Yesterday, change influenced
our business environment.
Today, change is The environment.
Over the last several years, Woodward members have
transformed the way we do business. This year we
introduced our new corporate signature, a symbol uniting
all Woodward locations in a renewed dedication to our
customers, shareholders, and members.
WOODWARD
Our new symbon
Innovative. Bold. Dynamic.
It reflects who we are as a company
and who we aspire to be.
CONTENTS
To All Shareholder and Worker Members 2
Change and Opportunity 6
Financial Summary and Analysis 15
Financial Statements 21
Summary of Operations/Ten Year Record 36
Board of Directors and Officers 37
Investor Information 38
BUSINESS DESCRIPTION
Woodward provides innovative engine controls and fuel
delivery systems designed for a wide variety of
applications. Serving global markets from locations
worldwide, Woodward is a leading producer of fuel control
systems and components for aircraft and industrial
engines and turbines.
The company's products and services are used in the
aviation, marine, locomotive, large off-road vehicle,
power generation, gas generation, and process industries.
Woodward is moving into small industrial engine markets.
The applications include standby power generators,
construction and agricultural equipment, marine pleasure
craft, and specialty vehicles such as refrigeration units
on trucks and trains, fire trucks, welders, and large
lawn tractors.
FINANCIAL HIGHLIGHTS
Fiscal year ended September 30, 1998 1997 1996
(In thousands of dollars except per share amounts and
other year-end data)
Operating Results
Net billings for products and
services $490,476 $442,216 $417,290
Total costs and expenses 449,130 402,528 382,109
Net earnings 21,592* 18,140* 22,178
Diluted earnings per share 1.90* 1.57* 1.92
Cash dividends per share .93 .93 .93
Year-end Financial Position
Working capital 119,506 124,827 121,103
Total assets 563,435 348,110 348,798
Long-term debt 175,685 17,717 22,696
Shareholders' equity 220,102 210,614 207,995
Other Data
Shareholders' equity per share $ 19.48 $ 18.40 $ 18.01
Worker members 3,994 3,246 3,211
Registered shareholder members 1,907 1,994 2,029
To all SHAREHOLDER and WORKER MEMBERS
I am pleased to report that fiscal 1998 was a year of
substantial progress toward Woodward's long-term
strategic objectives. We continued to synchronize our
strategies with evolving markets, focusing on
opportunities for profitable growth. In an effort to
become an increasingly important partner and supplier to
our customers, we completed the largest acquisition in
Woodward's history. Financially, our operating
performance during fiscal 1998 was comparable to that of
the previous year despite the effects of global economic
uncertainties and accelerated investments in growth
and quality initiatives.
Our new corporate signature, shown on the cover of this
report, captures the spirit of progress and optimism
associated with Woodward, which, in many ways, has
changed profoundly over the past few years and is
continuing to change. Our strategies and goals are more
sharply focused on customers, competitiveness, and long-
term growth. Our membership is firmly aligned with our
goals, and more committed than ever to quality,
productivity, and innovation. The corporate signature
calls attention to our renewed sense of global mission
and dedication to continuous improvement.
Growth
The highlight of the year was our June acquisition of
Fuel Systems Textron, Inc., which greatly expanded our
ability to meet customer needs for integrated fuel
delivery systems and components, particularly in the
aircraft engine market. Renamed Woodward FST, Inc. (FST),
the company is a leading manufacturer of fuel injection
nozzles, spray manifolds, and fuel metering and
distribution valves for gas turbine engines used in
military and commercial aircraft, as well as industrial
applications, the most rapidly growing segment of its
markets.
The addition of FST is expected to increase Aircraft's
annual revenues for 1999 by more than 40 percent. The
acquisition enables us to play a larger role in our
customers' engine programs, which ultimately will
strengthen our ability to provide reliable and cost-
effective solutions. The integration of Woodward FST's
operations with those of our Aircraft Controls group is
going smoothly. The combined organizations have been
named Aircraft Engine Systems to reflect the broadened
capabilities. The group has already identified exciting
opportunities to introduce a wider range of products to
the newly enlarged customer base.
In line with our strategy of leveraging our core
strengths for growth opportunities, we achieved another
strategic milestone with the formation of a new business
group charged with applying our engine controls expertise
to rapidly develop and manufacture fuel control systems
for industrial engines producing less than 300
horsepower. Smaller than those traditionally served by
our Industrial Controls group, these engines typically
are used in heavy-duty construction and agricultural
equipment, standby generators, and marine applications.
To gain access to the needed technology and high-quality,
high-volume, low-cost manufacturing skills, the group
plans to enter into a series of acquisitions, strategic
partnerships, or license agreements. With Woodward's
existing strengths--fuel management, systems integration,
and a strong reputation among customers--we are well-
positioned to achieve profitable penetration in these
markets for complete fuel management systems. Required
technologies include actuation, ignition, electronics,
and sensors. In addition to establishing relationships
with suppliers for some of our initial requirements, we
completed this group's first acquisition, Baker
Electrical Products, Inc., in May. Baker provides us with
the capability to manufacture high-quality solenoids for
industrial applications, as well as a strong existing
business in electromagnetic coils used for automotive
anti-lock braking systems.
Market Positioning
As we pursue our long-term goals for growth and total
return to shareholders, we are striving, by definition,
to increase our share in a number of highly competitive
but profitable market niches. We bring several core
strengths to this battle: a reputation for reliability
and service; state-of-the-art operational capabilities;
independence from engine and turbine manufacturers; and a
skilled, empowered workforce, with the know-how and
motivation to respond to customer needs quickly and
effectively.
We also are carefully calibrating our strategic
priorities to long-term trends in our markets. For
example, engine original equipment manufacturers (OEMs)
increasingly are trimming the ranks of their suppliers
and, wherever possible, replacing discrete components
with customized integrated systems. We are rapidly
adapting our capabilities to meet these customer needs,
as the Woodward FST acquisition clearly demonstrates.
Industrial Controls is moving in the same direction,
rounding out its product offerings with the goal of
becoming a key supplier to the major engine OEMs and
broadening the distribution of its products and services.
The remarkable power and declining cost of the
microprocessor have placed a growing premium on the
ability to integrate electronic technologies with
indispensable mechanical devices. Woodward has developed
and nurtured this ability, a natural by-product of our
decades of experience as a leading independent controls
supplier. Strengthening our capabilities in this critical
area is an ongoing priority.
To address this need, during fiscal 1998, Aircraft Engine
Systems forged a new alliance with Lockheed Martin
Control Systems, creating a limited liability company
called AESYS. The venture combines Woodward's expertise
in mechanical controls and components with Lockheed
Martin's electronics capabilities to create total
solution fuel delivery systems for aircraft engine OEMs.
Subsequent to year end, AESYS delivered a prototype of an
advanced actuation control system for a large turbofan
engine.
Six Sigma Initiative
Over the next few years, we expect to generate a
significant portion of our revenue growth by expanding
Woodward content on our customers' engine programs, by
providing components, subsystems, or, increasingly,
complete fuel delivery systems. Our success will be
determined, in large part, by our ability to continue
strengthening our current relationships with those
customers. That effort, in turn, hinges on further
progress toward our achievement of total customer
satisfaction in four key areas: product quality, on-time
delivery, responsiveness, and cost.
Enhancing our operating efficiency will push us toward a
better performance in each of those areas. We realized
efficiency gains in several areas during fiscal 1998. For
example, we completed the integration of Industrial
Controls' Colorado operations. In Aircraft Engine
Systems, we opened our new aftermarket support center in
Prestwick, Scotland, which will enable us to provide more
convenient, cost-effective service to many of our
international customers. In addition, teams throughout
our operations continued to be a prolific source of ideas
for reducing cycle time and cost, and improving quality
and customer satisfaction.
To intensify our focus on total customer satisfaction, we
began implementing the Six Sigma methodology for
continuous quality improvement, which is being employed
by a growing number of leading global corporations. The
Six Sigma approach is grounded in the quantification of
product and service performance as defined by customers,
followed by disciplined data-gathering and statistical
analysis, with the long-term goal of improving all
business processes and driving the number of defects down
to ultra-low levels. Six Sigma will not only enhance
customer satisfaction with our products but will also
provide the framework for continuous productivity and
profitability improvements. Carefully selected members
have already been trained as Six Sigma Black Belts, and
more will follow. We expect tangible benefits from this
long-term initiative to begin emerging in fiscal 1999.
Financial Performance
Total net billings for products and services in fiscal
1998 were $490.5 million, up 11 percent from $442.2
million a year ago. Our acquisitions in May and June
accounted for more than half of our revenue growth.
Shipments by Aircraft Engine Systems (including FST in
1998) and Industrial Controls rose 18 percent and 3
percent, respectively.
Before the effect of our GENXON(tm) Power Systems, LLC
(GENXON) joint venture, pre-tax earnings were up 4
percent for the year, and after-tax earnings were $24.6
million, or $2.16 per diluted share, compared with $24.3
million, or $2.11 per diluted share, in fiscal 1997. An
improved gross margin was largely offset by increased
interest, amortization, and other expenses, in part
related to our acquisitions. However, FST was slightly
additive to our earnings as a result of stronger
shipments than we originally expected. Reflecting our
portion of GENXON's losses, which declined significantly
compared with last year, net earnings per diluted share
were $1.90, up 21 percent from $1.57 a year ago.
Despite the weakening of a number of Asian economies,
Woodward's shipments from Asian locations were flat to
slightly up in local currencies, but were off somewhat in
U.S. dollars. Orders from North American and European
manufacturers with Asian customers also were modestly
affected. However, the overall effect of Asian economic
weakness was more than offset by strong performances in
other international markets--notably in Europe.
Our cash flow for the year (net earnings plus
depreciation and amortization) totaled $48.2 million, or
$4.24 per diluted share, more than twice our net
earnings. Annual cash dividend payments were $0.93 per
share, unchanged from last year.
Top priorities for fiscal 1999 include completing the
integration of Woodward FST into Aircraft Engine Systems
and exploring more fully the opportunities for cross-
selling and integrating the group's product lines. In
Industrial Controls, key objectives are the expansion of
OEM partnerships, and continued focusing of resources on
our most profitable products. We also expect to complete
additional transactions which round out our small engine
design/engineering and manufacturing capabilities,
enabling that group to introduce its first new products
to the industrial engine market. Last but not least, we
expect to complete the introduction of Six Sigma
throughout all our operations, with the intent to imbed
Six Sigma into our total culture.
I would like to thank our Board of Directors for their
wisdom and guidance in these challenging times, our
members for their enthusiastic embrace of the changes
required for success, and our shareholders for their
continued interest and support.
Looking forward, despite near-term uncertainties, we are
convinced we have the right strategies in place to
strengthen our market presence in the years ahead. We are
committed to sharpening our competitiveness, building our
revenues, and increasing profitability--in short, to
building shareholder value. With a talented and engaged
membership and leadership, we are dedicated to the
pursuit and realization of these opportunities.
John A. Halbrook
Chairman of the Board
and Chief Executive Officer
December 11, 1998
CHANGE AND OPPORTUNITY
The needs of the world's markets are changing. And with
change, new opportunities arise. There is an increasing
demand for Woodward to supply products and services based
on its long-demonstrated competence in control system
design, manufacturing and service.
with CHANGE new OPPORTUNITIES ARISE
In today's demanding world, our customers require robust,
sophisticated, high-technology systems, and they want
them delivered by fewer suppliers. Without fail,
customers want these products delivered on time,
conforming to all operating specifications, and at
competitive prices. Plus, they want highly responsive
support once this equipment enters service. During
fiscal year 1998, Woodward took steps to continue to
fulfill these critical demands.
AIRCRAFT ENGINE SYSTEM
In fiscal 1998, Woodward took a bold leap forward in the
execution of the long-term growth strategy it has been
pursuing in the aircraft market for several years_moving
beyond the manufacture of fuel metering units and related
engine control components to become a valued provider of
integrated engine fuel delivery systems.
The June 1998 purchase of Fuel Systems Textron for $160
million was significant not only for its contribution to
Woodward's revenues and earnings, but also for its
excellent strategic fit with Woodward's Aircraft
Controls. Founded in 1919 as the Ex-Cell-O Tool &
Manufacturing Company and acquired by Textron in 1986,
the renamed Woodward FST, Inc. is a global leader in fuel
spray technologies_most notably, fuel nozzles for gas
turbines. FST has a major presence in original equipment
nozzle markets for both commercial and military aircraft
engines, as well as industrial gas turbines. In addition,
FST provides repair and overhaul services in support of
its commercial and military products.
Integrating FST
In the few months since the transaction closed, Woodward
has begun to capitalize upon opportunities to package
FST's nozzles with existing Woodward products. The long-
term goal is to create fully integrated fuel control
systems for complex engines. The early evidence of
Woodward's enhanced capabilities, and the enthusiastic
response of the marketplace, have been encouraging.
To reflect the broadening in Aircraft Controls' product
offerings and strategic mission in the wake of the FST
acquisition, the group's name was changed to Aircraft
Engine Systems.
A less apparent, but equally exciting, opportunity for
Woodward as a result of the acquisition lies in the
highly complementary nature of the two companies'
customer bases. Each organization has valuable, time-
tested relationships with major customers which the other
has traditionally not served. One of the top priorities
of Aircraft Engine Systems is to capitalize on those
relationships by aggressively introducing the
capabilities of the combined companies to all of their
customers.
At the time of the acquisition, FST employed about 440
people at plants in Zeeland, Michigan (its headquarters);
Greenville, South Carolina; and Harvard, Illinois. To
improve the efficiency of the combined companies,
Woodward announced plans to phase out operations at the
Harvard plant early in fiscal 1999, shifting production
responsibilities and most of the plant's employees to
Aircraft's Rockford, Illinois, facility.
Focused on Growth
During fiscal 1998, Aircraft Engine Systems continued to
pursue its strategies for internal growth. As work on
older engine programs tapers down, Woodward focuses on
contracts for fuel delivery components and systems on
newer aircraft engines and those now entering production.
Although fuel metering units and nozzles continue to
account for most of the group's revenues, newer products
such as specialty valves and actuators account for a
growing portion of the mix. Frequently, Woodward's hard-
earned know-how, as an independent control systems
supplier for decades on many different engine platforms,
allows it to provide enabling technology to integrate the
various components of the fuel delivery system_a
capability many of its competitors cannot match.
The group continues to strive for operational excellence
in all phases of its operations. Woodward engineers work
intimately with customers from the idea stage through
production and shipment to ensure that their fuel
delivery system needs are met. Product design and
engineering benefit from state-of-the-art computer
equipment using proprietary as well as commercial
software. Throughout the group's manufacturing
facilities, there is a sharpened focus on all of the
elements of total customer satisfaction_product quality,
operating efficiency, on-time delivery, customer service,
and cost_supported by the implementation of the high-
priority Six Sigma initiative.
Aircraft engine manufacturers today are seeking to buy
more from fewer suppliers, and are funneling orders to
suppliers with the capacity to develop cost-effective
solutions that enhance the competitiveness of their
engines. With its design/engineering and manufacturing
capabilities, an empowered, highly skilled and
experienced work force, and a significantly broadened
product line in the wake of the FST acquisition, Woodward
is both well-positioned and dedicated to expanding its
presence in the original equipment aircraft engine
systems market.
Where opportunities arise to acquire complementary skills
or technology that further strengthen Woodward's
capabilities, the company plans to pursue them, whether
through acquisition, merger, joint venture, or other
partnership arrangement. For example, during fiscal 1998,
Woodward completed a joint venture agreement with
Lockheed Martin Control Systems, forming a limited
liability company which will be known as AESYS. The
venture provides Woodward with valuable access to
Lockheed's electronics capabilities, complementing its
own strengths in mechanical controls and in systems
integration.
Aftermarket Opportunities
Aircraft Engine Systems is also committed to providing
customers and end-users of its fuel delivery components
and systems with high-quality maintenance, repair, and
overhaul services. While steady growth in Woodward's
installed product base provides a built-in stream of
potential service revenues, capturing and retaining this
business is one of management's top priorities.
Growth in global air travel remained strong in 1998,
contributing to increases in Woodward's aircraft service
revenues. The group continues to market fixed-cost
maintenance programs to major airlines, which are
increasingly interested in ensuring a predictable cost
for each hour of flight time, as opposed to conventional
time-and-materials pricing for services provided. These
programs also give Woodward an opportunity to improve its
profits by providing maintenance which is both high-
quality and low-cost. Another ongoing focus for Aircraft
Engine Systems in the aftermarket is shortening cycle
times so inventory investment for customers is reduced.
During fiscal 1998, Aircraft Engine Systems opened a new
service facility for customers in Europe, the Middle
East, and South Africa. Activities previously conducted
in portions of Woodward's facilities in Hoofddorp, the
Netherlands, and Reading, England, were consolidated at
the new Prestwick, Scotland, location. With increased
capacity, a more convenient location, and lower operating
costs, the Prestwick facility positions the group for
further growth in its international repair and overhaul
business.
INDUSTRIAL CONTROLS
Woodward's Industrial Controls group is a leading
independent provider of fuel control systems, components,
and related services for engines and turbines used in
power generation, process industries, transportation
equipment, and other industrial applications. Industrial
Controls has the product line breadth, the design and
engineering resources, and the manufacturing capabilities
to meet the exacting needs of its OEM and retrofit
customers.
Demand for the group's products is fueled by growth in
the world's industrial infrastructure, and the retrofit
of existing equipment with more efficient engines that
produce fewer emissions. Woodward has generated an
impressive array of new products, which are responsive to
these needs. Among those which were introduced or entered
commercial production during fiscal 1998 were:
- - The GloTech(tm) hot air valve for turbocharged engines.
The previous industry standard had been an on/off
wastegate valve, but GloTech provides precision
throttling capability to fine-tune the air/fuel mix,
enabling engine OEMs to reduce harmful emissions.
Prototypes were produced during the year, and commercial
shipments began early in fiscal 1999.
- - SOGAV(tm) or Solenoid-Operated Gas Emission Valve. This
new valve enables manufacturers of industrial gas engines
with multi-port injection to more precisely control the
timing and amount of gas entering the combustion chamber,
improving fuel efficiency and reducing emissions.
Woodward was the first to offer this product, which was
ramped up for commercial production during fiscal 1998.
- - Liquid fuel DLE (dry-low emissions) technology. DLE, a
widely used technology for reducing emissions to comply
with regulatory requirements, has traditionally been
available only for natural gas-fueled turbines. Woodward
has adapted DLE for turbines which run on liquid fuel,
enabling power producers and other turbine operators to
more easily navigate the permitting process in parts of
the world where natural gas is not readily available
- - TecJet(tm) 50 gas metering valve. Originally developed
by Woodward's Deltec subsidiary for natural gas-fueled
buses, this innovative valve was successfully adapted for
broader use in power generation applications during
fiscal 1998. TecJet is a low-cost, all-electric valve
which enables OEMs to precisely meter and throttle gas at
low pressures, enhancing operating efficiency and curbing
emissions.
Broadly Functional Control Systems
Industrial Controls' product strategy is to offer broadly
functional control systems which represent low-cost
solutions and create competitive advantages for the
manufacturer and the users of the equipment. Woodward's
Integrated Turbine and Compressor Controls (ITCCs)
provide an excellent illustration. Previously, OEMs
purchased a speed/load control for their turbines as well
as a separate control for the compressor, which handled
load-sharing and anti-surge functions. With Woodward's
new ITCCs, commercialized in fiscal 1998, manufacturers
can reduce costs and improve reliability_and source from
one supplier.
Woodward FST, which was acquired during the year, is
expected to make a significant contribution to Industrial
Controls' efforts to increase the scope and functionality
of its systems. In addition to its strong position in the
aircraft engine market, FST has a significant and growing
share of the market for fuel injection nozzles in
industrial turbines. Industrial Controls and FST have
already begun exploring opportunities to package their
products and make more compelling joint bids on engine
programs, and are beginning to market their combined
services to turbine OEMs and end-users.
Of course, meeting and anticipating market needsby
developing the right set of products and services is only
part of the challenge. After the orders are placed,
Woodward's manufacturing facilities are responsible for
delivering high-quality products, on spec, on time, and
efficiently so Industrial Controls can offer the best
possible price.
Although quality improvements have long been among the
group's top priorities, the recent introduction of a Six
Sigma initiative represents an intensification of these
efforts. Woodward's initial Six Sigma efforts have
already received a ringing endorsement from a major
customer. A project which dramatically reduced the
variability in a grinding operation, resulting in
consistently higher quality and lower costs, was selected
by General Electric as a Six Sigma Project of the Month,
the only project by a GE Power Systems supplier to be so
honored during the year.
Serving the Installed Base
As Industrial Controls' products become increasingly
complex, the need for responsive support services in the
aftermarket becomes even more critical. Providing spare
parts, as well as maintenance, repair, and overhaul
services, on a timely, cost-effective basis is one of the
cornerstones of Woodward's mission. In addition to the
recurring-revenue nature of these activities, a residual
benefit is that they keep the group abreast of evolving
customer requirements, and position it more effectively
to market upgrades, line extensions, and related
products.
During fiscal 1998, Industrial Controls continued to
build its roster of product distributors and certified
service providers, and introduced an improved sales
training effort. The group also is marketing a total
service and support program through which it guarantees
the on-site availability of qualified service
personnel_valuable to Woodward customers which have
downsized their own staffs.
Over the past year, the outlook for GENXON, Woodward's
joint venture with Catalytica, Inc. for the development
and marketing of Catalytica's XONON(tm) ultra-low NOx
combustion system in installed, out-of-warranty gas
turbines, has changed. Although the long-term market
drivers, deregulation of electricity and increasingly
stringent emissions regulations, remain in force, the
market is taking longer than expected to evolve.
Meanwhile, interest among turbine manufacturers in
applying XONON to new turbines is extremely strong, in
part reflecting the dramatic increase in orders for new
turbines over the past year. Woodward is well-positioned
to compete as a supplier of controls for XONON original
equipment systems. However, pending the emergence of a
larger retrofit market for XONON, GENXON is expected to
generate lower development expenses, reflecting reduced
development activity.
Over the course of the business cycle, Woodward benefits
from the geographical diversity of its business, which
includes large profit centers in North America and
Europe, as well as the Asia/Pacific Region. In developing
economies, there is a great need for power-generating
equipment and controls which drive the emerging
industrial and transportation infrastructures. In
developed countries, economic growth, new technologies,
environmental protection, and the introduction of
competition in the production and sale of electricity are
the principal demand drivers for equipment and
sophisticated control systems.
Automotive Products (Small Industrial Engines)
Woodward engineers have identified a potential new growth
opportunity in the under-300 horsepower industrial engine
and turbine markets, where OEMs are striving to improve
the efficiency and the environmental profile of their
products. The name Automotive Products was chosen for
this new group to capture its principal focus on products
which require low-cost, high-volume, high-reliability
manufacturing processes characteristic of automobile
systems, even though the group will primarily target non-
automotive small engine markets. Applications include
standby power generators, construction and agricultural
equipment, marine pleasure craft, specialty vehicles such
as refrigeration units on trucks and trains, fire trucks,
welders, and large lawn tractors. All of these power
sources are facing significantly tightened emission
regulations, which are being phased in over the next few
years. With most efforts to develop advanced controls
currently focused on larger horsepower units, small
engines represent a particularly attractive market for
sophisticated controls.
Small engine controls require a higher-volume
manufacturing capability than do Woodward's traditional
markets. With high-volume production comes the need for
automated, rapid processes, which uniformly yield high-
quality, low-cost products. Woodward's strategy is to
develop production technology and products through a
series of acquisitions and strategic partnerships.
Woodward's know-how and systems integration capabilities
represent a strong base on which to build a decisive
competitive edge.
In May, the formation of Automotive Products was
announced, along with the first acquisition, Baker
Electrical Products, Inc., a Michigan-based manufacturer
of electromagnetic coils used in anti-lock braking
systems. Baker serves as Woodward's center of excellence
for the manufacture of high-quality solenoids, which are
an essential building block for the integrated engine
management systems. Woodward is actively exploring
opportunities to secure the additional building blocks
necessary to create a portfolio of products. Although
only in existence a short time, Automotive Products has
already developed and tested a number of new product
prototypes, for which customer responses have been
extremely favorable. Plans call for continued aggressive
development of our small engine capabilities.
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, as well as
the cautionary statement on page 35.
RESULTS OF OPERATIONS
1998 Compared to 1997
Shipments
Shipments totaled $490,476,000 in 1998, an increase of
$48,260,000 or 10.9% over the $442,216,000 shipped in
1997. Business acquisitions in 1998 accounted for
$36,596,000 of the increase. Excluding the impact of the
business acquisitions, shipments increased $11,664,000 or
2.6%, primarily due to higher volumes, partially offset
by unfavorable currency translation adjustments of
overseas shipments of $9,910,000 due to the stronger U.S.
dollar. Excluding the impact of these currency
translation adjustments, shipments increased $21,574,000
or 4.9% before acquisitions. Military sales continue to
be less than 10% of total shipments.
Aircraft Engine Systems' shipments totaled $234,173,000,
an increase of $35,210,000 or 17.7% over 1997. This
represented 47.8% of 1998 total company shipments,
compared to 45.0% in 1997. The most significant reason
for the increase is the June 1998 acquisition of Fuel
Systems Textron, Inc., renamed Woodward FST, Inc. (FST).
Excluding the effects of this acquisition, the increase
would have been $4,690,000 or 2.4%. Approximately 60% of
total shipments are to original equipment manufacturers
(OEMs), with the remaining 40% comprising revenues from
aftermarket business. With the significantly broadened
product line due to the FST acquisition and ongoing
efforts to strive for operational excellence in all
phases of its operations, OEM sales are expected to
increase as the company enters into contracts for fuel
delivery components and systems on newer aircraft
engines. The consolidation of the European overhaul and
service centers to Prestwick, Scotland, in 1998 resulted
in increased capacity, a more convenient location for
customers in Europe, the Middle East, and South Africa
and lower operating costs which is expected to result in
increased shipments from the aftermarket business.
Industrial Controls' shipments totaled $250,224,000 in
1998, an increase of $6,971,000 or 2.9% over 1997. This
represented 51.0% of 1998 total company shipments,
compared to 55.0% in 1997. Overseas shipments increased
to $138,410,000, an 8.3% increase over 1997. Excluding
currency translation adjustments, most significantly from
the currencies of Japan and the Netherlands, the overseas
shipment increase would have been 16.0%. This growth was
primarily the result of a strong engine controls market
and higher shipments of engineered systems in Europe.
There continue to be growth opportunities in overseas
markets, particularly in Europe. There are also
significant opportunities in the emerging markets of
Asia/Pacific, although the state of the economies in this
region have and will result in project delays that will
affect shipments in the near term. Domestic shipments
totaled $111,814,000 in 1998, a decrease of 3.1% when
compared to the prior year due to softening market
conditions. In the domestic markets, economic growth, new
technologies, and environmental protection are the
primary drivers of future growth opportunities.
Automotive Products' shipments totaled $6,079,000 in
1998, resulting from the May 1998 acquisition of Baker
Electrical Products, Inc. OEMs of industrial engines and
turbines under 300 horsepower comprise the market focus
for this business group. Future growth is anticipated by
further developing production technology and products
through a series of acquisitions and strategic
partnerships, and by creating a portfolio of products
leveraging on the design and production techniques of the
automotive markets and selling them into the small
industrial engine market.
Cost of Goods Sold
In 1998, cost of goods sold increased $30,965,000 or 9.5%
over 1997. This increase was primarily due to the 1998
business acquisitions, partially offset by currency
translation adjustments related to overseas shipments.
As a percentage of net shipments, total cost of goods
sold improved to 72.7% in 1998 versus 73.7% in 1997,
despite increases in product development activities.
There will continue to be investments in product
development, as well as investments to continue to
improve quality through the Six Sigma initiative.
Benefits from the Six Sigma effort will begin to be
realized in fiscal 1999.
Sales, Service, and Administrative Expenses
Sales, service, and administrative expenses increased
$7,037,000 or 9.7% over 1997. This increase was mostly
caused by costs associated with the 1998 business
acquisitions and increased business development
activities. The pursuit of profitable growth
opportunities continues to be an important part of the
company's strategies.
Amortization of Intangible Assets
Amortization of intangible assets totaled $2,927,000 in
1998 compared to $983,000 in 1997. This increase was
caused by the amortization of intangible assets that were
recorded by the company in connection with its 1998
business acquisitions.
Interest Expense
Interest expense totaled $5,227,000 in 1998 compared to
$2,382,000 in 1997. This increase resulted from higher
short-term and long-term borrowings which the company
incurred in connection with its 1998 business
acquisitions.
Interest Income
Interest income was $708,000 in 1998 compared to $780,000
in 1997.
Other Expense_Net
Other expense_net increased to $5,550,000 in 1998 from
$1,811,000 in 1997. In 1997, there was more royalty
income netted against other expenses, primarily from an
Aircraft Engine Systems' customer, received in the fourth
quarter of that year. The increase is additionally
explained by higher foreign currency transaction losses
and expenses related to the planned consolidation and
integration of operations at one of the foreign
locations.
Income Taxes
Income tax expense was $16,726,000 with an effective tax
rate of 40.5% in 1998 compared to $15,339,000 with an
effective tax rate of 38.6% in 1997. The effective tax
rate increased due to the effects of foreign losses that
provided no tax benefit and foreign tax rate differences
when compared to 1997. The income tax benefits
attributable to the GENXON(TM) Power Systems, LLC
(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 is shown net of tax.
Equity in Loss of Unconsolidated Affiliate
In 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 an ultra-low NOx emission
control system. The joint venture focuses on the retrofit
market for installed, out-of-warranty industrial gas
turbines.
In 1998, the joint venture incurred a $9,615,000 pre-tax
loss. The impact to consolidated net earnings was a
$3,028,000 loss, net of $1,780,000 of income tax
benefits.
Development efforts will continue in fiscal 1999 at a
slower rate. The OEM market is very interested in this
technology and the joint venture wants to assess the
direction of that market. Sales will occur slowly over
the next couple of years, but expenses will be contained
also. Additional funding will be required from the
partners, as well as from outside sources. The company
remains committed to the joint venture and will assess
capital commitments as necessary.
Net Earnings
Net earnings were $21,592,000 in 1998, an increase of
$3,452,000 or 19.0% from the $18,140,000 that was earned
in 1997. On a diluted per share basis, net earnings
totaled $1.90 in 1998 as compared to $1.57 in 1997, an
increase of $.33 or 21.0%. Net earnings from foreign
operations decreased by $3,199,000 from 1997, primarily
as a result of the planned consolidation and integration
of operations at one of the foreign locations, impacts of
foreign currency transactions and translation
adjustments, the tax effects of foreign losses that
provided no tax benefit, and foreign tax rate
differences. Net earnings from domestic operations
increased by $6,651,000 over 1997, primarily as a result
of a reduction in the company's equity in the loss of
GENXON and improved gross margins.
Financial Condition
The financial condition of the company remained strong as
of September 30, 1998, with total shareholders' equity of
$220,102,000, long-term debt of $175,685,000, and total
assets of $563,435,000.
Cash balances decreased $2,573,000 to $12,426,000 at
September 30, 1998 when compared to a year earlier.
Accounts receivable increased $16,406,000 or 17.9% to
$108,212,000 at September 30, 1998 when compared to a
year earlier. The increase was primarily due to the
impact of the 1998 business acquisitions and higher
balances in Europe due to increased shipments and
lengthened collection periods. The allowance for losses
totaled $4,451,000 at September 30, 1998, a $1,694,000
increase over the balance a year earlier. This increase
was also due to the impact of the 1998 business
acquisitions. Inventories totaled $106,404,000 at
September 30, 1998, an increase of $23,155,000 or 27.8%
as compared to a year earlier. This increase was
primarily due to the impact of the 1998 business
acquisitions and higher domestic Industrial Controls'
inventory carried in anticipation of future shipments.
Property, plant, and equipment_net increased from
$110,948,000 at September 30, 1997 to $130,052,000 at
September 30, 1998. This increase was principally due to
the impact of the 1998 business acquisitions. Exclusive
of these acquisitions, property, plant, and equipment
decreased by $3,516,000. This decrease reflects
depreciation expense in excess of capital expenditures
during 1998. The company is making a change in its
depreciation method in 1999.
Property, plant, and equipment placed into service prior
to September 30, 1998 are depreciated principally using
the declining-balance method over the estimated useful
lives of the assets. Assets placed in service after
September 30, 1998 will be depreciated using the straight-
line method of depreciation. This change will conform the
company to common industry practice. The effect on
future net earnings will depend on the level of future
capital expenditures. Currently, the change is expected
to improve next year's after-tax results by approximately
$700,000.
Intangibles and other assets increased to $166,769,000 at
September 30, 1998 as compared to $8,933,000 a year
earlier due to the 1998 business acquisitions.
Deferred income taxes increased from $38,175,000 at
September 30, 1997 to $39,572,000 at September 30, 1998.
Deferred income tax assets are expected to be realized
through future earnings.
Short-term borrowings and long-term debt (current and non-
current) increased to $213,645,000 at September 30, 1998
as compared to $30,604,000 a year earlier as a result of
borrowings incurred in connection with the 1998 business
acquisitions.
Accounts payable and accrued expenses increased to
$82,916,000 at September 30, 1998 as compared to
$64,824,000 at September 30, 1997, primarily as a result
of the 1998 business acquisitions.
Other liabilities totaled $40,111,000 and comprise the
non-current accumulated postretirement benefit
obligation. See Footnote H of the Notes to Consolidated
Financial Statements.
Total shareholders' equity was $220,102,000 at September
30, 1998, an increase of $9,488,000 or 4.5% from the
balance of $210,614,000 at September 30, 1997. This
increase was primarily the result of current year
earnings, net of cash dividend payments. Shareholders'
equity was additionally reduced by purchases of treasury
stock totaling $5,174,000, but was partially offset by a
$2,405,000 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 M of the Notes to Consolidated Financial
Statements.
Liquidity and Capital Expenditures
Net cash provided by operating activities was $43,053,000
in 1998 compared to $56,079,000 in 1997. The primary
reason for this decrease was due to relative changes in
working capital, assets, and liabilities in 1998 compared
to 1997.
Net cash flows used in investing activities were
$207,945,000 in 1998 compared to $28,579,000 in 1997.
This increase was mainly due to the 1998 business
acquisitions. Capital expenditure levels in 1998 were
1.4% lower than 1997. Based on current operating
conditions, the company expects a significant increase in
capital expenditures in 1999 due to the additional
requirements of the acquired companies.
Net cash provided by financing activities was
$162,626,000 in 1998 compared to net cash used in
financing activities of $25,179,000 in 1997. Borrowings,
both short-term and long-term, were the primary sources
of cash during 1998. Cash dividends paid to shareholders
were $.93 per share in both 1998 and 1997.
Cash flows from operations and available revolving lines
of credit (totaling $104,022,000 at September 30, 1998)
are expected to be adequate to meet the company's
operating, investing, and financing cash requirements
during 1999. However, certain provisions of current loan
agreements could impact decisions involving relatively
large business acquisitions.
Membership
Worldwide membership increased to 3,994 at September 30,
1998 from 3,246 at September 30, 1997. This increase was
primarily due to the 1998 business acquisitions.
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 Readiness
Woodward recognizes the potential problems associated
with the year 2000. In May 1997, the company formed a
task force, with representation from each business unit
and location, to address this risk. The mission statement
adopted by the task force is:
We will provide year 2000 compliant products, work
with customers who have existing products to validate year
2000 compliance, and provide other year 2000 services. We
intend to provide uninterrupted, normal operation of business-
critical systems at all Woodward locations before, during, and
after the turn of the century and we will manage the problems
associated with non-critical systems. In addition, we will
encourage similar compliance from customers, suppliers, and
partners as appropriate and we will work with them to achieve
this goal.
The company has identified its year 2000 risks in three
categories:products, internal systems, and external noncompliance by
partners and suppliers.
The company has evaluated its manufactured products, has
determined the year 2000 compliance of such products, and
informed its customers and end-users through the
company's internet website and by other appropriate
means. As a stand-alone product and operating system,
Woodward will continue to determine year 2000 compliance,
by testing and other means, to validate our product's
compliance. However, products with time-date function(s)
have the capability of being programmed, configured or
otherwise modified for their particular applications,
prior to or following installation. Woodward may or may
not have had any involvement in, or responsibility for,
these modifications.
Additionally, in certain cases, our systems have included
auxiliary hardware and software (providing time-date
functions) not manufactured by the company, but provided
by third party suppliers. While Woodward remains
committed to supporting and assisting its customers and
end-users as they assess such systems, limitations
imposed by license agreement restrictions, in some cases,
and non-access to source code, in other cases, make it
generally impossible for the company to determine (except
by testing individual systems) the year 2000 compliance
of third party supplied hardware and software not
manufactured by the company.
Regarding internal systems, inclusive of information
systems, manufacturing equipment and facilities, the
company has completed its awareness, assessment,
inventory, and prioritization tasks. Most mission-
critical systems are year 2000 compliant today. Those
that are not have been scheduled for upgrade or
remediation to be completed by March 1999. Testing of
mission-critical systems and contingency plan development
tasks are planned to be completed by December 1998.
We are also contacting partners and suppliers with
requests for their year 2000 project status to determine
if they will be adversely affected by the year 2000 and
consequently cause disruption to our operations. We will
create contingency plans for critical partners and
suppliers as necessary.
The company intends to apply the newly available and
beneficial provisions of the federal "Year 2000
Information and Readiness Disclosure Act" (the "Act").
Statements such as the mission statement and other
comments above, will be appropriately identified and
should be regarded as being "Year 2000 Statements" and
"Year 2000 Readiness Disclosures," as applicable, within
the meaning of, and subject to, the exclusions prescribed
by the Act.
External costs of corrective efforts, principally system
reprogramming and upgrades, are not anticipated to be
material and are currently estimated to be less than
$1,000,000. Total external costs incurred for corrective
efforts through September 30, 1998 were $18,000, with
remaining budgeted year 2000 costs anticipated to be
incurred in early 1999. Even though management feels that
planned corrective efforts should adequately address year
2000 issues, there can be no assurance that unforeseen
difficulties will not arise. There is no assurance that
the failure of any external party to resolve its year
2000 issues would not have an adverse effect on the
company.
Euro Introduction
The company does not expect the introduction of the Euro
by the European Monetary Union to have any significant
impact on our competitive position or operations.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." Both are
effective in fiscal year 1999. SFAS No. 130 establishes
standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and
losses) in the financial statements. SFAS No. 131 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. SFAS No. 131 also establishes
standards for related disclosures about products and
services, geographic areas, and major customers. The
company has not yet determined the impact these new
statements may have on disclosures in the consolidated
financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which
is effective in fiscal year 2000. This statement
establishes accounting and reporting standards for
derivative instruments and for hedging activities. Among
other requirements, it requires that an entity recognize
all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair
value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative.
The company has not yet determined the impact this new
statement may have on disclosures in the consolidated
financial statements.
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.
Industrial Controls' 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.
Aircraft 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. Aircraft
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.
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.
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
Industrial Controls 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
Aircraft 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 June 1997, GENXON signed a memorandum of understanding
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.
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.
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 diluted share basis, net earnings
totaled $1.57 in 1997 as compared to $1.92 in 1996, a
decline of $.35 per diluted share. Without the $.54 per
share impact of the GENXON loss, net earnings per diluted
share would have been $2.11, a $.19 or 9.9% 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 ongoing 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 M 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 investment in the GENXON
joint venture. Capital expenditure levels were unchanged
when compared to 1996.
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.
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 Industrial Controls 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.
FINANCIAL STATEMENTS
Woodward Governor Company and Subsidiaries
STATEMENTS OF CONSOLIDATED EARNINGS
Woodward Governor Company and Subsidiaries Year Ended September 30,
(In thousands except per share amounts) 1998 1997 1996
Net billings for products and services $490,476 $442,216 $417,290
Costs and expenses:
Cost of goods sold 356,802 325,837 304,887
Sales, service, and administrative
expenses 79,332 72,295 69,874
Amortization of intangible assets 2,927 983 608
Interest expense 5,227 2,382 3,325
Interest income (708) (780) (825)
Other expense_net 5,550 1,811 4,240
Total costs and expenses 449,130 402,528 382,109
Earnings before income taxes and equity in loss
of unconsolidated affiliate 41,346 39,688 35,181
Income taxes 16,726 15,339 13,003
Earnings before equity in loss
of unconsolidated affiliate 24,620 24,349 22,178
Equity in loss of unconsolidated affiliate,
net of tax 3,028 6,209 -
Net earnings $ 21,592 $ 18,140 $ 22,178
Basic earnings per share $ 1.90 $ 1.58 $ 1.92
Diluted earnings per share $ 1.90 $ 1.57 $ 1.92
Weighted average number of basic
shares outstanding 11,340 11,482 11,570
Weighted average number of diluted
shares outstanding 11,379 11,525 11,570
See accompanying Notes to Consolidated Financial
Statements.
CONSOLIDATED BALANCE SHEETS
Woodward Governor Company and Subsidiaries
At September 30,
(In thousands except per share amounts) 1998 1997
Assets
Current assets:
Cash and cash equivalents $ 12,426 $ 14,999
Accounts receivable, less allowance for
losses of $4,451 for 1998 and $2,757
for 1997 108,212 91,806
Inventories 106,404 83,249
Deferred income taxes 20,001 19,651
Total current assets 247,043 209,705
Property, plant, and equipment, at cost:
Land 6,127 5,842
Buildings and improvements 127,054 119,997
Machinery and equipment 215,358 188,758
Construction in progress 2,855 2,270
351,394 316,867
Less allowance for depreciation 221,342 205,919
Property, plant, and equipment-net 130,052 110,948
Intangibles_net 162,229 5,295
Other assets 4,540 3,638
Deferred income taxes 19,571 18,524
Total assets $ 563,435 $ 348,110
Liabilities and shareholders' equity
Current liabilities:
Short-term borrowings $ 12,927 $ 7,908
Current portion of long-term debt 25,033 4,979
Accounts payable and accrued
expenses 82,916 64,824
Taxes on income 6,661 7,167
Total current liabilities 127,537 84,878
Long-term debt, less current portion 175,685 17,717
Other liabilities 40,111 34,901
Commitments and contingencies _ _
Shareholders' equity represented by:
Preferred stock, par value $.003 per
share, authorized 10,000 shares,
no shares issued _ _
Common stock, par value $.00875 per
share, authorized 50,000 shares,
issued 12,160 shares 106 106
Additional paid-in capital 13,304 13,283
Unearned ESOP compensation (9,723) (12,128)
Currency translation adjustment 9,849 9,391
Retained earnings 226,736 215,211
240,272 225,863
Less treasury stock, at cost 20,170 15,249
Total shareholders' equity 220,102 210,614
Total liabilities and shareholders' equity $563,435 $ 348,110
See accompanying Notes to Consolidated Financial Statements.
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
Woodward Governor Company and Subsidiaries
Addit'l Unearned Currency
Common Paid-in ESOP Translation Retained Treasury Stock
(In thousands Stock Capital Comp. Adjustment Earnings Stock Shares
of dollars
except per
share amounts)
Balance at Sept.
30, 1995 $106 $13,644 $(17,333) $16,802 $195,598 555,152 $10,914
Net earnings _ _ _ _ 22,178 _ _
Purchases of
treasury stk _ _ _ _ _ 89,428 1,730
Sales of
treasury stk _ (343) _ _ _ (26,400) (778)
Issuance of stock
to ESOP _ (52) _ _ _ (5,596) (159)
ESOP compensation
expense _ _ 2,668 _ _ _ _
Cash dividends_$.93
per common sh _ _ _ _ (10,758) _ _
Tax benefit applicable
to ESOP
dividen _ _ _ _ 374 _ _
Translation adjust-
ments, including
income taxes allocated
of $14 _ _ _ (3,182) _ _ _
Balance at Sept.
30, 1996 106 13,249 (14,665) 13,620 207,392 612,584 11,707
Net earnings _ _ _ _ 18,140 _ _
Purchases of
treasury stk _ _ _ _ _ 109,600 3,761
Sales of
treasury stk _ 28 _ _ _ (7,042) (168)
Issuance of stock
to ESOP _ 6 _ _ _ (2,108) (51)
ESOP compensation
expense _ _ 2,537 _ _
Cash dividends_$.93
per common shr_ _ _ _ (10,681) _ _
Tax benefit applicable
to ESOP divid _ _ _ _ 360 - -
Translation adjustments,
including income taxes
allocat of $12 _ _ (4,229) _ _ - -
Balance at Sept.
30, 1997 106 13,283 (12,128) 9,391 215,211 713,034 15,249
Net earnings _ _ _ 21,592 _ - -
Purchases of
treasury stock _ _ _ _ - 160,413 5,174
Sales of
treasury stock _ 10 _ _ _ (8,580) (206)
Issuance of stock
to ESOP _ 11 _ _ _ (1,977) (47)
ESOP compensation
expense _ _ 2,405 _ __ _ -
Cash dividends_$.93
per common shr _ _ _ _ (10,543) _ -
Tax benefit applicable
to ESOP dividend and
stock options _ _ _ _ 476 _ _
Translation adjustments,
including income taxes
allocated of $14 _ _ _ 458 _
_ _
Balance at Sept.
30, 1998 $106 $13,304 $(9,723) $ 9,849 $226,736 862,890 $20,170
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) 1998 1997 1996
Cash flows from operating activities:
Net earnings $ 21,592 $ 18,140 $ 22,178
Adjustments to reconcile net earnings
to net cash provided (used) by
operating activities:
Depreciation and amortization 26,642 22,837 23,394
Deferred income taxes (1,046) 44 (791)
ESOP compensation expense 2,405 2,537 2,668
Equity in loss of unconsolidated
affiliate 4,808 8,243 _
Changes in assets and liabilities,
net of business acquisitions:
Accounts receivable (5,489) (13,070) (430)
Inventories (8,313) 7,262 (577)
Current liabilities, other than
short-term borrowings and
current portion of long-term debt (3,893) 10,164 10,000
Other_net 6,347 (78) (3,960)
Total adjustments 21,461 37,939 30,304
Net cash provided by operating
activities 43,053 56,079 52,482
Cash flows from investing activities:
Payments for purchase of property, plant,
and equipment (20,862) (21,152) (21,163)
Investment in unconsolidated affiliate (5,462) (8,243) _
Business acquisitions, net of
cash acquired (181,805) _ _
Other 184 816 1,079
Net cash used in investing activities (207,945) (28,579) (20,084)
Cash flows from financing activities:
Cash dividends paid (10,543) (10,681) (10,758)
Proceeds from sales of treasury stock 216 196 435
Purchases of treasury stock (5,174) (3,761) (1,730)
Borrowings on term note 100,000 _ _
Payments of long-term debt (10,117) (4,862) (5,105)
Net proceeds from (payments on)
short-term borrowings 4,768 (6,431) (14,588)
Net proceeds from borrowings
under revolving lines 83,000 _ _
Tax benefit applicable to ESOP
dividend and stock options 476 360 374
Net cash provided by (used in)
financing activities 162,626 (25,179) (31,372)
Effect of exchange rate changes on cash (307) (392) (407)
Net change in cash and cash equivalents (2,573) 1,929 619
Cash and cash equivalents, beginning
of year 14,999 13,070 12,451
Cash and cash equivalents, end of year$ 12,426 $14,999 $13,070
Supplemental cash flow information:
Interest expense paid $ 3,797 $ 2,434 $ 3,680
Income taxes paid $ 11,255 $ 8,629 $13,475
Non cash investing and financing activities:
Liabilities assumed in business
acquisitions $ 25,527 _ _
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. Assets
placed in service as of and prior to September 30, 1998 are
depreciated principally using 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. Assets
placed in service after September 30, 1998 will be
depreciated using the straight-line method of depreciation.
This change in accounting principle will conform the company
policy to common industry practice. It should also better
reflect improvements in preventative maintenance practices
that have generally resulted in more uniform productive
capacities and maintenance costs of machinery and equipment
over the useful life of an asset. Although the effect on net
earnings of this change will be based on the level of future
capital spending, the change is expected to improve after-
tax results by approximately $700 for the year ended
September 30, 1999.
Intangibles: Intangible assets are being amortized using
the straight-line method over the periods estimated to be
benefited, generally 5 to 30 years. Intangibles are
presented net of accumulated amortization of $5,424 and
$2,641 at September 30, 1998 and 1997, respectively.
Long-lived assets: The company reviews for impairment
whenever events or changes in circumstances indicate that
the carrying amount of the asset may not be recoverable.
Impairment losses are recognized when the expected future
cash flows are less than the asset's carrying value. There
was no material effect on the consolidated financial
statements as a result of impairment losses.
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 may 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 $18,500, $11,300, and $13,800, for
1998, 1997, and 1996, respectively.
B. Business acquisitions: In 1998, the company acquired two
companies for an aggregate of $181,805 in cash. The
transactions were financed utilizing borrowings under a
term loan and a revolving line of credit. Each of the
acquisitions was accounted for using the purchase method of
accounting and results of operations of the acquired
companies were included in the consolidated results of the
company from their respective acquisition dates.
Baker Electrical Products, Inc.: On May 8, 1998, the
company purchased the net assets of Baker Electrical
Products, Inc., of Memphis, Michigan, a manufacturer of
electromagnetic coils for anti-lock braking systems, for
$7,096, including other direct costs associated with the
acquisition. The excess of the purchase price over the
estimated fair value of the net assets acquired
approximated $5,140 and is being amortized over 15 years.
Fuel Systems Textron, Inc.: On June 12, 1998, the company
acquired the stock of Fuel Systems Textron, Inc.
(subsequently renamed Woodward FST, Inc.), of Zeeland,
Michigan, a leading designer, developer, and manufacturer
of fuel injection nozzles, spray manifolds, and fuel
metering and distribution valves for gas turbine engines in
the aircraft (commercial and military) and industrial
markets, for $160,000. As allowed in the purchase
agreement, the company exercised an option to elect
Internal Revenue Code Section 338(h)(10) to treat the
transaction as an asset purchase for tax purposes. The
company was required to make an additional payment to the
seller, of $12,826, as compensation for the additional tax
liability which the seller will recognize under this
election.
As a result of the acquisition, $151,616 of intangible
assets were recorded by the company, reflecting the
adjustments necessary to allocate the purchase price to the
fair value of assets acquired and liabilities assumed. The
acquired intangible assets, principally representing
goodwill, customer relationships, and process technology,
are being amortized over 30 years, an approximate average
life of such intangible assets. Other direct costs
associated with the acquisition were $1,883 and are being
amortized over 5 years.
In accordance with terms of the purchase agreement, the
seller is required to fund an amount $500 in excess of the
actuarially determined liability associated with an assumed
defined benefit plan. This actuarial valuation will be
calculated in accordance with a method specified in the
purchase agreement and has not been completed at September
30, 1998. The amounts recorded relating to the acquisition
are currently subject to adjustment subsequent to September
30, 1998 as the company has not yet completed final
allocation of the purchase price. However, significant
changes are not expected by management.
The following unaudited pro forma data summarize the results
of operations for the periods indicated as if the
acquisition of Fuel Systems Textron, Inc. had been
completed on October 1, 1996, the beginning of the 1997
fiscal year. The pro forma data excludes the acquisition of
Baker Electrical Products, Inc. as the resulting pro forma
data would not have been materially different from the
results reported. The pro forma data gives effect to actual
operating results prior to the acquisition and adjustments
to reflect estimated interest and depreciation expense,
goodwill amortization and income taxes. These pro forma
amounts do not purport to be indicative of the results that
would have actually been obtained if the acquisitions had
occurred on October 1, 1996 or that may be obtained in the
future.
Year ended September 30, 1998 1997
Net billings $558,630 $524,316
Earnings before equity in loss of
unconsolidated affiliate 24,627 23,953
Net earnings 21,599 17,744
Net earnings per diluted share $ 1.90 $ 1.54
C. 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 venture combines
the company's proprietary fuel metering and control
technology with CCSI's unique XONON(tm) catalytic combustion
technology to offer an 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. The joint venture incurred a pre-tax loss of
$9,615 and $10,486 in 1998 and 1997, respectively, with
$5,462 and $8,243 being funded by the company in accordance
with the joint venture agreements. The effect on
consolidated net earnings in 1998 and 1997 was a loss of
$3,028 and $6,209, net of $1,780 and $2,034 of income tax
benefits, respectively. Most of the costs incurred during
1998 and 1997 were directly related to product development.
At September 30, 1998 and 1997, the joint venture had $2,095
and $1,204 of total assets and $786 and $2,690 of total
liabilities, respectively.
D. The provision for income taxes consisted of:
Year ended September 30, 1998 1997 1996
Currently payable:
Federal $10,165 $ 6,504 $ 4,590
State 1,768 1,551 1,058
Foreign 6,586 6,474 6,525
Deferred (1,793) 810 830
$16,726 $15,339 $13,003
The components of the net deferred tax assets were:
At September 30, 1998 1997
Deferred tax assets:
Postretirement and
early retirement benefits $17,927 $16,210
Restructuring 3,069 3,567
Foreign net operating loss
and state tax credits 8,833 7,921
Inventory 8,609 7,518
Other items 17,331 15,706
Valuation allowance (11,296) (9,703)
Total deferred tax assets 44,473 41,219
Total deferred tax liabilities (4,901) 3,044)
Net deferred tax assets $39,572 $38,175
The company 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. Remaining deferred tax assets are expected to
be realized through future earnings. The changes in the
valuation allowance were as follows:
Year ended September 30, 1998 1997
Beginning balance $ (9,703) $(9,332)
Foreign net operating loss carryforward (1,646) 976
State net operating loss carryforward (36) (177)
Capital loss carryforward 89 (1,170)
Ending balance $(11,296) $(9,703)
The reasons for the differences between the effective tax
rate of the company and the United States statutory federal
income tax rate were as follows:
Percent of pre-tax earnings
Year ended September 30, 1998 1997 1996
Statutory rate 35.0 35.0 35.0
State income taxes 2.5 2.2 2.4
Foreign loss effect 2.6 (0.1) 1.8
Foreign tax rate differences 1.8 0.4 (2.9)
Foreign sales corporation (1.5) (0.8) (1.3)
Other items, net 0.1 1.9 2.0
Effective rate 40.5 38.6 37.0
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 37.0% and
24.7% in 1998 and 1997, respectively.
E. Short-term borrowings: Bank lines of credit available to
the company totaled $49,949 and $51,024, of which $12,927
and $7,908 were used at September 30, 1998 and 1997,
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 these borrowings were
5.0%, 5.1%, and 5.8% for 1998, 1997, and 1996,
respectively.
F. Long-term debt:
At September 30, 1998 1997
Term note $100,000 $ _
Borrowings under revolving line
of credit facility 83,000 _
ESOP debt guarantee_8.01% 12,000 14,500
Unsecured note_9.45% 5,600 8,000
Other 118 196
200,718 22,696
Less current portion 25,033 4,979
$175,685 $ 17,717
During the third quarter of 1998, the company entered into
uncollateralized financing arrangements with a syndicate of
U.S. banks, including a $100,000 term note and a revolving
line of credit facility up to a maximum amount of $150,000.
The interest rate on borrowings under the term note varies
with LIBOR and was 6.4% at September 30, 1998. The
revolving line of credit facility carries a facility fee of
0.25%, with outstanding borrowings due 5 years from the
inception of the agreement. The interest rate on borrowings
under the revolving line of credit facility varies with
LIBOR, the money market rate or the prime rate, and was
6.1% at September 30, 1998.
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 and
used the proceeds to buy 1,027,224 shares of common stock
from the company. The company guaranteed the 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. Unearned
ESOP compensation and shares are being allocated to
participants using the shares allocated method, over the
repayment period of the ESOP debt guarantee. The
unallocated shares were 399,492; 498,304; and 602,524 as of
September 30, 1998, 1997, and 1996, respectively.
Required principal payments of long-term debt, exclusive of
the revolving line of credit facility, are: $9,033 in 1999,
$21,685 in 2000, $22,500 in 2001, $22,500 in 2002, and
$42,000 in 2003. At September 30, 1998, the company
classified $16,000 of borrowings under its revolving line
of credit facility as current. The remaining borrowings of
$67,000 are classified as long-term as the company has both
the intent and ability, through its revolving line of
credit facility, to refinance this amount on a long-term
basis.
Provisions of the loan agreements require the company to
maintain a minimum fixed charge coverage ratio, current
ratio, consolidated net worth, and a maximum funded debt to
total capitalization ratio, as defined in the agreements
and permit the lenders to accelerate the obligations in the
event of a material adverse event. In addition, the
agreements require the company to make a prepayment of all
net proceeds from future indebtedness and 50% of the net
proceeds from future issuance of equity instruments.
Further provisions 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. At September 30, 1998, the company
could pay dividends and purchase the company's common stock
up to an amount not exceeding $20,557.
G. Accounts payable and accrued expenses:
At September 30, 1998 1997
Accounts payable $ 24,432 $ 14,906
Salaries and other member benefits 24,656 22,352
Taxes, other 7,255 6,366
Warranty 5,373 4,887
Early retirement 3,856 4,665
Interest 1,620 128
Postretirement and postemployment 3,000 3,000
Other items_net 12,724 8,520
$ 82,916 $ 64,824
H. Retirement and benefit plans: The company provides
certain healthcare 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 80% to
100% of eligible expenses not paid by Medicare. These plans
include retirees and active members of Woodward FST who met
eligibility requirements as of December 31, 1993. 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:
At September 30, 1998 1997
Retirees $ 24,823 $ 20,599
Fully eligible active plan participants 291 267
Other active plan participants 15,537 13,766
Accumulated postretirement
benefit obligation 40,651 34,632
Unrecognized net gain from past
experience different from that assumed 1,460 2,269
Total accumulated postretirement
benefit obligation $ 42,111 $ 36,901
The company included $40,111 and $34,901 in other
liabilities and the remaining balance in current
liabilities for 1998 and 1997, respectively.
The periodic postretirement benefit cost consisted of:
Year ended September 30, 1998 1997 1996
Service cost_benefits attributed
to service during the period $ 1,054 $ 923 $ 927
Interest cost on accumulated
postretirement benefit
obligation 2,551 2,388 2,443
Amortization of
unrecognized net gain (33) (24) _
Net periodic postretirement
benefit cost $ 3,572 $3,287 $ 3,370
Actuarial assumptions used were as follows:
Year ended September 30, 1998 1997 1996
Projected healthcare cost
trend rate 7.50% 8.00% 8.50%
Ultimate trend rate 4.75% 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 $ 6,579 $ 6,370 $ 6,054
Effect of a 1.0% increase in the
healthcare trend rate on the
net periodic cost $ 741 $ 717 $ 724
Weighted average discount rate 6.75% 7.50% 7.75%
The company is required, under local regulations, to provide
a defined benefit plan covering approximately 150 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 plan's funded status was as follows:
At September 30, 1998 1997
Accumulated benefit obligation $ 7,059 $ 7,507
Increase in benefits due to estimated
future compensation increases 3,153 3,478
Projected benefit obligation 10,212 10,985
Plan's assets at fair value 10,386 11,621
Projected benefit obligation
less than plan's assets (174) (636)
Unrecognized net gain
from experience 777 1,453
Unrecognized transition amount (938) (1,136)
Prepaid asset $ (335) $ (319)
The components of the net periodic pension cost were as
follows:
Year ended September 30, 1998 1997 1996
Service cost_benefits earned
during the period $ 467 $ 484 $ 334
Interest cost on projected
benefit obligation 413 438 504
Actual return on plan's assets (420) (464) (539)
Net amortization and deferral 73 68 36
Net periodic pension cost $ 533 $ 526 $ 335
Assumptions used in the accounting for net periodic pension
cost were:
At September 30, 1998 1997 1996
Weighted average discount rate 4.0% 4.0% 4.5%
Expected long-term rate of
return on plan's assets 4.0% 4.0% 4.5%
Compensation increase rate 3.5% 3.5% 3.5%
The company has a Member Investment and Stock Ownership 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 plan totaled $6,077, $5,099, and
$4,483, in 1998, 1997, and 1996, respectively.
I. Stock Option Plan: In 1996, the company's shareholders
approved the adoption of the 1996 Long-Term Incentive
Compensation 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 were available for
issuance upon grant of the options, which generally had a
term of 10 years.
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 diluted share would have
changed to the pro forma amounts indicated below:
Year ended September 30, 1998 1997 1996
Net earnings $20,814 $17,723 $22,268
Net earnings per diluted share 1.83 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:
At September 30, 1998 1997 1996
Risk-free interest rate 5.8% 6.1% 5.6%
Expected life 7 years 7 years 7 years
Expected volatility 21.9% 19.7% 19.7%
Expected dividend yield 4.2% 4.6% 4.6%
Option activity for 1998, 1997, and 1996 was as follows:
<OPTION>
Weighted
Average
Exercise
Options Price
Balance at September 30, 1995 _ _
Options granted 97,000 $16.63
Balance at September 30, 1996 97,000 16.63
Options granted 162,200 23.59
Options exercised (9,820) 16.63
Options canceled (17,540) 16.63
Balance at September 30, 1997 231,840 21.97
Options granted 226,641 32.33
Options exercised (5,800) 23.50
Options canceled _ _
Balance at September 30, 1998 452,681 $26.88
The weighted average fair value of options granted during
1998, 1997, and 1996 was $6.45, $4.26, and $3.75,
respectively. The number of options exercisable were 419,331
and 230,840 at September 30, 1998 and 1997, respectively.
The exercise prices and weighted average contractual lives
of stock options outstanding at September 30, 1998 were as
follows:
Weighted
Average
Remaining
Options Contractual Options
Exercise Price Outstanding Life in Years Exercisable
$16.6250 69,640 7.1 69,640
23.5000 155,400 8.0 155,400
30.5940 12,600 9.7 _
32.0000 55,701 8.8 55,701
32.2500 138,340 8.6 138,340
33.7500 1,000 8.7 250
34.8750 20,000 9.0 _
452,681 8.3 419,331
J. Earnings per share: On October 1, 1997, the company
adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share." This new standard simplifies
the calculations of earnings per share and requires
presentation of both basic and diluted earnings per share on
the Statements of Consolidated Earnings. Diluted earnings
per share reflects the impact of outstanding stock options,
if exercised. The following is a reconciliation of the
numerators and denominators for the computation of basic and
diluted earnings per share:
Year ended September 30, 1998 1997 1996
Basic earnings per share:
Earnings
Net earnings available to
common shareholders $21,592 $18,140 $22,178
Shares
Weighted average number
of common shares 11,340 11,482 11,570
Basic earnings per share $ 1.90 $ 1.58 $ 1.92
Diluted earnings per share:
Earnings
Net earnings available to
common shareholders $21,592 $18,140 $22,178
Shares
Weighted average number
of common shares 11,340 11,482 11,570
Dilutive stock options 39 43 _
Weighted average
diluted shares 11,379 11,525 11,570
Diluted earnings per share $ 1.90 $ 1.57 $ 1.92
The following options were not included in the computation
of weighted average diluted shares as the options exercise prices were
greater than the average market price of the common shares
during the respective periods:
Weighted
Average
Exercise
Options Price
September 30, 1998 227,641 32.35
September 30, 1997 1,000 33.75
K. 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.
L. Leases: The company has entered into leases for certain
facilities. Future minimum rental commitments under these
operating leases are: $1,893 in 1999, $1,802 in 2000, $1,616
in 2001, and $1,459 in 2002. Rent expense for leases was
approximately $1,740, $1,423, and $1,228, for 1998, 1997,
and 1996, respectively.
M. 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 $1,572 and $1,953 at September 30, 1998 and
1997, 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.
N. Financial instruments: The estimated fair values of the
company's financial instruments were as follows:
At September 30, 1998 1997
Cash and cash equivalents $12,426 $14,999
Short-term borrowings (12,927) (7,908)
Long-term debt, including current
portion (202,227) (24,490)
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: For long-term debt at fixed rates, fair
value estimates were based on rates available to the
company at year end for similar debt of the same maturity.
For long-term debt at varying rates, the carrying value
approximates fair value as it is repriced frequently at
market interest rates.
O. 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 such 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 16%, 17%,
and 17%, of the net billings to customers in 1998, 1997, and
1996, respectively. The company's accounts receivable from
the customer were $13,193 and $15,513 at September 30, 1998
and 1997, respectively. Billings derived from domestic sales
to unaffiliated customers in other countries were
approximately 16%, 15%, and 11%, of the net billings to
customers in 1998, 1997, and 1996, respectively.
Intercompany transfers are made at established intercompany
selling prices. Summarized financial information relating to
these operations is as follows:
United States Other Countries Eliminations Total
1998
Net billings:
Customers $346,613 $143,863 $ _ $490,476
Intercompany
transfers 40,197 4,175 (44,372) _
$386,810 $148,038 $(44,372) $490,476
Earnings before
income taxes
and equity
in loss of
unconsolidated
affiliate $ 26,255 $ 15,091 $ _ $ 41,346
Earnings before
equity in loss
of unconsolidated
affiliate $ 15,929 $ 8,691 $ _ $ 24,620
Net earnings $ 12,901 $ 8,691 $ _ $ 21,592
Identifiable
assets $469,468 $ 93,967 $ _ $563,435
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
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, PricewaterhouseCoopers
LLP, audited the financial statements prepared by the
management of Woodward Governor Company. Their opinion on
these financial statements is presented below.
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
In our opinion, the accompanying consolidated balance sheets
and the related statements of consolidated earnings,
shareholders' equity and of cash flows present fairly, in
all material respects, the financial position of Woodward
Governor Company and its subsidiaries at September 30, 1998
and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted
accounting principles. These financial statements are the
responsibility of the company's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of
these statements in accordance with generally accepted
auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
November 10, 1998
Selected Quarterly Financial Data
(Unaudited)
1998 Fiscal Quarters 1997 Fiscal Quarters
First Second Third Fourth First Second Third Fourth
(In thousands except per share data)
Net
billings$98,140 $113,160 $119,399 $159,777 $99,029 $106,546 $115,761 $120,880
Gross
profit 25,081 31,597 32,213 44,783 27,772 26,838 28,514 33,255
Earnings before
equity in loss
of unconsolidated
affiliate 3,339 6,383 5,521 9,377 5,793 4,200 5,570 8,786
Net
earnings $2,458 $ 5,415 $ 4,891 $ 8,828 $ 5,138 $ 3,430 $ 4,838 $ 4,734
Net earnings
per diluted
share (1)$ 0.21 $ 0.48 $ 0.43 $ 0.78 $ 0.44 $ 0.30 $ 0.42 $ 0.41
Cash dividends
per share0.2325 0.2325 0.2325 0.2325 0.2325 0.2325 0.2325 0.2325
Common stock price per share (2)
High $33.75 $ 29.00 $ 31.00 $ 23.50 $ 33.50 $$37.25 $ 36.75 $ 37.50
Low 31.50 27.00 28.00 20.50 21.50 25.50 26.25 32.25
Close 32.37 27.87 30.87 23.00 33.00 27.25 36.00 35.00
(1)The 1997 fourth quarter net earnings included the impact
of the company's share of the GENXON joint venture loss of
approximately $.17 per diluted share. Additionally, the company,
according to the joint venture agreement, was committed
to provide 80% of the first $10 million of funding which
was 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 diluted share by approximately $.18.
(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.
Cautionary Statement
This annual report contains forward-looking statements,
including financial projections, management plans and
objectives for future operations, expectations of future
economic performance, and various other assumptions relating
to the future. While such statements reflect management's
current expectations, all such statements involve risks and
uncertainties. Actual results could differ materially from
projections or any other forward-looking statement.
Important factors that could cause results to differ
materially from those projected or otherwise stated include
the following: unanticipated global or regional economic
developments, particularly in, but not limited to, Asia;
changes in business cycles of particular industries served
by our company; fluctuations in currency exchange rates of
U.S. and foreign countries, primarily those located in
Europe and Asia; fluctuations in interest rates, primarily
LIBOR, which affect the cost of borrowing under the
company's lines of credit facilities; timing and acceptance
of new products and product enhancements; competitor actions
that adversely impact company orders or pricing; adverse
changes in the business acquisition climate; effects of any
business acquisitions or divestitures; changes in U.S. and
other country laws and regulations involving acquisitions,
the environment, and taxes; relative success of quality and
productivity initiatives, such as the Six Sigma initiative;
business interruptions caused by incomplete or ineffective
remediation of computer problems associated with the year
2000 throughout the company's supply chain; the outlook for
GENXON products and markets and its funding requirements;
unusual or extraordinary events or developments involving
litigation or other potential liabilities.
SUMMARY OF OPERATIONS/TEN YEAR RECORD
(In thousands except per share amounts and other data)
Net Billings, Costs, and Earnings
Net Earnings
For Net Billings Total Costs % of Avg For
the for Products and Income Per Diluted Shrhldrs' the
Year and Services Expenses Taxes Amount Share %of Sales Equity Year
1998 $490,476 $449,130 $16,726 $21,592*** $ 1.90*** 4.4 10.0 1998
1997 442,216 402,528 15,339 18,140*** 1.57*** 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
Dividends, Expenditures, and Other Data
Weighted Cash Dividends At
For Average Rgstrd the
the Diluted Shares Capital Depr. Worker Shrhlder Year
Year Outstanding Amount Per Share Expenditures Expense Members Members End
1998 11,379 $10,543 $0.93 $20,862 $23,715 3,994 1,907 1998
1997 11,525 10,681 0.93 21,152 21,854 3,246 1,994 1997
1996 11,570 10,758 0.93 21,163 22,786 3,211 2,029 1996
1995 11,623 10,811 0.93 18,988 23,334 3,071 2,179 1995
1994 11,765 10,956 0.93 16,515 26,114 3,439 2,256 1994
1993 11,889 11,057 0.93 18,335 24,837 3,264 2,301 1993
1992 11,179 10,330 0.92 52,684 22,241 3,632 2,301 1992
1991 10,967 10,145 0.92 33,075 18,236 3,953 2,303 1991
1990 10,966 9,181 0.84 22,057 15,397 3,673 2,209 1990
1989 10,996 7,971 0.72 31,190 13,165 3,317 2,084 1989
Financial Position
At At
the Plant and Shareholders'Equity the
Year Working Current Equipment Total Long-term Year
End Capital Ratio Net Assets Debt Amount Per Share End
1998 $119,506 1.9 to 1 $130,052 $563,435 $175,685 $220,102 $19.48 1998
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
Management's Financial Summary and Analysis is on pages 15-
20.
*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 1998 and 1997 includes a reduction for
the equity in loss of an unconsolidated affiliate of $3,028
or $.26 per diluted share and $6,209 or $.54 per diluted
share, net of tax, respectively.
BOARD OF DIRECTORS
J. Grant Beadle
Retired Chairman and
Chief Executive Officer
Union Special Corporation
Vern H. Cassens
Retired Senior Vice President
and Chief Financial Officer
of the Company
Carl J. Dargene
Chairman of the Board
AMCORE Financial, Inc.
Lawrence E. Gloyd
Chairman and
Chief Executive Officer
CLARCOR Inc.
John A. Halbrook
Chairman and
Chief Executive Officer
of the Company
Thomas W. Heenan
Retired Partner
in the law firm of
Chapman and Cutler
J. Peter Jeffrey
Retired Vice President
of Development
Father FlanaganOs BoysO Home
Michael T. Yonker
Retired President and
Chief Executive Officer
Portec, Inc.
OFFICERS
John A. Halbrook
Chairman and
Chief Executive Officer
Stephen P. Carter
Vice President
Chief Financial Officer
and Treasurer
Ronald E. Fulkrod
Vice President
Industrial Controls
Operations
Charles F. Kovac
Vice President
General Manager
Industrial Controls
Gary D. Larrew
Vice President
Business Development
C. Phillip Turner
Vice President
General Manager
Aircraft Engine Systems
Carol J. Manning
Corporate Secretary
INVESTOR INFORMATION
Woodward Governor Company
Corporate Headquarters
5001 North Second Street
P.O. Box 7001
Rockford, Illinois 61125-7001, U.S.A.
Transfer Agent and Registrar
Wachovia Bank, N.A.
301 North Church Street
Winston-Salem, North Carolina 27101
Independent Accountants
PricewaterhouseCoopers LLP
Chicago, Illinois
Corporate Counsel
Chapman and Cutler
Chicago, Illinois
International Counsel
Baker & McKenzie
Chicago, Illinois
Annual Meeting
January 19, 1999 at 10:00 A.M. in
the Auditorium of the company
5001 North Second Street
Rockford, Illinois, U.S.A.
Annual Report on Form 10-K
Shareholders may obtain, without
charge, a single copy of the companyOs
1998 annual report on Securities and
Exchange Commission Form 10-K upon
written request to the Corporate
Secretary, Woodward Governor Company,
Rockford, Illinois 61125-7001.
Stock Exchange
Nasdaq National Market
Ticker Symbol: WGOV
An Equal Opportunity Employer
It is Woodward's policy to take affirmative
action to provide equal employment
opportunity to all members and applicants
for employment without regard to race,
color, religion, sex, national origin, disability,
veteran's or handicapped status, and to base
all employment decisions so as to further this
principle of equal employment opportunity.