<Page>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
{ X } QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from...............to...............
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 (I.R.S. Employer identification No.)
incorporation or organization)
5001 North Second Street, Rockford, Illinois 61125-7001
(Address of principal executive offices)
(815) 877-7441
(Registrant's telephone number, including area code)
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 X No
----- -----
As of July 26, 2001, 11,320,858 shares of common stock with a par value of
$.00875 cents per share were outstanding.
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TABLE OF CONTENTS
<Table>
<Caption>
Page
Part I. Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 18
Part II. Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</Table>
<Page>
Part I
ITEM 1. FINANCIAL STATEMENTS
Statements of Consolidated Earnings
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
<Table>
<Caption>
- --------------------------------------------------------------------------------
THREE MONTHS
ENDED JUNE 30,
- --------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2001 2000
- --------------------------------------------------------------------------------
Net Sales $182,508 $155,496
- --------------------------------------------------------------------------------
Costs and expenses:
Cost of goods sold 137,702 116,717
Sales, general, and administrative
expenses 20,270 19,980
Amortization of intangible assets 1,701 1,631
Interest expense 1,652 2,842
Interest income (147) (214)
Other expense - net (1,051) (5)
Gain on sale of business - (25,244)
- --------------------------------------------------------------------------------
Total costs and expenses, net of gain 160,127 (5)
- --------------------------------------------------------------------------------
Earnings before income taxes 22,381 39,789
Income taxes 8,653 13,624
- --------------------------------------------------------------------------------
Net earnings $ 13,728 $ 26,165
================================================================================
Basic earnings per share $ 1.21 $ 2.33
================================================================================
Diluted earnings per share $ 1.18 $ 2.32
================================================================================
Weighted-average number of basic shares
outstanding 11,319 11,252
================================================================================
Weighted-average number of diluted shares
outstanding 11,603 11,275
================================================================================
Cash dividends per share $ 0.2325 $ 0.2325
================================================================================
</Table>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
1
<Page>
Statements of Consolidated Earnings
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
<Table>
<Caption>
- --------------------------------------------------------------------------------
NINE MONTHS
ENDED JUNE 30,
- --------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2001 2000
- --------------------------------------------------------------------------------
Net Sales $503,414 $438,173
- --------------------------------------------------------------------------------
Costs and expenses:
Cost of goods sold 379,688 332,710
Sales, general, and administrative
expenses 52,563 58,649
Amortization of intangible assets 5,068 4,806
Interest expense 6,167 8,727
Interest income (715) (553)
Other expense - net (521) 470
Gain on sale of business - (25,244)
- --------------------------------------------------------------------------------
Total costs and expenses, net of gain 442,250 379,565
- --------------------------------------------------------------------------------
Earnings before income taxes 61,164 58,608
Income taxes 23,856 21,064
- --------------------------------------------------------------------------------
Net earnings $ 37,308 $ 37,544
================================================================================
Basic earnings per share $ 3.30 $ 3.34
================================================================================
Diluted earnings per share $ 3.23 $ 3.33
================================================================================
Weighted-average number of basic shares
outstanding 11,317 11,256
================================================================================
Weighted-average number of diluted shares
outstanding 11,541 11,284
================================================================================
Cash dividends per share $ 0.6975 $ 0.6975
================================================================================
</Table>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
<Page>
Consolidated Balance Sheets
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
<Table>
<Caption>
================================================================================
At June At September
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 30, 2001 30, 2000
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 6,712 $ 9,315
Accounts receivable, less
allowance for losses of
$3,145 for June and
$4,452 for September 112,689 105,153
Inventories 118,279 102,990
Deferred income taxes 17,662 16,835
- --------------------------------------------------------------------------------
Total current assets 255,342 234,293
- --------------------------------------------------------------------------------
Property, plant, and equipment, at
cost:
Land 7,741 6,032
Buildings and improvements 129,979 127,825
Machinery and equipment 240,850 233,188
Construction in progress 1,672 3,364
- --------------------------------------------------------------------------------
380,242 370,409
Accumulated depreciation 253,892 247,951
- --------------------------------------------------------------------------------
Property, plant, and equipment - net 126,350 122,458
Intangibles - net 166,081 150,118
Other assets 10,605 8,450
Deferred income taxes 17,328 18,404
- --------------------------------------------------------------------------------
TOTAL ASSETS $575,706 $533,723
================================================================================
</Table>
BALANCE SHEETS CONTINUED ON NEXT PAGE.
3
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<Table>
<Caption>
============================================================================================
At June At September
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 30, 2001 30, 2000
- --------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 22,437 $ 21,284
Current portion of long-term debt 22,500 22,500
Accounts payable and accrued
expenses 82,485 81,342
Income taxes payable 9,883 8,331
- --------------------------------------------------------------------------------------------
Total current liabilities 137,305 133,457
- --------------------------------------------------------------------------------------------
Long-term debt, less current portion 84,500 74,500
Other liabilities 51,530 50,142
Commitments and contingencies - -
- --------------------------------------------------------------------------------------------
Shareholders' equity represented by:
Preferred stock, par value $.003
per share, authorized 10,000
shares, no shares issued - -
Common stock, par value $.00875
per share, authorized 50,000
shares, issued 12,160 shares 106 106
Additional paid-in capital 13,434 13,295
Unearned ESOP compensation (5,674) (5,308)
Accumulated other comprehensive
earnings 118 3,045
Retained earnings 314,120 284,431
- --------------------------------------------------------------------------------------------
322,104 295,569
Less treasury stock, at cost 19,733 19,945
- --------------------------------------------------------------------------------------------
Total shareholders' equity 302,371 275,624
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $575,706 $533,723
============================================================================================
</Table>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<Page>
Statements of Consolidated Cash Flows
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
<Table>
<Caption>
=========================================================================================
NINE MONTHS
ENDED JUNE 30,
- -----------------------------------------------------------------------------------------
(IN THOUSANDS) 2001 2000
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $37,308 $37,544
- -----------------------------------------------------------------------------------------
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 24,669 23,014
Net (gain)/loss on sale of property, plant, and equipment 924 (148)
Gain on sale of business - (25,244)
Deferred income taxes 249 2,826
ESOP compensation expense (366) (269)
Equity in loss of unconsolidated affiliate - 142
Changes in operating assets and liabilities,
net of business acquisitions and sale:
Accounts receivable (8,848) 10,947
Inventories (14,045) (3,912)
Current liabilities, other than short-
term borrowings and current portion
of long-term debt 5,148 3,595
Other - net (814) (2,104)
- -----------------------------------------------------------------------------------------
Total adjustments 6,917 8,847
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities 44,225 46,391
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property, plant, and equipment (17,019) (21,287)
Proceeds from sale of property, plant, and equipment 343 1,121
Proceeds from sale of business - net of direct costs - 42,027
Payments associated with sale of business (3,886) -
Business acquisitions, net of cash acquired (29,942) -
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (50,504) 21,861
- -----------------------------------------------------------------------------------------
</Table>
CASH FLOWS CONTINUED ON NEXT PAGE.
5
<Page>
<Table>
<Caption>
===============================================================================================
NINE MONTHS
ENDED JUNE 30,
- -----------------------------------------------------------------------------------------------
(IN THOUSANDS) 2001 2000
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (7,893) (7,847)
Proceeds from sales of treasury stock 351 1,423
Purchases of treasury stock - (1,762)
Net proceeds (payments) from borrowings under revolving lines 26,308 (43,910)
Payments of long-term debt (15,000) (11,250)
Tax benefit applicable to ESOP dividend and stock options 274 314
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 4,040 (63,032)
- -----------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (364) (1,270)
- -----------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,603) 3,950
Cash and cash equivalents, beginning of year 9,315 10,449
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 6,712 $14,399
===============================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest expense paid $ 6,437 $ 9,668
Income taxes paid $21,934 $12,506
NONCASH INVESTING:
Liabilities assumed in business acquisitions (sale) - net $ 1,071 $(2,739)
</Table>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
<Page>
Notes to Consolidated Financial Statements
(1) The consolidated balance sheet as of June 30, 2001, the statements
of consolidated earnings for the three and nine-month periods ended
June 30, 2001 and 2000, and the statements of consolidated cash flows
for the nine-month periods ended June 30, 2001 and 2000, were prepared
by the company without audit. The September 30, 2000, consolidated
balance sheet was derived from audited financial statements, but does
not include all disclosures required by generally accepted accounting
principles. Information in this 10-Q report is based in part on
estimates and is subject to year-end adjustments and audit. In our
opinion, the figures reflect all adjustments necessary to present
fairly the company's financial position as of June 30, 2001, the
results of its operations for the three and nine-month periods ended
June 30, 2001 and 2000, and its cash flows for the nine-month periods
ended June 30, 2001 and 2000. All such adjustments were of a normal and
recurring nature. The statements were prepared following the accounting
policies described in the company's 2000 annual report on Form 10-K and
should be read with the Notes to Consolidated Financial Statements on
pages 26-33 of the 2000 annual report to shareholders. The statements
of consolidated earnings for the three and nine-month periods ended
June 30, 2001, are not necessarily indicative of the results to be
expected for other interim periods or for the full year.
(2) In the statements of consolidated earnings, amounts reported under
the caption other expense-net include our equity in loss of an
unconsolidated affiliate. Prior to the first quarter of the year ending
September 30, 2001, we reported our equity in loss of this
unconsolidated affiliate, net of tax, as a separate line in the
statements. Amounts reported for the three months and nine months ended
June 30, 2000, have been reclassified to be consistent with the current
presentation.
(3) On November 3, 2000, we acquired the stock of Hoeflich Controls,
Inc., a manufacturer of ignition systems, and related assets for
$5,184,000, including direct costs related to the acquisition. The
acquisition was accounted for using the purchase method of accounting
and results of operations of the acquired company were included in our
consolidated results from the acquisition date. The excess of the
purchase price over the estimated fair value of tangible and identified
intangible net assets acquired is being amortized over 15 years. Under
terms of the purchase agreement, we could be required to make an
additional payment of up to $1,200,000 in fiscal year 2004, contingent
upon attaining certain investment and sales volumes, as defined by the
agreement. We currently expect any additional payment to be accounted
for as additional purchase price to be allocated among intangible
assets acquired. If we had completed the acquisition on October 1,
1999, net sales and net earnings for the nine-month periods ended June
30, 2001 and 2000, would not have been materially different from
amounts reported in the Statements
7
<Page>
of Consolidated Earnings.
(4) On June 29, 2001, we acquired certain assets and assumed certain
liabilities of the Bryce diesel fuel injection business of Delphi
Automotive Systems for $25,386,000, including direct costs related to
the acquisition. The acquisition was accounted for using the purchase
method of accounting. The excess of the purchase price over the
estimated fair value of tangible and identified intangible net assets
acquired is being amortized over 20 years. If we had completed the
acquisition on October 1, 1999, net sales and net earnings for the
nine-month periods ended June 30, 2001 and 2000, would not have been
materially different from amounts reported in the Statements of
Consolidated Earnings.
(5) Earnings per share:
<Table>
<Caption>
---------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------
Net earnings (A) $13,728 $26,165 $37,308 $37,544
---------------------------------------------------------------------------------------------------
Determination of shares:
Weighted-average shares of common stock
outstanding (B) 11,319 11,252 11,317 11,256
Assumed exercise of stock options 284 23 224 28
---------------------------------------------------------------------------------------------------
Weighted-average shares of common stock
outstanding assuming dilution (C) 11,603 11,275 11,541 11,284
===================================================================================================
Basic earnings per share (A/B) $1.21 $2.33 $3.30 $ 3.34
Diluted earnings per share (A/C) $1.18 $2.32 $3.23 $ 3.33
===================================================================================================
</Table>
The following stock options were outstanding during the three months
and nine months ended June 30, 2001 and 2000, but were not included in
the computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the
common shares during the respective periods.
<Table>
<Caption>
---------------------------------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------------------------------------------------
2001 2000 2001 2000
---------------------------------------------------------------------------------------------------
Options - 330,635 167,374 329,218
Weighted-average exercise price N/A $29.04 $69.22 $29.55
===================================================================================================
</Table>
8
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(6) Inventories:
<Table>
<Caption>
------------------------------------------------------------------------------------------
AT JUNE AT SEPTEMBER
(IN THOUSANDS) 30, 2001 30, 2000
------------------------------------------------------------------------------------------
Raw materials $ 3,071 $ 3,056
Component parts 63,155 58,559
Work in process 31,537 27,315
Finished goods 20,619 14,453
------------------------------------------------------------------------------------------
118,382 103,383
Less progress payments (103) (393)
------------------------------------------------------------------------------------------
$118,279 $102,990
==========================================================================================
</Table>
(7) Accounts payable and other accrued expenses:
<Table>
<Caption>
------------------------------------------------------------------------------------------
AT JUNE AT SEPTEMBER
(IN THOUSANDS) 30, 2001 30, 2000
------------------------------------------------------------------------------------------
Accounts payable $22,742 $25,065
Salaries and other member benefits 35,655 28,153
Other items - net 24,088 28,124
------------------------------------------------------------------------------------------
$82,485 $81,342
==========================================================================================
</Table>
(8) The assets and liabilities of substantially all subsidiaries
outside the United States are translated to the United States dollar at
period-end rates of exchange, and earnings and cash flow statements are
translated at weighted-average rates of exchange. Translation
adjustments are accumulated with other comprehensive earnings (losses)
as a separate component of shareholders' equity. We have no other
components of other comprehensive earnings. The company's total
comprehensive earnings were as follows:
<Table>
<Caption>
-----------------------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-----------------------------------------------------------------------------------------
(IN THOUSANDS) 2001 2000 2001 2000
-----------------------------------------------------------------------------------------
Net earnings $13,728 $26,165 $37,308 $37,544
Other comprehensive losses (2,530) (1,844) (2,927) (5,338)
-----------------------------------------------------------------------------------------
Total comprehensive earnings $11,198 $24,321 $34,381 $32,206
=========================================================================================
</Table>
9
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(9) Segment information:
<Table>
<Caption>
-----------------------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-----------------------------------------------------------------------------------------
(IN THOUSANDS) 2001 2000 2001 2000
-----------------------------------------------------------------------------------------
Industrial Controls:
External net sales $104,113 $86,921 $282,338 $247,936
Intersegment sales 10 168 559 566
Segment earnings 16,108 10,912 41,946 35,194
-----------------------------------------------------------------------------------------
Aircraft Engine Systems:
External net sales $78,395 $68,575 $221,076 $190,237
Intersegment sales 818 861 2,432 1,462
Segment earnings 15,227 11,190 41,884 19,647
=========================================================================================
</Table>
Portions of Industrial Controls were previously reported as Aircraft
Engine Systems or Other Segments. Amounts for 2000 in the information
above have been restated to be consistent with the current composition
of our segments.
The difference between the total of segment earnings and the statements
of consolidated earnings follows:
<Table>
<Caption>
-----------------------------------------------------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-----------------------------------------------------------------------------------------
(IN THOUSANDS) 2001 2000 2001 2000
-----------------------------------------------------------------------------------------
Total earnings for reportable segments $31,335 $22,102 $83,830 $54,841
Interest expense, interest income, gain
on sale of business (1,505) 22,616 (5,452) 17,070
Unallocated corporate expenses (7,449) (4,929) (17,214) (13,303)
-----------------------------------------------------------------------------------------
Consolidated earnings before income taxes $22,381 $39,789 $61,164 $58,608
=========================================================================================
</Table>
Segment assets were as follows:
<Table>
<Caption>
-----------------------------------------------------------------------------------------
AT JUNE AT SEPTEMBER
(IN THOUSANDS) 30, 2001 30, 2000
-----------------------------------------------------------------------------------------
Industrial Controls $268,366 $214,935
Aircraft Engine Systems 250,888 260,712
=========================================================================================
</Table>
10
<Page>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We prepared the following discussion and analysis to help you
better understand our results of operations and financial
condition. This discussion should be read with the consolidated
financial statements, including the notes, and the cautionary
statement on page 35 of our 2000 annual report to shareholders,
which was filed with our Form 10-K for the year ended September
30, 2000.
Statements in this discussion and analysis concerning the
company's future sales, earnings, business performance, and
prospects reflect current expectations and are forward-looking
statements that involve risks and uncertainties. Actual results
could differ materially from projections or any other
forward-looking statement and we have no obligation to update
our forward-looking statements. Factors that could affect
performance and could cause results to differ materially from
projections and forward-looking statements are described in the
cautionary statement referred to above.
Results of Operations
Our results of operations are discussed and analyzed by segment.
We have two segments--Industrial Controls and Aircraft Engine
Systems. Industrial Controls provides energy control systems and
components primarily to OEMs (original equipment manufacturers)
of industrial engines and turbines. Aircraft Engine Systems
provides energy control systems and components primarily to OEMs
of aircraft engines. Portions of Industrial Controls, related to
the manufacture and sale of fuel injection nozzles for
industrial markets, control systems and related services for
industrial users in retrofit situations, and products for small
industrial engine markets, were previously reported as Aircraft
Engine Systems or Other Segments. Prior-year amounts in the
financial information that follows have been restated to be
consistent with the current composition of our segments.
The segment earnings reported in this discussion and analysis do
not reflect gain on sale of business or allocations of corporate
expenses, and are before interest and income taxes. These other
items are separately discussed and analyzed.
<Table>
<Caption>
Industrial Controls
----------------------------------------------------------------------------
Three months Nine months
ended ended
June 30, June 30,
----------------------------------------------------------------------------
IN THOUSANDS 2001 2000 2001 2000
----------------------------------------------------------------------------
External net sales $104,113 $86,921 $282,338 $247,936
Segment earnings 16,108 10,912 41,946 35,194
============================================================================
</Table>
11
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External net sales for Industrial Controls increased in both the
three months and nine months ended June 30, 2001 as compared to
the corresponding periods last year. Included in last year's
amounts were sales from a portion of Industrial Controls that
was divested on May 31, 2000. Although the actual amount of
sales associated with this portion of our business has not been
determined, we believe it had annual sales of approximately $50
million. If adjusted for the effects of the divestiture, our
sales increase in both the three-month and nine-month periods
would have been higher than reflected above.
Our sales increase in Industrial Controls reflects strong demand
for turbine and engine control products throughout the world, as
well as new product introductions and market share gains. We
benefited from continued strength in key end-markets,
particularly power generation. We continue to encounter strong
demand for energy-efficient, environmentally friendly control
systems for turbines and engines.
To capitalize on new technologies and the demand for broader
functionality, Industrial Controls continues to develop new
products and product lines. We expect over 30 new products will
have entered production by the end of the year. These new
products will contribute to sales growth over the next several
quarters.
In the third quarter, Industrial Controls announced an alliance
with Leonhard-Reglerbau for networked system solutions targeting
distributed power and centrally generated power applications,
ranging from 100 kilowatts to 50 megawatts.
In addition, at the end of the quarter, Industrial Controls
acquired the Bryce diesel fuel injection business of Delphi
Automotive Systems, which extends and complements Woodward's
existing products for the important medium-speed diesel market.
Fuel injection systems are vital to diesel engines used in power
generation, marine, and locomotive applications, and are key to
reducing emissions and improving engine fuel efficiency.
Segment earnings for Industrial Controls increased in both the
three months and nine months ended June 30, 2001, as compared to
the corresponding periods last year. Segment earnings also
increased over adjusted amounts for last year in both periods.
Last year, we incurred expenses that we associated with the
decision to sell our turbine control retrofit business. We also
incurred certain expenses associated with the sudden and
unexpected business failure of a customer located in Germany. We
do not believe these expenses, which totaled $2.5 million in
both the three-month and nine-month periods, are indicative of
normal operations. Without these expenses, segment earnings
would have been $13.4 million in the three months ended June 30,
2000, and $37.3 million in the nine months ended June 30, 2000.
12
<Page>
The increases in Industrial Controls' segment earnings would
have been higher if the divested operations, which last year
generated earnings in proportion to sales similar to the rest of
Industrial Controls, had been excluded from last year's
comparison amounts. Our acquisition of the Bryce diesel fuel
injection business occurred at the end of the current quarter
and had no impact on sales or earnings of the current three or
nine-month periods.
<Table>
<Caption>
Aircraft Engine Systems
=============================================================================
Three months Nine months
ended ended
June 30, June 30,
-----------------------------------------------------------------------------
IN THOUSANDS 2001 2000 2001 2000
-----------------------------------------------------------------------------
External net sales $78,395 $68,575 $221,076 $190,237
Segment earnings 15,227 11,190 41,884 19,647
=============================================================================
</Table>
External net sales for Aircraft Engine Systems increased in both
the three months and nine months ended June 30, 2001, as
compared to the corresponding periods last year. In addition to
solid orders for products used in regional and narrow-body
commercial jets, sales growth for both periods was driven by
increased demand for some OEM products, aero derivative engine
nozzles and controls for power generation applications, military
spare parts, and commercial aftermarket sales.
Although there has been good growth in Aircraft Engine Systems
so far this year, we do not expect this growth trend to continue
into the fourth quarter. Recent industry forecasts have
suggested that aerospace industry growth rates may slow.
Nevertheless, we are positioned well in the markets we serve and
the large supply contracts won earlier this year, while
requiring investment in product development, will provide a
solid base for future sales.
Segment earnings for Aircraft Engine Systems increased in both
the three months and nine months ended June 30, 2001, as
compared to the corresponding periods last year. Segment
earnings also increased over adjusted amounts for last year in
both periods. Last year, we incurred expenses related to a
workforce realignment program, which was partially offset by a
reduction in certain accruals related to a prior business
acquisition. We do not believe these expenses, which totaled
$1.4 million in the three months ended June 30, 2000, and $3.9
million in the nine months ended June 30, 2000, are indicative
of normal operations. Without these expenses, our segment
earnings would have been $12.6 million in the three months ended
June 30, 2000, and $23.5 million in the nine months ended June
30, 2000.
The improvement in Aircraft Engine Systems' segment earnings
reflects the impact of higher sales and cost reduction actions
initiated in the second quarter of fiscal 2000. In particular,
our cost of goods sold was relatively high in the first half of
fiscal 2000, impacting the nine-month comparison. Following last
year's workforce management
13
<Page>
program, which aligned staffing levels with expected demand,
and other cost reduction actions, our cost of goods sold as a
percent of sales decreased to levels comparable to those in
fiscal year 1999.
<Table>
<Caption>
Nonsegment Expenses and Gain
=========================================================================
Three months Nine months
ended ended
June 30, June 30,
-------------------------------------------------------------------------
IN THOUSANDS 2001 2000 2001 2000
-------------------------------------------------------------------------
Interest expense $1,652 $2,842 $6,167 $8,727
Interest income (147) (214) (715) (553)
Corporate
expenses 7,449 4,929 17,214 13,303
Gain on sale of
business - (25,244) - (25,244)
=========================================================================
</Table>
Interest expense decreased in both the three months and nine
months ended June 30, 2001, as compared to the corresponding
periods last year because we had lower levels of average
outstanding debt this year. Even with the recently completed
acquisition of the Bryce diesel fuel injection business, our
June 30, 2001, total debt balance is more than $40 million lower
than it was immediately prior to the May 2000 sale of the
turbine control retrofit business.
Corporate expenses not allocated to segments were higher in the
three-month and nine-month periods this year as compared to the
same periods last year primarily because of increases in
variable compensation expenses as a result of improved company
profitability and increases in the market value of the company's
common stock.
<Table>
<Caption>
Net Earnings
=============================================================================
Three months Nine months
ended ended
June 30, June 30,
----------------------------------------------------------------------------
IN THOUSANDS EXCEPT
PER SHARE AMOUNTS 2001 2000 2001 2000
----------------------------------------------------------------------------
Earnings before
income taxes $22,381 $39,789 $61,164 $58,608
Income taxes 8,653 13,624 23,856 21,064
----------------------------------------------------------------------------
Net earnings $13,728 $26,165 $37,308 $37,544
=============================================================================
Basic earnings
per share $ 1.21 $ 2.33 $ 3.30 $ 3.34
Diluted earnings
per share 1.18 2.32 3.23 3.33
=============================================================================
</Table>
Income taxes were provided at an effective rate of 39.0% of
pre-tax earnings in the nine-month period ended June 30, 2001,
compared to 35.9% for the same period last year. Last year's
rate was impacted by the sale of our turbine control retrofit
business, which allowed us to use capital loss carryforwards for
which we previously provided valuation allowances.
14
<Page>
Net earnings decreased in both the three months and nine months
ended June 30, 2001, as compared to the corresponding periods
last year. Net earnings last year included the following items:
1) An after-tax gain of $17.2 million for both the three-month
and nine-month periods last year, related to our sale of the
turbine control retrofit business ($1.53 per diluted share for
the three-month period and $1.52 per diluted share for the
nine-month period); and, 2) Certain expenses totaling $2.4
million in the three-month period last year and totaling $3.9
million in the nine-month period, primarily related to the
retrofit business sale and to workforce realignment ($0.21 per
diluted share for the three-month period and $0.34 per diluted
share for the nine-month period). Without these items, net
earnings would have been $11.3 million, or $1.00 per diluted
share, for the three months ended June 30, 2000, and $24.2
million, or $2.15 per diluted share, for the nine months ended
June 30, 2000.
Looking forward to the remainder of the year, we clearly expect
consolidated net sales for the year ending September 30, 2001,
to exceed our previously stated sales growth goal of 10 percent
over last year's sales of $597.4 million. In addition, we now
expect net earnings for the year ending September 30, 2001, to
increase at least 30 percent over last year, excluding certain
gains and expenses. These gains and expenses included last
year's gain on the sale of our turbine control retrofit business
(which was $17.1 million, or $1.51 per diluted share) and last
year's expenses associated with the retrofit business sale,
workforce realignment, and other costs not believed to be
indicative of normal operations (which totaled $6.7 million, or
$0.59 per diluted share). Without these gains and expenses, net
earnings last year would have been $36.6 million, or $3.23 per
diluted share. (Reported net earnings for the full fiscal year
last year were $47.0 million, or $4.15 per diluted share.)
Beyond September 30, 2001, we continue to believe that we can
sustain 15 percent earnings growth on average over the next
three to four years.
Financial Condition
Our discussion and analysis of financial condition is presented
by segment for total segment assets, which consists of accounts
receivable, inventories, property, plant, and equipment--net,
and intangibles--net. We also discuss and analyze other balance
sheet and cash flow items. Together, this discussion and
analysis will help you assess our liquidity and capital
resources, as well as understand changes in our financial
condition.
15
<Page>
<Table>
<Caption>
Assets
---------------------------------------------------------------------------
At March At September
IN THOUSANDS 31, 2001 30, 2000
---------------------------------------------------------------------------
Total segment assets:
Industrial Controls $268,366 $214,935
Aircraft Engine Systems 250,888 260,712
Unallocated corporate
property, plant, and
equipment - net 4,145 5,072
Other unallocated assets 52,307 53,004
---------------------------------------------------------------------------
Total assets $575,706 $533,723
===========================================================================
</Table>
Industrial Controls' total segment assets at June 30, 2001,
increased over the amount at September 30, 2000, because of
acquisitions and the impact to accounts receivable and inventory
as a result of higher sales activity.
<Table>
<Caption>
Other Balance Sheet Measures
---------------------------------------------------------------------------
At March At September
IN THOUSANDS 31, 2001 30, 2000
---------------------------------------------------------------------------
Total assets $575,706 $533,723
Working capital 118,037 100,836
Long-term debt, less
current portion 84,500 74,500
Other liabilities 51,530 50,142
Commitments and
contingencies - -
Shareholders' equity $302,371 $275,624
===========================================================================
</Table>
The increase in working capital (current assets less current
liabilities) over the September 30, 2000, amount was most
significantly due to increases in accounts receivables and
inventory caused by higher sales levels. Our long-term debt
increased since September 30, 2000, because business
acquisitions and other investing activities have required more
cash than generated from operations in the first nine months of
the year. The increase in shareholders' equity over the
September 30, 2000, amount was primarily due to the excess of
net earnings over dividends.
We are currently involved in matters of litigation arising from
the normal course of business, including certain environmental
and product liability matters. Further discussion of these
matters is in Note P in the notes to consolidated financial
statements in our 2000 annual report to shareholders, which was
filed with our Form 10-K for the year ended September 30, 2000.
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<Page>
<Table>
<Caption>
Cash Flows
--------------------------------------------------------------------------
NINE MONTHS
ENDED JUNE 30,
--------------------------------------------------------------------------
IN THOUSANDS 2001 2000
--------------------------------------------------------------------------
Net cash provided by operating
activities $44,225 $46,391
Net cash provided by (used in)
investing activities (50,504) 21,861
Net cash provided by (used in)
financing activities 4,040 (63,032)
==========================================================================
</Table>
Net cash provided by operating activities remained strong, but
down slightly. Exclusive of last year's sale of the turbine
control retrofit business (the proceeds of which is considered
an investing activity), earnings were higher in the nine months
ended June 30, 2001, than they were in the same period last
year. However, timing issues affecting accounts receivable and
inventories impacted the nine-month comparison. These balances
will be a source of future operating cash flows.
Net cash flows for investing activities changed primarily
because of differences in our business acquisition and
divestiture activities. In the nine-month period this year, we
completed two acquisitions. In the same nine-month period last
year, we completed one divestiture. In addition, our capital
expenditures were $4.3 million lower in the nine months this
year as compared to the same period last year. Of this amount,
$1.4 million is related to internal software development costs
that we capitalized last year. Currently, there are no ongoing
or planned software development projects similar in size or
scope to that project. The remaining difference is related to
both normal quarterly variations in capital expenditure rates
and an expectation for lower capital expenditures for the full
fiscal year 2001 as compared to fiscal year 2000. We expect our
capital expenditures for the year ending September 30, 2001, to
be less than this year's expected depreciation expense of
approximately $26 million. Net cash flows for financing
activities also changed primarily because of differences in our
business acquisition and divestiture activities. In the
nine-month period ended June 30, 2001, we borrowed to finance
our first-quarter and third-quarter acquisitions. In the
nine-month period last year, we used the proceeds from the sale
of the turbine control retrofit business to repay debt.
17
<Page>
Future cash flows from operations and available revolving lines
of credit are expected to be adequate to meet our cash
requirements during the next twelve months. However, it is
possible business acquisitions could be made in the future that
would require amendments to existing debt agreements and the
need to obtain additional financing.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible
Assets." Statement No. 141 primarily impacts accounting for
acquisitions initiated or completed after June 30, 2001;
however, there are transition provisions that may result in the
reclassification of carrying values among existing goodwill and
other intangible assets. Once adopted, Statement No. 142
prohibits amortization of goodwill, but requires transitional
and annual impairment reviews that may result in the recognition
of losses, among other requirements. Statement No. 142 and the
transition provisions of Statement No. 141, which must be
adopted at the same time, will be effective on October 1, 2002,
or on October 1, 2001, if we elect to adopt early. While we have
not yet completed our assessment of the impact of these
statements on our financial statements, adoption will result in
a reduction in our amortization expense.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements." This bulletin provides interpretations
and practices followed by the Division of Corporation Finance
and the Office of the Chief Accountant in administering the
disclosure requirements of the Federal securities laws regarding
revenue recognition. We have completed a review of our revenue
recognition practices and have not discovered any revenue
recognition practices that needed to be changed in order to
comply with this bulletin, which became effective no later than
July 1, 2001.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our long-term debt is sensitive to changes in interest rates.
Also, assets, liabilities and commitments that are to be settled
in cash and are denominated in foreign currencies are sensitive
to changes in currency exchange rates. These market risks are
discussed more fully in the Management Discussion and Analysis
on page 21 of our 2000 annual report to shareholders, which was
filed with our Form 10-K for the year ended September 30, 2000.
18
<Page>
Part II
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Filed as Part of This Report None.
(b) Reports Filed on Form 8-K During the Third Quarter of the Fiscal
Year Ending September 30, 2001. None.
19
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WOODWARD GOVERNOR COMPANY
July 30, 2001 /s/John A. Halbrook
- ------------------------ John A. Halbrook, President
and Chief Executive Officer
July 30, 2001 /s/Stephen P. Carter
- ------------------------ Stephen P. Carter, Vice
President, Chief Financial
Officer and Treasurer
20