CONTENTS
To All Shareholder and Worker Members 2
Woodward - - A Worldwide Operation 6
Financial Summary and Analysis 13
Financial Statements 19
Summary of Operations/Ten Year Record 35
Board of Directors 36
BUSINESS DESCRIPTION
Founded in 1870, Woodward Governor Company built for decades reliable
governors for the water power industry. Today, our products include hydro-
mechanical and electronic controls, fuel-delivery systems, actuators, valves,
and related components. We focus on introducing new products and services to
serve customers worldwide. We manufacture, sell, or support products from
thirty-two company locations in seventeen countries. We also have distribu-
tors, dealers, and authorized independent service facilities throughout the
world.
Our Aircraft Controls group, one of the largest independent suppliers of
aircraft fuel controls, supplies engine and airframe manufacturers and
civilian and military aircraft operators with up-to-date products and
services. With years of lessons learned, our engineers are expert at develop-
ing control products to meet a customer's precise needs. Our products are
used on many of the world's most popular engine platforms.
Our Industrial Controls group supplies reliable, cost-effective controls,
control system components, and fully integrated systems to manufacturers and
operators of turbines and engines. The group provides original equipment
products and aftermarket parts and service to the power generation, process
manufacturing, marine, locomotive, off-road vehicle, and gas transmission
industries. The on-going need for more efficient turbine and engine operation
has opened new doors for our products. In addition, the quest for clean power
and the deregulation of the sale of electricity represent potential growth
opportunities.
FINANCIAL HIGHLIGHTS
Fiscal year ended September 30th 1997 1996 1995
(in thousands of dollars except per
share amounts and other data)
Operating Results
Net billings for products and services $442,216 $417,290 $379,736
Total costs and expenses 402,528 382,109 359,553*
Net earnings 18,140** 22,178 11,936
Per share 1.58*** 1.92 1.03
Cash dividends per share .93 .93 .93
Year-end Financial Position
Working capital 124,827 121,103 116,364
Total assets 348,110 348,798 349,599
Long-term debt 17,717 22,696 27,796
Shareholders' equity 210,614 207,995 197,903
Other Data
Shareholder's equity per share $ 18.40 $ 18.01 $ 17.05
Worker members 3,246 3,211 3,071
Registered shareholder members 1,994 2,029 2,179
* Total costs and expenses includes restructuring expense of $5,927 for 1995.
** Net earnings for 1997 includes a reduction for the equity in loss of an
unconsolidated affiliate of $6,209 or $.54 per share, net of tax. Without
this item, net earnings would have been $24,349 or $2.12 per share.
TO ALL SHAREHOLDER AND WORKER MEMBERS
With great pleasure, I can say that Woodward intensified its focus on total
customer satisfaction and higher operating efficiency in fiscal 1997. We made
further progress towards our primary objective of long-term growth in
revenues and profits. In addition, we launched a new joint venture with
Catalytica Combustion Systems, Inc. to capitalize on the expanding need for
low emission gas turbines. This venture, GENXON(tm) Power Systems, LLC,
offers new emission control technology and, during the year, attained a
number of key milestones.
Our total net billings for fiscal 1997 rose 6 percent to $442.2 million from
last year's $417.3 million. Costs and expenses as a percentage of revenues
were slightly lower, reflecting programs to boost productivity, quality, and
margins. As a result, before the effect of GENXON, pre-tax earnings increased
13 percent to $39.7 million from $35.2 million in 1996 and after-tax earnings
rose 10 percent to $24.3 million, or $2.12 per share, from $22.2 million, or
$1.92 per share. Including our portion of GENXON's net loss ($6.2 million,
or $0.54 per share), net earnings were $18.1 million, or $1.58 per share.
Our Industrial Controls group increased net billings by 5 percent over the
prior year despite the dampening effect of the dollar's strength. Engineered
systems, engine controls in Europe, and aftermarket products and services
were the leading contributors to the growth. Aircraft Controls' net billings
were up 8 percent from last year, reflecting strong global aircraft
production schedules and healthy demand for aftermarket products and services
from our growing installed base of equipment.
Progress was evident on the cost side, despite investments in training,
quality, and process improvement programs, which generate returns over a
longer time frame. In Industrial Controls, we combined Turbomachinery and
Engine controls units in Colorado and centralized many functions that
previously had been handled by individual plants. These changes enabled us to
better focus our resources on growing more profitable market segments, while
reducing costs.
In Aircraft Controls, during fiscal 1997, we made plans to consolidate our
increasing aftermarket business in a leased facility in Prestwick, Scotland.
Beginning early in the new fiscal year, Prestwick will serve our customers in
Europe and the Middle East, previously served primarily from separate
locations in England and the Netherlands. The new facility will enable us
to provide better service and faster turnaround time at lower cost, and will
free up needed capacity in the Netherlands plant. Our Rockton, Illinois,
aftermarket facility continues to serve customers throughout the rest of the
world.
Our plan for long-term growth and building shareholder value is centered on
the following objectives which will help us reach our strategic goals:
To become an increasingly important partner and supplier to our customers
by consistently meeting or exceeding their expectations for product
performance and quality, on-time delivery, cost, and service;
To increase profitability from our existing revenue base by continuously
improving efficiency in all phases of operations;
To develop new sources of revenue by applying our know-how to products and
services which complement or extend our core business;
To develop and intensify our presence in selected geographic markets with
promising growth potential; and
To apply our expertise, intellectual property, and financial resources to
closely related businesses which we can develop internally, acquire, or
pursue through joint ventures and alliances.
Company-wide, we intensified and expanded programs for continuous improvement
during fiscal 1997. We continue to encourage member involvement in all work
processes, in the further compression of cycle times, and in systematic cost
reduction efforts. Already we observe progress in customer satisfaction,
increased output, reduced waste, and higher profitability. We view the
training and other costs associated with these programs as strategic
investments, which will generate excellent returns in the form of total
customer satisfaction, continued market leadership, and member development.
Both our operating groups are executing the general strategies and member
development programs noted above, but each has its own growth plan tailored
to its own market opportunities. Aircraft Controls, in addition to its
ongoing pursuit of new engine and re-engineering programs, has been moving
beyond its core fuel metering products, which are among the most critical and
complex building blocks of the engine. We also are focusing on the design and
supply of associated engine fuel-delivery systems and components. The fuel
system of the BMW Rolls-Royce BR700 family of engines, for example, contains
not only our fuel metering unit, but six additional Woodward products. This
strategy accommodates preferences for fewer suppliers and closely integrated
components; it builds on our customer relationships and our reputation for
reliable, innovative products.
In another Aircraft Controls growth opportunity, we set detailed plans during
the year to implement our previously announced alliance with Lockheed Martin
Control Systems, a leading manufacturer of electronic control systems. A new
limited liability company is expected to be finalized by the end of calendar
1997. This venture will combine Lockheed Martin's electronics and Woodward's
hydromechanics, enabling both parties to focus on their strengths, and provide
customers with fully integrated systems from a single supplier.
Infrastructure development, primarily in power, transportation, and
industrial process equipment, is a key growth opportunity for Industrial
Controls. Developing economies in the Pacific Rim countries and Latin America
represent the largest markets for new infrastructure projects. In developed
economies, we see opportunities for the retrofit of installed turbines, and
demand for new equipment based on more efficient technologies and
increasingly stringent emissions requirements. Industrial Controls is
focusing on these markets, with the objective of supplying a wider scope of
the fuel system for engine and turbine manufacturers and packagers.
We view GENXON as an investment in a leading technology which, once
commercialized, will increase the market for our existing turbine products
and services. This venture combines our proven control technologies with
Catalytica's unique XONON(tm) catalytic combustion technology, providing an
ultra-low NOx emission system that will be offered as a retrofit on out-of-
warranty gas turbines. During fiscal 1997, GENXON met some significant
milestones including the signing of a memorandum of understanding with
General Electric Company for the worldwide commercialization of XONON
systems in installed, GE-designed gas turbines. In response to the positive
reaction from the marketplace, GENXON accelerated its development activities,
which added to its expenditures.
Exploration of acquisitions, joint ventures, and alliances is an integral
part of our growth plans. Although we made no significant acquisitions in
fiscal 1997, we explored a number of possibilities and plan to continue our
search in fiscal 1998. Acquisition candidates will have the potential to
broaden our base of products and technology and to improve our growth
prospects. In addition, we are seeking acquisitions which will be non-
dilutive, or additive, to our earnings per share performance.
Our balance sheet remained strong at year-end, with long-term debt accounting
for less than 8 percent of total capital. We also made progress in the
management of inventory levels, which declined almost 10 percent from the
previous year-end totals.
In January 1997, Woodward shares began trading on the Nasdaq National Market
system. Benefits of the Nasdaq listing include exposure to a broader
universe of potential shareholders and the liquidity provided by Nasdaq
market-makers. We also split Woodward stock four-for-one. The Board of
Directors maintained our annual dividend payments (adjusted for the split) at
$0.93 per share.
We owe a debt of gratitude to all our stakeholders. Therefore, I thank our
customers, members, and shareholders for their support, and our Board of
Directors for their guidance. Mark Leum, who retired from our Board at fiscal
year-end, deserves special acknowledgment for his leadership and many
contributions, which spanned more than 40 years with the company, and
included positions as vice chairman and president. In addition, Vern Cassens
retired as our senior vice president and chief financial officer in January
and continues to serve as a member of the Board. Upon Vern's retirement, the
Board named Steve Carter, vice president and treasurer, as our chief
financial officer.
While 1997 continued to be filled with challenges, we move forward into 1998
with confidence. Our focus is on the future and our goal is to align and
involve all members in achieving success.
John A. Halbrook
Chairman of the Board
and Chief Executive Officer
December 2, 1997
WOODWARD
A Worldwide Operation
Over 100 separate locations support Woodward Governor Company and its world-
wide operations. These locations include company plants, offices, and agents,
plus Central Distributors, Authorized Dealers, and Authorized Independent
Service Facilities.
WOODWARD USA LOCATIONS USA REGIONAL OFFICES
Corporate Headquarters Birmingham, Alabama
Rockford, Illinois
Walnut Creek, California
Aircraft Controls Group
Rockford, Illinois Olympia Fields, Illinois
Rockton, Illinois
Buffalo, New York Norristown, Pennsylvania
Industrial Controls Group Houston (Bellaire), Texas
Fort Collins, Colorado
Loveland, Colorado Bellevue, Washington
WOODWARD LOCATIONS OUTSIDE USA
Sydney (Kingsgrove), Australia Christchurch, New Zealand
Campinas, Brazil Warsaw, Poland
Pointe Claire, Quebec, Canada Prestwick, Scotland
Beijing and Tianjin, China Singapore
Reading, England Abu Dhabi, UAE
Aken, Kelbra, and Tettnang Germany
Ballabgarh, Haryana, India
Tomisato and Kobe, Japan
Pusan, Korea
Mexico City, Mexico
Hoofddorp and Rotterdam, The Netherlands
AIRCRAFT CONTROLS
Woodward's Aircraft Controls group (ACG) is a leader in the design, manufact-
ure, and service of aircraft fuel systems and related components. Its
principal market is control systems for fuel delivery, which, including
products and services, generated approximately 80 percent of its revenues in
fiscal 1997. Fuel delivery systems are considered to be the most complex
system in the aircraft engine. At the heart of fuel delivery is the fuel
metering system, ACG's main product group. Related components include
sensors, valves, and actuators. Beyond fuel delivery systems, ACG also
provides propeller control and synchronization and servo components.
ACG's customers include engine and airframe manufacturers, airlines, fleet
managers, and the military. Providing superior quality, proven reliability,
and responsive service for more than sixty years enabled ACG to establish
strong customer relationships. To sustain and build those relationships,
ACG's objectives are to deliver quality products at low cost for value
received, consistently on or ahead of schedule.
Productivity Improvements
During the past several years, customers have asked suppliers to lower the
cost of products and quicken response time, while maintaining the highest
quality standards. In addition, customers sought the advantages of buying
from fewer suppliers. These initiatives by customers to increase their own
competitiveness represented opportunities for Woodward. As a result, the
Woodward ACG:
Broadened and intensified its training programs,
Expanded the number of self-directed (Kaizen) teams devoted to
improving operating performance,
Accelerated implementation of Kaizen recommendations, and
Continued to empower its members to meet customer expectations.
Over the past two years, the ACG implemented changes recommended by more than
thirty key Kaizen teams and then measured the impact on operations. The
impressive results exceeded expectations, encouraging many members routinely
to incorporate "continuous improvement" in their thinking.
Growth Plans
ACG's growth strategy focuses on:
Developing and introducing new products related to fuel delivery systems,
Moving beyond individual components towards integrated engine control
systems, and
Providing repair, overhaul, and replacement parts to a growing installed
base of products.
In addition to the relatively infrequent new engine launches, there are also
opportunities for replacing, upgrading, and overhauling installed system
components. New products may be developed internally, or through an
acquisition or joint venture. This growth strategy allows ACG to offer
customers an opportunity to buy functionally integrated products, which have
been modeled and tested together, from one vendor.
Actuators, a new product line readied for production and certification in
1997, exemplify Woodward's basic approach to new product design and
manufacturing. In jet engines, fuel driven actuators are a critical component
of the fuel system used to control compressor vanes and bleed valves. ACG
designed standard actuator platforms with proven features and materials,
which can then be modified to produce models designed for specific
applications. Last year, Woodward engineers tested six actuators for more
than 2,100 hours each, with each piston moving a total of 5.1 million inches.
The test results were successful under conditions ranging from normal to
extreme.
ACG's actuators are made in a production cell responsible for manufacturing,
assembling and testing, and committed to a 6-sigma level of quality. Through
concentrating all of the activities in one cell at one location, ACG is
working to increase quality and reduce lead times for all actuator products.
By accelerating the development process and increasing manufacturing
efficiency, Woodward is able to better serve its customers, while enhancing
product breadth and profitability.
Woodward's position as supplier of seven components for each of the BMW
Rolls-Royce BR700 series turbofan engines demonstrates the potential for
increasing the company's presence on an engine. The BR710 powers the
Gulfstream V and the Global Express business jets, the most prestigious in
the industry. The BR710 engine recently has been selected by the Royal Air
Force to re-engine its Nimrod aircraft fleet, and the engine family is being
considered for several regional jets, one of the fastest growing segments of
the airframe market.
In addition, Boeing recently decided to proceed with the new MD-95. The BR715
engine, using Woodward components, will power this two-engine aircraft.
Industry studies indicate that the MD-95 has the potential to fill a market
niche.
Woodward's alliance with Lockheed Martin Control Systems spent the year on
business and product development. Working together, engineers of both
companies are developing an integrated control system, which incorporates
Woodward's hydraulic multiplexer, an advanced technology for fuel flow and
actuation control. Data from tests scheduled for 1998 will be used to
develop a variety of product applications.
A Woodward/Lockheed Martin limited liability company is expected to be
officially launched by the end of calendar 1997. Its mission will be to
market, design, manufacture, and service new and existing engine control
systems. The venture brings together the two largest engine control
suppliers in the world; both have the additional advantage of being
unaffiliated with any engine manufacturer. For Woodward, the venture
underscores its commitment to ally with resourceful partners, to capitalize
on its core know-how and manufacturing assets, and to expand its product
line and customer base.
Serving the Installed Base
ACG's service business benefits from the continuous increase in its installed
product base. Aircraft downtime is expensive, and proper maintenance is
critical to the operational reliability of aircraft engine components.
Customers rely on Woodward to provide expert, fast, and reliable overhaul and
repair services.
Woodward constantly looks for new ideas to better serve customers. Subsequent
to the end of fiscal year 1997, the ACG reached agreement with a major
domestic airline to service Woodward controls for a fixed price. Under a
fixed-price service contract, the customer benefits from predictable cost and
the service provider has an opportunity to enhance its profits by delivering
reliable and cost-effective maintenance. ACG plans to pursue more such
contracts in the future.
Recently, the ACG consolidated its European service facilities. Soon to
operate from a leased location right next to the airport in Prestwick,
Scotland, the facility will combine all aircraft support services previously
conducted at Hoofddorp, the Netherlands, and Reading, England. With the
Prestwick airport rapidly becoming a center for aviation-related industries,
many current and potential Woodward customers already are nearby. For other
customers, the expanding Prestwick air-freight industry has the capacity to
quickly move controls from one location to another. As part of the ACG's
commitment to serve customers worldwide, management is evaluating other
support-service locations.
INDUSTRIAL CONTROLS
Woodward's Industrial Controls group (ICG) is one of the world's leading
providers of control systems, components, and related services for engines
and turbomachinery. Its product mix ranges broadly from small single-function
mechanical components to comprehensive, fault-tolerant microprocessor-based
systems which automatically control speed, load, pressure, temperature, and
emissions, as well as gather data and monitor operations. The products are
developed in close collaboration with engine and turbine makers. Some are
custom-designed for unique applications, others designed for broader use as
standard equipment.
Serving Worldwide Markets
Used on fossil-fueled engines and turbines, and on steam and hydraulic
turbines, Woodward products are sold to original equipment manufacturers and
turbine packagers. The ICG, and its large network of distributors and
dealers, sell and service products for installed engines and turbines.
Power generation, which represents ICG's largest set of applications, ranges
from large electric utility power plants, to cogeneration facilities and
small standby generators. The process industry currently ranks as the second
largest market for ICG controls, and engineers continually explore new ideas
to increase sales for process controls in the petrochemical industry.
Transportation equipment (locomotives, ships, and off-road vehicles) and gas
transmission facilities are also significant markets.
ICG designs, manufactures, markets, distributes, and services hundreds of
systems and components, most of which perform mission-critical functions. ICG
members focus on total quality and continuous improvement, while continually
finding new ways to address customer needs and preferences.
During fiscal 1997, ICG increased the programs through which members receive
technical and job-skill training. One program, particularly well-received,
focused on broadening each member's responsibility for quality, continuous
improvement, and customer satisfaction. ICG views these programs as
investments in developing its members' talents and effectiveness, which are
equal in importance to investments in capital equipment.
Demand for new power equipment is particularly strong in the developing
nations of the world where energy use is rising rapidly and the power,
industrial, and transportation infrastructure is being established or
expanded. In addition to its plants and offices throughout the United States,
Woodward maintains a significant presence in Europe, the Pacific Rim, South
America, and the Mid-East/Asia region, as well as a global network of
distributors, dealers, and authorized independent service facilities.
In addition, developed industrial countries offer new opportunities in power
generation industries as authorities move to deregulate electricity, which
could lead to new applications for Woodward controls.
New Opportunities
ICG has targeted China, India, and South America as particularly attractive
markets over the next decade. In July 1997, ICG formed Woodward (Tianjin)
Controls Co. Ltd., a 65/35 joint venture, with Tianjin Locomotive and
Rolling Stock Machinery Works (TLW), a state-owned company in China. As part
of the agreement, Woodward will invest up to $2.7 million.
This venture's initial project will consist of a modified Woodward fuel-
control system for engines on diesel-electric locomotives. The Chinese
Ministry of Railways is considering a proposal, funded by a World Bank loan,
to grant the venture a contract to manufacture at least 200 control systems.
Woodward (Tianjin) represents a major expansion of ICG's presence in China, a
country with urgent infrastructure requirements, and potentially, a base for
future growth.
Today, customers demand controls and systems that deliver reliable high
performance. For example, more customers request fast-acting systems capable
of instantaneously processing large volumes of data. As a result, new
products introduced during the year generally focused on giving customers
high measurable value, broadened functionality, increased efficiency, and ease
of operation. The development of new products enables Woodward to incorporate
new technologies and add functionality customers need. Examples of new
controls are the GECO(tm) S100 for gas engines, the 5009 fault tolerant
control system for power applications, and the MicroNet(tm) control based on
our world-class NetCon(r) system.
Not all of Woodward's controls are designed for fossil-fueled engines and
turbines or for steam-driven turbines. Since 1870 Woodward has served hydro-
turbine markets; during 1997, ICG began shipping a custom-designed system to
control a large hydro plant for Georgia Power, a division of Southern
Company, the nation's largest producer of electricity. Ultimately, Woodward
controls will automate the operation of 19 turbines at six power plants in
addition to regulating water flows through a series of gates and dams.
Participation in this project underscores the breadth of applications served
by Woodward's control technologies.
Woodward's commitment to developing leading technologies led to its selection
by all three of the leading gas turbine manufacturers to develop and supply
combustion controls and fuel management systems for their dry-low emissions
(DLE) aeroderivative turbines. With heightened attention throughout the
world on clean air and global warming, an acceptable emissions profile
becomes critical for obtaining or maintaining a permit to operate power
equipment. For customers needing to deploy new equipment or expand their
power production, DLE is an enabling technology.
GENXON(tm) Power Systems
For operators of installed, out-of-warranty gas turbines, there is an
exciting new technology being developed. This new approach may dramatically
improve the emissions profile of such equipment. To offer this technology,
Woodward formed GENXON(tm) Power Systems, LLC (GENXON) with a 50/50 partner,
Catalytica Combustion Systems, Inc. GENXON offers Woodward's versatile control
technology and Catalytica's unique, XONON(tm) combustion system as a cost-
effective, ultra-low NOx solution for out-of-warranty turbines.
The joint venture, first announced in September 1996, made substantial
progress in fiscal 1997, attaining a number of key milestones. In December
1996, GENXON received its first commercial order from a California electric
utility. In June 1997, GENXON announced the successful operation of the XONON
combustion system on a Kawasaki gas turbine operating in field conditions
under full load. The company also signed a memorandum of understanding with
General Electric Company for the commercialization of the ultra-low emission
system in installed GE-designed, heavy duty gas turbines. Shortly after the
end of fiscal 1997, GENXON named a new president and chief executive officer,
Patrick T. Conroy, who has many years of experience in the power equipment
industry. To Woodward, GENXON represents an investment in innovative
technology with the potential to open new markets and new applications for
Woodward products and services.
FINANCIAL SUMMARY AND ANALYSIS
INTRODUCTION
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of
the results of operations and financial condition of the company. This
discussion should be read in conjunction with the consolidated
financial statements and accompanying notes. All share information has
been restated to reflect the four-for-one stock split on January 23,
1997.
This annual report contains forward-looking statements reflect-
ing Woodward's current expectations. Such forward-looking statements
include, without limitation, references relating to expected shipments
and net earnings, Industrial Controls group (ICG) opportunities in
overseas and domestic markets, Aircraft Controls group (ACG) outlook,
GENXON(tm) Power Systems, LLC (GENXON) joint venture prospects and on-
going funding, 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 other risk factors.
RESULTS OF OPERATIONS
1997 Compared to 1996
Shipments
Shipments totaled $442,216,000 in 1997, an increase of $24,926,000 or
6.0% over the $417,290,000 shipped in 1996. This increase primarily
resulted from higher volumes, partially offset by a strong U.S. dollar
that caused unfavorable currency translation adjustments of overseas
shipments. Excluding the $10,605,000 impact of foreign currency
translation, shipments increased $35,531,000 or 8.5% from 1996.
Military sales accounted for 9.3% of total shipments compared to 10.0%
in 1996.
ICG shipments totaled $243,253,000 in 1997, a 4.5% increase over
$232,746,000 in 1996. This represents 55.0% of 1997 total company
shipments, compared to 55.8% in 1996. Shipments from overseas plants
totaled $127,841,000, an increase of 5.0% over 1996. Excluding an
unfavorable foreign currency translation, predominantly from the
Japanese Yen and the Netherlands Dutch Guilder, the increase would
have been 13.6%. This growth was primarily the result of a strong
engine control market in Europe, increased shipments of electronic
control systems to Japanese customers and the June 1996 acquisition of
Deltec Fuel Systems. Domestic plant shipments totaled $115,412,000 in
1997, an increase of 4.0% when compared to the prior year.
There continue to be more opportunities for growth in the overseas
markets, particularly in Europe and the emerging markets of the
Asia/Pacific region. There has also been a shift in market demand from
mechanical to electronic fuel control systems, which has helped to
solidify ICG's market positions in Japan and Europe with proven and
well-regarded system technology. In the more mature domestic market,
opportunities for future growth will be focused on improving market
share and introducing new standardized products.
ACG shipments increased 7.8% to $198,963,000 as compared to
$184,544,000 in 1996. Excluding Bauer Aerospace, which was divested in July
1996, the increase would have been 10.0%, which reflects the current
upswing in the airframe production cycle. ACG shipments represent
45.0% of total company shipments compared to 44.2% in 1996.
Approximately 60% of shipments are to original equipment manufacturers
(OEMs), with the remaining 40% comprising revenues from aftermarket
business. Despite being a competitive business, aftermarket
service-related revenues are anticipated to increase, particularly in
the area of fixed-price maintenance contracts. This growth
opportunity, along with expansion of the new actuator product line,
will help to offset a potential leveling-off of the airframe
production cycle and related OEM product shipments.
Cost of Goods Sold
In 1997, total cost of goods sold was $325,837,000 as compared to
$304,887,000 in 1996, an increase of 6.9%. This increase was mainly
due to higher levels of shipments, increased product development and
support, and member training costs, which were partially offset by the
favorable currency translation of overseas expenses. As a percentage
of net shipments, total cost of goods sold was 73.7% in 1997 versus
73.1% in 1996. Although not yet reflected in this ratio, cost
improvements are beginning to be realized from a continued focus on
productivity and efficiency improvements through efforts of
self-directed member teams. Paramount to each team's focus is
maintaining the highest quality standards and improving on-time
delivery to customers. There is a cost to meeting and exceeding
customer expectations, however, and this has caused engineering
support and other quality-related costs to increase over 1996.
Sales, Service, and Administrative Expenses
Sales, service, and administrative expenses totaled $72,295,000 in
1997, a 3.5% increase over $69,874,000 in 1996. This increase was
mostly caused by higher levels of member training and development,
costs associated with the consolidation of previously separate
Colorado ICG business units, the June 1996 acquisition of Deltec Fuel
Systems, and expanding international sales operations. As a percent of
total shipments, sales, service, and administrative expenses were
16.3% in 1997 as compared to 16.7% a year earlier. This decline
reflects both higher shipment levels relative to the fixed cost base
and the company's ongoing emphasis on cost management.
Interest Expense
Interest expense totaled $2,382,000 in 1997 compared to $3,325,000 in
1996. This decline resulted from lower levels of short-term borrowings and the
paydown of long-term debt.
Interest Income
Interest income was $780,000 in 1997 compared to $825,000 in 1996.
Other Expense-Net
Other expense-net totaled $2,794,000 in 1997 compared to $4,848,000 in
1996. The majority of this favorable decline was due to the receipt of
royalty income from an ACG customer in the fourth quarter.
Income Taxes
The income tax expense in 1997 was $15,339,000 and the effective tax
rate was 38.6%. In 1996, the effective tax rate was 37.0% and the tax
expense was $13,003,000. The effective tax rate increased in 1997 due
to lower levels of foreign tax credit utilization when compared to
1996. The income tax benefits attributable to the GENXON joint venture
loss are included in the equity in loss of unconsolidated affiliate
category, which is presented separately on the statements of
consolidated earnings and shown net of tax.
Earnings before Equity in Loss of Unconsolidated Affiliate
Earnings before the effect of the company's equity in loss of GENXON
totaled $24,349,000 in 1997, an increase of $2,171,000 or 9.8% over
1996 net earnings of $22,178,000. The return on sales in 1997 was 5.5%
versus 5.3% in 1996. The return on average net worth was 11.6% in
1997, an improvement over the 10.9% in 1996.
Earnings before income taxes from foreign operations increased 3.9%,
from $17,857,000 in 1996 to $18,545,000 in 1997. The shipment level
also rose in 1997 from $127,666,000 to $134,513,000, a 5.4% increase.
Domestic shipments totaled $307,703,000 in 1997, an increase of 6.2%
over $289,624,000 in 1996. Domestic earnings before income taxes and
the impact of GENXON were $21,143,000, an increase of 22.0% as
compared to $17,324,000 in 1996.
Equity in Loss of Unconsolidated Affiliate
In October 1996, the company and Catalytica Combustion Systems, Inc.
(CCSI), a subsidiary of Catalytica, Inc., formed GENXON, a 50/50 joint
venture. GENXON combines the company's highly developed, field-proven
fuel metering control technology with CCSI's unique XONON(tm) catalytic
combustion technology to offer a highly competitive, ultra-low NOx
emission control system. The joint venture will offer products as a
retrofit on installed, out-of-warranty industrial gas turbines. As
part of the joint venture agreement, the company committed to fund
$8,000,000 of the initial $10,000,000 capital commitment. Any
additional capital funding, although not contractually required, is to
be split on a 50/50 basis with CCSI.
In its first year of operation, GENXON made some very encouraging
achievements. In June 1997, GENXON signed a memorandum of understand-
ing with General Electric Company for the worldwide commercialization
of the ultra-low emission system in GE-designed, heavy duty gas
turbines. GENXON also announced the successful operation of XONON on a
gas turbine operating in field conditions under full load. These
developments, coupled with recent indications of continued political
support for strict worldwide air-quality regulations, helped to focus
attention on the acceleration of development efforts to support the
potential for expanded market opportunities.
In 1997, the joint venture incurred a $10,486,000 pre-tax loss, with
$8,243,000 being funded by the company in accordance with the joint
venture agreement. Accordingly, this required amount of funding was
expensed in 1997 and reflected as equity in loss of unconsolidated
affiliate in the statements of consolidated earnings. The impact to
consolidated net earnings was a $6,209,000 loss, net of $2,034,000 of
income tax benefits.
Development efforts will continue in fiscal 1998. There is optimism
about the unique technology and opportunities the joint venture brings
to the marketplace. While initial market sales will occur in 1998,
additional funding of on-going product development will be necessary.
The company remains committed to the joint venture and will assess
capital commitments as necessary.
Net Earnings
Net earnings were $18,140,000 in 1997, a $4,038,000 or 18.2% decline
from the $22,178,000 that was reported in 1996. Excluding the
$6,209,000 after-tax equity in loss of GENXON, net earnings would have
increased $2,171,000, or 9.8%. On a per share basis, net earnings
totaled $1.58 in 1997 as compared to $1.92 in 1996, a decline of $.34
per share. Without the $.54 per share impact of the GENXON loss, net
earnings per share would have been $2.12, a $.20 or 10.4% increase
over 1996.
Financial Condition
The financial condition of the company remained strong as of September
30, 1997, with total shareholders' equity of $210,614,000 and long-
term debt of $17,717,000, which was less than 8% of total capital.
Total assets at September 30, 1997 were $348,110,000, a 0.2% decline
from the balance a year earlier.
Cash balances increased $1,929,000 to $14,999,000 at September 30,
1997 when compared to a year ago. Higher cash balances during 1997
have been utilized to reduce short-term borrowings, which declined
$7,402,000 since the end of the previous fiscal year to $7,908,000 at
September 30, 1997. Long-term debt also declined $4,979,000 when
compared to the prior fiscal year-end balance of $22,696,000.
Accounts receivable increased $10,904,000 or 13.5% to $91,806,000 at
September 30, 1997 when compared to $80,902,000 a year earlier. The
increase was due to higher levels of shipments, particularly in the
last month of the fiscal year. Although accounts receivable balances
increased, the level of past-due accounts has declined when compared
to the previous fiscal year-end. The allowance for losses totaled
$2,757,000 at September 30, 1997, a $2,000 increase over the balance
a year earlier.
Inventories totaled $83,249,000 at September 30, 1997 as compared to
$92,135,000 at September 30, 1996, a decline of $8,886,000 or 9.6%.
This decline was primarily due to high shipment levels in the last
month of the fiscal year, coupled with the company's on-going emphasis
on inventory management.
Property, plant, and equipment-net decreased from $114,213,000 at
September 30, 1996 to $110,948,000 at September 30, 1997, due to
current year depreciation and foreign currency translation.
Deferred income taxes decreased from $38,559,000 at September 30, 1996
to $38,175,000 at September 30, 1997. Deferred income tax assets are
expected to be realized through future earnings.
Accounts payable and accrued expenses increased $3,227,000 or 5.2% to
$64,824,000 at September 30, 1997 as compared to $61,597,000 at
September 30, 1996. This increase was predominantly caused by higher
levels of shipment activity toward the end of the fiscal year.
Other liabilities totaled $34,901,000 and comprise the non-current
accumulated postretirement benefit obligation. See Footnote H of the
Notes to Consolidated Financial Statements.
Total shareholders' equity was $210,614,000 at September 30, 1997, an
increase of $2,619,000 or 1.3% from the balance of $207,995,000 at
September 30, 1996. This increase was primarily the result of current
year earnings, net of cash dividend payments. Shareholders' equity was
reduced by a $4,229,000 decline in the currency translation
adjustment, but was partially offset by a $2,537,000 change in
unearned ESOP compensation.
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 Footnote L of the Notes to Consolidated Financial Statements.
Liquidity and Capital Expenditures
Cash dividends paid to shareholders were $.93 per share in both 1997
and 1996.
Net cash provided by operating activities was $56,079,000 in 1997
compared to $52,482,000 in 1996. The primary reason for this increase
was higher pre-GENXON earnings.
Net cash flows used in investing activities were $28,579,000 in 1997
compared to $20,084,000 in 1996. This increase was due to the invest-
ment in the GENXON joint venture. Capital expenditure levels were
unchanged when compared to 1996. Based on current operating cond-
itions, the company does not expect a significant increase in capital
expenditures in 1998.
Net cash used in financing activities was $25,179,000 in 1997 compared
to $31,372,000 in 1996. Reduction of both short-term and long-term
borrowing levels and payment of dividends were the primary uses of
cash during 1997. Based on current operating conditions, both lines of
credit and cash flow from operations should be adequate to meet
company cash requirements during 1998.
Membership
Worldwide membership increased to 3,246 at September 30, 1997 from
3,211 at September 30, 1996. This increase was primarily due to
continued growth of international operations, partially offset by a
reduction from the consolidation of Colorado ICG business units.
Membership levels are continually monitored to ensure that adequate
resources are allocated to customer quality and service expectations,
production levels, product line growth, and other factors.
Year 2000 Task Force
The company has formed a Year 2000 Task Force with representatives
from each business unit and location. This task force is charged with
the responsibility of determining and coordinating the action
necessary to provide uninterrupted, normal operation of business-
critical systems before, during, and after Year 2000. The company is
also encouraging similar compliance from customers, suppliers, and
partners, as appropriate, and will work with them to help achieve this
goal. Management believes that total costs associated with Year 2000
issues will not have a material effect on the consolidated earnings of
the company.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share," which is required to be adopted in the company's
first quarter fiscal 1998 financial statements. This new standard
establishes methods for computing and presenting earnings per share
(EPS) and also simplifies the previous standards found in APB Opinion
No. 15, "Earnings per Share." It requires dual presentation of basic
and diluted EPS on the Statements of Consolidated Earnings. The
company's current calculation of its earnings per share will be
equivalent to the basic EPS under this new standard. The calculation
of diluted EPS is not expected to be materially different from
basic EPS.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is effective
in fiscal year 1999. This new statement revises standards for public
companies to report information about segments of their business and
also requires disclosure of selected segment information in quarterly
financial reports. The statement also establishes standards for
related disclosures about products and services, geographic areas, and
major customers. The company has not yet determined the impact this
new statement may have on disclosures in the consolidated financial
statements.
The FASB also issued certain other disclosure-related accounting
pronouncements during 1997. While these new statements are effective
for future reporting periods, the company does not anticipate they
will have any significant impact on the consolidated financial
statements.
RESULTS OF OPERATIONS
1996 Compared to 1995
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. The volume of shipments increased 9.9% including a
reimbursement of nonrecurring engineering charges in 1995. Without
this reimbursement, 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 1995. Both ACG and ICG shipments have
increased since 1995. Military sales increased to 10.0% of sales
compared to 7.4% in 1995.
ICG shipments were $232,746,000 in 1996, a 7.0% increase from the 1995
total of $217,612,000. This represented 55.8% of 1996 total company
shipments, compared to 57.3% in 1995. The shipments from overseas
plants were up 9.0% and continued to increase at a faster rate than
shipments from domestic plants, which were up almost 4.8% over 1995.
ACG shipments increased 13.8% to $184,544,000 from $162,124,000 in
1995. The 1995 total included over $7,000,000 in reimbursements for
nonrecurring engineering charges incurred in previous years. Without
this item, shipments were up over 19% from 1995. This increase
reflected the strengthening of the demand for products in the
commercial aircraft markets, particularly in aftermarket spares and
overhauls, and also additional military sales. ACG shipments
represented 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
represented an increase of 11%. 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.
Engineering costs continued to increase to meet the demands of
customer satisfaction.
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 reflected the cost containment efforts
in this area. To meet customer service expectations, however,
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. These costs
related to additional charges from initiatives started in prior years,
including the divestiture of Bauer Aerospace and the move of the Hydro
business unit from Stevens Point to the plants in Colorado.
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 was lower due to a higher
portion of income generated in the United States at lower tax rates.
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
did 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 $1.92 per share
in 1996 from $1.03 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 restruc-
turing expense of $5,927,000 in 1995, earnings before income taxes
from domestic operations would have been $10,984,000.
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 has continued to
focus on decreasing 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 increased in 1996 due to the higher level of shipment activity.
Accrued salaries and wages also increased due to additional withhold-
ing taxes and profit sharing resulting from 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 primarily to the increase
in retained net earnings in 1996 compared to 1995.
Liquidity and Capital Expenditures
Cash dividends paid to the shareholders in 1996 and 1995 were $.93 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 as capital expenditures increased in 1996 over the 1995
level.
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.
Membership
Worldwide membership increased to 3,211 at September 30, 1996 from
3,071 at September 30, 1995. The increased level of shipments and
members gained through acquisitions were the reasons for the increase.
STATEMENTS OF CONSOLIDATED EARNINGS
Woodward Governor Company and Subsidiaries
Year Ended September 30,
(In thousands of dollars except share amounts) 1997 1996 1995
Net billings for products and services $442,216 $417,290 $379,736
Costs and expenses:
Cost of goods sold 325,837 304,887 274,676
Sales, service, and administrative
expenses 72,295 69,874 69,961
Restructuring expense - - 5,927
Interest expense 2,382 3,325 3,825
Interest income (780) (825) (555)
Other expense-net 2,794 4,848 5,719
Total costs and expenses 402,528 382,109 359,553
Earnings before income taxes and equity in loss
of unconsolidated affiliate 39,688 35,181 20,183
Income taxes 15,339 13,003 8,247
Earnings before equity in loss of
unconsolidated affiliate 24,349 22,178 11,936
Equity in loss of unconsolidated
affiliate, net of tax 6,209 - -
Net earnings $18,140 $22,178 $11,936
Net earnings per share $1.58 $1.92 $1.03
Average number of shares outstanding 11,481,545 11,570,484 11,623,000
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
Woodward Governor Company and Subsidiaries
At September 30,
(In thousands of dollars except share amounts) 1997 1996
Assets
Current assets:
Cash and cash equivalents $ 14,999 $ 13,070
Accounts receivable, less allowance for
losses of $2,757 for 1997 and $2,755 for
1996 91,806 80,902
Inventories 83,249 92,135
Deferred income taxes 19,651 19,991
Total current assets 209,705 206,098
Property, plant, and equipment, at cost:
Land 5,842 6,218
Buildings and improvements 119,997 120,283
Machinery and equipment 188,758 182,680
Construction in progress 2,270 6,971
316,867 316,152
Less allowance for depreciation 205,919 201,939
Property, plant, and equipment-net 110,948 114,213
Intangibles and other assets 8,933 9,919
Deferred income taxes 18,524 18,568
Total assets $348,110 $348,798
Liabilities and shareholders' equity
Current liabilities:
Short-term borrowings $ 7,908 $ 15,310
Current portion of long-term debt 4,979 4,862
Accounts payable and accrued expenses 64,824 61,597
Taxes on income 7,167 3,226
Total current liabilities 84,878 84,995
Long-term debt, less current portion 17,717 22,696
Other liabilities 34,901 33,112
Commitments and contingencies - -
Shareholders' equity represented by:
Preferred stock, par value $.003 per
share, authorized 10,000,000 shares,
no shares issued - -
Common stock, par value $.00875 per share,
authorized 50,000,000 shares, issued
12,160,000 shares 106 106
Additional paid-in capital 13,283 13,249
Unearned ESOP compensation (12,128) (14,665)
Currency translation adjustment 9,391 13,620
Retained earnings 215,211 207,392
225,863 219,702
Less treasury stock, at cost 15,249 11,707
210,614 207,995
Total liabilities and shareholders' equity $348,110 $348,798
See accompanying Notes to Consolidated Financial Statements.
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
Woodward Governor Company and Subsidiaries
(In thousands
of dollars Add'l Unearned Currency
except Common Paid-in ESOP Trans. Retained Treasury Stock
share amts) Stock Capital Compen. Adjust. Earnings Shares Amount
Balance
at Sept. 30,
1994 $106 $13,975 $(19,777) $15,210 $194,088 463,644 $9,756
Net earnings - - - - 11,936 - -
Purchases of
treas. stk - - - - - 208,064 3,363
Sales of
treas. stk - (334) - - - (111,180) (2,120)
Issuance of
stk. to ESOP- 3 - - - (5,376) (85)
ESOP compen.
expense - - 2,444 - - - -
Cash dividends-
$.93 per common
share - - - - (10,811) - -
Tax benefit applic.
to ESOP
dividend - - - - 385 - -
Translation
adjust.
including income
taxes allocated
of $19 - - - 1,592 - - -
Balance at Sept.
30, 1995 106 13,644 (17,333) 16,802 195,598 555,152 10,914
Net earnings - - - - 22,178 - -
Purchases of
treasury stk - - - - - 89,428 1,730
Sales of treas.
stock - (343) - - - (26,400) (778)
Issuance of stk.
to ESOP - (52) - - - (5,596) (159)
ESOP compen.
expense - - 2,668 - - - -
Cash dividends-
$.93 per
common share - - - - (10,758) - -
Tax benefit
applicable
to ESOP
dividend - - - - 374 - -
Translation
adjust.
including
income taxes
allocated
of $14 - - - (3,182) - - -
Balance at
Sept. 30,
1996 106 13,249 (14,665) 13,620 207,392 612,584 11,707
Net earnings - - - - 18,140 - -
Purchases of
treas. stock - - - - - 109,600 3,761
Sales of treas.
stock - 28 - - - (7,042) (168)
Issuance of stk.
to ESOP - 6 - - - (2,108) (51)
ESOP compen.
expense - - 2,537 - - - -
Cash dividends-
$.93 per
common share - - - - (10,681) - -
Tax benefit
applicable to
ESOP dividend- - - - 360 - -
Translation adjust.
including
income taxes
allocated
of $12 - - - (4,229) - - -
Balance at Sept.
30, 1997 $106 $13,283 $(12,128) $ 9,391 $215,211 713,034 $15,249
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) 1997 1996 1995
Cash flows from operating activities:
Net earnings $18,140 $22,178 $11,936
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Depreciation and amortization 22,837 23,394 23,786
Deferred income taxes 44 (791) (3,407)
ESOP compensation expense 2,537 2,668 2,444
Equity in loss of unconsolidated affiliate 8,243 - -
Changes in assets and liabilities:
Accounts receivable (13,070) (430) (11,158)
Inventories 7,262 (577) (11,830)
Current liabilities, other than
short-term borrowings and current
portion of long-term debt 10,164 10,000 20,415
Other-net (78) (3,960) (865)
Total adjustments 37,939 30,304 19,385
Net cash provided by operating activities 56,079 52,482 31,321
Cash flows from investing activities:
Payments for purchase of property,
plant, and equipment (21,152) (21,163) (18,988)
Investment in unconsolidated affiliate (8,243) - -
Other 816 1,079 560
Net cash used in investing activities (28,579) (20,084) (18,428)
Cash flows from financing activities:
Cash dividends paid (10,681) (10,758) (10,811)
Proceeds from sales of treasury stock 196 435 1,377
Purchases of treasury stock (3,761) (1,730) (3,363)
Payments of long-term debt (4,862) (5,105) (4,254)
Short-term borrowings net proceeds (payments) (6,431) (14,588) 5,144
Tax benefit applicable to ESOP dividend 360 374 385
Net cash used in financing activities (25,179) (31,372) (11,522)
Effect of exchange rate changes on cash (392) (407) 808
Net change in cash and cash equivalents 1,929 619 2,179
Cash and cash equivalents, beginning of year 13,070 12,451 10,272
Cash and cash equivalents, end of year $14,999 $13,070 $12,451
Supplemental cash flow information:
Interest expense paid $ 2,434 $ 3,680 $ 3,930
Income taxes paid $ 8,629 $13,475 $ 8,669
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except share amounts)
A. Significant accounting policies are as follows:
Principles of consolidation: The consolidated financial statements
include the accounts of the company and all majority-owned
subsidiaries. The company accounts for its investment in the GENXON(tm)
Power Systems, LLC (GENXON) joint venture under the equity method of
accounting. 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 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 prices over the fair values of net
assets acquired have been recorded as intangible assets which are
being amortized using the straight-line method over 5 to 10 years.
Amortization expense was $983 and $608 in 1997 and 1996, respectively.
Long-lived assets: Effective with fiscal year 1997, the company
adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of" (SFAS 121). The company reviews for
impairment whenever events or changes in circumstances indicate that
the carrying amount of the asset may not be recoverable. There was no
material effect on the consolidated financial statements in 1997.
Impairment losses are recognized when the expected future cash flows
are less than the asset's carrying value.
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 upon
shipment to the customer.
Research and development costs: Expenditures related to new product
development are charged to expense when incurred and total
approximately $11,300, $13,800, and $13,700, for 1997, 1996, and 1995,
respectively.
Stock Split: The company's Board of Directors approved a four-for-one
stock split effective as of January 23, 1997. Accordingly, all share
information has been restated.
B. GENXON(tm) Power Systems Joint Venture: In October 1996, the company
and Catalytica Combustion Systems, Inc. (CCSI), a subsidiary of
Catalytica, Inc., formed GENXON(tm) Power Systems, LLC, a 50/50 joint
venture. This new venture combines the company's proprietary fuel
metering and control technology with CCSI's unique XONON(tm) catalytic
combustion technology to offer a highly competitive, ultra-low NOx
emission control system that will be offered as a retrofit on
installed, out-of-warranty industrial gas turbines.
As part of the joint venture agreement, the company committed to fund
$8,000 of the initial $10,000 capital commitment. Any additional
capital funding, although not contractually required, is to be split
on a 50/50 basis with CCSI. In 1997, the joint venture incurred a
$10,486 pre-tax loss, with $8,243 being funded by the company in
accordance with the joint venture agreement. Accordingly, this
required amount of funding was expensed in 1997 and reflected as
equity in loss of unconsolidated affiliate in the statements of
consolidated earnings. The effect on consolidated net earnings was a
$6,209 loss, net of $2,034 of income tax benefits. Most of the costs
incurred during 1997 were directly related to product development.
At September 30, 1997, the joint venture had $1,204 of total assets
and $2,690 of total liabilities.
C. Restructuring charges: In 1995, the company recognized additional
costs associated with the 1994 board-approved restructuring initiative,
in connection with closing facilities and the divestiture of Bauer
Aerospace, 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 activity in the restructuring accruals for the years ended
September 30 is as follows:
1997 1996
Beginning balance $7,607 $10,164
Payments (1,843) (2,557)
$5,764 $ 7,607
The components of the accruals related to restructuring at September
30 were as follows:
1997 1996
Severance related benefits $ 5 $ 353
Early retirement 4,665 6,157
Other closure costs 1,094 1,097
$5,764 $7,607
The early retirement benefits are payable over a 10 year period.
D. The provision for income taxes consists of:
1997 1996 1995
Currently payable:
Federal $ 6,504 $ 4,590 $2,754
State 1,551 1,058 1,007
Foreign 6,474 6,525 7,386
Deferred 810 830 (2,900)
$15,339 $13,003 $8,247
The components of the net deferred tax assets at September 30 were as
follows:
1997 1996
Deferred tax assets:
Postretirement and
early retirement benefits $16,210 $15,941
Restructuring 3,567 4,114
Foreign net operating loss and tax credits 7,921 10,116
Inventory 7,518 9,145
Other items 15,706 11,485
Valuation allowance (9,703) (9,332)
Total deferred tax assets 41,219 41,469
Deferred tax liabilities:
Unremitted earnings of
foreign subsidiaries (1,928) (1,867)
Other items (1,116) (1,043)
Total deferred tax liabilities (3,044) (2,910)
Net deferred tax assets $38,175 $38,559
The company has recorded a valuation allowance to reflect the
estimated amount of deferred tax assets which may not be realized
principally due to capital loss carryforwards and acquired foreign net
operating loss carryforward limitations. The change in foreign net
operating loss carryforward in 1997 primarily relates to currency
translation. 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:
1997 1996
Beginning balance $(9,332) $(9,006)
Foreign net operating loss carryforward 976 (1,771)
Utilization of foreign tax credit carryover - 1,647
State net operating loss carryforward (177) (75)
Capital loss carryforward (1,170) (127)
$(9,703) $(9,332)
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
1997 1996 1995
Statutory rate 35.0 35.0 35.0
State income taxes 2.2 2.4 1.9
Foreign tax rate differences 0.3 (1.1) 2.1
Foreign sales corporation (0.8) (1.3) (1.8)
Other items, net 1.9 2.0 3.7
Effective rate 38.6 37.0 40.9
The provision for income taxes and effective rate information noted
above is prior to the tax benefits associated with the GENXON joint
venture. The effective tax benefit rate for the GENXON joint venture
was 24.7% and varied from the statutory rate as a portion of the loss
was treated as a capital loss.
E. Short-term borrowings: Bank lines of credit available to the
company totaled $51,024 and $60,305, of which $7,908 and $15,310 were
used at September 30, 1997 and 1996, respectively. 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
5.1%, 5.8%, and 6.3% for 1997, 1996, and 1995, respectively.
F. Long-term debt:
1997 1996
9.45% note $ 8,000 $10,200
ESOP debt guarantee 14,500 17,000
Other 196 358
22,696 27,558
Less current portion (4,979) (4,862)
$17,717 $22,696
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 1997 are: $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
1,027,224 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 annual principal payments of $2,500 each September
30, with a final payment of $2,000 in 2003. Interest of $1,361,
$1,562, and $1,723 was paid in 1997, 1996, and 1995, respectively.
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 498,304, 602,524, and 712,152
as of September 30, 1997, 1996, and 1995, respectively.
The company recognized ESOP related expense on the Shares Allocated
Method as follows:
1997 1996 1995
Interest expense $ 471 $ 652 $ 789
Compensation expense 2,537 2,668 2,444
$3,008 $3,320 $3,233
Company cash contributions to the Plan used for debt service were
$2,971, $3,152, and $2,789, in 1997, 1996, and 1995, respectively.
Dividends on these shares used for debt service were approximately
$890 in 1997, $910 in 1996, and $934 in 1995.
Federal income tax benefits of $360, $374, and $385 in 1997, 1996, and
1995, 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,
1997, the company could pay dividends and purchase the company's
common stock up to an amount not exceeding $19,828.
G. Accounts payable and accrued expenses:
1997 1996
Accounts payable $14,906 $14,327
Salaries and wages 14,249 13,523
Taxes, other 6,366 7,262
Restructuring 5,764 7,607
Warranty 4,887 3,666
Postretirement and postemployment 3,000 3,000
Other items-net 15,652 12,212
$64,824 $61,597
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:
1997 1996
Retirees $20,599 $21,195
Fully eligible active plan participants 267 81
Other active plan participants 13,766 12,854
Accumulated postretirement
benefit obligation 34,632 34,130
Unrecognized net gain from past
experience different from that assumed 2,269 982
Total accumulated postretirement
benefit obligation $36,901 $35,112
The company has included $34,901, and $33,112 in other liabilities and
the remaining balance in current liabilities for 1997 and 1996,
respectively.
The periodic postretirement benefit cost consists of:
1997 1996 1995
Service cost-benefits attributed
to service during the period $ 923 $ 927 $ 894
Interest cost on accumulated
postretirement benefit
obligation 2,388 2,443 2,347
Amortization of
unrecognized net gain (24) - -
Net periodic postretirement
benefit cost $3,287 $3,370 $3,241
Actuarial assumptions used were as follows:
1997 1996 1995
Projected healthcare cost
trend rate 8.00% 8.50% 9.00%
Ultimate trend rate 5.25% 5.25% 5.25%
Year ultimate trend rate
is achieved 2002 2002 2002
Effect of a 1.0% increase in
the healthcare trend rate
on the accumulated post-
retirement benefit obligation $6,370 $6,054 $6,216
Effect of a 1.0% increase in the
healthcare trend rate on the
net periodic cost $ 717 $ 724 $ 690
Weighted average discount rate 7.50% 7.75% 7.75%
The company is required, under local regulations, to provide a defined
benefit plan covering approximately 135 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:
1997 1996 1995
Service cost-benefits earned
during the period $484 $334 $492
Interest cost on projected
benefit obligation 438 504 562
Actual return on plan's assets (464) (539) (546)
Net amortization and deferral 68 36 107
Net periodic pension cost $526 $335 $615
Assumptions used in the accounting for net periodic pension cost were:
1997 1996 1995
Weighted average discount rate 4.0% 4.5% 4.0%
Expected long-term rate of
return on plan's assets 4.0% 4.5% 3.1%
Compensation increase rate 3.5% 3.5% 3.0%
The plan's funded status at September 30 is as follows:
1997 1996
Accumulated benefit obligation $7,507 $7,192
Increase in benefits due to estimated
future compensation increases 3,478 3,481
Projected benefit obligation 10,985 10,673
Plan's assets at fair value 11,621 11,518
Projected benefit obligation
less than plan's assets (636) (845)
Unrecognized net gain
from experience 1,453 2,021
Unrecognized transition amount (1,136) (1,335)
Accrued asset $ (319) $ (159)
The company has a Member Investment and Stock Ownership Plan (the
"Plan") for members meeting certain service requirements. The company
contributes 5% of eligible wages and matches member contributions with
respect to a 401(k) 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 $5,529, $4,483, and $2,788, in 1997, 1996, and 1995,
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,
800,000 shares of the company's common stock are available for
issuance upon grant of the options.
In January 1996, the company granted 97,000 options to purchase common
stock at the fair market value as of October 1, 1995 ($16.63 per share),
of which 79,460 options became exercisable in November 1996. Compensation
expense of $445 was recorded in 1996, based upon an estimate of the
achievement of certain performance requirements. These options, as well as
the options granted in 1997, expire no later than 10 years from the grant
date.
Effective with fiscal 1997, the company adopted the disclosure-only
option of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation." Accordingly, the company
continues to account for stock options under Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and does not recognize compensation expense for options
issued at fair market value at the date of the grant. Had compensation
expense for stock options been determined based upon the fair value at
the grant date consistent with methodology prescribed under SFAS No.
123, the company's net earnings and net earnings per share would have
changed to the pro forma amounts indicated below:
1997 1996
As Reported
Net earnings $18,140 $22,178
Net earnings per share 1.58 1.92
Pro Forma
Net earnings $17,723 $22,268
Net earnings per share 1.54 1.92
The fair value of the options granted was estimated on the date of their
grant using the Black-Scholes option pricing model based on the
following weighted average assumptions:
1997 1996
Risk-free interest rate 6.1% 5.6%
Expected life 7 years 7 years
Expected volatility 19.7% 19.7%
Expected dividend yield 4.6% 4.6%
There were no stock options outstanding in 1995. Option activity for
1997 and 1996 was as follows:
1997 1996
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
Outstanding at
beginning of year 97,000 $16.63 - -
Granted 162,200 23.59 97,000 $16.63
Exercised (9,820) 16.63 - -
Cancelled (17,540) 16.63 - -
Outstanding at
end of year 231,840 $21.97 97,000 $16.63
Exercisable at
end of year 230,840 $21.89 - -
Weighted average
fair value of
options granted
during the year $4.26 $3.75
The exercise prices and weighted average contractual lives of stock
options outstanding at September 30, 1997 were as follows:
Weighted
Average
Remaining
Options Contractual Options
Exercise Price Outstanding Life in Years Exercisable
$16.63 69,640 8.0 69,640
23.50 161,200 8.9 161,200
33.75 1,000 9.7 -
231,840 8.6 230,840
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-four hundredth of a share of Series A Preferred Stock,
par value $.003 per share, of the company at a price of $75.00,
subject to adjustment, and restated for the January 1997 stock split.
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 $.003 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:
$1,425 in 1998, $1,370 in 1999, $962 in 2000, and $375 in 2001. Rent
expense for leases was approximately $1,423, $1,228, and $765, for
1997, 1996, and 1995, 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 $1,953 and $2,058 at September 30, 1997 and
1996, 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.
M. Financial instruments: The estimated fair values of the company's
financial instruments at September 30 were as follows:
1997 1996
Cash and cash equivalents $14,999 $13,070
Short-term borrowings (7,908) (15,310)
Long-term debt (24,490) (29,500)
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%, 17%, and 16%, of
the net billings to customers in 1997, 1996, and 1995, respectively.
The company's accounts receivable from the customer were $15,513 and
$15,375 at September 30, 1997 and 1996, respectively. Billings derived
from domestic sales to unaffiliated customers in other countries were
approximately 15%, 11%, and 12%, of the net billings to customers in
1997, 1996, and 1995, respectively. Intercompany transfers are made at
established intercompany selling prices. Summarized financial
information relating to these operations is as follows:
United Other
States Countries Eliminations Total
1997
Net billings:
Customers $307,703 $134,513 $ - $442,216
Intercompany transfers 33,939 4,101 (38,040) -
$341,642 $138,614 $(38,040) $442,216
Earnings before income taxes
and equity in loss of
unconsolidated affiliate $ 21,143 $ 18,545 - $ 39,688
Earnings before equity in
loss of unconsolidated
affiliate $ 12,459 $ 11,890 - $ 24,349
Net earnings $ 6,250 $ 11,890 - $ 18,140
Identifiable assets $268,398 $ 79,712 - $348,110
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
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Woodward Governor Company has prepared, and is
responsible for the accuracy and consistency of, the financial
statements and other information included in this annual report.
Management believes that the financial statements have been prepared
in conformity with generally accepted accounting principles and has
made what it believes to be reasonable and prudent judgments and
estimates where necessary.
The company has developed a system of internal accounting control
designed to provide reasonable assurance that its financial records
are accurate, assets are safeguarded, transactions are executed in
accordance with management's authorizations, and financial statements
fairly present the financial position and results of operations of the
company. The internal accounting control system is tested, monitored,
and revised as necessary.
The Board of Directors has an audit committee comprised of outside
directors, who meet periodically with management and the company's
independent auditors to review internal accounting control, auditing,
and financial reporting matters. The independent auditors have
unrestricted access to the audit committee and may meet with or
without management being present.
The company's independent auditors, Coopers & Lybrand L.L.P., audited
the financial statements prepared by the management of Woodward
Governor Company. Their opinion on these financial statements is
presented on page 33.
John A. Halbrook
Chairman and
Chief Executive Officer
Stephen P. Carter
Vice President,
Chief Financial Officer and Treasurer
REPORT OF INDEPENDENT ACCOUNTANTS
Shareholder and Worker Members
Woodward Governor Company
We have audited the accompanying consolidated balance sheets of
Woodward Governor Company and Subsidiaries as of September 30, 1997
and 1996, and the related statements of consolidated earnings,
shareholders' equity, and cash flows for the years ended September 30,
1997, 1996, and 1995. These financial statements are the responsi-
bility 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, 1997
and 1996, and the results of their consolidated operations and their
cash flows for the years ended September 30, 1997, 1996, and 1995, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Chicago, Illinois
November 8, 1997
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
1997 Fiscal Quarters 1996 Fiscal Quarters
In thousands
except per
share
data) First Second Third Fourth First Second Third Fourth
Net
billings $99,029 $106,546 $115,761 $120,880 $88,142 $106,785 $106,034 $116,329
Gross
profit 27,772 26,838 28,514 33,255 23,385 26,442 26,722 35,854
Earnings
before
equity in
loss of
unconsol.
affiliate 5,793 4,200 5,570 8,786 4,175 4,550 4,965 8,488
Net
earnings $ 5,138 $ 3,430 $ 4,838 $ 4,734 $4,175 $ 4,550 $ 4,965 $ 8,488
Net
earnings
per share
(1) (3) $ 0.44 $ 0.30 $ 0.42 $ 0.42 $ 0.36 $ 0.39 $ 0.43 $ 0.74
Cash
dividends
per share
(1) 0.2325 0.2325 0.2325 0.2325 0.2325 0.2325 0.2325 0.2325
Common stock price per share (2)
High $ 33.50 $ 37.25 $ 36.75 $ 37.50 $18.38 $ 22.00 $ 23.25 $ 23.25
Low 21.50 25.50 26.25 32.25 16.25 18.25 21.25 21.75
Close 33.00 27.25 36.00 35.00 18.38 21.19 22.13 23.25
(1)On January 23, 1997, a four-for-one stock split was distributed to
shareholders. Accordingly, all per share information has been
restated to reflect the effect of the split.
(2)On January 14, 1997, common shares of the company began trading on
the Nasdaq National Market. Prior to this date, the shares of the
company were listed on the NASD OTC Bulletin Board. Accordingly,
the share prices for periods prior to this date reflect only the
high and low bid prices based upon quotations from brokers and may
not necessarily represent actual transactions. Share prices have
also been restated to reflect the four-for-one stock split.
(3)The 1997 fourth quarter net earnings includes the impact of the
company's share of the GENXON joint venture loss of approximately
$.17 per share. Additionally, the company, according to the joint
venture agreement, was committed to provide 80% of the first $10
million of funding which has been completed in 1997. As a result,
the accumulated investment cost exceeded the company's 50% share of
the joint venture cumulative losses. This difference was expensed
in the fourth quarter, affecting net earnings per share by
approximately $.18. The accumulated investment cost will not exceed
the company's 50% share of the joint venture cumulative losses in
future periods, as the company has expensed all required initial
funding, and future funding and loss recognition will be on a 50/50
basis.
SUMMARY OF OPERATIONS/TEN YEAR RECORD
(In thousands of dollars except share amounts and other data)
Net Billings, Costs, and Earnings
Net % of
For Billings Total Net Earnings Avg. For
the For Prod. Costs and Income Per % of Shrhld the
Year and Serv. Expenses Taxes Amount Share Sales Equity Year
1997 $442,216 $402,528 $15,339 $18,140*** $ 1.58*** 4.1 8.7 1997
1996 417,290 382,109 13,003 22,178 1.92 5.3 10.9 1996
1995 379,736 359,553** 8,247 11,936 1.03 3.1 6.1 1995
1994 333,207 338,402** (1,922) (3,273) (0.28) (1.0) (1.7) 1994
1993 331,156 308,072** 9,695 13,389* 1.13* 4.0 6.3 1993
1992 374,173 341,197** 12,764 20,212 1.81 5.4 9.4 1992
1991 361,924 323,907 13,724 24,293 2.22 6.7 12.1 1991
1990 340,128 293,913 16,776 29,439 2.68 8.7 16.0 1990
1989 299,789 258,659 15,627 25,503 2.32 8.5 15.5 1989
1988 277,656 238,108 15,306 24,242 2.21 8.7 16.5 1988
Dividends, Expenditures, and Other Data
Weighted At
For Average Cash Dividends Reg. the
the Shares Per Capital Deprec. Wrker Shrhdr Year
Year Outstanding Amount Share Expend. Expense Mmbrs Mmbrs End
1997 11,481,545 $10,681 $0.93 $21,152 $21,854 3,246 1,994 1997
1996 11,570,484 10,758 0.93 21,163 22,786 3,211 2,029 1996
1995 11,623,000 10,811 0.93 18,988 23,334 3,071 2,179 1995
1994 11,764,708 10,956 0.93 16,515 26,114 3,439 2,256 1994
1993 11,889,200 11,057 0.93 18,335 24,837 3,264 2,301 1993
1992 11,178,628 10,330 0.92 52,684 22,241 3,632 2,301 1992
1991 10,967,352 10,145 0.92 33,075 18,236 3,953 2,303 1991
1990 10,966,248 9,181 0.84 22,057 15,397 3,673 2,209 1990
1989 10,996,224 7,971 0.72 31,190 13,165 3,317 2,084 1989
1988 10,979,328 6,862 0.62 21,540 11,213 3,180 1,919 1988
Financial Position
At At
the Plant and Long- Shrhldrs' Eqity the
Year Working Current Equipment Total term Per Year
End Capital Ratio Net Assets Debt Amount Share End
1997 $124,827 2.5 to 1 $110,948 $348,110 $17,717 $210,614 $18.40 1997
1996 121,103 2.4 to 1 114,213 348,798 22,696 207,995 18.01 1996
1995 116,364 2.3 to 1 118,066 349,599 27,796 197,903 17.05 1995
1994 113,751 2.7 to 1 122,911 323,318 32,665 193,846 16.57 1994
1993 107,809 2.7 to 1 144,016 332,461 36,246 206,222 17.36 1993
1992 103,818 2.5 to 1 151,126 331,653 40,135 219,690 18.48 1992
1991 105,213 2.4 to 1 118,417 306,534 17,300 208,564 19.02 1991
1990 115,737 3.3 to 1 101,985 269,221 18,700 194,081 17.70 1990
1989 83,009 2.2 to 1 96,075 249,833 - 173,241 15.74 1989
1988 81,798 2.6 to 1 78,504 211,240 - 156,083 14.19 1988
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.
***Net earnings for 1997 includes a reduction for the equity in loss
of an unconsolidated affiliate of $6,209, or $.54 per share,
net of tax.