BUSINESS
DESCRIPTION
The Woodward Governor Company
designs and manufactures fuel delivery
and control systems for prime movers.
C O N T E N T S
To All Shareholder and Worker Members 2
Focusing On World Markets 5
Financial Summary and Analysis 11
Financial Statements 15
Summary of Operations/Ten Year Record 27
Board of Directors 28
FINANCIAL HIGHLIGHTS
Fiscal year ended September 30th 1994 1993 1992
(In Thousands of Dollars except per
share amounts and other data)
Operating Results
Net billings for products and services $333,207 $331,156 $374,173
Total costs and expenses* 338,402 308,072 341,197
Earnings (loss) before cumulative
effect of accounting changes (3,273) 13,389 20,212
Per share (1.11) 4.50 7.23
Cumulative effect of accounting changes,
net of tax (17,417)
Per share (5.86)
Net earnings (loss) (3,273) (4,028) 20,212
Per share (1.11) (1.36) 7.23
Cash dividends per share 3.72 3.72 3.70
Year-end Financial Position
Working capital 113,751 107,809 103,818
Total assets 323,318 332,461 331,653
Long-term debt 32,665 36,246 40,135
Shareholders' equity 193,846 206,222 219,690
Other Data
Shareholders' equity per share $66.29 $69.42 $73.90
Worker members 3,439 3,264 3,632
Registered shareholder members 2,256 2,301 2,301
*Total costs and expenses includes restructuring expense of $23,700, $3,480,
and $2,741 for 1994, 1993, and 1992, respectively.
TO ALL SHAREHOLDER AND WORKER MEMBERS
Woodward Governor Company
Fiscal year 1994 sales figures did not reach initial expectations. Industrial
markets remained flat, and the aircraft industry continued its decline.
Although we saw many encouraging opportunities last year, they did not mature
quickly enough to generate the business we envisioned. We remain optimistic
because most of these opportunities are still viable, and we are well prepared
to take advantage of them as they develop.
Total sales during fiscal year 1994 were $333.2 million, a slight increase
from last year's $331.2 million. Earnings (loss) before income taxes and
cumulative effect of accounting changes decreased from $23.1 million to $(5.2)
million due principally to a restructuring expense of $23.7 million. In fiscal
1994, earnings (loss) per share before the cumulative effect of accounting
changes were $(1.11) compared to $4.50 last year.
Throughout the year, we have invested a great deal of time and effort
analyzing global markets to determine the proper areas in which to concentrate
our resources. We did so because it is good business, and because we take the
confidence placed in us by shareholder members very seriously. The best way we
can fulfill our obligation to maximize shareholder investment is to focus on
meeting customer needs, not only during the short term but also over the long
term.
In today's markets, customers have increased expectations of prime mover
controls and control systems. In the "Focusing on World Markets" section of this
report, we describe how we continue to make considerable investment in the
research and development needed to meet market demands. As a result, we recently
introduced several products, and we diligently work to develop new control
concepts to meet emerging customer needs.
Where we once made products to perform discrete functions, we now deliver
integrated systems capable of performing a variety of tasks, at the lowest
cost possible. To be the supplier of choice, we must exceed market demands
and use our unique strengths to our advantage.
To reduce operating costs and eliminate excess aircraft capacity, we will
close a leased facility in Rockford and eliminate aircraft parts manufacturing
operations at Stevens Point, Wisconsin. We will consolidate all aircraft
operations into the two remaining Rockford-area plants and sell the Stevens
Point plant. The Hydraulic Turbine Controls operation will remain in Stevens
Point for the time being. We also intend to divest ourselves of Bauer Aerospace
as it has continued to operate at a loss and no longer matches our long-term
strategic goals. Although these actions will result in a one-time restructuring
expense of $23.7 million, they will help improve profitability in future years.
As our markets change and require complete systems, we must quickly acquire
or develop new technology by using the most cost-effective means possible. We
have taken appropriate steps to meet this requirement. To address the needs of
medium and large diesel engine markets, we acquired two firms in Germany:
Einspritzgertewerk Aken, a manufacturer of fuel injection pumps, and
Feingertebau Kelbra, a firm making fuel injection nozzles. These operations have
become Woodward Governor Germany GmbH. We also bought HSC Controls, Inc. in
Buffalo, New York. HSC makes key components required for new generations of
aircraft controls. Total shipments of the three companies included in 1994
results were $10.7 million.
This year we implemented our new management information system (MIS),
completing a major five-year commitment in both time and money. The new system's
flexibility allows members to input and retrieve information on a real-time
basis. In addition, the system's modular design allows for expansion or
modification as our business needs change.
On the organizational side, the Board elected Michael T. Yonker and Lawrence
E. Gloyd to serve as directors, and we welcome them to the organization. Mr.
Yonker is President and Chief Executive Officer at Portec, Inc. of Chicago,
Illinois, and Mr. Gloyd is Chairman, President and Chief Executive Officer at
CLARCOR, Inc. of Rockford, Illinois. On January 12, 1994 the Board of Directors
elected Stephen P. Carter to serve as Assistant Treasurer. He has been with the
company for seven years.
As we reported last year, we had anticipated that 1994 would place increased
demands on Woodward Governor Company, and this past year has certainly fulfilled
that expectation. Next year, 1995, also holds a full slate of challenges for us.
In addition to the effective implementation of the 1994 decisions, we must
maintain a strong, focused effort to develop new business while we continue with
aggressive efforts to reduce our cost base. Competitive markets, demanding
unique solutions to engine control needs, require that we supply complex
controls at lower costs than ever before. We are moving aggressively to meet
these requirements, and we will be successful.
It goes without saying that the single most important element in our success
is our persevering, dedicated, talented membership. We all have proven we have
the ability to accomplish great things by setting goals, making commitments to
one another, and following through on them. Time and again, the members have
demonstrated they are conscientious and take their promises seriously.
We will redouble our efforts to ensure that we not only maintain the
atmosphere that fosters this commitment but also will work diligently to improve
it. Working together through every level of our company, we intend to eliminate
barriers and encourage communication concerning every activity, every decision,
every interaction to flow quickly through the company. By doing so, everyone
will be able to pull together toward our common goal the success of Woodward
Governor Company.
Woodward Governor Company is fortunate to have a strong foundation based on
the Corporate Partnership philosophy. With the full support of both our worker
and shareholder members, we will take the necessary steps to realign our
resources within the global marketplace, as we better prepare ourselves to
convert opportunity into reality. Working together, we shall meet the challenges
ahead and maintain the position of leadership, quality, and service that is the
hallmark of Woodward Governor Company.
Sincerely,
Calvin C. Covert
Chairman of the Board
John A. Halbrook
President and
Chief Executive Officer
November 30, 1994
FOCUSING ON WORLD MARKETS
Woodward Governor Company
Customers throughout our markets demand more from the products they purchase,
and they want them at the lowest price possible. Not only do customers demand
more, but competition has become fierce. Pure prime mover control no longer is
sufficient. The industrial marketplace wants systems capable of managing
additional plant operations, and many customers need to exert control from a
remote location. In the aviation marketplace, control systems based on
electronic technology have become industry standards as customers increasingly
move in that direction.
Over the past two decades, we steadily improved the features of our controls
and the benefits they deliver. In keeping with our worldwide market commitment,
we continue to meet the demands of a broadening customer base and customers have
recognized us for our accomplishments. Because of these achievements, we see
important opportunities opening to us. Foremost is the opportunity to expand
further into markets throughout the world. Furthermore, as emission laws
continue to drive technology, we will work with our customers to design and
develop new controls and accessories for the emerging clean-burning, fuel-
efficient engines and turbines used in tomorrow's industrial and aviation
applications.
INDUSTRIAL CONTROLS
With the advent of digital controls, competition has become intense. To be
successful, we are making every effort to increase our customer associations and
continue to discover and respond to market needs.
We hold relatively strong positions with the traditional market of original
equipment manufacturers (OEMs), and we have achieved increased success with end
user markets. Although many OEMs make their own controls, and generally use them
when they can, we provide them with controls to solve unique problems.
Woodward's specialized know-how offers OEMs a cost effective approach to meet
unusual or specialized control requirements.
Retrofit markets exist throughout the world and increasingly offer
opportunities for our controls. The world's need for automation, improved fuel
efficiency, emission control, and reliability are the primary drivers for these
markets. Electrical power generation, oil and gas transmission (pipelines), and
process industries are some industries that offer substantial growth
possibilities for retrofit applications.
The development of available energy resources will be important if many
emerging countries are to become world-class industrial nations. Effective prime
mover control will be an important part of this development, and we are making
our products known in these areas.
Our business units interact with customers in Europe, Africa, and the Middle
East, including countries once part of the Soviet Union. Throughout Eastern
Europe, there exist untapped markets for turbine controls, including hydropower
applications.
One area where there is particularly strong competition is the Asia/Pacific
region. This situation highlights the significant market potential existing
there.
China also offers an almost unlimited range of opportunities for all our
industrial controls including hydroturbine controls.
The use of electronic control applications is growing throughout South
America. This area has a need for upgraded hydroturbine controls. Throughout
all our industrial markets, we believe 1995 offers strong sales potential.
Turbomachinery Controls
For turbomachinery applications, the NetCon 5000(@) system remains a premier
control for large retrofit applications. This year, Turbomachinery Controls
members developed the LinkNet(TM) distributed I/O, the TM1001 precise fuel
metering system, the EM35(TM) all-electric actuator for use with established
3103 valves, GAP(TM) software, and the Loopmate control system module. In
addition, they significantly enhanced the field-proven 505 and 511 control
systems.
Turbomachinery Controls has emerged as a world leader in dry low emissions
(DLE) turbine control technology. We are working with the three leading
aeroderivative gas turbine manufacturers (GE Marine & Industrial Engines, Turbo
Power and Marine Systems, and Rolls-Royce) to develop controls and fuel
management systems for their DLE turbines.
An indicator of Turbomachinery Controls' strong capabilities is the
completion of some extremely complex retrofit projects. For example, we
completed the electrical and mechanical retrofit of one of the largest mainline
steam turbines for Consolidated Edison of New York. Such projects have
strengthened our presence in retrofit markets; consequently, we enjoy an
increased acceptance rate on proposals. Significant credit for this success goes
to the regional offices, which we established five years ago.
Hydraulic Turbine Controls (Hydro)
This year, Hydro continued to solve intricate hydroelectric control problems
through the use of specialized digital technology. The members also developed
the ModuFlo(TM) valve, which will significantly reduce hydroturbine control
costs and manufacturing times. Hydro members are improving control designs to
give operators a cleaner environment. These are the types of actions that
indicate our commitment to listen to our customers and produce products capable
of meeting their needs.
Another example of our commitment to meet customer needs occurred when a
customer had limited water flow, but needed to obtain maximum benefit from those
available resources. Hydro installed a system specifically designed to help
generate the maximum amount of electrical power from the available water flow.
Currently we have a group of members working with turbine manufacturers in
Japan and have received control systems orders for several large projects.
Shipments will begin in fiscal year 1995. We also are prepared to enter into the
market as an engineering resource by supplying controls to several generating
stations and operating them as a grid from a central location.
Engine Controls
In October 1993 we introduced our North America network of Central
Distributors (CDs) and Authorized Dealers (ADs). Currently we have eleven CDs
and fourteen ADs. Already the network has made contact with a large number of
end users, increasing Woodward business opportunities. During the year the group
achieved good sales growth and 1995 projections indicate continued growth. CDs
and ADs are important avenues for us to introduce new products to the end users,
who then may request OEMs to include those products on new engines.
During FY 1994, we introduced new products at a rate sufficient to overcome
the decline of our more traditional controls. The TQ-125 control, an integrated
control system for small engines, mounts directly on the engine and caters to
the large standby engine-generator market. Another new product, the Flo-Tech
valve, a low-cost, linearizing flow throttle body actuator/driver with a
separate or integrated speed control, has become particularly attractive for use
on carbureted gas engine vehicles as well as for wastegate control on these
vehicles.
The new digital sychronizer and load control (DSLC) integrates the function
of several older stand-alone electronic units, creating a cost-effective
solution for the normal generator-set control. It also offers networking
capabilities for future distributed control systems technology.
We are finding many opportunities to develop new products for OEMs supplying
equipment to be world's emerging gas engine markets. As emission laws continue
to become more stringent, many users are turning to natural gas engines as a
source of power in both vehicular and power generation applications. Our
opportunities include supplying everything from small portions to complete
systems, depending on the engine manufacturer's control strategy. The mobile
applications of these engines are very cost sensitive, and we are making headway
at understanding how to achieve low-cost, on-engine electronics.
We also have enjoyed continued success in the application of existing
controls, such as the CLC(TM), a complete locomotive control, the locomotive
engine control (LEC), and the 721 digital control. These products are gaining
increased acceptance in the United States as well as world markets.
We made significant progress in the electronic fuel injection market. We
developed new products, such as electronic rail valves and solenoid operated gas
admission valves, for this market. Also, we acquired assets and product rights
of two companies in Germany. In November 1993, we acquired Einspritzgertewerk
Aken (EGA), a fuel pump manufacturer, and in September, 1994, Feingertebau
Kelbra GmbH, a firm manufacturing fuel injection nozzles. When we combine
our extensive fuel control technology with the products of these two
firms, we offer a very strong fuel injection system for medium and slow speed
engine applications throughout the world.
AIRCRAFT CONTROLS
Aviation markets have redefined themselves and stabilized at a growth level
much lower than that of the booming '80s. The industry is demanding quieter,
less expensive, more fuel efficient turbines to increase operating efficiency
and maintain lower levels of noise and exhaust pollution. Electronic control
systems play an important role in meeting these objectives.
As the use of electronics increases, the complexity of individual
hydromechanical control assemblies decreases. Although we have maintained market
share, the value added per control has decreased. The old main engine "can"
control, so popular just a short time ago, required in excess of 2,000
individual parts. Newer hydromechanical fuel metering units generally have fewer
than 1,000 parts. In addition, new systems have a higher purchased-part content,
while the parts manufactured in-house are very specialized.
This past year, we acquired HSC Controls, Inc. in Buffalo, New York. HSC is a
recognized leader in electromagnetic devices, such as torque motors and
servovalves, and its acquisition underlines our commitment to develop electro-
magnetic technologies. With HSC, we now have established direct control over
increasingly critical components in aircraft control systems. HSC works with
other industries, supplying devices used in eye surgery, in respirators, in
blood pressure monitors, and in semi-conductor manufacturing. These activities
open avenues into new markets.
Large and Small Aircraft Controls
As aircraft-control markets increasingly ask for total system solutions for
control problems, our ability to work with customers to develop and integrate
such system components has become essential. Our first application of a fully
integrated electronic fuel control system will enter operation in the Williams
F129 turbofan engine. The Swedish Air Force selected this engine model to re-
engine its fleet of SK-60 trainers. We continue to make significant additional
investments to enhance our system integration capabilities.
To further illustrate our dedication to meet special market needs, we have
developed specialized valving to help turbine manufacturers reduce exhaust
emissions without sacrificing power. Another advanced development project,
our hydraulic multiplexer, has the potential to replace several older components
while weighing less and offering greater reliability.
This year the GE90 underwent initial evaluation on a flight-test aircraft. It
performed successfully and soon should be ready for certification testing on the
Boeing 777. This will be the first of many applications for this engine and its
derivatives.
Also, we are developing controls for the BMW Rolls-Royce BR700 series of
engines and working closely with this company. Intended for medium-sized
business and commercial aircraft, the BR700 family of engines will make BMW
Rolls-Royce a market leader.
Aircraft Product Service Centers
In spite of the downturn in aircraft markets, our Aircraft Product Service
Centers, and other aircraft-control support operations, have been quite
successful. Although sales of our new controls declined, revenues from these
support services rose. We have gained market share and are benefiting from the
the increased population of Woodward controls in the field.
Thousands of commercial aircraft are equipped with engines using Woodward
controls, and these engines will be in use for many decades. As we introduce
new products into the world's aviation marketplace, we will continue to upgrade
the services offered by our aftermarket support organization. We believe fast,
reliable, available support is a critical function to the success of any control
or auxiliary device.
Aircraft controls is a difficult, highly competitive market. Clearly, the
aviation industry has experienced momentous change before stabilizing at lowered
activity levels. However, we believe our technical know-how, our reputation for
producing quality products, and our commitment to work closely with customers
will ensure continued success.
FINANCIAL SUMMARY & ANALYSIS
Woodward Governor Company
RESULTS OF OPERATIONS
1994 Compared to 1993
Shipments
Shipments during 1994 were $333,207,000, .6% above the $331,156,000 shipped
in 1993. Price increases accounted for .6%, volume decreases accounted for 3.9%
and increases due to acquisitions accounted for 3.2% of the change in 1994
shipments. In addition, shipments from overseas plants translated into over
$2,300,000 or .7% more U.S. dollars compared to prior year exchange rates. A
decline in Aircraft Controls' shipments was offset by an increase in Industrial
Controls' shipments. Military sales continue to decline, dropping from 11.0% of
total company shipments in 1993 to 9.6% this year.
In 1994, the company acquired HSC Controls, Inc. of Buffalo, New York. HSC
designs and manufactures torque motors and servovalves primarily for aerospace
applications. HSC's shipments from the date of acquisition are included in the
Aircraft Controls group. The company also acquired two companies in Germany:
Einspritzgertewerk Aken, a diesel fuel pump manufacturer, and Feingertebau
Kelbra, a manufacturer of fuel-injection nozzles. These two companies have been
consolidated to become Woodward Governor Germany GmbH. Shipments from the dates
of acquisition for these companies are included in the Industrial Controls group
this year. Combined shipments included in 1994 results for these three
acquisitions amount to $10,699,000.
Aircraft Controls' shipments were $141,632,000, down 7.0% from last year's
total of $152,238,000. In 1994, Aircraft Controls' shipments were 42.5% of total
company shipments compared to 46.0% in 1993. The depression in the commercial
aircraft industry continues to influence shipments.
Industrial Controls' shipments in 1994 were $191,575,000 compared to
$178,918,000 last year, a 7.1% increase. Shipments made in 1994 represented
57.5% of total company shipments, compared to 54.0% last year. However,
shipments of the newly acquired Woodward Governor Germany GmbH accounted for
4.1% of the increase, while existing operations accounted for a 3.0% increase.
The importance of worldwide marketing efforts is evidenced by shipments at
overseas business units increasing at a higher rate than domestic shipments.
Cost of Goods Sold
Cost of goods sold was $248,839,000 or 74.7% of net sales in 1994, compared
to $246,254,000 or 74.4% in 1993. Material costs increased due to the greater
purchased material content of our products, but direct labor costs were reduced
as a result of improvements in productivity. Although research and development
costs decreased from the prior year, we continue to be committed to these
efforts which are necessary for future growth. Engineering costs overall
continued to increase because of the need to provide even greater support to
current products. Spending on research and development in 1994 amounted to
$16,400,000, compared to $18,500,000 in 1993.
Sales, Service, and Administrative Expenses
In 1994, sales, service, and administrative expenses were $58,557,000,
compared to $52,559,000 in 1993. This represents 17.6% of sales, compared to
15.9% in 1993. Included in the 1994 total are the sales, service, and
administrative expenses since the dates of acquisition for the three acquired
companies. That and the cost of implementing the final phase of the new
management information system at all domestic locations were the primary reasons
for the increase.
Restructuring Expense
Restructuring expense in 1994 was $23,700,000, compared to $3,480,000 in
1993, and reflects the major restructuring of the Aircraft Controls group to
bring manufacturing capacity in line with current and projected shipment
requirements. These costs include the closing of the Stevens Point plant,
divesting of Bauer Aerospace, and consolidating all aircraft manufacturing,
assembly, and test operations into the two remaining Rockford-area plants.
Included in both years are the costs of severance pay offered to terminated
workers. The cost of an early retirement program offered to eligible members is
included in 1993.
Interest Expense
Interest expense was $3,941,000 in 1994 compared to $2,722,000 in 1993. The
increase over last year is a result of higher levels of borrowing combined with
higher interest rates, in addition to $665,000 of interest as the result of
completing an income tax review.
Interest Income
Interest income in 1994 was $708,000 compared to $748,000 in 1993.
Other Expense-Net
Other expense-net was $4,073,000 in 1994, compared to $3,805,000 in 1993.
Income Taxes
Income taxes were a benefit of $1,922,000 in 1994 compared to an expense of
$9,695,000 in 1993. The primary reason for the benefit this year is the
significant restructuring charge.
Accounting Changes
In the fourth quarter of 1993, the company elected to adopt Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (SFAS 106). SFAS 106 requires the
company to accrue the cost of postretirement benefits (principally health care)
over the years members provide service. This resulted in a one-time charge in
1993 of $17,341,000 (after reduction for income tax of $11,087,000). The company
also elected to adopt Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" (SFAS 112). SFAS 112
requires the accrual method of accounting for benefits to former or inactive
members after active membership, but before retirement. Implementation of this
statement last year resulted in a one-time charge of $427,000 (after reduction
for income tax of $273,000).
In 1993, the company also adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires a change
from the deferred method to the asset and liability method of accounting for
income taxes. The cumulative effect of this adjustment was to increase earnings
by $351,000. The cumulative impact of the three accounting changes, net of tax,
amounted to a $17,417,000 charge against net earnings in 1993, or $5.86
per share.
Net Earnings (Loss)
The 1994 (loss) before the cumulative effect of accounting changes was
($3,273,000), a decrease of $16,662,000 from 1993 earnings of $13,389,000 before
the cumulative effect of accounting changes. The results for 1994 included a
restructuring expense of $23,700,000 compared to $3,480,000 in 1993. Return on
sales was (1.0)% compared to 4.0% in 1993. Return on average net worth was
(1.7)%, compared to 6.3% in 1993. Earnings (loss) per share before the
cumulative effect of accounting changes were ($1.11) in 1994, compared to $4.50
in 1993. After deducting the cumulative effect of accounting changes, net of
tax, of ($5.86) per share, the net (loss) per share in 1993 was ($1.36). The net
(loss) in 1994 was ($3,273,000) compared to ($4,028,000) in 1993.
Earnings before income taxes and cumulative effect of accounting changes from
foreign operations in 1994 were $12,550,000 on shipments of $89,128,000,
compared to the 1993 total of $15,238,000 on shipments of $78,018,000. The
(loss) before income taxes and cumulative effect of accounting changes from
domestic operations this year was ($17,745,000) on shipments of $244,079,000,
compared to $7,846,000 of earnings in 1993 on shipments of $253,138,000. Without
the restructuring expense of $23,700,000, 1994 would have reflected earnings
before income taxes from domestic operations of $5,955,000. In 1994, the net
(loss) was ($10,710,000) compared to ($13,145,000) in 1993 for domestic
operations.
Management expects that sales and earnings will improve next year. This
expectation is based on a flat shipment level for the Aircraft Controls group
and an increase in shipments for the Industrial Controls group. We expect the
increase in shipments of Industrial Controls to be driven principally by the
continued expansion of the company's overseas markets. The restructuring within
Aircraft Controls and the increased shipment level of Industrial Controls should
lead to higher earnings next year. The restructuring announced in 1994 also
results in reduced membership levels for 1995.
The company is currently involved in matters of litigation arising from the
normal course of business, including certain environmental and product liability
matters, as well as a pricing provisions claim. For a further discussion of
these issues refer to Notes to Consolidated Financial Statements, Footnote K,
"Contingencies," on page 24.
Financial Condition
Cash and cash equivalents were $10,272,000 in 1994 and $10,497,000 in 1993.
Combined short- and long-term debt increased to $61,591,000 from $58,258,000
in 1993.
Accounts receivable increased from $64,024,000 at September 30, 1993 to
$69,778,000 at September 30, 1994. The increase is principally due to additional
receivables of acquired companies. In addition the allowance for losses was
increased from $1,989,000 in 1993 to $3,021,000 in 1994.
Inventories decreased to $80,272,000 at September 30, 1994 from $83,128,000
at September 30, 1993. The reduction is a net result of the decreased shipment
volume at certain business units and the additional inventory from acquisitions.
Property, plant, and equipment net decreased from $144,016,000 at September
30, 1993 to $122,911,000 at September 30, 1994. This decrease is due to the
writedown of these assets as a result of the restructuring and capital
expenditures for 1994 being less than depreciation.
Deferred income taxes increased $10,419,000 from $24,909,000 in 1993 to
$35,328,000 in 1994. The main reason for the increase is $9,208,000 related to
the 1994 restructuring charges and an acquired net operating loss carryforward.
A valuation allowance of $7,518,000 in 1994 and $2,492,000 in 1993 was recorded
principally due to foreign tax credit and acquired foreign net operating loss
carryforward limitations. Remaining deferred tax assets are expected to be
realized through future earnings.
Accounts payable and accrued expenses increased from $35,915,000 in 1993 to
$37,972,000 in 1994.
Other liabilities reflects the non-current accumulated postretirement benefit
obligation.
Shareholders' equity at September 30, 1994 decreased to $193,846,000 from
$206,222,000 at September 30, 1993.
Liquidity and Capital Expenditures
Cash dividends paid to shareholders in 1994 were $3.72 compared to $3.72 in
1993.
Cash flows provided from operations were $35,805,000 in 1994 compared to
$37,222,000 for 1993.
Cash flows (used) in investing activities were ($23,902,000) in 1994. This
compares to ($18,088,000) in 1993. Capital expenditures are the primary use of
cash, even though these expenditures have been reduced significantly the last
two years. In 1994 the company also acquired HSC Controls, Inc. and the two
companies that now comprise Woodward Governor Germany GmbH.
Net cash (used) in financing activities was ($11,833,000) in 1994,
($16,204,000) in 1993. The principal financing activities are short-term
borrowing and long-term debt. Dividend payments continue to be the principal use
of cash in this area.
Membership
Worldwide membership increased from 3,264 in 1993 to 3,439 in 1994. The
membership in newly acquired companies accounted for an increase of 273, while
the membership from existing operations declined by 98 through attrition.
RESULTS OF OPERATIONS
1993 Compared to 1992
Shipments
Shipments of $331,156,000 in 1993 were 11.5% below the $374,173,000 shipped
in 1992. Price increases accounted for 1.2% and volume decreases for 12.7% of
the change in 1993 shipments. Military shipments declined from 14.6% of total
company shipments in 1992 to 11.0% in 1993.
Industrial Controls' shipments rose in 1993 to $178,918,000 compared to
$175,487,000 in 1992, a 2.0% increase from 1992. Industrial Controls' shipments
represent 54.0% of total company shipments in 1993 compared to 46.9% in 1992.
The company achieved a modest increase in Industrial Control business levels.
Close customer contact has allowed us to regularly introduce controls designed
to meet customer needs and resulted in increased market share.
Aircraft Controls' shipments in 1993 dropped to $152,238,000, a 23.4%
reduction from the $198,686,000 in 1992. As a result, the percent of total
company shipments from Aircraft Controls declined from 53.1% in 1992 to 46.0%
in 1993.
The recession in the aircraft industry proved to be deeper and longer-lasting
than expected. Cancellations and delays of new aircraft orders combined with
customer inventory reductions drastically curtailed sales throughout the
industry. Pressure from customers put demands on the company to reduce prices,
which further strained profitability.
Cost of Goods Sold
Cost of goods sold was 74.4% of net sales in 1993 compared to 75.6% in 1992.
Even though we have made progress in reducing our manufacturing costs, these
reductions have not kept pace with customers' demands for price reductions.
Also, since research and development projects represent a vital ingredient in
our future success, we continue to devote resources to fund these projects in
order to ensure future growth. Spending on research and development in 1993
amounted to $18,500,000 compared to $16,000,000 in 1992.
Sales, Service, and Administrative Expenses
In 1993, sales, service, and administrative expenses were $52,559,000
compared to $51,036,000 in 1992. This amounted to 15.9% of sales, compared to
13.6% in 1992. Ongoing customer needs required sales and service activities to
remain at previous levels, and even demanded increased efforts to achieve the
shipment level. In addition, there were increased costs associated with the new
Turbomachinery Controls facility in Loveland, Colorado.
Restructuring Expense
Restructuring expense in 1993 was $3,480,000 compared to $2,741,000 in 1992.
Included in this is the severance pay offered to terminated members affected by
workforce reductions, along with provisions for the cost of early retirement
programs offered to eligible members.
Interest Expense
Interest expense was $2,722,000 in 1993 compared to $3,009,000 in 1992. The
decline in interest expense reflects the lower level of borrowing and favorable
rates compared to the previous year. Reduced capital expenditures in 1993
contributed to the decrease in borrowing.
Interest Income
Interest income in 1993 was $748,000 compared to $966,000 in 1992.
Other Expense-Net
Other expense-net was $3,805,000 in 1993, compared to $2,356,000 in 1992. The
increase over the previous year is due mainly to postretirement expenses
associated with the adoption of SFAS 106.
Income Taxes
The effective income tax rate in 1993 was 42.0%, compared to 38.7% in 1992.
Although the federal tax rate increased from 1992, the major reason for this
rate increase was the fact that a significant portion of our income was
generated at overseas locations at tax rates higher than in the United States.
Accounting Changes
In 1993, the company adopted SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions"; SFAS 112, "Employers' Accounting
for Postemployment Benefits"; and SFAS 109, "Accounting for Income Taxes". The
cumulative effect of all three accounting changes, net of tax, was a $17,417,000
charge against net earnings.
Net Earnings (Loss)
The 1993 earnings before the cumulative effect of accounting changes were
$13,389,000 ($4.50 per share), a decrease of 34.0% from 1992 earnings of
$20,212,000 ($7.23 per share). Return on sales was 4.0%, compared to 5.4%
in 1992. Return on average net worth was 6.3%, compared to 9.4% in 1992. After
deducting the cumulative effect of accounting changes, net of tax, of $5.86 per
share, the net (loss) per share was ($1.36). The net (loss) in 1993 was
($4,028,000) compared to net earnings of $20,212,000 in 1992.
In 1993, earnings before income taxes and the cumulative effect of accounting
changes from foreign operations were $15,238,000 on shipments of $78,018,000
compared to the 1992 total of $12,593,000 on shipments of $80,352,000. Earnings
before income taxes and the cumulative effect of accounting changes on domestic
operations was $7,846,000 on shipments of $253,138,000 compared to $20,383,000
of earnings in 1992 on shipments of $293,821,000. In 1993 the net (loss) was
($13,145,000) compared to net earnings of $13,114,000 in 1992 for domestic
operations.
Financial Condition
Cash and cash equivalents were $10,497,000 in 1993 and $7,633,000 in 1992.
Combined short- and long-term debt decreased to $58,258,000 from $64,375,000 in
1992. The lower level of capital expenditures helped to reduce the borrowing. In
1992, the company restructured its debt by selling 256,806 shares of treasury
stock to the Woodward Stock Plan, a qualified employee stock ownership plan
(ESOP). Under the terms of the transaction, the Stock Plan borrowed $25,000,000
from an institutional lender and purchased 256,806 shares. The company
guaranteed payment of the loan and agreed to make future contributions to the
Stock Plan sufficient to repay the loan. The loan is repayable in installments
through September 30, 2003.
Accounts receivable decreased from $71,544,000 at September 30, 1992 to
$64,024,000 at September 30, 1993. The decrease was due to the lower volume of
shipments in 1993.
Inventories remained flat and totaled $83,128,000 on September 30, 1993
compared to $82,412,000 at September 30, 1992.
Deferred income taxes increased from $12,339,000 in 1992 to $24,909,000 in
1993. The increase is due primarily to a $12,025,000 increase related to the
cumulative effect of accounting changes.
Other liabilities reflect the non-current accumulated postretirement benefit
obligation of $27,634,000, incurred as a result of the decision to adopt SFAS
106.
As a result of the cumulative effect of accounting changes on 1993 earnings,
total shareholders' equity at September 30, 1993 decreased to $206,222,000 from
$219,690,000 at September 30, 1992.
Liquidity and Capital Expenditures
Cash dividends paid to shareholders in 1993 increased slightly to $3.72
compared to $3.70 paid in 1992.
Cash flows provided from operations were $37,222,000 in 1993, compared to
$54,127,000 for 1992. The principal source of cash is earnings before cumulative
effect of accounting changes which was down significantly in 1993 from 1992.
Cash flows (used) in investing activities were ($18,088,000) in 1993. This
compares to ($53,203,000) in 1992. The primary use of cash was for capital
expenditures, which were significantly less in 1993 than 1992.
Net cash provided (used) in financing activities was ($16,204,000) in 1993,
and $705,000 in 1992. The principal financing activity is borrowing, and the
major use of cash is dividends.
Membership
Worldwide membership decreased 10.1% in 1993 to 3,264, a decrease of 368 from
3,632 in 1992. The reduction in 1993 was accomplished through early retirements,
attrition, and by a permanent reduction in the workforce.
The shares of the company are traded over-the-counter. The company stock is
listed on the NASD OTC Bulletin Board. The following schedule presents the bid
price range and dividends paid for each quarter of the last two fiscal years.
The bid price ranges are based upon quotations from brokers and newspapers of
general circulation and may not necessarily represent actual transactions.
Payment of dividends is subject to certain restrictions described in Note F of
Notes to Consolidated Financial Statements.
Quarterly Quarterly
Bid Price Dividends
Quarter Ended High Low Per Share
September 30, 1994 $84 $80 $.93
June 30, 1994 86 80 .93
March 31, 1994 87 72 .93
December 31, 1993 74 65 .93
September 30, 1993 $74 $65 $.93
June 30, 1993 76 61 .93
March 31, 1993 77 60 .93
December 31, 1992 80 67 .93
FINANCIAL STATEMENTS
Woodward Governor Company and Subsidiaries
STATEMENTS OF CONSOLIDATED EARNINGS (LOSS)
Woodward Governor Company and Subsidiaries
Year Ended September 30,
(In Thousands of Dollars except per share amounts) 1994 1993 1992
Net billings for products and services $333,207 $331,156 $374,173
Costs and expenses:
Cost of goods sold 248,839 246,254 283,021
Sales, service, and administrative expenses 58,557 52,559 51,036
Restructuring expense 23,700 3,480 2,741
Interest expense 3,941 2,722 3,009
Interest income (708) (748) (966)
Other expense, net 4,073 3,805 2,356
Total costs and expenses 338,402 308,072 341,197
Earnings (loss) before income taxes and cumulative
effect of accounting changes (5,195) 23,084 32,976
Income taxes (1,922) 9,695 12,764
Earnings (loss) before cumulative effect
of accounting changes (3,273) 13,389 20,212
Cumulative effect of accounting changes,
net of tax benefit of $11,360 ------ (17,417) ------
Net earnings (loss) $(3,273) $(4,028) $20,212
Net earnings (loss) per share:
Before cumulative effect of
accounting changes $(1.11) $4.50 $7.23
Cumulative effect of accounting changes,
net of tax ----- (5.86) -----
Net earnings (loss) per share $(1.11) $(1.36) $7.23
Average number of shares outstanding 2,941,177 2,972,300 2,794,657
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
Woodward Governor Company and Subsidiaries
At September 30,
(In Thousands of Dollars except per share amounts) 1994 1993
Assets
Current assets:
Cash and cash equivalents $10,272 $10,497
Accounts receivable, less allowance for losses
of $3,021 for 1994 and $1,989 for 1993 69,778 64,024
Inventories 80,272 83,128
Deferred income taxes 20,957 12,519
Total current assets 181,279 170,168
Property, plant, and equipment, at cost:
Land 6,648 6,156
Buildings and improvements 120,503 140,780
Machinery and equipment 156,476 158,043
Construction in progress 2,475 3,792
286,102 308,771
Less allowance for depreciation 163,191 164,755
Property, plant, and equipment net 122,911 144,016
Intangibles and other assets 4,757 5,887
Deferred income taxes 14,371 12,390
Total assets $323,318 $332,461
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings $24,674 $18,123
Current portion of long-term debt 4,252 3,889
Accounts payable and accrued expenses 37,972 35,915
Taxes on income 630 4,432
Total current liabilities 67,528 62,359
Long-term debt, less current portion 32,665 36,246
Other liabilities 29,279 27,634
Commitments and contingencies ---- ----
Shareholders' equity represented by:
Preferred stock, par value $.01 per share, authorized
3,000,000 shares, no shares issued ---- ----
Common stock, par value $.0625 per share, authorized
7,000,000 shares, issued 3,040,000 shares 190 190
Additional paid-in capital 13,891 13,884
Unearned stock plan compensation (19,777) (22,327)
Currency translation adjustment 15,210 12,786
Retained earnings 194,088 207,924
203,602 212,457
Less treasury stock, at cost 9,756 6,235
193,846 206,222
Total liabilities and shareholders' equity $323,318 $332,461
See accompanying Notes to Consolidated Financial Statements.
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
Woodward Governor Company and Subsidiaries
Addtl Unearnd Currency
Common Paid-In Stock Trnslatn Retained Treasury Stock
Stock Capital Plan Cmp Adjustmt Earnings Shares Amount
- - - - - -------------------------------------------------------------------------------
Balance $190 $2,080 $----- $10,453 $212,656 298,162 $16,815
Sept 30, 1991
Net earnings --- ---- ----- ------ 20,212 ----- -----
Purchases of --- ---- ----- ------ ------ 25,700 2,466
treasury stock
Sale treasury --- 11,804 ----- ------ ------ (256,806) (13,196)
stock to ESOP
Unearned stock --- ---- (25,000) ------ ------ ----- -----
plan compensation
Stock plan --- ---- 373 ------ ------ ----- -----
compensation expense
Cash dvdnds $3.70
per commn share --- ---- ----- ------ (10,330) ----- -----
Tax benefit
applicable to
ESOP dividend --- ---- ----- ------ 98 ----- -----
Translation --- ---- ----- 3,239 ------ ----- -----
adjustments,
including
income taxes
allocated of $77
- - - - - --------------------------------------------------------------------------------
Balance $190 $13,884 (24,627) $13,692 $222,636 67,056 6,085
Sept 30, 1992
Net (loss) --- ---- ----- ------ (4,028) ---- ----
Purchases of --- ---- ----- ------ ------ 2,200 154
treasury stock
Issuance of --- ---- ----- ------ ------ (78) (4)
stock to ESOP
Stock plan --- ---- 2,300 ------ ------ ----- -----
compensation expense
Cash dvdnds $3.72
per commn share --- ---- ----- ------ (11,057) ----- -----
Tax benefit
applicable to
ESOP dividend --- ---- ----- ------ 373 ----- -----
Translation --- ---- ----- (906) ------ ----- -----
adjustments,
including
income taxes
allocated of $63
- - - - - --------------------------------------------------------------------------------
Balance $190 $13,884 (22,327) $12,786 $207,924 69,178 6,235
Sept 30, 1993
Net (loss) --- ---- ----- ------ (3,273) ---- ----
Purchases of --- ---- ----- ------ ------ 47,130 3,546
treasury stock
Issuance of --- ---- ----- ------ ------ (397) (25)
stock to ESOP
Stock plan --- ---- 2,550 ------ ------ ----- -----
compensation expense
Cash dvdnds $3.72
per commn share --- ---- ----- ------ (10,956) ----- -----
Tax benefit
applicable to
ESOP dividend --- ---- ----- ------ 393 ----- -----
Translation --- ---- ----- 2,424 ------ ----- -----
adjustments,
including
income taxes
allocated of $238
- - - - - --------------------------------------------------------------------------------
Balance $190 $13,891 $(19,777) $15,210 $194,088 115,911 $ 9,756
Sept 30, 1994
See accompanying Notes to Consolidated Financial Statements.
STATEMENTS OF CONSOLIDATED CASH FLOWS
Woodward Governor Company and Subsidiaries
Year Ended September 30,
(In Thousands of Dollars) 1994 1993 1992
Cash flows from operating activities:
Net earnings (loss) $(3,273) $(4,028) $20,212
Adjustments to reconcile
net earnings (loss) to net
cash provided (used) by
operating activities:
Cumulative effect of accounting
changes, net of tax ----- 17,417 -----
Restructuring 23,306 2,366 2,741
Depreciation 26,114 24,837 22,241
Deferred income taxes (10,419) (2,748) (2,404)
Stock plan compensation expense 2,550 2,300 373
Changes in assets and liabilities,
net of effect of acquisitions:
Accounts receivable (788) 6,395 (5,609)
Inventories 8,394 (1,607) 15,624
Current liabilities, other than
short-term borrowings and
current portion of long-term debt (9,762) (8,318) (1,317)
Other, net (317) 608 2,266
Total adjustments 39,078 41,250 33,915
Net cash provided by 35,805 37,222 54,127
operating activities
Cash flows from investing activities:
Payments for purchase of property, (16,515) (18,335) (52,684)
plant and equipment
Acquisitions, net of cash (8,014) ----- -----
Other 627 247 (519)
Net cash (used) in (23,902) (18,088) (53,203)
investing activities
Cash flows from financing activities:
Cash dividends paid (10,956) (11,057) (10,330)
Purchases of treasury stock (3,546) (154) (2,466)
Sale of treasury stock to ESOP ----- ----- 25,000
Proceeds from issuance of long-term debt ----- ----- 1,000
Payments of long-term debt (4,012) (3,165) (1,400)
Short-term borrowings,
by original maturity:
More than three months-proceeds ----- ----- 16,000
More than three months-payments ----- ----- (33,500)
Three months or less, net 6,288 (2,201) 6,303
Tax benefit applicable to ESOP dividend 393 373 98
Net cash provided (used) in
financing activities (11,833) (16,204) 705
Effect of exchange rate changes on cash (295) (66) (247)
Net change in cash and cash equivalents (225) 2,864 1,382
Cash and cash equivalents, 10,497 7,633 6,251
beginning of year
Cash and cash equivalents, end of year $10,272 $10,497 $7,633
Supplemental cash flow information:
Interest expense paid
(net of $0, $677, and $1,049
capitalized in 1994, 1993,
and 1992, respectively) $4,073 $2,803 $3,184
Income taxes paid $9,576 $10,069 $14,948
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands of Dollars except per share amounts)
A. Significant accounting policies are as follows:
Principles of consolidation: The consolidated financial statements include the
accounts of the company and its subsidiaries, the majority of which are
wholly-owned Intercompany transactions have been eliminated.
Foreign currency translation: The balance sheets of substantially all
subsidiaries outside the United States have been translated at year-end rates of
exchange and earnings statements at weighted average rates of exchange. In
addition, gains and losses from translation are accumulated as a separate
component of shareholders' equity; gains or losses resulting from overseas
currency transactions are included in net earnings (loss) and are not
significant.
Reclassifications: Certain reclassifications have been made to conform prior
years' data to the current presentation.
Inventories: Inventories, substantially all of which are work in process and
component parts, are valued at the lower of cost (on a first-in, first-out
basis) or market.
Property, plant, and equipment: Expenditures for major renewals and improvements
are capitalized at cost while repairs and maintenance are charged to expense.
Depreciation is provided principally on the declining-balance method over the
estimated useful lives of the assets (5 to 45 years for buildings and
improvements and 3 to 15 years for machinery and equipment). Upon disposal of an
asset the resulting gain or loss is included in net earnings. Certain property,
plant, and equipment have been reduced to their appraised and estimated net
realizable values due to restructuring.
Intangibles: The excess of purchase price over the fair values of net assets
acquired has been recorded as an intangible which is being amortized using the
straight-line method over 10 years, subject to impairment write-offs determined
by underlying cash flows.
Statements of cash flows: For purposes of the statements of cash flows, all
highly liquid investments purchased with an original maturity of three months or
less are considered to be cash equivalents.
Income taxes: In 1994 and 1993, deferred income taxes are provided for the
temporary differences between the financial reporting basis and the tax basis of
the company's assets and liabilities. In 1992 the provision for deferred income
taxes represents the tax effect of differences in the timing of income and
expense recognition for tax and financial reporting purposes. The company has
provided for taxes which would be payable if undistributed earnings of overseas
subsidiaries were to be remitted to the United States.
Revenue recognition: Revenue is recognized from product sales primarily upon
shipment to the customer.
Research and development costs: Expenditures related to new product development
are charged to expense when incurred and total approximately $16,400, $18,500,
and $16,000, for 1994, 1993, and 1992, respectively.
Interest rate swap agreement: The differential to be paid or received is accrued
as interest rates change and is recognized over the life of the agreement.
B. Acquisitions: The company purchased all of the shares of Einspritzgertewerk
Aken GmbH (EGA) in Aken, Germany, on November 8, 1993. Woodward Governor Germany
GmbH, formerly EGA, manufactures high quality fuel pumps for large diesel
engines.
On May 16, 1994, the company purchased all of the shares of HSC Controls, Inc.
(HSC) of Buffalo, New York. HSC designs and manufactures torque motors and
servovalves for aerospace, industrial, and medical applications.
Woodward Governor Germany GmbH acquired the assets of Feingertebau Kelbra GmbH
(Kelbra) on September 1, 1994. Kelbra manufactures injection nozzles and
injection nozzle-holders for diesel engines.
The acquisitions have been accounted for by the purchase method of accounting
and the operating results of the acquisitions are included in the company's
consolidated results of operations from the date of acquisition. The excess of
cost over fair value of the assets acquired is being amortized over a 10-year
period. Pro forma results of these acquisitions, assuming they had been made at
the beginning of each year presented, would not be materially different from the
results reported.
C. Restructuring Charges: In the fourth quarter of 1994, the company recognized
$23,700 in connection with a board-approved restructuring initiative. The
restructuring charge reflects costs associated with closing facilities and the
divestiture of Bauer Aerospace, manufacturer of the test equipment product line.
The charge includes approximately $1,913 in severance costs based on a company
designed severance package; $19,148 in write-downs of property, plant and
equipment, and intangible assets to their appraised and estimated net realizable
values; and $2,639 in other expenditures, including contractual commitments to
third parties and management's estimate of closing costs.
As of September 30, 1994, $4,310 of this amount remained in accrued liabilities
representing approximately $1,913 in severance costs and $2,397 in other
expenditures. It is anticipated that these remaining costs will be paid in
fiscal 1995.
In fiscal years 1993 and 1992, restructuring charges included severance payments
to terminated members and provisions for the cost of early retirement programs
offered to eligible members. As of September 30, 1994, $4,524 remains in accrued
liabilities.
D. The provision for income taxes consists of:
1994 1993 1992
Currently payable:
Federal $960 $5,144 $7,670
State 614 1,120 1,264
Foreign 4,991 5,958 4,498
Deferred (8,487) (2,527) (668)
$(1,922) $9,695 $12,764
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," which
required a change from the deferred method to the asset and liability method of
accounting for income taxes.
The company elected to adopt SFAS No. 109 as of October 1, 1992. The cumulative
effect of accounting change for income taxes as of October 1, 1992 decreased the
net loss by $351 ($.12 per share) and is reported separately in the statements
of consolidated earnings (loss) for the year ended September 30, 1993. Excluding
the amount recognized as the cumulative effect of accounting change, the effect
of applying SFAS No. 109 on the net loss for the year ended September 30, 1993,
was a benefit of $589 ($.20 per share). Prior years' financial statements were
not restated.
The components of the deferred tax benefit in 1994 and 1993 were as follows:
1994 1993
Restructuring $(9,208) $(1,850)
Postretirement benefits (172) (767)
Early retirement payments 205 (675)
Depreciation (171) (1,174)
State grant 10 (400)
Inventory capitalization 1,458 (343)
Other (609) 2,682
$(8,487) $(2,527)
Prior to 1993, differences in the recognition of revenue and expense for tax and
financial statement purposes resulted from the following:
1992
Depreciation $(1,312)
Inventory capitalization 1,745
Accrued liabilities (70)
Other (1,031)
$(668)
The components of the net deferred tax assets at September 30, 1994 and 1993
were as follows:
1994 1993
Deferred tax assets:
Postretirement benefits $12,025 $11,853
Restructuring 9,208 1,850
Foreign net operating loss carryforward ----- 5,535
Early retirement payments 1,351 1,556
Inventory capitalization 5,674 7,132
Foreign tax credit carryforwards 1,913 2,492
Other items 9,260 4,931
Valuation allowance (7,518) (2,492)
Total deferred tax assets 37,448 27,322
Deferred tax liabilities:
Unremitted earnings of
foreign subsidiaries (1,605) (1,633)
Other items (515) (780)
Total deferred tax liabilities (2,120) (2,413)
Net deferred tax assets $35,328 $24,909
The company has recorded a valuation allowance to reflect the estimated amount
of deferred tax assets which may not be realized principally due to foreign tax
credit and acquired foreign net operating loss carryforward limitations.
Remaining deferred tax assets are expected to be realized through future
earnings. The change in the valuation allowance for the year ended September
30, 1994, is as follows:
September 30, 1993 $(2,492)
Foreign net operating loss carryforward (5,535)
Utilization of foreign tax credit carryover 579
State net operating loss carryforward (70)
September 30, 1994 $(7,518)
The reasons for the differences between the effective tax rate of the company
and the United States statutory federal income tax rate are as follows:
Percent of pre-tax earnings
1994 1993 1992
---------------------------
Statutory rate (35.0) 34.8 34.0
State income taxes (4.0) 3.1 2.5
Foreign tax rate differences 4.4 7.6 3.0
Effect of rate change 2.4 (2.5) ----
Foreign sales corporation (7.8) (1.2) (1.4)
Other items, net 3.0 .2 .6
---------------------------
Effective rates (37.0) 42.0 38.7
E. Short-term borrowings: Bank lines of credit available to the company totaled
$48,679, of which $24,674 were used at September 30, 1994. Interest on
borrowings under the lines is based on various short-term rates. Several of the
lines require compensating balances or commitment fees. The lines, generally
reviewed annually for renewal, are subject to the usual terms and conditions
applied by the banks.
F. Long-term debt:
1994 1993
- - - - - ----------------------------------------------
9.45% note $14,100 $15,800
ESOP debt guarantee 21,500 23,500
Other 1,317 835
- - - - - ----------------------------------------------
36,917 40,135
Less current maturities (4,252) (3,889)
- - - - - ----------------------------------------------
$32,665 $36,246
- - - - - ----------------------------------------------
The company has a note agreement dated July 1990, wherein the company issued a
$20,000 unsecured note due August 1, 2000 with an interest rate of 9.45%.
Principal payments are due annually, with interest due semi-annually.
The principal payments required on the 9.45% note and other debt in each of the
5 years succeeding 1994 are: $2,252 in 1995, $2,367 in 1996, $2,582 in 1997,
$2,497 in 1998, and $2,783 in 1999.
In 1991, the company established the Woodward Stock Plan, a qualified employee
stock ownership plan (ESOP), within its existing Deferred Profit Sharing Plan,
which covers all worker members meeting certain service requirements. Using this
ESOP feature, on June 18, 1992, the Stock Plan borrowed $25,000 for a term of 11
years at an interest rate of 8.01% and used the proceeds to buy 256,806 shares
of common stock from the company. The company guaranteed payment of the loan and
agreed to make future contributions to the Stock Plan sufficient to repay the
loan. The loan and guarantee, a non-cash transaction, are recorded in the
company's Consolidated Balance Sheet as long-term debt and unearned Stock Plan
compensation. The related shares are being allocated to participants over 11
years as the debt is repaid. The Stock Plan debt requires principal payments
each September 30, through 2003; a payment of $2,000 was made in 1994 and
$1,500 in 1993. Payments increase to $2,500 with a final payment of $2,000.
Interest of $1,882 was paid in 1994 and $2,003 in 1993.
Dividends on these common shares are paid to the Stock Plan and, together with
company contributions, are used by the Stock Plan to repay principal and
interest on the outstanding debt. Shares are allocated to participants based
upon the ratio of the current year's debt service to the sum of total principal
and interest payments over the life of the loan.
The company recognized Stock Plan related expense on the Shares Allocated Method
as follows:
1994 1993 1992
-----------------------
Interest expense $933 $1,046 $310
Compensation expense 2,550 2,300 373
-----------------------
$3,483 $3,346 $683
Company cash contributions to the Stock Plan for debt service were $2,933,
$2,546, and $310 in 1994, 1993, and 1992, respectively. Dividends on these
shares used for debt service were approximately $949 in 1994, $956 in 1993, and
$257 in 1992.
Federal income tax benefits of $393, $373, and $98 in 1994, 1993, and 1992,
respectively, resulting from the deductibility of certain dividends paid on
unallocated shares by the company to the Stock Plan, were credited directly to
retained earnings.
The provisions of the note and the guarantee limit the ability of the company
to, among other things, incur debt, pay cash dividends, sell certain assets,
acquire other businesses, and purchase the company's capital stock. The
agreements include a provision that change in control of the company may result
in all unpaid principal and interest becoming due. The company must maintain
consolidated net worth of $150,000 and a consolidated current ratio of 1.25. At
September 30, 1994, the company could pay dividends and purchase the company's
common stock up to an amount not exceeding $18,379.
G. Interest rate swap agreement: At September 30, 1994, 1993, and 1992, the
company had outstanding an interest rate swap agreement with a commercial bank,
having a total notional principal amount of $15,000. The notional amount is used
to measure the volume of this agreement and does not represent exposure to
credit loss. This agreement, which effectively converts fixed rate debt into
variable rate debt, is indexed to the six-month LIBOR rate. The LIBOR rate
changes every 6 months and the market risk is that the rate will exceed the
fixed rate of 5.0%. The interest rate swap agreement matures on August 29, 1995.
The company is exposed to credit loss in the event of nonperformance by the
other party to the interest rate swap agreement. However, the company does not
anticipate nonperformance by the counterparty.
H. Accounts payable and accrued expenses:
1994 1993
-------------------
Accounts payable $6,850 $8,025
Salaries and wages 2,195 7,223
Restructuring 8,834 5,107
Taxes, other 4,534 2,183
Warranty 3,404 2,694
Postretirement and Postemployment 3,000 2,700
Other items, net 9,155 7,983
-------------------
$37,972 $35,915
I. Retirement and benefit plans: The company provides certain health care
benefits to eligible retired members and their dependents and survivors.
Generally, participants become eligible after reaching age 55 with 10 years of
service or after reaching age 65. The health plans (medical, dental, vision,
and hearing) are unfunded and pay 100% of eligible expenses not paid by
Medicare. A maximum reimbursement amount exists for each plan. The plan requires
cost-sharing by the members in varying amounts based on years of service. The
company has the right to modify or terminate these benefits.
In 1993, the company elected to adopt the provisions of SFAS No. 106, "Employers
Accounting for Postretirement Benefits Other Than Pensions." The Statement
requires companies to accrue the expected cost of providing postretirement
benefits other than pensions over the years that members render the necessary
service rather than the cash basis previously used. This resulted in a one-time
charge of $17,341 (after reduction for income tax of $11,087), related to prior
service cost, and was a non-cash transaction recognized as a cumulative effect
of accounting change as of October 1, 1992, decreasing net earnings by $5.83
per share.
The accumulated postretirement benefit obligations were as follows:
1994 1993
-----------------------
Retirees $18,430 $18,849
Fully eligible active plan participants 67 144
Other active plan participants 11,256 13,457
-----------------------
Accumulated postretirement
benefit obligation 29,753 32,450
-----------------------
Unrecognized net gain (loss) from past
experience different from that assumed 1,526 (2,816)
-----------------------
Total accumulated postretirement
benefit obligation $31,279 $29,634
-----------------------
The company has included $29,279 and $27,634 in other liabilities and the
balance in current liabilities for 1994 and 1993, respectively.
The periodic postretirement benefit cost consists of:
1994 1993
----------------------
Service cost-benefits attributed to
service during the period $951 $942
Interest cost on accumulated
postretirement benefit obligation 2,143 2,201
----------------------
Net periodic postretirement benefit cost $3,094 $3,143
For measurement purposes, an annual rate of increase in the per capita cost of
covered health care benefits of 9.5% for 1994 and 10.5% for 1993 was assumed;
the rate was assumed to decrease gradually to 5.25% by 2007 in 1994 and to 4.0%
by 2005 in 1993. The health care cost trend rate assumption has a significant
effect on the amounts reported. A 1.0% increase in the health care trend rate
per year would increase the accumulated postretirement benefit obligation by
$5,280 and the net periodic cost by $695 for 1994. The weighted average discount
rate used in determining the accumulated postretirement benefit obligation was
8.25% at September 30, 1994, 7.0% at September 30, 1993, and 8.0% at
October 1, 1992.
The cost of postretirement health care benefits incurred and expensed prior to
adoption of SFAS No. 106 was approximately $1,890 in 1992.
In 1993, the company also adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits." This statement requires the accrual method of
accounting for benefits to former or inactive members after membership but
before retirement. The company's postemployment benefits consist principally of
disability medical benefits. This resulted in a one-time charge of $427 (after
reduction for income tax of $273). The charge is related to prior service cost
and was a non-cash transaction recognized as a cumulative effect of accounting
change as of October 1, 1992, decreasing net earnings by $.15 per share in 1993.
The company has a Deferred Profit Sharing Plan which covers all worker members
meeting certain service requirements. The company makes annual contributions to
the plan based on net earnings of the company as defined by the plan document,
with total contributions not to exceed the amount deductible for federal income
tax purposes.
The company is required, under local regulations, to provide a defined benefit
plan covering approximately 120 members in a foreign country. The accumulated
benefit obligation at September 30, 1994 and 1993 was $12,492 and $11,260,
respectively. The value of plan assets as of September 30, 1994 and 1993 was
$12,541 and $10,877, respectively.
The total amounts contributed to the Deferred Profit Sharing Plan and defined
benefit plan and charged to expense were $658, $1,565, and $3,921 for 1994,
1993, and 1992, respectively.
J. Leases: The company has entered into leases for certain facilities. The
leases are for 5 years with options to extend. Future minimum rental commitments
under these operating leases are: $702 in 1995, $263 in 1996, $190 in 1997, and
$48 in 1998. Rent expense for leases was approximately $867, $796, and $2,076
for 1994, 1993, and 1992, respectively.
K. Contingencies: The company is currently involved in matters of litigation
arising from the normal course of business, including certain environmental and
product liability matters. The company had accruals of approximately $3,427 and
$3,716 at September 30, 1994 and 1993, respectively. These accruals are based on
the company's current estimate of the most likely amount of losses that it
believes will be incurred. These amounts, which are expected to be paid over the
next several years, have been included in accounts payable and accrued expense.
The most significant portion of these accruals relates to the matters in the
following two paragraphs:
The government conducted a review of the company's allocation of certain costs
to government contracts. As a result of this review, the company has reached a
preliminary settlement with the government on this matter with payment expected
to be made in the first quarter of 1995.
The company is involved in certain environmental matters, in several of which it
has been designated a "de minimis potentially responsible party" with respect to
the cost of investigation and cleanup of third-party sites. The company's
current accrual for these matters is based on costs incurred to date that have
been allocated to the company and its estimate of the most likely future
investigation and cleanup costs. There is, as in the case of most environmental
litigation, the theoretical possibility of joint and several liability being
imposed upon the company for damages which may be awarded.
It is the opinion of management, after consultation with legal counsel, that
additional liabilities, if any, resulting from these matters are not expected to
have a material adverse effect on the financial condition of the company,
although such matters could have a material effect on quarterly or annual
operating results when (or if) resolved in a future period.
The company has initiated a claim regarding pricing provisions in an alleged
agreement with a major customer. The ultimate outcome of this claim cannot be
determined at this time and, therefore, no amount has been recognized for
potential recoveries.
L. Financial instruments: The estimated fair values of the company's financial
instruments at September 30, 1994 and 1993, were as follows:
1994 1993
---------------------
Cash and cash equivalents $10,272 $10,497
Short-term borrowings (24,674) (18,123)
Long-term debt (36,917) (41,765)
Interest rate swap agreement (160) 330
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Cash and cash equivalents: The carrying amounts approximate fair value because
of the short-term maturity of the instruments.
Short-term borrowings: The carrying amounts approximate fair value because of
the short-term maturity of the instruments.
Long-term debt: Fair value estimate is based on rates currently offered to the
company for similar debt of the same maturities.
Interest rate swap agreement: Fair value estimate was based on a quote from a
financial institution.
M. Company operations: The company is engaged solely in the design, manufacture
and sale of prime mover controls and accessories in the United States and in
other countries. The company does business with the government as both a prime
contractor and a subcontractor. Substantially all contracts are firm fixed price
and may require cost data to be submitted in connection with contract
negotiations. The contracts are subject to government audit and review.
Billings to a single customer were approximately 17%, 22%, and 27% of the net
billings to customers in 1994, 1993, and 1992, respectively. The company's
accounts receivable from the customer were $10,240, $7,471, and $9,695 at
September 30, 1994, 1993, and 1992, respectively. Billings derived from domestic
sales to unaffiliated customers in other countries were approximately 15%, 12%,
and 12% of the net billings to customers in 1994, 1993, and 1992, respectively.
Intercompany transfers are made at established intercompany selling prices.
Summarized financial information relating to these operations is as follows:
United States Other Countries Eliminations Total
- - - - - --------------------------------------------------------------------------------
1994
Net billings:
Customers $244,079 $89,128 $------- $333,207
Intercompany transfers 18,199 3,599 (21,798) -----
- - - - - --------------------------------------------------------------------------------
$262,278 $92,727 $(21,798) $333,207
- - - - - --------------------------------------------------------------------------------
Earnings (loss) before
income taxes $(17,745) $12,550 ------ $(5,195)
Net earnings (loss) $(10,710) $7,437 ------ $(3,273)
Identifiable assets $263,628 $59,690 ------ $323,318
================================================================================
1993
Net billings:
Customers $253,138 $78,018 $------- $331,156
Intercompany transfers 17,423 4,395 (21,818) -----
- - - - - --------------------------------------------------------------------------------
$270,561 $82,413 $(21,818) $331,156
- - - - - --------------------------------------------------------------------------------
Earnings before income
taxes and cumulative
effect of accounting
changes $7,846 $15,238 ------ $23,084
Net earnings (loss) $(13,145) $9,117 ------ $(4,028)
Identifiable assets $280,386 $52,075 ------ $332,461
================================================================================
1992
Net billings:
Customers $293,821 $80,352 $------- $374,173
Intercompany transfers 17,266 3,537 (20,803) -----
- - - - - --------------------------------------------------------------------------------
$311,087 $83,889 $(20,803) $374,173
- - - - - --------------------------------------------------------------------------------
Earnings before $20,383 $12,593 ------- $32,976
income taxes
Net earnings $13,114 $7,098 ------- $20,212
Identifiable assets $278,148 $53,505 ------- $331,653
================================================================================
REPORT OF INDEPENDENT ACCOUNTANTS
Shareholder and Worker Members
Woodward Governor Company
We have audited the accompanying consolidated balance sheets of Woodward
Governor Company and Subsidiaries as of September 30, 1994 and 1993, and the
related statements of consolidated earnings (loss), shareholders' equity, and
and cash flows for the years ended September 30, 1994, 1993, and 1992. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Woodward Governor
Company and Subsidiaries as of September 30, 1994 and 1993 and the results of
their consolidated operations and their cash flows for the years ended September
30, 1994, 1993, and 1992, in conformity with generally accepted accounting
principles.
As discussed in Note D and Note I to the financial statements, the company
changed its method of accounting for postretirement benefits other than
pensions, postemployment benefits and income taxes in 1993.
Coopers & Lybrand L.L.P.
Rockford, Illinois
November 11, 1994
SUMMARY OF OPERATIONS/TEN YEAR RECORD
(In Thousands of Dollars except per share amounts and other data)
Net Billings, Costs and Earnings
|------------- Net Earnings ---------------|
For Net Bill Total % of For
The For Prod Costs & Income Per % of Shrhldrs' The
Year & Service Expenses Taxes Amount Share Sales Equity Year
- - - - - --------------------------------------------------------------------------------
1994 $333,207 $338,402** $(1,922) $(3,273) $(1.11) (1.0) (1.7) 1994
1993 331,156 308,072** 9,695 13,389* 4.50* 4.0 6.3 1993
1992 374,173 341,197** 12,764 20,212 7.23 5.4 9.4 1992
1991 361,924 323,907 13,724 24,293 8.86 6.7 12.1 1991
1990 340,128 293,913 16,776 29,439 10.74 8.7 16.0 1990
1989 299,789 258,659 15,627 25,503 9.28 8.5 15.5 1989
1988 277,656 238,108 15,306 24,242 8.83 8.7 16.5 1988
1987 244,656 212,494 14,505 17,657 6.44 7.2 13.5 1987
1986 212,367 180,563 15,075 16,729 5.83 7.9 14.1 1986
1985 186,331 156,893 14,042 15,396 5.34 8.3 14.4 1985
Dividends, Expenditures and Other Data
For Wghtd Avg |-Cash Dividends --| Regis At The
The Shares Per Capital Deprectn Workr Share Year
Year Outstandng Amount Share Expndtrs Expense Membr Membr End
- - - - - --------------------------------------------------------------------------------
1994 2,941,177 $10,956 $3.72 $16,515 $26,114 3,439 2,256 1994
1993 2,972,300 11,057 3.72 18,335 24,837 3,264 2,301 1993
1992 2,794,657 10,330 3.70 52,684 22,241 3,632 2,301 1992
1991 2,741,838 10,145 3.70 33,075 18,236 3,953 2,303 1991
1990 2,741,562 9,181 3.35 22,057 15,397 3,673 2,209 1990
1989 2,749,056 7,971 2.90 31,190 13,165 3,317 2,084 1989
1988 2,744,832 6,862 2.50 21,540 11,213 3,180 1,919 1988
1987 2,740,678 5,617 2.05 12,887 10,204 2,947 1,704 1987
1986 2,870,128 4,825 1.67 23,693 8,759 2,747 1,672 1986
1985 2,883,442 4,037 1.40 14,508 7,206 2,550 1,707 1985
Financial Position
For Plant & Long- |-Shrhld Eqty-| At The
The Working Current Equipmt Total Term Per Year
Year Capital Ratio Net Assets Debt Amount Share End
- - - - - --------------------------------------------------------------------------------
1994 $113,751 2.7 to 1 $122,911 $323,318 $32,665 $193,846 66.29 1994
1993 107,809 2.7 to 1 144,016 332,461 36,246 206,222 69.42 1993
1992 103,818 2.5 to 1 151,126 331,653 40,135 219,690 73.90 1992
1991 105,213 2.4 to 1 118,417 306,534 17,300 208,564 76.07 1991
1990 115,737 3.3 to 1 101,985 269,221 18,700 194,081 70.78 1990
1989 83,009 2.2 to 1 96,075 249,833 ---- 173,241 62.95 1989
1988 81,798 2.6 to 1 78,504 211,240 ---- 156,083 56.77 1988
1987 74,220 3.0 to 1 68,267 181,447 ---- 138,318 50.39 1987
1986 63,778 2.7 to 1 64,800 167,135 ---- 123,929 45.05 1986
1985 69,844 3.4 to 1 47,819 146,450 ---- 113,775 39.55 1985
Management's Financial Summary and Analysis is on pages 11-14.
*Net earnings for 1993 is before cumulative effect of accounting changes.
**Total costs and expenses includes restructuring expense of $23,700, $3,480,
and $2,741 for 1994, 1993, and 1992, respectively.
BOARD OF DIRECTORS
Woodward Governor Company
J. Grant Beadle
Former Chairman and Chief Executive Officer, Union Special Corporation
Vern H. Cassens
Senior Vice President and Treasurer and Chief Financial Officer of the Company
Calvin C. Covert
Chairman of the Board of the Company
Carl J. Dargene
President and Chief Executive Officer, AMCORE Financial, Inc.
Lawrence E. Gloyd
Chairman, President and Chief Executive Officer, CLARCOR, Inc.
John A. Halbrook
President and Chief Executive Officer of the Company
Thomas W. Heenan
Partner in the law firm of Chapman and Cutler
J. Peter Jeffrey
Vice President of Development, Father Flanagan's Boys Home
Mark Leum
Retired Vice Chairman of the Board of the Company
Michael T. Yonker
President and Chief Executive Officer, Portec, Inc.
H. Walter Thorell
Director Emeritus
As of September 30, 1994
Officers
Calvin C. Covert
Chairman of the Board
John A. Halbrook
President and
Chief Executive Officer
Vern H. Cassens
Senior Vice President and Treasurer and
Chief Financial Officer
Ronald E. Fulkrod
Vice President
Peter A. Gomm
Vice President
Duane L. Miller
Vice President
C. Phillip Turner
Vice President
Garin M. VanDeMark
Vice President
Carol J. Manning
Corporate Secretary
Jerry L. Forberg
Assistant Vice President
Gary D. Larrew
Assistant Vice President
George H. Mittendorf Jr.
Assistant Vice President
Terry A. Shetler
Assistant Vice President
Stephen P. Carter
Assistant Treasurer
Kimberly L. Thomas
Assistant Secretary
Woodward Governor Company
Corporate Headquarters
5001 North Second Street
Rockford, Illinois 61125-7001, U.S.A.
Transfer Agent and Registrar
Wachovia Bank and Trust Company, N.A.
301 North Church Street
Winston-Salem, North Carolina 27102
Independent Accountants
Coopers & Lybrand L.L.P.
Rockford, Illinois
Corporate Counsel
Chapman and Cutler
Chicago, Illinois
International Counsel
Baker & McKenzie
Chicago, Illinois
Annual Meeting
January 11, 1995 at 10:00 a.m. in the
auditorium of the company
5001 North Second Street
Rockford, Illinois
Annual Report on Form 10-K
Shareholders may obtain without
charge a single copy of the company's
1994 annual report on Securities and
Exchange Commission Form 10-K
upon written request to the Secretary,
Woodward Governor Company,
Rockford, Illinois 61125-7001.