-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QsXkxeqpihfKoohDIl2CKPMx1Jh+2w/1HAAz5zearVyNh5zNKwWoy4KWXR9GYEBl wR8/gVsO//f0eLVNuNDBew== 0000108312-97-000015.txt : 19971229 0000108312-97-000015.hdr.sgml : 19971229 ACCESSION NUMBER: 0000108312-97-000015 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971224 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WOODWARD GOVERNOR CO CENTRAL INDEX KEY: 0000108312 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL INDUSTRIAL APPARATUS [3620] IRS NUMBER: 361984010 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-08408 FILM NUMBER: 97744725 BUSINESS ADDRESS: STREET 1: 5001 N SECOND ST STREET 2: P O BOX 7001 CITY: ROCKFORD STATE: IL ZIP: 61125-7001 BUSINESS PHONE: 8158777441 10-K 1 10K FILE UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K { X } ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1997 Commission file #0-8408 OR { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 WOODWARD GOVERNOR COMPANY (Exact name of registrant as specified in its charter) Delaware 36-1984010 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5001 North Second Street, Rockford, Illinois 61125-7001 (Address of principal executive offices) Registrant's telephone number - (815) 877-7441 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $.00875 per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. { X } As of November 30, 1997, 11,449,875 shares of common stock with a par value of $.00875 per share were outstanding. The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $265,598,000 as of November 30, 1997(such aggregate market value does not include voting stock beneficially owned by directors, officers, the Woodward Governor Company Profit Sharing Trust or the Woodward Governor Company Charitable Trust). DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's annual report to shareholders for the fiscal year ended September 30, 1997 (1997 Annual Report), a copy of which is attached hereto, are incorporated by reference into Parts I, II and IV hereof, to the extent indicated herein. Portions of the registrant's proxy statement dated December 4, 1997, are incorporated by reference into Part III hereof, to the extent indicated herein. Part I Item 1. Business (a)General Description of Business Woodward Governor Company (the Company), established in 1870, designs and manufactures hydromechanical and electronic fuel controls and fuel-delivery systems, subsystems and components. These products are supplied to original equipment manufacturers and operators of diesel engines, steam turbines, industrial and aircraft gas turbines, and hydraulic turbines. In addition to original equipment products, the Company also provides aftermarket parts and service through a worldwide network including distributors, dealers, and authorized independent service facilities. There have been no material changes in the mode of conducting the business during the last five years. (b)Industry Segments Information with respect to business segments is set forth in Note N to the consolidated financial statements on Page 31 of the registrant's 1997 Annual Report and is hereby incorporated by reference. (c)(1) Narrative Description of Business (i) Information with respect to business segments is set forth in Note N to the consolidated financial statements on Page 31 of the registrant's 1997 Annual Report and is hereby incorporated by reference. (ii) In October 1996, the Company and Catalytica Combustion Systems, Inc. (CCSI), a subsidiary of Catalytica, Inc., formed GENXON(tm) Power Systems, LLC, a 50/50 joint venture. This venture combines the Company's proprietary fuel metering control technology with CCSI's unique XONON(tm)catalytic combustion technology to offer a highly competitive, ultra-low NOx emission control system. This system is expected to be offered as a retrofit on installed, out-of-warranty industrial gas turbines. For further information related to the impact of this joint venture on the registrant's consolidated net earnings, see Note B of the consolidated financial statements included in the registrant's 1997 Annual Report, and incorporated by reference as noted in Item 14. Pursuant to Rule 3-09 of Regulation S-X, separate financial statements of the joint venture are included herein as noted in Item 14. See also pages 13 through 15 of the "Financial Summary and Analysis" in the registrant's 1997 Annual Report with respect to forward-looking statements and a summary of the joint venture's achievements during its first year of operation. While the joint venture is expected to have initial market sales in fiscal 1998, additional funding of on -going product development will be necessary. The Company remains committed to the joint venture and will assess future capital funding needs as necessary. Despite optimism about the unique technology and opportunities the joint venture brings to the marketplace, there can be no assurance the joint venture will be successful in marketing and producing commercial quantities of this new emission control system. Furthermore, there can be no assurance the system will be accepted by the marketplace and be economically attractive. The success of this joint venture may also be partially dependent upon certain competitive and economic factors, as well as the regulatory environment. (iii) Many of the Company's products are machined from cast iron, cast aluminum and bar steel. Many of the Company's machined products are produced by contractors. In addition to the machined parts, electrical components are also purchased. There are numerous sources for most of the raw materials and components used by the Company in its operations, and they are believed to be in adequate supply. Certain control systems also utilize software or purchased electromagnetic products as their core technology. (iv) The Company has pursued a policy of applying for patents in both the United States and certain other countries on inventions made in the course of its development work. The Company regards its patents collectively as important, but does not consider its business dependent upon any one of such patents. (v) The Company's business is not subject to significant seasonal variation. (vi) The Company maintains inventory levels sufficient to meet customer demands. The Company's working capital requirements are not materially affected by return policies or extended credit terms provided to customers. (vii) One customer, General Electric Company, accounted for approximately 17% of consolidated sales during the fiscal year ended September 30, 1997. Seven other customers in total accounted for approximately 17% of consolidated sales in the fiscal year ended September 30, 1997. Sales to these customers involve several autonomous divisions and agencies. Products are supplied on the basis of individual purchase orders and contracts. There are no other material relationships between the Company and such customers. (viii) The Company's management believes that unfilled orders are not necessarily an indicator of future shipment levels. As customers demand shorter lead times and flexibility in delivery schedules, they have also revised their purchasing practices. As a result, notification of firm orders may occur only within thirty to sixty days of delivery. Consequently, the backlog of unfilled orders at fiscal year-end cannot be relied upon as a valid indication of sales or profitability in a subsequent year. Unfilled orders at September 30, 1997 totaled $152,034,000, a 30% decline from $218,020,000 as of September 30, 1996. This decline was primarily caused by changes in customers' purchasing practices and is not necessarily an indicator of future sales levels, as noted above. Of the September 30, 1997 total, $124,673,000 is currently scheduled for delivery in fiscal year 1998. (ix) The Company does business with various U.S. government agencies, principally in the defense area, as both a prime contractor and a subcontractor. Substantially all contracts are firm fixed price and may require cost data to be submitted in connection with contract negotiations. The contracts are subject to government audit and review. It is anticipated that adjustments, if any, with respect to determination of reimbursable costs, will not have a material effect on the Company's financial condition. Substantially all of the Company's business, including both commercial and government contracts, is subject to cancellation by the customer. The military portion of all shipments has declined from approximately 10 percent of total company shipments in fiscal 1996 to 9.3 percent in fiscal 1997. Military shipments are principally made by the Company's Aircraft Controls group. (x) The Company competes with several other manufacturers, including divisions of large diversified and integrated manufacturers. The Company also competes with other divisions of its major customers. Although competition has increased worldwide, the Company believes it maintains a significant competitive position within its line of business. The Company has several competitors in all product applications. Published information pertinent to the Company's product line and its competitors is not available in sufficient detail to permit an accurate assessment of its current relative competitive position. The principal methods of competition in the industry are price, product quality and customer service. In the opinion of management, the Company's prices are generally competitive and its product quality and customer service are favorable competitive factors. (xi) Information with respect to research and development is set forth in Note A to the consolidated financial statements on Page 24 of the registrant's 1997 Annual Report and is hereby incorporated by reference. The Company's products, whether proposed by the Company or requested by a customer, are offered for sale as proprietary designs and products of the Company. Consequently, all activities associated with basic research, the development of new products and the refinement of existing products are Company-sponsored. See also (c)(ii) of this section for information relative to development efforts by the Company's GENXON(tm) Power Systems, LLC joint venture. (xii) Compliance with provisions regulating the discharge of materials into the environment has caused and will continue to require capital expenditures. The Company is involved in certain environmental matters, in several of which it has been designated a "de minimis potentially responsible party" with respect to the cost of investigation and cleanup of third-party sites. The Company's current accrual for these matters is based on costs incurred to date that have been allocated to the Company and its estimate of the most likely future investigation and cleanup costs. There is, as in the case of most environmental litigation, the theoretical possibility of joint and several liability being imposed upon the Company for damages which may be awarded. It is the opinion of management, after consultation with legal counsel, that additional liabilities, if any, resulting from these matters are not expected to have a material adverse effect on the financial condition of the Company, although such matters could have a material effect on quarterly or annual operating results and cash flows when (or if) resolved in a future period. (xiii) Information with respect to the number of persons employed by the Company is set forth in the "Summary of Operations/Ten Year Record" on Page 35 of the registrant's 1997 Annual Report and is hereby incorporated by reference. As of November 30, 1997, 3,271 members were employed by the Company. (d) Company Operations Information with respect to operations in the United States and other countries is set forth in Note N to the consolidated financial statements on Page 31 of the registrant's 1997 Annual Report and is hereby incorporated by reference. Management is of the opinion there are no unusual risks attendant to the conduct of its operations in other countries. Executive Officers of the Registrant John A. Halbrook, age 52, is chairman and chief executive officer of the Company and was elected to this position in January 1995. He was elected chief executive officer in November 1993 and served as president from November 1991 until January 1995. He also served as chief operating officer from November 1991 until November 1993. Stephen P. Carter, age 46, is vice president, chief financial officer and treasurer of the Company and was elected to this position in January 1997. He was elected vice president and treasurer in September 1996 and was previously assistant treasurer since 1994. He has been employed by the Company in management positions for the last five years. Charles F. Kovac, age 41, was elected vice president of the Company and general manager of the Industrial Controls group in August 1996. He has been employed in management positions for the last five years. Gary D. Larrew, age 47, was elected vice president of the Company and manager of Business Development in June 1997. He has been employed by the Company in management positions for the last five years. C. Phillip Turner, age 57, is a vice president of the Company and general manager of the Aircraft Controls group. He was elected vice president in 1988. Carol J. Manning, age 48, was elected secretary of the Company in June 1991. All of the executive officers, unless otherwise noted, were elected to their present positions at the January 8, 1997 Board of Directors' meeting to serve until the organizational meeting of the Board of Directors to be held on January 14, 1998 or until their respective successors shall have been elected and qualified. Item 2. Properties The registrant owns five plants located in the United States. Aircraft controls and related components are manufactured in Rockford and Rockton, Illinois plants and the Buffalo, New York plant. Activities related to overhaul and repair of aircraft controls and sales of spare parts take place in the Rockton, Illinois facility. Industrial controls are manufactured in the Fort Collins and Loveland, Colorado plants. Corporate offices are maintained at the Rockford, Illinois facility. The registrant also has eleven facilities located overseas, that are predominantly utilized for manufacturing and servicing of industrial control systems, components and related products. Overseas manufacturing plants that are owned are located in Hoofddorp, The Netherlands and Tomisato, Chiba, Japan. The Company operates from leased plants in Reading, England; Rotterdam, The Netherlands; and Aken and Kelbra, Germany. Service shops are leased in Sydney, Australia; Kobe, Japan; Campinas, Sao Paulo, Brazil; Singapore; and Ballabgarh, Haryana, India. In addition, the Company plans to lease a facility in Prestwick, Scotland that will combine European aircraft product support services previously maintained in the Hoofddorp, The Netherlands and Reading, England facilities. Additional leased sales offices are maintained worldwide. The Company also owns a plant in Stevens Point, Wisconsin that was closed in 1995. A portion of the plant is being leased to a Woodward supplier. This facility is currently listed for sale. Management considers all facilities to be in excellent condition and all plants to have adequate production capacity available to satisfy the Company's customers' needs throughout the coming year. Item 3. Legal Proceedings The Company is currently involved in matters of litigation arising from the normal course of business, including certain environmental and product liability matters. For a further discussion of these issues refer to Note L to the consol- idated financial statements on page 30 of the registrant's 1997 Annual Report which is hereby incorporated by reference. Item 4. Submission of Matters to a Vote of Shareholders There were no matters submitted during the fourth quarter of the year ended September 30, 1997 to a vote of shareholders, through the solicitation of proxies or otherwise. Part II Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters Information with respect to common stock price ranges and dividends is set forth on Pages 34 and 35 of the registrant's 1997 Annual Report and is hereby incorporated by reference. The Company's common stock is listed on the Nasdaq National Market and as of September 30, 1997, there were approximately 2,000 holders of record. Item 6. Selected Financial Data Information with respect to this matter is set forth in the "Summary of Operations/Ten Year Record" on Page 35 of the registrant's 1997 Annual Report and is hereby incorporated by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations is set forth in the "Financial Summary and Analysis" on Pages 13 through 18 of the registrant's 1997 Annual Report and is hereby incorporated by reference. Information with respect to forward-looking statements is set forth in the Introduction section of the "Financial Summary and and Analysis" on page 13 of the registrant's 1997 Annual Report and is hereby incorporated by reference. Item 8. Financial Statements and Supplementary Data The Company's Consolidated Financial Statements, the Notes thereto and the Report of Independent Accountants, as required hereunder, are set forth on Pages 20 through 34, inclusive, of the 1997 Annual Report, and are incorporated herein by reference as set forth in Item 14 of this document and filed as Exhibit 13 to this Form 10-K. The Company's Financial Statement Schedule and related Report of Independent Accountants, as required hereunder, is further set forth in Item 14 of this document and is hereby incorporated by reference. Separate Financial Statements and Report of Independent Accountants of Genxon(tm) Power Systems, L.L.C., the Company's fifty percent-owned joint venture, which is not consolidated, is further set forth in Item 14 of this document and is hereby incorporated by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The accounting firm of Coopers & Lybrand L.L.P. has been engaged as independent accountants since 1940. There have been no disagreements on any matter of accounting principles or practices or financial statement disclosure. Part III Item 10. Directors and Executive Officers of the Registrant Information with respect to directors and executive officers, except for information which appears in Part I of this document, is set forth in the registrant's proxy statement dated December 4, 1997, which was filed with the Securities and Exchange Commission within 120 days following the end of the registrant's fiscal year ended September 30, 1997, and is made a part hereof. Item 11. Executive Compensation Information with respect to executive compensation is set forth under the caption "Executive Compensation" on Pages 9 through 12 of the registrant's proxy statement dated December 4, 1997, which is made a part hereof. Item 12. Security Ownership of Certain Beneficial Owners and Management Information with respect to security ownership of certain beneficial owners and management is set forth under the captions "Security Ownership of Principal Holders and Executive Officers" and "Election of Directors" on Pages 6 through 8 of the registrant's proxy statement dated December 4, 1997, which is made a part hereof. Item 13. Certain Relationships and Related Transactions Information with respect to certain relationships and related transactions is set forth under the caption "Compen- sation Committee Interlocks and Insider Participation" on Page 12 of the registrant's proxy statement dated December 4, 1997, which is made a part hereof. Part IV Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K (a) Index to Consolidated Financial Statements and Schedule Reference Form 10-K Annual Report Annual Report to Shareholders Page Page Incorporated by reference to the registrant's annual report to shareholders for the fiscal year ended September 30, 1997 and filed as Exhibit 13 to this Form 10-K: Statements of Consolidated Earnings for the years ended September 30, 1997, 1996 and 1995 20 Consolidated Balance Sheets at September 30, 1997 and 1996 21 Statements of Consolidated Shareholders' Equity for the years ended September 30, 1997, 1996 and 1995 22 Statements of Consolidated Cash Flows for the years ended September 30, 1997, 1996 and 1995 23 Notes to Consolidated Financial Statements 24-31 Report of Independent Accountants 33 Selected Quarterly Financial Data 34 Included herein: Separate Financial Statement of Subsidiaries Not Consolidated and Fifty Percent-or-Less- Owned Persons: GENXON(tm) Power Systems, L.L.C. Financial Statements and Report of Independent Accountants for the period from October 21, 1996 (date of inception) to September 30, 1997 S-1 - S-11 Financial Statement Schedule: Report of Independent Accountants S-12 II. Valuation and Qualifying Accounts S-13 Financial statements and schedules other than those listed above are omitted for the reason that they are not applicable, are not required, or the information is included in the financial statements or the footnotes therein. Item 14 (Con't) Exhibits, Financial Statement Schedule, and Reports on Form 8-K (continued) (b)There were no reports filed on Form 8-K during the fourth quarter of the fiscal year ended September 30, 1997. (c)The following exhibits are filed as part of this report: (3) Articles of incorporation Articles of incorporation are and by-laws set forth in the exhibits filed with Form 10-K for the fiscal year ended September 30, 1977 and are hereby incorporated by reference. Two amendments to the Articles of incorporation effective January 14, 1981 are set forth in the exhibits filed with Form 10-K for the fiscal year ended September 30, 1981 and are hereby incorporated by reference. Two amendments to the Articles of incorporation effective January 11, 1984 are set forth in exhibits filed with Form 10-K for the fiscal year ended September 30, 1984 and are hereby incorporated by reference. One amendment to the Articles of incorporation effective January 13, 1988 is set forth in exhibits filed with Form 10-K for the fiscal year ended September 30, 1988 and is hereby incorporated by reference. One amendment to the Articles of incorporation effective January 23, 1997 is filed herewith. By-laws as amended through September 30, 1992 together with three amendments to the by-laws effective November 16, 1993 are set forth in exhibits filed with Form 10-K for the fiscal year ended September 30, 1993 and are hereby incorporated by reference. Item 14 (Con't) Exhibits, Financial Statement Schedule, and Reports on Form 8-K (continued) (3) Articles of incorporation One amendment to the by-laws and by-laws (continued) effective June 22, 1994 is set forth in exhibits filed with Form 10-K for the fiscal year ended September 30, 1994 and is hereby incorporated by reference. Three amendments to the by- laws effective January 11, 1995, March 29, 1995 and June 28, 1995 are set forth in exhibits filed with Form 10-K for the fiscal year ended September 30, 1995 and are hereby incorporated by reference. Two amendments to the by-laws effective January 15, 1996 and January 23, 1996 are set forth in exhibits filed with Form 10-K for the fiscal year ended September 30, 1996 and are hereby incorporated by reference. One amendment to the by-laws effective June 25, 1997 is filed herewith. (4) Instruments defining the Instruments with respect to rights of security holders, long-term debt and the ESOP including indentures debt guarantee are not being filed as they do not individually exceed 10 percent of the registrant's assets. The registrant agrees to furnish a copy of each such instrument to the Commission upon request. (11) Statement re computation Filed as an exhibit hereto. of per share earnings (13) Annual report to Except to the extent shareholders for the specifically incorporated fiscal year ended herein by reference, said September 30, 1997 report is furnished solely for the information of the Commission and is not deemed "filed" as part of this report. (21) Subsidiaries of the Filed as an exhibit hereto. registrant (23) Consent of Independent Filed as an exhibit hereto. Accountants (27) Financial data schedule Filed as an exhibit hereto. (99) Additional exhibit - description Filed as an exhibit hereto. of annual report graphs SIGNATURES This report has been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and the financial statements referenced herein have been prepared in accord- ance with such rules and regulations and with generally accepted accounting principles, by officers and worker members of Woodward Governor Company. This has been done under the general supervision of Stephen P. Carter, vice president, chief financial officer and treasurer. The consolidated financial statements have been audited by Coopers & Lybrand L.L.P., independent accountants, as indicated in their report in the annual report to shareholders for the fiscal year ended September 30, 1997. This report contains much detailed information of which the various signatories cannot and do not have independent personal knowledge. The signatories believe, however, that the preparation and review processes summarized above are such as to afford reasonable assurance of compliance with applicable requirements. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WOODWARD GOVERNOR COMPANY /s/ John A. Halbrook Director, Chairman of John A. Halbrook the Board and Chief Executive Officer /s/ Stephen P. Carter Vice President, Chief Stephen P. Carter Financial Officer and Treasurer Date 12/18/97 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date /s/ J. Grant Beadle Director J. Grant Beadle /s/ Carl J. Dargene Director December 18, 1997 Carl J. Dargene /s/ Lawrence E. Gloyd Director December 18, 1997 Lawrence E. Gloyd /s/ Thomas W. Heenan Director Thomas W. Heenan /s/ J. Peter Jeffrey Director J. Peter Jeffrey /s/ Vern H. Cassens Director December 18, 1997 Vern H. Cassens /s/ Michael T. Yonker Director December 18, 1997 Michael T. Yonker NOTE: THE FOLLOWING FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT ACCOUNTANTS OF THE REGISTRANT'S FIFTY PERCENT-OWNED JOINT VENTURE, WHICH IS NOT CONSOLI- DATED, IS REQUIRED TO BE FILED AS PART OF THIS FORM 10-K IN ACCORDANCE WITH REGULATION S-X, RULE 3-09. GENXON POWER SYSTEMS, L.L.C. (a Delaware limited liability company) FINANCIAL STATEMENTS for the period from October 21, 1996 (date of inception) to September 30, 1997 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Managers and Members GENXON Power Systems, L.L.C.: We have audited the accompanying balance sheet of GENXON Power Systems, L.L.C. (a Delaware limited liability company) as of September 30, 1997, and the related statements of operations, members' capital and cash flows for the period from October 21, 1996 (date of inception) to September 30, 1997. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GENXON Power Systems, L.L.C. as of September 30, 1997, and the results of its operations and its cash flows for the period from October 21, 1996 (date of inception) to September 30, 1997 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Coopers & Lybrand L.L.P. San Jose, California October 17, 1997 GENXON POWER SYSTEMS, L.L.C. (a Delaware limited liability company) BALANCE SHEET, September 30, 1997
ASSETS Current assests: Cash and cash equivalents $ 54,366 Inventory 233,977 Prepaid expenses 358,482 Total current assets 646,825 Property and equipment 557,362 Total assets $1,204,187 LIABILITIES AND MEMBERS'CAPITAL Current liabilities: Payable to Woodward Governor Company $ 89,483 Payable to Catalytic Combustion Systems, Inc. 315,580 Accounts payable 1,852,014 Accrued liabilities 433,261 Total current liabilities 2,690,338 Commitments and contingencies (Note 3) Members' capital (1,486,151) Total liabilities and members' capital $1,204,187 The accompanying notes are an integral part of these financial statements.
GENXON POWER SYSTEMS, L.L.C. (a Delaware limited liability company) STATEMENT OF OPERATIONS for the period from October 21, 1996 (date of inception) to September 30, 1997
Revenues: Research contract $ 268,000 Operating expenses: Research and development 8,656,442 Selling, general and administrative expenses 2,147,797 10,804,239 Loss from operations (10,536,239) Other income (expense): Interest income, net 50,088 Net loss $(10,486,151) The accompanying notes are an integral part of these financial statements.
GENXON POWER SYSTEMS, L.L.C. (a Delaware limited liability company) STATEMENT OF MEMBERS' CAPITAL for the period from October 21, 1996 (date of inception) to September 30, 1997
Woodward Catalytica Governor Combustion Company Systems, Inc. Total Capital contributions $ 7,100,000 $ 1,900,000 $ 9,000,000 Net loss (8,243,076) (2,243,075) (10,486,151) Members' capital, September 30, 1997 $(1,143,076) $ (343,075) $(1,486,151) The accompanying notes are an integral part of these financial statements.
GENXON POWER SYSTEMS, L.L.C. (a Delaware limited liability company) STATEMENT OF CASH FLOWS for the period from October 21, 1996 (date of inception) to September 30, 1997
Cash flows from operating activities: Net loss $(10,486,151) Adjustments to reconcile net loss to net cash used in operating activities: Changes in assets and liabilities: Inventory (233,977) Prepaid expenses (358,482) Payable to members 405,063 Accounts payable 1,852,014 Accrued liabilities 433,261 Net cash used in operating activities (8,388,272) Cash flows from investing activities: Acquisition of property and equipment (557,362) Cash flows from financing activities: Members' capital contributions 9,000,000 Net increase in cash and cash equivalents 54,366 Cash and cash equivalents, beginning of period - Cash and cash equivalents, end of period $ 54,366 The accompanying notes are an integral part of these financial statements. GENXON POWER SYSTEMS, L.L.C. (a Delaware limited liability company) NOTES TO FINANCIAL STATEMENTS 1.Formation and Business of the Company: GENXON Power Systems, L.L.C. (the Company), a Delaware limited liability company, was formed on October 21, 1996 to develop and sell products and services to a wide range of users of out-of- warranty gas turbines which require reductions in emissions, overhaul or upgrade. Except as provided for in the Limited Liability Operating Agreement, the existence of the Company will be perpetual. Investor members in GENXON Power Systems, L.L.C. received a percent- age interest in the Company based on the amount of cash and the agreed-upon fair value of certain technology licenses contributed to the Company. There were two initial investor members, each receiving a 50 percent interest in the Company. Their initial capital commitments were as follows:
Cash Technology Commitment Licenses Total Catalytica Combusions Systems, Inc. (Catalytica) $2,000,000 $8,000,000 $10,000,000 Woodward Governor Company (Woodward) $8,000,000 $2,000,000 $10,000,000
At September 30, 1997, each member had contributed its agreed-upon technology licenses and cash in the total amount of $9 million. Subsequent to year-end, the members contributed the balance of their initial cash commitment and an additional $1,200,000 in cash. Additional future cash contributions will be at the discretion of each of the members, but will generally be in proportion to their respective percentage interests in the Company and will be governed by the terms of the Operating Agreement. For financial statement purposes only, the fair value of the technology licenses has not been recorded. 1. Formation and Business of the Company, continued: The Operating Agreement generally provides that profits and losses in any fiscal year, or other applicable period, shall be allocated to each member in proportion to their respective percentage interest. In the event that a member's cumulative capital account, including the fair value of the technology licenses contributed, is reduced to zero, losses will be reallocated to members having positive capital account balances until all members' capital accounts have been reduced to zero. Thereafter, losses will again be allocated to the members based on their respective percentage interests. Such "reallocated" losses shall first be restored by an allocation of profits before any additional profits are allocated to the members. Under the terms of the Operating Agreement, the Company is required to make cash distributions to each member in the amount of the estimated tax liability for the net taxable income and gains allocated to such member during the fiscal year. Any additional distributions of cash or property will be at the discretion of the Board of Managers as provided for in the Operating Agreement. At September 30, 1997, cumulative capital account balances determined in accordance with the Operating Agreement are as follows:
Catalytica Woodward Total Cash contributed $1,900,000 $7,100,000 $ 9,000,000 Technology licenses contributed 8,000,000 2,000,000 10,000,000 Allocation of net loss (5,243,075) (5,243,076) (10,486,151) Capital account balances $4,656,925 $3,856,924 $ 8,513,849
2. Summary of Significant Accounting Policies: Basis of Presentation: The Company's financial statements have been prepared on a basis of accounting assuming that it is a going concern, which contemplates realization of assets and satisfaction of liabilities in the normal course of business. The Company has reported a net loss for the period from October 21, 1996 (date of inception) to September 30, 1997 in the amount of $10,486,151. Management plans to obtain additional capital contributions from its members or other additional investors to meet its current and ongoing obligations. Continued existence of the Company is dependent on the Company's ability to ensure the availability of adequate funding and the establishment of profitable operations. The financial statements do not include adjustments that might result from the outcome of this uncertainty. 2. Summary of Significant Accounting Policies, continued: Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents: The Company considers all highly liquid investments purchased with original or remaining maturities of three months or less at the date of purchase to be cash equivalents. Substantially all of the Company's excess cash is invested in money market accounts with a major investment company. Fair Value of Financial Instruments: Carrying amounts of certain of the Company's financial instruments, including cash and cash equivalents, accounts payable and other accrued liabilities approximate fair value due to their short maturities. Inventory: Inventory, consisting of purchased and manufactured parts to be used in the overhaul and upgrade of gas turbine engines, is stated at the lower of cost or market. Property and Equipment: Property and equipment are stated at cost and will be depreciated using the straight-line method over their estimated useful lives, generally 3 to 10 years. Gains and losses from the disposal of property and equipment will be taken into income in the year of disposition. At September 30, 1997, property and equipment consists solely of tooling costs incurred in the construction of the Company's manufacturing equipment. As this equipment has not yet been completed or placed in service, no depreciation costs have been recorded. 2. Summary of Significant Accounting Policies, continued: Income Taxes: The financial statements include no provision for income taxes since the Company's income and losses are reported in the members' separate tax returns. Recent Accounting Pronouncements: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income. This statement establishes requirements for disclosure of comprehensive income and becomes effective for the Company for its fiscal year 1999, with reclass- ification of earlier financial statements for comparative purposes. Comprehensive income generally represents all changes in members' capital except those resulting from investments or contributions by members. The Company is evaluating alternative formats for presenting this information, but does not expect this pronouncement to materially impact the Company's results of operations. In June 1997, The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 (SFAS 131), Disclosures about Segments of an Enterprise and Related Informa- tion. This statement establishes standards for disclosure about operating segments in annual financial statements and selected information in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This statement supersedes Statement of Financial Accounting Standards No. 14, Financial Reporting for Segments of a Business Enterprise. The new standard becomes effective for the Company's fiscal year 1999, and requires that comparative information from earlier years be restated to conform to the requirements of this standard. The Company is evaluating the requirements of SFAS 131 and the effects, if any, on the Company's current reporting and disclosures. 3. Commitments and Contingencies: The Company entered into an exclusive agreement with Agilis Group, Inc. (Agilis) to provide assistance and advice in the development and design of the combustor and combustor related hardware for the Company's proprietary catalytic combustion technology. Under the terms of the agreement, Agilis has responsibility as to the details, methods, and means of performing its services. Subject to the Company's approval and on its behalf, Agilis may enter into purchase commitments and contracts with outside vendors to provide materials and services to complete the projects. At September 30, 1997, the Company has approximately $2.3 million in open purchase commitments through Agilis. The agreement will expire on the later of the completion of all services described in the agreement or December 31, 1999, unless extended in writing and agreed to by both parties. The Company has entered into a technical services agreement with the City of Glendale, California to retrofit an FT4 gas turbine engine which was provided by the City. Under the terms of the agreement, the retrofit will include adding the Company's proprietary combustion system and a digital control system for a total turnkey price of $700,000, and must be completed by December 1998. In the event that the Company is unable to complete the agreed upon retrofit on time or damages the engine in the process, the agreement requires the Company to return the engine to its original state or replace it with a similar engine, for which the Company has recorded a reserve of $134,000. 4. Related Party Transactions: The Company has entered into a services agreement with Catalytica and Woodward to provide the Company with management support, technical services support and administrative services. For the period from October 21, 1996 (date of inception) through September 30, 1997, the Company incurred general and administrative support costs from Catalytica in the amount of $1,355,308 and research and development costs totaling $3,450,077. For the same period, the Company incurred $65,192 of general and administrative support costs from Woodward and $513,487 for research and development services. The Company has also entered into supply agreements with both Catalytica and Woodward to supply combustion system products and control system products to be used by the Company in its business of retrofitting installed and operating gas turbine engines. REPORT OF INDEPENDENT ACCOUNTANTS Shareholders and Worker Members Woodward Governor Company Our report on the consolidated financial statements of Woodward Governor Company and Subsidiaries has been incorporated by reference in this Form 10-K from Page 33 of the 1997 Annual Report to Share- holders and Worker Members of Woodward Governor Company and Subsid- iaries. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on Page 11 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Chicago, Illinois November 8, 1997 WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES SCHEDULE II -VALUATION AND QUALIFYING ACCOUNTS for the years ended September 30, 1997, 1996 and 1995 (In thousands of dollars)
1997: Allowance for Doubtful accounts $2,755 $539 $136 $673 $2,757 1996: Allowance for Doubtful accounts $4,605 $937 $50 $2,837 $2,755 1995: Allowance for Doubtful accounts $3,021 $2,192 $32 $640 $4,605 NOTE: (A) Represents accounts written off during the year and also overseas currency translation adjustments that increased the deduction from reserves by $134 in 1997 and $99 in 1996 and decreased the deduction from reserves by $80 in 1995. Write-offs in 1996 were $1,864, with the remaining portion related to reduction of previously established reserves based on an overall assessment of accounts. (B) Recovery of accounts previously written-off.
EX-3 2 ARTICLES OF INCORP & BYLAWS CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF WOODWARD GOVERNOR COMPANY Pursuant to Section 242 of the General Corporation Law of the State of Delaware, WOODWARD GOVERNOR COMPANY, a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of the State of Delaware (hereinafter referred to as the "Corporation"), does hereby certify: (1) That the original Certificate of Incorporation of the Corporation was filed in the Office of the Secretary of State of Delaware on November 18, 1976. (2) That at the regular meeting of the Board of Directors of the Corporation held on November 19, 1996, resolutions were duly adopted settingforth a proposed amendment to the Certificate of Incorporation of the Corporation, declaring the amendment to be advisable, and directing that the proposed amendment be considered at the next annual meeting of the stockholders of the Corporation. (3) That the resolutions of the Board of Directors of the Corporation setting forth the proposed amendment to the Certificate of Incorporation of the Corporation are as follows: RESOLVED, that it is hereby declared advisable by the Board of Directors of the Corporation, that Article FOURTH of the Certificate of Incorporation of the Corporation be amended to read as follows: "FOURTH. The total number of shares of all classes of stock which the Corporation shall have authority to issue is 60,000,000, of which 50,000,000 shares shall be Common Stock with a par value of $0.00875 per share, and 10,000,000 shares shall be Preferred Stock with a par value of $0.003 per share. The Preferred Stock may be issued from time to time in one or more series, with each such series to consist of such number of shares and to have such voting powers (whether less than, equal to or greater than one vote per share), or limited voting powers or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors, and the Board of Directors is expressly vested with authority to the full extent now or hereafter provided by law, to adopt any such resolution or resolutions. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares then outstanding) by the affirmative vote of the holders of two-thirds of the outstanding shares of Common Stock without a vote of the holders of the shares of Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the resolution or resolutions of the Board of Directors providing for the issue of the series of Preferred Stock." RESOLVED FURTHER, that upon this amendment to the Certificate of Incorporation of the Corporation becoming effective pursuant to the provisions of the General Corporation Law of the State of Delaware, (a) The total number of shares of Common Stock which the Corporation is authorized to issue shall be changed from 7,000,000 shares of Common Stock with a par value of $0.0625 per share to 50,000,000 shares of Common Stock with a par value of $0.00875 per share; (b) Each issued share of Common Stock of the Corporation with a par value of $0.0625 per share (including shares held in the treasury of the Corporation) shall be changed into four issued shares of Common Stock of the Corporation with a par value of $0.00875 per share authorized by this amendment; (c) Each certificate representing issued shares of Common Stock of the Corporation with a par value of $0.0625 per share shall be deemed to represent the same number of shares of Common Stock of the Corporation with a par value of $0.00875 per share authorized by this amendment; and (d) Each holder of record of a certificate representing shares of Common Stock of the Corporation with a par value of $0.0625 per share shall be entitled to receive as soon as practicable without surrender of such certificate a certificate representing three additional shares of common Stock of the Corporation of the par value of $0.00875 per share authorized by this amendment for each share of Common Stock represented by the certificate of such holder immediately prior to this amendment becoming effective. RESOLVED FURTHER, that the above and foregoing proposed amendment to the Certificate of Incorporation of the Corporation shall not result in any change in the capital of the Corporation as determined pursuant to the General Corporation Law of the State of Delaware. RESOLVED FURTHER, that the above and foregoing proposed amendment to the Certificate of Incorporation of the Corporation shall not result in any change in the paid-in capital of the Corporation as determined pursuant to the Illinois Business Corporation Act. (4) That thereafter, pursuant to the resolutions of the Board of Directors of the Corporation, the stock- holders of the Corporation at the annual meeting of the Corporation held on Wednesday, January 8, 1997, duly adopted said amendments by the affirmative vote of the holders of in excess of two-thirds of the outstanding shares of Common Stock of the Corporation entitled to vote thereon. (5) That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation law of the State of Delaware. (6) That said amendment to the Certificate of Incorporation shall become effective at the close of business on January 23, 1997, at 5:01 P.M. Eastern Standard Time. IN WITNESS WHEREOF, WOODWARD GOVERNOR COMPANY has caused this Certificate of Amendment to be executed by John A. Halbrook, its Chairman of the Board and Chief Executive Officer, and has caused its corporate seal to be hereunto affixed and attested by Carol J. Manning, its Secretary, this 8th day of January, 1997. WOODWARD GOVERNOR COMPANY By________________________________ John A. Halbrook Chairman of the Board and Chief Executive Officer (Corporate Seal) Attest: ________________________________ Carol J. Manning, Secretary WOODWARD GOVERNOR COMPANY BOARD OF DIRECTORS RESOLUTION TO INCORPORATE THE COMPANY'S DIRECTOR SHARE OWNERSHIP GUIDELINE RESOLVED, that Section 3.4 of the Bylaws of the Corporation is hereby amended and restated in its entirety to read as follows: SECTION 3.4. QUALIFICATIONS. Unless otherwise determined by the Board of Directors, the term of any director shall end on September 30th next following said director's seventieth birthday. No person may serve as a director unless such person agrees in writing that in connection with such service he or she will be guided by the philosophy and concepts of human and industrial association of the corporation as expressed in its Constitution. EX-13 3 ANNUAL REPORT CONTENTS To All Shareholder and Worker Members 2 Woodward - - A Worldwide Operation 6 Financial Summary and Analysis 13 Financial Statements 19 Summary of Operations/Ten Year Record 35 Board of Directors 36 BUSINESS DESCRIPTION Founded in 1870, Woodward Governor Company built for decades reliable governors for the water power industry. Today, our products include hydro- mechanical and electronic controls, fuel-delivery systems, actuators, valves, and related components. We focus on introducing new products and services to serve customers worldwide. We manufacture, sell, or support products from thirty-two company locations in seventeen countries. We also have distribu- tors, dealers, and authorized independent service facilities throughout the world. Our Aircraft Controls group, one of the largest independent suppliers of aircraft fuel controls, supplies engine and airframe manufacturers and civilian and military aircraft operators with up-to-date products and services. With years of lessons learned, our engineers are expert at develop- ing control products to meet a customer's precise needs. Our products are used on many of the world's most popular engine platforms. Our Industrial Controls group supplies reliable, cost-effective controls, control system components, and fully integrated systems to manufacturers and operators of turbines and engines. The group provides original equipment products and aftermarket parts and service to the power generation, process manufacturing, marine, locomotive, off-road vehicle, and gas transmission industries. The on-going need for more efficient turbine and engine operation has opened new doors for our products. In addition, the quest for clean power and the deregulation of the sale of electricity represent potential growth opportunities. FINANCIAL HIGHLIGHTS
Fiscal year ended September 30th 1997 1996 1995 (in thousands of dollars except per share amounts and other data) Operating Results Net billings for products and services $442,216 $417,290 $379,736 Total costs and expenses 402,528 382,109 359,553* Net earnings 18,140** 22,178 11,936 Per share 1.58*** 1.92 1.03 Cash dividends per share .93 .93 .93 Year-end Financial Position Working capital 124,827 121,103 116,364 Total assets 348,110 348,798 349,599 Long-term debt 17,717 22,696 27,796 Shareholders' equity 210,614 207,995 197,903 Other Data Shareholder's equity per share $ 18.40 $ 18.01 $ 17.05 Worker members 3,246 3,211 3,071 Registered shareholder members 1,994 2,029 2,179 * Total costs and expenses includes restructuring expense of $5,927 for 1995. ** Net earnings for 1997 includes a reduction for the equity in loss of an unconsolidated affiliate of $6,209 or $.54 per share, net of tax. Without this item, net earnings would have been $24,349 or $2.12 per share.
TO ALL SHAREHOLDER AND WORKER MEMBERS With great pleasure, I can say that Woodward intensified its focus on total customer satisfaction and higher operating efficiency in fiscal 1997. We made further progress towards our primary objective of long-term growth in revenues and profits. In addition, we launched a new joint venture with Catalytica Combustion Systems, Inc. to capitalize on the expanding need for low emission gas turbines. This venture, GENXON(tm) Power Systems, LLC, offers new emission control technology and, during the year, attained a number of key milestones. Our total net billings for fiscal 1997 rose 6 percent to $442.2 million from last year's $417.3 million. Costs and expenses as a percentage of revenues were slightly lower, reflecting programs to boost productivity, quality, and margins. As a result, before the effect of GENXON, pre-tax earnings increased 13 percent to $39.7 million from $35.2 million in 1996 and after-tax earnings rose 10 percent to $24.3 million, or $2.12 per share, from $22.2 million, or $1.92 per share. Including our portion of GENXON's net loss ($6.2 million, or $0.54 per share), net earnings were $18.1 million, or $1.58 per share. Our Industrial Controls group increased net billings by 5 percent over the prior year despite the dampening effect of the dollar's strength. Engineered systems, engine controls in Europe, and aftermarket products and services were the leading contributors to the growth. Aircraft Controls' net billings were up 8 percent from last year, reflecting strong global aircraft production schedules and healthy demand for aftermarket products and services from our growing installed base of equipment. Progress was evident on the cost side, despite investments in training, quality, and process improvement programs, which generate returns over a longer time frame. In Industrial Controls, we combined Turbomachinery and Engine controls units in Colorado and centralized many functions that previously had been handled by individual plants. These changes enabled us to better focus our resources on growing more profitable market segments, while reducing costs. In Aircraft Controls, during fiscal 1997, we made plans to consolidate our increasing aftermarket business in a leased facility in Prestwick, Scotland. Beginning early in the new fiscal year, Prestwick will serve our customers in Europe and the Middle East, previously served primarily from separate locations in England and the Netherlands. The new facility will enable us to provide better service and faster turnaround time at lower cost, and will free up needed capacity in the Netherlands plant. Our Rockton, Illinois, aftermarket facility continues to serve customers throughout the rest of the world. Our plan for long-term growth and building shareholder value is centered on the following objectives which will help us reach our strategic goals: To become an increasingly important partner and supplier to our customers by consistently meeting or exceeding their expectations for product performance and quality, on-time delivery, cost, and service; To increase profitability from our existing revenue base by continuously improving efficiency in all phases of operations; To develop new sources of revenue by applying our know-how to products and services which complement or extend our core business; To develop and intensify our presence in selected geographic markets with promising growth potential; and To apply our expertise, intellectual property, and financial resources to closely related businesses which we can develop internally, acquire, or pursue through joint ventures and alliances. Company-wide, we intensified and expanded programs for continuous improvement during fiscal 1997. We continue to encourage member involvement in all work processes, in the further compression of cycle times, and in systematic cost reduction efforts. Already we observe progress in customer satisfaction, increased output, reduced waste, and higher profitability. We view the training and other costs associated with these programs as strategic investments, which will generate excellent returns in the form of total customer satisfaction, continued market leadership, and member development. Both our operating groups are executing the general strategies and member development programs noted above, but each has its own growth plan tailored to its own market opportunities. Aircraft Controls, in addition to its ongoing pursuit of new engine and re-engineering programs, has been moving beyond its core fuel metering products, which are among the most critical and complex building blocks of the engine. We also are focusing on the design and supply of associated engine fuel-delivery systems and components. The fuel system of the BMW Rolls-Royce BR700 family of engines, for example, contains not only our fuel metering unit, but six additional Woodward products. This strategy accommodates preferences for fewer suppliers and closely integrated components; it builds on our customer relationships and our reputation for reliable, innovative products. In another Aircraft Controls growth opportunity, we set detailed plans during the year to implement our previously announced alliance with Lockheed Martin Control Systems, a leading manufacturer of electronic control systems. A new limited liability company is expected to be finalized by the end of calendar 1997. This venture will combine Lockheed Martin's electronics and Woodward's hydromechanics, enabling both parties to focus on their strengths, and provide customers with fully integrated systems from a single supplier. Infrastructure development, primarily in power, transportation, and industrial process equipment, is a key growth opportunity for Industrial Controls. Developing economies in the Pacific Rim countries and Latin America represent the largest markets for new infrastructure projects. In developed economies, we see opportunities for the retrofit of installed turbines, and demand for new equipment based on more efficient technologies and increasingly stringent emissions requirements. Industrial Controls is focusing on these markets, with the objective of supplying a wider scope of the fuel system for engine and turbine manufacturers and packagers. We view GENXON as an investment in a leading technology which, once commercialized, will increase the market for our existing turbine products and services. This venture combines our proven control technologies with Catalytica's unique XONON(tm) catalytic combustion technology, providing an ultra-low NOx emission system that will be offered as a retrofit on out-of- warranty gas turbines. During fiscal 1997, GENXON met some significant milestones including the signing of a memorandum of understanding with General Electric Company for the worldwide commercialization of XONON systems in installed, GE-designed gas turbines. In response to the positive reaction from the marketplace, GENXON accelerated its development activities, which added to its expenditures. Exploration of acquisitions, joint ventures, and alliances is an integral part of our growth plans. Although we made no significant acquisitions in fiscal 1997, we explored a number of possibilities and plan to continue our search in fiscal 1998. Acquisition candidates will have the potential to broaden our base of products and technology and to improve our growth prospects. In addition, we are seeking acquisitions which will be non- dilutive, or additive, to our earnings per share performance. Our balance sheet remained strong at year-end, with long-term debt accounting for less than 8 percent of total capital. We also made progress in the management of inventory levels, which declined almost 10 percent from the previous year-end totals. In January 1997, Woodward shares began trading on the Nasdaq National Market system. Benefits of the Nasdaq listing include exposure to a broader universe of potential shareholders and the liquidity provided by Nasdaq market-makers. We also split Woodward stock four-for-one. The Board of Directors maintained our annual dividend payments (adjusted for the split) at $0.93 per share. We owe a debt of gratitude to all our stakeholders. Therefore, I thank our customers, members, and shareholders for their support, and our Board of Directors for their guidance. Mark Leum, who retired from our Board at fiscal year-end, deserves special acknowledgment for his leadership and many contributions, which spanned more than 40 years with the company, and included positions as vice chairman and president. In addition, Vern Cassens retired as our senior vice president and chief financial officer in January and continues to serve as a member of the Board. Upon Vern's retirement, the Board named Steve Carter, vice president and treasurer, as our chief financial officer. While 1997 continued to be filled with challenges, we move forward into 1998 with confidence. Our focus is on the future and our goal is to align and involve all members in achieving success. John A. Halbrook Chairman of the Board and Chief Executive Officer December 2, 1997 WOODWARD A Worldwide Operation Over 100 separate locations support Woodward Governor Company and its world- wide operations. These locations include company plants, offices, and agents, plus Central Distributors, Authorized Dealers, and Authorized Independent Service Facilities. WOODWARD USA LOCATIONS USA REGIONAL OFFICES Corporate Headquarters Birmingham, Alabama Rockford, Illinois Walnut Creek, California Aircraft Controls Group Rockford, Illinois Olympia Fields, Illinois Rockton, Illinois Buffalo, New York Norristown, Pennsylvania Industrial Controls Group Houston (Bellaire), Texas Fort Collins, Colorado Loveland, Colorado Bellevue, Washington WOODWARD LOCATIONS OUTSIDE USA Sydney (Kingsgrove), Australia Christchurch, New Zealand Campinas, Brazil Warsaw, Poland Pointe Claire, Quebec, Canada Prestwick, Scotland Beijing and Tianjin, China Singapore Reading, England Abu Dhabi, UAE Aken, Kelbra, and Tettnang Germany Ballabgarh, Haryana, India Tomisato and Kobe, Japan Pusan, Korea Mexico City, Mexico Hoofddorp and Rotterdam, The Netherlands AIRCRAFT CONTROLS Woodward's Aircraft Controls group (ACG) is a leader in the design, manufact- ure, and service of aircraft fuel systems and related components. Its principal market is control systems for fuel delivery, which, including products and services, generated approximately 80 percent of its revenues in fiscal 1997. Fuel delivery systems are considered to be the most complex system in the aircraft engine. At the heart of fuel delivery is the fuel metering system, ACG's main product group. Related components include sensors, valves, and actuators. Beyond fuel delivery systems, ACG also provides propeller control and synchronization and servo components. ACG's customers include engine and airframe manufacturers, airlines, fleet managers, and the military. Providing superior quality, proven reliability, and responsive service for more than sixty years enabled ACG to establish strong customer relationships. To sustain and build those relationships, ACG's objectives are to deliver quality products at low cost for value received, consistently on or ahead of schedule. Productivity Improvements During the past several years, customers have asked suppliers to lower the cost of products and quicken response time, while maintaining the highest quality standards. In addition, customers sought the advantages of buying from fewer suppliers. These initiatives by customers to increase their own competitiveness represented opportunities for Woodward. As a result, the Woodward ACG: Broadened and intensified its training programs, Expanded the number of self-directed (Kaizen) teams devoted to improving operating performance, Accelerated implementation of Kaizen recommendations, and Continued to empower its members to meet customer expectations. Over the past two years, the ACG implemented changes recommended by more than thirty key Kaizen teams and then measured the impact on operations. The impressive results exceeded expectations, encouraging many members routinely to incorporate "continuous improvement" in their thinking. Growth Plans ACG's growth strategy focuses on: Developing and introducing new products related to fuel delivery systems, Moving beyond individual components towards integrated engine control systems, and Providing repair, overhaul, and replacement parts to a growing installed base of products. In addition to the relatively infrequent new engine launches, there are also opportunities for replacing, upgrading, and overhauling installed system components. New products may be developed internally, or through an acquisition or joint venture. This growth strategy allows ACG to offer customers an opportunity to buy functionally integrated products, which have been modeled and tested together, from one vendor. Actuators, a new product line readied for production and certification in 1997, exemplify Woodward's basic approach to new product design and manufacturing. In jet engines, fuel driven actuators are a critical component of the fuel system used to control compressor vanes and bleed valves. ACG designed standard actuator platforms with proven features and materials, which can then be modified to produce models designed for specific applications. Last year, Woodward engineers tested six actuators for more than 2,100 hours each, with each piston moving a total of 5.1 million inches. The test results were successful under conditions ranging from normal to extreme. ACG's actuators are made in a production cell responsible for manufacturing, assembling and testing, and committed to a 6-sigma level of quality. Through concentrating all of the activities in one cell at one location, ACG is working to increase quality and reduce lead times for all actuator products. By accelerating the development process and increasing manufacturing efficiency, Woodward is able to better serve its customers, while enhancing product breadth and profitability. Woodward's position as supplier of seven components for each of the BMW Rolls-Royce BR700 series turbofan engines demonstrates the potential for increasing the company's presence on an engine. The BR710 powers the Gulfstream V and the Global Express business jets, the most prestigious in the industry. The BR710 engine recently has been selected by the Royal Air Force to re-engine its Nimrod aircraft fleet, and the engine family is being considered for several regional jets, one of the fastest growing segments of the airframe market. In addition, Boeing recently decided to proceed with the new MD-95. The BR715 engine, using Woodward components, will power this two-engine aircraft. Industry studies indicate that the MD-95 has the potential to fill a market niche. Woodward's alliance with Lockheed Martin Control Systems spent the year on business and product development. Working together, engineers of both companies are developing an integrated control system, which incorporates Woodward's hydraulic multiplexer, an advanced technology for fuel flow and actuation control. Data from tests scheduled for 1998 will be used to develop a variety of product applications. A Woodward/Lockheed Martin limited liability company is expected to be officially launched by the end of calendar 1997. Its mission will be to market, design, manufacture, and service new and existing engine control systems. The venture brings together the two largest engine control suppliers in the world; both have the additional advantage of being unaffiliated with any engine manufacturer. For Woodward, the venture underscores its commitment to ally with resourceful partners, to capitalize on its core know-how and manufacturing assets, and to expand its product line and customer base. Serving the Installed Base ACG's service business benefits from the continuous increase in its installed product base. Aircraft downtime is expensive, and proper maintenance is critical to the operational reliability of aircraft engine components. Customers rely on Woodward to provide expert, fast, and reliable overhaul and repair services. Woodward constantly looks for new ideas to better serve customers. Subsequent to the end of fiscal year 1997, the ACG reached agreement with a major domestic airline to service Woodward controls for a fixed price. Under a fixed-price service contract, the customer benefits from predictable cost and the service provider has an opportunity to enhance its profits by delivering reliable and cost-effective maintenance. ACG plans to pursue more such contracts in the future. Recently, the ACG consolidated its European service facilities. Soon to operate from a leased location right next to the airport in Prestwick, Scotland, the facility will combine all aircraft support services previously conducted at Hoofddorp, the Netherlands, and Reading, England. With the Prestwick airport rapidly becoming a center for aviation-related industries, many current and potential Woodward customers already are nearby. For other customers, the expanding Prestwick air-freight industry has the capacity to quickly move controls from one location to another. As part of the ACG's commitment to serve customers worldwide, management is evaluating other support-service locations. INDUSTRIAL CONTROLS Woodward's Industrial Controls group (ICG) is one of the world's leading providers of control systems, components, and related services for engines and turbomachinery. Its product mix ranges broadly from small single-function mechanical components to comprehensive, fault-tolerant microprocessor-based systems which automatically control speed, load, pressure, temperature, and emissions, as well as gather data and monitor operations. The products are developed in close collaboration with engine and turbine makers. Some are custom-designed for unique applications, others designed for broader use as standard equipment. Serving Worldwide Markets Used on fossil-fueled engines and turbines, and on steam and hydraulic turbines, Woodward products are sold to original equipment manufacturers and turbine packagers. The ICG, and its large network of distributors and dealers, sell and service products for installed engines and turbines. Power generation, which represents ICG's largest set of applications, ranges from large electric utility power plants, to cogeneration facilities and small standby generators. The process industry currently ranks as the second largest market for ICG controls, and engineers continually explore new ideas to increase sales for process controls in the petrochemical industry. Transportation equipment (locomotives, ships, and off-road vehicles) and gas transmission facilities are also significant markets. ICG designs, manufactures, markets, distributes, and services hundreds of systems and components, most of which perform mission-critical functions. ICG members focus on total quality and continuous improvement, while continually finding new ways to address customer needs and preferences. During fiscal 1997, ICG increased the programs through which members receive technical and job-skill training. One program, particularly well-received, focused on broadening each member's responsibility for quality, continuous improvement, and customer satisfaction. ICG views these programs as investments in developing its members' talents and effectiveness, which are equal in importance to investments in capital equipment. Demand for new power equipment is particularly strong in the developing nations of the world where energy use is rising rapidly and the power, industrial, and transportation infrastructure is being established or expanded. In addition to its plants and offices throughout the United States, Woodward maintains a significant presence in Europe, the Pacific Rim, South America, and the Mid-East/Asia region, as well as a global network of distributors, dealers, and authorized independent service facilities. In addition, developed industrial countries offer new opportunities in power generation industries as authorities move to deregulate electricity, which could lead to new applications for Woodward controls. New Opportunities ICG has targeted China, India, and South America as particularly attractive markets over the next decade. In July 1997, ICG formed Woodward (Tianjin) Controls Co. Ltd., a 65/35 joint venture, with Tianjin Locomotive and Rolling Stock Machinery Works (TLW), a state-owned company in China. As part of the agreement, Woodward will invest up to $2.7 million. This venture's initial project will consist of a modified Woodward fuel- control system for engines on diesel-electric locomotives. The Chinese Ministry of Railways is considering a proposal, funded by a World Bank loan, to grant the venture a contract to manufacture at least 200 control systems. Woodward (Tianjin) represents a major expansion of ICG's presence in China, a country with urgent infrastructure requirements, and potentially, a base for future growth. Today, customers demand controls and systems that deliver reliable high performance. For example, more customers request fast-acting systems capable of instantaneously processing large volumes of data. As a result, new products introduced during the year generally focused on giving customers high measurable value, broadened functionality, increased efficiency, and ease of operation. The development of new products enables Woodward to incorporate new technologies and add functionality customers need. Examples of new controls are the GECO(tm) S100 for gas engines, the 5009 fault tolerant control system for power applications, and the MicroNet(tm) control based on our world-class NetCon(r) system. Not all of Woodward's controls are designed for fossil-fueled engines and turbines or for steam-driven turbines. Since 1870 Woodward has served hydro- turbine markets; during 1997, ICG began shipping a custom-designed system to control a large hydro plant for Georgia Power, a division of Southern Company, the nation's largest producer of electricity. Ultimately, Woodward controls will automate the operation of 19 turbines at six power plants in addition to regulating water flows through a series of gates and dams. Participation in this project underscores the breadth of applications served by Woodward's control technologies. Woodward's commitment to developing leading technologies led to its selection by all three of the leading gas turbine manufacturers to develop and supply combustion controls and fuel management systems for their dry-low emissions (DLE) aeroderivative turbines. With heightened attention throughout the world on clean air and global warming, an acceptable emissions profile becomes critical for obtaining or maintaining a permit to operate power equipment. For customers needing to deploy new equipment or expand their power production, DLE is an enabling technology. GENXON(tm) Power Systems For operators of installed, out-of-warranty gas turbines, there is an exciting new technology being developed. This new approach may dramatically improve the emissions profile of such equipment. To offer this technology, Woodward formed GENXON(tm) Power Systems, LLC (GENXON) with a 50/50 partner, Catalytica Combustion Systems, Inc. GENXON offers Woodward's versatile control technology and Catalytica's unique, XONON(tm) combustion system as a cost- effective, ultra-low NOx solution for out-of-warranty turbines. The joint venture, first announced in September 1996, made substantial progress in fiscal 1997, attaining a number of key milestones. In December 1996, GENXON received its first commercial order from a California electric utility. In June 1997, GENXON announced the successful operation of the XONON combustion system on a Kawasaki gas turbine operating in field conditions under full load. The company also signed a memorandum of understanding with General Electric Company for the commercialization of the ultra-low emission system in installed GE-designed, heavy duty gas turbines. Shortly after the end of fiscal 1997, GENXON named a new president and chief executive officer, Patrick T. Conroy, who has many years of experience in the power equipment industry. To Woodward, GENXON represents an investment in innovative technology with the potential to open new markets and new applications for Woodward products and services. FINANCIAL SUMMARY AND ANALYSIS INTRODUCTION The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the results of operations and financial condition of the company. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes. All share information has been restated to reflect the four-for-one stock split on January 23, 1997. This annual report contains forward-looking statements reflect- ing Woodward's current expectations. Such forward-looking statements include, without limitation, references relating to expected shipments and net earnings, Industrial Controls group (ICG) opportunities in overseas and domestic markets, Aircraft Controls group (ACG) outlook, GENXON(tm) Power Systems, LLC (GENXON) joint venture prospects and on- going funding, the level of capital expenditures, the adequacy of earnings and lines of credit to handle cash requirements, and the impact of currency exchange rate changes on operating results. These statements involve risk and uncertainty. Actual future results and trends may differ materially depending on a variety of factors, including the volume and timing of orders received during the year, the mix of changes in distribution channels through which the company's products are sold, the timing and acceptance of new products and product enhancements by the company or its competitors, the success rate of the company's research and development efforts, changes in pricing, product life cycles, purchasing patterns of customers, competitive conditions in the industry, business cycles affecting the markets in which the company's products are sold, extraordinary events, such as litigation or acquisitions, including related charges, and economic conditions generally or in various geographic areas. All of the foregoing matters are difficult to forecast. The future results of the company may fluctuate as a result of these and other risk factors. RESULTS OF OPERATIONS 1997 Compared to 1996 Shipments Shipments totaled $442,216,000 in 1997, an increase of $24,926,000 or 6.0% over the $417,290,000 shipped in 1996. This increase primarily resulted from higher volumes, partially offset by a strong U.S. dollar that caused unfavorable currency translation adjustments of overseas shipments. Excluding the $10,605,000 impact of foreign currency translation, shipments increased $35,531,000 or 8.5% from 1996. Military sales accounted for 9.3% of total shipments compared to 10.0% in 1996. ICG shipments totaled $243,253,000 in 1997, a 4.5% increase over $232,746,000 in 1996. This represents 55.0% of 1997 total company shipments, compared to 55.8% in 1996. Shipments from overseas plants totaled $127,841,000, an increase of 5.0% over 1996. Excluding an unfavorable foreign currency translation, predominantly from the Japanese Yen and the Netherlands Dutch Guilder, the increase would have been 13.6%. This growth was primarily the result of a strong engine control market in Europe, increased shipments of electronic control systems to Japanese customers and the June 1996 acquisition of Deltec Fuel Systems. Domestic plant shipments totaled $115,412,000 in 1997, an increase of 4.0% when compared to the prior year. There continue to be more opportunities for growth in the overseas markets, particularly in Europe and the emerging markets of the Asia/Pacific region. There has also been a shift in market demand from mechanical to electronic fuel control systems, which has helped to solidify ICG's market positions in Japan and Europe with proven and well-regarded system technology. In the more mature domestic market, opportunities for future growth will be focused on improving market share and introducing new standardized products. ACG shipments increased 7.8% to $198,963,000 as compared to $184,544,000 in 1996. Excluding Bauer Aerospace, which was divested in July 1996, the increase would have been 10.0%, which reflects the current upswing in the airframe production cycle. ACG shipments represent 45.0% of total company shipments compared to 44.2% in 1996. Approximately 60% of shipments are to original equipment manufacturers (OEMs), with the remaining 40% comprising revenues from aftermarket business. Despite being a competitive business, aftermarket service-related revenues are anticipated to increase, particularly in the area of fixed-price maintenance contracts. This growth opportunity, along with expansion of the new actuator product line, will help to offset a potential leveling-off of the airframe production cycle and related OEM product shipments. Cost of Goods Sold In 1997, total cost of goods sold was $325,837,000 as compared to $304,887,000 in 1996, an increase of 6.9%. This increase was mainly due to higher levels of shipments, increased product development and support, and member training costs, which were partially offset by the favorable currency translation of overseas expenses. As a percentage of net shipments, total cost of goods sold was 73.7% in 1997 versus 73.1% in 1996. Although not yet reflected in this ratio, cost improvements are beginning to be realized from a continued focus on productivity and efficiency improvements through efforts of self-directed member teams. Paramount to each team's focus is maintaining the highest quality standards and improving on-time delivery to customers. There is a cost to meeting and exceeding customer expectations, however, and this has caused engineering support and other quality-related costs to increase over 1996. Sales, Service, and Administrative Expenses Sales, service, and administrative expenses totaled $72,295,000 in 1997, a 3.5% increase over $69,874,000 in 1996. This increase was mostly caused by higher levels of member training and development, costs associated with the consolidation of previously separate Colorado ICG business units, the June 1996 acquisition of Deltec Fuel Systems, and expanding international sales operations. As a percent of total shipments, sales, service, and administrative expenses were 16.3% in 1997 as compared to 16.7% a year earlier. This decline reflects both higher shipment levels relative to the fixed cost base and the company's ongoing emphasis on cost management. Interest Expense Interest expense totaled $2,382,000 in 1997 compared to $3,325,000 in 1996. This decline resulted from lower levels of short-term borrowings and the paydown of long-term debt. Interest Income Interest income was $780,000 in 1997 compared to $825,000 in 1996. Other Expense-Net Other expense-net totaled $2,794,000 in 1997 compared to $4,848,000 in 1996. The majority of this favorable decline was due to the receipt of royalty income from an ACG customer in the fourth quarter. Income Taxes The income tax expense in 1997 was $15,339,000 and the effective tax rate was 38.6%. In 1996, the effective tax rate was 37.0% and the tax expense was $13,003,000. The effective tax rate increased in 1997 due to lower levels of foreign tax credit utilization when compared to 1996. The income tax benefits attributable to the GENXON joint venture loss are included in the equity in loss of unconsolidated affiliate category, which is presented separately on the statements of consolidated earnings and shown net of tax. Earnings before Equity in Loss of Unconsolidated Affiliate Earnings before the effect of the company's equity in loss of GENXON totaled $24,349,000 in 1997, an increase of $2,171,000 or 9.8% over 1996 net earnings of $22,178,000. The return on sales in 1997 was 5.5% versus 5.3% in 1996. The return on average net worth was 11.6% in 1997, an improvement over the 10.9% in 1996. Earnings before income taxes from foreign operations increased 3.9%, from $17,857,000 in 1996 to $18,545,000 in 1997. The shipment level also rose in 1997 from $127,666,000 to $134,513,000, a 5.4% increase. Domestic shipments totaled $307,703,000 in 1997, an increase of 6.2% over $289,624,000 in 1996. Domestic earnings before income taxes and the impact of GENXON were $21,143,000, an increase of 22.0% as compared to $17,324,000 in 1996. Equity in Loss of Unconsolidated Affiliate In October 1996, the company and Catalytica Combustion Systems, Inc. (CCSI), a subsidiary of Catalytica, Inc., formed GENXON, a 50/50 joint venture. GENXON combines the company's highly developed, field-proven fuel metering control technology with CCSI's unique XONON(tm) catalytic combustion technology to offer a highly competitive, ultra-low NOx emission control system. The joint venture will offer products as a retrofit on installed, out-of-warranty industrial gas turbines. As part of the joint venture agreement, the company committed to fund $8,000,000 of the initial $10,000,000 capital commitment. Any additional capital funding, although not contractually required, is to be split on a 50/50 basis with CCSI. In its first year of operation, GENXON made some very encouraging achievements. In June 1997, GENXON signed a memorandum of understand- ing with General Electric Company for the worldwide commercialization of the ultra-low emission system in GE-designed, heavy duty gas turbines. GENXON also announced the successful operation of XONON on a gas turbine operating in field conditions under full load. These developments, coupled with recent indications of continued political support for strict worldwide air-quality regulations, helped to focus attention on the acceleration of development efforts to support the potential for expanded market opportunities. In 1997, the joint venture incurred a $10,486,000 pre-tax loss, with $8,243,000 being funded by the company in accordance with the joint venture agreement. Accordingly, this required amount of funding was expensed in 1997 and reflected as equity in loss of unconsolidated affiliate in the statements of consolidated earnings. The impact to consolidated net earnings was a $6,209,000 loss, net of $2,034,000 of income tax benefits. Development efforts will continue in fiscal 1998. There is optimism about the unique technology and opportunities the joint venture brings to the marketplace. While initial market sales will occur in 1998, additional funding of on-going product development will be necessary. The company remains committed to the joint venture and will assess capital commitments as necessary. Net Earnings Net earnings were $18,140,000 in 1997, a $4,038,000 or 18.2% decline from the $22,178,000 that was reported in 1996. Excluding the $6,209,000 after-tax equity in loss of GENXON, net earnings would have increased $2,171,000, or 9.8%. On a per share basis, net earnings totaled $1.58 in 1997 as compared to $1.92 in 1996, a decline of $.34 per share. Without the $.54 per share impact of the GENXON loss, net earnings per share would have been $2.12, a $.20 or 10.4% increase over 1996. Financial Condition The financial condition of the company remained strong as of September 30, 1997, with total shareholders' equity of $210,614,000 and long- term debt of $17,717,000, which was less than 8% of total capital. Total assets at September 30, 1997 were $348,110,000, a 0.2% decline from the balance a year earlier. Cash balances increased $1,929,000 to $14,999,000 at September 30, 1997 when compared to a year ago. Higher cash balances during 1997 have been utilized to reduce short-term borrowings, which declined $7,402,000 since the end of the previous fiscal year to $7,908,000 at September 30, 1997. Long-term debt also declined $4,979,000 when compared to the prior fiscal year-end balance of $22,696,000. Accounts receivable increased $10,904,000 or 13.5% to $91,806,000 at September 30, 1997 when compared to $80,902,000 a year earlier. The increase was due to higher levels of shipments, particularly in the last month of the fiscal year. Although accounts receivable balances increased, the level of past-due accounts has declined when compared to the previous fiscal year-end. The allowance for losses totaled $2,757,000 at September 30, 1997, a $2,000 increase over the balance a year earlier. Inventories totaled $83,249,000 at September 30, 1997 as compared to $92,135,000 at September 30, 1996, a decline of $8,886,000 or 9.6%. This decline was primarily due to high shipment levels in the last month of the fiscal year, coupled with the company's on-going emphasis on inventory management. Property, plant, and equipment-net decreased from $114,213,000 at September 30, 1996 to $110,948,000 at September 30, 1997, due to current year depreciation and foreign currency translation. Deferred income taxes decreased from $38,559,000 at September 30, 1996 to $38,175,000 at September 30, 1997. Deferred income tax assets are expected to be realized through future earnings. Accounts payable and accrued expenses increased $3,227,000 or 5.2% to $64,824,000 at September 30, 1997 as compared to $61,597,000 at September 30, 1996. This increase was predominantly caused by higher levels of shipment activity toward the end of the fiscal year. Other liabilities totaled $34,901,000 and comprise the non-current accumulated postretirement benefit obligation. See Footnote H of the Notes to Consolidated Financial Statements. Total shareholders' equity was $210,614,000 at September 30, 1997, an increase of $2,619,000 or 1.3% from the balance of $207,995,000 at September 30, 1996. This increase was primarily the result of current year earnings, net of cash dividend payments. Shareholders' equity was reduced by a $4,229,000 decline in the currency translation adjustment, but was partially offset by a $2,537,000 change in unearned ESOP compensation. The company is currently involved in matters of litigation arising from the normal course of business, including certain environmental and product liability matters. For further discussion of these issues, refer to Footnote L of the Notes to Consolidated Financial Statements. Liquidity and Capital Expenditures Cash dividends paid to shareholders were $.93 per share in both 1997 and 1996. Net cash provided by operating activities was $56,079,000 in 1997 compared to $52,482,000 in 1996. The primary reason for this increase was higher pre-GENXON earnings. Net cash flows used in investing activities were $28,579,000 in 1997 compared to $20,084,000 in 1996. This increase was due to the invest- ment in the GENXON joint venture. Capital expenditure levels were unchanged when compared to 1996. Based on current operating cond- itions, the company does not expect a significant increase in capital expenditures in 1998. Net cash used in financing activities was $25,179,000 in 1997 compared to $31,372,000 in 1996. Reduction of both short-term and long-term borrowing levels and payment of dividends were the primary uses of cash during 1997. Based on current operating conditions, both lines of credit and cash flow from operations should be adequate to meet company cash requirements during 1998. Membership Worldwide membership increased to 3,246 at September 30, 1997 from 3,211 at September 30, 1996. This increase was primarily due to continued growth of international operations, partially offset by a reduction from the consolidation of Colorado ICG business units. Membership levels are continually monitored to ensure that adequate resources are allocated to customer quality and service expectations, production levels, product line growth, and other factors. Year 2000 Task Force The company has formed a Year 2000 Task Force with representatives from each business unit and location. This task force is charged with the responsibility of determining and coordinating the action necessary to provide uninterrupted, normal operation of business- critical systems before, during, and after Year 2000. The company is also encouraging similar compliance from customers, suppliers, and partners, as appropriate, and will work with them to help achieve this goal. Management believes that total costs associated with Year 2000 issues will not have a material effect on the consolidated earnings of the company. New Accounting Pronouncements In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which is required to be adopted in the company's first quarter fiscal 1998 financial statements. This new standard establishes methods for computing and presenting earnings per share (EPS) and also simplifies the previous standards found in APB Opinion No. 15, "Earnings per Share." It requires dual presentation of basic and diluted EPS on the Statements of Consolidated Earnings. The company's current calculation of its earnings per share will be equivalent to the basic EPS under this new standard. The calculation of diluted EPS is not expected to be materially different from basic EPS. In June 1997, the FASB also issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective in fiscal year 1999. This new statement revises standards for public companies to report information about segments of their business and also requires disclosure of selected segment information in quarterly financial reports. The statement also establishes standards for related disclosures about products and services, geographic areas, and major customers. The company has not yet determined the impact this new statement may have on disclosures in the consolidated financial statements. The FASB also issued certain other disclosure-related accounting pronouncements during 1997. While these new statements are effective for future reporting periods, the company does not anticipate they will have any significant impact on the consolidated financial statements. RESULTS OF OPERATIONS 1996 Compared to 1995 Shipments Shipments during 1996 were $417,290,000, 9.9% greater than the $379,736,000 shipped in 1995. Price increases accounted for only 1.5% of the change. The volume of shipments increased 9.9% including a reimbursement of nonrecurring engineering charges in 1995. Without this reimbursement, the volume increase was approximately 12%. Foreign exchange rates also had an effect on the shipment level as shipments from overseas plants translated into over $5,600,000 or 1.5% fewer U.S. dollars compared to 1995. Both ACG and ICG shipments have increased since 1995. Military sales increased to 10.0% of sales compared to 7.4% in 1995. ICG shipments were $232,746,000 in 1996, a 7.0% increase from the 1995 total of $217,612,000. This represented 55.8% of 1996 total company shipments, compared to 57.3% in 1995. The shipments from overseas plants were up 9.0% and continued to increase at a faster rate than shipments from domestic plants, which were up almost 4.8% over 1995. ACG shipments increased 13.8% to $184,544,000 from $162,124,000 in 1995. The 1995 total included over $7,000,000 in reimbursements for nonrecurring engineering charges incurred in previous years. Without this item, shipments were up over 19% from 1995. This increase reflected the strengthening of the demand for products in the commercial aircraft markets, particularly in aftermarket spares and overhauls, and also additional military sales. ACG shipments represented 44.2% of total company shipments in 1996, compared to 42.7% in 1995. Cost of Goods Sold Cost of goods sold was $304,887,000 or 73.1% of net sales in 1996 compared to $274,676,000 or 72.3% of net sales in 1995. This represented an increase of 11%. The company recognizes the need to invest for the future; as a result, spending on research and development was $13,800,000 in 1996 and $13,700,000 in 1995. Engineering costs continued to increase to meet the demands of customer satisfaction. Sales, Service, and Administrative Expenses Sales, service, and administrative expenses in 1996 were $69,874,000 or 16.7% of sales, compared to $69,961,000 or 18.4% in 1995. This decrease as a percent of sales reflected the cost containment efforts in this area. To meet customer service expectations, however, additional resources have been added in the marketing and sales areas and new offices have been established in other locations around the world. Restructuring Expense The company did not incur restructuring expense in 1996. In 1995, restructuring expenses of $5,927,000 were incurred. These costs related to additional charges from initiatives started in prior years, including the divestiture of Bauer Aerospace and the move of the Hydro business unit from Stevens Point to the plants in Colorado. Interest Expense Interest expense was $3,325,000 in 1996 compared to $3,825,000 in 1995. This decrease was due to the lower level of borrowing in 1996. Interest Income Interest income in 1996 was $825,000 compared to $555,000 in 1995. Other Expense-Net Other expense-net was $4,848,000 in 1996 compared to $5,719,000 in 1995. Income Taxes The income tax expense in 1996 was $13,003,000 and the effective tax rate was 37.0%. In 1995, the effective tax rate was 40.9% and the tax expense was $8,247,000. The effective rate was lower due to a higher portion of income generated in the United States at lower tax rates. Net Earnings Net earnings for 1996 were $22,178,000, an increase of $10,242,000 or 86% from the 1995 net earnings of $11,936,000. While the 1996 results did not include any restructuring expenses, there were $5,927,000 of restructuring expenses in 1995. Return on sales in 1996 was 5.3% compared to 3.1% in 1995. Return on average net worth was 10.9% in 1996 and 6.1% in 1995. Earnings per share increased to $1.92 per share in 1996 from $1.03 per share in 1995. Earnings before income taxes from foreign operations increased from $15,126,000 in 1995 to $17,857,000 in 1996. The shipment level also increased from $118,293,000 in 1995 to $127,666,000 in 1996. Domestic shipments increased to $289,624,000 in 1996 from $261,443,000 in 1995. Over the same period, earnings before income taxes increased to $17,324,000 in 1996 from $5,057,000 in 1995. Without the restruc- turing expense of $5,927,000 in 1995, earnings before income taxes from domestic operations would have been $10,984,000. Financial Condition Cash and cash equivalents increased from $12,451,000 in 1995 to $13,070,000 in 1996. Combined short-term and long-term debt decreased from $62,960,000 in 1995 to $42,868,000 in 1996. With the increase in shipments, and accounts receivable and inventory remaining at the same levels, the cash generated was used primarily to repay debt. Accounts receivable decreased slightly at September 30, 1996 to $80,902,000 from $81,880,000 at September 30, 1995. While shipments increased 10%, the level of accounts receivable remained stable due to collection efforts. The prior year allowance for losses included a $1,100,000 specific reserve for one customer that was written off in 1996. Inventories decreased slightly to $92,135,000 at September 30, 1996 from $92,831,000 at September 30, 1995. Although inventories remained level with the increased shipment amount, the company has continued to focus on decreasing the investment in inventory. Property, plant, and equipment-net decreased from $118,066,000 at September 30, 1995 to $114,213,000 at September 30, 1996. This is a result of holding the level of capital expenditures in 1996 below depreciation expense for the fourth consecutive year. Deferred income taxes decreased from $39,630,000 at September 30, 1995 to $38,559,000 at September 30, 1996. Deferred income tax assets are expected to be realized through future earnings. Accounts payable and accrued expenses increased to $61,597,000 at September 30, 1996 from $50,765,000 at September 30, 1995. Accounts payable increased in 1996 due to the higher level of shipment activity. Accrued salaries and wages also increased due to additional withhold- ing taxes and profit sharing resulting from the improved results in 1996. Other liabilities reflects the non-current accumulated postretirement benefit obligation. Shareholders' equity increased to $207,995,000 at September 30, 1996 from $197,903,000 at September 30, 1995 due primarily to the increase in retained net earnings in 1996 compared to 1995. Liquidity and Capital Expenditures Cash dividends paid to the shareholders in 1996 and 1995 were $.93 per share. Net cash provided by operating activities was $52,482,000 in 1996 compared to $31,321,000 in 1995. The primary reasons for the increase in cash provided were the increase in earnings and controlling increases in accounts receivable and inventories from 1995 to 1996, even with increased shipment levels. Net cash flows used in investing activities were $20,084,000 in 1996 compared to $18,428,000 in 1995. The primary use of cash is capital expenditures as capital expenditures increased in 1996 over the 1995 level. Net cash used in financing activities was $31,372,000 in 1996 compared to $11,522,000 in 1995. Reduction of borrowing levels and payment of dividends were the main uses of cash during 1996. Membership Worldwide membership increased to 3,211 at September 30, 1996 from 3,071 at September 30, 1995. The increased level of shipments and members gained through acquisitions were the reasons for the increase. STATEMENTS OF CONSOLIDATED EARNINGS Woodward Governor Company and Subsidiaries
Year Ended September 30, (In thousands of dollars except share amounts) 1997 1996 1995 Net billings for products and services $442,216 $417,290 $379,736 Costs and expenses: Cost of goods sold 325,837 304,887 274,676 Sales, service, and administrative expenses 72,295 69,874 69,961 Restructuring expense - - 5,927 Interest expense 2,382 3,325 3,825 Interest income (780) (825) (555) Other expense-net 2,794 4,848 5,719 Total costs and expenses 402,528 382,109 359,553 Earnings before income taxes and equity in loss of unconsolidated affiliate 39,688 35,181 20,183 Income taxes 15,339 13,003 8,247 Earnings before equity in loss of unconsolidated affiliate 24,349 22,178 11,936 Equity in loss of unconsolidated affiliate, net of tax 6,209 - - Net earnings $18,140 $22,178 $11,936 Net earnings per share $1.58 $1.92 $1.03 Average number of shares outstanding 11,481,545 11,570,484 11,623,000 See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS Woodward Governor Company and Subsidiaries
At September 30, (In thousands of dollars except share amounts) 1997 1996 Assets Current assets: Cash and cash equivalents $ 14,999 $ 13,070 Accounts receivable, less allowance for losses of $2,757 for 1997 and $2,755 for 1996 91,806 80,902 Inventories 83,249 92,135 Deferred income taxes 19,651 19,991 Total current assets 209,705 206,098 Property, plant, and equipment, at cost: Land 5,842 6,218 Buildings and improvements 119,997 120,283 Machinery and equipment 188,758 182,680 Construction in progress 2,270 6,971 316,867 316,152 Less allowance for depreciation 205,919 201,939 Property, plant, and equipment-net 110,948 114,213 Intangibles and other assets 8,933 9,919 Deferred income taxes 18,524 18,568 Total assets $348,110 $348,798 Liabilities and shareholders' equity Current liabilities: Short-term borrowings $ 7,908 $ 15,310 Current portion of long-term debt 4,979 4,862 Accounts payable and accrued expenses 64,824 61,597 Taxes on income 7,167 3,226 Total current liabilities 84,878 84,995 Long-term debt, less current portion 17,717 22,696 Other liabilities 34,901 33,112 Commitments and contingencies - - Shareholders' equity represented by: Preferred stock, par value $.003 per share, authorized 10,000,000 shares, no shares issued - - Common stock, par value $.00875 per share, authorized 50,000,000 shares, issued 12,160,000 shares 106 106 Additional paid-in capital 13,283 13,249 Unearned ESOP compensation (12,128) (14,665) Currency translation adjustment 9,391 13,620 Retained earnings 215,211 207,392 225,863 219,702 Less treasury stock, at cost 15,249 11,707 210,614 207,995 Total liabilities and shareholders' equity $348,110 $348,798 See accompanying Notes to Consolidated Financial Statements.
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY Woodward Governor Company and Subsidiaries
(In thousands of dollars Add'l Unearned Currency except Common Paid-in ESOP Trans. Retained Treasury Stock share amts) Stock Capital Compen. Adjust. Earnings Shares Amount Balance at Sept. 30, 1994 $106 $13,975 $(19,777) $15,210 $194,088 463,644 $9,756 Net earnings - - - - 11,936 - - Purchases of treas. stk - - - - - 208,064 3,363 Sales of treas. stk - (334) - - - (111,180) (2,120) Issuance of stk. to ESOP- 3 - - - (5,376) (85) ESOP compen. expense - - 2,444 - - - - Cash dividends- $.93 per common share - - - - (10,811) - - Tax benefit applic. to ESOP dividend - - - - 385 - - Translation adjust. including income taxes allocated of $19 - - - 1,592 - - - Balance at Sept. 30, 1995 106 13,644 (17,333) 16,802 195,598 555,152 10,914 Net earnings - - - - 22,178 - - Purchases of treasury stk - - - - - 89,428 1,730 Sales of treas. stock - (343) - - - (26,400) (778) Issuance of stk. to ESOP - (52) - - - (5,596) (159) ESOP compen. expense - - 2,668 - - - - Cash dividends- $.93 per common share - - - - (10,758) - - Tax benefit applicable to ESOP dividend - - - - 374 - - Translation adjust. including income taxes allocated of $14 - - - (3,182) - - - Balance at Sept. 30, 1996 106 13,249 (14,665) 13,620 207,392 612,584 11,707 Net earnings - - - - 18,140 - - Purchases of treas. stock - - - - - 109,600 3,761 Sales of treas. stock - 28 - - - (7,042) (168) Issuance of stk. to ESOP - 6 - - - (2,108) (51) ESOP compen. expense - - 2,537 - - - - Cash dividends- $.93 per common share - - - - (10,681) - - Tax benefit applicable to ESOP dividend- - - - 360 - - Translation adjust. including income taxes allocated of $12 - - - (4,229) - - - Balance at Sept. 30, 1997 $106 $13,283 $(12,128) $ 9,391 $215,211 713,034 $15,249 See accompanying Notes to Consolidated Financial Statements.
STATEMENTS OF CONSOLIDATED CASH FLOWS Woodward Governor Company and Subsidiaries
Year Ended September 30, (In thousands of dollars) 1997 1996 1995 Cash flows from operating activities: Net earnings $18,140 $22,178 $11,936 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Depreciation and amortization 22,837 23,394 23,786 Deferred income taxes 44 (791) (3,407) ESOP compensation expense 2,537 2,668 2,444 Equity in loss of unconsolidated affiliate 8,243 - - Changes in assets and liabilities: Accounts receivable (13,070) (430) (11,158) Inventories 7,262 (577) (11,830) Current liabilities, other than short-term borrowings and current portion of long-term debt 10,164 10,000 20,415 Other-net (78) (3,960) (865) Total adjustments 37,939 30,304 19,385 Net cash provided by operating activities 56,079 52,482 31,321 Cash flows from investing activities: Payments for purchase of property, plant, and equipment (21,152) (21,163) (18,988) Investment in unconsolidated affiliate (8,243) - - Other 816 1,079 560 Net cash used in investing activities (28,579) (20,084) (18,428) Cash flows from financing activities: Cash dividends paid (10,681) (10,758) (10,811) Proceeds from sales of treasury stock 196 435 1,377 Purchases of treasury stock (3,761) (1,730) (3,363) Payments of long-term debt (4,862) (5,105) (4,254) Short-term borrowings net proceeds (payments) (6,431) (14,588) 5,144 Tax benefit applicable to ESOP dividend 360 374 385 Net cash used in financing activities (25,179) (31,372) (11,522) Effect of exchange rate changes on cash (392) (407) 808 Net change in cash and cash equivalents 1,929 619 2,179 Cash and cash equivalents, beginning of year 13,070 12,451 10,272 Cash and cash equivalents, end of year $14,999 $13,070 $12,451 Supplemental cash flow information: Interest expense paid $ 2,434 $ 3,680 $ 3,930 Income taxes paid $ 8,629 $13,475 $ 8,669 See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands of dollars except share amounts) A. Significant accounting policies are as follows: Principles of consolidation: The consolidated financial statements include the accounts of the company and all majority-owned subsidiaries. The company accounts for its investment in the GENXON(tm) Power Systems, LLC (GENXON) joint venture under the equity method of accounting. Intercompany transactions have been eliminated. Use of estimates in the preparation of financial statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. Foreign currency translation: The balance sheets of substantially all subsidiaries outside the United States have been translated at year-end rates of exchange and earnings and cash flow statements at weighted average rates of exchange. In addition, gains and losses from translation are accumulated as a separate component of shareholders' equity; gains or losses resulting from overseas currency transactions are included in net earnings and are not significant. Inventories: Inventories, substantially all of which are work in process and component parts, are valued at the lower of cost (on a first-in, first-out basis) or market. Property, plant, and equipment: Expenditures for major renewals and improvements are capitalized at cost while repairs and maintenance are charged to expense. Depreciation is provided principally on the declining-balance method over the estimated useful lives of the assets (5 to 45 years for buildings and improvements and 3 to 15 years for machinery and equipment). Upon disposal of an asset the resulting gain or loss is included in net earnings. Intangibles: The excess of purchase prices over the fair values of net assets acquired have been recorded as intangible assets which are being amortized using the straight-line method over 5 to 10 years. Amortization expense was $983 and $608 in 1997 and 1996, respectively. Long-lived assets: Effective with fiscal year 1997, the company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" (SFAS 121). The company reviews for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. There was no material effect on the consolidated financial statements in 1997. Impairment losses are recognized when the expected future cash flows are less than the asset's carrying value. Statements of cash flows: For purposes of the statements of cash flows, all highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. Income taxes: Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the company's assets and liabilities. The company has provided for taxes which would be payable if undistributed earnings of overseas subsidiaries were to be remitted to the United States. Revenue recognition: Revenue is recognized from product sales upon shipment to the customer. Research and development costs: Expenditures related to new product development are charged to expense when incurred and total approximately $11,300, $13,800, and $13,700, for 1997, 1996, and 1995, respectively. Stock Split: The company's Board of Directors approved a four-for-one stock split effective as of January 23, 1997. Accordingly, all share information has been restated. B. GENXON(tm) Power Systems Joint Venture: In October 1996, the company and Catalytica Combustion Systems, Inc. (CCSI), a subsidiary of Catalytica, Inc., formed GENXON(tm) Power Systems, LLC, a 50/50 joint venture. This new venture combines the company's proprietary fuel metering and control technology with CCSI's unique XONON(tm) catalytic combustion technology to offer a highly competitive, ultra-low NOx emission control system that will be offered as a retrofit on installed, out-of-warranty industrial gas turbines. As part of the joint venture agreement, the company committed to fund $8,000 of the initial $10,000 capital commitment. Any additional capital funding, although not contractually required, is to be split on a 50/50 basis with CCSI. In 1997, the joint venture incurred a $10,486 pre-tax loss, with $8,243 being funded by the company in accordance with the joint venture agreement. Accordingly, this required amount of funding was expensed in 1997 and reflected as equity in loss of unconsolidated affiliate in the statements of consolidated earnings. The effect on consolidated net earnings was a $6,209 loss, net of $2,034 of income tax benefits. Most of the costs incurred during 1997 were directly related to product development. At September 30, 1997, the joint venture had $1,204 of total assets and $2,690 of total liabilities. C. Restructuring charges: In 1995, the company recognized additional costs associated with the 1994 board-approved restructuring initiative, in connection with closing facilities and the divestiture of Bauer Aerospace, including $1,300 related to the relocation of machinery and members and $4,627 of early retirement benefits and costs based on a company designed severance package. The activity in the restructuring accruals for the years ended September 30 is as follows:
1997 1996 Beginning balance $7,607 $10,164 Payments (1,843) (2,557) $5,764 $ 7,607
The components of the accruals related to restructuring at September 30 were as follows:
1997 1996 Severance related benefits $ 5 $ 353 Early retirement 4,665 6,157 Other closure costs 1,094 1,097 $5,764 $7,607
The early retirement benefits are payable over a 10 year period.
D. The provision for income taxes consists of: 1997 1996 1995 Currently payable: Federal $ 6,504 $ 4,590 $2,754 State 1,551 1,058 1,007 Foreign 6,474 6,525 7,386 Deferred 810 830 (2,900) $15,339 $13,003 $8,247
The components of the net deferred tax assets at September 30 were as follows:
1997 1996 Deferred tax assets: Postretirement and early retirement benefits $16,210 $15,941 Restructuring 3,567 4,114 Foreign net operating loss and tax credits 7,921 10,116 Inventory 7,518 9,145 Other items 15,706 11,485 Valuation allowance (9,703) (9,332) Total deferred tax assets 41,219 41,469 Deferred tax liabilities: Unremitted earnings of foreign subsidiaries (1,928) (1,867) Other items (1,116) (1,043) Total deferred tax liabilities (3,044) (2,910) Net deferred tax assets $38,175 $38,559
The company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets which may not be realized principally due to capital loss carryforwards and acquired foreign net operating loss carryforward limitations. The change in foreign net operating loss carryforward in 1997 primarily relates to currency translation. Remaining deferred tax assets are expected to be realized through future earnings. The change in the valuation allowance for the years ended September 30 is as follows:
1997 1996 Beginning balance $(9,332) $(9,006) Foreign net operating loss carryforward 976 (1,771) Utilization of foreign tax credit carryover - 1,647 State net operating loss carryforward (177) (75) Capital loss carryforward (1,170) (127) $(9,703) $(9,332)
The reasons for the differences between the effective tax rate of the company and the United States statutory federal income tax rate are as follows:
Percent of pre-tax earnings 1997 1996 1995 Statutory rate 35.0 35.0 35.0 State income taxes 2.2 2.4 1.9 Foreign tax rate differences 0.3 (1.1) 2.1 Foreign sales corporation (0.8) (1.3) (1.8) Other items, net 1.9 2.0 3.7 Effective rate 38.6 37.0 40.9
The provision for income taxes and effective rate information noted above is prior to the tax benefits associated with the GENXON joint venture. The effective tax benefit rate for the GENXON joint venture was 24.7% and varied from the statutory rate as a portion of the loss was treated as a capital loss. E. Short-term borrowings: Bank lines of credit available to the company totaled $51,024 and $60,305, of which $7,908 and $15,310 were used at September 30, 1997 and 1996, respectively. Interest on borrowings under the lines is based on various short-term rates. Several of the lines require compensating balances or commitment fees. The lines, generally reviewed annually for renewal, are subject to the usual terms and conditions applied by the banks. The weighted average interest rate for the company's borrowings was 5.1%, 5.8%, and 6.3% for 1997, 1996, and 1995, respectively. F. Long-term debt:
1997 1996 9.45% note $ 8,000 $10,200 ESOP debt guarantee 14,500 17,000 Other 196 358 22,696 27,558 Less current portion (4,979) (4,862) $17,717 $22,696
The company has a note agreement dated July 1990, wherein the company issued a $20,000 unsecured note due August 1, 2000 with an interest rate of 9.45%. Principal payments are due annually, with interest due semi-annually. The principal payments required on the 9.45% note and other debt in years succeeding 1997 are: $2,479 in 1998, $2,783 in 1999, and $2,934 in 2000. The company has a Member Investment and Stock Ownership Plan, which includes a qualified employee stock ownership plan (ESOP), and covers all worker members meeting certain service requirements. Using this ESOP feature, on June 18, 1992, the Plan borrowed $25,000 for a term of 11 years at an interest rate of 8.01% and used the proceeds to buy 1,027,224 shares of common stock from the company. The company guaranteed payment of the loan and agreed to make future contributions to the Plan sufficient to repay the loan. The loan and guarantee are recorded in the company's Consolidated Balance Sheets as long-term debt and unearned ESOP compensation. The related shares are being allocated to participants over 11 years as the debt is repaid. The Plan debt requires annual principal payments of $2,500 each September 30, with a final payment of $2,000 in 2003. Interest of $1,361, $1,562, and $1,723 was paid in 1997, 1996, and 1995, respectively. Dividends on these common shares are paid to the Plan and, together with company contributions, are used by the Plan to repay principal and interest on the outstanding debt. Shares are allocated to participants based upon the ratio of the current year's debt service to the sum of total principal and interest payments over the life of the loan. The unallocated shares were 498,304, 602,524, and 712,152 as of September 30, 1997, 1996, and 1995, respectively. The company recognized ESOP related expense on the Shares Allocated Method as follows:
1997 1996 1995 Interest expense $ 471 $ 652 $ 789 Compensation expense 2,537 2,668 2,444 $3,008 $3,320 $3,233
Company cash contributions to the Plan used for debt service were $2,971, $3,152, and $2,789, in 1997, 1996, and 1995, respectively. Dividends on these shares used for debt service were approximately $890 in 1997, $910 in 1996, and $934 in 1995. Federal income tax benefits of $360, $374, and $385 in 1997, 1996, and 1995, respectively, resulting from the deductibility of certain dividends paid by the company to the Plan, were credited directly to retained earnings. The provisions of the note and the guarantee limit the ability of the company to, among other things, incur debt, pay cash dividends, sell certain assets, acquire other businesses, and purchase the company's capital stock. The agreements include a provision that change in control of the company may result in all unpaid principal and interest becoming due. The company must maintain consolidated net worth of $150,000 and a consolidated current ratio of 1.25. At September 30, 1997, the company could pay dividends and purchase the company's common stock up to an amount not exceeding $19,828. G. Accounts payable and accrued expenses:
1997 1996 Accounts payable $14,906 $14,327 Salaries and wages 14,249 13,523 Taxes, other 6,366 7,262 Restructuring 5,764 7,607 Warranty 4,887 3,666 Postretirement and postemployment 3,000 3,000 Other items-net 15,652 12,212 $64,824 $61,597
H. Retirement and benefit plans: The company provides certain health care benefits to eligible retired members and their dependents and survivors. Generally, participants become eligible after reaching age 55 with 10 years of service or after reaching age 65. The health plans (medical, dental, vision, and hearing) are unfunded and pay 100% of eligible expenses not paid by Medicare. A maximum reimbursement amount exists for each plan. The plans require cost-sharing by the members in varying amounts based on years of service. The company has the right to modify or terminate these benefits. The accumulated postretirement benefit obligations were as follows:
1997 1996 Retirees $20,599 $21,195 Fully eligible active plan participants 267 81 Other active plan participants 13,766 12,854 Accumulated postretirement benefit obligation 34,632 34,130 Unrecognized net gain from past experience different from that assumed 2,269 982 Total accumulated postretirement benefit obligation $36,901 $35,112
The company has included $34,901, and $33,112 in other liabilities and the remaining balance in current liabilities for 1997 and 1996, respectively. The periodic postretirement benefit cost consists of:
1997 1996 1995 Service cost-benefits attributed to service during the period $ 923 $ 927 $ 894 Interest cost on accumulated postretirement benefit obligation 2,388 2,443 2,347 Amortization of unrecognized net gain (24) - - Net periodic postretirement benefit cost $3,287 $3,370 $3,241 Actuarial assumptions used were as follows: 1997 1996 1995 Projected healthcare cost trend rate 8.00% 8.50% 9.00% Ultimate trend rate 5.25% 5.25% 5.25% Year ultimate trend rate is achieved 2002 2002 2002 Effect of a 1.0% increase in the healthcare trend rate on the accumulated post- retirement benefit obligation $6,370 $6,054 $6,216 Effect of a 1.0% increase in the healthcare trend rate on the net periodic cost $ 717 $ 724 $ 690 Weighted average discount rate 7.50% 7.75% 7.75%
The company is required, under local regulations, to provide a defined benefit plan covering approximately 135 members in a foreign country. Benefits are based primarily on each member's years of service and average compensation over the period of participation. The components of the net periodic pension cost are as follows:
1997 1996 1995 Service cost-benefits earned during the period $484 $334 $492 Interest cost on projected benefit obligation 438 504 562 Actual return on plan's assets (464) (539) (546) Net amortization and deferral 68 36 107 Net periodic pension cost $526 $335 $615 Assumptions used in the accounting for net periodic pension cost were: 1997 1996 1995 Weighted average discount rate 4.0% 4.5% 4.0% Expected long-term rate of return on plan's assets 4.0% 4.5% 3.1% Compensation increase rate 3.5% 3.5% 3.0% The plan's funded status at September 30 is as follows: 1997 1996 Accumulated benefit obligation $7,507 $7,192 Increase in benefits due to estimated future compensation increases 3,478 3,481 Projected benefit obligation 10,985 10,673 Plan's assets at fair value 11,621 11,518 Projected benefit obligation less than plan's assets (636) (845) Unrecognized net gain from experience 1,453 2,021 Unrecognized transition amount (1,136) (1,335) Accrued asset $ (319) $ (159)
The company has a Member Investment and Stock Ownership Plan (the "Plan") for members meeting certain service requirements. The company contributes 5% of eligible wages and matches member contributions with respect to a 401(k) feature up to certain limits. The 5% company contribution to the Plan is used to first fund debt service associated with the ESOP debt guarantee (described in Note F), with remaining funds allocated to members based upon eligible wages. Company contributions to the Member Investment and Stock Ownership Plan totaled $5,529, $4,483, and $2,788, in 1997, 1996, and 1995, respectively. I. Stock Option Plan: In 1996, the company's shareholders approved the adoption of the 1996 Long-Term Incentive Compensation Plan (the "Plan"). The purpose of the Plan is to promote the interests of the company and its shareholders by retaining the services of outstanding key management members and encouraging them to have a greater financial investment in the company and increase their personal interest in its continued success. Under this nonqualified plan, 800,000 shares of the company's common stock are available for issuance upon grant of the options. In January 1996, the company granted 97,000 options to purchase common stock at the fair market value as of October 1, 1995 ($16.63 per share), of which 79,460 options became exercisable in November 1996. Compensation expense of $445 was recorded in 1996, based upon an estimate of the achievement of certain performance requirements. These options, as well as the options granted in 1997, expire no later than 10 years from the grant date. Effective with fiscal 1997, the company adopted the disclosure-only option of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." Accordingly, the company continues to account for stock options under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and does not recognize compensation expense for options issued at fair market value at the date of the grant. Had compensation expense for stock options been determined based upon the fair value at the grant date consistent with methodology prescribed under SFAS No. 123, the company's net earnings and net earnings per share would have changed to the pro forma amounts indicated below:
1997 1996 As Reported Net earnings $18,140 $22,178 Net earnings per share 1.58 1.92 Pro Forma Net earnings $17,723 $22,268 Net earnings per share 1.54 1.92
The fair value of the options granted was estimated on the date of their grant using the Black-Scholes option pricing model based on the following weighted average assumptions:
1997 1996 Risk-free interest rate 6.1% 5.6% Expected life 7 years 7 years Expected volatility 19.7% 19.7% Expected dividend yield 4.6% 4.6%
There were no stock options outstanding in 1995. Option activity for 1997 and 1996 was as follows:
1997 1996 Weighted Weighted Average Average Exercise Exercise Options Price Options Price Outstanding at beginning of year 97,000 $16.63 - - Granted 162,200 23.59 97,000 $16.63 Exercised (9,820) 16.63 - - Cancelled (17,540) 16.63 - - Outstanding at end of year 231,840 $21.97 97,000 $16.63 Exercisable at end of year 230,840 $21.89 - - Weighted average fair value of options granted during the year $4.26 $3.75
The exercise prices and weighted average contractual lives of stock options outstanding at September 30, 1997 were as follows:
Weighted Average Remaining Options Contractual Options Exercise Price Outstanding Life in Years Exercisable $16.63 69,640 8.0 69,640 23.50 161,200 8.9 161,200 33.75 1,000 9.7 - 231,840 8.6 230,840
J. Shareholder Rights Plan: On January 17, 1996, the Board of Directors of the company adopted a shareholder rights plan and declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of common stock. The company adopted the plan to protect shareholders against unsolicited attempts to acquire control of the company that do not offer what the company believes to be an adequate price to all shareholders. The dividend was paid on February 2, 1996, to the shareholders of record on that date. Each Right entitles the registered holder thereof to purchase from the company one-four hundredth of a share of Series A Preferred Stock, par value $.003 per share, of the company at a price of $75.00, subject to adjustment, and restated for the January 1997 stock split. The Rights expire on January 17, 2006. The Rights are not exercisable or transferable apart from the company common stock until the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired beneficial ownership of 15% or more of the outstanding common shares or (ii) 15 business days (or such later date as may be determined by action of the Board of Directors of the company prior to such time as any person or group of affiliated persons becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding common shares. The Board of Directors may redeem the Rights in whole, but not in part, at a redemption price of $.003 per Right at any time prior to the acquisition by an Acquiring Person of 15% or more of the outstanding company common stock. K. Leases: The company has entered into leases for certain facilities. Future minimum rental commitments under these operating leases are: $1,425 in 1998, $1,370 in 1999, $962 in 2000, and $375 in 2001. Rent expense for leases was approximately $1,423, $1,228, and $765, for 1997, 1996, and 1995, respectively. L. Contingencies: The company is currently involved in matters of litigation arising from the normal course of business, including certain environmental and product liability matters. The company had accruals of approximately $1,953 and $2,058 at September 30, 1997 and 1996, respectively. These accruals are based on the company's current estimate of the most likely amount of losses that it believes will be incurred. These amounts, which are expected to be paid over the next several years, have been included in accounts payable and accrued expense. The most significant portion of these accruals relates to the matters in the following two paragraphs: The company is involved in certain environmental matters, in several of which it has been designated a "de minimis potentially responsible party" with respect to the cost of investigation and cleanup of third- party sites. The company's current accrual for these matters is based on costs incurred to date that have been allocated to the company and its estimate of the most likely future investigation and cleanup costs. There is, as in the case of most environmental litigation, the theoretical possibility of joint and several liability being imposed upon the company for damages which may be awarded. It is the opinion of management, after consultation with legal counsel, that additional liabilities, if any, resulting from these matters are not expected to have a material adverse effect on the financial condition of the company, although such matters could have a material effect on quarterly or annual operating results and cash flows when (or if) resolved in a future period. M. Financial instruments: The estimated fair values of the company's financial instruments at September 30 were as follows:
1997 1996 Cash and cash equivalents $14,999 $13,070 Short-term borrowings (7,908) (15,310) Long-term debt (24,490) (29,500)
The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and cash equivalents: The carrying amounts approximate fair value because of the short-term maturity of the instruments. Short-term borrowings: The carrying amounts approximate fair value because of the short-term maturity of the instruments and market rates of interest. Long-term debt: Fair value estimate is based on rates currently offered to the company for similar debt of the same maturities. N. Company operations: The company designs and manufactures engine fuel delivery and engine control systems, subsystems, and components in the United States and in other countries. The company does business with the government as both a prime contractor and a subcontractor. Substantially all contracts are firm fixed price and may require cost data to be submitted in connection with contract negotiations. The contracts are subject to government audit and review. Billings to a single customer were approximately 17%, 17%, and 16%, of the net billings to customers in 1997, 1996, and 1995, respectively. The company's accounts receivable from the customer were $15,513 and $15,375 at September 30, 1997 and 1996, respectively. Billings derived from domestic sales to unaffiliated customers in other countries were approximately 15%, 11%, and 12%, of the net billings to customers in 1997, 1996, and 1995, respectively. Intercompany transfers are made at established intercompany selling prices. Summarized financial information relating to these operations is as follows:
United Other States Countries Eliminations Total 1997 Net billings: Customers $307,703 $134,513 $ - $442,216 Intercompany transfers 33,939 4,101 (38,040) - $341,642 $138,614 $(38,040) $442,216 Earnings before income taxes and equity in loss of unconsolidated affiliate $ 21,143 $ 18,545 - $ 39,688 Earnings before equity in loss of unconsolidated affiliate $ 12,459 $ 11,890 - $ 24,349 Net earnings $ 6,250 $ 11,890 - $ 18,140 Identifiable assets $268,398 $ 79,712 - $348,110 1996 Net billings: Customers $289,624 $127,666 $ - $417,290 Intercompany transfers 30,928 3,533 (34,461) - $320,552 $131,199 $(34,461) $417,290 Earnings before income taxes $ 17,324 $ 17,857 - $ 35,181 Net earnings $ 11,108 $ 11,070 - $ 22,178 Identifiable assets $272,890 $ 75,908 - $348,798 1995 Net billings: Customers $261,443 $118,293 $ - $379,736 Intercompany transfers 29,680 4,101 (33,781) - $291,123 $122,394 $(33,781) $379,736 Earnings before income taxes $ 5,057 $ 15,126 - $ 20,183 Net earnings $ 3,646 $ 8,290 - $ 11,936 Identifiable assets $271,508 $ 78,091 $ - $349,599
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The management of Woodward Governor Company has prepared, and is responsible for the accuracy and consistency of, the financial statements and other information included in this annual report. Management believes that the financial statements have been prepared in conformity with generally accepted accounting principles and has made what it believes to be reasonable and prudent judgments and estimates where necessary. The company has developed a system of internal accounting control designed to provide reasonable assurance that its financial records are accurate, assets are safeguarded, transactions are executed in accordance with management's authorizations, and financial statements fairly present the financial position and results of operations of the company. The internal accounting control system is tested, monitored, and revised as necessary. The Board of Directors has an audit committee comprised of outside directors, who meet periodically with management and the company's independent auditors to review internal accounting control, auditing, and financial reporting matters. The independent auditors have unrestricted access to the audit committee and may meet with or without management being present. The company's independent auditors, Coopers & Lybrand L.L.P., audited the financial statements prepared by the management of Woodward Governor Company. Their opinion on these financial statements is presented on page 33. John A. Halbrook Chairman and Chief Executive Officer Stephen P. Carter Vice President, Chief Financial Officer and Treasurer REPORT OF INDEPENDENT ACCOUNTANTS Shareholder and Worker Members Woodward Governor Company We have audited the accompanying consolidated balance sheets of Woodward Governor Company and Subsidiaries as of September 30, 1997 and 1996, and the related statements of consolidated earnings, shareholders' equity, and cash flows for the years ended September 30, 1997, 1996, and 1995. These financial statements are the responsi- bility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Woodward Governor Company and Subsidiaries as of September 30, 1997 and 1996, and the results of their consolidated operations and their cash flows for the years ended September 30, 1997, 1996, and 1995, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Chicago, Illinois November 8, 1997 SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
1997 Fiscal Quarters 1996 Fiscal Quarters In thousands except per share data) First Second Third Fourth First Second Third Fourth Net billings $99,029 $106,546 $115,761 $120,880 $88,142 $106,785 $106,034 $116,329 Gross profit 27,772 26,838 28,514 33,255 23,385 26,442 26,722 35,854 Earnings before equity in loss of unconsol. affiliate 5,793 4,200 5,570 8,786 4,175 4,550 4,965 8,488 Net earnings $ 5,138 $ 3,430 $ 4,838 $ 4,734 $4,175 $ 4,550 $ 4,965 $ 8,488 Net earnings per share (1) (3) $ 0.44 $ 0.30 $ 0.42 $ 0.42 $ 0.36 $ 0.39 $ 0.43 $ 0.74 Cash dividends per share (1) 0.2325 0.2325 0.2325 0.2325 0.2325 0.2325 0.2325 0.2325 Common stock price per share (2) High $ 33.50 $ 37.25 $ 36.75 $ 37.50 $18.38 $ 22.00 $ 23.25 $ 23.25 Low 21.50 25.50 26.25 32.25 16.25 18.25 21.25 21.75 Close 33.00 27.25 36.00 35.00 18.38 21.19 22.13 23.25 (1)On January 23, 1997, a four-for-one stock split was distributed to shareholders. Accordingly, all per share information has been restated to reflect the effect of the split. (2)On January 14, 1997, common shares of the company began trading on the Nasdaq National Market. Prior to this date, the shares of the company were listed on the NASD OTC Bulletin Board. Accordingly, the share prices for periods prior to this date reflect only the high and low bid prices based upon quotations from brokers and may not necessarily represent actual transactions. Share prices have also been restated to reflect the four-for-one stock split. (3)The 1997 fourth quarter net earnings includes the impact of the company's share of the GENXON joint venture loss of approximately $.17 per share. Additionally, the company, according to the joint venture agreement, was committed to provide 80% of the first $10 million of funding which has been completed in 1997. As a result, the accumulated investment cost exceeded the company's 50% share of the joint venture cumulative losses. This difference was expensed in the fourth quarter, affecting net earnings per share by approximately $.18. The accumulated investment cost will not exceed the company's 50% share of the joint venture cumulative losses in future periods, as the company has expensed all required initial funding, and future funding and loss recognition will be on a 50/50 basis.
SUMMARY OF OPERATIONS/TEN YEAR RECORD (In thousands of dollars except share amounts and other data) Net Billings, Costs, and Earnings
Net % of For Billings Total Net Earnings Avg. For the For Prod. Costs and Income Per % of Shrhld the Year and Serv. Expenses Taxes Amount Share Sales Equity Year 1997 $442,216 $402,528 $15,339 $18,140*** $ 1.58*** 4.1 8.7 1997 1996 417,290 382,109 13,003 22,178 1.92 5.3 10.9 1996 1995 379,736 359,553** 8,247 11,936 1.03 3.1 6.1 1995 1994 333,207 338,402** (1,922) (3,273) (0.28) (1.0) (1.7) 1994 1993 331,156 308,072** 9,695 13,389* 1.13* 4.0 6.3 1993 1992 374,173 341,197** 12,764 20,212 1.81 5.4 9.4 1992 1991 361,924 323,907 13,724 24,293 2.22 6.7 12.1 1991 1990 340,128 293,913 16,776 29,439 2.68 8.7 16.0 1990 1989 299,789 258,659 15,627 25,503 2.32 8.5 15.5 1989 1988 277,656 238,108 15,306 24,242 2.21 8.7 16.5 1988
Dividends, Expenditures, and Other Data
Weighted At For Average Cash Dividends Reg. the the Shares Per Capital Deprec. Wrker Shrhdr Year Year Outstanding Amount Share Expend. Expense Mmbrs Mmbrs End 1997 11,481,545 $10,681 $0.93 $21,152 $21,854 3,246 1,994 1997 1996 11,570,484 10,758 0.93 21,163 22,786 3,211 2,029 1996 1995 11,623,000 10,811 0.93 18,988 23,334 3,071 2,179 1995 1994 11,764,708 10,956 0.93 16,515 26,114 3,439 2,256 1994 1993 11,889,200 11,057 0.93 18,335 24,837 3,264 2,301 1993 1992 11,178,628 10,330 0.92 52,684 22,241 3,632 2,301 1992 1991 10,967,352 10,145 0.92 33,075 18,236 3,953 2,303 1991 1990 10,966,248 9,181 0.84 22,057 15,397 3,673 2,209 1990 1989 10,996,224 7,971 0.72 31,190 13,165 3,317 2,084 1989 1988 10,979,328 6,862 0.62 21,540 11,213 3,180 1,919 1988
Financial Position
At At the Plant and Long- Shrhldrs' Eqity the Year Working Current Equipment Total term Per Year End Capital Ratio Net Assets Debt Amount Share End 1997 $124,827 2.5 to 1 $110,948 $348,110 $17,717 $210,614 $18.40 1997 1996 121,103 2.4 to 1 114,213 348,798 22,696 207,995 18.01 1996 1995 116,364 2.3 to 1 118,066 349,599 27,796 197,903 17.05 1995 1994 113,751 2.7 to 1 122,911 323,318 32,665 193,846 16.57 1994 1993 107,809 2.7 to 1 144,016 332,461 36,246 206,222 17.36 1993 1992 103,818 2.5 to 1 151,126 331,653 40,135 219,690 18.48 1992 1991 105,213 2.4 to 1 118,417 306,534 17,300 208,564 19.02 1991 1990 115,737 3.3 to 1 101,985 269,221 18,700 194,081 17.70 1990 1989 83,009 2.2 to 1 96,075 249,833 - 173,241 15.74 1989 1988 81,798 2.6 to 1 78,504 211,240 - 156,083 14.19 1988
Management's Financial Summary and Analysis is on pages 13-18. *Net earnings for 1993 is before cumulative effect of accounting changes. **Total costs and expenses includes restructuring expense of $5,927, $23,700, $3,480, and $2,741 for 1995, 1994, 1993, and 1992, respectively. ***Net earnings for 1997 includes a reduction for the equity in loss of an unconsolidated affiliate of $6,209, or $.54 per share, net of tax. EX-21 4 SUBSIDIARIES Exhibit 21 Woodward Governor Company Subsidiaries of the Registrant Woodward Governor Nederland B.V. Hoofddorp, The Netherlands Woodward Governor (U.K.) Limited Reading, England Woodward Governor GmbH Lucerne, Switzerland and Hoofddorp, The Netherlands Woodward Governor (Japan) Ltd. Tomisato, Chiba, Japan and Kobe, Japan Woodward Governor (Reguladores) Limitada Campinas, Sao Paulo, Brazil Woodward Governor (Quebec) Inc. Montreal, Quebec, Canada Woodward Governor France S.A.R.L. Venissieux, France Woodward Governor Asia/Pacific PTE. LTD. Singapore, Republic of Singapore Woodward Governor Poland, Limited Warsaw, Poland Woodward Governor Germany GmbH Aken and Kelbra, Germany HSC Controls, Inc. Buffalo, New York Woodward Governor de Mexico S.A. de C.V. Mexico City, Mexico Woodward Governor Company (New Zealand) Limited Christchurch, New Zealand Woodward Governor India PTE. LTD. Ballabgarh, India Woodward Aircraft Controls Prestwick, Inc. Prestwick, Scotland EX-23 5 CONSENT OF INDEP. AUDITORS CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Woodward Governor Company and Subsidiaries on Form S-8 (File No. 333- 104-09) of our report dated November 8, 1997, on our audits of the consolidated financial statements and financial statement schedule of Woodward Governor Company and Subsidiaries as of September 30, 1997 and 1996, and for the years ended September 30, 1997, 1996 and 1995, which report is incorporated by reference in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Chicago, Illinois December 23, 1997 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Woodward Governor Company and Subsidiaries on Form S-8 (File No. 333-104-09) of our report dated October 17, 1997, on our audit of the financial statements of GENXON(tm) Power Systems, L.L.C. as of September 30, 1997 and for the year then ended, which report is incorporated by reference in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. San Jose, California December 23, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Financial Statements for the fiscal year ended September 30, 1997, included herein in Exhibit 13, and is qualified in its entirety by reference to such financial statements. 1000 YEAR SEP-30-1997 SEP-30-1997 14999 0 94563 2757 83249 209705 316867 205919 348110 84878 17717 0 0 106 210508 348110 442216 442216 325837 398132 2014 0 2382 39688 15339 18140 0 0 0 18140 1.57 1.57
EX-99 7 GRAPH DESCRIP ADDITIONAL EXHIBIT - DESCRIPTION OF ANNUAL REPORT GRAPHS FOR THE YEAR ENDED SEPTEMBER 30, 1997 An explanation of the graphs which appear in the "Financial Highlights" on page 1 of the registrant's annual report for the fiscal year ended September 30, 1997. NET BILLINGS: This stacked bar graph shows net billings to customers in millions of dollars for Aircraft Controls and Industrial Controls for the fiscal years ended 1993 through 1997. Consolidated plot points are $331, $333, $380, $417, and $442 with the first plot point being 1993. Aircraft Controls' plot points are $152, $141, $162, $184, and $199 and Industrial Controls' plot points are $179, $192, $218, $233, and $243, both with the first plot point being 1993. NET EARNINGS (LOSS): The bar graph for consolidated net earnings (loss) before the cumulative effect of accounting changes in 1993 is in millions of dollars for fiscal years 1993 through 1997. The plot points beginning with 1993 are $13, -$3, $12, $22, and $18. A second plot point in 1997 of $24 reflects earnings before equity in loss of an unconsolidated affiliate. NET EARNINGS (LOSS) AND CASH DIVIDENDS PER SHARE: The bar graph for consolidated net earnings (loss) and cash dividends per share is for fiscal years ended 1993 through 1997. For fiscal year ended 1993 the net earnings point is before cumulative effect of accounting changes. Beginning with 1993, plot points for net earnings per share are $1.13, -$.28, $1.03, $1.92, and $1.58. Cash dividends per share plot points, beginning with 1993, are $.93 in all years. EX-11 8 STMT COMPUT OF PER SHARE EARNINGS Exhibit 11 Woodward Governor Company Statement Re Computation of Per Share Earnings Year Ended September 30, (in 000's) 1997 1996 1995 Primary Earnings per Share: Earnings Net earnings applicable to common stock $18,140 $22,178 $11,936 Shares Weighted average number of common shares 11,482 11,570 11,623 Add: Dilutive effect of outstanding stock options (as determined by application of the treasury stock method) 44 6 - Weighted average shares, as adjusted 11,526 11,576 11,623 Primary Earnings per Share $1.57 $1.92 $1.03 Fully-Diluted Earnings per Share: Earnings Net earnings applicable to common stock 18,140 22,178 11,936 Shares Weighted average shares, as adjusted 11,526 11,576 11,623 Add: Additional fully-dilutive effect of outstanding stock options 8 4 - Weighted average shares, as adjusted for fu 11,534 11,580 11,623 Fully-Diluted Earnings per Share $1.57 $1.92 $1.03 Note: This calculation is submitted in accordance with Regulation S-K item 601(b) (11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. -----END PRIVACY-ENHANCED MESSAGE-----