BUSINESS DESCRIPTION
Woodward Governor Company designs
and manufactures engine fuel delivery
and engine controls systems, subsystems,
and components.
CONTENTS
To All Shareholder and Worker Members 2
Woodward - A World Leader 6
Financial Summary and Analysis 13
Financial Statements 19
Summary of Operations/Ten Year Record 31
Board of Directors 32
FINANCIAL HIGHLIGHTS
Fiscal year ended September 30th 1996 1995 1994
(In Thousands of Dollars except per share
amounts and other data)
Operating Results
Net billings for products and services $417,290 $379,736 $333,207
Total costs and expenses* 382,109 359,553 338,402
Net earnings (loss) 22,178 11,936 (3,273)
Per share 7.67 4.11 (1.11)
Cash dividends per share 3.72 3.72 3.72
Year-end Financial Position
Working capital 121,103 116,364 113,751
Total assets 348,798 349,599 323,318
Long-term debt 22,696 27,796 32,665
Shareholders' equity 207,995 197,903 193,846
Other Data
Shareholders' equity per share $ 72.05 $ 68.21 $ 66.29
Worker members 3,211 3,071 3,439
Registered shareholder members 2,029 2,179 2,256
*Total costs and expenses includes restructuring expense of $5,927 and
$23,700 for 1995 and 1994, respectively.
TO ALL SHAREHOLDER AND WORKER MEMBERS
Woodward Governor Company
Last year, I said we had turned a corner and the future held a
promise of higher sales and profit levels. As we close fiscal year
1996, I am delighted to report Woodward has made what appears to be a
good start toward fulfilling those expectations.
Aircraft Controls saw an upturn in sales, which I find particularly
encouraging. I believe the business has emerged from facing a
diminishing market to a market filled with challenge and opportunity.
Still, I do not believe the industry will be anywhere near the robust
levels of a few years ago.
Industrial Controls also had an increase in sales, but at a slower
pace than that of Aircraft Controls. However, Industrial Controls
serves many different markets, which offer a number of significant
opportunities. We plan to take full advantage of these situations as a
means of maintaining a steady rate of business growth.
Sales for fiscal year 1996 were $417.3 million, a 10 percent
increase over last year's $379.7 million. Net earnings for fiscal year
1996 totaled $22.2 million, 86 percent above last year's $11.9
million. Compared to last year's earnings per share of $4.11, fiscal
year 1996 per share earnings grew to $7.67.
What made this success possible? We can trace part of it to
stronger market economies throughout the world. However, stronger
markets alone did not cause our success. We had to plan and diligently
work toward the plan. Although our task often seemed perplexing, we
had two crucial factors working in our favor. One, perhaps the most
important, consists of our members. The second factor concerns our
strong focus on core competencies in the design, manufacture, and
application of fuel control technologies. Not only were these factors
important during the last year, but also they are the foundation for
future success. With a creative, innovative, energized, focused-in
other words empowered-membership and critical, market-focused core
technologies, Woodward will remain a powerful contender in all of its
world markets.
Over the year, we have made more inroads toward empowerment. We
encourage every member to take an active role in our operations and
maintain a high degree of interest in the company's success.
Therefore, shaping and maintaining a work environment that permits and
rewards creativity has become an ongoing job for all Woodward leaders.
For many decades, having a long-term career at Woodward meant
showing up for work, working hard, and obeying rules. But during the
last decade, the world changed, and to remain competitive and
profitable, the company eliminated this expectation. We now recognize
and reward success when members become thoroughly involved in the
company and actively contribute to its success.
I am very proud of the way members responded when I urged them to
become more involved in the company's operation. They put their
creativity to work and discovered many new concepts capable of adding
greater value to our products. They generated ideas to reduce
throughput times and past-due orders. They continue to improve
manufacturing and materials management techniques, which further cut
costs and inventory investment. I might add, although we continue to
target inventory reduction, I'm not happy with the results we've
achieved. I expect us to bear down on this troublesome task and show a
significant improvement this coming year.
Members also implemented more powerful design strategies; they took
steps to eliminate paperwork and put up-to-date information right at
their fingertips. They are centralizing many operations to cut costs,
reduce time, and become more responsive to customer needs. Every day,
more members make important decisions directly concerning their work.
We leaders of the company must devote assets to continue building
this kind of interactive, creative behavior. We need to simplify what
we say and do, and we need to create a feeling of self-confidence and
trust throughout Woodward. We have to focus our energies to electrify
our thought processes and promote the idea that taking an intelligent
risk is okay.
We need to snuff out bureaucracy and break down departmental
barriers that tend to squelch innovative thought. We achieve this by
encouraging alliances among departments so they can reach goals no
department alone can attain. We require leaders who can act
vigorously, deliver on performance commitments, and encourage members
to be creative and bold. These then are the kinds of leaders we need.
As far as I'm concerned, if a leader cannot act accordingly, Woodward
has no place for that person in a leadership role.
To achieve these ends, we need to look at vitalizing our
communication strategies, investing in productive training processes,
and, most important of all, setting the benchmarks for members to
follow. We need to eliminate any attitude of "I'll be the best I need
to be" and replace it with "I'll become the very best I can be."
As I mentioned, over the past year, we had good success toward
achieving a more empowered Woodward. Still, we've just begun, and we
have much more to accomplish. However, I have full trust that with the
support of good positive-thinking leaders, our members are more than
ready to meet the challenge.
With members taking a more active role in the business, the second
key to success centers on achieving the right blend of core
competencies. Along with building an effective work environment, we
need to provide the machines, processes and disciplines that will
build these critical core competencies, which will allow us to serve
our markets better than anyone else.
For many years, our product base was fairly stable and did not
require the time, energy, and expense of expanding our technology.
Today, merely maintaining basic core technologies no longer is
sufficient. Over the last few years, the world changed its way of
doing business-and we had to change with it. We found ways of
acquiring new technologies quickly, but with reasonable and prudent
investment. We were able to offer the right products in the right
places at the right cost.
The upturn in Aircraft Controls was, to a degree, attributable to
our commitment to change. By concentrating on strengthening our core
technologies, we were able to develop vital components required for
fully integrated fuel-delivery systems. As a result, we developed,
tested, and marketed several new products. One of them consists of a
new generation of fuel metering units (FMUs). Our work on the highly
effective hydraulic multiplexer (HMUX) continues, and the industry
eagerly has begun to discover the significant merits of this value-
creating device.
Aircraft Controls has taken another innovative approach by
developing a new line of products, such as actuators and valves,
outside our traditional product line. We expect these new devices will
play a significant part in increasing sales revenues.
Because we decided to focus on what we are good at doing, we have
developed an expanded number of products important to fuel delivery
systems demanded by the aircraft powerplant industry. Furthermore, by
designing around a common-platforms philosophy, and using up-to-date
design tools, we hold costs and reduce product development time and
product delivery cycles.
Rather than investing in electronic system technology, Aircraft
Controls entered into an agreement with Lockheed Martin Control
Systems, a company well versed in the manufacture of electronic
control systems and components. With this decision, we transferred our
full authority digital engine control (FADEC) technology to Lockheed
Martin, one of the largest independent electronic controls suppliers.
Woodward will use its well-defined core competencies to provide an
expanding catalog of hydromechanical subsystems required for system
integration. Lockheed Martin will concentrate on system electronics.
Industrial Controls members face a different set of market
challenges. This group must compete in, and meet, the needs of
numerous niche markets. These markets range from original equipment
manufacturers, to particular industries, to an operator of an
individual engine or turbine driving a generator, pump, compressor, or
other device. Therefore, complex challenges face these members, but
they are meeting them aggressively.
Through strategic planning, we achieved significant strides in a
number of markets. Forecasts indicate the worldwide market for control
systems designed for engines fueled by natural gas will double by the
year 2000. We decided to take whatever steps necessary to capitalize
on this opportunity by becoming the world's market leader in
integrated natural gas engine control systems. To acquire the new
technologies we needed to achieve our goal, we purchased Deltec Fuel
Systems B.V. of Rotterdam, The Netherlands. We also entered into a
licensing agreement with MESA Environmental to use its product line
and technology for heavy-duty natural gas vehicles (NGV) and
stationary gas engine applications.
In very short order, we acquired the core knowledge to make us a
leader in this industry. With Deltec's natural gas engine knowledge,
the MESA Environmental license, and our product and manufacturing
capabilities, we now offer the most extensive range of integrated
systems in the world for natural gas fueled engines.
We continued to build partnerships. At F. G. Wilson, Europe's
largest supplier of engine-generator equipment, our control package is
part of its standard offering. As a result, many engines, which
otherwise may have used a competitor's controls, now use our
equipment.
To keep pace with customer needs, Woodward entered into
negotiations with Catalytica Combustion Systems, Inc., a leader in
turbine emission technology, to form a joint venture company. These
negotiations were finalized during the first quarter of fiscal year
1997 (October 1996). The new company, called GENXON(tm) Power Systems,
combines Woodward and Catalytica technology to provide critical
capabilities to upgrade existing turbines. With these capabilities,
GENXON is able to improve turbine performance and give the machine a
new lease on life. Now we can help operators of gas turbine fleets
dramatically improve their profit-making potential.
What does all this mean for our business? It means we intend to
take advantage of our opportunities. This last year, we enjoyed
several successes and expect we will see more in the future. Whenever
situations indicate we need to take steps to meet customer
expectations, we will act. We will make the decisions that make most
sense for the situation, the company, and the customer. Never in our
history has the investment in core technology been as vital to our
continued success as it is today.
This fiscal year was the first year we used incentive pay as part
of management compensation. As explained during last year's annual
meeting, incentive pay connects high-level managers directly to the
results of their operations. Because incentive pay closely links
managers with results, it serves as a very reliable means for focusing
on opportunity areas as well as a highly visible method of ensuring
managerial accountability.
In addition to all these achievements, we recently had some
important organizational changes. In May, after 37 years with the
company, Peter Gomm retired as vice president, Asia/Pacific Region,
and in August, the board elected Chuck Kovac as vice president of the
Industrial Controls group. Chuck started with Woodward in June 1988,
and most recently was manager of Engine Controls in Europe.
Furthermore, at the last board meeting in fiscal year 1996, board
members elected Steve Carter vice president and treasurer of the
company. Steve had been serving as assistant treasurer since January
1994.
The past fiscal year certainly has been an exceptional time. We can
regard change either as a threat or as a door opening to a world
filled with magnificent opportunities-we have chosen the door. The
path through the door is one of understanding market needs, acquiring
the core competencies to meet those needs, and empowering the
membership to fully release its creativity toward that end. This path,
then, serves as our fundamental strategy to achieve the goals of
expanding market opportunities; building a solid, rewarding future for
our members; and creating more wealth for our shareholders.
We are not looking to the short term. In the long term, the need to
promote and accomplish change will remain a vital part of our
business. Considering the spirit and ingenuity displayed by every
Woodward member during this past year, and the faith shown by our
investors, I have no hesitancy in believing we will succeed. I see a
world of opportunity before us.
John A. Halbrook
Chairman of the Board
and Chief Executive Officer
December 2, 1996
WOODWARD - A WORLD LEADER
Fuel Controls, Integrated Systems, and Components
Woodward continues to face tough competition in every market. The
demand for more complex fuel systems increases daily. In addition,
customers want cost-effective, integrated systems, and ideally they
want those systems supported by one company.
We are taking steps to make Woodward that company. We base our
strategies on anticipated customer needs; investment in product
research and development; and the addition of new machines, processes,
and technology as the need arises. Through these strategies, we gather
vital core disciplines and form the alliances we need to succeed in
today's competitive world.
The days of making a control that simply "does the job" are gone.
Today, we have to offer customers a control or system that not only
complies with all form, fit, and function specifications, but also
offers greater value than competitive units.
Who interprets that value? The customer. Value may be interpreted
as more reliability, more efficiency, more on-site service, more
responsive support, and the list goes on. Sometimes less is more. For
example, a control that has a lower cost of ownership offers more
value to the customer. This continues to be our challenge. How have we
met it?
Members of every Woodward business unit are developing more efficient
work processes and improving on-time deliveries. They are improving
materials management processes and developing marketing programs
designed to contribute toward improved profit margins. 1)In Aircraft
Controls, increasing numbers of members are participating in Kaizen
events... 2)Throughout Woodward, members look into every aspect of a
process and propose ways to improve it... 3) When necessary, members
even reposition machinery to increase efficiency.
INDUSTRIAL CONTROLS
On the Industrial Controls side of our business, the demand for
engine and turbine controls and control systems increases, and we
continue to identify needs of new markets.
This year we not only improved existing partnerships, but also we
established new ones. We purchased a new business to enhance our core
competencies toward becoming the leader in the natural gas engine
control market. We even made the commitment to enter into a joint
business venture as a means of increasing our turbine retrofit
business.
As we gain insight into present and future market expectations for
controls and control systems, we increase our ability to accurately
focus our research and development efforts on customer concerns. With
this knowledge, we become even better prepared to develop the means to
effectively meet market expectations.
ENGINE CONTROLS
Woodward Engine Controls' strategy helps original equipment
manufacturers (OEMs) worldwide sell more engines. We used to provide
generic controls designed for engines manufactured by several
different manufacturers. Today, we supply OEMs with anything from a
control component to a complete control system specifically designed
to add value to their engines.
Woodward products include all elements of the fuel control system.
Most new products use advanced micro-controllers executing Woodward's
proprietary Graphical Application Programming (GAP(tm)) software
technology. This combination provides the flexibility to quickly adapt
engines for diverse applications. Because control optimization remains
critical for engine applications, Woodward systems allow the customer
to configure engines to meet the needs of many markets.
Natural gas engines is our fastest growing market segment, and we
are the recognized leader of technology for this market. As a result,
customers are eager to work with us and gain our valuable advanced
technology as well as industry expertise. To serve customers better,
we acquired Deltec Fuel Systems B.V. of Rotterdam, The Netherlands.
Through experience, we found Deltec and Woodward naturally complement
each other. It was by combining Deltec's gas engine "know how" with
our electronic/mechanical design and manufacturing capability that we
were able to increase our leadership in the natural gas engine
industry.
A licensing agreement between Woodward and MESA Environmental
further solidifies our position as an industry leader for natural gas
engine systems. Through the agreement, we sell MESA Environmental's
products, adapting their technology to meet customer requirements for
heavy-duty natural gas engines. We developed this technology in
conjunction with strategic engine programs at key engine
manufacturers, and currently we are integrating it into the larger
scope of our control systems for gas engines.
Our development activities have broadened our range of products.
Over the past few years, Woodward Engine Controls members developed
effective electronic fuel injection (EFI) control systems and controls
for diesel injection pumps. A firm knowledge of engine fuel valves,
drivers, actuators, and control systems, as well as monitoring,
sequencing, and engine protection systems makes us a leader in core
technologies for engines worldwide.
Today, Woodward Engine Controls is the largest independent supplier
of control systems for the stationary gas engine market in the U.S.
and the world. We offer on-board diagnostic systems for the heavy duty
engine market, and we have developed engine management systems that
can adaptively learn and continuously monitor emissions on engines. We
have been the first to introduce the integration of the electronic
driver, actuating motor, and throttle body. These air/fuel management
technologies give us the ability to control mass fuel flow in ways
that give our customers a highly competitive edge in the fast-paced
gas engine market.
Recently, Woodward Germany signed a contract to supply a fuel
injection system for a German government-sponsored ocean-going vessel.
Under this agreement, our electronic fuel injection system will meter
heavy fuel to the ship's engines. We believe this effort will provide
visible proof of the depth of our capabilities and our strengths in
this market.
During 1996 we enhanced our partnership with F.G. Wilson, the
world's third largest producer of engine generator equipment. To meet
some of their specific generator set package needs, we developed a new
generator control capability. Now, this product is part of their
standard offering. We are in the early stages of developing an
enhanced capability product. We believe it is crucial to develop
strong relationships with customers, helping them become long-term
winners in their marketplace.
Since the advent of the diesel locomotive, supplying controls for
their engines has been an important part of the Woodward business.
Like every industry, railroads have come under increasing pressure to
improve efficiency and reliability. Last year, the rail industry
produced a record in tonnage hauled. This increase has helped motivate
the railroads to continually look for ways to increase the pulling
power of a locomotive.
Locomotive operators now want the ability to dispatch trains with
fewer locomotives per ton of freight than ever before. To meet this
need, Woodward offers a complete locomotive control system capable of
drastically improving the adhesion levels of existing locomotives.
With less slip of a steel wheel on the steel rail, locomotives gain
increased efficiency. We also have made troubleshooting the locomotive
systems easier and increased engine reliability.
Woodward's Complete Locomotive Control system provides start fuel
limiting, dynamic brake controls, cooling system controls, lube oil
pressure shutdowns, and many other features to protect today's high
powered locomotive systems. We continue to support existing equipment
as well as develop rugged modern electronic locomotive control
systems. Obviously, we are here for the long haul.
As Woodward's Engine Controls members solidify their position as
the technology leader in engine controls and systems, the role of
Central Distributors (CDs) changed. Once only service centers, today's
CDs have engineering staff and sales skills to work directly with end
users to upgrade engines, particularly to meet the latest mandated
emissions requirements.
Woodward's dedication to the development of control system
technology backed by service has helped make Engine Controls a full-
line supplier of engine control systems. Our goal is to provide either
components or a complete system to enhance engine capability and add
value to the engine over its life. A strong international presence
gives our customers the added confidence of continuous product support
when they choose Woodward systems to help them compete with other
engine companies for market share and recognition worldwide.
TURBOMACHINERY CONTROLS
A world leader in the design and manufacture of controls and
accessories for gas, steam, and hydraulic turbines, Woodward's
Turbomachinery Controls serves power generation, cogeneration, gas
transmission, marine propulsion, petrochemical, and processing
industries worldwide.
Turbomachinery Controls' members design, manufacture, market, and
sell a full range of mechanical and electronic industrial rotating
equipment control devices. Their products range from simple electronic
devices which measure speed and control it by monitoring fuel flow, to
32-bit digital microprocessor-based systems capable of performing
complex control functions including plant control. Mechanical products
include a large variety of liquid and gas fuel valves, on-engine
hardware, hydraulic fuel skids, and actuators.
Customers recognize that Woodward's Turbomachinery Controls
products offer exceptional value through fully integrated control
solutions. Not only do members design and manufacture power-generation
control systems that provide turbine and plant control with complete
fuel management, start sequencing, load control, and grid
synchronization, but they also manufacture superior corrosion-
resistant fuel valves to control critical, highly specialized
turbomachinery equipment. In addition, these members developed a
unique dry-low emission control system that accurately meters fuel
mass flow for individual or multi-zone combustion. The system controls
air-to-fuel ratio within extremely tight tolerances.
To keep pace with customer needs, in October 1996, Woodward
finalized an agreement to form a joint venture company with Catalytica
Combustion Systems, Inc., a leader in turbine emission technology. The
new company, called GENXON(tm) Power Systems, combines Woodward and
Catalytica technology to offer a highly competitive ultra-low NOx
emission control system. This one-stop-shop approach combines superior
dry-low emission control with proven turbomachinery control for
operators of fleets of installed, out-of-warranty industrial gas
turbines.
Because success comes through meeting customer needs with
innovative solutions, Woodward engineers continually research new
products. Recent introductions include: new model-based controls with
smoother actuator operation, eliminating traditional dither and
causing less wear and tear; a unique compressor surge and process
control that ensures smooth, efficient operation; and an upgraded 505
digital control system package for steam and hydraulic turbines that
consists of a stand-alone unit controller, an operator control panel,
and a first-out indicator.
Throughout the world, market demand for Woodward turbine controls
is increasing. In particular, South America, Asia, and Central Europe
show strong growth potential. This year, as part of a global expansion
effort, business unit members opened several new offices and developed
new customer-focused products and services.
Recently Turbomachinery Controls members supplied a plant control
system to facilitate river management and plant automation to six
Georgia, USA, hydroelectric plants on one river system. They provided
integrated turbine and compressor controls for large petrochemical
plants in Jilin, China; Alberta, Canada; and Kansas, USA. Woodward
products are managing critical cogeneration processes for power
generation and precise steam extraction in Spain, Aruba, Czech
Republic, the USA, and Australia. Woodward engineers modernized
controls and valves for a 1,000 MW mainline steam turbine customer in
New York City to yield marked improvements and to position this
customer for pending deregulation.
Whether control needs are simple or complex, Turbomachinery
Controls progressively uses its resources and application experience
to solve fuel management problems. The company's highly effective
product development, manufacturing, test, and support resources
continue to provide reliable, cost-effective answers for the world's
turbomachinery control markets.
AIRCRAFT CONTROLS
Customers have indicated they want us to develop improved,
integrated aircraft fuel systems. Demands for these systems have been
unequaled in the past. To meet the challenge, Aircraft Controls
members use highly developed core competencies to produce and improve
products designed to meet emerging system requirements. At the same
time, they constantly investigate inventive ideas to improve the
products and services used in today's fuel systems.
Fulfilling new market requirements is a big job. And continuing to
satisfy current customer needs at the same time is an even more
demanding undertaking. To concurrently fulfill both of these
significant goals, members focused on:
- - Maintaining a forward-looking approach to meet market needs for
both the short and the long term;
- - Refining core competencies needed to design, manufacture, and
support the controls capable of fulfilling market needs;
- - Undertaking a program of simplification to develop products to
satisfy present and future fuel-delivery strategies at lower costs and
with increased reliability.
One of the earliest results of this new approach was the
development of the super fuel metering unit (FMU) platform. The super
FMU has won every project for which it has openly competed. The BMW
Rolls-Royce BR710 and BR715 turbofans employ one of Woodward's family
of super FMUs. Super FMUs deliver fuel to the new Boeing 777s equipped
with GE90 turbofans. Also, the McDonnell Douglas MD-90 and Airbus 320
family of aircraft equipped with International Aero Engines (IAE)
V2500 turbofans use the new FMU platform, as will the newest version
of GE CF-34 turbofans.
As we developed the super FMU, we learned many lessons. We applied
the lessons in the design, development, and production of components
outside our normal product line. No longer can industry look at
Woodward as a "one product company." We are developing-and
delivering-actuators, valves, and other components essential to fully
integrated fuel management systems. As we move forward, we believe
products of this nature will account for an increasing amount of
aircraft control sales.
Already, new turbine designs are using a number of Woodward
products. For example, the BR715 incorporates traditional as well as
new Woodward products in its fuel management system. The turbofan uses
a super FMU, an overspeed splitter unit, a booster bleed valve
actuator, a variable stator vane actuator, a bypass and vent valve,
and a buffer air valve.
Another success, Woodward's small block platform, has found high
acceptance in small turbine engine markets. A highly flexible
platform, the small block allows Woodward to provide controls ranging
from purely mechanical to full single channel electronic control with
mechanical backup. Furthermore, the backup control can vary from
simple pilot control of fuel flow to a fully functional mechanical
governing control.
By deciding to use common families of components throughout these
platforms, we reduced development and production time. We also gained
flexibility to custom design a control for a specific need using short
development lead times. The platform concept also results in the end
user obtaining field-proven hardware that offers high reliability from
service entry to the end of its service life.
With the degree of system commonality contained within the
platforms, members quickly integrate them into a complete line of
fuel-system devices. In this manner, they cost effectively fulfill the
needs of highly integrated fuel delivery systems.
This year, HSC Controls Inc., a part of Aircraft Controls,
continued to meet market needs. HSC designs and manufacturers small
torque motors and servovalves, key elements in any fuel system.
Although the company principally serves aircraft markets, it also
supplies products to select industrial and medical markets. HSC is
highly recognized for its ability to design and deliver small,
specialized servovalves and other electrical-mechanical devices.
Several of its newer developments are proving to meet very special
needs of the aircraft-powerplant industry.
We are continuing to aggressively pursue research and development
activities. These efforts have converted new technologies into
products that address the aircraft industry's fundamental
requirements-cost and reliability. In just one example, Woodward
focused efforts on simplifying actuation control and developed a
patented hydraulic multiplexer or HMUX. This device performs the task
previously done by several servovalves or solenoids. It is less
expensive to acquire, less costly to operate, and more reliable than
previously available systems.
In addition, multi-functional teams are undertaking large-scale
reengineering activities in many facets of our business. These teams
review and improve activities that range from reducing development
cycle time and cost, to reorganizing our manufacturing operations to
support responsive lead times. These teams are redefining roles and
interfaces that allow members to more clearly concentrate on their
responsibilities. They are looking at ways to continually reduce parts
supply, repair, and overhaul times as a means to more effectively meet
customer needs.
We are energizing the membership through the consistent use of the
continuous-improvement technique called Kaizen. As a result, members
are participating in events aimed at eliminating waste and reducing
lead times, all of which helps improve efficiency and reduce costs.
As Aircraft Controls becomes more involved in global activity, its
need to continually look for new ideas to streamline processes, reduce
lead times, supply highly affordable products, and provide the highest
value-to-cost ratio to the industry grows in importance. We are
committed to continuously supporting OEM customers and end users
throughout a product's life. With this level of commitment, the
Woodward Aircraft Controls group will remain a world leader in
aviation engine controls, accessories, and control systems.
After careful consideration, we made the decision that electronic
aircraft controls did not lie within our core competencies. Therefore,
we entered into an agreement with Lockheed Martin, a company well
versed in the manufacture of electronic control systems and
components. With this move, we transferred our full authority digital
engine control (FADEC) technology to Lockheed Martin Control Systems
and joined this industry leader to provide state-of-the-art, fully
integrated control systems, with a low cost of ownership, to aircraft
powerplant manufacturers and operators. In this partnership of the
largest independent engine controls suppliers, Woodward will use a
fully developed core competency to provide an expanding catalog of
hydromechanical subsystems required for system integration, while
Lockheed Martin supplies system electronics.
As we begin the new fiscal year, the aviation industry is in a
period of recovery and offers many opportunities. We are keeping
abreast of industry trends and continue to develop new products, many
outside our traditional product line. We are investigating the
opportunities to participate in engine development programs with many
aircraft turbine manufacturers. We also perform aftermarket work for
these same manufacturers as well as some of the world's largest third-
party repair shops. We reached this position because we maintain a
commitment to meet the needs of our customers.
Cost drives customer decisions. Quality and reliability remain
musts-they are routinely expected features. Value delivered for money
invested remains the most important criteria for success. In addition,
end users have heightened their influence on engine manufacturers to
place a strong emphasis on life-cycle costs. With cost containment an
important consideration, alternative methods of financing are growing
in importance, both for supporting OEM sales to airlines and for
winning service contracts. Woodward's strong financial position
continues to work in our favor as we create and market innovative ways
to help end users cut costs, particularly in the support of their fuel
controls.
Woodward is strengthening its global presence, whether it's developing
a new idea or improving an existing one, we are a company dedicated to
the continuous development of control system technology. We seek to
provide our customers with service and products that are second to
none-anywhere in the world.
FINANCIAL SUMMARY AND ANALYSIS
Woodward Governor Company
RESULTS OF OPERATIONS
1996 Compared to 1995
This annual report contains forward-looking statements reflecting
Woodward's current expectations. Such forward-looking statements include,
without limitation, references relating to expected shipments and net
earnings, Industrial Controls opportunities in overseas and domestic
markets, Aircraft Controls outlook, the level of capital expenditures, the
adequacy of earnings and lines of credit to handle cash requirements, and
the impact of currency exchange rate changes on operating results. These
statements involve risk and uncertainty. Actual future results and trends
may differ materially depending on a variety of factors, including the
volume and timing of orders received during the year, the mix of changes in
distribution channels through which the company's products are sold, the
timing and acceptance of new products and product enhancements by the
company or its competitors, the success rate of the company's research and
development efforts, changes in pricing, product life cycles, purchasing
patterns of customers, competitive conditions in the industry, business
cycles affecting the markets in which the company's products are sold,
extraordinary events, such as litigation or acquisitions, including related
charges, and economic conditions generally or in various geographic areas.
All of the foregoing matters are difficult to forecast. The future results
of the company may fluctuate as a result of these and the other risk
factors.
Shipments
Shipments during 1996 were $417,290,000, 9.9% greater than the $379,736,000
shipped in 1995. Price increases accounted for only 1.5% of the change from
last year, as it continues to be difficult to raise prices to customers.
The volume of shipments increased 9.9% from last year's total including the
nonrecurring engineering charges incurred in 1995. Without these charges,
the volume increase was approximately 12%. Foreign exchange rates also had
an effect on the shipment level as shipments from overseas plants
translated into over $5,600,000 or 1.5% fewer U.S. dollars compared to the
prior year. Both Aircraft Controls' and Industrial Controls' shipments have
increased since last year. Military sales increased this year to 10.0% of
sales compared to 7.4 % last year.
Industrial Controls' shipments were $232,746,000 in 1996, a 7.0%
increase from the 1995 total of $217,612,000. This represents 55.8% of 1996
total company shipments, compared to 57.3% last year. The shipments from
overseas plants were up 9.0% from the prior year and continued to increase
at a faster rate than shipments from domestic plants which were up almost
4.8% from last year. The greater opportunities for growth for Industrial
Controls will continue to be in the overseas markets. The domestic markets
are projected to remain flat or increase slightly. New product
introductions as well as strategic alliances and joint ventures will
provide additional opportunities in the domestic markets.
Aircraft Controls' shipments increased 13.8% to $184,544,000 from
$162,124,000 in 1995. The 1995 total included over $7,000,000 in
nonrecurring engineering charges incurred in previous years. Without this
item, shipments are up over 19% from last year. This increase reflects the
strengthening of the demand for products in the commercial aircraft
markets, particularly in aftermarket spares and overhauls, and also
additional military sales. Aircraft Controls' shipments represent 44.2% of
total company shipments in 1996, compared to 42.7% in 1995.
Cost of Goods Sold
Cost of goods sold was $304,887,000 or 73.1% of net sales in 1996 compared
to $274,676,000 or 72.3% of net sales in 1995. This represents an increase
of 11%. The company continues to implement plans to control costs and
improve efficiencies, and expects improvements in profitability. The
company recognizes the need to invest for the future; as a result, spending
on research and development was $13,800,000 in 1996 and $13,700,000 in
1995. Customer support and satisfaction are important to the company's
success, and engineering costs in support of these items continue to
increase.
Sales, Service, and Administrative Expenses
Sales, service, and administrative expenses in 1996 were $69,874,000 or
16.7% of sales, compared to $69,961,000 or 18.4% in 1995. This decrease as
a percent of sales reflects the cost containment efforts in this area. To
meet customer service expectations, additional resources have been added in
the marketing and sales areas and new offices have been established in
other locations around the world.
Restructuring Expense
The company did not incur restructuring expense in 1996. In 1995,
restructuring expenses of $5,927,000 were incurred. Many of the initiatives
started in prior years have been completed and adequate accruals have been
provided by the company for severance, early retirement, and other closure
costs still in process. During 1996, Bauer Aerospace was sold, completing
the divestiture announced in fiscal year 1994. Efforts continue to sell the
plant in Stevens Point and to date no acceptable offers have been received.
Part of the plant continues to be leased, which offsets some of the costs
to maintain the facility.
Interest Expense
Interest expense was $3,325,000 in 1996 compared to $3,825,000 in 1995.
This decrease was due to the lower level of borrowing in 1996.
Interest Income
Interest income in 1996 was $825,000 compared to $555,000 in 1995.
Other Expense-Net
Other expense-net was $4,848,000 in 1996 compared to $5,719,000 in 1995.
Income Taxes
The income tax expense in 1996 was $13,003,000 and the effective tax rate
was 37.0%. In 1995, the effective tax rate was 40.9% and the tax expense
was $8,247,000. The effective rate is lower due to a higher portion of
income being generated in the United States this year compared to last
year.
Net Earnings
Net earnings for 1996 were $22,178,000, an increase of $10,242,000 or 86%
from the 1995 net earnings of $11,936,000. While the 1996 results do not
include any restructuring expenses, there were $5,927,000 of restructuring
expenses in 1995. Return on sales in 1996 was 5.3% compared to 3.1% in
1995. Return on average net worth was 10.9% in 1996 and 6.1% in 1995.
Earnings per share increased to $7.67 per share in 1996 from $4.11 per
share in 1995.
Earnings before income taxes from foreign operations increased from
$15,126,000 in 1995 to $17,857,000 in 1996. The shipment level also
increased from $118,293,000 in 1995 to $127,666,000 in 1996. Domestic
shipments increased to $289,624,000 in 1996 from $261,443,000 in 1995. Over
the same period, earnings before income taxes increased to $17,324,000 in
1996 from $5,057,000 in 1995. Without the restructuring expense of
$5,927,000 in 1995, earnings before income taxes from domestic operations
would have been $10,984,000.
Expectations of management are that shipments will continue to increase
next year. Net earnings are also expected to increase, but will be affected
by investments in product development and the results of joint venture
activities.
The growth experienced in the Aircraft Controls group in 1996 was
greater than had been anticipated, and this growth is expected to level off
and be basically flat in the next year. The aircraft market has
substantially recovered from the downward move in the early '90s, but the
number of planes being built is still less than the historic high levels.
This group continues to work toward the goal of being a total fuel delivery
system supplier to the aircraft industry.
Shipments for the Industrial Controls group are expected to increase
next year, principally due to the continued increase in the overseas
markets. This group is developing new products for ever-changing customer
needs.
The company is currently involved in matters of litigation arising from
the normal course of business, including certain environmental and product
liability matters. For further discussion of these issues, refer to Notes
to Consolidated Financial Statements, Footnote L, "Contingencies," on page
28.
Financial Condition
Cash and cash equivalents increased from $12,451,000 in 1995 to $13,070,000
in 1996. Combined short-term and long-term debt decreased from $62,960,000
in 1995 to $42,868,000 in 1996. With the increase in shipments, and
accounts receivable and inventory remaining at the same levels, the cash
generated was used primarily to repay debt.
Accounts receivable decreased slightly at September 30, 1996 to
$80,902,000 from $81,880,000 at September 30, 1995. While shipments
increased 10%, the level of accounts receivable remained stable due to
collection efforts. The prior year allowance for losses included a
$1,100,000 specific reserve for one customer that was written off in 1996.
Inventories decreased slightly to $92,135,000 at September 30, 1996 from
$92,831,000 at September 30, 1995. Although inventories remained level with
the increased shipment amount, the company continues to look to decrease
the investment in inventory.
Property, plant, and equipment-net decreased from $118,066,000 at
September 30, 1995 to $114,213,000 at September 30, 1996. This is a result
of holding the level of capital expenditures in 1996 below depreciation
expense for the fourth consecutive year.
Deferred income taxes decreased from $39,630,000 at September 30, 1995
to $38,559,000 at September 30, 1996. Deferred income tax assets are
expected to be realized through future earnings.
Accounts payable and accrued expenses increased to $61,597,000 at
September 30, 1996 from $50,765,000 at September 30, 1995. Accounts payable
have increased from last year due to the higher level of shipment activity.
Accrued salaries and wages have increased due to additional withholding
taxes and additional profit sharing due to the improved results in 1996.
Other liabilities reflects the non-current accumulated postretirement
benefit obligation.
Shareholders' equity increased to $207,995,000 at September 30, 1996
from $197,903,000 at September 30, 1995 due to the increase in earnings in
1996 compared to 1995.
Liquidity and Capital Expenditures
Cash dividends paid to the shareholders in 1996 and 1995 were $3.72 per
share.
Net cash provided by operating activities was $52,482,000 in 1996
compared to $31,321,000 in 1995. The primary reasons for the increase in
cash provided were the increase in earnings and controlling increases in
accounts receivable and inventories from 1995 to 1996, even with increased
shipment levels.
Net cash flows (used) in investing activities were ($20,084,000) in 1996
compared to ($18,428,000) in 1995. The primary use of cash is capital
expenditures which increased in 1996 over the 1995 level.
The company does not expect a significant increase in capital expenditures
in 1997.
Net cash (used) in financing activities was ($31,372,000) in 1996
compared to ($11,522,000) in 1995. Reduction of borrowing levels and
payment of dividends were the main uses of cash during 1996. Both lines of
credit and cash flow from operations should be adequate to meet company
cash requirements in 1997.
Membership
Worldwide membership increased to 3,211 at September 30, 1996 from 3,071 at
September 30, 1995. The increasing level of shipments and members gained
through acquisitions are the reasons for the increase. Company leadership
is working very hard to keep the number of members at the appropriate level
to meet customer requirements and yet be cost effective.
New Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" (SFAS 121). This new standard requires that long-lived assets be
reviewed for impairment whenever the carrying amount of those assets may
not be recoverable. The recoverability is based on the estimated future
cash flow resulting from the use of the asset. Adoption of SFAS 121 is
required in fiscal 1997. The company does not expect the adoption of SFAS
121 to have a material impact on the company's financial condition or
results of operations.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-based Compensation" (SFAS 123).
This new standard encourages, but does not require, a fair-value based
method of accounting for stock-based compensation plans. Adoption of the
disclosure requirements of SFAS 123 is required in fiscal 1997. The company
expects to adopt only the disclosure provisions of SFAS 123 and, therefore,
there will be no impact on the company's financial condition or results of
operations.
RESULTS OF OPERATIONS
1995 Compared to 1994
Shipments
Shipments in 1995 were $379,736,000, 14% greater than the $333,207,000
shipped in 1994. Price increases accounted for 1.5% of the change and
volume increases 8.8% of the change in 1995 shipments. In addition,
shipments from overseas plants translated into over $11,700,000 or 3.5%
more U.S. dollars compared to prior year exchange rates. Aircraft Controls'
and Industrial Controls' shipments have both increased since last year.
Military sales continued to decline and were 7.4% of sales this year
compared to 9.6% last year.
Aircraft Controls' shipments were $162,124,000 in 1995, up 14.5% from
last year's total of $141,632,000. There were some items in 1995 that need
to be considered when comparing to 1994. Over $9,500,000 of revenue was
recognized in 1995 for reimbursement of nonrecurring engineering charges.
This compares to $2,600,000 in 1994. Shipments in 1994 for the then newly
acquired HSC Controls Inc. and Bauer Aerospace, which at year end 1994, the
company announced its intent to divest of, were $7,300,000. In 1995, these
entities had shipments of $14,525,000. Aircraft Controls' shipments were
42.7% of total company shipments in 1995 compared to 42.5% in 1994. The
aircraft industry has seen some stabilization of the market, and the
company is seeing an increase in market share.
Industrial Controls' shipments in 1995 were $217,612,000 compared to
$191,575,000 in 1994, a 13.6% increase. This represents 57.3% of total
company shipments in 1995 compared to 57.5% in 1994. Shipments from the
overseas plants continue to increase at a much higher rate than domestic
shipments which were down slightly from the prior year. The domestic
business units are the principal manufacturing support for the overseas
plants, so even though customer shipments from the domestic plants were
down, the manufacturing activity was up. The growth in the overseas markets
is projected to continue in the near future, with the domestic markets
remaining flat or increasing slightly.
Cost of Goods Sold
Cost of goods sold was $274,676,000 or 72.3% of net sales in 1995. This
compares to $248,839,000 or 74.7% in 1994. The favorable change as a
percent of shipments from 1994 to 1995 reflects the company's cost control
efforts and early benefits related to the restructuring plan implemented in
1995. Research and development efforts continue to be an important part of
customer commitment, with many customers requesting work be done to develop
new applications for control technology. Spending on research and
development was $13,700,000 in 1995 compared to $16,400,000 in 1994.
Engineering costs overall continue to increase to meet the demands of
customer support.
Sales, Service, and Administrative Expenses
For 1995, sales, service, and administrative expenses were $69,961,000 or
18.4% of sales compared to $58,557,000, or 17.6% in 1994. Included in 1995
are some items that should not be incurred in the future: these include
costs related to the ongoing restructuring and consolidation of the
Aircraft Controls group which was essentially completed in 1995 and a
$1,100,000 bad debt provision relating to a long time customer. These items
in total added over $4,000,000 in expenses.
Restructuring Expense
In 1995, restructuring expenses of $5,927,000 were incurred. These
principally relate to an early retirement program announced in fiscal year
1994 that was implemented in 1995 and the move of the Hydro business unit
from Stevens Point to the plants in Colorado. The decision to make this
move was made in the first quarter of 1995 and the move completed in the
third quarter.
Interest Expense
Interest expense was $3,825,000 in 1995 compared to $3,941,000 in 1994.
Interest Income
Interest income in 1995 was $555,000 compared to $708,000 in 1994.
Other Expense-Net
Other expense-net was $5,719,000 in 1995 compared to $4,073,000 in 1994.
Income Taxes
The income tax expense in 1995 was $8,247,000 and the effective rate was
40.9%. In 1994, there was a tax benefit of $1,922,000 primarily due to a
significant restructuring charge. The effective rate in 1995 is higher than
the statutory rate in the United States due to the fact that a significant
portion of the income was generated at overseas locations at higher tax
rates.
Net Earnings (Loss)
The 1995 net earnings were $11,936,000, an increase of $15,209,000 from the
net (loss) in 1994 of ($3,273,000). The results for 1994 included a
restructuring expense of $23,700,000 while 1995 also included $5,927,000 of
restructuring expenses. The return on sales was 3.1% in 1995 compared to
(1.0%) in 1994. Return on average net worth was 6.1% in 1995 and (1.7%) in
1994. Earnings (loss) per share were $4.11 in 1995 and ($1.11) in 1994.
The earnings before income taxes from foreign operations increased from
$12,550,000 in 1994 to $15,126,000 in 1995. The shipment level also
increased, going from $89,128,000 in 1994 to $118,293,000 in 1995.
Shipments from domestic operations increased from $244,079,000 in 1994 to
$261,443,000 in 1995. Over the same period, earnings (loss) before income
taxes from domestic operations went from ($17,745,000) in 1994 to
$5,057,000 in 1995. Without the restructuring expense of $23,700,000, 1994
would have reflected earnings before income taxes from domestic operations
of $5,955,000. The 1995 earnings before income taxes from domestic
operations would have been $10,984,000 without the restructuring expense of
$5,927,000. The net earnings of $3,646,000 in 1995 compared to the net
(loss) in 1994 of ($10,710,000) for domestic operations.
The company is currently involved in matters of litigation arising from
the normal course of business, including certain environmental and product
liability matters. For a further discussion of these issues refer to Notes
to Consolidated Financial Statements, Footnote L, "Contingencies," on page
28.
Financial Condition
Cash and cash equivalents increased from $10,272,000 in 1994 to $12,451,000
in 1995. Combined short- and long-term debt increased slightly to
$62,960,000 in 1995 from $61,591,000 in 1994. With the increase in accounts
receivable and inventory, this increase was not unexpected.
Accounts receivable increased from $69,778,000 at September 30, 1994 to
$81,880,000 at September 30, 1995. This increase is due to the exceptional
shipment level in the month of September 1995, $7,500,000 greater than
September 1994, and the deterioration in timely payments from our
customers. In addition, the allowance for losses increased from $3,021,000
in 1994 to $4,605,000 in 1995. Of this increase, $1,100,000 relates to a
specific reserve for one customer.
Inventories increased from $80,272,000 at September 30, 1994 to
$92,831,000 at September 30, 1995. The increase was disappointing. Although
shipments increased, the inventory level needs to be better managed.
Material flow teams have been formed to focus on this issue and major
changes are underway in inventory management.
Property, plant, and equipment-net decreased from $122,911,000 at
September 30,1994 to $118,066,000 at September 30, 1995. The decrease is a
result of holding the capital expenditure level in 1995 below the
depreciation expense.
Deferred income taxes increased from $35,328,000 in 1994 to $39,630,000
in 1995. A valuation allowance of $9,006,000 in 1995 and $7,518,000 in 1994
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 $37,972,000 at
September 30, 1994 to $50,765,000 at September 30,1995. Accounts payable
have increased from fiscal 1994 due to greater shipment activity. Accrued
salaries and wages are up due to the additional days pay accrued in fiscal
1995, additional withholding taxes, and profit sharing. In addition, the
accrued early retirement liability increased as a result of the program
offered in fiscal 1995.
Other liabilities reflects the non-current accumulated postretirement
benefit obligation.
Shareholders' equity at September 30, 1995 increased to $197,903,000
from $193,846,000 at September 30,1994.
Liquidity and Capital Expenditures
Cash dividends paid to shareholders in 1995 and 1994 were $3.72 per share.
Cash flows provided from operations were $31,321,000 in 1995 compared to
$35,805,000 in 1994.
Cash flows (used) in investing activities were ($18,428,000) in 1995.
This compares to ($23,902,000) in 1994. The primary use of cash is capital
expenditures, with capital expenditures in 1995 up from 1994. The 1994
total also included the acquisitions of HSC Controls Inc. and the two
companies that comprise Woodward Governor Germany GmbH.
Net cash (used) in financing activities was ($11,522,000) in 1995 and
($11,833,000) in 1994. Cash dividends continue to be the principal use of
cash in this area. The main financing activities are related to short-term
borrowings and long-term debt payments.
Membership
Worldwide membership decreased in 1995 from 3,439 at the beginning of the
year to 3,071 at September 30, 1995. The decrease occurred in the Aircraft
Controls group and was accomplished through an early retirement program,
attrition, and the closing of the Stevens Point plant.
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 may
not necessarily represent actual transactions. Payment of dividends is
subject to certain restrictions described in the Notes to Consolidated
Financial Statements, Footnote F, "Long-term debt," page 25.
Quarterly Quarterly
Bid Price Dividends
Quarter Ended High Low Per Share
September 30, 1996 $92 $87 $.93
June 30, 1996 93 85 .93
March 31, 1996 88 73 .93
December 31, 1995 73 65 .93
September 30, 1995 $67 $60 $.93
June 30, 1995 63 55 .93
March 31, 1995 67 55 .93
December 31, 1994 83 59 .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) 1996 1995 1994
Net billings for products and services $417,290 $379,736 $333,207
Costs and expenses:
Cost of goods sold 304,887 274,676 248,839
Sales, service, and administrative expenses 69,874 69,961 58,557
Restructuring expense - 5,927 23,700
Interest expense 3,325 3,825 3,941
Interest income (825) (555) (708)
Other expense-net 4,848 5,719 4,073
Total costs and expenses 382,109 359,553 338,402
Earnings (loss) before income taxes 35,181 20,183 (5,195)
Income taxes 13,003 8,247 (1,922)
Net earnings (loss) $ 22,178 $ 11,936 $ (3,273)
Net earnings (loss) per share $ 7.67 $ 4.11 $ (1.11)
Average number of shares outstanding 2,892,621 2,905,750 2,941,177
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) 1996 1995
Assets
Current assets:
Cash and cash equivalents $ 13,070 $ 12,451
Accounts receivable, less allowance for losses
of $2,755 for 1996 and $4,605 for 1995 80,902 81,880
Inventories 92,135 92,831
Deferred income taxes 19,991 21,853
Total current assets 206,098 209,015
Property, plant, and equipment, at cost:
Land 6,218 6,674
Buildings and improvements 120,283 121,870
Machinery and equipment 182,680 175,455
Construction in progress 6,971 985
316,152 304,984
Less allowance for depreciation 201,939 186,918
Property, plant, and equipment-net 114,213 118,066
Intangibles and other assets 9,919 4,741
Deferred income taxes 18,568 17,777
Total assets $348,798 $349,599
Liabilities and shareholders' equity
Current liabilities:
Short-term borrowings $ 15,310 $ 30,297
Current portion of long-term debt 4,862 4,867
Accounts payable and accrued expenses 61,597 50,765
Taxes on income 3,226 6,722
Total current liabilities 84,995 92,651
Long-term debt, less current portion 22,696 27,796
Other liabilities 33,112 31,249
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 13,165 13,560
Unearned ESOP compensation (14,665) (17,333)
Currency translation adjustment 13,620 16,802
Retained earnings 207,392 195,598
219,702 208,817
Less treasury stock, at cost 11,707 10,914
207,995 197,903
Total liabilities and shareholders' equity $348,798 $349,599
See accompanying Notes to Consolidated Financial Statements.
STATEMENTS OF CONSOLIDATED SHAREHOLDER'S EQUITY
Woodward Governor Company and Subsidiaries
(In Thousands
of Dollars Add'l Unearned Currency
except per Common Paid-in ESOP Trans. Retained Treas. Stock
share amounts) Stock Capital Compen. Adjust. Earnings Shares Amt.
Balance
at Sept. 30, 1993$190 $13,884 $(22,327) $12,786 $207,924 69,178 $ 6,235
Net (loss) - - - - (3,273) - -
Purchases of
treasury stock - - - - - 47,130 3,546
Issuance of stock
to ESOP - 7 - - - (397) (25)
ESOP compensation
expense - - - 2,550 - - -
Cash dividends-$3.72
per common share - - - - (10,956) - -
Tax benefit applicable
to ESOP dividend - - - - 393 - -
Translation adjustments,
including income taxes
allocated of $238 - - - 2,424 - - -
Balance
at Sept. 30, 1994 190 13,891 (19,777) 15,210 194,088 115,911 9,756
Net earnings - - - - 11,936 - -
Purchases of
treasury stock - - - - - 52,016 3,363
Sales of treasury
stock - (334) - - - (27,795) (2,120)
Issuance of stock
to ESOP - 3 - - - (1,344) (85)
ESOP compensation
expense - - 2,444 - - - -
Cash dividends-$3.72
per common share - - - - (10,811) - -
Tax benefit applicable
to ESOP dividend - - - - 385 - -
Translation adjustments,
including income taxes
allocated of $19 - - - 1,592 - - -
Balance
at Sept. 30, 1995 190 13,560 (17,333) 16,802 195,598 138,788 10,914
Net earnings - - - - 22,178 - -
Purchases of treasury
stock - - - - - 22,357 1,730
Sales of treasury
stock - (343) - - - (6,600) (778)
Issuance of stock
to ESOP - (52) - - - (1,399) (159)
ESOP compensation
expense - - 2,668 - - - -
Cash dividends-$3.72
per common share - - - - (10,758) - -
Tax benefit applicable
to ESOP dividend - - - - 374 - -
Translation adjustments,
including income taxes
allocated of $14 - - - (3,182) - - -
Balance
at Sept. 30, 1996 $190 $13,165 $(14,665) $13,620$207,392 153,146 $11,707
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) 1996 1995 1994
Cash flows from operating activities:
Net earnings (loss) $22,178 $11,936 $ (3,273)
Adjustments to reconcile net earnings (loss)
to net cash provided (used) by
operating activities:
Restructuring - - 23,306
Depreciation and amortization 23,394 23,786 26,614
Deferred income taxes (791) (3,407) (10,419)
ESOP compensation expense 2,668 2,444 2,550
Changes in assets and liabilities,
net of effect of acquisitions:
Accounts receivable (430) (11,158) (788)
Inventories (577) (11,830) 8,394
Current liabilities, other than short-term
borrowings and current portion of long-term
debt 10,000 20,415 (9,762)
Other-net (3,960) (865) (817)
Total adjustments 30,304 19,385 39,078
Net cash provided by operating activities 52,482 31,321 35,805
Cash flows from investing activities:
Payments for purchase of property, plant,
and equipment (21,163) (18,988) (16,515)
Acquisitions, net of cash - - (8,014)
Other 1,079 560 627
Net cash (used) in investing activities (20,084) (18,428) (23,902)
Cash flows from financing activities:
Cash dividends paid (10,758) (10,811) (10,956)
Proceeds from sales of treasury stock 435 1,377 -
Purchases of treasury stock (1,730) (3,363) (3,546)
Payments of long-term debt (5,105) (4,254) (4,012)
Short-term borrowings proceeds (payments) (14,588) 5,144 6,288
Tax benefit applicable to ESOP dividend 374 385 393
Net cash (used) in financing activities (31,372) (11,522) (11,833)
Effect of exchange rate changes on cash (407) 808 (295)
Net change in cash and cash equivalents 619 2,179 (225)
Cash and cash equivalents, beginning of year 12,451 10,272 10,497
Cash and cash equivalents, end of year $13,070 $12,451 $10,272
Supplemental cash flow information:
Interest expense paid $ 3,680 $ 3,930 $ 4,073
Income taxes paid $13,475 $ 8,669 $ 9,576
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.
Use of estimates in the preparation of financial statements: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from those
estimates.
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 and cash flow 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.
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.
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. The accumulated amortization as
of September 30, 1996 and 1995 is $608 and $481, respectively.
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: 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. 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
$13,800, $13,700, and $16,400, for 1996, 1995, and 1994, respectively.
B. Acquisitions: The company purchased three companies in 1994. 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. In 1995, the company recognized additional costs
associated with the restructuring initiative including $1,300 related to
the relocation of machinery and members and $4,627 of early retirement
benefits and costs based on a company designed severance package.
The components of the restructuring provision were as follows:
1996 1995 1994
Write-down of property,
plant, and equipment
and intangible assets $ - $ - $19,148
Severance and early retirement - 4,627 1,913
Other closure costs - 1,300 2,639
$ - $ 5,927 $23,700
The restructuring activity for the years ended September 30 is as follows:
1996 1995
Beginning balance $10,164 $ 8,834
Current year provision - 5,927
Expenses incurred (2,557) (4,597)
$ 7,607 $10,164
The components of the accruals related to restructuring at September 30
were as follows:
1996 1995
Severance related benefits $ 353 $ 1,149
Early retirement 6,157 7,093
Other closure costs 1,097 1,922
$ 7,607 $10,164
The early retirement benefits are payable for up to 10 years. Other closure
costs at September 30, 1996 are expected to be incurred next year.
D. The provision for income taxes consists of:
1996 1995 1994
Currently payable:
Federal $ 4,590 $ 2,754 $ 960
State 1,058 1,007 614
Foreign 6,525 7,386 4,991
Deferred 830 (2,900) (8,487)
$13,003 $ 8,247 $(1,922)
The components of the net deferred tax assets at September 30 were as
follows:
1996 1995
Deferred tax assets:
Postretirement and
early retirement benefits $15,941 $15,213
Restructuring 4,114 7,900
Foreign net operating loss and tax credits 10,116 9,114
Inventory 9,145 8,778
Other items 11,485 9,919
Valuation allowance (9,332) (9,006)
Total deferred tax assets 41,469 41,918
Deferred tax liabilities:
Unremitted earnings of
foreign subsidiaries (1,867) (1,766)
Other items (1,043) (522)
Total deferred tax liabilities (2,910) (2,288)
Net deferred tax assets $38,559 $39,630
The company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized principally due to
a capital loss carryforward 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 years ended September 30 is as follows:
1996 1995
Beginning balance $(9,006) $(7,518)
Foreign net operating loss carryforward (1,771) (440)
Utilization of foreign tax credit carryover 1,647 265
State net operating loss carryforward (75) (60)
Capital loss carryforward (127) (1,253)
$(9,332) $(9,006)
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
1996 1995 1994
Statutory rate 35.0 35.0 (35.0)
State income taxes 2.4 1.9 (4.0)
Foreign tax rate differences (1.1) 2.1 4.4
Effect of rate change - - 2.4
Foreign sales corporation (1.3) (1.8) (7.8)
Other items, net 2.0 3.7 3.0
Effective rates 37.0 40.9 (37.0)
E. Short-term borrowings: Bank lines of credit available to the company
totaled $60,305, of which $15,310 were used at September 30, 1996. 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.
The weighted average interest rate for the company's borrowings was 5.8%,
6.3%, and 5.3% for 1996, 1995, and 1994, respectively.
F. Long-term debt:
1996 1995
9.45% note $10,200 $12,200
ESOP debt guarantee 17,000 19,500
Other 358 963
27,558 32,663
Less current portion (4,862) (4,867)
$22,696 $27,796
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 years
succeeding 1996 are: $2,362 in 1997, $2,479 in 1998, $2,783 in 1999, and
$2,934 in 2000.
The company has a Member Investment and Stock Ownership Plan, which
includes a qualified employee stock ownership plan (ESOP), and covers all
worker members meeting certain service requirements. Using this ESOP
feature, on June 18, 1992, the 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 Plan sufficient to repay the
loan. The loan and guarantee are recorded in the company's Consolidated
Balance Sheets as long-term debt and unearned ESOP compensation. The
related shares are being allocated to participants over 11 years as the
debt is repaid. The Plan debt requires principal payments each September
30, through 2003. Payments are $2,500 with a final payment of $2,000.
Interest of $1,562 was paid in 1996, $1,722 in 1995, and $1,882 in 1994.
Dividends on these common shares are paid to the Plan and, together with
company contributions, are used by the 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 unallocated shares
were 150,631, 178,038, and 203,152 as of September 30, 1996, 1995, and
1994, respectively.
The company recognized ESOP related expense on the Shares Allocated Method
as follows:
1996 1995 1994
Interest expense $ 652 $ 789 $ 933
Compensation expense 2,668 2,444 2,550
$3,320 $3,233 $3,483
Company cash contributions to the Plan used for debt service were $3,152,
$2,788, and $2,933, in 1996, 1995, and 1994, respectively. Dividends on
these shares used for debt service were approximately $910 in 1996, $934 in
1995, and $949 in 1994.
Federal income tax benefits of $374, $385, and $393 in 1996, 1995, and
1994, respectively, resulting from the deductibility of certain dividends
paid by the company to the 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, 1996, the company
could pay dividends and purchase the company's common stock up to an amount
not exceeding $20,200.
G. Accounts payable and accrued expenses:
1996 1995
Accounts payable $14,327 $10,419
Salaries and wages 13,523 6,148
Restructuring 7,607 10,164
Taxes, other 7,262 6,103
Warranty 3,666 3,646
Postretirement and postemployment 3,000 3,000
Other items-net 12,212 11,285
$61,597 $50,765
H. 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
plans require cost-sharing by the members in varying amounts based on years
of service. The company has the right to modify or terminate these
benefits.
The accumulated postretirement benefit obligations were as follows:
1996 1995
Retirees $21,195 $19,021
Fully eligible active plan participants 81 156
Other active plan participants 12,854 14,275
Accumulated postretirement
benefit obligation 34,130 33,452
Unrecognized net gain (loss) from past
experience different from that assumed 982 (203)
Total accumulated postretirement
benefit obligation $35,112 $33,249
The company has included $33,112 and $31,249 in other liabilities and the
balance in current liabilities for 1996 and 1995, respectively.
The periodic postretirement benefit cost consists of:
1996 1995 1994
Service cost-benefits attributed
to service during the period $ 927 $ 894 $ 951
Interest cost on accumulated
postretirement benefit
obligation 2,443 2,347 2,143
Net periodic postretirement
benefit cost $3,370 $3,241 $3,094
Actuarial assumptions used were as follows:
1996 1995 1994
Projected healthcare cost
trend rate 8.5% 9.0% 9.5%
Ultimate trend rate 5.25% 5.25% 5.25%
Year ultimate trend rate
is achieved 2002 2002 2007
Effect of a 1.0% increase in
the healthcare trend rate
on the accumulated post-
retirement benefit obligation $6,054 $6,216 $5,280
Effect of a 1.0% increase in the
healthcare trend rate on the
net periodic cost $ 724 $ 690 $ 695
Weighted average discount rate 7.75% 7.75% 8.25%
In 1995, the company extended loans to certain outside directors for the
purpose of purchasing company stock. The notes are to be repaid in exchange
for directors' retainer fees over the next four years and totaled $303 and
$385 as of September 30, 1996 and 1995, respectively.
The company is required, under local regulations, to provide a defined
benefit plan covering approximately 120 members in a foreign country.
Benefits are based primarily on each member's years of service and average
compensation over the period of participation.
The components of the net periodic pension cost are as follows:
1996 1995 1994
Service cost-benefits earned
during the period $334 $492 $497
Interest cost on projected
benefit obligation 504 562 662
Actual return on plan's assets (539) (546) (629)
Net amortization and deferral 36 107 107
Net periodic pension cost $335 $615 $637
Assumptions used in the accounting for net periodic pension cost were:
1996 1995 1994
Weighted average discount rate 4.5% 4.0% 5.0%
Expected long-term rate of
return on plan's assets 4.5% 3.1% 5.5%
Compensation increase rate 3.5% 3.0% 3.5%
The plan's funded status at September 30 is as follows:
1996 1995
Accumulated benefit obligation $7,192 $12,890
Increase in benefits due to estimated
future compensation increases 3,481 1,972
Projected benefit obligation 10,673 14,862
Plan's assets at fair value 11,518 13,040
Projected benefit obligation in
excess of (less than) plan's assets (845) 1,822
Unrecognized net gain (loss)
from experience 2,021 (158)
Unrecognized transition amount (1,335) (1,602)
Accrued (asset) liability $ (159) $ 62
The company has a Member Investment and Stock Ownership Plan (formerly
referred to as the Deferred Profit Sharing Plan). For members meeting
certain service requirements, the company contributes 5% of eligible wages
and matches member contributions with respect to a 401k feature up to
certain limits. The 5% company contribution to the Plan is used to first
fund debt service associated with the ESOP debt guarantee (described in
Note F), with remaining funds allocated to members based upon eligible
wages. Company contributions to the Member Investment and Stock Ownership
Plan totaled $4,483, $2,788, and $2,933, in 1996, 1995, and 1994,
respectively.
I. Stock Option Plan: In 1996, the company's shareholders approved the
adoption of the 1996 Long-Term Incentive Compensation Plan (the "Plan").
The purpose of the Plan is to promote the interests of the company and its
shareholders by retaining the services of outstanding key management members
and encouraging them to have a greater financial investment in the
company and increase their personal interest in its continued success.
Under this nonqualified plan, 200,000 shares of the company's common stock
are available for issuance upon grant of the options.
During 1996, the company granted a maximum of 24,250 options to purchase
common stock at the fair market value on October 1, 1995 ($66.50 per
share), contingent upon the achievement of certain performance requirements
in 1996. The options are generally exercisable after six months and expire
no later than 10 years from the date of grant. The company accrued
compensation expense of $500 for 1996 based on estimated performance.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-based Compensation"
(SFAS 123) governing the accounting for stock options, which must be
adopted by fiscal 1997. The company expects to adopt only the disclosure
provisions of SFAS 123 and, therefore, there will be no impact on the
company's financial condition or results of operations.
J. Shareholder Rights Plan: On January 17, 1996, the Board of Directors of
the company adopted a shareholder rights plan and declared a dividend of
one preferred share purchase right (a "Right") for each outstanding share
of common stock. The company adopted the plan to protect shareholders
against unsolicited attempts to acquire control of the company that do not
offer what the company believes to be an adequate price to all
shareholders. The dividend was paid on February 2, 1996, to the
shareholders of record on that date. Each right entitles the registered
holder thereof to purchase from the company one one-hundredth of a share of
Series A Preferred Stock, par value $.01 per share, of the company at a
price of $300.00, subject to adjustment. The Rights expire on January 17,
2006.
The Rights are not exercisable or transferable apart from the company
common stock until the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired beneficial ownership of 15% or more of the
outstanding common shares or (ii) 15 business days (or such later date as
may be determined by action of the Board of Directors of the company prior
to such time as any person or group of affiliated persons becomes an
Acquiring Person) following the commencement of, or announcement of an
intention to make, a tender offer or exchange offer, the consummation of
which would result in the beneficial ownership by a person or group of 15%
or more of the outstanding common shares.
The Board of Directors may redeem the Rights in whole, but not in part, at
a redemption price of $.01 per right at any time prior to the acquisition
by an Acquiring Person of 15% or more of the outstanding company common
stock.
K. Leases: The company has entered into leases for certain facilities.
Future minimum rental commitments under these operating leases are: $1,215
in 1997, $1,047 in 1998, $978 in 1999, $936 in 2000, and $373 in 2001. Rent
expense for leases was approximately $1,228, $765, and $867, for 1996,
1995, and 1994, respectively.
L. 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 $2,058 and $1,634 at September 30, 1996 and 1995,
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 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 and cash flows when (or if) resolved
in a future period.
The company settled its claim regarding pricing provisions with a major
customer in the first quarter of 1995. The company received approximately
$7,000 for reimbursement of non-recurring engineering charges.
M. Financial instruments: The estimated fair values of the company's financial
instruments at September 30 were as follows:
1996 1995
Cash and cash equivalents $13,070 $ 12,451
Short-term borrowings (15,310) (30,297)
Long-term debt (29,500) (34,119)
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 and market rates of interest.
Long-term debt: Fair value estimate is based on rates currently offered to
the company for similar debt of the same maturities.
N. Company operations: The company designs and manufactures engine fuel
delivery and engine control systems, subsystems, and components 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%, 16%, and 17%, of the
net billings to customers in 1996, 1995, and 1994, respectively. The
company's accounts receivable from the customer were $15,375 and $11,314 at
September 30, 1996 and 1995, respectively. Billings derived from domestic
sales to unaffiliated customers in other countries were approximately 11%,
12%, and 15% of the net billings to customers in 1996, 1995, and 1994,
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
1996
Net billings:
Customers $289,624 $127,666 $ - $417,290
Intercompany transfers 30,928 3,533 (34,461) -
$320,552 $131,199 $(34,461) $417,290
Earnings before income taxes $ 17,324 $ 17,857 - $ 35,181
Net earnings $ 11,108 $ 11,070 - $ 22,178
Identifiable assets $272,890 $ 75,908 - $348,798
1995
Net billings:
Customers $261,443 $118,293 $ - $379,736
Intercompany transfers 29,680 4,101 (33,781) -
$291,123 $122,394 $(33,781) $379,736
Earnings before income taxes $ 5,057 $ 15,126 - $ 20,183
Net earnings $ 3,646 $ 8,290 - $ 11,936
Identifiable assets $271,508 $ 78,091 - $349,599
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
REPORT OF INDEDPEDENT 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, 1996 and 1995, and
the related statements of consolidated earnings (loss), shareholders'
equity, and cash flows for the years ended September 30, 1996, 1995, and
1994. 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, 1996 and 1995, and
the results of their consolidated operations and their cash flows for the
years ended September 30, 1996, 1995, and 1994, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Chicago, Illinois
November 12, 1996
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 Billings Total % of Avg. For
the for Products Costs and Income Per Shrhldrs' the
Year and Services Expenses Taxes Amount Share % of Sales Equity Year
>C>
1996 $417,290 $382,109 $13,003 $22,178 $7.67 5.3 10.9 1996
1995 379,736 359,553** 8,247 11,936 4.11 3.1 6.1 1995
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
Dividends, Expenditures and Other Data
Weighted Cash Dividends
For Average Registered
the Shares Per Capital Deprec. Worker Shareholder At the
Year Outstanding Amount Share Expend. Expense Members Members Year End
1996 2,892,621 $10,758 $3.72 $21,163 $22,786 3,211 2,029 1996
1995 2,905,750 10,811 3.72 18,988 23,334 3,071 2,179 1995
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
Financial Position
Plant and Shareholders' Equity
At the Working Current Equipment Total Long-term Per At the
Year End Capital Ratio Net Assets Debt Amount Share Year End
1996 $121,103 2.4 to 1 $114,213 $348,798 $22,696 $207,995 $72.05 1996
1995 116,364 2.3 to 1 118,066 349,599 27,796 197,903 68.21 1995
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
Management's Financial Summary and Analysis is on pages 13-18.
*Net earnings for 1993 is before cumulative effect of accounting changes.
**Total costs and expenses includes restructuring expense of $5,927,
$23,700, $3,480, and $2,741 for 1995, 1994, 1993, and 1992, respectively.