FINANCIAL HIGHLIGHTS
Fiscal year ended September 30, 1999 1998 1997
(In thousands of dollars except per share amounts and other year-
end data)
Operating Results
Net billings for products
and services $596,904 $490,476 $442,216
Net earnings 30,829* 21,592* 18,140*
Basic earnings per share 2.74* 1.90* 1.58*
Diluted earnings per share 2.73* 1.90* 1.57*
Cash dividends per share .93 .93 .93
Year-end Financial Position
Working capital 124,392 119,506 124,827
Total assets 550,664 563,435 348,110
Long-term debt 139,000 175,685 17,717
Shareholders' equity 241,992 220,102 210,614
Other Year-end Data
Shareholders' equity per
diluted share $21.43 $19.34 $18.27
Worker members 3,791 3,994 3,246
Registered shareholder members 1,866 1,907 1,994
*Net earnings includes a reduction for the equity in loss of an
unconsolidated affiliate, net of tax, of $1,287 or $.11 per basic
and diluted share for 1999, $3,028 or $.27 per basic share and
$.26 per diluted share for 1998, and $6,209 or $.54 per basic and
diluted share for 1997. Without this item, net earnings would
have been $32,116 or $2.85 per basic share and $2.84 per diluted
share for 1999, $24,620 or $2.17 per basic share and $2.16 per
diluted share for 1998, and $24,349 or $2.12 per basic share and
$2.11 per diluted share for 1997.
CONTENTS
To All Shareholders 2
Focus on Our Members 5
Financial Section 13
Board of Directors 37
Board of Directors, Officers, and Investor Information 38
BUSINESS DESCTIPTION
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.
Our products and services are used in the aviation, marine,
locomotive, large off-road vehicle, power generation, gas
generation, and oil and gas process industries.
At Woodward we are responsive to the needs of our key
stakeholders: our shareholders, our customers, our suppliers, and
our members. We focus on both short- and long-term goals to
ensure positive performance and growth. We constantly encourage
our members to reach across business lines to share their
experience and innovative ideas. The result-products that
provide solutions for our customers.
TO ALL SHAREHOLDERS
We achieved record sales and earnings in fiscal 1999, primarily
through our intense focus on Six Sigma initiatives that improved
quality, productivity, and costs, coupled with billings generated
by our Woodward FST business. Our strong financial results also
reflect the repositioning of our Industrial Controls business and
the introduction of new products. It is clear that the growth
strategies we have put in place over the past few years are
producing results.
As we continued to invest in programs to sustain growth, we
achieved significant milestones in a number of new, major product
programs in our aircraft and industrial businesses. In addition,
customers have responded positively to our small industrial
engine business, which was launched last year.
2
FINANCIAL PERFORMANCE
Our net earnings rose 43 percent in 1999 to $30.8 million or
$2.73 per diluted share, from $21.6 million, or $1.90 per diluted
share in 1998. Results for 1999 included a restructuring expense
of $0.42 per diluted share and gains on sales of real estate
totaling $0.15 per diluted share. Without the restructuring
expense and gains on sales of real estate, earnings for 1999
would have been $3.00 per diluted share.
Our improved earnings reflect our strong increase in net
billings, up 22 percent to $596.9 million in 1999 from $490.5
million in 1998. Aircraft Engine Systems billings increased to
$325.9 million from $234.2 million last year, primarily related
to contributions from Woodward FST, which we acquired in June
1998. Woodward FST has experienced impressive growth in billings
in 1999 beyond its full-year pro forma 1998 levels. Industrial
Controls billings decreased to $191.6 million from $207.4 million
in 1998, due to softness in Asian markets and the oil and gas
sectors. Our other operations saw billings increase to $79.4
million in 1999, from $48.9 million in 1998, largely due to
contributions from the small industrial engine business, which
was formed in May 1998 following our acquisition of Baker
Electrical Products, Inc.
A WINNING COMBINATION
This year, we successfully integrated Woodward FST after
acquiring it in June 1998. As a global leader in fuel spray
technologies, Woodward FST strengthens both our aircraft and
industrial businesses. Woodward FST also created significant
cross-selling opportunities for our existing businesses.
The acquisition increased our presence in the thriving large, gas
turbine industrial market and moved us a major step closer to
offering complete, integrated fuel control and delivery systems
for the aircraft engine market.
As part of the integration, we consolidated a Woodward FST
facility in Harvard, Illinois, to our Rockford, Illinois,
facility to significantly reduce operating costs.
REPOSITIONING TO STRENGTHEN PERFORMANCE
We have seen positive results from the reorganization of
Industrial Controls into two separate businesses, initiated at
the end of the second quarter. Now, each business, Industrial
Controls and Global Services, can tailor their operations around
their distinct target markets.
Industrial Controls will continue to benefit from its streamlined
cost structure and from growing recognition of its capabilities
by engine original equipment manufacturers (OEMs).
Developing and manufacturing core fuel and combustion control
products remains Industrial Controls' primary strategy. Advanced
technologies and precision engineered products position
Industrial Controls to partner with OEMs to develop high-
performance, low-cost engines and turbines for the growing gas
and power generation markets. Industrial Controls has earned the
preferred supplier status with some OEMs and continues to develop
these kinds of relationships with all its customers to increase
revenues, profitability, and shareholder value.
Global Services will address the needs of the end-user markets.
Global Services provides engineered control systems for retrofit
and aftermarket applications.
With one business focusing on OEMs and the other on end users,
both are realizing greater efficiencies and improved financial
performance. More importantly, we are strengthening our
credibility with our customers, which gives us the opportunity to
build our market share and sustain our growth.
NEW PRODUCT INTRODUCTIONS
The backbone of Woodward's growth strategy is new products that
will enhance our customers' competitive positions in the
marketplace. In fiscal 1999, we achieved significant milestones
in the development and validation of product platforms and
systems.
Williams International ordered Woodward's new integrated main
fuel pump and control for an engine under development for a class
of light, affordable business jets. Late in the year, our
advanced Hydraulic Multiplexing Unit (HMUX), which replaces up to
a dozen actuators and
3
valves on an aircraft engine, operated successfully on a General
Electric Aircraft Engines test rig. The HMUX, designed to reduce
cost and weight, was developed with the assistance of Lockheed
Martin Control Systems, Woodward's AESYS joint venture partner.
In addition to marketing the products introduced over the past
few years, Industrial Controls accelerated work on platforms for
distributed "smart" on-engine fuel systems for engines and
turbines that will replace cabinet-mounted, off-engine controls.
By combining advanced digital electronics and the latest hydro-
mechanical components, this generation of products will provide
significant advantages in performance, reliability, and cost.
Our new product development efforts for the small industrial
engine markets were well received by existing and prospective
customers. This has confirmed the market needs and opportunities
that we identified before launching our small industrial engine
business. In fiscal 1999, we worked closely with customers to
design three new products for gas engines that will start
production in fiscal 2000.
A PASSION FOR CUSTOMER SATISFACTION
In fiscal 1999, our customers responded favorably as we improved
our product quality, on-time delivery, responsiveness, and cost.
We are determined to produce better products at a lower cost and
at a faster pace than our competitors by continuing to implement
Six Sigma methodologies.
This year, more than 27 members and 9 supplier representatives
earned the distinction of Six Sigma Black Belts, bringing the
company-wide total to over 60. As our Black Belts continue to
advise and guide our teams, we fully expect to see further
process improvements that will lead to additional productivity
gains.
Also, this year, we trained hundreds of our members to use basic
Six Sigma tools to help their teams reach their process
improvement goals. Woodward extensively uses this basic method of
measuring, analyzing, improving, and controlling processes to
help eliminate waste from the business. By instilling the Six
Sigma philosophy and tools among all our members, we will
continue to raise Woodward to even higher performance levels. Not
only has Six Sigma contributed to Woodward's financial success
through improved profitability, it has generated a growing
enthusiasm among our members as they personally contribute to our
business.
A BRIGHT FUTURE
We look ahead with optimism. We are positioned to grow in our
aircraft and industrial markets. We are delivering new products
and new technologies, expanding our presence on customers'
engines and turbines, and translating continuous quality
improvements into competitive advantages, increased market share,
and profitability improvements.
We have good momentum as we move into fiscal 2000. First, global
economic conditions continue to improve. Second, we are
participating in the fast-growing regional and small business
aircraft markets, as well as the expanding industrial power
generation markets. And, we remain firmly committed to broadening
our product offerings and services to achieve our growth targets
in these markets.
I want to thank our Board of Directors for their wisdom and
guidance in matters crucial to Woodward's performance, our
members for their enthusiasm and willingness to put our customers
first, and our shareholders for their continued support. We look
forward to the challenges and opportunities that lie ahead.
John A. Halbrook
Chairman of the Board
and Chief Executive Officer
December 6, 1999
4
Around the world, people depend on Woodward-probably more than
they realize.
Globally, every three seconds an airplane with our products takes
off. With our aircraft engine fuel delivery systems and
components, people rely on our products for on-time flight
departures.
Every day, our products help light, heat, and air condition
homes. With our systems and components for gas engines and
turbines, we help to produce the electricity used in people's
homes.
In emergency energy situations, hospitals depend on our products.
With our controls for stand-by emergency power generator sets,
patients are assured that when utility power is not available,
services are not disrupted.
At Woodward, we are focused on developing and producing quality
products because we understand people depend on them. So, we
listen to our customers; we learn from their experiences; and we
create innovative solutions to meet their critical needs.
5
AIRCRAFT MARKET TRENDS
With a renewed corporate jet industry and with passenger air
miles projected to continue rising among regional airlines,
aircraft manufacturers, such as Airbus, Boeing, and Bombardier,
are relying heavily on engine manufacturers to provide complex
propulsion systems to power their planes. In turn, engine
manufacturers turn to Woodward for integrated engine fuel
delivery systems, as well as subsystems and components.
Both Woodward and engine original equipment manufacturers (OEMs)
benefit from a systems approach, especially as OEMs are
consolidating their supplier base by as much as 75 percent.
Woodward offers fuel delivery systems to ensure our position as a
preferred supplier, to increase our content on aircraft engines,
and to help OEMs in their supplier consolidation efforts.
As a systems provider, Woodward developed an integrated aircraft
fuel pump and control in fiscal 1999. Williams International
selected it for their FJ33 and FJ44 turbofan engines, which are
being developed to power a new class of small business jets.
The Woodward fuel pump and control will also be used by Pratt &
Whitney Canada (P&WC) on PW200, PT6C, and PT6T engines to power a
variety of helicopter applications. In addition, the PT6C is
being developed for the revolutionary Bell Agusta BA609
Tiltrotor. The BA609 combines the vertical lift capability of a
helicopter with the cruise speed of a fixed-wing aircraft.
In addition, Woodward's systems expertise is represented with the
new hydraulic multiplexer unit (HMUX), which was successfully
tested on a test rig for General Electric Aircraft Engines. The
HMUX streamlines the engine fuel system by replacing up to a
dozen actuators and valves with a lighter, more reliable, and
less expensive unit.
AIRCRAFT AFTERMARKET SERVICES
In the aftermarket arena, regional airlines continue to log more
air miles than ever before, which is increasing the demand for
spare parts, maintenance, overhaul, and retrofit services. We are
proud to be known as a premier source for the overhaul and repair
of engine fuel system accessories.
6
[PICTURES]
7
The acquisition of Fuel Systems Textron in 1998 strengthened
Woodward's maintenance capabilities. Now, we offer our customers
a complete fuel system repair and overhaul package to include
fuel metering units, pumps, actuators, specialty valves, and fuel
nozzles.
In fiscal 1999, AESYS, a joint venture between Lockheed Martin
Control Systems and Woodward, was awarded a portion of the
largest private maintenance contract in U.S. military history-the
Propulsion Business Area at Kelly Air Force Base in Texas.
The AESYS team is performing repair and overhaul of General
Electric TF39 engine fuel accessories-the electronic and
mechanical systems that control engine fuel distribution-for the
C-5 Galaxy transport aircraft. By combining Lockheed Martin's
electronics expertise with Woodward's hydro-mechanical technology
and fuel system integration expertise, AESYS provides more
complete aircraft engine systems and services than either company
could do separately.
Also, this year, Woodward introduced a unique aftermarket program
for propeller controls, Woodward ExpressT. Woodward knows its
customers must keep their engines running with fast exchanges.
So, our program offers solutions-exchange units within 24 hours
and at competitive prices.
8
INDUSTRIAL MARKET TRENDS
Similar to the aircraft market, industrial market trends are
rapidly changing. In 1990, the use of natural gas for power
generation was at two percent with coal power generation in the
forefront. In 1997, natural gas use in gas power generation rose
to 27 percent and it is expected to continue to increase.
Deregulation of the energy market in the U.S. and Europe is a
major catalyst for growth in this dynamic market. Also, stringent
environmental laws governing emissions favor gas engine and
turbine technology because natural gas is clean burning and
efficient.
Global leaders such as Caterpillar, General Electric, MHI,
Wartsila, and others want suppliers who can provide core fuel
controls that lower exhaust emissions and provide better fuel
efficiency. And, some OEMs have capacity issues that are
requiring them to outsource more than ever before. So, in fiscal
1999, Woodward developed a product strategy to introduce a
revitalized line of on-engine electronics and fuel systems. By
narrowing our product focus around core fuel and combustion
control components, we are at the forefront of industrial market
trends that favor electronic fuel injection systems and the
emerging "networked" engine.
Our broad product offerings, systems knowledge, and ability to
address engine and turbine core fuel control applications are
unmatched in the industrial market. We are the only manufacturer
with a complete range of injection devices for diesel and gas
engines and gas turbines, plus a complete offering of valves,
actuators, electronic controls, and software. Once again, we are
there meeting our customers' systems needs-offering products that
help them sell more engines.
9
Three products, two introduced in fiscal 1999, greatly enhance
industrial gas engines-the TecJetT, the Fire Fly, and the EGS.
Woodward has partnered with OEMs to supply these products as
standard offerings on their gas engines.
The TecJet, an electronic gas injection valve, precisely
controls fuel flow.
The Fire Fly, an engine knock sensor, allows the engine to
operate with greater efficiency and safety by detecting and
compensating for knock before engine damage occurs.
The EGS, an engine gas management system, calculates the gas
flow desired for any load or speed the engine requires.
Woodward is the first to offer an innovative, single-stage,
solenoid-operated gas admission valve, the SOGAVT, which improves
fuel efficiency and reduces emissions in industrial gas engines.
The valve enables engine manufacturers with multi-port injection
to more precisely control the timing and amount of gas entering
the combustion chamber. In fiscal 1999, Cummins Wartsila and
Wartsila NSD offered the SOGAV as standard for a number of its
engines, and it was tested successfully for use by MAN B&W.
We are also leveraging our expertise and responding to
opportunities in the growing small industrial gas engine markets
of less than 300 horsepower. In fiscal 1999, Woodward developed
several new products for small industrial engines. Launched this
year, the LCS (low-cost speed controller), an electromagnetic
actuator control, is used for power generation applications,
welders, and refrigeration units. In addition, the new OH1.2 gas
engine control system provides low emissions with excellent fuel
economy and "diesel equivalent" power. These products are
expected to begin high-volume production in fiscal 2000.
OPERATIONAL EXCELLENCE
While Woodward's commitment to quality has always been in the
forefront, over the past two years, we have intensified our
focus. With the company-wide adoption of Six Sigma principles, a
methodology used by leading industrial companies such as GE and
Motorola, Woodward is striving to attain the highest level of
customer satisfaction.
Six Sigma concepts are based on measuring, analyzing, improving,
and controlling manufacturing processes along with gaining a firm
understanding of the customers' needs. Throughout Woodward, more
than 60 members have been trained as Six Sigma Black Belts-a
process that entails at least four weeks of specialized training.
10
Black Belts focus their daily efforts on applying Six Sigma
concepts to quality improvement projects. For instance, in fiscal
1999, at our facility in Fort Collins, Colorado, members of the
Mechanical Manufacturing Department reduced their scrap dollars
to the lowest level ever recorded in the department's history.
The average monthly scrap dollar fell by 32 percent from fiscal
1998 levels.
At our facility in Rockton, Illinois, the number of rejects from
final test for a part assembled in the Small Gas Assembly and
Test area dropped dramatically. With a Black Belt as the project
leader, the team reduced the variations in assembly without
redesigning the part. Test stand rejects dropped to 0 percent
while on-time delivery rose to almost 100 percent.
Focusing on root causes, relying on Black Belts, and using Six
Sigma tools make these quality achievements possible. Ultimately,
Six Sigma methods are helping us improve product designs, reduce
cycle times, and refine processes, which adds to the bottom line
by reducing costs.
During fiscal 1999, Woodward repositioned Industrial Controls by
separating it into two businesses. Now, Industrial Controls is
concentrating on the needs of OEMs while Global Services is
focusing on designing and delivering flexible, customized control
systems along with retrofit services for engine and turbine
operators and aftermarket support services.
To strengthen its position as a solutions provider for complex
fuel systems, Woodward continually explores possibilities for
obtaining complementary technology and manufacturing expertise
through acquisitions, joint ventures, and alliances. For
instance, this year Woodward successfully completed integrating
the acquisitions it made in the later half of fiscal 1998-Fuel
Systems Textron, now Woodward FST, and Baker Electrical Products.
By adding Woodward FST nozzles to our product line along with our
newly developed pumps and long-established fuel metering units,
we can offer aircraft OEMs fully integrated engine fuel delivery
systems. As part of our integration efforts, operations at our
Woodward FST plant in Harvard, Illinois, were
consolidated with our Rockford, Illinois, facility to generate
additional cost savings. Acquiring Baker Electrical Products has
provided Woodward low-cost, high-volume manufacturing capacity in
solenoids, which accelerated product development and production
capacity for the growing small industrial engine control market.
A STRATEGIC ADVANTAGE-OUR MEMBERS
Industry trends, short- and long-term strategies, and new product
introductions are just part of the equation for success. The
foundation of Woodward's business is our members. This diverse
group of men and women, who are located in facilities throughout
the world, are the primary reason for our success. This is why we
devote significant resources to recruiting, training, and
retaining our members.
11
With the implementation of Six Sigma, training has moved far
beyond typical task-specific skills. Now, members use their
problem-solving abilities to approach product design,
manufacturing processes, supplier coordination, and customer
service. Workers are developing into accountable leaders-leaders
who work individually and belong to interdependent, supportive
teams.
At Woodward, it's our skilled members who design and produce
innovative engine fuel delivery systems and components for
aircraft and industrial markets. It is our members who are
focused on our financial and operating performance and who are
dedicated to customer satisfaction. It is our talented and
motivated workforce who give us an unmatched strategic advantage
in the marketplace.
12
FINANCIAL SECTION
WOODWARD GOVERNOR COMPANY
CONTENTS
Management Discussion and Analysis
of Results of Operations and Financial Condition 14
Consolidated Financial Statements 22
Management's Responsibility for Financial Statements 34
Report of Independent Accountants 34
Selected Quarterly Financial Data 35
Cautionary Statement 35
Summary of Operations/Eleven-Year Record 36
13
MANAGEMENT DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
INTRODUCTION
We have prepared the following discussion and analysis to help
you better understand our results of operations and financial
condition. This discussion should be read with the consolidated
financial statements, including the notes, and the cautionary
statement on page 35.
RESULTS OF OPERATIONS
Our results of operations are discussed and analyzed by
reportable segment. We have two reportable segments-Aircraft
Engine Systems and Industrial Controls. Aircraft Engine Systems
provides fuel control systems and components primarily to
original equipment manufacturers of aircraft engines. Industrial
Controls provides fuel control systems and components primarily
to original equipment manufacturers of industrial engines and
turbines.
Our other operations include Global Services and Automotive
Products. Global Services, which resulted because of a change in
the structure of our internal Industrial Controls organization in
mid-1999, focuses on providing control systems and related
services to industrial engine users in retrofit situations.
Automotive Products, which began in 1998 following the
acquisition of Baker Electrical Products, Inc., focuses on
products for the non-automotive small engine markets which
require low-cost, high-volume, high-reliability manufacturing
processes characteristic of suppliers to the automotive industry.
Under our new basis of segmentation, Global Services and
Automotive Products have been combined and are discussed and
analyzed as "other segments." However, for comparative purposes,
we also provide discussion and analysis under our old basis of
segmentation before our organizational change, in which Global
Services was combined with Industrial Controls.
The segment earnings reported for these segments in the
discussion and analysis that follows do not reflect restructuring
expense, interest expense, interest income, and allocations of
corporate expenses, and are before income taxes and equity in
loss of unconsolidated affiliate. These other items are
separately discussed
and analyzed.
Aircraft Engine Systems
<OPTION>
In thousands for the year
ended September 30, 1999 1998 1997
External net billings $325,915 $234,173 $198,963
Segment earnings 57,752 39,202 30,442
1999 Compared to 1998
External net billings of Aircraft Engine Systems increased 39% in
1999 over 1998. Most of this increase was due to the June 1998
acquisition of Fuel Systems Textron, Inc., which we subsequently
named Woodward FST, Inc. Woodward FST designs, develops and
manufactures fuel injection nozzles, spray manifolds, and fuel
metering and distribution valves for gas turbine engines in both
aircraft and industrial markets. In 1999, Woodward FST generated
billings 18% higher than the full year pro forma billings in
1998. Much of this increase was in industrial markets. Exclusive
of Woodward FST, billings of Aircraft Engine Systems increased 3%
in 1999. Billings from our domestic locations other than Woodward
FST increased 2%, related to both price and volume changes. Our
foreign locations generated billing increases of 38%, primarily
related to increased volume. We believe the increase overseas is
due to the positive impact of the 1998 consolidation of our
European overhaul and service centers to a location in Prestwick,
Scotland. We estimate that about 60% of our billings result from
sales to original equipment manufacturers and 40% from the
aftermarket.
We are anticipating modest growth in Aircraft Engine Systems'
billings in 2000. Overall, aircraft markets are expected to be
flat to down in 2000. However, we expect to be suppliers for
certain aircraft engine programs that are strengthening, which
will help offset those that are weakening. Long-term, we believe
that regional airlines will continue to log more air miles than
ever before, which will increase the demand for spare parts,
maintenance, overhaul, and retrofit services. Increases in
billings of fuel injection nozzles to industrial markets that we
saw in 1999 are also expected to continue in 2000 and for the
next several years.
Segment earnings of Aircraft Engine Systems increased 47% in
1999 over 1998. About 83% of our increase in earnings can be
directly attributed to the increase in net billings, using 1998's
segment earnings as a percent of net billings. The remaining
difference is primarily related to the following: 1) Our selling,
general, and administrative activities are relatively independent
14
of changes in billing volumes. As a result, our total selling,
general, and administrative expenses increased only slightly on
the 39% increase in billings. Domestically, our selling, general,
and administrative expenses increased 6%. We actually reduced
selling, general, and administrative expenses overseas by 35%,
primarily because activities related to the start up of our
Prestwick, Scotland, location were completed in 1998. 2) Included
in the selling, general, and administrative expenses discussed
above, and also in cost of goods sold, is depreciation expense.
In 1999, we changed our depreciation methods from principally
accelerated methods to the straight-line method for newly-
acquired assets. This change reduced our 1999 cost of goods sold
and selling, general, and administrative expenses by a total of
about $1,080,000. 3) Amortization expense increased by $3,665,000
because we recognized expense associated with our June 1998
acquisition of Fuel Systems Textron, Inc. for a full 12-month
period in 1999 as compared to 4 months in 1998.
1998 Compared to 1997
External net billings of Aircraft Engine Systems increased 18% in
1998 over 1997. The most significant reason for the increase was
the June 1998 acquisition of Fuel Systems Textron, Inc. Excluding
the effects of this acquisition, the increase would have been 2%.
We estimate that about 60% of our billings result from sales to
original equipment manufacturers and 40% from the aftermarket.
Segment earnings increased 29% in 1998 over 1997. About 61% of
our increase in earnings can be directly attributed to the
increase in net billings, using 1997's segment earnings as a
percent of net billings. The remaining difference is primarily
related to reductions in cost of goods sold as a percent of net
billings, partially offset by higher amortization expense.
Improvements in cost of goods sold as a percent of billings were
achieved because of changes in sales mix, including the impact of
the June 1998 acquisition of Fuel Systems Textron, Inc., and cost
reductions generated through various operational improvement
initiatives. Amortization expense increased by $1,799,000 because
of the impact of the June 1998 acquisition of Fuel Systems
Textron, Inc.
Industrial Controls
<OPTION>
In thousands for the year
ended September 30, 1999 1998 1997
New basis of segmentation:
External net billings $191,568 $207,403 $200,809
Old basis of segmentation:
External net billings 244,235 250,224 243,253
Intersegment net billings 8,728 457 631
Segment earnings 35,378 24,267 23,302
1999 Compared to 1998
External net billings for Industrial Controls under our new basis
of segmentation, as restated for the mid-1999 change in the
structure of the company's internal organization, decreased 8% in
1999 from 1998. Billings from our foreign locations, accounting
for 60% of our 1999 billings, decreased 3%. Without the effects
of foreign currency translation adjustments, the decrease
overseas would have been 6%. Billings from our domestic location,
accounting for 40% of our 1999 billings, decreased 15%. We
believe these decreases, both foreign and domestic, are
attributable to softness in Asian markets and in the oil and gas
sectors.
There are a number of signs that indicate to us the potential
for increased sales in 2000 and beyond. The Asian markets are
beginning to rebound, the price of oil has been increasing in
recent months, and activities involving large gas turbines is
very strong. In addition, the change in the structure of our
internal organization is making it easier for us to focus on the
specific needs of original equipment manufacturers. We believe
this increased focus will help us succeed in becoming involved in
more of the programs of original equipment manufacturers.
The change in the organizational structure referred to above
relates to the formation of Global Services, which focuses on
providing control systems and related services to industrial
engine users in retrofit situations. Prior to the change, Global
Services was an integral part of Industrial Controls.
External net billings of Industrial Controls under the old
basis of segmentation, which included Global Services, decreased
2% in 1999 from 1998. In 1999, 55% of our billings were generated
from our foreign locations and 45% from our domestic locations.
Billings from our foreign locations decreased 3%. Without the
effects of foreign currency translation adjustments, billings
from our foreign locations would have decreased 5%. Billings from
our domestic locations decreased 2% in 1999. Without estimated
price increases, associated primarily with the Global Services
portion of this segment, billings from our domestic locations
would have decreased 5%. We believe these decreases, both
domestic and foreign, are attributable to softness in Asian
15
markets and in the oil and gas sectors. However, we were able to
somewhat offset the decrease of our domestic locations by
completing several large contracts for control system upgrades.
Intersegment sales of Industrial Controls under the old basis
of segmentation increased substantially in 1999 over 1998 due to
sales of inventory to Automotive Products, which is included in
other segments discussed below.
Segment earnings of Industrial Controls under the old basis of
segmentation increased 46% in 1999 over 1998. This increase
resulted primarily from the following: 1) In the second quarter
1999, we terminated 197 members in connection with the change in
our internal organization that resulted in the formation of
Global Services. Most of the terminations occurred in our
domestic locations, affecting all job functions to varying
degrees. As a result of these and other cost control actions, we
were able to reduce both our cost of goods sold and our selling,
general, and administrative expenses at our domestic locations by
approximately 10% for 1999 as compared to 1998. These reductions
were offset somewhat by increases at our foreign locations,
primarily in selling, general, and administrative expenses.
Overall, our cost of goods sold decreased 6% on a sales decrease
of 2% for 1999. This decrease in costs included reductions
associated with the change in our depreciation methods from
principally accelerated methods to the straight-line method for
newly-acquired assets. 2) The 1999 change in our depreciation
method reduced cost of goods sold and selling, general, and
administrative expenses by a total of about $430,000. 3) We sold
land located in The Netherlands, which resulted in a gain of
$1,914,000 in 1999. 4) In 1998, we incurred expenses related to
the consolidation and integration of operations at one of our
foreign locations that we did not incur in 1999. 5) Foreign
currency transaction gains in Japan improved segment earnings by
approximately $800,000 for 1999 as compared to 1998.
We believe the favorable impact of the changes in our internal
organization which began in the third quarter of 1999 will
continue in 2000 and beyond. Not only did this change result in a
reduced cost structure, but it will enable us to better focus on
the divergent needs of original equipment manufacturers and end
users in retrofit situations.
1998 Compared to 1997
External net billings of Industrial Controls, under our new basis
of segmentation which excludes Global Services, increased 3% in
1998 over 1997. Billings from our foreign locations, representing
57% of total billings in 1998, increased by 9%. Excluding foreign
currency translation adjustments, most significantly from the
currencies of Japan and The Netherlands, the billings increase
from foreign locations would have been 16%. This growth was
primarily the result of a strong engine controls market in
Europe. Billings from our domestic location, accounting for 43%
of total billings in 1998, decreased by 4% due to softening
market conditions.
External net billings of Industrial Controls, under the old
basis of segmentation which includes Global Services, also
increased 3% in 1998 over 1997. Billings from our foreign
locations accounted for 55% of 1998 billings and increased 8%
over 1997. The increase from our foreign locations would have
been 16% without considering the impacts of foreign currency
translation adjustments, most significantly from the currencies
of Japan and The Netherlands. This growth was primarily the
result of a strong engine controls market and higher shipments of
engineered systems in Europe. Net billings from our domestic
locations accounted for 45% of 1998 billings and decreased 3%
from 1997 due to softening market conditions.
Segment earnings of Industrial Controls under the old basis of
segmentation increased 4% in 1998 over 1997. This increase
resulted primarily from a decrease in cost of goods sold as a
percent of net billings. Overall, our cost of goods sold
increased 1% on a 3% increase in billings, reflecting the net of
sales mix and cost changes. This earnings increase was offset
somewhat in that we incurred expenses related to the
consolidation and integration of operations at one of our foreign
locations in 1998 that we did not incur in 1997.
Other Segments
<OPTION>
In thousands for the year
ended September 30, 1999 1998 1997
New basis of segmentation:
External net billings $79,421 $48,900 $42,444
Old basis of segmentation:
External net billings 26,754 6,079 -
Segment loss (2,911) (2,587) -
1999 Compared to 1998
External net billings of other segments under our new basis of
segmentation, as restated for the 1999 change in the structure of
the company's internal organization, increased 62% in 1999 over
1998. Of the total billings reported for this segment in 1999,
71% was generated by domestic locations and 29% by foreign
locations. Net billings from domestic locations increased 96% in
1999. This increase was due to the following: 1) In May 1998, we
acquired Baker Electrical Products, Inc. Billings in 1999 reflect
sales for a full 12-month period compared to a 5-month
16
period in 1998. 2) Global Services has increased its sales
volumes over 1998 by completing several large contracts for
control system upgrades. 3) Automotive Products, which was formed
at the time of the Baker acquisition, has begun to generate sales
of new products in 1999. 4) Global Services has increased some of
its prices.
Net billings by foreign locations increased 15% in 1999. This
increase is primarily related to the establishment of an
Automotive Products location in Europe to generate sales in that
area of the world.
We believe there are a number of factors that will generate
higher sales for our other segments in 2000 and beyond. First,
with demands high, independent power producers are likely to
consider the possibility of retrofitting equipment rather than
installing new equipment in their facilities. With our increased
focus on the retrofit markets following the 1999 change in our
organization, we are poised to take advantage of these
opportunities. We have also developed a number of products in our
Automotive Products group that will begin shipping in 2000. We
are encouraged by the market acceptance of both our products and
our company as a supplier to small industrial engine
manufacturers.
External net billings of other segments under the old basis of
segmentation, which excluded Global Services, increased 340% in
1999 over 1998. In May 1998, we acquired Baker Electrical
Products, Inc. Billings in 1999 reflect sales for a full 12-month
period compared to a 5-month period last year. Also, Automotive
Products, which was formed at the time of the Baker acquisition,
has begun to generate sales of new products in 1999.
Segment losses of other segments under the old basis of
segmentation were slightly higher in 1999 as compared to 1998.
The impact of the 1999 change in depreciation method from
principally accelerated methods to the straight-line method for
newly-acquired assets reduced our loss in 1999 by about $190,000
from what it would have been under our previous methods. However,
in 1999, as was the case in 1998, our sales volumes were
insufficient to cover our costs of continuing investments in
developing new products for this relatively new operation. We
plan to continue to make investments in developing new products
in 2000 to benefit future periods.
1998 Compared to 1997
External net billings of other segments under our new basis of
segmentation increased 15% in 1998 over 1997. This increase was
primarily due to the May 1998 acquisition of Baker Electrical
Products, Inc., which generated 1998 billings of $6,079,000.
Global Services experienced only a slight increase in sales, from
its foreign locations, in 1998.
External net billings and segment losses of other segments
under our old basis of segmentation would have consisted solely
of Automotive Products, which was formed following the May 1998
acquisition of Baker Electrical Products, Inc.
Expenses Excluded From Segment Earnings
<OPTION>
In thousands for the year
ended September 30, 1999 1998 1997
Restructuring expense $ 7,889 $ - $ -
Interest expense 12,746 5,227 2,382
Interest income (827) (708) (780)
Unallocated corporate expenses 17,113 15,017 12,454
1999 Compared to 1998
We incurred restructuring expense in 1999 primarily in connection
with a change in the structure of our internal Industrial
Controls organization. We terminated 197 members, impacting all
job functions to varying degrees. Most of the terminations were
in Fort Collins and Loveland, Colorado. As part of this
organization change, we formed Global Services, which focuses on
providing control systems and related services to industrial
engine users in retrofit situations.
Interest expense increased in 1999 because we had higher
levels of average outstanding debt in 1999 over 1998, resulting
from borrowings for business acquisitions made in May 1998 and
June 1998.
Unallocated corporate expenses increased in 1999 over 1998
because of increases in corporate activities in support of the
company, offset somewhat by a gain of $1,013,000 on the sale of
non-operating real estate in Stevens Point, Wisconsin. Excluding
this gain, unallocated corporate expenses were 3% of consolidated
net billings in both 1999 and 1998. The impact of the 1999 change
in depreciation method from principally accelerated methods to
the straight-line method for newly-acquired assets reduced our
unallocated corporate expenses in 1999 by about $240,000.
1998 Compared to 1997
Interest expense increased in 1998 because we had higher levels
of average outstanding debt in 1998 over 1997, resulting from
borrowings for business acquisitions made in May 1998 and June
1998. Unallocated corporate expenses increased in 1998 over 1997
primarily because of increases in business development
activities. Unallocated corporate expenses were 3% of
consolidated net billings in both 1998 and 1997.
17
Net Earnings
<OPTION>
In thousands, except per share
amounts, for the year
ended September 30, 1999 1998 1997
Earnings before income
taxes and equity in loss
of unconsolidated affiliate $53,298 $41,346 $39,688
Income taxes 21,182 16,726 15,339
Equity in loss of
unconsolidated affiliate,
net of tax 1,287 3,028 6,209
Net earnings $30,829 $21,592 $18,140
Basic earnings per share $ 2.74 $ 1.90 $ 1.58
Diluted earnings per share 2.73 1.90 1.57
1999 Compared to 1998
The increase in earnings before income taxes and equity in loss
of unconsolidated affiliate, which consists of the segment
earnings and expenses previously discussed, resulted in an
increase in 1999 income taxes. Income taxes were provided at an
effective rate in 1999 only slightly lower than the effective
rate in 1998.
The equity in loss of unconsolidated affiliate reflects our
share of the losses generated by GENXON(tm) Power Systems, LLC, a
50/50 joint venture. Since its inception, most of the activities
and costs incurred were directly related to product development.
GENXON reduced the amount of development activities in 1999 from
1998. GENXON is focused on the retrofit market for installed, out-
of-warranty industrial gas turbines, which we believed would
develop before the original equipment manufacturer markets.
However, the original equipment manufacturers have shown strong
interest in the technology, and we are assessing our
participation in that market. In the meantime, GENXON's costs
will be significantly below the levels of those incurred in 1999.
Basic and diluted earnings per share both increased about 44%
on a net earnings increase of 43% in 1999 as compared to 1998.
This difference is due to slight decreases in the weighted-
average shares of common stock outstanding both before and after
the assumed exercise of outstanding stock options.
1998 Compared to 1997
The increase in earnings before income taxes and equity in loss
of unconsolidated affiliate resulted in an increase in 1998
income taxes. Income taxes were provided at a higher effective
rate in 1998 than in 1997 due to the effects of foreign losses
that provided no tax benefit and foreign tax rate differences.
The equity in loss of unconsolidated affiliate reflects our
share of the losses generated by GENXON Power Systems, LLC, a
50/50 joint venture. Since its inception, most of the activities
and costs incurred were directly related to product development.
GENXON reduced the amount of development activities in 1998 from
1997.
Basic earnings per share increased about 20% and diluted
earnings per share increased about 21% on a net earnings increase
of 19% in 1998 as compared to 1997. This difference is due to
slight decreases in the weighted-average shares of common stock
outstanding both before and after the assumed exercise of
outstanding stock options.
FINANCIAL CONDITION
Our discussion and analysis of financial condition is presented
by segment for total segment assets, which consists of accounts
receivable, inventories, property, plant, and equipment-net and
intangibles-net. We also discuss and analyze other balance sheet
and cash flow items. Together, this discussion and analysis will
help you assess our liquidity and capital resources, as well as
understand changes in our financial condition.
Assets
In thousands at September 30, 1999 1998 1997
Total segment assets-
old basis of segmentation:
Aircraft Engine Systems $330,299 $321,646 $137,913
Industrial Controls 148,600 163,819 146,059
Other Segments 17,873 13,994 -
Unallocated corporate
property, plant, and
equipment-net and
intangibles-net 3,926 7,438 7,326
Other unallocated assets 49,966 56,538 56,812
Total assets $550,664 $563,435 $348,110
1999 Compared to 1998
Aircraft Engine Systems total segment assets at September 30,
1999, were 3% higher than a year earlier. Increases in accounts
receivable and inventory attributable to increased business
activity were offset somewhat by reductions in intangibles due to
amortization expense, net of additions to goodwill. Additions to
goodwill totaled $2,459,000 in 1999, most of which were related
to recording accrued pension benefit costs assumed as part of the
June 1998 acquisition of Fuel Systems Textron, Inc.
18
Industrial Controls total segment assets at September 30,
1999, were 9% lower than a year earlier. Domestic inventory
balances were reduced from relatively high levels at the end of
1998. Also, total capital expenditures in 1999 were at about 50%
of total depreciation expense for the year and $2,628,000 lower
than in 1998. We do not expect to maintain this low level of
capital expenditures in the future.
Total segment assets of our other segmants increased during
1999 due to increased business activity in Automotive Products.
1998 Compared to 1997
Aircraft Engine Systems total segment assets at September 30,
1998, were $183,733,000 higher than a year earlier primarily
because of the June 1998 acquisition of Fuel Systems Textron,
Inc. Exclusive of segment assets at September 30, 1998, that are
associated with this acquired business, total segment assets
would have decreased 9%. These reductions were achieved primarily
in accounts receivable and inventories.
Industrial Controls total segment assets at September 30,
1998, were 12% higher than a year earlier. Accounts receivable
balances in Europe increased due to higher shipments and
lengthened collection periods, partially offset by increases in
allowance for losses of accounts receivable. Inventory balances
in the United States were also increased in anticipation of 1999
shipments.
Total segment assets of our other segments at September 30,
1998, resulted from the May 1998 acquisition of Baker Electrical
Products, Inc.
Selected Other Balance Sheet Items
In thousands at September 30, 1999 1998 1997
Total assets $550,664 $563,435 $348,110
Working capital (current
assets less current liabilities)124,392 119,506 124,827
Long-term debt, less
current portion 139,000 175,685 17,717
Other liabilities 46,620 40,111 34,901
Commitments and contingencies - - -
Shareholders' equity 241,992 220,102 210,614
1999 Compared to 1998
Our balance sheet remained strong at September 30, 1999. Changes
in our balance sheet from 1998 included an increase in working
capital and a reduction in long-term debt, made possible from
operating cash flows. Other liabilities increased in 1999 due to
pension benefit obligations assumed as part of the June 1998
acquisition of Fuel Systems Textron, Inc. and other changes in
postemployment and retirement obligations. Shareholders' equity
increased 10%, resulting from 1999 net earnings in excess of cash
dividend payments.
We are currently involved in matters of litigation arising
from the normal course of business, including certain
environmental and product liability matters. Further discussion
of these matters are in Note P in the Notes to Consolidated
Financial Statements.
1998 Compared to 1997
Our balance sheet remained strong at September 30, 1998. Changes
in our balance sheet from 1997 included a significant increase in
total assets and long-term debt, both driven primarily by the May
and June 1998 business acquisitions. Working capital decreased
only slightly from the prior year. Other liabilities increased in
1998 due to retirement healthcare benefit obligations assumed as
part of the June 1998 acquisition of Fuel Systems Textron, Inc.
and other changes in retirement obligations. Shareholders' equity
increased 5%, resulting from 1999 net earnings in excess of cash
dividend payments.
Selected Cash Flow Items
In thousands for the year
ended September 30, 1999 1998 1997
Net cash provided by
operating activities $59,932 $43,053 $56,079
Net cash used in
investing activities (17,963) (207,945) (28,579)
Net cash provided by (used in)
financing activities (42,982) 162,626 (25,179)
1999 Compared to 1998
Net cash flows provided by operations increased by 39% in 1999
over 1998. This increase is primarily driven by increased net
earnings before noncash expenses. The most significant of these
noncash expenses is depreciation and amortization, which
increased largely due to intangibles associated with the May and
June 1998 business acquisitions and deferred income taxes.
Net cash flows used in investing activities decreased by
$189,982,000 in 1999 as compared to 1998. Without the cash flows
associated with the May and June 1998 business acquisitions, the
decrease would have been $8,239,000. This change is primarily
related to proceeds from the 1999 sale of non-operating real
estate in Stevens Point, Wisconsin, and land in The Netherlands,
and to reduced losses associated with our equity in the GENXON
Power Systems, LLC joint venture. Based on current operating
conditions, we expect an increase in capital expenditures in 2000
over 1999 more in line with depreciation expense.
19
Net cash flows for financing activities changed by
$205,608,000 in 1999 as compared to 1998. Without the cash flows
associated with 1998 borrowings under a term note and a revolving
line of credit made because of the May and June 1998 business
acquisitions, the change would have been $22,608,000. Net cash
flows provided by operations in excess of net cash flows used in
investing activities enabled us to reduce our debt by a greater
amount than in 1998.
Future cash flows from operations and available revolving
lines of credit are expected to be adequate to meet our investing
and financing cash requirements during the next twelve months.
However, it is possible business acquisitions could be made in
the future that would require amendments to existing debt
agreements and the need to obtain additional financing.
1998 Compared to 1997
Net cash flows provided by operating activities decreased in 1998
compared to 1997 primarily due to relative changes in working
capital, assets, and liabilities in 1998 compared to 1997.
Net cash flows used in investing activities increased in 1998
over 1997 mainly due to the 1998 business acquisitions. Capital
expenditure levels in 1998 were 1.4% lower than in 1997.
Net cash flows related to financing activities changed by
$187,805,000 in 1998 compared to 1997. Borrowing, both short-term
and long-term, were the primary sources of cash during 1998.
Without the cash flows associated with 1998 borrowings under a
term note and a revolving line of credit made because of the May
and June 1998 business acquisitions, the change would have been
$4,805,000.
OTHER MATTERS
Market Risks
Our long-term debt is sensitive to changes in interest rates. We
monitor trends in interest rates as a basis for determining
whether to enter into fixed rate or variable rate debt agreements
and for the basis of determining the duration of such agreements.
Our primary objective is to minimize our long-term costs of
borrowing. Currently, all long-term debt is denominated in U.S.
dollars and consists primarily of variable rate agreements
associated with LIBOR market rates. We do not have any derivative
instruments associated with interest rates. A hypothetical 1%
immediate increase in interest rates would adversely affect our
2000 net earnings and cash flows by approximately $900,000 and
reduce the fair value of our long-term debt, as measured at
September 30, 1999, by approximately $250,000. Last year, a
hypothetical 1% immediate increase in interest rates would have
adversely affected our 1999 net earnings and cash flows by
approximately $975,000 and reduced the fair value of our long-
term debt by approximately $425,000.
Assets, liabilities, and commitments that are to be settled in
cash and are denominated in foreign currencies for transaction
purposes are sensitive to changes in currency exchange rates. We
monitor trends in foreign currency exchange rates and our
exposure to changes in those rates as a basis for determining
whether to use hedging strategies. Our primary exposures are to
the European Monetary Union euro, the British pound and the
Japanese yen. We do not have any derivative instruments
associated with foreign currency exchange rates. A hypothetical
10% immediate decrease in the value of the United States dollar
relative to all other currencies, when applied to September 30,
1999, balances, would adversely affect our expected 2000 net
earnings and cash flows by approximately $1,780,000. Last year, a
hypothetical 10% immediate decrease in the value of the United
States dollar relative to all other currencies would have
adversely affected our expected 1999 net earnings and cash flows
by $1,750,000.
Year 2000 Readiness
We recognize the potential problems associated with the year
2000. In May 1997, we formed a task force, with representation
from each 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.
We identified our year 2000 risks in three categories:
products, internal systems, and external noncompliance by
partners and suppliers.
We evaluated our manufactured products, have determined the
year 2000 compliance of such products, and informed our customers
and end-users through our Internet site and by other appropriate
means. As a stand-alone product and operating system, we will
continue to determine year 2000 compliance, by testing and other
means, to validate our product's
20
compliance. However, products with time-date functions have the
capability of being programmed, configured or otherwise modified
for their particular applications, prior to or following
installation. We 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
with time-date functions not manufactured by us, but provided by
third party suppliers. While we remain committed to supporting
and assisting our 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 us to determine (except by
testing individual systems) the year 2000 compliance of third
party supplied hardware and software not manufactured by us.
Regarding internal systems, including information systems,
manufacturing equipment and facilities, we completed our
awareness, inventory, assessment, and prioritization tasks. We
have completed the upgrade/remediation, compliance validation,
and contingency plan development tasks associated with mission-
critical systems. Non-critical internal systems are being
addressed now. Each non-critical system has been assigned a
priority rating. The higher priority systems have been addressed.
Medium and high priority systems will be addressed by December
31, 1999.
We have contacted 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 are using phone audits for
follow-up and have developed contingency plans for our high-risk
critical suppliers.
We have applied available and beneficial provisions of the
federal "Year 2000 Information and Readiness Disclosure Act."
Statements such as the mission statement and other comments above
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 this 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 $600,000. Total
external costs incurred for corrective efforts through September
30, 1999, were $247,000, with remaining budgeted year 2000 costs
anticipated to be incurred in the first quarter of fiscal 2000.
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.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal
Use." This statement provides guidance on accounting for the
costs of software developed or obtained for internal use and is
effective in fiscal year 2000. We have determined that we will
need to capitalize certain software development costs that we
have expensed in the past. We have estimated that the effect of
complying with this statement for planned projects will be to
increase net earnings in 2000 by approximately $650,000.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities." Following a
subsequent deferral of the original implementation date, it is
effective in fiscal year 2001. 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. We
currently do not have any derivative instruments and do not
expect this new statement to have any significant impact on our
consolidated financial statements.
21
STATEMENTS OF CONSOLIDATED EARNINGS
Woodward Governor Company and Subsidiaries
Year Ended September 30,
(In thousands except per
share amounts) 1999 1998 1997
Net billings for products and
services $596,904 $490,476 $442,216
Costs and expenses:
Cost of goods sold 437,121 356,802 325,837
Sales, general, and
administrative expenses 79,043 79,332 72,295
Amortization of
intangible assets 6,769 2,927 983
Restructuring expense 7,889 - -
Interest expense 12,746 5,227 2,382
Interest income (827) (708) (780)
Other expense-net 865 5,550 1,811
Total costs and expenses 543,606 449,130 402,528
Earnings before income taxes and equity in loss
of unconsolidated affiliate 53,298 41,346 39,688
Income taxes 21,182 16,726 15,339
Earnings before equity in loss
of unconsolidated affiliate 32,116 24,620 24,349
Equity in loss of unconsolidated
affiliate, net of tax 1,287 3,028 6,209
Net earnings $30,829 $21,592 $18,140
Basic earnings per share $ 2.74 $ 1.90 $ 1.58
Diluted earnings per share $ 2.73 $ 1.90 $ 1.57
Weighted-average number of basic
shares outstanding 11,272 11,340 11,482
Weighted-average number of
diluted shares outstanding 11,292 11,379 11,525
See accompanying Notes to Consolidated Financial Statements.
22
CONSOLIDATED BALANCE SHEETS
Woodward Governor Company and Subsidiaries
(In thousands except per share At September 30,
amounts) 1999 1998
Assets
Current assets:
Cash and cash equivalents $ 10,449 $ 12,426
Accounts receivable, less
allowance for losses of $4,417
for 1999 and $4,451 for 1998 115,517 108,212
Inventories 104,257 106,404
Deferred income taxes 17,221 20,001
Total current assets 247,444 247,043
Property, plant, and equipment, at cost:
Land 6,100 6,127
Buildings and improvements 128,668 127,054
Machinery and equipment 227,611 215,358
Construction in progress 3,534 2,855
365,913 351,394
Less allowance for depreciation 241,791 221,342
Property, plant, and equipment-net 124,122 130,052
Intangibles-net 156,802 162,229
Other assets 4,287 4,540
Deferred income taxes 18,009 19,571
Total assets $550,664 $563,435
Liabilities and shareholders' equity
Current liabilities:
Short-term borrowings $ 7,303 $ 12,927
Current portion of long-term debt 34,650 25,033
Accounts payable and accrued
expenses 76,772 82,916
Taxes on income 4,327 6,661
Total current liabilities 123,052 127,537
Long-term debt, less current portion139,000 175,685
Other liabilities 46,620 40,111
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 13,300 13,304
Unearned ESOP compensation (7,450) (9,723)
Accumulated other comprehensive
earnings 9,351 9,849
Retained earnings 247,420 226,736
262,727 240,272
Less treasury stock, at cost 20,735 20,170
Total shareholders' equity 241,992 220,102
Total liabilities and shareholders'
equity $550,664 $563,435
See accompanying Notes to Consolidated Financial Statements.
23
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
Woodward Governor Company and Subsidiaries
(In thousands Accum.
of dollars Other
except per Add'l ESOP Compre-
share Common Paid-in Compen- hensive Retained Treasurey Stock Total
amounts) Stock Capital sation Earnings Earnings Shares Amount Amount
Balance at
September 30,
1996 $106 $13,249 $(14,665) $13,620 $207,392 612,584 $(11,707) $207,995
Net earnings - - - - 18,140 - - 18,140
Other
comprehensive
earnings - - - (4,229) - - - (4,229)
Total
comprehensive
earnings 13,911
Purchases of
treasury
stock - - - - - 109,600 (3,761) (3,761)
Sales of
treasury
stock - 28 - - - (7,042) 168 196
Issuance of
stock to ESOP- 6 - - - (2,108) 51 57
ESOP compensation
expense - - 2,537 - - - - 2,537
Cash dividends-$.93
per common
share - - - - (10,681) - - (10,681)
Tax benefit applicable to
ESOP
dividend - - - - 360 - - 360
Balance at
September 30,
1997 106 13,283 (12,128) 9,391 215,211 713,034 (15,249) 210,614
Net earnings - - - - 21,592 - - 21,592
Other
comprehensive
earnings - - - 458 - - - 458
Total
comprehensive
earnings 22,050
Purchases of
treasury
stock - - - - - 160,413 (5,174) (5,174)
Sales of
treasury
stock - 10 - - - (8,580) 206 216
Issuance of
stock to
ESOP - 11 - - - (1,977) 47 58
ESOP
compensation
expense - - 2,405 - - - - 2,405
Cash dividends-$.93
per common
share - - - - (10,543) - - (10,543)
Tax benefit
applicable to
ESOP
dividend - - - - 476 - - 476
Balance at
September 30,
1998 106 13,304 (9,723) 9,849 226,736 862,890 (20,170) 220,102
Net earnings - - - - 30,829 - - 30,829
Other comprehensive
earnings - - - (498) - - - (498)
Total comprehensive
earnings 30,331
Purchases of
treasury
stock - - - - - 46,700 (1,029) (1,029)
Sales of
treasury
stock - (3) - - - (13,049) 313 310
Issuance of
stock to
ESOP - (1) - - - (6,287) 151 150
ESOP compensation
expense - - 2,273 - - - - 2,273
Cash dividends-$.93
per common
share - - - - (10,484) - - (10,484)
Tax benefit
applicable
to ESOP
dividend and
stock
options - - - - 339 - - 339
Balance at
September 30,
1999 $106 $13,300 $ (7,450) $ 9,351 $247,420 890,254 $(20,735) $241,992
See accompanying Notes to Consolidated Financial Statements.
24
STATEMENTS OF CONSOLIDATED CASH FLOWS
Woodward Governor Company and Subsidiaries
Year Ended September 30,
(In thousands of dollars) 1999 1998 1997
Cash flows from operating activities:
Net earnings $30,829 $21,592 $18,140
Adjustments to reconcile net earnings to
Net cash provided by operating activities:
Depreciation and amortization 32,036 26,642 22,837
Net (gain) loss on sale of property,
plant, and equipment (2,848) 7 (258)
Deferred income taxes 4,342 (1,046) 44
ESOP compensation expense 2,273 2,405 2,537
Equity in loss of unconsolidated
affiliate 2,079 4,808 8,243
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable (8,015) (5,489) (13,070)
Inventories 2,145 (8,313) 7,262
Current liabilities, other than
short-term borrowings and current
portion of long-term debt (7,228) (3,893) 10,164
Other-net 4,319 6,340 180
Total adjustments 29,103 21,461 37,939
Net cash provided by operating
activities 59,932 43,053 56,079
Cash flows from investing activities:
Payments for purchase of property, plant,
and equipment (22,789) (20,862) (21,152)
Proceeds from sale of property, plant,
and equipment 6,293 1,305 1,022
Investment in unconsolidated
affiliate (1,405) (5,462) (8,243)
Business acquisitions, net of cash
acquired (62) (181,805) -
Other - (1,121) (206)
Net cash used in investing
activities (17,963) (207,945) (28,579)
Cash flows from financing activities:
Cash dividends paid (10,484) (10,543) (10,681)
Proceeds from sales of treasury stock 310 216 196
Purchases of treasury stock (1,029) (5,174) (3,761)
Net proceeds (payments) from borrowings
under revolving lines (23,050) 87,768 (6,431)
Proceeds from long-term debt 75,000 100,000 -
Payments of long-term debt (84,068) (10,117) (4,862)
Tax benefit applicable to ESOP dividend
and stock options 339 476 360
Net cash provided by (used in)
financing activities (42,982) 162,626 (25,179)
Effect of exchange rate changes
on cash (964) (307) (392)
Net change in cash and cash
equivalents (1,977) (2,573) 1,929
Cash and cash equivalents, beginning of
year 12,426 14,999 13,070
Cash and cash equivalents, end
of year $10,449 $12,426 $14,999
Supplemental cash flow information:
Interest expense paid $12,675 $ 3,797 $ 2,434
Income taxes paid $19,024 $11,255 $ 8,629
Noncash investing and financing activities:
Liabilities assumed in business
acquisitions $ 1,994 $25,527 $ -
See accompanying Notes to Consolidated Financial Statements.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except per share amounts)
A. Significant accounting policies:
Principles of consolidation: The consolidated financial
statements include the accounts of the company and its majority-
owned subsidiaries. Transactions within and between these
companies are eliminated. Results of joint ventures are included
in the financial statements using the equity method of
accounting.
Use of estimates: Financial statements prepared in conformity
with generally accepted accounting principles require the use of
estimates and assumptions that affect amounts reported. Actual
results could differ materially from our estimates.
Foreign currency translation: The assets and liabilities of
substantially all subsidiaries outside the United States are
translated at year-end rates of exchange and earnings and cash
flow statements are translated at weighted average rates of
exchange. Translation adjustments are accumulated with other
comprehensive earnings as a separate component of shareholders'
equity and are presented net of tax in the statements of
consolidated shareholders' equity. We have no other components of
accumulated other comprehensive earnings.
Revenue recognition: Billings for products and services are
recognized when products are shipped or services are provided to
the customer.
Research and development costs: Expenditures related to new
product development are charged to expense when incurred and
totaled approximately $24,600 in 1999, $18,500 in 1998, and
$11,300 in 1997.
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. We provide
for taxes which may be payable if undistributed earnings of
overseas subsidiaries were to be remitted to the United States.
Cash equivalents: Highly liquid investments purchased with an
original maturity of three months or less are considered to be
cash equivalents.
Inventories: Inventories are valued at the lower of cost or
market, with cost being determined on a first-in, first-out
basis.
Property, plant, and equipment: Property, plant, and equipment
are recorded at cost and are depreciated over the estimated
useful lives of the assets, ranging from 5 to 45 years for
buildings and improvements and 3 to 15 years for machinery and
equipment. Assets placed in service as of and prior to September
30, 1998, are depreciated principally using accelerated methods.
Assets placed in service after September 30, 1998, are
depreciated using the straight-line method. This change was made
to better reflect improvements in preventative maintenance
practices that have generally resulted in more uniform productive
capabilities and maintenance costs of machinery and equipment
over the useful life of an asset. Net earnings in 1999 were
increased by approximately $1,150 as a result of this change in
depreciation method. Beginning October 1, 1999, we will
capitalize certain costs associated with developing software to
be used by us. Previously we expensed such costs as incurred.
This change is being made to adopt the provisions of Statement of
Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," issued by the American
Institute of Certified Public Accountants in March 1998. The
effect of this change is expected to increase net earnings in
2000 by approximately $650.
Intangibles: Intangibles are amortized over the periods estimated
to be benefited using the straight-line method. No amortization
period exceeds 30 years. We apply impairment losses on long-lived
assets first to related goodwill. Impairment losses are
recognized whenever expected operating cash flows are less than
the carrying values of specific groups of property, plant and
equipment, identifiable intangibles and related goodwill.
B. Business acquisitions: In May 1998, we acquired the net
assets of Baker Electrical Products, Inc., a manufacturer of
electromagnetic coils for anti-lock braking systems, for $7,096.
In June 1998, we acquired the stock of Fuel Systems Textron, Inc.
(subsequently renamed Woodward FST, Inc.), a leading designer,
developer, and manufacturer of fuel injection nozzles, spray
manifolds, and fuel metering and distribution valves for gas
turbine engines, for $174,771. These acquisitions were financed
utilizing borrowings under a term loan and a revolving line of
credit. Both of the acquisitions were accounted for using the
purchase method of accounting and results of operations of the
acquired companies were included in our consolidated results from
their acquisition dates. The excess of the purchase price over
the estimated fair value of tangible and identifiable intangible
net assets acquired is being amortized over 15 years for Baker
Electrical Products, Inc. and 30 years for Fuel Systems Textron,
Inc.
The following unaudited pro forma information summarizes the
results of operations for 1998 and 1997 as if the acquisition of
Fuel Systems Textron, Inc. had been completed on October 1, 1996,
26
the beginning of the 1997 fiscal year. This information reflects
the actual operating results prior to the acquisition and
adjustments to reflect estimated interest, depreciation,
amortization of intangibles, and income taxes. These pro forma
amounts should not be considered indicative of the results that
would have actually been obtained if the acquisition had occurred
on October 1, 1996, or that may be obtained in the future. (The
pro forma information excludes the acquisition of Baker
Electrical Products, Inc. as the resulting pro forma data would
not have been materially different from the results reported.)
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
Basic earnings per share 1.90 1.55
Diluted earnings per share 1.90 1.54
C. Restructuring expense: We incurred restructuring expense of
$7,889 during 1999 in connection with a change in the structure
of our internal Industrial Controls organization (described more
fully in Note R) and the consolidation of two of our facilities.
This amount reflects a $285 fourth quarter reduction of the
amount originally recognized in our second quarter ended March
31, 1999. The amount of restructuring expense accrued at
September 30, 1999, totaled $475 and is related to member
termination benefits.
Restructuring expense for termination benefits and other
termination related costs totaled $7,351 and related to the
termination of 197 members in 1999. The terminations impacted all
job functions to varying degrees, primarily in Fort Collins and
Loveland, Colorado, where 148 members were terminated.
Restructuring expense associated with the consolidation of two of
our facilities was primarily for the exit from one of those
facilities and totaled $538.
D. Equity in loss of unconsolidated affiliate: The equity in
loss of unconsolidated affiliate is related to our 50% interest
in GENXON Power Systems, LLC, and is presented net of tax benefit
of $792 in 1999, $1,780 in 1998 and $2,034 in 1997. This venture
combines our proprietary fuel metering and control technology
with an unique catalytic combustion technology to offer an ultra-
low NOx emission control system. To date, most of the activities
and costs incurred were directly related to product development,
resulting in joint venture pretax losses of $4,157 in 1999,
$9,615 in 1998 and $10,486 in 1997. At September 30, 1999, the
joint venture had total assets of $608 and total liabilities of
$646. At September 30, 1998, the joint venture had total assets
of $2,095 and total liabilities of $786.
E. Income taxes: Income taxes, which are presented in the
statement of consolidated earnings exclusive of the tax benefits
associated with the unconsolidated affiliate GENXON Power
Systems, LLC, consisted of the following:
Year ended September 30, 1999 1998 1997
Currently payable:
Federal $11,242 $10,165 $ 6,504
State 1,484 1,768 1,551
Foreign 3,929 6,586 6,474
Deferred 4,527 (1,793) 810
$21,182 $16,726 $15,339
Deferred income taxes presented in the consolidated balance
sheets are related to the following:
At September 30, 1999 1998
Deferred tax assets:
Postretirement and
early retirement benefits $18,560 $17,927
Foreign net operating loss
and state tax credits 9,255 8,833
Inventory 8,624 8,609
Other 18,748 20,400
Valuation allowance (11,716) (11,296)
Total deferred tax assets,
net of valuation allowance 43,471 44,473
Deferred tax liabilities:
Intangibles-net (4,734) (2,026)
Other (3,507) (2,875)
Total deferred tax liabilities (8,241) (4,901)
Net deferred tax assets $35,230 $39,572
We recorded a valuation allowance to reflect the estimated amount
of deferred tax assets which may not be realized primarily due to
capital loss carryforwards and 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, 1999 1998
Beginning balance $(11,296) $ (9,703)
Foreign net operating loss carryforward (376) (1,646)
State net operating loss carryforward (44) (36)
Capital loss carryforward - 89
Ending balance $(11,716) $(11,296)
27
The reasons for the differences between our effective income tax
rate and the United States statutory federal income tax rate were
as follows:
Percent of pre-tax earnings,
year ended September 30, 1999 1998 1997
Statutory rate 35.0 35.0 35.0
State income taxes, net
of federal tax benefit 2.5 2.5 2.2
Foreign loss effect 2.3 2.6 (0.1)
Foreign tax rate differences2.1 1.8 0.4
Foreign sales corporation (1.6) (1.5) (0.8)
Other items, net (0.6) 0.1 1.9
Effective rate 39.7 40.5 38.6
F. Earnings per share:
Year ended September 30, 1999 1998 1997
Net earnings (A) $30,829 $21,592 $18,140
Determination of shares,
in thousands:
Weighted-average shares
of common stock
outstanding (B) 11,272 11,340 11,482
Assumed exercise of
stock options 20 39 43
Weighted-average shares
of common stock outstanding
assuming dilution,
in thousands (C) 11,292 11,379 11,525
Basic earnings per share (A/B) $ 2.74 $ 1.90 $ 1.58
Diluted earnings per share (A/C) $ 2.73 $ 1.90 $ 1.57
The following stock options were outstanding during 1999, 1998,
and 1997 but were not included in the computation of diluted
earnings per share because the options' exercise prices were
greater than the average market price of the common shares during
the respective periods:
Year ended September 30, 1999 1998 1997
Options 220,375 181,935 266
Weighted-average exercise price $ 32.34 $ 32.46 $ 33.75
G. Inventories:
At September 30, 1999 1998
Raw materials $ 2,452 $ 2,397
Component parts 64,059 65,707
Work in process 26,955 26,994
Finished goods 12,021 13,256
105,487 108,354
Less progress payments (1,230) (1,950)
$104,257 $106,404
H. Intangibles-net:
At September 30, 1999 1998
Goodwill $ 95,552 $ 97,479
Customer relationships 42,357 43,834
Other 18,893 20,916
$156,802 $162,229
Intangibles are shown net of accumulated amortization of $10,732
in 1999 and $5,424 in 1998.
I. Short-term borrowings: Short-term borrowings reflect
borrowings under certain bank lines of credit. The total amount
available under these lines of credit, including outstanding
borrowings, totaled $46,280 at September 30, 1999, and $49,949 at
September 30, 1998. Interest on borrowings under the lines of
credit 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 outstanding borrowings was 4.4% at September
30, 1999, 5.1% at September 30, 1998, and 4.7% at September 30,
1997.
J. Long-term debt:
At September 30, 1999 1998
Term note $ 96,250 $100,000
Borrowings under revolving line
of credit facility 65,000 83,000
ESOP debt guarantee-8.01% 9,500 12,000
Unsecured note-9.45% 2,900 5,600
Other - 118
173,650 200,718
Less current portion 34,650 25,033
$139,000 $175,685
During the third quarter of 1998, we 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
5.94% at September 30, 1999. 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 5.87% at September 30, 1999.
In June 1992, the company's Member Investment and Stock Ownership
Plan (a qualified employee stock ownership 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. We guaranteed the
payment of the
28
loan and agreed to make future contributions to the plan
sufficient to repay the loan. Accordingly, the original amount of
the loan was recorded as long-term debt and unearned ESOP
compensation. The consolidated balance sheets reflect the
outstanding balance of the loan in long-term debt and the
remaining unearned ESOP compensation as a component of
shareholders' equity. Unearned ESOP compensation has been reduced
using the shares allocated method for shares allocated to plan
participants. The unallocated shares were 306,088 at September
30, 1999, 399,492 at September 30, 1998, and 498,304 at September
30, 1997.
Exclusive of the revolving line of credit facility, required
future principal payments of long-term debt are: $21,650 in 2000,
$22,500 in 2001, $22,500 in 2002, and $42,000 in 2003. At
September 30, 1999, we classified $13,000 of borrowings under the
revolving line of credit facility as current. The remaining
borrowings of $52,000 are classified as long-term as we have both
the intent and ability, through the company's revolving line of
credit facility, to refinance this amount on a long-term basis.
Provisions of the debt agreements require us 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 repayment requirements in the event of a material
adverse event. In addition, the agreements require us 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 our ability to incur debt, pay cash
dividends, sell certain assets, acquire other businesses, and
purchase the company's capital stock, among other things. At
September 30, 1999, we had the ability to pay dividends and
purchase the company's common stock up to $32,630.
K. Accounts payable and accrued expenses:
At September 30, 1999 1998
Accounts payable $20,923 $24,432
Salaries and other member benefits 27,706 24,656
Taxes, other than on income 5,479 7,255
Other items-net 22,664 26,573
$76,772 $82,916
L. Retirement benefits: We provide various benefits to eligible
members of our company, including retirement healthcare benefits,
pension benefits, and contributions to various defined
contribution plans.
Currently, approximately 56% of our members may become eligible
for healthcare benefits, generally after reaching age 55 with 10
years of service or after reaching age 65. We pay 80% to 100% of
eligible healthcare expenses of retired members, their dependents
and survivors which are not paid by Medicare, up to maximum
amounts established under the plans. Plan participants share in
the cost of these benefits in varying amounts based on years of
service, and we have the right to modify or terminate the plans.
The plans are not funded and there are no plan assets. Changes in
the benefit obligations, the unfunded status of the
plans, and the amount of accrued benefit costs for our retirement
healthcare plans were as follows:
At or for the year ended September 30, 1999 1998
Change in benefit obligation:
Benefit obligation at beginning of year $40,651 $34,632
Service cost 1,103 1,054
Interest cost 2,587 2,551
Contributions by plan participants 2,208 2,581
Net actuarial losses (gains) (6,325) 1,560
Benefits paid (3,405) (4,120)
Business acquisition - 2,393
Benefit obligation at end of year
and unfunded status 36,819 40,651
Unrecognized net actuarial gains 7,785 1,460
Total accrued benefit cost 44,604 42,111
Portion of accrued benefit cost
included in accrued expenses 2,000 2,000
Portion of accrued benefit cost
included in other liabilities $42,604 $40,111
The components of the net periodic benefit cost associated with
the retirement healthcare plans were as follows:
Year ended September 30, 1999 1998 1997
Service cost $1,103 $1,054 $ 923
Interest cost 2,587 2,551 2,388
Amortization of unrecognized
net gain - (33) (24)
Net periodic benefit cost $3,690 $3,572 $3,287
29
In accounting for the retirement healthcare plans, we assumed the
weighted-average discount rate was 7.50% in 1999, 6.75% in 1998,
and 7.50% in 1997. We also assumed net healthcare cost trend
rates of 6.70% to 7.00% in 2000, decreasing gradually to 4.50% in
2005, and remaining at 4.50% thereafter. A 1.00% change in
assumed healthcare cost trend rates would have had the following
effects on amounts reported in 1999:
1.00% Increase 1.00% Decrease
Effect on total of service and
interest cost components $ 839 $ (634)
Effect on benefits obligation
at end of year 6,294 (4,975)
Approximately 14% of our members are currently covered under
defined benefit pension plans. Benefits paid under these plans
vary primarily due to members' length of service and
compensation. However, effective September 30, 1999, the years of
service factor was frozen for participants in one of our pension
plans. Changes in benefit obligations and plan assets, and the
funded status and the amount of accrued benefit costs for our
pension plans were as follows:
At or for the year ended September 30, 1999 1998
Change in benefit obligations:
Benefit obligation at beginning of year $10,212 $10,985
Service cost 1,490 467
Interest cost 1,575 413
Net actuarial losses (gains) 839 (187)
Foreign currency exchange rate changes 2,987 (1,222)
Benefits paid (711) (244)
Business acquisition 12,069 -
Benefit obligation at end of the year 28,461 10,212
Change in plan assets:
Fair value of assets at beginning of year 10,386 11,621
Actual return on plan assets 1,259 (420)
Foreign currency exchange rate changes 2,794 (1,092)
Contributions by the company 566 521
Benefit paid (711) (244)
Business acquisition 10,075 -
Fair value of assets at the end of the year 24,369 10,386
Funded status (4,092) 174
Unamortized prior service cost (133) (112)
Unrecognized net losses (gains) 512 (665)
Unamortized transition obligation 1,088 938
Net prepaid (accrued) benefit cost (2,625) 335
Portion of net prepaid (accrued) benefit
cost included in other assets 391 335
Portion of net prepaid (accrued) benefit
cost included in other liabilities $ (3,016) $ -
The business acquisition referred to above relates to the June
1998 acquisition of Fuel Systems Textron, Inc. (more fully
described in Note B). The actuarial valuation associated with the
assumed defined benefit pension plan was not completed until
1999.
The components of the net periodic benefit cost associated with
the pension plans were as follows:
Year ended September 30, 1999 1998 1997
Service cost $1,490 $467 $484
Interest cost 1,575 413 438
Expected return on plan assets (1,529) (420) (464)
Amortization of prior service cost (8) (7) (8)
Recognized net gains - - (14)
Amortization of transition obligation 90 80 90
Net periodic pension cost $1,618 $533 $526
The following weighted-average assumptions, reflecting rates
appropriate in the United States and Japan, were used in
accounting for pension plans:
Year ended September 30, 1999 1998 1997
Discount rate 5.3% 4.0% 4.0%
Rate of compensation increase 4.3% 3.5% 3.5%
Expected long-term rate of
return on plan assets 5.2% 4.0% 4.0%
Approximately 78% of our members are currently eligible for one
or more defined contribution plans. Contributions to these plans
are discretionary. However, we do have a qualified employee stock
ownership plan that has outstanding borrowings which have been
guaranteed by the company. We have agreed to make future
contributions to the plan sufficient to repay the loan. The
proceeds of the borrowing were used by the plan to purchase
common stock from the company, the shares of which are allocated
to plan participants as contributions are made to the plan.
Amounts charged to expense for defined contribution plans totaled
$10,551 in 1999, $9,512 in 1998, and $9,082 in 1997.
L. Stock Option Plan: In 1996, shareholders approved a plan in
which options to purchase shares of common stock could be granted
to key management members of the company. This plan reserved
800,000 shares of common stock for issuance. Granted options
under the plan generally have a term of 10 years and generally
vest immediately. These options are accounted for in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and therefore we do not recognize
compensation expense in association with options granted at or
above the market price of our common stock at the date of grant.
30
As required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the following table
presents pro forma net earnings and per share information that
has been prepared as if compensation for these options was
recognized:
Year ended September 30, 1999 1998 1997
Net earnings $30,298 $20,814 $17,723
Basic earnings per share 2.69 1.84 1.54
Diluted earnings per share 2.68 1.83 1.54
The determination of compensation expense for this pro-forma
information was based upon the estimated fair value of the
options granted on the date of their grant using the Black-
Scholes option pricing model and the following weighted-average
assumptions by grant year:
Year ended September 30, 1999 1998 1997
Risk-free interest rate 4.9% 5.8% 6.1%
Expected life 7 years 7 years 7 years
Expected volatility 23.0% 21.9% 19.7%
Expected dividend yield 4.2% 4.2% 4.6 %
Option activity was as follows:
<OPTION>
Weighted-
Average
Exercise
Options Price
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
Balance at September 30, 1998 452,681 26.88
Options granted 200,000 22.00
Options exercised (4,000) 22.00
Options canceled (7,266) 32.18
Balance at September 30, 1999 641,415 $25.33
The weighted-average fair value of options granted was $4.27 in
1999, $6.45 in 1998 and $4.26 in 1997. The number of options
exercisable were 616,465 at September 30, 1999, 419,331 at
September 30, 1998, and 230,840 at September 30, 1997.
The exercise prices and weighted-average contractual lives of
stock options outstanding at September 30, 1999, were as follows:
Weighted-
Average
Remaining
Options Contractual Options
Exercise Price Outstanding Life in Years Exercisable
$16.625 69,640 5.0 69,640
22.000 196,000 9.0 196,000
23.500 155,400 6.1 155,400
30.594 12,600 8.7 3,150
32.000 53,716 7.5 53,716
32.250 133,059 7.3 133,059
33.750 1,000 7.7 500
34.875 20,000 8.0 5,000
641,415 7.3 616,465
N. Shareholder Rights Plan: We have a shareholder rights plan to
protect shareholders against unsolicited attempts to acquire
control of the company that do not offer what the Board of
Directors believes to be an adequate price to all shareholders.
In connection with this plan, a dividend of one preferred stock
purchase right for each outstanding share of common stock was
paid to shareholders in February 1996. Each Right entitles its
holder to purchase from the company one-four hundredth of a share
of Series A Preferred Stock, par value $.003 per share, at a
price of $75.00 (subject to adjustment, and restated for the
January 1997 stock split). The rights may not be exercised or
transferred apart from the company's common stock until 10 days
after it is announced that a person or group has acquired 15% or
more of the outstanding common stock or 15 business days after it
is announced that there is an offer (or an intent to make an
offer ) by a person or group to acquire 15% or more of the
outstanding common stock. The Board of Directors may increase the
15 business day period referred to above and may redeem the
rights in whole (but not in part) at a redemption price of $.003
per right at any time prior to an acquisition of 15% or more of
the outstanding common stock by a person or group. The rights
expire on January 17, 2006.
O. Leases: We have entered into leases for certain facilities.
Future minimum rental commitments under these operating leases
are: $2,965 in 2000, $2,737 in 2001, $2,586 in 2002, $1,973 in
2003, and $1,828 in 2004. Rent expense for facilities was
approximately $2,634 in 1999, $1,740 in 1998, and $1,423 in 1997.
31
P. Contingencies: We are currently involved in matters of
litigation arising from the normal course of business, including
certain environmental and product liability matters. We have
accruals of approximately $1,200 at September 30, 1999, and
$1,572 at September 30, 1998. These accruals are based on our
current estimate of the most likely amount of losses that we
believe will be incurred. These amounts, which are expected to be
paid over the next several years, have been included in accounts
payable and accrued expenses.
We have been designated a "de minimis potentially responsible
party" with respect to the cost of investigation and
environmental cleanup of certain third-party sites. Our current
accrual for these matters is based on costs incurred to date that
we have been allocated and our estimate of the most likely future
investigation and cleanup costs. There is, as in the case of most
environmental litigation, the possibility that under joint and
several liability we could be required to pay more than our
allocated share of costs.
It is our opinion, after consultation with legal counsel, that
additional liabilities, if any, resulting from these matters are
not expected to have a material adverse effect on our financial
condition, although such matters could have a material effect on
our quarterly or annual operating results and cash flows when
resolved in a
future period.
Q. Financial instruments: The estimated fair values of our
financial instruments were as follows:
At September 30, 1999 1998
Cash and cash equivalents $10,449 $12,426
Short-term borrowings (7,303) (12,927)
Long-term debt, including current portion (173,645) (202,227)
The fair value of cash and cash equivalents, short-term
borrowings and long-term debt at variable interest rates were
assumed to be equal to their carrying amounts. Cash and cash
equivalents have short-term maturities, short-term borrowings
have short-term maturities and market interest rates, and long-
term debt at variable interest rates is repriced frequently at
market rates of interest. The fair value of long-term debt at
fixed interest rates was estimated based on a model that
discounted future principal and interest payments at interest
rates available to the company at year end for similar debt of
the same maturity.
R. Segment information: Our operations are organized based on
the nature of products and services provided. In 1999, we adopted
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information." Under
this statement, we have two reportable segments-Aircraft Engine
Systems and Industrial Controls. Aircraft Engine Systems provides
fuel control systems and components primarily to original
equipment manufacturers of aircraft engines. Industrial Controls
provides fuel control systems and components primarily to
original equipment manufacturers of industrial engines and
turbines.
Our other operations include Global Services and Automotive
Products, which are reported as other segments in the information
which follows. Global Services, which resulted because of a
change in the structure of our internal Industrial Controls
organization in 1999, focuses on providing control systems and
related services to industrial engine users in retrofit
situations. Certain summarized financial information presented
below for Global Services has not been restated for 1998 and 1997
because a restatement was not practicable. Such information has
been marked "na." Comparative information has been provided using
the old basis of segmentation in which Global Services was
combined with Industrial Controls. Automotive Products, which
began in 1998 following the acquisition of Baker Electrical
Products, Inc., focuses on products for the small industrial
engine markets which require low-cost, high-volume, high-
reliability manufacturing processes characteristic of suppliers
to the automotive industry.
The accounting policies of the segments are the same as those
described in Note A. Intersegment billings and transfers are made
at established intersegment selling prices generally intended to
approximate selling prices to unrelated parties. Our
determination of segment earnings does not reflect restructuring
expense, interest expense, interest income and allocations of
corporate expenses, and is before income taxes and equity in loss
of unconsolidated affiliate. Segment assets consist of accounts
receivable, inventories, property, plant, and equipment-net, and
intangible assets-net. Summarized financial information for the
new basis in segmentation, reflecting the restatement of certain
financial information in 1998 and 1997 related to the change in
our internal structure in 1999, follows:
32
At or for the year ended September 30, 1999 1998 1997
Aircraft Engine Systems:
External net billings $325,915 $234,173 $198,963
Intersegment net billings 1,564 1,706 1,603
Segment earnings 57,752 39,202 30,442
Segment assets 330,299 321,646 137,913
Depreciation and amortization 17,663 11,959 9,144
Capital expenditures 13,049 10,407 9,497
Industrial Controls:
External net billings $191,568 $207,403 $200,809
Intersegment net billings 13,297 na na
Segment earnings 36,008 na na
Segment assets 126,344 na na
Depreciation and amortization 9,918 10,974 11,147
Capital expenditures 4,831 6,135 7,804
Other Segments:
External net billings $ 79,421 $ 48,900 $ 42,444
Intersegment net billings 4,534 na na
Segment losses (3,541) na na
Segment assets 40,129 na na
Depreciation and amortization 2,797 1,734 919
Capital expenditures 2,879 2,924 1,459
Summarized financial information for the old basis in
segmentation, which ignores the impact of the change in our
internal structure in 1999, follows:
At or for the year ended September 30, 1999 1998 1997
Aircraft Engine Systems:
External net billings $325,915 $234,173 $198,963
Intersegment net billings 1,564 1,706 1,603
Segment earnings 57,752 39,202 30,442
Segment assets 330,299 321,646 137,913
Depreciation and amortization 17,663 11,959 9,144
Capital expenditures 13,049 10,407 9,497
Industrial Controls:
External net billings $244,235 $250,224 $243,253
Intersegment net billing s 8,728 457 631
Segment earnings 35,378 24,267 23,302
Segment assets 148,600 163,819 146,059
Depreciation and amortization 10,981 12,048 12,066
Capital expenditures 5,150 7,778 9,263
Other Segments:
External net billings $ 26,754 $ 6,079 $ -
Intersegment net billings 883 - -
Segment losses (2,911) (2,587) -
Segment assets 17,873 13,994 -
Depreciation and amortization 1,734 660 -
Capital expenditures 2,560 1,281 -
The differences between the total of segment amounts, as measured
using the old basis of segmentation, and the consolidated
financial statements were as follows:
Year ended September 30, 1999 1998 1997
Total net billings for
reportable segments $580,442 $486,560 $444,450
Other net billings 27,637 6,079 -
Elimination of intersegment
net billings (11,175) (2,163) (2,234)
Consolidated net billings $596,904 $490,476 $442,216
Total earnings for
reportable segments $ 93,130 $ 63,469 $ 53,744
Other losses (2,911) (2,587) -
Restructuring expense, interest
expense and interest income (19,808) (4,519) (1,602)
Unallocated corporate expenses (17,113) (15,017) (12,454)
Consolidated earnings before
income taxes and equity in
loss of unconsolidated affiliate $ 53,298 $ 41,346 $ 39,688
At September 30, 1999 1998 1997
Total assets for reportable
segments $478,899 $485,465 $283,972
Other assets 17,873 13,994 -
Unallocated corporate property,
plant, and equipment-net,
and intangibles-net 3,926 7,438 7,326
Other unallocated assets 49,966 56,538 56,812
Consolidated total assets $550,664 $563,435 $348,110
Differences between total depreciation and amortization and
capital expenditures of reportable segments and the corresponding
consolidated amounts are due to other segments and unallocated
corporate amounts.
One customer accounted for more than ten percent of consolidated
net billings, impacting both the Aircraft Engine Controls and
Industrial Controls segments, and totaled approximately $130,000
in 1999, $76,500 in 1998, and $75,000 in 1997.
External net billings by geographical area, as determined by the
location of the company invoiced, were as follows:
Year ended September 30, 1999 1998 1997
United States $350,999 $271,265 $245,536
Other countries 245,905 219,211 196,680
$596,904 $490,476 $442,216
Property, plant and equipment-net by geographical area, as
determined by the physical location of the assets, were as
follows:
At September 30, 1999 1998 1997
United States $106,325 $111,478 $ 94,035
Other countries 17,797 18,574 16,913
$124,122 $130,052 $110,948
33
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 jugements 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 accountants, 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 Stephen P. Carter
Chariman and Chief Executive Officer Vice President, Chief
Financial Officer And Treasurer
REPORT OF INDEPENDENT ACCOUNTANTS
To Board of Directors and Shareholders
Woodward Governor Company
In our opinion, the accompanying consolidated balance sheets and
the related statements of consolidated earnings, shareholders'
equity and cash flows present fairly, in allmaterial respects,
the financial position of Woodward Governor Company and its
subsidiaries at September 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years
in the period ended September 30, 1999, 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 required that we plan and perofrm 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.
As discussed in Note A to the consolidated financial statements,
as of October 1, 1998, the Company changed from depreciating
newly-acquired assets using principally accelerated methods to
the straight-line method.
PricewaterhouseCoopers LLP
Chicago, Illinois
November 9, 1999
34
SELECTED QUARTERLY FINANCIAL DATA
(Unaudited)
1999 Fiscal Quarters
(In thousands except
per share data) First Second Third Fourth
Net billings
for products
and services $144,908 $144,408 $139,239 $168,349
Gross profit 34,893 36,844 38,994 49,052
Earnings before
equity in loss
of unconsolidated
affiliate 5,596 2,343 8,387 15,790
Net earnings 5,204 2,064** 8,079 15,482
Net earnings per
basic share 0.46 0.18** 0.72 1.37
Net earnings per
diluted share 0.46 0.18** 0.72 1.37
Cash dividends per
diluted share 0.2325 0.2325 0.2325 0.2325
Common stock price per share:
High $ 25.56 $ 25.50 $ 27.25 $ 26.63
Low 20.00 20.50 23.00 24.00
Close 22.00 25.00 26.00 24.94
1998 Fiscal Quarters
(In thousands except
per share data) First Second Third Fourth
Net billings for
products and
services $ 98,140 $113,160 $119,399 $159,777
Gross
profit* 25,081 31,597 32,213 44,783
Earnings before equity
in loss of
unconsolidated
affiliate 3,339 6,383 5,521 9,377
Net earnings 2,458 5,415 4,891 8,828
Net earnings per
basic share 0.21 0.48 0.43 0.78
Net earnings per
diluted share 0.21 0.48 0.43 0.78
Cash dividends per
share 0.2325 0.2325 0.2325 0.2325
Common stock price
per share
High $ 35.75 $ 33.00 $ 31.00 $ 32.00
Low 30.87 25.25 27.50 20.50
Close 32.38 27.88 30.88 23.00
* Gross profit represents net billings for products and services
less cost of goods sold as reported in our statements of
consolidated earnings.
** We incurred restructuring expense, net of tax, of $4,904 in
the second quarter 1999. Without this restructuring expense, our
net earnings in the second quarter 1999 would have been $6,968 or
$0.62 per basic and diluted share.
CAUTIONARY STATEMENT
This annual report contains forward-looking statements, including
financial projections, our plans and objectives for future
operations, expectations of future economic performance, and
various other assumptions relating to the future. While such
statements reflect our 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, primarily original equipment manufacturers of aircraft
engines and industrial engines and turbines; 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 our
term note and line of credit facilities; timing and acceptance of
new products and product enhancements; competitor actions that
adversely impact our 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; and unusual or extraordinary events or
developments involving litigation or other potential liabilities.
35
Net Billings, Costs, and Earnings
Net Earnings (Loss)
For Net Billings Per Per % of Beginning For
the for Products Income Basic Diluted Shareholders' the
Year and Services Taxes Amount Share Share % of Sales Equity Year
1999 $596,904 $21,182 $30,829** $ 2.74** $ 2.73** 5.2 14.0 1999
1998 490,476 16,726 21,592** 1.90** 1.90** 4.4 10.3 1998
1997 442,216 15,339 18,140** 1.58** 1.57** 4.1 8.7 1997
1996 417,290 13,003 22,178 1.92 1.92 5.3 11.2 1996
1995 379,736 8,247 11,936 1.03 1.03 3.1 6.2 1995
1994 333,207 (1,922) (3,273) (0.28) (0.28) (1.0) (1.6) 1994
1993 331,156 9,695 13,389* 1.13* 1.13* 4.0 6.1 1993
1992 374,173 12,764 20,212 2.22 1.81 5.4 9.7 1992
1991 361,924 13,724 24,293 1.81 2.22 6.7 12.5 1991
1990 340,128 16,776 29,439 2.68 2.68 8.7 17.0 1990
1989 299,789 15,627 25,503 2.32 2.32 8.5 16.3 1989
Dividends, Expenditures, and Other Data
Weighted Cash Dividends
Average At
For Shares Registered the
the Diluted Capital Deprec. Worker Shareholder Year
Year Outstanding Amount Per Share Expenditures Expense Members Members End
1999 11,292 $10,484 $0.93 $22,789 $25,267 3,791 1,866 1999
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 Per Diluted Year
End Capital Ratio Net Assets Debt Amount Share End
1999 $124,392 2.0 to 1 $124,122 $550,664 $139,000 $241,992 $21.43 1999
1998 119,506 1.9 to 1 130,052 563,435 175,685 220,102 19.34 1998
1997 124,827 2.5 to 1 110,948 348,110 17,717 210,614 18.27 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 14-21.
*Net earnings for 1993 is before cumulative effect of accounting
changes.
**Net earnings includes a reduction for the equity in loss of an
unconsolidated affiliate, net of tax, of $1,287 or $.11 per basic
and diluted share for 1999, $3,028 or $.27 per basic share and
$.26 per diluted share for 1998, and $6,209 or $.54 per basic and
diluted share for 1997.
36
[BOARD OF DIRECTORS PICTURES]
37
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
Woodward Governor 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
Woodward Governor Company
THOMAS W. HEENAN
Retired Partner
Chapman and Cutler law firm
J. PETER JEFFREY
Retired Vice President Development
Father Flanagan's Boys' Home
RODNEY O'NEAL
Vice President
Delphi Automotive Systems and
President
Delphi Interior Systems
LOU L. PAI
Chairman and Chief Executive Officer
Enron Energy Services
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
General Manager
Industrial Controls
North America
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, IL 61125-7001 U.S.A.
www.woodward.com
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
New York, NY
1-800-937-5449
Correspondence and transfer requests
should be sent to the following:
American Stock Transfer & Trust Company
Shareholder Services
40 Wall Street
New York, NY 10005 U.S.A.
SHAREHOLDER ACCOUNT ASSISTANCE
Shareholders who wish to change the address or ownership of
stock, report lost certificates, eliminate duplicate mailings or
for other account registration procedures and
assistance should contact the Transfer Agent
at the address or phone number above.
DIVIDEND REINVESTMENT PLAN AND DIRECT DEPOSIT OF DIVIDENDS
Woodward offers shareholders of record a
convenient Dividend Reinvestment Plan whereby dividends can be
automatically
reinvested in Woodward's common stock. The plan also provides for
a voluntary quarterly cash deposit option for the purchase of
additional stock.
For further information and authorization forms, contact the
Transfer Agent at the address or phone number above.
ANNUAL MEETING
January 18, 2000, at 10:00 A.M.
Woodward Auditorium
5001 North Second Street
Rockford, IL
ANNUAL REPORT ON FORM 10-K
Shareholders may obtain, without charge, a single copy of
Woodward's 1999 annual report on Securities and Exchange
Commission Form 10-K upon written request to the Corporate
Secretary, Woodward Governor Company,
Rockford, IL.
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.
38