September 30, 2013. The Local Lodge 727-N International Association of Machinists and Aerospace Workers agreement, which covers 348 employees as of October 31, 2010, was signed in April 2010 and expires April 20, 2014. We believe our relationships with our employees and the representative unions are good.

All of our employees in the U.S. were at-will employees as of October 31, 2010. Generally, our employees are not subject to any type of employment contract or agreement. Certain MPC employees who are not executive officers of Woodward had pre-existing employment agreements with MPC prior to the MPC acquisition, which expire in October 2011. In addition, our executive officers and our other corporate officers each have change-in-control agreements.

Outside of the U.S., we enter into employment contracts and agreements in those countries in which such relationships are mandatory or customary. The provisions of these agreements correspond in each case with the required or customary terms in the subject jurisdiction.

Patents, Intellectual Property, and Licensing

We own numerous patents and have licenses for the use of patents owned by others, which relate to our products and their manufacture. In addition to owning a large portfolio of intellectual property, we also license intellectual property to and from third parties. For example, the U.S. Government has certain rights in our patents that are developed in performance of certain government contracts, and it may use or authorize others to use the inventions covered by such patents for government purposes as allowed by law. Unpatented process technology, including research, development and engineering technical skills and know-how, as well as unpatented production software and other intellectual property rights, are important to our overall business and to the operations of each of our business segments. While our intellectual property rights in the aggregate are important, we do not believe our business or any of our business segments would be materially affected by the expiration of any particular intellectual property rights or termination of any particular intellectual property patent license agreements.

As of September 30, 2010, our Consolidated Balance Sheet includes $292,149 of net intangible assets. This value represents the carrying values; net of amortization, of certain assets acquired in various business acquisitions and does not purport to represent the fair value of our intellectual property as of September 30, 2010.

U.S. GAAP requires that research and development costs be expensed as incurred; therefore as we develop new intellectual property in the normal course of business, the costs of developing such assets are expensed as incurred, with no corresponding intangible asset recorded.

Environmental Matters and Climate Change

The Company is regulated by federal, state and international environmental laws governing our use, transport and disposal of substances and control of emissions. Compliance with these existing laws has not had a material impact on our capital expenditures, earnings or global competitive position.

We are engaged in remedial activities, generally in coordination with other companies, pursuant to federal and state laws. When it is reasonably probable we will pay remedial costs at a site, and those costs can be reasonably estimated, we accrue a liability for such future costs with a related charge against our earnings. In formulating that estimate and recognizing those costs, we do not consider amounts expected to be recovered from insurance companies or others, until such recovery is assured. Our accrued liability for environmental remediation costs is not significant and is included in the line item “Accrued liabilities” in the Consolidated Balance Sheets in “Item 8 — Financial Statements and Supplementary Data.”

We generally cannot reasonably estimate costs at sites in the very early stages of remediation. Currently, we have one site in the later stages of remediation, and there is no more than a remote chance that a material amount of costs for remedial activities at any individual site, or at all sites in the aggregate, will be required.

Our manufacturing facilities generally do not produce significant volumes or quantities of byproducts, including greenhouse gases, that would be considered hazardous waste or otherwise harmful to the environment. We do not expect legislation currently pending or expected in the next several years to significantly negatively impact our operations in any of our segments.

Domestic and foreign legislative initiatives on emissions control, renewable energy, and climate change tend to favorably impact the sale of our energy control products. For example our Electrical Power Systems business segment produces inverters for wind turbines, and our Engine Systems and Turbine Systems produce energy control products that help our customers maximize engine efficiency and minimize wasteful emissions, including greenhouse gases.

Executive Officers of the Registrant

Information about our executive officers is provided below. There are no family relationships between any of the executive officers listed below.

Thomas A. Gendron, Age 49. Chairman of the Board since January 2008; Chief Executive Officer, President, and Director since July 2005; Chief Operating Officer and President from September 2002 through June 2005; Vice President and General Manager of Industrial Controls June 2001 through September 2002; Vice President of Industrial Controls April 2000 through May 2001; Director of Global Marketing and Industrial Controls’ Business Development February 1999 through March 2000.

Robert F. Weber, Jr., Age 56. Chief Financial Officer and Treasurer since August 2005. Prior to August 2005, Mr. Weber was employed at Motorola, Inc. for 17 years, where he held various positions, including Corporate Vice President and General Manager — EMEA Auto. Prior to this role, Mr. Weber served in a variety of financial positions at both a corporate and operating unit level with Motorola.

Martin V. Glass, Age 55. President, Turbine Systems since October 2009; Group Vice President, Turbine Systems September 2007 through September 2009; Vice President of the Aircraft Engine Systems Customer Business Segment December 2002 through August 2007; Director of Sales, Marketing, and Engineering February 2000 through December 2002.

Dennis M. Benning, Age 69. President, Airframe Systems since October 2009; Group Vice President, Airframe Systems October 2008 through September 2009; Group Vice President, Engine Systems September 2007 through September 2008; Vice President, Center of Excellence Industrial Controls December 2002 through August 2007; General Manager, Center of Excellence Industrial Controls July 2002 through November 2002; Director of Operations, Aircraft Engine Systems January 2002 through June 2002.

Gerhard Lauffer, Age 49. President, Electrical Power Systems since October 2009; Group Vice President, Electrical Power Systems September 2007 through September 2009; Vice President and General Manager Electronic Controls March 2002 through August 2007; Managing Director Leonhard-Reglerbau GmbH 1991 through March 2002 when it was acquired by Woodward.

Chad R. Preiss, Age 45. President, Engine Systems since October 2009; Group Vice President, Engine Systems October 2008 through September 2009; Vice President, Sales, Service, and Marketing, Engine Systems December 2007 through September 2008; and Vice President, Industrial Controls September 2004 through December 2007. Prior to this role, Mr. Preiss served in a variety of engineering and marketing/sales management roles, including Director of Business Development, since joining Woodward in 1988.

A. Christopher Fawzy, Age 41. Corporate Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer since October 2009; Vice President, General Counsel, and Corporate Secretary June 2007 through September 2009. Mr. Fawzy became the Company’s Chief Compliance Officer in August 2009. Prior to joining Woodward, Mr. Fawzy was employed by Mentor Corporation, a global medical device company. He joined Mentor in 2001 and served as Corporate Counsel, then General Counsel in 2003, and was appointed Vice President, General Counsel and Secretary in 2004.

Other Corporate Officers of the Registrant

Information about our other corporate officers is provided below. There are no family relationships between any of the corporate officers listed below or between any of the corporate officers listed below and the aforementioned executive officers.

Harlan G. Barkley, Age 57. Corporate Vice President, Information Technology since October, 2009; Vice President, Information Technology April 2009 through September 2009; Director, Global Information Technology from November 2002 through March 2009; Prior to joining Woodward in October 1999, Mr. Barkley was employed by Sundstrand Corporation/Hamilton Sundstrand for 19 years in a variety of leadership roles in information technology.

Steven J. Meyer, Age 50. Corporate Vice President, Human Resources since October 2009; Vice President, Human Resources from November 2006 through September 2009; Director, Global Human Resources from November 2002 Through October 2006; Director, Human Resources for Industrial Controls from July 1997 through October 2002. Prior to joining Woodward, Mr. Meyer was employed by PG&E Corporation and Nortel in a variety of roles in human resources.

James D. Rudolph, Age 49. Corporate Vice President, Global Sourcing since October 2009; Vice President, Global Sourcing from April 2009 through October 2009; Director of Global Sourcing from April 2005 through April 2009; Director of Engineering for Industrial Controls from March 2000 through April 2005. Prior to this role Mr. Rudolph served in a variety of engineering, operations and sales roles since joining the company in 1984.

Information available on Woodward’s Website

Through a link on the Investor Information section of our website, www.woodward.com, we make available the following filings as soon as reasonably practicable after they are electronically filed or furnished to the SEC: our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

Stockholders may obtain, without charge, a single copy of Woodward’s 2010 Annual Report on Form 10-K upon written request to the Corporate Secretary, Woodward Governor Company, 1000 East Drake Road, Fort Collins, Colorado 80525.

Item 1A.		Risk Factors

Investment in our securities involves risk. An investor or potential investor should consider the risks summarized in this section when making investment decisions regarding our securities.

Important factors that could individually, or together with one or more other factors, affect our business, results of operations, financial condition, and/or cash flows include, but are not limited to, the following:

Company Risks

A decline in business with, or financial distress of, our significant customers could decrease our consolidated net sales or impair our ability to collect amounts due and payable and have a material adverse effect on our business, financial condition, results of operations and cash flows.

We have fewer customers than many companies with similar sales volumes. For the fiscal year ended September 30, 2010, approximately 39% of our consolidated net sales were made to our five largest customers. Sales to these same five largest customers represented approximately 38% of our consolidated net sales for the fiscal year ended September 30, 2009. Sales to General Electric accounted for approximately 15%, 17%, and 17% of consolidated net sales in each of the fiscal years ended September 30, 2010, 2009, and 2008, respectively, and accounts receivable from General Electric represented approximately 14% and 15% of accounts receivable at September 30, 2010 and 2009, respectively. Sales to Caterpillar accounted for approximately 5%, 5%, and 10% of consolidated net sales in each of the fiscal years ended September 30, 2010, 2009, and 2008, respectively. If any of our significant customers were to change suppliers, in-source production, institute significant restructuring or cost-cutting measures, or experience financial distress, including that which is a result of the prolonged unfavorable economic conditions and continued instability in the financial markets, these significant customers may substantially reduce or otherwise be unable to pay for purchases from us. Accordingly, our consolidated net sales could decrease significantly or we may experience difficulty collecting or be unable to collect amounts due and payable, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

The continued instability in the financial markets and prolonged unfavorable economic conditions could have a material adverse effect on the ability of our customers to perform their obligations to us and on their demand for our products and services.

There has been widespread concern over the continued instability in the financial markets and their influence on the global economy. As a result of the extreme volatility in the credit and capital markets, and other prolonged economic challenges currently affecting the global economy, our current or potential customers may experience cash flow problems and, as a result, may modify, delay or cancel plans to purchase our products. Additionally, if customers are not successful in generating sufficient revenue or are precluded from securing necessary financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us. Any inability of current or potential customers to pay us for our products may adversely affect our earnings and cash flows.

In addition, the general economic environment significantly affects demand for our products and services. During periods of slowing economic activity, such as the prolonged unfavorable economic conditions we have recently experienced, a global slowdown in spending on infrastructure development may occur in the markets in which we operate, and customers may reduce their purchases of our products and services. In addition, unfavorable economic conditions and public perceptions regarding the use of business jets have reduced demand for systems and components for new business jet aircraft and have resulted in the withdrawal from service of some commercial aircraft. Any further reduction in aircraft order flow or withdrawal from service of business jet and commercial aircraft could further reduce demand for some of our products and services.

There can be no assurance that the prolonged unfavorable economic and market conditions in the United States and internationally will not have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We may not be able to obtain financing, on acceptable terms or at all, to implement our business plans, complete acquisitions, or otherwise take advantage of business opportunities or respond to competitive pressures.

Global financial markets and economic conditions have been, and continue to be, disrupted and volatile. The credit and debt and equity capital markets have been distressed. These issues, along with significant write-offs in the financial services sector, the re-pricing of credit risk, and the prolonged weak economic conditions have made, and will likely continue to make, it difficult to obtain financing. In addition, as a result of concerns about the stability of financial markets generally and the solvency of counterparties specifically, the cost of obtaining money from the credit markets has generally increased as many lenders and institutional investors have increased interest rates, enacted tighter lending standards, refused to refinance existing debt at maturity either at all or on terms similar to existing debt and reduced and, in some cases, ceased to provide financing to borrowers. Due to these factors, we cannot be certain that financing, to the extent needed, will be available on acceptable terms or at all. If financing is not available when needed, or is available only on unacceptable terms, we may be unable to implement our business plans, complete acquisitions, or otherwise take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

The long sales cycle, customer evaluation process and implementation period of our products and services may increase the costs of obtaining orders and reduce the predictability of sales cycles and our inventory requirements.

Our products and services are technologically complex. Prospective customers generally must commit significant resources to test and evaluate our products and to install and integrate them into larger systems. Orders expected in one quarter may shift to another quarter or be cancelled with little advance notice as a result of customers’ budgetary constraints, internal acceptance reviews and other factors affecting the timing of customers’ purchase decisions. In addition, customers often require a significant number of product presentations and demonstrations before reaching a sufficient level of confidence in the product’s performance and compatibility with the approvals that typically accompany capital expenditure approval processes. The difficulty in forecasting demand increases the challenge in anticipating sales cycles and our inventory requirements, which may cause us to over-produce finished goods and could result in inventory write-offs, or could cause us to under-produce finished goods. Any such over-production or under-production could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We have engaged in restructuring activities and may need to implement further restructurings in the future, and there can be no assurance that our restructuring efforts will have the intended effects.

From time to time, we have responded to changes in our industry and the markets we serve by restructuring our operations. We have previously disclosed non-acquisition related restructuring charges recorded primarily as a result of workforce management and other restructuring charges related to our recently acquired businesses, including, among others, changes associated with integrating similar operations, managing our workforce, vacating or consolidating certain facilities and cancelling certain contracts. Restructuring activities can create unanticipated consequences, and we cannot be sure that any or all of these restructuring efforts will be successful. There can be no assurance that the reductions in sites, workforce management and other cost-cutting measures will have the effect currently expected by our management or that they will not harm our future business operations and prospects. A variety of risks could cause us not to realize the expected cost savings, including, among others, the following:

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higher than expected severance costs related to staff reductions;

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higher than expected retention costs for employees that will be retained;

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higher than expected stand-alone overhead expenses;

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delays in the anticipated timing of activities related to our cost-saving plan; and

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other unexpected costs associated with operating the business.

We also cannot be certain that we will not be required to implement further restructuring activities or make additions, reductions or other changes to our management or workforce based on other cost reduction measures or changes in the industry and markets in which we compete. If we are unable to structure our operations in the light of our recently acquired businesses and evolving market conditions, it could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Suppliers may be unable to provide us with materials of sufficient quality or quantity required to meet our production needs at favorable prices or at all.

We are dependent upon suppliers for parts and raw materials used in the manufacture of components that we sell to our customers. We may experience an increase in costs for parts or materials that we source from our suppliers, or we may experience a shortage of materials for various reasons, such as the loss of a significant supplier, high overall demand creating shortages in parts and supplies we use, financial distress, work stoppages, natural disasters, or production difficulties that may affect one or more of our suppliers. In particular, the prolonged global economic downturn may affect our key suppliers in terms of their operating cash flow and access to financing. This may in turn affect their ability to perform their obligations to us. Our customers rely on us to provide on-time delivery and have certain rights if our delivery standards are not maintained. A significant increase in our supply costs, or a protracted interruption of supplies for any reason, could result in the delay of one or more of our customer contracts or could damage our reputation and relationships with customers. Any of these events could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Our profitability may suffer if we are unable to manage our expenses while responding to sales increases or decreases.

Some of our expenses are relatively fixed in relation to changes in sales volume and are difficult to adjust in the short term. Expenses such as depreciation or amortization, which are the result of past capital expenditures or business acquisitions, or expenses driven by business activity other than sales level, such as manufacturing overhead, may be difficult to reduce in a timely manner in response to a reduction in sales. Additionally, due to the nature of our sales cycle, in periods of sales increases it may be difficult to rapidly increase our production of finished goods, particularly if such sales increases are unanticipated. An increase in the production of our finished goods requires an increase in both the purchases of raw materials and components and in the size of our workforce. If a sudden, unanticipated need for raw materials, components and labor should arise in order to meet unexpected sales demand, we could experience difficulties in sourcing raw materials, components and labor at a favorable cost or to meet our production needs. These factors could result in delays in fulfilling customer sales contracts, damage to our reputation and relationships with our customers, an inability to meet the demands of the market which could prevent us from taking advantage of business opportunities or responding to competitive pressures and an increase in variable and fixed costs leading to a decrease in net earnings or even net losses. Any of these events could have an adverse effect on our business, financial condition, results of operations and cash flows.

Subcontractors may fail to perform contractual obligations.

We frequently subcontract portions of work due under contracts with our customers and are dependent on the continued availability and satisfactory performance by these subcontractors. Nonperformance or underperformance by subcontractors could materially impact our ability to perform obligations to our customers. A subcontractor’s failure to perform could result in a customer terminating our contract for default, expose us to liability, substantially impair our ability to compete for future contracts and orders, and limit our ability to enforce fully all of our rights under these agreements, including any rights to indemnification. Any of these events could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Our product development activities may not be successful or may be more costly than currently anticipated.

Our business involves a significant level of product development activities, generally in connection with our customers’ development activities. Industry standards, customer expectations, or other products may emerge that could render one or more of our products or services less desirable or obsolete. Maintaining our market position will require continued investment in research and development. During an economic downturn or a subsequent recovery, we may need to maintain our investment in research and development, which may limit our ability to reduce these expenses in proportion to a sales shortfall. If these activities are not as successful as currently anticipated, or if they are more costly than currently anticipated, future sales and/or earnings could be lower than expected, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Activities necessary to integrate acquisitions may result in costs in excess of current expectations or be less successful than anticipated.

In fiscal year 2009, we completed two significant acquisitions and we may acquire other businesses in the future. The success of these transactions will depend on, among other things, our ability to integrate assets and personnel acquired in these transactions and to apply our internal controls process to these acquired businesses. The integration of these acquisitions may require significant attention from our management, and the diversion of management’s attention and resources could have a material adverse effect on our ability to manage our business. Furthermore, we may not realize the degree or timing of benefits we anticipated when we first enter into these transactions. If actual integration costs are higher than amounts assumed, if we are unable to integrate the assets and personnel acquired in an acquisition as anticipated, or if we are unable to fully benefit from anticipated synergies, our business, financial condition, results of operations, and cash flows could be materially adversely affected.

Our debt obligations and the restrictive covenants in the agreements governing our debt could limit our ability to operate our business or pursue our business strategies, and could adversely affect our business, financial condition, results of operations, and cash flows.

As of September 30, 2010, our total long-term debt, excluding short-term borrowings of $22,099 was $443,673. Our debt obligations could require us to dedicate a portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow for other purposes, including business development efforts and mergers and acquisitions. We are contractually obligated under the agreements governing our debt to make principal payments of $18,425 in fiscal year 2011, $18,373 in fiscal year 2012, $7,500 in fiscal year 2013, $149,375 in fiscal year 2014 and $250,000 in years after 2015. Our debt obligations could make us more vulnerable to general adverse economic and industry conditions and could limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, thereby placing us at a disadvantage to our competitors that have less indebtedness.

Our existing term loan facility, revolving credit facility and note purchase agreements impose financial covenants on us and our subsidiaries that require us to maintain certain leverage ratios and minimum levels of consolidated net worth. Certain of these agreements require us to repay outstanding borrowings with portions of the proceeds we receive from certain sales of property or assets and specified future debt offerings.

These financial covenants place certain restrictions on our business that may affect our ability to execute our business strategy successfully or take other actions that we believe would be in the best interests of our Company. These restrictions include limitations or restrictions, among other things, on our ability and the ability of our subsidiaries to:

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incur additional indebtedness;

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pay dividends or make distributions on our capital stock or certain other restricted payments or investments;

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purchase or redeem stock;

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issue stock of our subsidiaries;

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make domestic and foreign investments and extend credit;

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engage in transactions with affiliates;

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transfer and sell assets;

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effect a consolidation or merger or sell, transfer, lease, or otherwise dispose of all or substantially all of our assets; and

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create liens on our assets to secure debt.

These agreements contain certain customary events of default, including certain cross-default provisions related to other outstanding debt arrangements. Any breach of the covenants under these agreements or other event of default could cause a default under these agreements and/or a cross-default under our other debt arrangements, which could restrict our ability to borrow under our revolving credit facility. If there were an event of default under certain provisions of our debt arrangements that was not cured or waived, the holders of the defaulted debt may be able to cause all amounts outstanding with respect to the debt instrument to be due and payable immediately. Our assets and cash flow may not be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default. If we are unable to repay, refinance, or restructure our indebtedness as required, or amend the covenants contained in these agreements, the lenders or note holders may be entitled to obtain a lien or institute foreclosure proceedings against our assets. Any of these events could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

At September 30, 2010, we were in compliance with all covenants under our existing long-term debt agreements and revolving credit facility.

Our business may be affected by government contracting risks.

Sales made directly to U.S. Government agencies and entities were 5% of total net sales during fiscal year 2010, 5% during fiscal year 2009, and 5% during fiscal year 2008, primarily in the aerospace & defense markets. Sales made directly to U.S. Government agencies and entities, or indirectly through third party manufacturers utilizing Woodward parts and subassemblies, accounted for approximately 23% of total sales in fiscal year 2010, 20% in fiscal year 2009, and 14% in fiscal year 2008. Our contracts with the U.S. Government are subject to the following unique risks, some of which are beyond our control, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

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The level of U.S. defense spending is subject to periodic congressional appropriation actions, which is subject to change at any time. The mix of programs to which such funding is allocated is also uncertain, and we can provide no assurance that an increase in defense spending will be allocated to programs that would benefit our business. If the amount of spending were to decrease, or there were a shift from certain aerospace and defense programs to other programs, our sales could decrease.

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Our U.S. Government contracts and the U.S. Government contracts of our customers are subject to modification, curtailment or termination by the government, either for the convenience of the government or for default as a result of our failure to perform under the applicable contract. If any of our contracts are terminated by the U.S. Government, our backlog would be reduced, in accordance with contract terms, by the expected value of the remaining work under such contracts. In addition, we are not the prime contractor on most of our contracts for supply to the U.S. Government, and the U.S. Government could terminate a prime contract under which we are a subcontractor, irrespective of the quality of our products and services as a subcontractor.

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We must comply with procurement laws and regulations relating to the formation, administration and performance of our U.S. Government contracts. The U.S. Government may change procurement laws and regulations from time to time. A violation of U.S. Government procurement laws or regulations, a change in U.S. Government procurement laws and regulations, or a termination arising out of our default could expose us to liability, disbarment, or suspension and could have an adverse effect on our ability to compete for future contracts and orders.

Changes in the estimates of fair value of reporting units or of long-lived assets may result in future impairment charges, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Over time, the fair values of long-lived assets change. At September 30, 2010, we had $438,594 of goodwill, representing 26.4% of our total assets. We test goodwill for impairment on the reporting unit level on an annual basis and more often if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Future goodwill impairment charges may occur if estimates of fair values decrease, which would reduce future earnings. We also test property, plant, and equipment and other intangibles for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Future asset impairment charges may occur if asset utilization declines, if customer demand decreases, or for a number of other reasons, which would reduce future earnings. Any such impairment charges could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We completed our annual goodwill impairment test during the quarter ended March 31, 2010. The results of our fiscal year 2010 annual goodwill impairment test performed as of March 31, 2010 indicated that the estimated fair value of each of our reporting units was in excess of it carrying value and that no goodwill impairment existed. At March 31, 2010 the reporting unit with the closest ratio of estimated fair value to carrying value was our recently acquired Airframe Systems reporting unit, which has a significant concentration of business in the presently depressed business jet and regional jet market segments. Our March 31, 2010 analysis indicated a premium of over 30% compared to this reporting unit’s carrying value. We are not aware of any facts, circumstances, or triggering events that have arisen since March 31, 2010 indicating that goodwill has been impaired or that the premium of over 30% has changed significantly. As part of our ongoing monitoring efforts, we will continue to consider the global economic environment and its potential impact on our businesses, as well as other factors, in assessing goodwill recoverability.

Future subsidiary results or changes in domestic or international tax statutes may change the amount of valuation allowances provided for deferred income tax assets.

During fiscal year 2010, 45.2% of our external net sales were made outside the United States. We establish valuation allowances to reflect the estimated amount of deferred tax assets that might not be realized. The underlying analysis is performed for individual tax jurisdictions, generally at a subsidiary level. Future subsidiary results, actual or forecasted, as well as changes to the relevant tax statutes, could change the outcome of our analysis and change the amount of valuation allowances provided for deferred income tax assets, which could have a material adverse effect on our financial condition, results of operations, and cash flows.

Manufacturing activities may result in future environmental costs or liabilities.

We use hazardous materials and/or regulated materials in our manufacturing operations. We also own and operate and may acquire facilities that were formerly owned and operated by others that used such materials. The risk that a significant release of regulated materials has occurred in the past or will occur in the future cannot be completely eliminated or prevented. As a result, we are subject to a substantial number of costly regulations. In particular, we are required to comply with increasingly stringent requirements of federal, state, and local environmental, occupational health and safety laws and regulations in the United States, the European Union, and other territories, including those governing emissions to air, discharges to water, noise and odor emissions, the generation, handling, storage, transportation, treatment and disposal of waste materials, and the cleanup of contaminated properties and human health and safety. Compliance with these laws and regulations results in ongoing costs. We cannot be certain that we have been, or will at all times be, in complete compliance with all environmental requirements, or that we will not incur additional material costs or liabilities in connection with these requirements. As a result, we may incur material costs or liabilities or be required to undertake future environmental remediation activities that could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Our performance depends on continued access to a stable workforce and on favorable labor relations with our employees.

Certain of our operations in the United States and overseas involve different employee/employer relationships and the existence of works’ councils. In addition, a portion of our workforce is unionized and is expected to remain unionized for the foreseeable future. Competition for technical personnel in the industry in which we compete is intense. Our future success depends in part on our continued ability to hire, train, assimilate, and retain qualified personnel. There is no assurance that we will continue to be successful in recruiting qualified employees in the future. Any significant increases in labor costs, deterioration of employee relations, including any conflicts with works’ councils or unions, or slowdowns or work stoppages at any of our locations, whether due to employee turnover, changes in availability of qualified technical personnel, or otherwise, could have a material adverse effect on our business, our relationships with customers, and our financial condition, results of operations, and cash flows.

A natural disaster could have a material adverse effect on our business, financial condition, results of operations and cash flows.

A substantial portion of our Airframe Systems business is located in California. Historically, California has been susceptible to natural disasters, such as earthquakes, floods and wildfires. These natural disasters could harm the operations of our Airframe Systems business through interference with communications, including the interruption or loss of its computer systems and the destruction of our facilities or our operational, financial and management information systems, which could prevent or impede us from processing and controlling the flow of business. Accordingly, any such natural disaster could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Our intellectual property rights may not be sufficient to protect all our products or technologies.

Our success depends in part on our ability to obtain patents or rights to patents, protect trade secrets and know-how, prevent others from infringing on our patents, trademarks, and other intellectual property rights. Some of our intellectual property is not covered by any patent or patent application and includes trade secrets and other know-how that is not patentable or for which we have elected not to obtain a patent, including intellectual property relating to our manufacturing processes and engineering design. We will be able to protect our intellectual property from unauthorized use by third parties only to the extent that it is covered by valid and enforceable patents, trademarks, or licenses. Patent protection generally involves complex legal and factual questions and, therefore, enforceability of patent rights cannot be predicted with certainty; thus, any patents that we own or license from others may not provide us with adequate protection against competitors. Moreover, the laws of certain foreign countries do not recognize intellectual property rights or protect them to the same extent as do the laws of the United States. Additionally, our commercial success depends significantly on our ability to operate without infringing upon the patent and other proprietary rights of others. Our current or future technologies may, regardless of our intent, infringe upon the patents or violate other proprietary rights of third parties. In the event of such infringement or violation, we may face expensive litigation or indemnification obligations and may be prevented from selling existing products and pursuing product development or commercialization. If we are unable to sufficiently protect our patent and other proprietary rights or if we infringe on the patent or proprietary rights of others or, our business, financial condition, results of operations, and cash flows could be materially adversely affected.

Product liability claims, product recalls or other liabilities associated with the products and services we provide may force us to pay substantial damage awards and other expenses that could exceed our accruals and insurance coverage.

The manufacture and sale of our products and the services we provide expose us to risk of product liability and other tort claims. Both currently and in the past, we have had a number of product liability claims relating to our products, and we will likely be subject to additional product liability claims in the future for both past and current products, some of which may have a material adverse effect on our business, financial condition, results of operations and cash flows. We also provide certain services to our customers and are subject to claims with respect to the services provided. In providing such services, we may rely on subcontractors to perform all or a portion of the contracted services. It is possible that we could be liable to our customers for work performed by a subcontractor. While we believe that we have appropriate insurance coverage available to us related to any such claims, our insurance may not cover all liabilities or be available in the future at a cost acceptable to us. If a product liability or other claim or series of claims, including class action claims, is brought against us for liabilities that are not covered by insurance or for which indemnification or other recovery is not available, such claim could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Amounts accrued for contingencies may be inadequate to cover the amount of loss when the matters are ultimately resolved.

In addition to intellectual property and product liability matters, we are currently involved or may become involved in claims, pending or threatened litigation or other legal proceedings, investigations or regulatory proceedings regarding employment or other regulatory, legal, or contractual matters arising in the ordinary course of business. There is no certainty that the results of these matters will be favorable to the Company. We accrue for known individual matters that we believe are likely to result in a loss when ultimately resolved using estimates of the most likely amount of loss. There may be additional losses that have not been accrued, or liabilities may exceed our estimates, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Legal and regulatory proceedings, inquiries or investigations of our business practices by the U.S. Government are unpredictable and an adverse decision in any such matter, or an adverse decision resulting in a loss that exceeds our best estimates, could have a material adverse impact on our business, liquidity, financial condition, results of operations, and cash flows.

We are sometimes subject to government inquiries and investigations of our business due to our business relationships with the U.S. Government and the heavily regulated industries in which we do business. Any such inquiry or investigation could potentially result in an adverse ruling against the Company which could have a material adverse impact on our business, liquidity, financial condition, results of operations, and cash flows. In October 2009, MPC Products, one of our recently acquired subsidiaries, reached an agreement with the U.S. Department of Justice (“DOJ”) to resolve the criminal and civil claims related to the investigation of certain of its government contract pricing practices prior to June 2005, and related administrative actions by the U.S. Department of Defense (“DOD”). In connection with the settlement of the criminal claims, on November 4, 2009, MPC Products pled guilty to one count of wire fraud related to its pre-June 2005 government contract pricing practices. Pursuant to the plea agreement, MPC Products was placed on probation for two years, concluding the DOJ’s investigation of these matters. If MPC Products fails to comply with the terms of the civil settlement or plea agreement or the conditions of probation, it could be subject to additional fines, sanctions, suspensions or debarment. Woodward and MPC Products also entered into a three-year administrative agreement with the DOD on October 7, 2009. The administrative agreement required, among other things, that Woodward and its affiliates, including MPC Products, implement certain enhancements to existing ethics and compliance programs, which are substantially complete, and make periodic reports to the DOD. If Woodward and MPC Products fail to complete the implementation these enhancements to their ethics and compliance programs or fail to otherwise adhere to the terms of the administrative agreement, the DOD could suspend or debar Woodward or MPC Products from doing business with U.S. Government agencies and entities.

Changes in the legal and regulatory environments of the countries in which we operate may affect future sales and expenses.

We operate in a number of countries and are affected by a variety of laws and regulations governing various matters, including foreign investment, employment, import, export, business acquisitions, environmental and taxation matters, land use rights, property, and other matters. Our ability to operate in these countries may be materially adversely affected by unexpected changes in such laws and regulations which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We must also comply with restrictions on exports imposed under the U.S. Export Control Laws and Sanctions Programs. These laws and regulations change from time to time and may restrict foreign sales.

Operations and suppliers may be subject to physical and other risks that could disrupt production.

Our operations include principal facilities in the United States, China, Germany, and Poland. In addition, we operate sales and service facilities in Brazil, India, Japan, the Netherlands, Peru, the Republic of Korea, Russia and the United Kingdom. We also have suppliers for materials and parts inside and outside the United States. Our operations and sources of supply could be disrupted by a natural disaster, war, political unrest, terrorist activity, public health concerns, or other unforeseen events, which could cause significant delays in the shipment of products and the provision of services and could cause the loss of sales and customers. Accordingly, disruption of our operations or the operations of a significant supplier could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We have significant investments outside the United States and significant sales and purchases in foreign denominated currencies, creating exposure to foreign currency exchange rate fluctuations.

We have significant investments outside the United States. Further, we have sales and purchases of raw materials and finished goods in foreign denominated currencies. Accordingly, we have exposure to fluctuations in foreign currency exchange rates relative to the U.S. dollar. These exposures may change over time as our business and business practices evolve, and they could have a material adverse effect on our financial results and cash flows. An increase in the value of the U.S. dollar could increase the real cost to our customers of our products in those markets outside the United States where we sell in U.S. dollars, and a weakened U.S. dollar could increase the cost of local operating expenses and procurement of raw materials to the extent that we must purchase components in foreign currencies. Foreign currency exchange rate risk is reduced through several means, including the maintenance of local production facilities in the markets served, invoicing of customers in the same currency as the source of the products, prompt settlement of inter-company balances utilizing a global netting system, and limited use of foreign currency denominated debt. Despite these measures, continued instability in the worldwide financial markets could impact our ability to manage effectively our foreign currency exchange rate fluctuation risk, which could have a material adverse effect on our international operations or on our business, financial condition, results of operations, and cash flows.

Our net postretirement benefit obligation liabilities may grow, and the fair value of our pension plan assets may decrease, which could require us to make additional and/or unexpected cash contributions to our pension plans, increase the amount of postretirement benefit expenses, affect our liquidity or affect our ability to comply with the terms of our outstanding debt arrangements.

Accounting for retirement pension and postretirement benefit obligations and related expense requires the use of assumptions, including a weighted-average discount rate, an expected long-term rate of return on assets, and a net healthcare cost trend rate, among others. Benefit obligations and benefit costs are sensitive to changes in these assumptions. As a result, assumption changes could result in increases in our obligation amounts and expenses. If interest rates decline, the present value of our postretirement benefit plan liabilities may increase faster than the value of plan assets, resulting in significantly higher unfunded positions in some of our pension plans. As of September 30, 2010, we had $128,667 in invested pension plan assets. Investment losses may result in decreases to our pension plan assets.

Funding estimates are based on certain assumptions, including discount rates, interest rates, mortality, fair value of assets and expected return on plan assets and are subject to changes in government regulations in the countries in which our employees work. Volatility in the financial markets may impact future discount and interest rate assumptions. Also, new accounting standards on fair value measurement may impact the calculation of future funding levels. We periodically review our assumptions, and any such revision can significantly change the present value of future benefits, and in turn, the funded status of our pension plans and the resulting periodic pension expense. Changes in our pension benefit obligations and the related net periodic costs or credits may occur as a result of variances of actual results from our assumptions, and we may be required to make additional cash contributions in the future beyond those which have been estimated.

In addition, our existing term loan facility, revolving credit facility, and note purchase agreements contain continuing covenants and events of default regarding our pension plans, including provisions regarding the unfunded liabilities related to those pension plans. See the discussion above concerning “Our debt obligations and the restrictive covenants in the agreements governing our debt could limit our ability to operate our business or pursue our business strategies, and could adversely affect our business, financial condition, results of operations, and cash flows.”

To the extent that the present values of benefits incurred for pension obligations are greater than values of the assets supporting those obligations or if we are required to make additional or unexpected contributions to our pension plans for any reason, our ability to comply with the terms of our outstanding debt arrangements and our business, financial condition, results of operations and cash flows may be adversely affected.

Industry Risks

Competitors may develop breakthrough technologies that are adopted by our customers.

The markets in which we operate experience rapidly changing technologies and frequent introductions of new products and services. The technological expertise we have developed and maintained could become less valuable if a competitor were to develop a breakthrough technology that would allow it to match or exceed the performance of existing technologies at a lower cost. If we are unable to develop competitive technologies, future sales or earnings could be lower than expected, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Industry consolidation trends could reduce our sales opportunities, decrease sales prices, and drive down demand for our product.

There has been consolidation and there may be further consolidation in the aerospace, power, and process industries. The consolidation in these industries has resulted in customers with vertically integrated operations, including increased in-sourcing capabilities, which may result in economies of scale for those companies. If our customers continue to seek to control more aspects of vertically integrated projects, cost pressures resulting in further integration or industry consolidation could reduce our sales opportunities, decrease sales prices, and drive down demand for our products, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We operate in a highly competitive industry.

We face intense competition from a number of established competitors in the United States and abroad, some of which are larger in size or are divisions of large diversified companies with substantially greater financial resources. Companies compete on the basis of providing products that meet the needs of customers, as well as on the basis of price, quality, and customer service. Changes in competitive conditions, including the availability of new products and services, the introduction of new channels of distribution, and changes in OEM and aftermarket pricing, could adversely affect future sales, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Unforeseen events may occur that significantly reduce commercial aviation.

A significant portion of our business is related to commercial aviation. The prolonged global economic downturn led to a general reduction in air travel, and passenger miles and cargo service declined. In addition, some airlines withdrew aircraft from service, which further exposed our Turbine Systems and Airframe Systems segments to sales volume declines. Prevailing economic conditions have also negatively affected sales of systems and components for new business jet aircraft. Any further deterioration of economic conditions globally could lead to additional reductions in air traffic. Market demand for our components and systems, including market demand in our aftermarket channels, could be materially adversely affected by such reductions in commercial airline travel and commercial airlines’ financial difficulties, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Increasing emission standards that drive certain product sales may be eased or delayed.

We sell components and systems that have been designed to meet strict emission standards, including standards that have not yet been implemented but are intended to be implemented soon. If these emission standards are eased, our future sales could be lower as potential customers select alternative products or delay adoption of our products, which would have a material adverse affect on our business, financial condition, results of operations, and cash flows.

Natural gas prices may increase significantly and disproportionately to other sources of fuels used for power generation.

Commercial producers of electricity use many of our components and systems, most predominately in their power plants that use natural gas as their fuel source. Commercial producers of electricity are often in a position to manage the use of different power plant facilities and make decisions based on operating costs. Compared to other sources of fuels used for power generation, natural gas prices have increased slower than fuel oil, but about the same as coal. This increase in natural gas prices and any future increases could decrease the use of our components and systems, which could have a material adverse affect on our business, financial condition, results of operations, and cash flows.

Investment Risks

The historic market price of our common stock may not be indicative of future market prices.

The market price of our common stock changes over time. Stock markets in general have experienced extreme price and volume volatility particularly over the past year. The trading price of our common stock ranged from a high of $35.21 per share to a low of $22.49 per share during the twelve months ended September 30, 2010. The following factors, among others, could cause the price of our common stock in the public market to fluctuate significantly:

•

general economic conditions, particularly in the aerospace, power generation and process and transportation industries;

•

variations in our quarterly results of operation;

•

a change in sentiment in the market regarding our operations or business prospects;

•

the addition or departure of key personnel; and

•

announcements by us or our competitors of new business, acquisitions or joint ventures.

Fluctuations in our stock price often occur without regard to specific operating performance. The price of our common stock could fluctuate based upon the above factors or other factors, including those that have little to do with our company, and these fluctuations could be material.

The typical trading volume of our common stock may affect an investor’s ability to sell significant stock holdings in the future without negatively affecting stock price.

As of September 30, 2010, we had 72,960 shares of common stock issued, of which 4,223 shares were held as treasury shares. In addition, 4,011 shares were reserved for issuance upon exercise of outstanding stock option awards. While the level of trading activity will vary each day, the typical trading level represents only a small percentage of total shares of stock outstanding. As a result, a stockholder who sells a significant number of shares of stock in a short period of time could negatively affect our share price.

Certain anti-takeover provisions of our charter documents and under Delaware law could discourage or prevent others from acquiring our company.

While the Company believes that these provisions are in the best interests of its stockholders, our certificate of incorporation and bylaws do contain provisions that:

	•		provide for a classified board;
	•		provide that directors may be removed only for cause by holders of at least two-thirds of the outstanding shares of common stock;
	•		authorize our board of directors to fill vacant directorships or to increase the size of our board of directors;
	•		permit us to issue, without stockholder approval, up to 10,000 shares of preferred stock, in one or more series and, with respect to each series, to fix the designation, powers, preferences and rights of the shares of the series;
	•		require special meetings of stockholders to be called by holders of at least two-thirds of the outstanding shares of common stock;
	•		prohibit stockholders from acting by written consent;
	•		require advance notice for stockholder proposals and nominations for election to the board of directors to be acted upon at meetings of stockholders; and
	•		require the affirmative vote of two-thirds of the outstanding shares of our common stock for amendments to our certificate of incorporation and certain business combinations, including mergers, consolidations, sales of all or substantially all of our assets or dissolution.

In addition, Section 203 of the Delaware General Corporation Law limits business combinations with owners of more than 15% of our stock that have not been approved by the board of directors. These provisions and other similar provisions make it more difficult for a third party to acquire us without negotiation. Our board of directors could choose not to negotiate a potential acquisition that it did not believe to be in our strategic interest. Accordingly, the potential acquirer could be discouraged from offering to acquire us or prevented from successfully completing a hostile acquisition by the anti-takeover measures.

Item 1B.		Unresolved Staff Comments

None.

Item 2.		Properties

Our principal plants are as follows:

United States

Fort Collins, Colorado — Corporate headquarters and Turbine Systems, Engine Systems and Electrical Power Systems manufacturing and Turbine Systems and Electrical Power Systems engineering

Greenville, South Carolina (leased) — Turbine Systems manufacturing and engineering

Loveland, Colorado — Turbine Systems, Engine Systems and Electrical Power Systems manufacturing, and Engine Systems engineering

Niles, Illinois (leased) — Airframe Systems manufacturing and engineering

Pacoima, California (leased) — Airframe Systems manufacturing and engineering

Rockford, Illinois — Turbine Systems manufacturing and engineering

Santa Clarita, California — Airframe Systems manufacturing and engineering

Skokie, Illinois (leased) — Airframe Systems manufacturing and Airframe Systems and Engine Systems engineering

Zeeland, Michigan — Turbine Systems manufacturing and engineering

Other Countries

Aken, Germany (leased) — Engine Systems manufacturing and engineering

Kempen, Germany — Electrical Power Systems manufacturing and engineering

Krakow, Poland — Electrical Power Systems manufacturing and engineering

Stuttgart, Germany (leased) — Electrical Power Systems manufacturing and engineering

Tianjin, Peoples’ Republic of China (leased) — Engine Systems and Electrical Power Systems assembly

In addition to the principal plants listed above, we own or lease other facilities used primarily for sales and service activities in Brazil, China, India, Japan, the Netherlands, Peru, the Republic of Korea, Russia, and the United Kingdom.

Our principal plants are suitable and adequate for the manufacturing and other activities performed at those plants, and we believe our utilization levels are generally high. However, with continuing advancements in manufacturing technology and operational improvements, we believe we can continue to increase production without significant capital expenditures for expansion, retooling, or acquisition of additional plants.

Construction has begun on a new 48,000 square foot system test facility at our Rockford, Illinois campus. The facility, which will house numerous environmental system test cells and a vibration lab, will support Turbine Systems’ development opportunities.

Item 3.		Legal Proceedings

Woodward is currently involved in claims, pending or threatened litigation or other legal proceedings, investigations or regulatory proceedings arising in the normal course of business, including, among others, those relating to product liability claims, employment matters, workers’ compensation claims, regulatory, legal or contractual disputes, product warranty claims and alleged violations of various environmental laws. We have accrued for individual matters that we believe are likely to result in a loss when ultimately resolved using estimates of the most likely amount of loss.

While the outcome of pending claims, legal proceedings, investigations and regulatory proceedings cannot be predicted with certainty, management believes that any liabilities that may result from these claims, proceedings and investigations will not have a material adverse effect on our liquidity, financial condition, or results of operations.

Item 4.

(Removed and Reserved)

This section intentionally left blank.

PART II

Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on The NASDAQ Global Select Market and at November 8, 2010, there were approximately 1,300 holders of record. Cash dividends were declared quarterly during 2010 and 2009. The amount of cash dividends per share and the high and low sales price per share for our common stock for each fiscal quarter in 2010 and 2009 are included in Note 21, Supplemental quarterly financial data (Unaudited), to the Consolidated Financial Statements in “Item 8 — Financial Statements and Supplementary Data.”

The information required by this item relating to securities authorized for issuance under equity plans is included under the caption “Executive Compensation — Equity Compensation Plan Information” in our Proxy Statement for the 2010 Annual Meeting of Stockholders to be held January 26, 2011 and is incorporated herein by reference.

Performance Graph

The following graph compares the cumulative 5-year total return to stockholders on our common stock relative to the cumulative total returns of the S&P Midcap 400 index and the S&P Industrial Machinery index. The graph shows total stockholder return assuming an investment of $100 (with reinvestment of all dividends) was made on September 30, 2005 in our common stock and in each of the two indexes and tracks relative performance through September 30, 2010.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Woodward Governor Company, the S&P Midcap 400 Index
and the S&P Industrial Machinery Index

		9/05				9/06				9/07				9/08				9/09				9/10
Woodward Governor Company		$	100.00			$	119.62			$	224.60			$	255.32			$	177.63			$	239.48
S&P Midcap 400			100.00				106.56				126.55				105.44				102.16				120.33
S&P Industrial Machinery			100.00				111.36				148.00				109.23				107.59				137.70

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

Recent Sales of Unregistered Securities

Sales of common stock issued from treasury during the fourth quarter of fiscal 2010 consisted of the following:

		Total Shares				Consideration
		Sold (2)				Received
July 1, 2010 through July 31, 2010			—			$	—
August 1, 2010 through August 31, 2010 (1)			296				9
September 1, 2010 through September 30, 2010			—				—

Issuer Purchases of Equity Securities

Total

Number of

Maximum Number

Shares

(or Approximate

Purchased

Dollar Value) of

Total

as Part of

Shares that may

Number of

Publicly

yet be Purchased

Shares

Average

Announced

under the Plans or

Purchased

Price Paid

Plans or

Programs at Period

(4)

Per Share

Programs (1)

End (1)

July 1, 2010 through July 31, 2010

—

$

—

—

$

200,000

August 1, 2010 through August 31, 2010 (2)

55,999

26.88

55,999

198,495

September 1, 2010 through September 30, 2010 (2)(3)

52,753

28.75

52,100

196,999

Item 6.		Selected Financial Data

The following selected financial data should be read in conjunction with the Consolidated Financial Statements and related notes which appear in “Item 8 — Financial Statements and Supplementary Data” of this Annual Report.

		Year Ended September 30,
		2010				2009				2008				2007				2006
		(In thousands except per share amounts)
Net sales (1)		$	1,457,030				1,430,125				1,258,204				1,042,337				854,515
Net Earnings:
Net earnings attributable to Woodward (1)(2)(3)(4)(5)(6)(8)		$	110,844				94,352				121,880				98,157				69,900
Net earnings attributable to noncontrolling interests (8)		$	318				64				675				692				396
Earnings per share attributable to Woodward:
Basic earnings per share attributable to Woodward (7)(8)		$	1.62				1.39				1.80				1.43				1.02
Diluted earnings per share attributable to Woodward (7)(8)		$	1.59				1.37				1.75				1.39				0.99
Cash dividends per share		$	0.240				0.240				0.235				0.215				0.200
Income taxes (3)(4)(5)		$	43,713				28,060				60,030				33,831				14,597
Interest expense		$	29,385				33,629				3,834				4,527				5,089
Interest income		$	509				1,131				2,120				3,604				2,750
Depreciation expense		$	40,502				37,828				28,620				25,428				22,064
Amortization expense		$	35,114				26,120				6,830				7,496				6,953
Capital expenditures		$	28,104				28,947				37,516				31,984				31,713
Weighted-average shares outstanding:
Basic shares outstanding			68,472				67,891				67,564				68,489				68,702
Diluted shares outstanding			69,864				69,103				69,560				70,487				70,382

		At September 30,
		2010				2009				2008				2007				2006
		(Dollars in thousands)
Working capital		$	456,577				434,166				369,211				275,611				257,836
Total assets		$	1,663,233				1,696,422				927,017				829,767				735,497
Long-term debt, less current portion		$	425,250				526,771				33,337				45,150				58,379
Total debt		$	465,842				572,340				48,928				66,586				73,515
Total liabilities (8)		$	860,039				984,907				294,601				828,554				254,401
Stockholders’ equity (8)		$	803,194				711,515				632,416				547,213				481,096
Full-time worker members			5,433				5,721				4,476				4,248				3,731

Notes:

Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

We are a global leader in energy control within the aerospace & defense and energy markets that we serve. We design, produce and service components and integrated systems that manage and control the energy of fluid movement, motion, combustion and electricity. Our prices, technology, quality, and customer service allow us to compete effectively within dozens of unique aerospace & defense and energy market niches and against various other manufacturers, including the in-house operations of certain OEMs. Examples of our market niches include motors for moving aircraft flight surfaces, fuel pumps for large diesel engines, and fuel nozzles for industrial gas turbines. We believe we have a significant position in the markets for fuel systems for aircraft and inverters for wind turbines.

We serve two significant markets — the aerospace & defense market and the energy market — served by our four operating business segments: Turbine Systems, Airframe Systems, Electrical Power Systems, and Engine Systems. We use segment information internally to manage our business, including the assessment of business segment performance and making decisions on the allocation of resources between segments.

Turbine Systems — Our Turbine Systems segment develops and manufactures systems and components that provide energy control and optimization solutions for commercial and military aircraft propulsion applications, including fuel and combustion systems for turbine engines in our aerospace & defense markets, and for the industrial gas and steam turbines in our energy markets.

Airframe Systems — Our Airframe Systems segment develops and manufactures high-performance cockpit, electromechanical and hydraulic motion control systems, and mission-critical actuation systems and controls, including actuators, hydraulic motors, gears and sensors. These systems and controls are used in commercial and military fixed wing and rotary aircraft, combat vehicles and weapons systems, including guided weapons, and electro-optical targeting and motion suppression systems programs for combat vehicles.

Electrical Power Systems — Our Electrical Power Systems segment develops and manufactures systems and components that provide power sensing and energy control management. These systems and components improve the security, quality, reliability and availability of power generation and electrical power networks for industrial markets, which include the power generation, power distribution, and power conversion industries.

Engine Systems — Our Engine Systems segment develops and manufactures systems and components that provide energy control and optimization solutions for the industrial reciprocating engine markets, which include power generation, transportation and process industries.

We use segment information internally to assess the performance of each segment and to make decisions on the allocation of resources.

Management’s discussion and analysis should be read together with the Consolidated Financial Statements and Notes included in this report. Dollar and number of share amounts contained in this discussion and elsewhere in this Annual Report on Form 10-K are in thousands, except per share amounts.

On October 1, 2009, Woodward adopted authoritative guidance which requires, among other things, a noncontrolling interest in a subsidiary to be reported in the Consolidated Balance Sheets within stockholders’ equity, but separate from the parent’s stockholders’ equity. As required by the authoritative guidance, the presentation and disclosure requirements must be applied retrospectively for all periods presented. Accordingly, certain financial data included in this Management’s Discussion and Analysis for the fiscal years ended September 30, 2009 and September 30, 2008 has been recast from amounts previously reported. Further discussion of the authoritative guidance adopted by Woodward on October 1, 2009 can be found in Note 2, New accounting standards, in the notes to the Consolidated Financial Statements included in “Item 8 — Financial Statements and Supplemental Data”, of this Form 10-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 1, Operations and summary of significant accounting policies, to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. The accounting positions described below are significantly affected by critical accounting estimates. Such accounting positions require significant judgments, assumptions, and estimates to be used in the preparation of the Consolidated Financial Statements, and actual results could differ materially from the amounts reported based on variability in factors affecting these estimates.

Our management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors, and the Audit Committee has reviewed our disclosures in this Management’s Discussion and Analysis.

Revenue recognition

Woodward recognizes revenue upon shipment or delivery of tangible products for sale. Delivery is upon completion of manufacturing, customer acceptance, and the transfer of the risks and rewards of ownership. In countries whose laws provide for retention of some form of title by sellers, enabling recovery of goods in the event of customer default on payment, product delivery is considered to have occurred when the customer has assumed the risks and rewards of ownership of the products. Occasionally, Woodward transfers title of product to customers, but retains substantive performance obligations such as completion of product testing, customer acceptance or in some instances regulatory acceptance. Revenue is deferred until the performance obligations are satisfied. Judgment is sometimes required to identify the point in time at which the customer assumes the risks and rewards of ownership.

Woodward provides certain development services to customers under fully funded and partially funded long and short-term development contracts. Revenue for such contracts is recognized using the percentage-of-completion, milestone method or completed contract method. Funded development contracts may be fixed price or cost-reimbursable contracts. Anticipated losses on fully funded contracts, if any, are recognized in the period in which the losses become probable and estimable. Revenue recognition under the percentage-of-completion method requires accurate estimation of total costs to complete the development project, which requires judgment and is subject to revision. Revenue recognition under the milestone method requires identification of meaningful milestones with economic substance consistent with the revenue recognition criteria.

Purchase accounting

Woodward consummated three acquisitions during fiscal year 2009 for a total cost of $768,423. In addition, we sold the Fuel and Pneumatics (“F&P”) product line acquired as part of the HRT acquisition for net proceeds of approximately $48,000. Significant assumptions and estimates, including projections of future cash flows, affect the carrying value of acquired assets and assumed liabilities, including inventories and other tangible and intangible assets. Changes in the carrying amounts of acquired assets and assumed liabilities change the carrying value of goodwill, which is not amortized for accounting purposes. Changes in the carrying amount of acquired assets and assumed liabilities also impact future costs and may subject the Company to risk of future impairment of assets acquired, including goodwill.

Inventory

Inventories are valued at the lower of cost or market, with cost being determined using methods that approximate a first-in, first-out basis. Cost of HRT and MPC inventories are determined on a standard cost and average cost basis, respectively, which approximates the first-in, first-out basis.

Customer-specific information and contractual terms are considered when evaluating lower of cost or market considerations. The carrying value of inventory as of September 30, 2010 was $295,034. If economic conditions, customer product mix decisions or other factors significantly reduce future customer demand for our products from forecast levels, then future adjustments to the carrying value of inventory may become necessary. We attempt to maintain inventory quantities at levels considered necessary to fill expected orders in a reasonable time frame, which we believe mitigates our exposure to future inventory carrying cost adjustments.

Postretirement benefits

The Company provides various benefits to certain employees through defined benefit plans and other postretirement benefit plans. For financial reporting purposes, net periodic benefits expense and related obligations are calculated using a number of significant actuarial assumptions, including anticipated discount rates, rates of compensation increases, long-term return on defined benefit plan investments, and anticipated healthcare cost increases. Based on these actuarial assumptions, at September 30, 2010 our recorded liabilities include $25,776 for underfunded defined benefit pension plans and $37,222 for unfunded other postretirement benefit plans. Changes in net periodic expense or the amounts of recorded liabilities may occur in the future due to changes in these assumptions.

Estimates of the value of postretirement benefit obligations, and related net periodic benefits expense, are dependent on actuarial assumptions including future interest rates, compensation rates, healthcare cost trends, and returns on defined benefit plan investments. Variances from our fiscal year end estimates for these variables could materially affect our recognized postretirement benefit obligation liabilities. On a near-term basis, such changes are unlikely to have a material impact on reported earnings, since such adjustments are recorded to other comprehensive income and recognized into expense over a number of years. Significant changes in estimates could, however, materially affect the carrying amounts of benefit obligation liabilities, including accumulated benefit obligations, which could affect compliance with the provisions of our debt arrangements and future borrowing capacity.

Reviews for impairment of goodwill

At September 30, 2010, we had $438,594 of goodwill, representing 26.4% of our total assets. Goodwill is tested for impairment on the reporting unit level on an annual basis and more often if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The impairment tests consist of comparing the fair value of reporting units, determined using discounted cash flows, with its carrying amount including goodwill. If the carrying amount of the reporting unit exceeds its fair value, we compare the implied value of goodwill with its carrying amount. If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss would be recognized to reduce the carrying amount to its implied fair value. There was no impairment charge recorded in fiscal years 2010, 2009 or 2008.

We completed our annual goodwill impairment test during the quarter ended March 31, 2010. The fair value of the reporting units was based on reporting unit level cash flow forecasts that were updated to reflect current global economic conditions, including anticipated weakening of global demand for certain products. Forecasted cash flows were discounted using an 11.3% weighted average cost of capital assumption. The terminal value of the forecasted cash flows assumed an annual compound growth rate of 4.5% after five years and was calculated using the Gordon Growth Model.

The results of our fiscal year 2010 annual goodwill impairment test performed as of March 31, 2010 indicated that no goodwill impairment existed. The estimated fair value of each of our reporting units was in excess of its carrying value.

At March 31, 2010, the reporting unit with the closest ratio of estimated fair value to carrying value was our recently acquired Airframe Systems reporting unit, which has a significant concentration of business in the presently depressed business jet and regional jet market segments. Our March 31, 2010 analysis indicated a premium of over 30% compared to this reporting unit’s carrying value. We are not aware of any facts, circumstances or triggering events that have arisen since March 31, 2010 indicating that goodwill has been impaired or that the premium of over 30% has changed significantly since our March 31, 2010 analysis. The carrying value of our Airframe Systems segment goodwill was $294,558 as of September 30, 2010.

As part of the Company’s ongoing monitoring efforts, Woodward will continue to consider the global economic environment and its potential impact on Woodward’s business in assessing goodwill recoverability. There can be no assurance that Woodward’s estimates and assumptions regarding forecasted cash flows of certain reporting units, or the duration of the current economic downturn, or the period or strength of the recovery, made for purposes of the annual goodwill impairment test performed during the second fiscal quarter of 2010, will prove to be accurate predictions of the future. If Woodward’s assumptions are not realized, it is possible that an impairment charge may need to be recorded in future periods.

Income taxes

We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes.

During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. The reserves are established when we believe that certain positions are likely to be challenged and may not be fully sustained on review by tax authorities. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or refinement of an estimate. Although we believe our reserves are reasonable, no assurance can be given that the final outcome of these matters will not be consistent with what is reflected in our historical income tax provisions and accruals. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate. As of September 30, 2010, unrecognized gross tax benefits for which recognition has been deferred was $10,586.

Significant judgment is also required in determining any valuation allowance recorded against deferred tax assets. In assessing the need for a valuation allowance, we consider all available evidence including past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. In the event that we change our determination as to the amount of deferred tax assets that can be realized, we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made. As of September 30, 2010, our valuation allowance was $96.

Our effective tax rates differ from the U.S. statutory rate primarily due to the tax impact of foreign operations, adjustments of valuation allowances, research tax credits, state taxes, and tax audit settlements.

Our provision for income taxes is subject to volatility and could be affected by earnings that are different than anticipated in countries which have lower or higher tax rates by; changes in the valuation of our deferred tax assets and liabilities; transfer pricing adjustments; tax effects of share-based compensation; by costs or benefits related to intercompany restructurings; and/or changes in tax laws, regulations, and accounting principles, including accounting for uncertain tax positions, or interpretations thereof. In addition, we are subject to examination of our income tax returns by the U.S. Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these examinations will not have a significant effect on our operating results, financial condition and cash flows.

BUSINESS ENVIRONMENT AND TRENDS

We serve the aerospace & defense and energy markets through our four business segments.

The global economic downturn impacted all of our markets in 2009, but these markets began strengthening in early fiscal year 2010.

Aerospace & Defense Markets

Our aerospace & defense products are primarily used to provide energy and motion control in both commercial and military fixed wing and rotary aircraft and in various other defense platforms, including guided weapon systems and combat vehicles.

Aircraft — In the commercial aerospace markets, which are mainly served by our Turbine Systems and Airframe Systems business segments, global air traffic is estimated to have returned in 2010 to pre-recession levels and both wide-body and single aisle commercial jet production has stabilized. While relatively long development cycles mean the impacts are several years delayed, we are exploring opportunities on new engine and aircraft programs which are under consideration or have been recently announced.

Defense — In the defense markets, which are mainly served by our Turbine Systems and Airframe Systems business segments, overall spending increased in 2010. Key military programs in fixed wing, rotorcraft and weapons systems have provided relative stability in the defense markets during this uncertain economic environment. Key programs that have been stable or growing include the F/A-18 E/F, the F-35 (Joint Strike Fighter), and the Blackhawk and Apache helicopter programs. Military aftermarket, tied to the support of ongoing U.S. war efforts, has been consistent throughout this cycle.

We continue to explore opportunities on next generation smart weapon systems, including enhanced guided bomb and guided rocket programs.

Energy Markets

Our energy products are used in global power generation and distribution, and to control energy in industrial, mobile and marine equipment.

Industrial Turbines — The industrial turbine market, which is mainly served by our Turbine Systems business segment, was impacted by the economic downturn in relation to credit market availability, large capital project constraints and decreased demand for global energy. OEM build rates have begun to recover in fiscal year 2010, particularly in developing economies, as the global economic recovery is starting to drive increased power demand. We anticipate that long-term power needs, as well as backup power for renewable resource generators such as wind turbines, should cause industrial turbines to continue to return to more favorable growth rates. The aftermarket segment of the industry has been favorably impacted by service needs related to turbine installations early in the decade.

As power generation demand growth returns, turbines are expected to provide a strong solution due to their inherent low emissions and fast permitting and construction times, along with the abundant availability of lower cost natural gas. Further, gas turbines are expected to serve a critical market need in supporting renewable assets in providing fast start and load acceptance during times when renewable sources fluctuate. OEM turbine manufacturers appear to be investing in new technologies focused on emissions, part load operation, start times, and fuel flexibility.

In the oil and gas/process industry, demand for industrial gas and steam turbines is expected to grow fueled by the demand for oil and natural gas products. Exploration, production, and distribution of oil and gas products utilize both gas and steam turbines in process and power generation applications. Increased construction of floating production storage & offloading and gas to liquids facilities will drive demand in aeroderivative and steam turbine applications.

Reciprocating Engines — The reciprocating engines markets are mainly served by our Engine Systems business segment. While the recent economic climate adversely affected the end markets for industrial engines in fiscal year 2009, industrial production and other economic indicators have shown signs of global stabilization and growth in 2010.

Demand for small gas and diesel engines, including engines used in alternative fuel vehicles and industrial equipment, is recovering from depressed levels as equipment manufacturers increase their production schedules. Demand increased for these small engines through fiscal year 2010. Orders for construction, agricultural, and material handling equipment, particularly in Asia, are driving demand for small diesel engines, and interest in using non-petroleum (alternative) fuels particularly in Korea, China, and India is driving demand for small gas engines.

Demand for large gas and diesel engines began to stabilize during fiscal year 2010, but more slowly than for small gas and diesel engines. We believe that increasing commodity prices are driving renewed investments in engine-powered mining and oil production equipment, although investments have been somewhat dampened by depressed prices for natural gas due to high supply levels. However, demand for higher margin large engine marine applications has remained weak in fiscal year 2010.

Longer term, new mandated emissions requirements across many regions and engine applications is driving demand for higher-technology control systems, as is customer demand for improved engine efficiencies. Energy policies in some countries encourage the use of natural gas and other alternative fuels over carbon-rich petroleum fuels, thereby increasing demand for a variety of alternative fuel clean engine control technologies.

Electrical Power Generation and Distribution — The electrical power generation and distribution markets, which are mainly served by our Electrical Power Systems, Engine Systems, and Turbine Systems business segments, were impacted negatively in fiscal years 2009 and 2010 by tight credit, lower levels of global energy demand and uncertainty over government stimulus packages.

Our Electrical Power Systems segment develops and manufactures systems and components that provide power sensing and energy control management. These systems and components improve the security, quality, reliability, and availability of power generation and electrical power networks for industrial markets, which include the power generation, power distribution, and power conversion industries.

Our Turbine Systems segment develops and manufactures systems and components that provide energy control and optimization solutions for the industrial gas and steam turbines in our energy markets.

Our Engine Systems segment develops and manufactures systems and components that provide energy control and optimization solutions for the industrial reciprocating engine markets, which include the power generation industry.

The global economic recovery, especially in developing economies, is beginning to drive increased global power demand. Also, increased global natural gas supply, combined with lower natural gas prices, is expected to support increased demand for industrial gas turbines and reciprocating engines used in power generation applications.

Wind Energy — The renewable wind industry, which is mainly served by our Electrical Power Systems business segment, was affected by the global economic recession more severely and later than was experienced by most industries. Current and near-term wind turbine installations have decreased as a result of tight credit markets and governmental delay in the provision of stimulus funding and clarification of tax credit availability. We believe the continued support of wind energy technology, however, through the United States’ stimulus package, the European Union’s Renewable Energy Directive, and China’s initiative to achieve significant renewable energy targets by 2012, favors long-term growth for this market.

The market for renewable wind energy technology is immature and changing rapidly. Also, delays in wind turbine installation caused by the recent economic downturn have led to over-capacity with manufacturers. Management believes it is likely that market consolidation may lead to price becoming more important within the wind turbine converter market.

RESULTS OF OPERATIONS

2010 Highlights

Net sales for fiscal year 2010 were $1,457,030, an increase of 1.9% from $1,430,125 for fiscal year 2009. Fiscal year 2010 sales included $117,329 of HRT external sales for the six months from October 2009 to March 2010 that were not present in fiscal year 2009.

Net earnings attributable to Woodward for fiscal year 2010 were $110,844, or $1.59 per diluted share, an increase of 17.5% from $94,352, or $1.37 per diluted share, in fiscal year 2009. Net earnings for fiscal year 2010 and fiscal year 2009 included the special items described in the tables below.

Non-U.S. GAAP Financial Measures

EBIT, EBITDA and free cash flow

Earnings before interest and taxes (“EBIT”), earnings before interest, taxes, depreciation and amortization (“EBITDA”) and free cash flow are financial measures not prepared and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Management uses EBIT to evaluate Woodward’s performance without financing and tax related considerations, as these elements may not fluctuate with operating results. Management uses EBITDA in evaluating Woodward’s operating performance, making business decisions, including developing budgets, managing expenditures, and forecasting future periods, and evaluating capital structure impacts of various strategic scenarios. Management uses free cash flow, which is derived from cash flows provided by operating activities, in reviewing the financial performance of Woodward’s various business segments and evaluating cash levels. Securities analysts, investors, and others frequently use EBIT, EBITDA and free cash flow in their evaluation of companies, particularly those with significant property, plant, and equipment, and intangible assets that are subject to amortization. The use of these non-U.S. GAAP financial measures is not intended to be considered in isolation of, or as a substitute for, the financial information prepared and presented in accordance with U.S. GAAP. As EBIT and EBITDA exclude certain financial information compared with net earnings, the most comparable U.S. GAAP financial measure, users of this financial information should consider the information that is excluded. Free cash flow does not necessarily represent funds available for discretionary use and is not necessarily a measure of our ability to fund our cash needs. Our calculations of EBIT, EBITDA and free cash flow may differ from similarly titled measures used by other companies, limiting their usefulness as comparative measures.

EBIT and EBITDA for the fiscal years ended September 30, 2010, September 30, 2009 and September 30, 2008 were as follows:

		Year Ended September 30,
		2010				2009				2008
Net earnings		$	111,162			$	94,416			$	122,555
Income taxes			43,713				28,060				60,030
Interest expense			29,385				33,629				3,834
Interest income			(509	)			(1,131	)			(2,120	)
EBIT			183,751				154,974				184,299
Amortization of intangible assets			35,114				26,120				6,830
Depreciation expense			40,502				37,828				28,620
EBITDA		$	259,367			$	218,922			$	219,749

Free cash flow was as follows:

		Year Ended September 30,
		2010				2009				2008
Net cash provided by operating activities		$	184,572			$	219,227			$	126,023
Capital expenditures			(28,104	)			(28,947	)			(37,516	)
Free cash flow		$	156,468			$	190,280			$	88,507

2010 RESULTS OF OPERATIONS

Special Items and Adjusted EBIT

2010 net earnings included the following benefits related to special items:

		Year Ended
		September 30, 2010
						Per Share
Favorable resolutions of prior year tax matters and completion of certain internal revaluation assessments		$	6,416			$	0.09

2009 net earnings included the following charges and benefits related to special items:

		Year Ended
		September 30, 2009
						Per Share
Purchase accounting — inventory basis step-up charge		$	(12,500	)
Less: income tax benefit			4,500
Net after income tax benefit		$	(8,000	)		$	(0.12	)
Workforce management and other charges		$	(16,605	)
Less: income tax benefit			5,762
Net after income tax benefit		$	(10,843	)		$	(0.16	)
Favorable resolution of prior year tax issues		$	4,992			$	0.07
Total special (charges) benefits		$	(13,851	)		$	(0.21	)

EBIT for fiscal year 2010 was $183,751, an increase of 18.6% from $154,974 for fiscal year 2009. EBIT for fiscal year 2009 included the special items described above. EBIT adjusted for those special items (“Adjusted EBIT”) is as follows:

		Year Ended September 30,
		2010				2009				2008
Net earnings		$	111,162			$	94,416			$	122,555
Income taxes			43,713				28,060				60,030
Interest expense			29,385				33,629				3,834
Interest income			(509	)			(1,131	)			(2,120	)
EBIT			183,751				154,974				184,299
Purchase accounting — inventory basis step-up charge			—				12,500				—
Workforce management and other charges			—				16,605				—
Adjusted EBIT		$	183,751			$	184,079			$	184,299

EBIT and Adjusted EBIT are financial measures not prepared and presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Management uses EBIT to evaluate Woodward’s performance without financing and tax related considerations, as these elements may not fluctuate with operating results. Securities analysts, investors, and others frequently use EBIT in their evaluation of companies, particularly those with significant property, plant, and equipment, and intangible assets that are subject to amortization. Management uses Adjusted EBIT to evaluate Woodward’s performance after eliminating certain special items that are of sufficient magnitude to make comparisons between years difficult. The use of these non-U.S. GAAP financial measures is not intended to be considered in isolation of, or as a substitute for, the financial information prepared and presented in accordance with U.S. GAAP. As EBIT and Adjusted EBIT exclude certain financial information compared with net earnings, the most comparable U.S. GAAP financial measure, users of this financial information should consider the information that is excluded. Our calculations of EBIT and Adjusted EBIT may differ from similarly titled measures used by other companies, limiting their usefulness as comparative measures.

Sales

The following table presents the breakdown of consolidated net external sales by segment:

		Year Ended September 30,
		2010								2009								2008
Segment net sales:
Turbine Systems		$	610,833				42	%		$	632,222				44	%		$	634,658				50	%
Airframe Systems			379,284				26				321,956				23				—				—
Electrical Power Systems			230,331				16				243,146				17				289,294				23
Engine Systems			326,668				22				340,995				24				469,432				37
Total segment net sales			1,547,116				106				1,538,319				108				1,393,384				111
Less intersegment net sales:
Turbine Systems			(9,457	)			(1	)			(14,272	)			(1	)			(18,470	)			(1	)
Airframe Systems			(3,102	)			(0	)			(2,947	)			(0	)			—				—
Electrical Power Systems			(43,540	)			(3	)			(48,146	)			(3	)			(66,571	)			(5	)
Engine Systems			(33,987	)			(2	)			(42,829	)			(3	)			(50,139	)			(4	)
Consolidated net external sales		$	1,457,030				100	%		$	1,430,125				100	%		$	1,258,204				100	%

Consolidated net external sales for the fiscal year ended September 30, 2010 increased 1.9% compared to fiscal year 2009. Consolidated net external sales increased approximately 1.5%, excluding the approximately $5,200 increase in sales attributable to the effects of foreign currency exchange rates.

Intersegment sales primarily reflect contract-manufacturing activity across business segments. As part of their system offerings, Turbine Systems and Engine Systems sell electronic controls manufactured by Electrical Power Systems. Engine Systems also manufactures certain components of larger systems ultimately sold by Turbine Systems. These intersegment activities have historically increased growth in our Turbine Systems, Electrical Power Systems and Engine Systems segments. Further integration of our Airframe Systems segment is also expected to result in the manufacture of additional electronic controls by Electrical Power Systems.

2010 Sales Compared to 2009

Consolidated net external sales increased 1.9% from $1,430,125 in fiscal year 2009 to $1,457,030 in fiscal year 2010 primarily due to the inclusion of a full fiscal year of HRT sales in fiscal year 2010 compared to only six months of HRT sales in fiscal year 2009, partially offset by sales volume declines in all of our segments.

Details of the changes in consolidated net external sales are as follows:

Consolidated net external sales at September 30, 2009		$	1,430,125
HRT external sales from October 2009 to March 2010			117,329
F&P product line external sales from April 2009 to September 2009			(9,620	)
Turbine Systems volume changes			(25,743	)
Airframe Systems volume changes			(50,536	)
Electrical Power Systems volume changes			(6,767	)
Engine Systems volume changes			(9,837	)
Price changes and sales mix			6,894
Effects of changes in foreign currency			5,185
Consolidated net external sales at September 30, 2010		$	1,457,030

Fiscal year 2010 sales included $117,329 of HRT external sales for the six months from October 2009 to March 2010 that were not present in fiscal year 2009. Also, fiscal year 2009 sales included $9,620 of F&P product line sales from April 2009 to September 2009 that were not present in fiscal year 2010.

HRT was acquired on April 3, 2009; therefore HRT’s sales are included in Airframe Systems segment results for the six months ended September 30, 2009 and for the twelve months ended September 30, 2010. Likewise, the F&P product line was acquired as part of the HRT acquisition on April 3, 2009 and disposed of in August 2009; therefore, sales of the F&P business from April to August of 2009 are included in Airframe Systems net external sales for the fiscal year ended September 30, 2009, but no F&P sales are included in Airframe Systems segment net external sales for the fiscal year ended September 30, 2010.

Sales for 2010 began stabilizing in the second half of the year and returned to sequential growth overall. Some volatility is anticipated going forward due to continued uncertainty and some continued softness in certain market segments. Fluctuations in customer order volumes for certain products, coupled with our vendors’ reduction of their production capacities as global demand has fallen, and continued tight credit constraints impacting our suppliers have complicated our management of the overall global supply chain. Meeting customer demand on a timely basis, managing our inventory levels, and coordinating with vendors are key tactical initiatives as we manage our business during the emerging economic recovery.

Turbine Systems’ segment net sales (including intersegment sales) were $610,833 for the fiscal year ended September 30, 2010 compared to $632,222 for fiscal year 2009. From a broad market perspective, the fiscal year-over-year sales decline from 2009 to 2010 was driven by lower sales in industrial markets, with declines in each of the first three quarters of fiscal year 2010, compared to the same periods in fiscal year 2009. Sales in the aerospace & defense markets were slightly higher in 2010 than in 2009, with sales gains in the second half of fiscal year 2010 outpacing declines experienced during the first half of fiscal year 2010 compared to the same periods in fiscal year 2009.

While we believe our experience is largely consistent with underlying economic market trends, we also believe the fleet dynamics of commercial aircraft platforms on which we have content, such as the Airbus A320, the Boeing 777 and the Embraer and the Bombardier 70- to 90-seat Regional Jets, have allowed us to be somewhat less negatively impacted by the effects of the recent economic down-cycle than some of our competitors in the aftermarket segment. Commercial OEM aircraft deliveries of narrow-body and wide-body as well as military aircraft sales have remained relatively stable, although order patterns have fluctuated, such that our overall sales volume has remained less affected, despite larger fluctuations from quarter to quarter. Primary impacts of the recent economic down-cycle have included slower deliveries of industrial aeroderivative gas turbines, heavy frame gas turbines, and business and regional jets.

Sales in both the aerospace and industrial turbine markets were higher in the fourth quarter of fiscal year 2010 compared to both the third quarter of fiscal year 2010 and the fourth quarter of fiscal year 2009.

The continuing impact of the global recession has temporarily resulted in excess supplies of electricity in certain markets, which has contributed to reduced sales volumes of industrial gas and steam turbines. Also, uncertainty caused by the delay in issuance of new emissions policies and standards in the U.S. continues to dampen customer demand for industrial turbines.

Our Turbine Systems segment net sales in the fourth quarter of fiscal year 2010 were the highest since the fourth quarter of fiscal year 2008. Business jet markets, primarily the large cabin and long-range markets in which Turbine Systems products are well represented, have continued to recover in fiscal year 2010, as evidenced by higher deliveries of product for business jet engines in the second half of fiscal year 2010 compared to the same period of fiscal year 2009. Likewise, the global economic recovery, especially in developing economies, is beginning to drive increased global power demand. Increased global natural gas supply, combined with lower natural gas prices, supported increasing demand for industrial gas turbines used in power generation and process applications. Increased power demand and increased air traffic use also favorably impacted our aftermarket sales levels.

During the fiscal year ended September 30, 2010, our net sales were positively impacted by approximately $1,500 due to changes in foreign currency exchange rates compared to fiscal year 2009.

Airframe Systems’ segment net sales (including intersegment sales) were $379,284 for the fiscal year ended September 30, 2010 compared to $321,956 for fiscal year 2009.

On April 3, 2009, we acquired HRT and we have subsequently integrated this business into Woodward, and more specifically into our Airframe Systems segment. Fiscal year 2010 sales included $117,329 of HRT external sales for the six months from October 2009 to March 2010 that were not present in fiscal year 2009.

In August 2009, we sold the F&P product line, which had been acquired as part of the HRT acquisition. Fiscal year 2009 sales included $9,620 of F&P product line sales from April 2009 to September 2009 that were not present in fiscal year 2010.

Excluding changes due to the acquisition of HRT and the sale of the F&P product line, sales changes for the annual period were primarily due to production softness in the global commercial business and regional jet OEM and aftermarket segments, coupled with reduced utilization of various platforms supplied by Airframe Systems. The sales change was also impacted by reduced demand on various military applications, particularly fixed wing and electro-optical targeting programs, which are markets in which we have a significant presence. Aftermarket sales have experienced slight declines, primarily due to passenger and cargo carriers removing planes from service.

Airframe Systems’ segment net sales were higher in the fourth quarter of fiscal year 2010 compared to each of the first three quarters of fiscal year 2010, supported by stable demand for military applications, commercial aircraft, and regional aircraft.

During the fiscal year ended September 30, 2010, foreign currency exchange rates had no appreciable impact on net sales compared to the same period of fiscal year 2009.

Electrical Power Systems’ segment net sales (including intersegment sales) were $230,331 for the fiscal year ended September 30, 2010, compared to $243,146 for fiscal year 2009. Decreased sales of wind turbine converters were partially offset by increases in non-wind related power generation and distribution equipment. Intersegment sales were $43,540 in fiscal year 2010 compared to $48,146 in fiscal year 2009. The intersegment sales declines reflect weakness in demand for industrial gas turbine and reciprocating engine controls used in power generation applications.

Wind converter sales declined in the fiscal year ended September 30, 2010, as compared to the same period of fiscal year 2009. Wind converter demand continues to be impacted by tight lender requirements for project financing, and uncertainty regarding government stimulus programs due to a lack of clear policy direction in the U.S. and elsewhere. Continued global weakness in wind converter deliveries was the primary contributor to Electrical Power Systems’ segment net sales declines for the fiscal year ended September 30, 2010 compared to the same period in fiscal year 2009.

Electrical Power Systems saw a significant decrease in demand during the last quarter of fiscal year 2009, which continued during the first nine months of fiscal year 2010. During the last three months of fiscal year 2010, Electrical Power Systems’ segment net sales increased to $71,721 from $53,718 in the last three months of fiscal year 2009, reflecting improved demand from our wind converter customers and our non-wind power generation and distribution customers. During the second half of fiscal year 2009, demand for our non-wind power generation and distribution equipment and services declined driven by stock reduction programs and postponement of projects on customer side. Demand for these products increased slightly in the fiscal year ended September 30, 2010 compared to the same period of fiscal year 2009. Electrical Power Systems’ segment net sales for the fourth fiscal quarter of fiscal year 2010 were 36% higher than the average segment net sales of the first three quarters of fiscal year 2010.

During the fiscal year ended September 30, 2010, segment net sales were positively impacted by approximately $1,600 due to changes in foreign currency exchange rates, compared to the same period of fiscal year 2009.

Engine Systems’ segment net sales (including intersegment sales) were $326,668 for the fiscal year ended September 30, 2010 compared to $340,995 for fiscal year 2009.

Lower fiscal year-over-year sales levels for the fiscal year ended September 30, 2010 compared to the same period in fiscal year 2009 were primarily attributable to declines in sales of controls used in large engine applications that serve the power generation, marine and process markets. Sales of controls used in small engine applications that support the construction, agricultural, and alternative-fuel vehicle markets were higher for the fiscal year ended September 30, 2010 compared to the same period in fiscal year 2009.

Engine Systems showed sequential quarter over quarter growth in the second, third and fourth quarters of fiscal year 2010.

During the fiscal year ended September 30, 2010, segment net sales were positively impacted by approximately $2,100 due to changes in foreign currency exchange rates, compared to the same period of fiscal year 2009.

Price changes and sales mix: Selling price increases across several products in Turbine Systems and Engine Systems were in response to prevailing market conditions, partially offset by price decreases and changes in sales mix by customer in Electrical Power Systems.

Foreign currency exchange rates: Our worldwide sales activities are primarily denominated in U.S. dollars (“USD”), European Monetary Units (the “Euro”), Great Britain pounds (“GBP”), Japanese yen (“JPY”) and Chinese Yuan (“CNY”). As the USD, Euro, GBP, and JPY fluctuate against each other and other currencies, we are exposed to gains or losses on sales transactions. If CNY, which the Chinese government has not allowed to fluctuate significantly against USD in 2009 or 2010, is allowed to fluctuate against USD in the future, we would be exposed to gains or losses on sales transactions denominated in CNY.

During the fiscal year ended September 30, 2010, our net sales were positively impacted by approximately $5,200 due to changes in foreign currency exchange rates, compared to the same period of fiscal year 2009.

Costs and Expenses

The following table presents costs and expenses:

		Year Ended September 30,
		2010								2009								2008
						% of Net								% of Net								% of Net
						Sales								Sales								Sales
Net sales		$	1,457,030				100.0	%		$	1,430,125				100.0	%		$	1,258,204				100.0	%
Cost of goods sold		$	1,021,516				70.1	%		$	1,029,095				72.0	%		$	882,996				70.2	%
Selling, general, and administrative expenses			135,880				9.3				128,682				9.0				115,399				9.2
Research and development costs			82,560				5.7				78,536				5.5				73,414				5.8
Amortization of intangible assets			35,114				2.4				26,120				1.8				6,830				0.5
Restructuring and other charges			—				—				15,159				1.1				—				—
Interest and other income			(2,513	)			(0.2	)			(4,212	)			(0.3	)			(6,992	)			(0.6	)
Interest and other expenses			29,598				2.0				34,269				2.4				3,972				0.3
Consolidated costs and expenses		$	1,302,155				89.4	%		$	1,307,649				91.4	%		$	1,075,619				85.5	%

2010 Costs and Expenses Compared to 2009

Recent economic events have caused variable compensation expense, which is tied to relative financial performance, to vary significantly from fiscal year-to-year. Increases in variable compensation expense of $6,695 in fiscal year 2010 compared to fiscal year 2009 impacted cost of goods sold, selling general and adminsitrative, and research and development expenses.

Cost of goods sold decreased by $7,579 or 0.7%, to $1,021,516 or 70.1% of net sales, in the fiscal year ended September 30, 2010, from $1,029,095 or 72.0% of net sales in fiscal year 2009. Excluding the $12,500 charge for the step-up in basis of inventory related to the HRT acquisition, cost of goods sold increased by $4,921 during fiscal year 2010.

Correspondingly, gross margins, measured as net sales less cost of goods sold divided by net sales, were 29.9% for the fiscal year ended September 30, 2010 compared to 28.0% for the fiscal year ended September 30, 2009. The increase in gross margins is largely a result from our focus on cost reductions and the impact of purchase accounting inventory step-up adjustments recorded on the fiscal year ended September 30, 2009 of $12,500 related to HRT and $2,900 related to MPC. Excluding the $12,500 inventory step-up adjustments, gross margins in fiscal year 2009 were 29.1% compared to 29.9% in fiscal year 2010.

Cost of goods sold decreased in the fiscal year ended September 30, 2010 primarily because of decreased sales levels in fiscal year 2010 compared to fiscal year 2009 and as a result of our focus on cost control, changes in pricing on some products and changes in sales mix, partially offset by increases in variable compensation.

Selling, General and Administrative (“SG&A”) expenses increased by $7,198 or 5.6% to $135,880 for the fiscal year ended September 30, 2010 from $128,682 for the fiscal year ended September 30, 2009. Selling, general, and administrative expenses increased as a percent of sales to 9.3% in fiscal year 2010 from 9.0% in fiscal year 2009. The increase is primarily the result of additional expenses of the HRT business and higher levels of variable compensation, partially offset by the impact of cost reduction efforts taken during fiscal year 2009.

Research and development costs increased from $78,536 in fiscal year 2009 to $82,560 in fiscal year 2010. The 5.1% increase is primarily due to increases in spending within our Airframe Systems business segment due to the acquisition of HRT on April 3, 2009, which resulted in higher spending during fiscal year 2010 and higher levels of variable compensation.

As a percentage of sales, research and development expenses increased to 5.7% in fiscal year 2010 from 5.5% in fiscal year 2009. Our research and development activities extend across almost all our customer base, and our current level of spending is consistent with our strategy of continuing to invest in future platforms and technologies.

Amortization of intangible assets as a percent of sales was 2.4% for the fiscal year ended September 30, 2010, as compared to 1.8% for the same period last fiscal year, primarily reflecting increased amortization expense related to $128,400 of intangible assets acquired in the HRT acquisition in April 2009.

Restructuring and other charges of $15,159 were recognized in fiscal year 2009. No restructuring costs were recognized in fiscal year 2010. The 2009 charges resulted from a number of initiatives we implemented to maintain our margins through cost reduction and efficiency improvements. The program savings were primarily related to indirect expenses, selling, general, and administrative expenses, material productivity and facility rationalization.

Interest and other expenses as a percent of sales was 2.0% for the fiscal year ended September 30, 2010, as compared to 2.4% for the same period last fiscal year. Interest expense decreased for the fiscal year ended September 30, 2010 because of interest savings related to debt reductions.

Since the issuance of $400,000 of long-term debt October 2008, which was used primarily to finance the acquisitions of MPC and MotoTron, and $220,000 of long-term debt issued in April 2009, which was used primarily to finance the acquisition of HRT, we have made unscheduled prepayments of $167,000 on our outstanding long-term debt. Since the acquisition of HRT on April 3, 2009, we reduced our total debt by $291,017, including short-term borrowings, from $756,859 to $465,842 as of September 30, 2010.

Earnings

The following table presents earnings by segment:

		Year Ended September 30,
		2010				2009				2008
Turbine Systems		$	142,993			$	136,120			$	128,930
Airframe Systems			11,578				11,023				—
Electrical Power Systems			24,268				35,891				42,303
Engine Systems			27,346				18,454				43,737
Total segment earnings			206,185				201,488				214,970
Nonsegment expenses			(22,434	)			(46,514	)			(30,671	)
Interest expense and income, net			(28,876	)			(32,498	)			(1,714	)
Consolidated earnings before income taxes			154,875				122,476				182,585
Income tax expense			(43,713	)			(28,060	)			(60,030	)
Consolidated net earnings		$	111,162			$	94,416			$	122,555

The following table presents earnings by segment as a percent of segment net sales, including intersegment sales:

		Year Ended September 30,
		2010				2009				2008
Turbine Systems			23.4	%			21.5	%			20.3	%
Airframe Systems			3.1				3.4				—
Electrical Power Systems			10.5				14.8				14.6
Engine Systems			8.4				5.4				9.3

Total segment earnings increased to $206,185 in fiscal year 2010 from $201,488 in the fiscal year ended September 30, 2009 primarily because of increased segment earnings of our Engine Systems and Turbine Systems business segments, partially offset by lower segment earnings in our Electrical Power Systems business segment, as more fully discussed below. Excluding the fiscal year 2009 $12,500 acquisition related inventory step-up charge taken in Airframe Systems, total segment earnings decreased by $7,803 in fiscal year 2010, compared to fiscal year 2009.

Total segment earnings decreased by $13,482 from total segment earnings of $214,970 in fiscal year 2008 to total segment earnings of $201,488 in fiscal year 2009. The decrease was primarily due to lower segment earnings in our Engine Systems and Electrical Power Systems business segments, partially offset by increased earnings in our Turbine Systems business segment and the creation of our Airframe Systems business segment with the acquisition of MPC and HRT, as more fully discussed below.

2010 Earnings Compared to 2009

Turbine Systems’ segment earnings increased $6,873 or 5.0% for the fiscal year ended September 30, 2010, as compared to the same period last fiscal year due to the following:

Earnings at September 30, 2009		$	136,120
Sales volume changes			(11,939	)
Selling price changes			7,685
Sales mix			9,630
Savings related to workforce management			4,900
Changes in variable compensation			(3,831	)
Effects of changes in foreign currency			440
Other, net			(12	)
Earnings at September 30, 2010		$	142,993

Turbine Systems’ segment earnings increased in the fiscal year ended September 30, 2010 compared to the same period of fiscal year 2009 primarily as a result of more favorable sales mix, selling price changes, and workforce management savings, partially offset by decreases in sales volume and higher levels of variable compensation. Earnings as a percentage of sales increased to 23.4% in the fiscal year ended September 30, 2010 compared to 21.5% for the same period of fiscal year 2009.

Airframe Systems’ segment earnings increased to $11,578 in fiscal year ended September 30, 2010 from $11,023 in the comparable period ended September 30, 2009, due to the following:

Earnings at September 30, 2009		$	11,023
Purchase accounting inventory basis step-up charge in 2009			12,500
HRT earnings from October 2009 to March 2010			14,397
F&P product line earnings from April 2009 to August 2009			(3,897	)
Sales volume changes			(25,253	)
Sales mix			(1,807	)
Depreciation & intangible amortization			(4,342	)
Investments in business development opportunities			(3,896	)
Savings related to workforce management			17,530
Changes in variable compensation			(1,515	)
Other, net			(3,162	)
Earnings at September 30, 2010		$	11,578

HRT was acquired on April 3, 2009; therefore HRT’s results are included in Airframe Systems segment results for the six months ended September 30, 2009 and for the twelve months ended September 30, 2010. Likewise, the F&P product line was acquired as part of the HRT acquisition on April 3, 2009 and disposed of in August 2009; therefore, F&P business results from April to August of 2009 are included in Airframe Systems segment earnings for the fiscal year ended September 30, 2009, but no F&P results are included in Airframe Systems segment results for the fiscal year ended September 30, 2010. The April 3, 2009 HRT acquisition contributed $14,397 to Airframe Systems segment earnings for the fiscal year ended September 30, 2010. The F&P product line, which was acquired as part of the HRT acquisition in April 2009 and sold in August 2009, contributed $3,897 to the fiscal year ended September 30, 2009 and did not contribute in fiscal year 2010. Segment earnings for the fiscal year ended September 30, 2009 also included a $12,500 charge related to a purchase accounting step-up in basis of HRT inventory.

Earnings were also impacted by significant sales volume declines and sales mix, increased investments in business development opportunities, higher levels of variable compensation and higher levels of intangible amortization, partially offset by restructuring savings.

Because of the 2009 acquisitions of MPC and HRT, and the related adjustments made in purchase accounting to assign values to various intangible assets, the Airframe Systems business segment absorbs more amortization expense than our other business segments. Non-cash intangible amortization expense was $28,567 for the fiscal year ended September 30, 2010 and $19,551 for the fiscal year ended September 30, 2009.

Integration of our Airframe Systems business is expected to contribute to improved profitability, broader control system content, and better aftermarket presence and support. Airframe Systems has begun to realize previously anticipated benefits from cost reduction efforts taken at both MPC and HRT, and the operational integration of the MPC and HRT businesses is proceeding consistent with our expectations. Additional expense control initiatives that are expected to occur during fiscal year 2011 relate primarily to the planned closing of the Pacoima, California facility as part of a decision to consolidate HRT’s production facilities. Most of the costs of these additional expense control initiatives were included in accrued restructuring costs recorded in connection with the HRT acquisition.

Electrical Power Systems’ segment earnings decreased $11,623 or 32.4% for the fiscal year ended September 30, 2010 as compared to the fiscal year ended September 30, 2009, due to the following:

Earnings at September 30, 2009		$	35,891
Sales volume changes			(4,576	)
Selling price changes			(1,671	)
Sales mix			(846	)
Costs associated with global expansion			(2,457	)
Savings related to workforce management			1,328
Changes in variable compensation			(2,039	)
Effects of changes in foreign currency			(122	)
Other, net			(1,240	)
Earnings at September 30, 2010		$	24,268

The decrease in earnings in the fiscal year ended September 30, 2010 compared to the same period of fiscal year 2009 was driven mainly by the decrease in sales volumes, which was primarily due to reduced current market demand for wind turbines, partially offset by increased sales of non-wind related power generation and distribution equipment. Also contributing were pricing pressures, sales mix changes, increased costs associated with global expansion of Electrical Power Systems and higher variable compensation costs, partially offset by savings realized as a result of workforce management actions taken during fiscal year 2009 in response to declining sales.

Engine Systems’ segment earnings increased $8,892, or 48.2% for the fiscal year ended September 30, 2010 due to the following:

Earnings at September 30, 2009		$	18,454
Sales volume changes			(6,248	)
Selling price changes			2,205
Sales mix			(883	)
Decreased infrastructure and overhead related expenses			2,481
Savings related to workforce management			9,746
Changes in variable compensation			(2,556	)
Effects of changes in foreign currency			1,336
Other, net			2,811
Earnings at September 30, 2010		$	27,346

For the fiscal year ended September 30, 2010, price changes, cost savings related to workforce management activities, reduced infrastructure and overhead spending, changes in foreign currency exchange rates, and other factors favorably impacted earnings, but were partially offset by lower sales volumes and increases in variable compensation costs compared to fiscal year 2009. The infrastructure savings were related to consolidation of facilities and operations.

Nonsegment expenses for the fiscal year ended September 30, 2010 decreased to $22,434, or 1.5% of sales compared to $46,514 and 3.3% of sales for the fiscal year ended September 30, 2009.

In fiscal year 2009, we recorded $16,605 in special charges to properly size our business for the economic environment related to the global recession. Without these special charges, nonsegment expenses for the fiscal year ended September 30, 2009 were $29,909, or 2.1% of net sales.

Excluding the impact of the $16,605 special charges, fiscal year-over-year nonsegment expenses declined in fiscal year 2010 compared to fiscal year 2009, resulting primarily from cost reduction efforts and lower intercompany profit eliminations.

Income taxes were provided at an effective rate on earnings before income taxes of 28.2% in fiscal year 2010 compared to 22.9% in fiscal year 2009. For a reconciliation of our effective tax rate to the U.S. statutory tax rate see Note 5, Income taxes, to the Consolidated Financial Statements in “Item 8 — Financial Statements and Supplementary Data.” The change in the effective tax rate (as a percentage of earnings before income taxes) was attributable to the following:

Effective tax rate at September 30, 2009			22.9	%
Retroactive extension of research credit recorded in fiscal 2009			1.7
Research credit in fiscal 2010 as compared to fiscal 2009			2.6
Adjustment of tax issues recorded in the period ended September 30, 2009			6.6
Adjustment of tax issues recorded in the period ended September 30, 2010			(5.9	)
State income taxes, net of federal tax benefit			0.9
Foreign tax rate differences			0.7
Other changes, net			(1.3	)
Effective tax rate at September 30, 2010			28.2	%

The total amount of the gross liability for worldwide unrecognized tax benefits reported in other liabilities in the Consolidated Balance Sheet was $10,586 at September 30, 2010, and $19,783 at September 30, 2009. At September 30, 2010, the amount of unrecognized tax benefits that would impact Woodward’s effective tax rate, if recognized, was $8,720. At this time, we estimates that it is reasonably possible that the liability for unrecognized tax benefits will decrease by as much as $1,304 in the next twelve months due primarily to the expiration of certain statutes of limitations. We recognize interest and penalties related to unrecognized tax benefits in tax expense. Woodward had accrued interest and penalties of $1,431 as of September 30, 2010 and $3,804 as of September 30, 2009.

Woodward’s tax returns are audited by U.S., state, and foreign tax authorities, and these audits are at various stages of completion at any given time. Fiscal years remaining open to examination in significant foreign jurisdictions include 2003 and forward. Woodward has been subject to U.S. Federal income tax examinations for fiscal years through 2008; however, certain subsidiaries have open tax years back to 2007, which pre-dates the inclusion of these subsidiaries in the Woodward consolidated return filing group. Woodward is subject to U.S. state income tax examinations for fiscal years 2005 and forward.

The U.S. research tax credit expired as of December 31, 2009. The U.S. Congress is considering legislation to provide a one-year, retroactive extension; however, as of September 30, 2010, the expired tax credit has not been reinstated. Accounting guidance requires us to use the tax law in effect at the balance sheet date. Accordingly, the calculation of our 2010 income tax provision does not reflect any assumed benefit from the research tax credit for the year ended September 30, 2010. In the event the research tax credit is enacted in some form in future periods, we will account for that change in the tax law at that time.

The Patient Protection and Affordable Care Act, which was signed into law on March 23, 2010, had no impact on our income tax expense in 2010.

2009 RESULTS OF OPERATIONS

2009 Sales Compared to 2008

Consolidated net external sales increased 13.7% from $1,258,204 in fiscal year 2008 to $1,430,125 in fiscal year 2009 primarily related to the acquisitions of MPC and HRT, partially offset by declines in sales volume of the Engine Systems segment and the impacts of changes in foreign currency exchange rates. Details of the changes in consolidated net external sales are as follows:

Consolidated net external sales at September 30, 2008		$	1,258,204
External Sales from acquisition of MPC and HRT (Airframe Systems)			319,009
External Sales from the acquisition of Mototron			7,229
Turbine Systems volume changes			(777	)
Electrical Power Systems volume changes			(5,843	)
Engine Systems volume changes			(119,334	)
Price changes			7,125
Effects of changes in foreign currency			(38,322	)
Other			2,834
Consolidated net external sales at September 30, 2009		$	1,430,125

Turbine Systems’ segment net sales (including intersegment sales) reflected growth in the first half of fiscal year 2009 and declines in the second half of fiscal year 2009 as compared to the same periods in fiscal year 2008. We believe this overall trend is consistent with underlying economic market trends during the period, which have been driven by slowing deliveries of new aerospace equipment and reduced commercial airline and cargo flight miles. In particular, deliveries of business jets have slowed significantly as companies have reduced their levels of capital investment. We did, however, experience increases in sales in the industrial gas turbine market. While the overall market was generally flat, we benefited from higher demand for the production of new industrial gas turbines which included more significant Woodward content for both heavy frame and aeroderivative turbines. We also benefited from increases in related aftermarket sales as compared to last fiscal year related to the timing of repair and overhaul activities on equipment installed.

Airframe Systems’ segment net sales (including intersegment sales) reflected the acquisitions of MPC and HRT. On October 1, 2008, we acquired MPC and formed the Airframe Systems segment. On April 3, 2009, we acquired HRT and added this business to our Airframe Systems segment. On August 10, 2009, we sold the F&P product line acquired as part of the HRT acquisition. Airframe Systems’ net sales for fiscal year 2009 included $9,620 for the F&P product line. A full year of sales for MPC and six months of sales for HRT where included in net external sales as of September 30, 2009. Post-acquisition sales of MPC and HRT decreased compared to the historical pre-acquisition sales for the same periods. The decline was driven mainly by expected significant reductions in the sales of control actuation systems for the Joint Direct Attack Munition (“JDAM”) and sales to business jet customers, consistent with the change in overall market volumes. These decreases in sales volume were offset by gains in our rotorcraft, military aircraft, and other markets. Aftermarket net sales experienced slight declines due to passenger and cargo carriers taking older aircraft out of service offset by moderate increases in the military aftermarket.

Electrical Power Systems’ segment net sales (including intersegment sales) experienced strong growth in demand for wind converters during the first three quarters of fiscal year 2009 and a significant decline during the fourth quarter of fiscal year 2009 as compared to the same periods in fiscal year 2008. The increase in power conversion sales was partially offset by declines in sales of demand for small and medium-sized GenSets (less than 10 megawatt) as compared to the same periods last fiscal year.

Engine Systems’ segment net sales (including intersegment sales) decreased due to the broad declines across the transportation and power generation markets for industrial engines compared to fiscal year 2008. During the fourth quarter of fiscal year 2009, MotoTron was fully integrated in Engine Systems. MotoTron’s net sales have been adversely impacted by the current economic environment.

Price changes: Selling price increases across most products in Turbine Systems and Engine Systems were in response to prevailing market conditions.

Foreign currency exchange rates: Our worldwide sales activities are primarily denominated in U.S. dollar (“USD”), European Monetary Unit (the “Euro”), and Great Britain pound (“GBP”). As these currencies fluctuate against each other and other currencies, we are exposed to gains or losses on sales transactions. During fiscal year 2009, net sales were negatively impacted by approximately $38,000 due to changes in foreign currency exchange rates.

2009 Costs and Expenses Compared to 2008

Cost of goods sold increased by $146,099 or 16.5% primarily as a result of the acquisitions of MPC and HRT, partially offset by decreases in sales volumes and the effects of changes in foreign currency. Details of changes in cost of goods sold are as follows:

Cost of goods sold for the year ended September 30, 2008		$	882,996
MPC and HRT cost of goods sold (Airframe Systems)			248,681
MotoTron cost of goods sold			9,788
Decrease in volume changes			(95,376	)
Effects of changes in foreign currency			(25,605	)
Changes in product mix			6,185
Other, net			2,426
Cost of goods sold for the year ended September 30, 2009		$	1,029,095

Gross margins, calculated as net sales less cost of goods sold divided by net sales, decreased to 28.0% for the fiscal year ended September 30, 2009 compared to 29.8% for the fiscal year ended September 30, 2008. The decrease in gross margins reflects charges related to purchase accounting inventory step-up adjustments of $12,500 related to HRT and $2,900 related to MPC, change in product mix, and the addition of MPC and HRT businesses, which generally have lower gross margins than our other businesses.

Selling, general, and administrative (“SG&A”) expenses increased by $13,283 or 11.5%, attributable to the following:

SG&A for the year ended September 30, 2008		$	115,399
MPC and HRT SG&A(Airframe Systems)			33,369
Variable compensation			(6,791	)
Effects of changes in foreign currency			(5,537	)
Savings related to workforce management			(2,655	)
Other, net			(5,103	)
		$	128,682

Selling, general, and administrative expenses decreased as a percent of sales to 9.0% in fiscal year 2009 from 9.2% in fiscal year 2008. Selling, general, and administrative expenses increased primarily from the addition of MPC and HRT, offset by decreases in foreign currency exchange rates and decreases in variable compensation, which is based on companywide performance factors for the entire fiscal year. Savings related to workforce management reflect the impact of the reduced workforce.

Research and development costs increased by $5,122 or 7.0%, attributable to the following:

Research and devlopment for the year ended September 30, 2008		$	73,414
MPC and HRT research and development (Airframe Systems)			9,036
Effects of changes in foreign currency			(931	)
Savings related to workforce management			(1,350	)
Variable compensation			(5,824	)
Other, net			4,191
Research and development for the year ended September 30, 2009		$	78,536