-----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, KZTczGWXFlWrv79nFVEJjlAITGUA9uY/g1EfKzRyx8If4WRh1gHxHKV8O4CLRg2j /zqctsRF9Yp8f+sML9ux/w== 0000108312-96-000026.txt : 19961224 0000108312-96-000026.hdr.sgml : 19961224 ACCESSION NUMBER: 0000108312-96-000026 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961223 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: 1934 Act SEC FILE NUMBER: 000-08408 FILM NUMBER: 96684934 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) { X }Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended September 30, 1996 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) (Zip Code) Registrant's telephone number, including area code (815) 877-7441 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered None None Securities registered pursuant to Section 12(g) of the Act: Common stock, par value $.0625 per share (Title of Class) 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} 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 As of November 30, 1996, 2,887,095 shares of common stock with a par value of $.0625 per share were outstanding. The aggregate market value on this date of the voting stock held by non-affiliates of the registrant was approximately $237,180,384 (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 for the fiscal year ended September 30, 1996, 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 3, 1996, 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, established in 1870,designs and manufactures engine fuel delivery and engine control systems, subsystems and components. Products include devices that are used on diesel engines, steam turbines, industrial and aircraft gas turbines and hydraulic turbines. Woodward sells directly to original equipment manufacturers, service providers and equipment users world wide. 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 29 of the registrant's annual report for the fiscal year ended September 30, 1996 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 29 of the registrant's annual report for the fiscal year ended September 30, 1996 and is hereby incorporated by reference. (ii) There has been no public information regarding a new product or line of business requiring the investment of a material amount of total assets. (iii)Most 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, there is an increasing number of purchased electrical components used. There are numerous sources of most of the raw materials and components used by the Company in its operations, and they are believed to be in adequate supply. Woodward products 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, 1996. Seven other customers in total accounted for approximately 18% of consolidated sales in the fiscal year ended September 30, 1996. 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)Unfilled orders at September 30, 1996 totalled $218,020,000 or 24% higher than the September 30, 1995 total of $175,336,000. Management believes that unfilled orders is 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, orders may become firm only within thirty to sixty days of delivery. Consequently, the backlog of unfilled orders at the year-end cannot be relied upon as a valid indication of profitability in a subsequent year. Of the September 30, 1996 total, $172,017,000 currently is scheduled for fiscal year 1997 delivery. (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 increased from approximately 7 percent of total company shipments last year to 10 percent this year. Military shipments are principally made by the Company's Aircraft Controls business. (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 annual report for the fiscal year ended September 30, 1996 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. (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 31 of the registrant's annual report for the fiscal year ended September 30, 1996 and is hereby incorporated by reference. As of November 30, 1996, 3228 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 29 of the registrant's annual report for the fiscal year ended September 30, 1996 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. Item 2. Description of Property The registrant has plants located in five communities in the United States. Aircraft controls and related aircraft components are manufactured in Rockford, Illinois, and Buffalo, New York while industrial controls are manufactured in Fort Collins and Loveland, Colorado. The overhaul and repair of aircraft controls and sales of aircraft controls spare parts are done in the Rockton, Illinois facility. The registrant has ten facilities located overseas. Industrial controls are manufactured in Hoofddorp, The Netherlands; Reading, England; Aken and Kelbra Germany; and Tomisato, Chiba, Japan. Aircraft controls are assembled in Reading as well. A European aircraft product service center for overhaul and repair of aircraft controls is located in Hoofddorp, The Netherlands. Service shops are maintained in Sydney, Australia; Kobe, Japan; Campinas, Sao Paulo, Brazil; Singapore, Republic of Singapore; and Ballabgarh, India. All facilities were in excellent condition at the year-end and adequate production capacity is available to satisfy the Company's customers' needs throughout the coming year. In 1995, a plant in Stevens Point, Wisconsin was closed except for a small portion of the plant currently being leased to a Woodward contractor. The plant has been placed for sale with an international real estate broker. As yet, no acceptable offers have been received. The Company sold Bauer Aerospace in Avon, Connecticut during fiscal 1996, as discussed in the "Financial Summary and Analysis" on page 14 of the registrant's annual report for the fiscal year ended September 30, 1996 and is hereby incorporated by reference. Corporate offices are maintained at the plant in Rockford, Illinois. Plants located in Rockford and Rockton, Illinois; Fort Collins and Loveland, Colorado; Buffalo, New York; Hoofddorp, The Netherlands; and Chiba, Japan are owned by the Company. The facilities in Kobe, Japan; Campinas, Sao Paulo, Brazil; Reading, England; Sydney, Australia; Ballabgarh, India; Aken and Kelbra Germany; and Singapore, Republic of Singapore are leased. Additional leased sales offices are maintained worldwide. 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 consolidated financial statements on page 28 of the registrant's annual report for the fiscal year ended September 30, 1996 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, 1996 to a vote of shareholders, through the solicitation of proxies or otherwise. Executive Officers of the Registrant John A. Halbrook, age 51, is chairman and chief executive officer and was elected to this position on January 10, 1995. He was elected chief executive officer on November 16, 1993 and served as president from November 1991 until January 1995. He also served as chief operating officer from November 1991 until November 16, 1993. He had formerly been senior vice president in charge of Domestic Operations since January 1990. Vern H. Cassens, age 64, is senior vice president and chief financial officer and was elected to this position during 1988. Prior to this appointment he had been a vice president since 1983 and treasurer of the company from 1968 to 1983. He was also treasurer of the Company from 1988 until September 1996. Stephen P. Carter, age 45, was elected a vice president and treasurer of the Company in September, 1996. He had been serving as assistant treasurer since January 1994. He has been employed by the Company in management positions for the last five years. Ronald E. Fulkrod, age 52, is a vice president of the Company and Industrial Controls Manufacturing manager. He was elected to the vice president position in January 1993. He has been employed by the Company in management positions for the last five years. Chuck Kovac, age 40, was elected vice president of the Company and manager of the Industrial Controls Group in August 1996. He started with the Company in 1988 and has been employed in management positions for the last five years. C. Phillip Turner, age 56, is a vice president of the Company and manager of the Aircraft Controls Group. He was elected vice president in 1988. He was treasurer of the Company from 1983 to 1988, and secretary of the Company from 1977 to 1991. Carol J. Manning, age 47, is secretary of the Company. She was elected to this position in June 1991. She also served as administrative assistant to the chairman of the board from 1984 to 1994. All of the executive officers, unless otherwise noted, were elected to their present positions at the January 10, 1996 Board of Directors' meeting to serve until the organizational meeting of the Board of Directors to be held on January 8, 1997 or until their respective successors shall have been elected and qualified. Part II Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters Information with respect to number of shareholders is set forth in "Financial Highlights" which appears on Page 1 in the registrant's annual report for the fiscal year ended September 30, 1996 and is hereby incorporated by reference. Information with respect to common stock and dividends is set forth in the "Financial Summary and Analysis" on Page 18 of the registrant's annual report for the fiscal year ended September 30, 1996 and is hereby incorporated by reference. No equity securities of the Company were sold by the Company during the fourth quarter of the fiscal year ended September 30, 1996. Item 6. Selected Financial Data Information with respect to this matter is set forth in the "Summary of Operations/Ten Year Record" on Page 31 of the registrant's annual report for the fiscal year ended September 30, 1996 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 annual report for the fiscal year ended September 30, 1996 and is hereby incorporated by reference. Information with respect to forward-looking statements is set forth in the "Financial Summary and Analysis" on page 13 of the registrant's annual report for the fiscal year ended September 30, 1996 and is hereby incorporated by reference. Item 8. Financial Statements and Supplementary Data Information with respect to this matter is set forth in the registrant's annual report for the fiscal year ended September 30, 1996 (Financial Statements), as further set forth in the Index to Consolidated Financial Statements and Schedules (See Item 14) and is hereby incorporated by reference. Item 9. Changes in and Disagreements on Accounting and Financial Disclosure The accounting firm of Coopers & Lybrand L.L.P. has been engaged 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 the information with respect to executive officers which appears in Part I of this report, is set forth under the caption "Election of Directors" on Pages 7 and 8 of the registrant's proxy statement dated December 3, 1996, which was filed with the Securities and Exchange Commission within 120 days following the end of the registrant's fiscal year ended September 30, 1996, 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 13 of the registrant's proxy statement dated December 3, 1996, 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" on Page 6 and "Election of Directors" on Pages 7 and 8 of the registrant's proxy statement dated December 3, 1996, 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 "Compensation Committee Interlocks and Insider Participation" on Page 13 of the registrant's proxy statement dated December 3, 1996, 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 Data incorporated by reference to the registrant's annual report to shareholders for the fiscal year ended September 30, 1996: Statements of Consolidated Earnings (Loss) for the years ended September 30, 1996, 1995 and 1994 - 20 Consolidated Balance Sheets at September 30, 1996 and 1995 - 21 Statements of Consolidated Shareholders' Equity for the years ended September 30, 1996, 1995 and 1994 - 22 Statements of Consolidated Cash Flows for the years ended September 30, 1996, 1995 and 1994 - 23 Notes to Consolidated Financial Statements - 24-29 Report of Independent Accountants - 30 Financial Statement Schedule: Report of Independent Accountants S-1 - II. Valuation and Qualifying Accounts S-2 - Exhibits, Financial Statement Schedule, and Reports on Form 8-K (continued) Financial statements and schedules other than those listed on the preceding page 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. (b) There were no reports filed on Form 8-K during the fourth quarter of the fiscal year ended September 30, 1996. (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. 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. Exhibits, Financial Statement Schedule, and Reports on Form 8-K (continued) (3) Articles of incorporation One amendment to the by-law and bylaws (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 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. (13)Annual report to Except to the extent shareholders for the fiscal specifically incorporated year ended September 30, herein by reference, said 1996 report is furnished solely for the information of the Commission and is not deemed "filed" as part of this report. (21)Subsidiaries of the Information with respect to registrant subsidiary operations is filed as an exhibit hereto. (23)Consent of Independent Consent of Independent Accountants Accountants is filed as an exhibit hereto. (27)Financial data schedule Information with respect to financial data required by electronic filers is filed as an exhibit hereto. 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 accordance 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 Vern H. Cassens, senior vice president and chief financial officer. 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, 1996. 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 (Registrant) Name /s/ John A. Halbrook Director, Chairman of the John A. Halbrook Board and Chief Executive Officer /s/ Vern H. Cassens Director, Senior Vice Vern H. Cassens President and Chief Financial and Date 12/19/96 Accounting Officer 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 date indicated: Signature Title Date /s/ J. Grant Beadle Director J. Grant Beadle /s/ Carl J. Dargene Director 12/18/96 Carl J. Dargene /s/ Lawrence E. Gloyd Director 12/19/96 Lawrence E. Gloyd /s/ Thomas W. Heenan Director Thomas W. Heenan /s/ J. Peter Jeffery Director J. Peter Jeffrey /s/ Mark Leum Director 12/19/96 Mark Leum /s/ Michael T. Yonker Director 12/20/96 Michael T. Yonker 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 30 of the 1996 Annual Report to Shareholders and Worker Members of Woodward Governor Company and Subsidiaries. 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 12, 1996 WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES SCHEDULE VIII -VALUATION AND QUALIFYING ACCOUNTS for the years ended September 30, 1996, 1995 and 1994 (In thousands of dollars)
Col. A Col. B Col. C Col. D Col. E Additions Balance at Charged to Charged to Balance Beginning Costs and Other at End DESCRIPTION of Year Expenses Accounts (B) Deductions(A) of Year 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 1994: Allowance for Doubtful accounts $1,989 $977 $218 $163 $3,021 NOTE: (A) Represents accounts written off during the year with overseas currency translation adjustments increasing the deduction from reserves by $99 in 1996 and decreasing the deduction from reserves by $80 in 1995 and $71 in 1994. Writeoffs 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 Section 2.3 of the Bylaws of Woodward Governor Company as adopted by the Board of Directors at their meeting on January 15, 1996, to read as follows: RESOLVED FURTHER, that the first sentence of Section 2.3 of the Bylaws of the Corporation is amended and restated in its entirely to read as follows: Each stockholder entitled to vote in accordance with the terms of the Certificate of Incorporation and in accordance with the provisions of these bylaws shall, except as otherwise provided by the Certificate of Incorporation, be entitled to one vote, in person or by proxy, for each share of stock entitled to vote held by such stockholder, but no proxy shall be voted after three years from its date unless such proxy provides for a longer period. Section 2.3 of the Bylaws of Woodward Governor Company as adopted by the Board of Directors at their meeting on January 23, 1996, to read as follows: RESOLVED, that Section 4.1 of the Bylaws of the Corporation is hereby amended and restated in its entirety to read as follows: SECTION 4.1. COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors shall designate an Executive Committee, an Audit Committee, a Compensation Committee, a Selection Committee, a Management Operations Committee, and a Stock Option Committee, each of which shall have and may exercise the powers and authority of the Board of Directors to the extent hereinafter provided. The Board of Directors may designate one or more additional committees of the Board of Directors with such powers and authority and shall be specified in the resolution of the Board of Directors. Each committee shall consist of such number of directors not less than two as shall be determined from time to time by resolution of the Board of Directors. The Chairman of the Board of Directors shall be ex-officio a member of all committees of the Board of Directors other than the Audit Committee and the Stock Option Committee, and he shall be chairman of the Executive Committee. All actions of the Board of Directors designating committees, or electing or removing members of such committees, shall be taken by a resolution passed by a majority of the whole Board of Directors. Each committee shall keep a written record of all action taken by it. All action taken by a committee shall be reported to the Board of Directors at its meeting next succeeding such action and shall be subject to approval and revision by the Board of Directors, provided that no legal rights of third parties shall be affected by such revisions and in no event shall the Board of Directors take any action with respect to the Stock Option Committee which would cause the 1996 Long Term Incentive Compensation Plan as amended from time to time (the "Long Term Incentive Plan") to fail to comply with Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or cause the members of the Stock Option Committee not to qualify as "disinterested persons" under said Rule 16b-3. RESOLVED FURTHER, that the Bylaws of the Corporation are hereby the existing amended by adding the following new Section 4.9 thereto immediately following Section 4.8: SECTION 4.9. STOCK OPTION COMMITTEE. The Stock Option Committee shall have the power to administer the Corporation's Long Term Incentive Plan in accordance with the terms of the Long Term Incentive Plan, and to make all determinations and to take all such actions in connection therewith or in relation thereto as it deems necessary or advisable, including the granting of all incentives to eligible worker members in accordance with the terms of the Long Term Incentive Plan. RESOLVED FURTHER, that all shares of the Corporation's Common Stock issued pursuant to incentives granted in accordance with the terms of the Long Term Incentive Plan, upon the receipt by the Corporation of the consideration established by the Stock Option Committee in payment therefore, shall be fully paid and non-assessable. EX-13 3 BUSINESS DESCRIPTION Woodward Governor Company designs and manufactures engine fuel delivery and engine controls systems, subsystems, and components. CONTENTS To All Shareholder and Worker Members 2 Woodward - A World Leader 6 Financial Summary and Analysis 13 Financial Statements 19 Summary of Operations/Ten Year Record 31 Board of Directors 32 FINANCIAL HIGHLIGHTS
Fiscal year ended September 30th 1996 1995 1994 (In Thousands of Dollars except per share amounts and other data) Operating Results Net billings for products and services $417,290 $379,736 $333,207 Total costs and expenses* 382,109 359,553 338,402 Net earnings (loss) 22,178 11,936 (3,273) Per share 7.67 4.11 (1.11) Cash dividends per share 3.72 3.72 3.72 Year-end Financial Position Working capital 121,103 116,364 113,751 Total assets 348,798 349,599 323,318 Long-term debt 22,696 27,796 32,665 Shareholders' equity 207,995 197,903 193,846 Other Data Shareholders' equity per share $ 72.05 $ 68.21 $ 66.29 Worker members 3,211 3,071 3,439 Registered shareholder members 2,029 2,179 2,256 *Total costs and expenses includes restructuring expense of $5,927 and $23,700 for 1995 and 1994, respectively.
TO ALL SHAREHOLDER AND WORKER MEMBERS Woodward Governor Company Last year, I said we had turned a corner and the future held a promise of higher sales and profit levels. As we close fiscal year 1996, I am delighted to report Woodward has made what appears to be a good start toward fulfilling those expectations. Aircraft Controls saw an upturn in sales, which I find particularly encouraging. I believe the business has emerged from facing a diminishing market to a market filled with challenge and opportunity. Still, I do not believe the industry will be anywhere near the robust levels of a few years ago. Industrial Controls also had an increase in sales, but at a slower pace than that of Aircraft Controls. However, Industrial Controls serves many different markets, which offer a number of significant opportunities. We plan to take full advantage of these situations as a means of maintaining a steady rate of business growth. Sales for fiscal year 1996 were $417.3 million, a 10 percent increase over last year's $379.7 million. Net earnings for fiscal year 1996 totaled $22.2 million, 86 percent above last year's $11.9 million. Compared to last year's earnings per share of $4.11, fiscal year 1996 per share earnings grew to $7.67. What made this success possible? We can trace part of it to stronger market economies throughout the world. However, stronger markets alone did not cause our success. We had to plan and diligently work toward the plan. Although our task often seemed perplexing, we had two crucial factors working in our favor. One, perhaps the most important, consists of our members. The second factor concerns our strong focus on core competencies in the design, manufacture, and application of fuel control technologies. Not only were these factors important during the last year, but also they are the foundation for future success. With a creative, innovative, energized, focused-in other words empowered-membership and critical, market-focused core technologies, Woodward will remain a powerful contender in all of its world markets. Over the year, we have made more inroads toward empowerment. We encourage every member to take an active role in our operations and maintain a high degree of interest in the company's success. Therefore, shaping and maintaining a work environment that permits and rewards creativity has become an ongoing job for all Woodward leaders. For many decades, having a long-term career at Woodward meant showing up for work, working hard, and obeying rules. But during the last decade, the world changed, and to remain competitive and profitable, the company eliminated this expectation. We now recognize and reward success when members become thoroughly involved in the company and actively contribute to its success. I am very proud of the way members responded when I urged them to become more involved in the company's operation. They put their creativity to work and discovered many new concepts capable of adding greater value to our products. They generated ideas to reduce throughput times and past-due orders. They continue to improve manufacturing and materials management techniques, which further cut costs and inventory investment. I might add, although we continue to target inventory reduction, I'm not happy with the results we've achieved. I expect us to bear down on this troublesome task and show a significant improvement this coming year. Members also implemented more powerful design strategies; they took steps to eliminate paperwork and put up-to-date information right at their fingertips. They are centralizing many operations to cut costs, reduce time, and become more responsive to customer needs. Every day, more members make important decisions directly concerning their work. We leaders of the company must devote assets to continue building this kind of interactive, creative behavior. We need to simplify what we say and do, and we need to create a feeling of self-confidence and trust throughout Woodward. We have to focus our energies to electrify our thought processes and promote the idea that taking an intelligent risk is okay. We need to snuff out bureaucracy and break down departmental barriers that tend to squelch innovative thought. We achieve this by encouraging alliances among departments so they can reach goals no department alone can attain. We require leaders who can act vigorously, deliver on performance commitments, and encourage members to be creative and bold. These then are the kinds of leaders we need. As far as I'm concerned, if a leader cannot act accordingly, Woodward has no place for that person in a leadership role. To achieve these ends, we need to look at vitalizing our communication strategies, investing in productive training processes, and, most important of all, setting the benchmarks for members to follow. We need to eliminate any attitude of "I'll be the best I need to be" and replace it with "I'll become the very best I can be." As I mentioned, over the past year, we had good success toward achieving a more empowered Woodward. Still, we've just begun, and we have much more to accomplish. However, I have full trust that with the support of good positive-thinking leaders, our members are more than ready to meet the challenge. With members taking a more active role in the business, the second key to success centers on achieving the right blend of core competencies. Along with building an effective work environment, we need to provide the machines, processes and disciplines that will build these critical core competencies, which will allow us to serve our markets better than anyone else. For many years, our product base was fairly stable and did not require the time, energy, and expense of expanding our technology. Today, merely maintaining basic core technologies no longer is sufficient. Over the last few years, the world changed its way of doing business-and we had to change with it. We found ways of acquiring new technologies quickly, but with reasonable and prudent investment. We were able to offer the right products in the right places at the right cost. The upturn in Aircraft Controls was, to a degree, attributable to our commitment to change. By concentrating on strengthening our core technologies, we were able to develop vital components required for fully integrated fuel-delivery systems. As a result, we developed, tested, and marketed several new products. One of them consists of a new generation of fuel metering units (FMUs). Our work on the highly effective hydraulic multiplexer (HMUX) continues, and the industry eagerly has begun to discover the significant merits of this value- creating device. Aircraft Controls has taken another innovative approach by developing a new line of products, such as actuators and valves, outside our traditional product line. We expect these new devices will play a significant part in increasing sales revenues. Because we decided to focus on what we are good at doing, we have developed an expanded number of products important to fuel delivery systems demanded by the aircraft powerplant industry. Furthermore, by designing around a common-platforms philosophy, and using up-to-date design tools, we hold costs and reduce product development time and product delivery cycles. Rather than investing in electronic system technology, Aircraft Controls entered into an agreement with Lockheed Martin Control Systems, a company well versed in the manufacture of electronic control systems and components. With this decision, we transferred our full authority digital engine control (FADEC) technology to Lockheed Martin, one of the largest independent electronic controls suppliers. Woodward will use its well-defined core competencies to provide an expanding catalog of hydromechanical subsystems required for system integration. Lockheed Martin will concentrate on system electronics. Industrial Controls members face a different set of market challenges. This group must compete in, and meet, the needs of numerous niche markets. These markets range from original equipment manufacturers, to particular industries, to an operator of an individual engine or turbine driving a generator, pump, compressor, or other device. Therefore, complex challenges face these members, but they are meeting them aggressively. Through strategic planning, we achieved significant strides in a number of markets. Forecasts indicate the worldwide market for control systems designed for engines fueled by natural gas will double by the year 2000. We decided to take whatever steps necessary to capitalize on this opportunity by becoming the world's market leader in integrated natural gas engine control systems. To acquire the new technologies we needed to achieve our goal, we purchased Deltec Fuel Systems B.V. of Rotterdam, The Netherlands. We also entered into a licensing agreement with MESA Environmental to use its product line and technology for heavy-duty natural gas vehicles (NGV) and stationary gas engine applications. In very short order, we acquired the core knowledge to make us a leader in this industry. With Deltec's natural gas engine knowledge, the MESA Environmental license, and our product and manufacturing capabilities, we now offer the most extensive range of integrated systems in the world for natural gas fueled engines. We continued to build partnerships. At F. G. Wilson, Europe's largest supplier of engine-generator equipment, our control package is part of its standard offering. As a result, many engines, which otherwise may have used a competitor's controls, now use our equipment. To keep pace with customer needs, Woodward entered into negotiations with Catalytica Combustion Systems, Inc., a leader in turbine emission technology, to form a joint venture company. These negotiations were finalized during the first quarter of fiscal year 1997 (October 1996). The new company, called GENXON(tm) Power Systems, combines Woodward and Catalytica technology to provide critical capabilities to upgrade existing turbines. With these capabilities, GENXON is able to improve turbine performance and give the machine a new lease on life. Now we can help operators of gas turbine fleets dramatically improve their profit-making potential. What does all this mean for our business? It means we intend to take advantage of our opportunities. This last year, we enjoyed several successes and expect we will see more in the future. Whenever situations indicate we need to take steps to meet customer expectations, we will act. We will make the decisions that make most sense for the situation, the company, and the customer. Never in our history has the investment in core technology been as vital to our continued success as it is today. This fiscal year was the first year we used incentive pay as part of management compensation. As explained during last year's annual meeting, incentive pay connects high-level managers directly to the results of their operations. Because incentive pay closely links managers with results, it serves as a very reliable means for focusing on opportunity areas as well as a highly visible method of ensuring managerial accountability. In addition to all these achievements, we recently had some important organizational changes. In May, after 37 years with the company, Peter Gomm retired as vice president, Asia/Pacific Region, and in August, the board elected Chuck Kovac as vice president of the Industrial Controls group. Chuck started with Woodward in June 1988, and most recently was manager of Engine Controls in Europe. Furthermore, at the last board meeting in fiscal year 1996, board members elected Steve Carter vice president and treasurer of the company. Steve had been serving as assistant treasurer since January 1994. The past fiscal year certainly has been an exceptional time. We can regard change either as a threat or as a door opening to a world filled with magnificent opportunities-we have chosen the door. The path through the door is one of understanding market needs, acquiring the core competencies to meet those needs, and empowering the membership to fully release its creativity toward that end. This path, then, serves as our fundamental strategy to achieve the goals of expanding market opportunities; building a solid, rewarding future for our members; and creating more wealth for our shareholders. We are not looking to the short term. In the long term, the need to promote and accomplish change will remain a vital part of our business. Considering the spirit and ingenuity displayed by every Woodward member during this past year, and the faith shown by our investors, I have no hesitancy in believing we will succeed. I see a world of opportunity before us. John A. Halbrook Chairman of the Board and Chief Executive Officer December 2, 1996 WOODWARD - A WORLD LEADER Fuel Controls, Integrated Systems, and Components Woodward continues to face tough competition in every market. The demand for more complex fuel systems increases daily. In addition, customers want cost-effective, integrated systems, and ideally they want those systems supported by one company. We are taking steps to make Woodward that company. We base our strategies on anticipated customer needs; investment in product research and development; and the addition of new machines, processes, and technology as the need arises. Through these strategies, we gather vital core disciplines and form the alliances we need to succeed in today's competitive world. The days of making a control that simply "does the job" are gone. Today, we have to offer customers a control or system that not only complies with all form, fit, and function specifications, but also offers greater value than competitive units. Who interprets that value? The customer. Value may be interpreted as more reliability, more efficiency, more on-site service, more responsive support, and the list goes on. Sometimes less is more. For example, a control that has a lower cost of ownership offers more value to the customer. This continues to be our challenge. How have we met it? Members of every Woodward business unit are developing more efficient work processes and improving on-time deliveries. They are improving materials management processes and developing marketing programs designed to contribute toward improved profit margins. 1)In Aircraft Controls, increasing numbers of members are participating in Kaizen events... 2)Throughout Woodward, members look into every aspect of a process and propose ways to improve it... 3) When necessary, members even reposition machinery to increase efficiency. INDUSTRIAL CONTROLS On the Industrial Controls side of our business, the demand for engine and turbine controls and control systems increases, and we continue to identify needs of new markets. This year we not only improved existing partnerships, but also we established new ones. We purchased a new business to enhance our core competencies toward becoming the leader in the natural gas engine control market. We even made the commitment to enter into a joint business venture as a means of increasing our turbine retrofit business. As we gain insight into present and future market expectations for controls and control systems, we increase our ability to accurately focus our research and development efforts on customer concerns. With this knowledge, we become even better prepared to develop the means to effectively meet market expectations. ENGINE CONTROLS Woodward Engine Controls' strategy helps original equipment manufacturers (OEMs) worldwide sell more engines. We used to provide generic controls designed for engines manufactured by several different manufacturers. Today, we supply OEMs with anything from a control component to a complete control system specifically designed to add value to their engines. Woodward products include all elements of the fuel control system. Most new products use advanced micro-controllers executing Woodward's proprietary Graphical Application Programming (GAP(tm)) software technology. This combination provides the flexibility to quickly adapt engines for diverse applications. Because control optimization remains critical for engine applications, Woodward systems allow the customer to configure engines to meet the needs of many markets. Natural gas engines is our fastest growing market segment, and we are the recognized leader of technology for this market. As a result, customers are eager to work with us and gain our valuable advanced technology as well as industry expertise. To serve customers better, we acquired Deltec Fuel Systems B.V. of Rotterdam, The Netherlands. Through experience, we found Deltec and Woodward naturally complement each other. It was by combining Deltec's gas engine "know how" with our electronic/mechanical design and manufacturing capability that we were able to increase our leadership in the natural gas engine industry. A licensing agreement between Woodward and MESA Environmental further solidifies our position as an industry leader for natural gas engine systems. Through the agreement, we sell MESA Environmental's products, adapting their technology to meet customer requirements for heavy-duty natural gas engines. We developed this technology in conjunction with strategic engine programs at key engine manufacturers, and currently we are integrating it into the larger scope of our control systems for gas engines. Our development activities have broadened our range of products. Over the past few years, Woodward Engine Controls members developed effective electronic fuel injection (EFI) control systems and controls for diesel injection pumps. A firm knowledge of engine fuel valves, drivers, actuators, and control systems, as well as monitoring, sequencing, and engine protection systems makes us a leader in core technologies for engines worldwide. Today, Woodward Engine Controls is the largest independent supplier of control systems for the stationary gas engine market in the U.S. and the world. We offer on-board diagnostic systems for the heavy duty engine market, and we have developed engine management systems that can adaptively learn and continuously monitor emissions on engines. We have been the first to introduce the integration of the electronic driver, actuating motor, and throttle body. These air/fuel management technologies give us the ability to control mass fuel flow in ways that give our customers a highly competitive edge in the fast-paced gas engine market. Recently, Woodward Germany signed a contract to supply a fuel injection system for a German government-sponsored ocean-going vessel. Under this agreement, our electronic fuel injection system will meter heavy fuel to the ship's engines. We believe this effort will provide visible proof of the depth of our capabilities and our strengths in this market. During 1996 we enhanced our partnership with F.G. Wilson, the world's third largest producer of engine generator equipment. To meet some of their specific generator set package needs, we developed a new generator control capability. Now, this product is part of their standard offering. We are in the early stages of developing an enhanced capability product. We believe it is crucial to develop strong relationships with customers, helping them become long-term winners in their marketplace. Since the advent of the diesel locomotive, supplying controls for their engines has been an important part of the Woodward business. Like every industry, railroads have come under increasing pressure to improve efficiency and reliability. Last year, the rail industry produced a record in tonnage hauled. This increase has helped motivate the railroads to continually look for ways to increase the pulling power of a locomotive. Locomotive operators now want the ability to dispatch trains with fewer locomotives per ton of freight than ever before. To meet this need, Woodward offers a complete locomotive control system capable of drastically improving the adhesion levels of existing locomotives. With less slip of a steel wheel on the steel rail, locomotives gain increased efficiency. We also have made troubleshooting the locomotive systems easier and increased engine reliability. Woodward's Complete Locomotive Control system provides start fuel limiting, dynamic brake controls, cooling system controls, lube oil pressure shutdowns, and many other features to protect today's high powered locomotive systems. We continue to support existing equipment as well as develop rugged modern electronic locomotive control systems. Obviously, we are here for the long haul. As Woodward's Engine Controls members solidify their position as the technology leader in engine controls and systems, the role of Central Distributors (CDs) changed. Once only service centers, today's CDs have engineering staff and sales skills to work directly with end users to upgrade engines, particularly to meet the latest mandated emissions requirements. Woodward's dedication to the development of control system technology backed by service has helped make Engine Controls a full- line supplier of engine control systems. Our goal is to provide either components or a complete system to enhance engine capability and add value to the engine over its life. A strong international presence gives our customers the added confidence of continuous product support when they choose Woodward systems to help them compete with other engine companies for market share and recognition worldwide. TURBOMACHINERY CONTROLS A world leader in the design and manufacture of controls and accessories for gas, steam, and hydraulic turbines, Woodward's Turbomachinery Controls serves power generation, cogeneration, gas transmission, marine propulsion, petrochemical, and processing industries worldwide. Turbomachinery Controls' members design, manufacture, market, and sell a full range of mechanical and electronic industrial rotating equipment control devices. Their products range from simple electronic devices which measure speed and control it by monitoring fuel flow, to 32-bit digital microprocessor-based systems capable of performing complex control functions including plant control. Mechanical products include a large variety of liquid and gas fuel valves, on-engine hardware, hydraulic fuel skids, and actuators. Customers recognize that Woodward's Turbomachinery Controls products offer exceptional value through fully integrated control solutions. Not only do members design and manufacture power-generation control systems that provide turbine and plant control with complete fuel management, start sequencing, load control, and grid synchronization, but they also manufacture superior corrosion- resistant fuel valves to control critical, highly specialized turbomachinery equipment. In addition, these members developed a unique dry-low emission control system that accurately meters fuel mass flow for individual or multi-zone combustion. The system controls air-to-fuel ratio within extremely tight tolerances. To keep pace with customer needs, in October 1996, Woodward finalized an agreement to form a joint venture company with Catalytica Combustion Systems, Inc., a leader in turbine emission technology. The new company, called GENXON(tm) Power Systems, combines Woodward and Catalytica technology to offer a highly competitive ultra-low NOx emission control system. This one-stop-shop approach combines superior dry-low emission control with proven turbomachinery control for operators of fleets of installed, out-of-warranty industrial gas turbines. Because success comes through meeting customer needs with innovative solutions, Woodward engineers continually research new products. Recent introductions include: new model-based controls with smoother actuator operation, eliminating traditional dither and causing less wear and tear; a unique compressor surge and process control that ensures smooth, efficient operation; and an upgraded 505 digital control system package for steam and hydraulic turbines that consists of a stand-alone unit controller, an operator control panel, and a first-out indicator. Throughout the world, market demand for Woodward turbine controls is increasing. In particular, South America, Asia, and Central Europe show strong growth potential. This year, as part of a global expansion effort, business unit members opened several new offices and developed new customer-focused products and services. Recently Turbomachinery Controls members supplied a plant control system to facilitate river management and plant automation to six Georgia, USA, hydroelectric plants on one river system. They provided integrated turbine and compressor controls for large petrochemical plants in Jilin, China; Alberta, Canada; and Kansas, USA. Woodward products are managing critical cogeneration processes for power generation and precise steam extraction in Spain, Aruba, Czech Republic, the USA, and Australia. Woodward engineers modernized controls and valves for a 1,000 MW mainline steam turbine customer in New York City to yield marked improvements and to position this customer for pending deregulation. Whether control needs are simple or complex, Turbomachinery Controls progressively uses its resources and application experience to solve fuel management problems. The company's highly effective product development, manufacturing, test, and support resources continue to provide reliable, cost-effective answers for the world's turbomachinery control markets. AIRCRAFT CONTROLS Customers have indicated they want us to develop improved, integrated aircraft fuel systems. Demands for these systems have been unequaled in the past. To meet the challenge, Aircraft Controls members use highly developed core competencies to produce and improve products designed to meet emerging system requirements. At the same time, they constantly investigate inventive ideas to improve the products and services used in today's fuel systems. Fulfilling new market requirements is a big job. And continuing to satisfy current customer needs at the same time is an even more demanding undertaking. To concurrently fulfill both of these significant goals, members focused on: - - Maintaining a forward-looking approach to meet market needs for both the short and the long term; - - Refining core competencies needed to design, manufacture, and support the controls capable of fulfilling market needs; - - Undertaking a program of simplification to develop products to satisfy present and future fuel-delivery strategies at lower costs and with increased reliability. One of the earliest results of this new approach was the development of the super fuel metering unit (FMU) platform. The super FMU has won every project for which it has openly competed. The BMW Rolls-Royce BR710 and BR715 turbofans employ one of Woodward's family of super FMUs. Super FMUs deliver fuel to the new Boeing 777s equipped with GE90 turbofans. Also, the McDonnell Douglas MD-90 and Airbus 320 family of aircraft equipped with International Aero Engines (IAE) V2500 turbofans use the new FMU platform, as will the newest version of GE CF-34 turbofans. As we developed the super FMU, we learned many lessons. We applied the lessons in the design, development, and production of components outside our normal product line. No longer can industry look at Woodward as a "one product company." We are developing-and delivering-actuators, valves, and other components essential to fully integrated fuel management systems. As we move forward, we believe products of this nature will account for an increasing amount of aircraft control sales. Already, new turbine designs are using a number of Woodward products. For example, the BR715 incorporates traditional as well as new Woodward products in its fuel management system. The turbofan uses a super FMU, an overspeed splitter unit, a booster bleed valve actuator, a variable stator vane actuator, a bypass and vent valve, and a buffer air valve. Another success, Woodward's small block platform, has found high acceptance in small turbine engine markets. A highly flexible platform, the small block allows Woodward to provide controls ranging from purely mechanical to full single channel electronic control with mechanical backup. Furthermore, the backup control can vary from simple pilot control of fuel flow to a fully functional mechanical governing control. By deciding to use common families of components throughout these platforms, we reduced development and production time. We also gained flexibility to custom design a control for a specific need using short development lead times. The platform concept also results in the end user obtaining field-proven hardware that offers high reliability from service entry to the end of its service life. With the degree of system commonality contained within the platforms, members quickly integrate them into a complete line of fuel-system devices. In this manner, they cost effectively fulfill the needs of highly integrated fuel delivery systems. This year, HSC Controls Inc., a part of Aircraft Controls, continued to meet market needs. HSC designs and manufacturers small torque motors and servovalves, key elements in any fuel system. Although the company principally serves aircraft markets, it also supplies products to select industrial and medical markets. HSC is highly recognized for its ability to design and deliver small, specialized servovalves and other electrical-mechanical devices. Several of its newer developments are proving to meet very special needs of the aircraft-powerplant industry. We are continuing to aggressively pursue research and development activities. These efforts have converted new technologies into products that address the aircraft industry's fundamental requirements-cost and reliability. In just one example, Woodward focused efforts on simplifying actuation control and developed a patented hydraulic multiplexer or HMUX. This device performs the task previously done by several servovalves or solenoids. It is less expensive to acquire, less costly to operate, and more reliable than previously available systems. In addition, multi-functional teams are undertaking large-scale reengineering activities in many facets of our business. These teams review and improve activities that range from reducing development cycle time and cost, to reorganizing our manufacturing operations to support responsive lead times. These teams are redefining roles and interfaces that allow members to more clearly concentrate on their responsibilities. They are looking at ways to continually reduce parts supply, repair, and overhaul times as a means to more effectively meet customer needs. We are energizing the membership through the consistent use of the continuous-improvement technique called Kaizen. As a result, members are participating in events aimed at eliminating waste and reducing lead times, all of which helps improve efficiency and reduce costs. As Aircraft Controls becomes more involved in global activity, its need to continually look for new ideas to streamline processes, reduce lead times, supply highly affordable products, and provide the highest value-to-cost ratio to the industry grows in importance. We are committed to continuously supporting OEM customers and end users throughout a product's life. With this level of commitment, the Woodward Aircraft Controls group will remain a world leader in aviation engine controls, accessories, and control systems. After careful consideration, we made the decision that electronic aircraft controls did not lie within our core competencies. Therefore, we entered into an agreement with Lockheed Martin, a company well versed in the manufacture of electronic control systems and components. With this move, we transferred our full authority digital engine control (FADEC) technology to Lockheed Martin Control Systems and joined this industry leader to provide state-of-the-art, fully integrated control systems, with a low cost of ownership, to aircraft powerplant manufacturers and operators. In this partnership of the largest independent engine controls suppliers, Woodward will use a fully developed core competency to provide an expanding catalog of hydromechanical subsystems required for system integration, while Lockheed Martin supplies system electronics. As we begin the new fiscal year, the aviation industry is in a period of recovery and offers many opportunities. We are keeping abreast of industry trends and continue to develop new products, many outside our traditional product line. We are investigating the opportunities to participate in engine development programs with many aircraft turbine manufacturers. We also perform aftermarket work for these same manufacturers as well as some of the world's largest third- party repair shops. We reached this position because we maintain a commitment to meet the needs of our customers. Cost drives customer decisions. Quality and reliability remain musts-they are routinely expected features. Value delivered for money invested remains the most important criteria for success. In addition, end users have heightened their influence on engine manufacturers to place a strong emphasis on life-cycle costs. With cost containment an important consideration, alternative methods of financing are growing in importance, both for supporting OEM sales to airlines and for winning service contracts. Woodward's strong financial position continues to work in our favor as we create and market innovative ways to help end users cut costs, particularly in the support of their fuel controls. Woodward is strengthening its global presence, whether it's developing a new idea or improving an existing one, we are a company dedicated to the continuous development of control system technology. We seek to provide our customers with service and products that are second to none-anywhere in the world. FINANCIAL SUMMARY AND ANALYSIS Woodward Governor Company RESULTS OF OPERATIONS 1996 Compared to 1995 This annual report contains forward-looking statements reflecting Woodward's current expectations. Such forward-looking statements include, without limitation, references relating to expected shipments and net earnings, Industrial Controls opportunities in overseas and domestic markets, Aircraft Controls outlook, 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 the other risk factors. 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 from last year, as it continues to be difficult to raise prices to customers. The volume of shipments increased 9.9% from last year's total including the nonrecurring engineering charges incurred in 1995. Without these charges, 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 the prior year. Both Aircraft Controls' and Industrial Controls' shipments have increased since last year. Military sales increased this year to 10.0% of sales compared to 7.4 % last year. Industrial Controls' shipments were $232,746,000 in 1996, a 7.0% increase from the 1995 total of $217,612,000. This represents 55.8% of 1996 total company shipments, compared to 57.3% last year. The shipments from overseas plants were up 9.0% from the prior year and continued to increase at a faster rate than shipments from domestic plants which were up almost 4.8% from last year. The greater opportunities for growth for Industrial Controls will continue to be in the overseas markets. The domestic markets are projected to remain flat or increase slightly. New product introductions as well as strategic alliances and joint ventures will provide additional opportunities in the domestic markets. Aircraft Controls' shipments increased 13.8% to $184,544,000 from $162,124,000 in 1995. The 1995 total included over $7,000,000 in nonrecurring engineering charges incurred in previous years. Without this item, shipments are up over 19% from last year. This increase reflects the strengthening of the demand for products in the commercial aircraft markets, particularly in aftermarket spares and overhauls, and also additional military sales. Aircraft Controls' shipments represent 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 represents an increase of 11%. The company continues to implement plans to control costs and improve efficiencies, and expects improvements in profitability. 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. Customer support and satisfaction are important to the company's success, and engineering costs in support of these items continue to increase. 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 reflects the cost containment efforts in this area. To meet customer service expectations, 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. Many of the initiatives started in prior years have been completed and adequate accruals have been provided by the company for severance, early retirement, and other closure costs still in process. During 1996, Bauer Aerospace was sold, completing the divestiture announced in fiscal year 1994. Efforts continue to sell the plant in Stevens Point and to date no acceptable offers have been received. Part of the plant continues to be leased, which offsets some of the costs to maintain the facility. 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 is lower due to a higher portion of income being generated in the United States this year compared to last year. 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 do 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 $7.67 per share in 1996 from $4.11 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 restructuring expense of $5,927,000 in 1995, earnings before income taxes from domestic operations would have been $10,984,000. Expectations of management are that shipments will continue to increase next year. Net earnings are also expected to increase, but will be affected by investments in product development and the results of joint venture activities. The growth experienced in the Aircraft Controls group in 1996 was greater than had been anticipated, and this growth is expected to level off and be basically flat in the next year. The aircraft market has substantially recovered from the downward move in the early '90s, but the number of planes being built is still less than the historic high levels. This group continues to work toward the goal of being a total fuel delivery system supplier to the aircraft industry. Shipments for the Industrial Controls group are expected to increase next year, principally due to the continued increase in the overseas markets. This group is developing new products for ever-changing customer needs. 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 Notes to Consolidated Financial Statements, Footnote L, "Contingencies," on page 28. 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 continues to look to decrease 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 have increased from last year due to the higher level of shipment activity. Accrued salaries and wages have increased due to additional withholding taxes and additional profit sharing due to 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 to the increase in earnings in 1996 compared to 1995. Liquidity and Capital Expenditures Cash dividends paid to the shareholders in 1996 and 1995 were $3.72 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 which increased in 1996 over the 1995 level. The company does not expect a significant increase in capital expenditures in 1997. 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. Both lines of credit and cash flow from operations should be adequate to meet company cash requirements in 1997. Membership Worldwide membership increased to 3,211 at September 30, 1996 from 3,071 at September 30, 1995. The increasing level of shipments and members gained through acquisitions are the reasons for the increase. Company leadership is working very hard to keep the number of members at the appropriate level to meet customer requirements and yet be cost effective. New Accounting Pronouncements In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). This new standard requires that long-lived assets be reviewed for impairment whenever the carrying amount of those assets may not be recoverable. The recoverability is based on the estimated future cash flow resulting from the use of the asset. Adoption of SFAS 121 is required in fiscal 1997. The company does not expect the adoption of SFAS 121 to have a material impact on the company's financial condition or results of operations. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation" (SFAS 123). This new standard encourages, but does not require, a fair-value based method of accounting for stock-based compensation plans. Adoption of the disclosure requirements of SFAS 123 is required in fiscal 1997. The company expects to adopt only the disclosure provisions of SFAS 123 and, therefore, there will be no impact on the company's financial condition or results of operations. RESULTS OF OPERATIONS 1995 Compared to 1994 Shipments Shipments in 1995 were $379,736,000, 14% greater than the $333,207,000 shipped in 1994. Price increases accounted for 1.5% of the change and volume increases 8.8% of the change in 1995 shipments. In addition, shipments from overseas plants translated into over $11,700,000 or 3.5% more U.S. dollars compared to prior year exchange rates. Aircraft Controls' and Industrial Controls' shipments have both increased since last year. Military sales continued to decline and were 7.4% of sales this year compared to 9.6% last year. Aircraft Controls' shipments were $162,124,000 in 1995, up 14.5% from last year's total of $141,632,000. There were some items in 1995 that need to be considered when comparing to 1994. Over $9,500,000 of revenue was recognized in 1995 for reimbursement of nonrecurring engineering charges. This compares to $2,600,000 in 1994. Shipments in 1994 for the then newly acquired HSC Controls Inc. and Bauer Aerospace, which at year end 1994, the company announced its intent to divest of, were $7,300,000. In 1995, these entities had shipments of $14,525,000. Aircraft Controls' shipments were 42.7% of total company shipments in 1995 compared to 42.5% in 1994. The aircraft industry has seen some stabilization of the market, and the company is seeing an increase in market share. Industrial Controls' shipments in 1995 were $217,612,000 compared to $191,575,000 in 1994, a 13.6% increase. This represents 57.3% of total company shipments in 1995 compared to 57.5% in 1994. Shipments from the overseas plants continue to increase at a much higher rate than domestic shipments which were down slightly from the prior year. The domestic business units are the principal manufacturing support for the overseas plants, so even though customer shipments from the domestic plants were down, the manufacturing activity was up. The growth in the overseas markets is projected to continue in the near future, with the domestic markets remaining flat or increasing slightly. Cost of Goods Sold Cost of goods sold was $274,676,000 or 72.3% of net sales in 1995. This compares to $248,839,000 or 74.7% in 1994. The favorable change as a percent of shipments from 1994 to 1995 reflects the company's cost control efforts and early benefits related to the restructuring plan implemented in 1995. Research and development efforts continue to be an important part of customer commitment, with many customers requesting work be done to develop new applications for control technology. Spending on research and development was $13,700,000 in 1995 compared to $16,400,000 in 1994. Engineering costs overall continue to increase to meet the demands of customer support. Sales, Service, and Administrative Expenses For 1995, sales, service, and administrative expenses were $69,961,000 or 18.4% of sales compared to $58,557,000, or 17.6% in 1994. Included in 1995 are some items that should not be incurred in the future: these include costs related to the ongoing restructuring and consolidation of the Aircraft Controls group which was essentially completed in 1995 and a $1,100,000 bad debt provision relating to a long time customer. These items in total added over $4,000,000 in expenses. Restructuring Expense In 1995, restructuring expenses of $5,927,000 were incurred. These principally relate to an early retirement program announced in fiscal year 1994 that was implemented in 1995 and the move of the Hydro business unit from Stevens Point to the plants in Colorado. The decision to make this move was made in the first quarter of 1995 and the move completed in the third quarter. Interest Expense Interest expense was $3,825,000 in 1995 compared to $3,941,000 in 1994. Interest Income Interest income in 1995 was $555,000 compared to $708,000 in 1994. Other Expense-Net Other expense-net was $5,719,000 in 1995 compared to $4,073,000 in 1994. Income Taxes The income tax expense in 1995 was $8,247,000 and the effective rate was 40.9%. In 1994, there was a tax benefit of $1,922,000 primarily due to a significant restructuring charge. The effective rate in 1995 is higher than the statutory rate in the United States due to the fact that a significant portion of the income was generated at overseas locations at higher tax rates. Net Earnings (Loss) The 1995 net earnings were $11,936,000, an increase of $15,209,000 from the net (loss) in 1994 of ($3,273,000). The results for 1994 included a restructuring expense of $23,700,000 while 1995 also included $5,927,000 of restructuring expenses. The return on sales was 3.1% in 1995 compared to (1.0%) in 1994. Return on average net worth was 6.1% in 1995 and (1.7%) in 1994. Earnings (loss) per share were $4.11 in 1995 and ($1.11) in 1994. The earnings before income taxes from foreign operations increased from $12,550,000 in 1994 to $15,126,000 in 1995. The shipment level also increased, going from $89,128,000 in 1994 to $118,293,000 in 1995. Shipments from domestic operations increased from $244,079,000 in 1994 to $261,443,000 in 1995. Over the same period, earnings (loss) before income taxes from domestic operations went from ($17,745,000) in 1994 to $5,057,000 in 1995. Without the restructuring expense of $23,700,000, 1994 would have reflected earnings before income taxes from domestic operations of $5,955,000. The 1995 earnings before income taxes from domestic operations would have been $10,984,000 without the restructuring expense of $5,927,000. The net earnings of $3,646,000 in 1995 compared to the net (loss) in 1994 of ($10,710,000) for domestic operations. 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 Notes to Consolidated Financial Statements, Footnote L, "Contingencies," on page 28. Financial Condition Cash and cash equivalents increased from $10,272,000 in 1994 to $12,451,000 in 1995. Combined short- and long-term debt increased slightly to $62,960,000 in 1995 from $61,591,000 in 1994. With the increase in accounts receivable and inventory, this increase was not unexpected. Accounts receivable increased from $69,778,000 at September 30, 1994 to $81,880,000 at September 30, 1995. This increase is due to the exceptional shipment level in the month of September 1995, $7,500,000 greater than September 1994, and the deterioration in timely payments from our customers. In addition, the allowance for losses increased from $3,021,000 in 1994 to $4,605,000 in 1995. Of this increase, $1,100,000 relates to a specific reserve for one customer. Inventories increased from $80,272,000 at September 30, 1994 to $92,831,000 at September 30, 1995. The increase was disappointing. Although shipments increased, the inventory level needs to be better managed. Material flow teams have been formed to focus on this issue and major changes are underway in inventory management. Property, plant, and equipment-net decreased from $122,911,000 at September 30,1994 to $118,066,000 at September 30, 1995. The decrease is a result of holding the capital expenditure level in 1995 below the depreciation expense. Deferred income taxes increased from $35,328,000 in 1994 to $39,630,000 in 1995. A valuation allowance of $9,006,000 in 1995 and $7,518,000 in 1994 was recorded principally due to foreign tax credit and acquired foreign net operating loss carryforward limitations. Remaining deferred tax assets are expected to be realized through future earnings. Accounts payable and accrued expenses increased from $37,972,000 at September 30, 1994 to $50,765,000 at September 30,1995. Accounts payable have increased from fiscal 1994 due to greater shipment activity. Accrued salaries and wages are up due to the additional days pay accrued in fiscal 1995, additional withholding taxes, and profit sharing. In addition, the accrued early retirement liability increased as a result of the program offered in fiscal 1995. Other liabilities reflects the non-current accumulated postretirement benefit obligation. Shareholders' equity at September 30, 1995 increased to $197,903,000 from $193,846,000 at September 30,1994. Liquidity and Capital Expenditures Cash dividends paid to shareholders in 1995 and 1994 were $3.72 per share. Cash flows provided from operations were $31,321,000 in 1995 compared to $35,805,000 in 1994. Cash flows (used) in investing activities were ($18,428,000) in 1995. This compares to ($23,902,000) in 1994. The primary use of cash is capital expenditures, with capital expenditures in 1995 up from 1994. The 1994 total also included the acquisitions of HSC Controls Inc. and the two companies that comprise Woodward Governor Germany GmbH. Net cash (used) in financing activities was ($11,522,000) in 1995 and ($11,833,000) in 1994. Cash dividends continue to be the principal use of cash in this area. The main financing activities are related to short-term borrowings and long-term debt payments. Membership Worldwide membership decreased in 1995 from 3,439 at the beginning of the year to 3,071 at September 30, 1995. The decrease occurred in the Aircraft Controls group and was accomplished through an early retirement program, attrition, and the closing of the Stevens Point plant. The shares of the company are traded over-the-counter. The company stock is listed on the NASD OTC Bulletin Board. The following schedule presents the bid price range and dividends paid for each quarter of the last two fiscal years. The bid price ranges are based upon quotations from brokers and may not necessarily represent actual transactions. Payment of dividends is subject to certain restrictions described in the Notes to Consolidated Financial Statements, Footnote F, "Long-term debt," page 25. Quarterly Quarterly Bid Price Dividends Quarter Ended High Low Per Share September 30, 1996 $92 $87 $.93 June 30, 1996 93 85 .93 March 31, 1996 88 73 .93 December 31, 1995 73 65 .93 September 30, 1995 $67 $60 $.93 June 30, 1995 63 55 .93 March 31, 1995 67 55 .93 December 31, 1994 83 59 .93 FINANCIAL STATEMENTS Woodward Governor Company and Subsidiaries STATEMENTS OF CONSOLIDATED EARNINGS (LOSS) Woodward Governor Company and Subsidiaries
Year Ended September 30, (In Thousands of Dollars except per share amounts) 1996 1995 1994 Net billings for products and services $417,290 $379,736 $333,207 Costs and expenses: Cost of goods sold 304,887 274,676 248,839 Sales, service, and administrative expenses 69,874 69,961 58,557 Restructuring expense - 5,927 23,700 Interest expense 3,325 3,825 3,941 Interest income (825) (555) (708) Other expense-net 4,848 5,719 4,073 Total costs and expenses 382,109 359,553 338,402 Earnings (loss) before income taxes 35,181 20,183 (5,195) Income taxes 13,003 8,247 (1,922) Net earnings (loss) $ 22,178 $ 11,936 $ (3,273) Net earnings (loss) per share $ 7.67 $ 4.11 $ (1.11) Average number of shares outstanding 2,892,621 2,905,750 2,941,177 See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS Woodward Governor Company and Subsidiaries
At September 30, (In Thousands of Dollars except per share amounts) 1996 1995 Assets Current assets: Cash and cash equivalents $ 13,070 $ 12,451 Accounts receivable, less allowance for losses of $2,755 for 1996 and $4,605 for 1995 80,902 81,880 Inventories 92,135 92,831 Deferred income taxes 19,991 21,853 Total current assets 206,098 209,015 Property, plant, and equipment, at cost: Land 6,218 6,674 Buildings and improvements 120,283 121,870 Machinery and equipment 182,680 175,455 Construction in progress 6,971 985 316,152 304,984 Less allowance for depreciation 201,939 186,918 Property, plant, and equipment-net 114,213 118,066 Intangibles and other assets 9,919 4,741 Deferred income taxes 18,568 17,777 Total assets $348,798 $349,599 Liabilities and shareholders' equity Current liabilities: Short-term borrowings $ 15,310 $ 30,297 Current portion of long-term debt 4,862 4,867 Accounts payable and accrued expenses 61,597 50,765 Taxes on income 3,226 6,722 Total current liabilities 84,995 92,651 Long-term debt, less current portion 22,696 27,796 Other liabilities 33,112 31,249 Commitments and contingencies - - Shareholders' equity represented by: Preferred stock, par value $.01 per share, authorized 3,000,000 shares, no shares issued - - Common stock, par value $.0625 per share, authorized 7,000,000 shares, issued 3,040,000 shares 190 190 Additional paid-in capital 13,165 13,560 Unearned ESOP compensation (14,665) (17,333) Currency translation adjustment 13,620 16,802 Retained earnings 207,392 195,598 219,702 208,817 Less treasury stock, at cost 11,707 10,914 207,995 197,903 Total liabilities and shareholders' equity $348,798 $349,599 See accompanying Notes to Consolidated Financial Statements.
STATEMENTS OF CONSOLIDATED SHAREHOLDER'S EQUITY Woodward Governor Company and Subsidiaries
(In Thousands of Dollars Add'l Unearned Currency except per Common Paid-in ESOP Trans. Retained Treas. Stock share amounts) Stock Capital Compen. Adjust. Earnings Shares Amt. Balance at Sept. 30, 1993$190 $13,884 $(22,327) $12,786 $207,924 69,178 $ 6,235 Net (loss) - - - - (3,273) - - Purchases of treasury stock - - - - - 47,130 3,546 Issuance of stock to ESOP - 7 - - - (397) (25) ESOP compensation expense - - - 2,550 - - - Cash dividends-$3.72 per common share - - - - (10,956) - - Tax benefit applicable to ESOP dividend - - - - 393 - - Translation adjustments, including income taxes allocated of $238 - - - 2,424 - - - Balance at Sept. 30, 1994 190 13,891 (19,777) 15,210 194,088 115,911 9,756 Net earnings - - - - 11,936 - - Purchases of treasury stock - - - - - 52,016 3,363 Sales of treasury stock - (334) - - - (27,795) (2,120) Issuance of stock to ESOP - 3 - - - (1,344) (85) ESOP compensation expense - - 2,444 - - - - Cash dividends-$3.72 per common share - - - - (10,811) - - Tax benefit applicable to ESOP dividend - - - - 385 - - Translation adjustments, including income taxes allocated of $19 - - - 1,592 - - - Balance at Sept. 30, 1995 190 13,560 (17,333) 16,802 195,598 138,788 10,914 Net earnings - - - - 22,178 - - Purchases of treasury stock - - - - - 22,357 1,730 Sales of treasury stock - (343) - - - (6,600) (778) Issuance of stock to ESOP - (52) - - - (1,399) (159) ESOP compensation expense - - 2,668 - - - - Cash dividends-$3.72 per common share - - - - (10,758) - - Tax benefit applicable to ESOP dividend - - - - 374 - - Translation adjustments, including income taxes allocated of $14 - - - (3,182) - - - Balance at Sept. 30, 1996 $190 $13,165 $(14,665) $13,620$207,392 153,146 $11,707 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) 1996 1995 1994 Cash flows from operating activities: Net earnings (loss) $22,178 $11,936 $ (3,273) Adjustments to reconcile net earnings (loss) to net cash provided (used) by operating activities: Restructuring - - 23,306 Depreciation and amortization 23,394 23,786 26,614 Deferred income taxes (791) (3,407) (10,419) ESOP compensation expense 2,668 2,444 2,550 Changes in assets and liabilities, net of effect of acquisitions: Accounts receivable (430) (11,158) (788) Inventories (577) (11,830) 8,394 Current liabilities, other than short-term borrowings and current portion of long-term debt 10,000 20,415 (9,762) Other-net (3,960) (865) (817) Total adjustments 30,304 19,385 39,078 Net cash provided by operating activities 52,482 31,321 35,805 Cash flows from investing activities: Payments for purchase of property, plant, and equipment (21,163) (18,988) (16,515) Acquisitions, net of cash - - (8,014) Other 1,079 560 627 Net cash (used) in investing activities (20,084) (18,428) (23,902) Cash flows from financing activities: Cash dividends paid (10,758) (10,811) (10,956) Proceeds from sales of treasury stock 435 1,377 - Purchases of treasury stock (1,730) (3,363) (3,546) Payments of long-term debt (5,105) (4,254) (4,012) Short-term borrowings proceeds (payments) (14,588) 5,144 6,288 Tax benefit applicable to ESOP dividend 374 385 393 Net cash (used) in financing activities (31,372) (11,522) (11,833) Effect of exchange rate changes on cash (407) 808 (295) Net change in cash and cash equivalents 619 2,179 (225) Cash and cash equivalents, beginning of year 12,451 10,272 10,497 Cash and cash equivalents, end of year $13,070 $12,451 $10,272 Supplemental cash flow information: Interest expense paid $ 3,680 $ 3,930 $ 4,073 Income taxes paid $13,475 $ 8,669 $ 9,576 See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Thousands of Dollars except per share amounts) A. Significant accounting policies are as follows: Principles of consolidation: The consolidated financial statements include the accounts of the company and its subsidiaries, the majority of which are wholly-owned. 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 (loss) 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 price over the fair values of net assets acquired has been recorded as an intangible which is being amortized using the straight-line method over 10 years, subject to impairment write- offs determined by underlying cash flows. The accumulated amortization as of September 30, 1996 and 1995 is $608 and $481, respectively. 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 primarily upon shipment to the customer. Research and development costs: Expenditures related to new product development are charged to expense when incurred and total approximately $13,800, $13,700, and $16,400, for 1996, 1995, and 1994, respectively. B. Acquisitions: The company purchased three companies in 1994. The acquisitions have been accounted for by the purchase method of accounting and the operating results of the acquisitions are included in the company's consolidated results of operations from the date of acquisition. The excess of cost over fair value of the assets acquired is being amortized over a 10-year period. Pro forma results of these acquisitions, assuming they had been made at the beginning of each year presented, would not be materially different from the results reported. C. Restructuring charges: In the fourth quarter of 1994, the company recognized $23,700 in connection with a board-approved restructuring initiative. The restructuring charge reflects costs associated with closing facilities and the divestiture of Bauer Aerospace, manufacturer of the test equipment product line. In 1995, the company recognized additional costs associated with the restructuring initiative 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 components of the restructuring provision were as follows:
1996 1995 1994 Write-down of property, plant, and equipment and intangible assets $ - $ - $19,148 Severance and early retirement - 4,627 1,913 Other closure costs - 1,300 2,639 $ - $ 5,927 $23,700
The restructuring activity for the years ended September 30 is as follows:
1996 1995 Beginning balance $10,164 $ 8,834 Current year provision - 5,927 Expenses incurred (2,557) (4,597) $ 7,607 $10,164
The components of the accruals related to restructuring at September 30 were as follows:
1996 1995 Severance related benefits $ 353 $ 1,149 Early retirement 6,157 7,093 Other closure costs 1,097 1,922 $ 7,607 $10,164
The early retirement benefits are payable for up to 10 years. Other closure costs at September 30, 1996 are expected to be incurred next year. D. The provision for income taxes consists of:
1996 1995 1994 Currently payable: Federal $ 4,590 $ 2,754 $ 960 State 1,058 1,007 614 Foreign 6,525 7,386 4,991 Deferred 830 (2,900) (8,487) $13,003 $ 8,247 $(1,922)
The components of the net deferred tax assets at September 30 were as follows:
1996 1995 Deferred tax assets: Postretirement and early retirement benefits $15,941 $15,213 Restructuring 4,114 7,900 Foreign net operating loss and tax credits 10,116 9,114 Inventory 9,145 8,778 Other items 11,485 9,919 Valuation allowance (9,332) (9,006) Total deferred tax assets 41,469 41,918 Deferred tax liabilities: Unremitted earnings of foreign subsidiaries (1,867) (1,766) Other items (1,043) (522) Total deferred tax liabilities (2,910) (2,288) Net deferred tax assets $38,559 $39,630
The company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets which may not be realized principally due to a capital loss carryforward and acquired foreign net operating loss carryforward limitations. 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:
1996 1995 Beginning balance $(9,006) $(7,518) Foreign net operating loss carryforward (1,771) (440) Utilization of foreign tax credit carryover 1,647 265 State net operating loss carryforward (75) (60) Capital loss carryforward (127) (1,253) $(9,332) $(9,006)
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 1996 1995 1994 Statutory rate 35.0 35.0 (35.0) State income taxes 2.4 1.9 (4.0) Foreign tax rate differences (1.1) 2.1 4.4 Effect of rate change - - 2.4 Foreign sales corporation (1.3) (1.8) (7.8) Other items, net 2.0 3.7 3.0 Effective rates 37.0 40.9 (37.0)
E. Short-term borrowings: Bank lines of credit available to the company totaled $60,305, of which $15,310 were used at September 30, 1996. 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 5.8%, 6.3%, and 5.3% for 1996, 1995, and 1994, respectively. F. Long-term debt:
1996 1995 9.45% note $10,200 $12,200 ESOP debt guarantee 17,000 19,500 Other 358 963 27,558 32,663 Less current portion (4,862) (4,867) $22,696 $27,796
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 1996 are: $2,362 in 1997, $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 256,806 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 principal payments each September 30, through 2003. Payments are $2,500 with a final payment of $2,000. Interest of $1,562 was paid in 1996, $1,722 in 1995, and $1,882 in 1994. 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 150,631, 178,038, and 203,152 as of September 30, 1996, 1995, and 1994, respectively. The company recognized ESOP related expense on the Shares Allocated Method as follows:
1996 1995 1994 Interest expense $ 652 $ 789 $ 933 Compensation expense 2,668 2,444 2,550 $3,320 $3,233 $3,483
Company cash contributions to the Plan used for debt service were $3,152, $2,788, and $2,933, in 1996, 1995, and 1994, respectively. Dividends on these shares used for debt service were approximately $910 in 1996, $934 in 1995, and $949 in 1994. Federal income tax benefits of $374, $385, and $393 in 1996, 1995, and 1994, 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, 1996, the company could pay dividends and purchase the company's common stock up to an amount not exceeding $20,200. G. Accounts payable and accrued expenses:
1996 1995 Accounts payable $14,327 $10,419 Salaries and wages 13,523 6,148 Restructuring 7,607 10,164 Taxes, other 7,262 6,103 Warranty 3,666 3,646 Postretirement and postemployment 3,000 3,000 Other items-net 12,212 11,285 $61,597 $50,765
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:
1996 1995 Retirees $21,195 $19,021 Fully eligible active plan participants 81 156 Other active plan participants 12,854 14,275 Accumulated postretirement benefit obligation 34,130 33,452 Unrecognized net gain (loss) from past experience different from that assumed 982 (203) Total accumulated postretirement benefit obligation $35,112 $33,249
The company has included $33,112 and $31,249 in other liabilities and the balance in current liabilities for 1996 and 1995, respectively. The periodic postretirement benefit cost consists of:
1996 1995 1994 Service cost-benefits attributed to service during the period $ 927 $ 894 $ 951 Interest cost on accumulated postretirement benefit obligation 2,443 2,347 2,143 Net periodic postretirement benefit cost $3,370 $3,241 $3,094
Actuarial assumptions used were as follows:
1996 1995 1994 Projected healthcare cost trend rate 8.5% 9.0% 9.5% Ultimate trend rate 5.25% 5.25% 5.25% Year ultimate trend rate is achieved 2002 2002 2007 Effect of a 1.0% increase in the healthcare trend rate on the accumulated post- retirement benefit obligation $6,054 $6,216 $5,280 Effect of a 1.0% increase in the healthcare trend rate on the net periodic cost $ 724 $ 690 $ 695 Weighted average discount rate 7.75% 7.75% 8.25%
In 1995, the company extended loans to certain outside directors for the purpose of purchasing company stock. The notes are to be repaid in exchange for directors' retainer fees over the next four years and totaled $303 and $385 as of September 30, 1996 and 1995, respectively. The company is required, under local regulations, to provide a defined benefit plan covering approximately 120 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:
1996 1995 1994 Service cost-benefits earned during the period $334 $492 $497 Interest cost on projected benefit obligation 504 562 662 Actual return on plan's assets (539) (546) (629) Net amortization and deferral 36 107 107 Net periodic pension cost $335 $615 $637
Assumptions used in the accounting for net periodic pension cost were:
1996 1995 1994 Weighted average discount rate 4.5% 4.0% 5.0% Expected long-term rate of return on plan's assets 4.5% 3.1% 5.5% Compensation increase rate 3.5% 3.0% 3.5%
The plan's funded status at September 30 is as follows:
1996 1995 Accumulated benefit obligation $7,192 $12,890 Increase in benefits due to estimated future compensation increases 3,481 1,972 Projected benefit obligation 10,673 14,862 Plan's assets at fair value 11,518 13,040 Projected benefit obligation in excess of (less than) plan's assets (845) 1,822 Unrecognized net gain (loss) from experience 2,021 (158) Unrecognized transition amount (1,335) (1,602) Accrued (asset) liability $ (159) $ 62
The company has a Member Investment and Stock Ownership Plan (formerly referred to as the Deferred Profit Sharing Plan). For members meeting certain service requirements, the company contributes 5% of eligible wages and matches member contributions with respect to a 401k 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 $4,483, $2,788, and $2,933, in 1996, 1995, and 1994, 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, 200,000 shares of the company's common stock are available for issuance upon grant of the options. During 1996, the company granted a maximum of 24,250 options to purchase common stock at the fair market value on October 1, 1995 ($66.50 per share), contingent upon the achievement of certain performance requirements in 1996. The options are generally exercisable after six months and expire no later than 10 years from the date of grant. The company accrued compensation expense of $500 for 1996 based on estimated performance. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation" (SFAS 123) governing the accounting for stock options, which must be adopted by fiscal 1997. The company expects to adopt only the disclosure provisions of SFAS 123 and, therefore, there will be no impact on the company's financial condition or results of operations. 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 one-hundredth of a share of Series A Preferred Stock, par value $.01 per share, of the company at a price of $300.00, subject to adjustment. 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 $.01 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: $1,215 in 1997, $1,047 in 1998, $978 in 1999, $936 in 2000, and $373 in 2001. Rent expense for leases was approximately $1,228, $765, and $867, for 1996, 1995, and 1994, 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 $2,058 and $1,634 at September 30, 1996 and 1995, 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. The company settled its claim regarding pricing provisions with a major customer in the first quarter of 1995. The company received approximately $7,000 for reimbursement of non-recurring engineering charges. M. Financial instruments: The estimated fair values of the company's financial instruments at September 30 were as follows:
1996 1995 Cash and cash equivalents $13,070 $ 12,451 Short-term borrowings (15,310) (30,297) Long-term debt (29,500) (34,119)
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%, 16%, and 17%, of the net billings to customers in 1996, 1995, and 1994, respectively. The company's accounts receivable from the customer were $15,375 and $11,314 at September 30, 1996 and 1995, respectively. Billings derived from domestic sales to unaffiliated customers in other countries were approximately 11%, 12%, and 15% of the net billings to customers in 1996, 1995, and 1994, respectively. Intercompany transfers are made at established intercompany selling prices. Summarized financial information relating to these operations is as follows:
United States Other Countries Eliminations Total 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 1994 Net billings: Customers $244,079 $ 89,128 $ - $333,207 Intercompany transfers 18,199 3,599 (21,798) - $262,278 $ 92,727 $(21,798) $333,207 Earnings (loss) before income taxes $ (17,745) $ 12,550 - $ (5,195) Net earnings (loss) $ (10,710) $ 7,437 - $ (3,273) Identifiable assets $ 263,628 $ 59,690 - $323,318
REPORT OF INDEDPEDENT 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, 1996 and 1995, and the related statements of consolidated earnings (loss), shareholders' equity, and cash flows for the years ended September 30, 1996, 1995, and 1994. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits 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, 1996 and 1995, and the results of their consolidated operations and their cash flows for the years ended September 30, 1996, 1995, and 1994, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Chicago, Illinois November 12, 1996 SUMMARY OF OPERATIONS/TEN YEAR RECORD (In Thousands of Dollars except per share amounts and other data) Net Billings, Costs and Earnings
Net Earnings For Net Billings Total % of Avg. For the for Products Costs and Income Per Shrhldrs' the Year and Services Expenses Taxes Amount Share % of Sales Equity Year >C> 1996 $417,290 $382,109 $13,003 $22,178 $7.67 5.3 10.9 1996 1995 379,736 359,553** 8,247 11,936 4.11 3.1 6.1 1995 1994 333,207 338,402** (1,922) (3,273) (1.11) (1.0) (1.7) 1994 1993 331,156 308,072** 9,695 13,389* 4.50* 4.0 6.3 1993 1992 374,173 341,197** 12,764 20,212 7.23 5.4 9.4 1992 1991 361,924 323,907 13,724 24,293 8.86 6.7 12.1 1991 1990 340,128 293,913 16,776 29,439 10.74 8.7 16.0 1990 1989 299,789 258,659 15,627 25,503 9.28 8.5 15.5 1989 1988 277,656 238,108 15,306 24,242 8.83 8.7 16.5 1988 1987 244,656 212,494 14,505 17,657 6.44 7.2 13.5 1987 Dividends, Expenditures and Other Data Weighted Cash Dividends For Average Registered the Shares Per Capital Deprec. Worker Shareholder At the Year Outstanding Amount Share Expend. Expense Members Members Year End 1996 2,892,621 $10,758 $3.72 $21,163 $22,786 3,211 2,029 1996 1995 2,905,750 10,811 3.72 18,988 23,334 3,071 2,179 1995 1994 2,941,177 10,956 3.72 16,515 26,114 3,439 2,256 1994 1993 2,972,300 11,057 3.72 18,335 24,837 3,264 2,301 1993 1992 2,794,657 10,330 3.70 52,684 22,241 3,632 2,301 1992 1991 2,741,838 10,145 3.70 33,075 18,236 3,953 2,303 1991 1990 2,741,562 9,181 3.35 22,057 15,397 3,673 2,209 1990 1989 2,749,056 7,971 2.90 31,190 13,165 3,317 2,084 1989 1988 2,744,832 6,862 2.50 21,540 11,213 3,180 1,919 1988 1987 2,740,678 5,617 2.05 12,887 10,204 2,947 1,704 1987 Financial Position Plant and Shareholders' Equity At the Working Current Equipment Total Long-term Per At the Year End Capital Ratio Net Assets Debt Amount Share Year End 1996 $121,103 2.4 to 1 $114,213 $348,798 $22,696 $207,995 $72.05 1996 1995 116,364 2.3 to 1 118,066 349,599 27,796 197,903 68.21 1995 1994 113,751 2.7 to 1 122,911 323,318 32,665 193,846 66.29 1994 1993 107,809 2.7 to 1 144,016 332,461 36,246 206,222 69.42 1993 1992 103,818 2.5 to 1 151,126 331,653 40,135 219,690 73.90 1992 1991 105,213 2.4 to 1 118,417 306,534 17,300 208,564 76.07 1991 1990 115,737 3.3 to 1 101,985 269,221 18,700 194,081 70.78 1990 1989 83,009 2.2 to 1 96,075 249,833 - 173,241 62.95 1989 1988 81,798 2.6 to 1 78,504 211,240 - 156,083 56.77 1988 1987 74,220 3.0 to 1 68,267 181,447 - 138,318 50.39 1987 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.
EX-21 4 Woodward Governor Company Exhibit 21 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 EX-23 5 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 12, 1996, on our audits of the consolidated financial statements and financial statement schedule of Woodward Governor Company and Subsidiaries as of September 30, 1996 and 1995, and for the years then ended September 30, 1996, 1995 and 1994, which report is incorporated by reference in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Chicago, Illinois December 19, 1996 EX-27 6
5 1000 YEAR SEP-30-1996 SEP-30-1996 6862 6208 83657 2755 92135 206098 316152 201939 348798 84995 22696 0 0 190 207805 348798 417290 417290 304887 69874 4023 0 3325 35181 13003 35181 0 0 0 35181 7.67 7.67
EX-99 7 APPENDIX TO 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1996 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, 1996. SALES GRAPH: This stacked bar graph is shipments in millions of dollars for Aircraft Controls and Industrial Controls for the fiscal years ended 1992 through 1996. Consolidated plot points are $374, $331, $333, $380, and $417 with the first plot point being 1992. Aircraft Controls' plot points are $199, $152, $141, $162, and $184. Industrial Controls' plot points are $175, $179, $192, $218, and $233 for the same time period. EARNINGS (LOSS): The bar graph for consolidated earnings (loss) before the cumulative effect of accounting changes in 1993 is in millions of dollars for fiscal years 1992 through 1996. The plot points beginning with 1992 are $20, $13, -$3, $12, and $22. EARNINGS (LOSS) AND CASH DIVIDENDS PER SHARE: The bar graph for consolidated earnings (loss) and cash dividends per share is for fiscal years ended 1992 through 1996. For fiscal year ended 1993 the points are before cumlative effect of accounting changes. Beginning with 1992, plot points for earnings per share are $7.23, $4.50, -$1.11, $4.11, and $7.67. Cash dividends plot points, beginning with 1992 are $3.70, $3.72, $3.72, $3.72, and $3.72. -----END PRIVACY-ENHANCED MESSAGE-----