-----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, GI/BBSdu+EpQzRyYlT9M+aPGquKxVYxC2PvnvBcivaz6Dyz+pyNhyl/r0pdcOrmN iccjm8//yrA3AIkQWzF6Vg== /in/edgar/work/20000801/0000108312-00-000015/0000108312-00-000015.txt : 20000921 0000108312-00-000015.hdr.sgml : 20000921 ACCESSION NUMBER: 0000108312-00-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000801 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WOODWARD GOVERNOR CO CENTRAL INDEX KEY: 0000108312 STANDARD INDUSTRIAL CLASSIFICATION: [3620 ] IRS NUMBER: 361984010 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-08408 FILM NUMBER: 683017 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-Q 1 0001.txt 3RD QTR FILING UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q { X } QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR { } TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from...............to............... Commission file number 0-8408 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) (815) 877-7441 (Registrant's telephone number, including area code) 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 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes... No... As of June 30, 2000, 11,273,537 shares of common stock with a par value of $.00875 cents per share were outstanding. WOODWARD GOVERNOR COMPANY FORM 10-Q For the Quarter Ended June 30, 2000 INDEX Description Part I. Financial Information Item 1. Financial Statements Statements of Consolidated Earnings for the three months ended June 30, 2000 and 1999 Statements of Consolidated Earnings for the nine months ended June 30, 2000 and 1999 Consolidated Balance Sheets as of June 30, 2000 and September 30, 1999 Statements of Consolidated Cash Flows for the nine months ended June 30, 2000 and 1999 Notes to Consolidated Financial Statements Item 2. Management Discussion and Analysis of Results of Operations and Financial Condition Part II. Other Information Item 6. Reports on Form 8-K Signatures WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED EARNINGS for the three months ended June 30, 2000 and 1999 (in thousands except per share amounts) (Unaudited)
2000 1999 Net billings for products and services $155,496 $139,239 Costs and expenses: Cost of goods sold 116,717 100,245 Sales, general, and administrative expenses 19,980 19,914 Amortization of intangible assets 1,631 1,698 Interest expense 2,842 2,856 Interest income (214) (218) Other expense/(income)--net (25) 779 Gain on sale of business (25,244) - Total costs and expenses, net of gain 115,687 125,274 Earnings before income taxes and equity in loss of unconsolidated affiliate 39,809 13,965 Income taxes 13,631 5,578 Earnings before equity in loss of unconsolidated affiliate 26,178 8,387 Equity in loss of unconsolidated affiliate, net of tax 13 308 Net earnings $26,165 $8,079 Basic earnings per share $2.33 $0.72 Diluted earnings per share $2.32 $0.72 Weighted-average number of basic shares outstanding 11,252 11,258 Weighted-average number of diluted shares outstanding 11,275 11,292 Cash dividends per share $0.2325 $0.2325 See accompanying Notes to Consolidated Financial Statements.
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED EARNINGS for the nine months ended June 30, 2000 and 1999 (in thousands except per share amounts) (Unaudited)
2000 1999 Net billings for products and services $438,173 $428,555 Costs and expenses: Cost of goods sold 332,710 317,824 Sales, general, and administrative expenses 58,649 59,611 Amortization of intangible assets 4,806 5,104 Restructuring expense - 8,174 Interest expense 8,727 9,379 Interest income (553) (693) Other expense--net 328 1,960 Gain on sale of business (25,244) - Total costs and expenses, net of gain 379,423 401,359 Earnings before income taxes and equity in loss of unconsolidated affiliate 58,750 27,196 Income taxes 21,116 10,870 Earnings before equity in loss of unconsolidated affiliate 37,634 16,326 Equity in loss of unconsolidated affiliate, net of tax 90 979 Net earnings $37,544 $15,347 Basic earnings per share $3.34 $1.36 Diluted earnings per share $3.33 $1.36 Weighted-average number of basic shares outstanding 11,256 11,275 Weighted-average number of diluted shares outstanding 11,284 11,292 Cash dividends per share $0.6975 $0.6975 See accompanying Notes to Consolidated Financial Statements.
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars except per share amounts)
JUNE SEPTEMBER 30, 2000 30, 1999 (Unaudited) Assets Current assets: Cash and cash equivalents $14,399 $10,449 Accounts receivable, less allowance for losses of $5,118 for June and $4,417 for September 90,768 115,517 Inventories 104,042 104,257 Deferred income taxes 16,657 17,221 Total current assets 225,866 247,444 Property, plant, and equipment, at cost: Land 5,971 6,100 Buildings and improvements 128,765 128,668 Machinery and equipment 231,586 227,611 Construction in progress 2,234 3,534 368,556 365,913 Less allowance for depreciation 245,241 241,791 Property, plant, and equipment - net 123,315 124,122 Intangibles - net 151,757 156,802 Other assets 7,904 4,287 Deferred income taxes 15,747 18,009 Total assets $524,589 $550,664 Liabilities and shareholders' equity Current liabilities: Short-term borrowings $12,490 $7,303 Current portion of long-term debt 35,400 34,650 Accounts payable and accrued expenses 76,948 76,772 Taxes on income 9,212 4,327 Total current liabilities 134,050 123,052 Long-term debt, less current portion 77,000 139,000 Other liabilities 47,282 46,620 Commitments and contingencies - - Shareholders' equity represented by: Preferred stock, par value $.003 per share, authorized 10,000 shares, no shares issued - - Common stock, par value $.00875 per share, authorized 50,000 shares, issued 12,160 shares 106 106 Additional paid-in capital 13,202 13,300 Unearned ESOP compensation (7,719) (7,450) Accumulated other comprehensive earnings 4,105 9,351 Retained earnings 277,431 247,420 287,125 262,727 Less treasury stock, at cost 20,868 20,735 Total shareholders' equity 266,257 241,992 Total liabilities and shareholders' equity $524,589 $550,664 See accompanying Notes to Consolidated Financial Statements.
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS for the nine months ended June 30, 2000 and 1999 (in thousands of dollars) (Unaudited)
2000 1999 Cash flows from operating activities: Net earnings $37,544 $15,347 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 23,014 24,922 Net gain on sale of property, plant, and equipment (148) (948) Gain on sale of business (25,244) - Deferred income taxes 2,826 (59) ESOP compensation expense (269) (171) Equity in loss of unconsolidated affiliate 142 1,574 Changes in operating assets and liabilities, net of acquisitions and sale of business: Accounts receivable 10,947 11,817 Inventories (3,912) (3,866) Current liabilities, other than short-term borrowings and current portion of long-term debt 3,595 (7,485) Other--net (2,104) 223 Total adjustments 8,847 26,007 Net cash provided by operating activities 46,391 41,354 Cash flows from investing activities: Payments for purchase of property, plant, and equipment (21,287) (17,436) Proceeds from sale of property, plant, and equipment 1,121 4,144 Proceeds from sale of business - net of direct costs 42,027 - Investment in unconsolidated affiliate - (1,235) Business acquisitions, net of cash - (62) Net cash provided by (used in) investing activities 21,861 (14,589) Cash flows from financing activities: Cash dividends paid (7,847) (7,864) Proceeds from sales of treasury stock 1,423 - Purchases of treasury stock (1,762) (1,029) Net payments on borrowings under revolving lines (43,910) (12,384) Proceeds of long-term debt - - Payments of long-term debt (11,250) (118) Tax benefit applicable to ESOP dividend 314 286 Net cash used in financing activities (63,032) (21,109) Effect of exchange rate changes on cash (1,270) (1,788) Net change in cash and cash equivalents 3,950 3,868 Cash and cash equivalents, beginning of year 10,449 12,426 Cash and cash equivalents, end of period $14,399 $16,294 Supplemental cash flow information: Interest expense paid $9,668 $9,211 Income taxes paid $12,506 $11,308
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) The consolidated balance sheet as of June 30, 2000, the statements of consolidated earnings for the three and nine-month periods ended June 30, 2000 and 1999, and the statements of consolidated cash flows for the nine-month periods ended June 30, 2000 and 1999, were prepared by the company without audit. The September 30, 1999 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Information in this 10-Q report is based in part on estimates and is subject to year-end adjustments and audit. In our opinion, the figures reflect all adjustments necessary to present fairly the company's financial position as of June 30, 2000, the results of its operations for the three and nine-month periods ended June 30, 2000 and 1999, and its cash flows for the nine-month periods ended June 30, 2000 and 1999. All such adjustments were of a normal and recurring nature. The statements were prepared following the accounting policies described in the company's 1999 annual report on Form 10-K and should be read with the Notes to Consolidated Financial Statements on pages 26-33 of the 1999 annual report to shareholders. The statements of consolidated earnings for the three and nine-month periods ended June 30, 2000 are not necessarily indicative of the results to be expected for other interim periods or for the full year. (2) On May 31, 2000, we sold certain assets for cash and the buyer assumed certain liabilities. These assets and liabilities were associated with our turbine control retrofit business, and the resulting gain on the sale is reported separately in the statements of consolidated earnings. The amount of the gain is an estimate, subject to final closing audit adjustments. The actual amount of cash proceeds from the sale, net of direct costs paid, is reported in the statement of consolidated cash flows. We have accrued for cash amounts expected to be paid in future periods, and such amounts will be recognized as investing cash flows when paid. (3) Earnings per share:
Three months Nine months ended ended June 30, June 30, (In thousands, except per share amounts) 2000 1999 2000 1999 Net earnings (A) $26,165 $ 8,079 $37,544 $15,347 Determination of shares: Weighted-average shares of common stock outstanding (B) 11,252 11,258 11,256 11,275 Assumed exercise of stock options 23 34 28 17 Weighted-average shares of common stock outstanding assuming dilution (C) 11,275 11,292 11,284 11,292 Basic earnings per share (A/B) $ 2.33 $ 0.72 $ 3.34 $ 1.36 Diluted earnings per share (A/C) $ 2.32 $ 0.72 $ 3.33 $ 1.36
The following stock options were outstanding during the three and nine-months ended June 30, 2000 and 1999, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares during the quarters.
Three months Nine months ended ended June 30, June 30, 2000 1999 2000 1999 Options 330,635 227,641 329,218 383,041 Weighted-average exercise price $29.04 $32.35 $29.55 $28.76
(4) Inventories:
June September (In thousands) 30, 2000 30, 1999 Raw materials $3,815 $2,452 Component parts 56,906 64,059 Work in process 32,525 26,955 Finished goods 10,796 12,021 104,042 105,487 Less progress payments - (1,230) $104,042 $104,257
(5) Included in accounts payable and accrued expenses are accounts payable of $21,952,000 at June 30, 2000, and $20,923,000 at September 30, 1999. Also included in accounts payable and accrued expenses are accrued restructuring expenses of $9,000 at June 30, 2000, and $475,000 at September 30, 1999. Accrued restructuring expense and its decrease are primarily due to member termination benefits. In the three months and nine months ended June 30, 2000, we developed plans to reduce the number of people in an Industrial Controls facility by 44, and accrued and expensed $1,229,000. By June 30, 2000, 25 of the 44 had been terminated and paid. The accrual for the remaining 19 people totaled $551,000 at June 30, 2000. (6) The assets and liabilities of substantially all subsidiaries outside the United States are translated to the United States dollar at period-end rates of exchange, and earnings and cash flow statements are translated at weighted-average rates of exchange. Translation adjustments are accumulated with other comprehensive earnings (losses) as a separate component of shareholders' equity. We have no other components of other comprehensive earnings. The company's total comprehensive earnings were as follows:
Three months Nine months ended ended June 30, June 30, (In thousands) 2000 1999 2000 1999 Net earnings $26,165 $8,079 $37,544 $15,347 Other comprehensive losses (1,844) (2,406) (5,338) (2,779) Total comprehensive earnings $24,321 $5,673 $32,206 $12,568
(7) Segment information:
Three months Nine months ended ended June 30, June 30, (In thousands) 2000 1999 2000 1999 Aircraft Engine Systems: External net billings $84,999 $73,097 $227,443 $235,626 Intersegment billings 852 274 1,410 1,004 Segment earnings 13,110 10,676 22,124 39,797 Industrial Controls: External net billings $49,891 $47,573 $141,388 $140,095 Intersegment billings 3,508 7,541 14,514 18,547 Segment earnings 9,497 10,112 29,438 20,975 Other Segments: External net billings $20,606 18,569 $69,342 $52,834 Intersegment billings 977 1,753 3,080 3,044 Segment earnings (losses) (505) (207) 3,309 (5,079)
The difference between the total of segment earnings (losses) and the statements of consolidated earnings follows:
Three months ended Nine months ended June 30, June 30, (In thousands) 2000 1999 2000 1999 Total earnings for reportable segments $22,607 $20,788 $51,562 $60,772 Other segments' earnings (losses) (505) (207) 3,309 (5,079) Restructuring expense, interest expense, interest income, and gain on sale of business 22,616 (2,638) 17,070 (16,860) Unallocated corporate expenses (4,909) (3,978) (13,191) (11,637) Consolidated earnings before income taxes and equity in loss of unconsolidated affiliate $39,809 $13,965 $58,750 $27,196
Segment assets are as follows:
At June 30, At September 30, (In thousands) 2000 1999 Aircraft Engine Systems $320,004 $330,299 Industrial Controls 113,676 126,344 Other segments 30,902 40,129
PART I - ITEM 2 WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION We have prepared the following discussion and analysis to help you better understand our results of operations and financial condition. This discussion should be read with the consolidated financial statements, including the notes. RESULTS OF OPERATIONS Our results of operations are discussed and analyzed by reportable segment. We have two reportable segments - Aircraft Engine Systems and Industrial Controls. Aircraft Engine Systems provides fuel control systems and components primarily to original equipment manufacturers of aircraft engines. Industrial Controls provides fuel control systems and components primarily to original equipment manufacturers of industrial engines and turbines. Our other operations include Global Services and Automotive Products. Global Services focused on providing control systems and related services to industrial engine users in retrofit situations. The turbine control retrofit portion of Global Services was sold in the third quarter of fiscal year 2000. Automotive Products focuses on products for the non-automotive small engine markets that require low-cost, high-volume, high- reliability manufacturing processes characteristic of suppliers to the automotive industry. Our business is currently in the process of being reorganized around our Aircraft Engine Systems and Industrial Controls segments. As a result, we expect the remaining portion of Global Services and Automotive Products to be combined with Industrial Controls in the fourth quarter of fiscal year 2000. In the current quarter, however, they continue to be reported as other operations. The segment earnings reported for these segments in the discussion and analysis that follows does not reflect restructuring expense, interest expense, interest income, gain on sale of business, and allocations of corporate expenses, and is before income taxes and equity in loss of unconsolidated affiliate. These other items are separately discussed and analyzed. Aircraft Engine Systems
Three months ended Nine months ended June 30, June 30, (In thousands) 2000 1999 2000 1999 External net billings $84,999 $ 73,097 $227,443 $ 235,626 Segment earnings 13,110 10,676 22,124 39,797
External net billings of Aircraft Engine Systems increased in the three months ended June 30 and decreased in the nine months ended June 30 in 2000 as compared to 1999. In addition to normal period-to-period variability, we experienced increases in billings for industrial nozzles, particularly in the third quarter, and decreases in billings related to aftermarket revenues. The increase in industrial nozzle billings resulted from strong demand for these components, which is expected to continue over the next several quarters. We believe the decrease in aftermarket revenues may be caused by broader industry trends, including the lengthening of time between our customers' discretionary repair and overhaul activities, increasing competition from original equipment manufacturers that have expanded their own aftermarket service offerings, and increasing reliability of our components. In addition, in fiscal year 1999 our first quarter billings were relatively strong due in part to shipments that were originally scheduled for delivery in the fourth quarter of fiscal year 1998. With improvements in delivery performance, we did not have similar shipments this year, impacting our nine-months comparison. Segment earnings of Aircraft Engine Systems were impacted by early retirement and termination benefits totaling $1.4 million for the three months ended June 30, 2000, and $4.8 million for the nine months ended June 30, 2000. These benefits were offered as part of a workforce management program to align staffing levels with expected demand. Without the expenses related to these benefits, segment earnings of Aircraft Engine Systems would have been $14.5 million for the three months ended and $26.9 million for the nine months ended June 30, 2000. Higher billing levels in the three-month period this year compared to last year favorably impacted our earnings, as many of our costs are relatively fixed in nature. In addition, the three- month period benefited from reductions in our workforce. The decrease in the nine-month period can be attributed to the reduced billing levels this year as compared to last year, especially related to aftermarket revenues, and higher expenses in several areas that more than offset the benefits of the third- quarter reductions in our workforce. Our expenses increased this year over last year primarily because of ongoing product development activities, specific warranty issues, and the rapid expansion of our industrial nozzle business. Except for warranty, we believe these costs will benefit future periods. The early retirement and termination benefits were associated with reductions in our workforce that were completed on or before June 30, 2000. Currently, we are continuing to assess staffing levels in each of our Aircraft Engine Systems operations. Industrial Controls
Three months ended Nine months ended June 30, June 30, (In thousands) 2000 1999 2000 1999 External net billings $49,891 $ 47,573 $141,388 $ 140,095 Segment earnings 9,497 10,112 29,438 20,975
External net billings of Industrial Controls increased in both the three months and nine months ended June 30 in 2000 as compared to 1999. This increase is related to strong demand in the power generation markets. We intend to gain market share by offering original equipment manufacturers high quality products and competitive prices, as well as by introducing innovative new products. In particular, we will focus on the growing demand for new gas turbines. As an example, in the third quarter, 2000, we signed a five-year contract to supply fuel and combustion control systems and components for a customer's industrial gas turbines. We expect billings associated with this contract to exceed $500 million over the next five years. While it is difficult to quantify, we believe that about two-thirds of the sales under this contract will represent new business relative to today's sales volumes. Segment earnings of Industrial Controls were impacted by termination benefits totaling $1.2 million in both the three months and nine months ended June 30, 2000. Without the expenses associated with these benefits, segment earnings for Industrial Controls would have been $10.7 million for the three months ended, and $30.6 million for the nine months ended June 30, 2000. Segment earnings of Industrial Controls were also adversely affected by a provision for a company's uncollectible receivables of $0.9 million in the three months and nine months ended June 30, 2000. Generally, Industrial Controls has benefited from our March 1999 reorganization, which enabled it to lower costs and increase its focus on engine and turbine manufacturers. The termination benefits were associated with plans to reduce the number of people in a facility that Industrial Controls shared with our turbine control retrofit business, which was sold. By June 30, 2000, 25 members of Industrial Controls had been terminated and paid, and we identified and provided accruals totaling $0.6 million for an additional 19. Other Segments
Three months ended Nine months ended June 30, June 30, (In thousands) 2000 1999 2000 1999 External net billings $20,606 $18,569 $69,342 $ 52,834) Segment earnings (505) (207) 3,309 (5,079)
On May 31, 2000, we sold the turbine control retrofit business of Global Services. This sale resulted in a gain, which is separately reported and excluded from segment earnings. While this sale did not involve our Global Services business in its entirety, it does impact both our three-month and nine-month comparisons of external net billings and segment earnings of our other segments. External net billings of other segments increased in both the three months and nine months ended June 30 in 2000 as compared to 1999. These increases primarily resulted from the turbine control retrofit portion of Global Services, even though that portion of our business was sold May 31, 2000. As a result of this sale, our billings for these other segments are expected to decrease by approximately 50% in the fourth quarter as compared to the third quarter of 2000. However, the sale included a product agreement for us to supply controls for application in the retrofit business that will increase external net billings of Industrial Controls (and decrease its intersegment net billings). Our other segments' results improved in the nine months ended June 30 in 2000 as compared to 1999 primarily because of higher billings and cost reductions in Global Services. In fiscal year 1999, that portion of our business generated losses. However, following reorganization in March 1999 that resulted in an increased focus on the control system retrofit needs of industrial engine users, it improved its financial performance and generated earnings in fiscal year 2000. Its results account for most of the fiscal year 2000 improvement over fiscal year 1999. Improvements in Global Services were offset somewhat by higher expenses in Automotive Products, primarily associated with a more fully-developed selling and administrative infrastructure for conducting business and the development of new products. Expenses (Income) Excluded From Segment Earnings
Three months ended Nine months ended June 30, June 30, (In thousands) 2000 1999 2000 1999 Restructuring expense $ - $ - $ - $8,174 Interest expense 2,842 2,856 8,727 9,379 Interest income (214) (218) (553) (693) Gain on sale of business (25,244) - (25,244) - Corporate expenses 4,909 3,978 13,191 11,637
Restructuring expense was recognized in the nine months ended June 30, 1999, in connection with the March 1999 reorganization and the consolidation of two of our facilities. Industrial Controls was reorganized to separate the units serving engine and turbine manufacturers from those that serve the retrofit market to enable us to better focus on the precise needs of our customers and to align staffing levels with expected demand. We also consolidated two facilities. Interest expense decreased in both the three months and nine months ended June 30 in 2000 as compared to 1999 because we had lower levels of average outstanding debt this year as compared to last year, more than offsetting the effects of higher interest rates. Most significantly, we reduced our debt toward the end of our third quarter, 2000, as a result of proceeds generated from the sale of our turbine control retrofit business. This reduction will benefit future quarters. In the third quarter, 2000, we sold certain assets for cash and the buyer assumed certain liabilities. This transaction, which was associated with our turbine control retrofit business, resulted in a gain. The amount of the gain is an estimate, subject to final closing audit adjustments. We expect the actual amount of the gain to be finalized within the next few quarters. Corporate expenses increased in the nine months ended June 30 in 2000 as compared to 1999 most significantly due to the recognition of a gain of $1.0 million on the sale of non- operating real estate last year. Net Earnings
Three months ended Nine months ended June 30, June 30, (In thousands, except per share amounts) 2000 1999 2000 1999 Earnings before income taxes and equity in loss of unconsolidated affiliate $39,809 $13,965 $58,750 $27,196 Income taxes 13,631 5,578 21,116 10,870 Equity in loss of unconsolidated affiliate, net of tax 13 308 90 979 Net earnings $26,165 $ 8,079 $37,544 $ 15,347 Basic earnings per share $2.33 $ .72 $3.34 $1.36 Diluted earnings per share $2.32 $ .72 $3.33 $1.36
The increase in earnings before income taxes and equity in loss of unconsolidated affiliate resulted in an increase in income taxes in both the three months and nine months ended June 30 in 2000 as compared to 1999. Our effective income tax rate decreased primarily as a result of the sale of our turbine control retrofit business, which will be taxed at an overall effective rate that is lower than our business generally. The equity in loss of unconsolidated affiliate reflects our share of the losses generated by a 50/50 joint venture, GENXONT Power Systems, LLC. Since its inception, most of the activities and costs incurred were directly related to product development. GENXON reduced the amount of development activities in both the three months and nine months ended June 30 in 2000 as compared to 1999. GENXON is focused on the retrofit market for installed, out-of-warranty industrial gas turbines, which we believed would develop before the original equipment manufacturers markets developed. However, the original equipment manufacturers have shown strong interest in the technology and we continue to monitor the direction of that market. In the meantime, GENXON's costs will be significantly below the levels of those incurred in fiscal year 1999. Basic and diluted earnings per share increased in both the three months and nine months ended June 30 in 2000 as compared to 1999 by approximately the same percentage as net earnings. Changes in the weighted-average shares of common stock outstanding both before and after the assumed exercise of outstanding stock options were relatively small. Without this year's gain on the sale of our turbine control retrofit business and early retirement and other termination benefits, net earnings for the three months ended June 30 would have been $10.6 million ($0.94 per diluted share) in 2000 compared to $8.1 million ($0.72 per diluted share) in 1999. Also without these items, and without last year's restructuring expense and gain on the sale of real estate, net earnings for the nine months ended June 30 would have been $24.1 million ($2.13 per diluted share) in 2000 compared to $19.6 million ($1.74 per diluted share) in 1999. FINANCIAL CONDITION Our discussion and analysis of our financial condition is presented by segment for total segment assets, which consists of accounts receivable, inventories, property, plant, and equipment- net and intangibles-net. We also discuss and analyze our working capital, noncurrent liabilities and shareholders' equity and cash flows. Together, this discussion and analysis will help you assess our liquidity and capital resources, as well as understand changes in our financial condition. Assets
June 30, September (In thousands) 2000 30, 1999 Aircraft Engine Systems $320,004 $ 330,299 Industrial Controls 113,676 126,344 Other Segments 30,902 40,129 Unallocated corporate property, plant, and equipment-net and intangibles-net 5,300 3,926 Other unallocated assets 54,707 49,966 Total assets $524,589 $ 550,664
Aircraft Engine Systems' and Industrial Controls' total segment assets at June 30, 2000, were lower than at September 30, 1999, primarily because of decreases in accounts receivable. The decreases in accounts receivable are principally attributable to lower billing levels in the third quarter of fiscal year 2000 as compared to the latter part of the fourth quarter of fiscal year 1999. Included above with the other segments at September 30, 1999, are assets related to the turbine control retrofit business we sold. The total amount of segment assets sold is approximately $15 million. Selected Other Balance Sheet Items
June 30, September (In thousands) 2000 30, 1999 Total assets $524,589 $550,664 Working capital (current assets less current liabilities) 91,816 124,392 Long-term debt, less current portion 77,000 139,000 Other liabilities 47,282 46,620 Commitments and contingencies - - Shareholders' equity 266,257 241,992
Our balance sheet remained strong at June 30, 2000. Changes in our balance sheet from September 30, 1999, included a reduction in our long-term debt, made possible from cash flows generated from ongoing operations and from the sale of our turbine control retrofit business. Our working capital decreased primarily as a result of reductions in Aircraft Engine Systems and Industrial Controls accounts receivable (as indicated above) and from the sale of our turbine control retrofit business. We are currently involved in matters of litigation arising from the normal course of business, including certain environmental and product liability matters. Further discussion of these matters is in Note P to the Consolidated Financial Statements on page 32 in our 1999 annual report to shareholders, which was filed with our Form 10-K for the year ended September 30, 1999. Selected Cash Flow Items
Nine months ended June 30, (In thousands) 2000 1999 Net cash provided by operating activities $ 46,391 $ 41,354 Net cash provided by (used in) investing activities 21,861 (14,589) Net cash used in financing activities (63,032) (21,109)
Net cash provided by operating activities improved in the nine months ended June 30 in 2000 as compared to 1999, primarily as a result of changes in accrued and deferred income taxes that resulted from the gain on the sale of the turbine control retrofit business. We expect to make higher tax payments in the fourth quarter this year than we did last year as a result of this gain. Net cash provided by investing activities in the nine months ended June 30, 2000, included proceeds from the sale of our turbine control retrofit business. Excluding the proceeds from this sale, net cash used in investing activities in the nine months ended June 30, 2000, was $20.2 million. In the nine-month period last year, we received cash from the sale of non-operating real estate. In addition, our capital expenditures in the first nine months of fiscal year 2000 were $3.9 million higher than they were in the first nine months of fiscal year 1999. Of this amount, approximately $1.4 million can be attributed to software development costs not previously capitalized. Net cash used for financing activities reflects our payment of dividends and our reduction of debt, among other financing activities, made possible by the net cash generated from operating and investing activities. We reduced our debt by $55.2 million in the nine months ended June 30, 2000, and by $12.5 million in the nine months ended June 30, 1999. The most significant reason for the increased debt reduction this year as compared to last year is related to the sale of our turbine control retrofit business. Future cash flows from operations and available revolving lines of credit are expected to be adequate to meet the investing and financing cash requirements of our existing business during the next twelve months. However, it is possible business acquisitions could be made, during the next twelve months or in the future, that would require amendments to existing debt agreements and the need to obtain additional financing. OTHER MATTERS Market Risks Our long-term debt is sensitive to changes in interest rates. Also, assets, liabilities and commitments that are to be settled in cash and are denominated in foreign currencies are sensitive to changes in currency exchange rates. These market risks are discussed more fully in the Management Discussion and Analysis of Results of Operations and Financial Condition on page 20 of our 1999 annual report to shareholders, which was filed with our Form 10-K for the year ended September 30, 1999. Recent Accounting Pronouncements In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement provides guidance on accounting for the costs of software developed or obtained for internal use and is effective beginning October 1, 1999. As a result, we are now capitalizing certain software development costs that we expensed in the past. We have estimated that the effect of complying with this statement for planned projects will be to increase net earnings in fiscal year 2000 by approximately $0.8 million. Of this amount, we have already recognized an increase in net earnings of $0.7 million in the nine months ended June 30, 2000. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." Following a subsequent deferral of the original implementation date, it is effective in fiscal year 2001. This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. Among other requirements, it requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative. The company currently does not have any derivative instruments and does not expect this new statement to have any significant impact on our consolidated financial statements. PART II - OTHER INFORMATION Item 6(b) b) No Form 8-K was filed for the quarter ended June 30, 2000. SIGNATURES Pursuant to the requirements 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 July 31, 2000 /s/ John A. Halbrook John A. Halbrook, President and Chief Executive Officer July 31, 2000 s/ Stephen P. Carter Stephen P. Carter, Vice President, Chief Financial Officer and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----