SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): August 28, 1998
(June 15, 1998)
WOODWARD GOVERNOR COMPANY
(Exact name of registrant as specified in its charter)
Commission File #0-8408
Delaware 36-1984010
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
5001 North Second Street, Rockford, Illinois 61125-7001
(Address of principal executive offices)
Registrant's telephone number - (815) 877-7441
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Business Acquired:
FUEL SYSTEMS TEXTRON INC.
1. Report of Independent Accountants
2. Statements of Income and Changes in Parent Company's Investment for
the fiscal years ended January 3, 1998, December 28, 1996 and
December 30, 1995.
3. Balance Sheets as of January 3, 1998 and December 28, 1996 .
4. Statements of Cash Flows for the fiscal years ended January 3, 1998,
December 28, 1996 and December 30, 1995.
5. Notes to Financial Statements.
6. Unaudited Balance Sheet as of April 4, 1998 and Statement of Income
and Changes in Parent Company's Investment and Statement of Cash
Flows for the interim three month periods ended April 4, 1998 and
March 29, 1997
(b) Pro Forma Financial Information:
WOODWARD GOVERNOR COMPANY AND FUEL SYSTEMS TEXTRON INC. COMBINED
1. Pro Forma Financial Information -- Introduction
2. Unaudited Pro Forma Condensed Balance Sheet as of March 31, 1998
3. Unaudited Pro Forma Condensed Statements of Earnings for the fiscal
year ended September 30, 1997 and the six month period ended March
31, 1998
4. Notes to Pro Forma Financial Information
(c) Exhibits
1. Consent letter from PricewaterhouseCoopers LLP
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
WOODWARD GOVERNOR COMPANY
By: /s/ Stephen P. Carter
- ------------------------------
Stephen P. Carter
VICE PRESIDENT, CHIEF FINANCIAL
OFFICER AND TREASURER
Date: August 28, 1998
<PAGE>
Item 7(a) Financial Statements of Business Acquired:
1. Report of Independent Accountants
To the Board of Directors and Shareholders
Textron Inc.
In our opinion, the accompanying balance sheets and the related
statements of income and changes in parent company's investment and of
cash flows present fairly, in all material respects, the financial
position of Fuel Systems Textron Inc. (Fuel Systems) at January 3, 1998
and December 28, 1996, and the results of its operations and its cash
flows for each of the three years in the period ended January 3, 1998,
in conformity with generally accepted accounting principles. These
financial statements reflect the determinations described in Note 1 and
are the responsibility of the Fuel System's management; our
responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that
we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Chicago, Illinois
August 14, 1998
<PAGE>
2. Statements of Income and Changes in Parent Company's Investment for
the fiscal years ended January 3, 1998, December 28, 1996 and December
30, 1995
<TABLE>
FUEL SYSTEMS TEXTRON INC.
Statement of Income
and Changes in Parent Company's Investment
(Dollars in millions)
<CAPTION>
For each of the three years in the
period ended January 3, 1998 1997 1996 1995
<S> <C> <C> <C>
Total revenues $ 82.1 $ 61.3 $ 51.4
Costs and expenses
Cost of sales 61.4 46.1 39.8
Selling and administrative 4.1 3.6 3.0
Goodwill amortization .9 .9 .9
Total costs and expenses 66.4 50.6 43.7
Income before income taxes 15.7 10.7 7.7
Income taxes 6.3 4.5 3.4
Net income 9.4 6.2 4.3
Parent Company's investment, beginning
of year 39.2 43.1 46.9
Advances, withdrawals and dividends, net (9.6) (10.1) (8.1)
Parent Company's investment, end of year $39.0 $39.2 $43.1
See notes to financial statements.
</TABLE>
<PAGE>
3. Balance Sheets as of January 3, 1998 and December 28, 1996 .
<TABLE>
FUEL SYSTEMS TEXTRON INC.
Balance Sheet
(Dollars in millions)
<CAPTION>
As of January 3,1998 and December 28, 1996 1997 1996
<S> <C> <C>
Assets
Cash $ - $ -
Receivables - net 6.0 4.6
Inventories 12.6 11.9
Other current assets .2 .2
Current assets 18.8 16.7
Property, plant, and equipment - net 9.3 8.1
Pension asset 2.1 1.9
Goodwill 26.2 27.1
Total assets $56.4 $53.8
Liabilities and Parent Company's Investment
Liabilities
Accounts payable $ 6.4 $ 4.3
Accrued liabilities (including income taxes) 6.7 6.6
Current liabilities 13.1 10.9
Other long-term liabilities 1.1 .6
Accrued postretirement benefits other than pensions 3.2 3.1
Total liabilities 17.4 14.6
Parent Company's Investment 39.0 39.2
Total Liabilities and Parent Company's
Investment $56.4 $53.8
See notes to financial statements.
</TABLE>
<PAGE>
4. Statements of Cash Flows for the fiscal years ended January 3, 1998,
December 28, 1996 and December 30, 1995
<TABLE>
FUEL SYSTEMS TEXTRON INC.
Statement of Cash Flows
(In millions)
<CAPTION>
For each of the three years in the period ended
January 3, 1998 1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 9.4 $ 6.2 $ 4.3
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1.4 1.5 1.6
Amortization .9 .9 .9
Changes in assets and liabilities:
Decrease (increase) in receivables (1.4) (.3) .7
Decrease (increase) in inventories (.7) .8 1.9
Decrease (increase) in other current
assets - (.1) (.1)
Decrease (increase) in pension asset (.2) (.2) (.3)
Increase (decrease) in accounts payable 2.1 1.0 .8
Increase (decrease) in accrued
liabilities .1 2.2 (.6)
Increase (decrease) in other long-term
liabilities .5 (.1) .1
Increase (decrease) in accrued
postretirement benefits other than
pensions .1 .1 .1
Net cash provided by operating activities 12.2 12.0 9.4
Cash flows from investing activities:
Capital expenditures (2.6) (2.0) (1.4)
Other investing activities, net - .1 .1
Net cash (used) by investing activities (2.6) (1.9) (1.3)
Cash flows from financing activities - change
in parent company's investment for advances,
withdrawals and dividends (9.6) (10.1) (8.1)
Net increase (decrease) in cash -
Cash at beginning of period - - -
Cash at end of period $ - $ - $ -
See notes to financial statements.
</TABLE>
<PAGE>
5. Notes to Financial Statements
FUEL SYSTEMS TEXTRON INC.
(As Defined, Note 1)
Notes to Financial Statements
(In millions)
1. Description of Business and Basis of Presentation
The financial statements present the historical financial position,
results of operations and cash flows of Fuel Systems Textron Inc.
(Fuel Systems), to the extent primarily related to the business
conducted by Fuel Systems.
Fuel Systems business is comprised of one segment, which develops,
manufactures, and markets fuel systems components for aircraft and
industrial gas turbine engines. Fuel Systems is a U.S. subsidiary
of Textron Inc. (Textron) with sales originating from the U.S.
On May 29, 1998, Textron entered into an agreement with Woodward
Governor Company (Woodward) for the sale of Fuel Systems stock.
The sale was effective June 12, 1998.
The accompanying financial statements may not necessarily be
indicative of the financial position, results of operations or cash
flows of Fuel Systems in the future or what the financial position,
results of operations or cash flows would have been had Fuel
Systems been a separate independent company during the periods
presented.
2. Financial Statement Presentation
Summary of Significant Accounting Policies
Significant accounting policies appear as an integral part of the
notes to the financial statements to which the policies relate.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
these statements and accompanying notes. Consequently, actual
results could differ from such estimates.
Revenue Recognition
Revenue is recognized from product sales upon shipment to the
customer.
3. Inventories
Inventories are stated at the lower of last-in, first-out (LIFO)
cost or market.
<TABLE>
<CAPTION>
January 3, December 28,
(in millions) 1998 1996
<S> <C> <C>
Work in process $ 3.6 $ 4.5
Raw materials and small components 9.0 7.4
$12.6 $11.9
</TABLE>
<PAGE>
Had such LIFO inventories been valued at current costs, their
carrying values would have been approximately $.4 million higher at
each of those respective dates.
4. Property Plant and Equipment
Property, plant and equipment is stated at cost. Normal
maintenance and repairs are charged to expense as incurred.
Additions and improvements to provide necessary capacity improve
the efficiency of production or to modernize facilities are
capitalized. Upon sale or retirement of property, plant or
equipment, the cost and accumulated depreciation are eliminated
from the accounts and the related gain or loss is included in the
statement of income. Depreciation is calculated on a straight-line
basis over the estimated useful lives of the various classes of
assets (which range from 3 to 40 years).
<TABLE>
<CAPTION>
January 3, December 28,
(In millions) 1998 1996
<S> <C> <C>
At cost:
Land and buildings $ 5.0 $ 5.1
Machinery and equipment 17.8 16.7
22.8 21.8
Less accumulated depreciation 13.5 13.7
$ 9.3 $ 8.1
</TABLE>
5. Goodwill
During 1986, Textron acquired substantially all of the outstanding
shares of Ex-Cell-O Corporation, which included the Fuel Systems
business. Goodwill represents the excess of cost over the fair
value of net assets acquired that relates to the Fuel Systems
business. Goodwill is being amortized using the straight-line
method over a 40-year period.
<TABLE>
January 3, December 28,
(In millions) 1998 1996
<S> <C> <C>
Goodwill $ 36.4 $ 36.4
Less accumulated amortization 10.2 9.3
$ 26.2 $ 27.1
</TABLE>
Goodwill is periodically reviewed for impairment by comparing the
carrying amount to the estimated future undiscounted cash flows of
Fuel Systems. If this review indicates that goodwill is not
recoverable, the carrying amount would be reduced to fair value.
6. Accounts Payable and Other Current Liabilities
Accounts Payable consist of trade payables. Other current
liabilities consist of the following:
<TABLE>
January 3, December 28,
(In millions) 1998 1996
<S> <C> <C>
Salaries and benefits $ 2.1 $ 2.0
Warranty accrual 1.4 .8
Deferred taxes .5 .6
Price determination reserves .9 -
Other 1.8 3.2
$ 6.7 $ 6.6
</TABLE>
<PAGE>
7. Concentration of Risk
For the year ended January 3, 1998, Fuel Systems had 3 customers
that accounted for approximately 58% of net sales. In 1996, two
customers accounting for approximately 63% of net sales. In 1995,
three customers accounted for 64% of net sales. Loss of, or
significant reduction in purchases by, any such customer could have
a material adverse effect on Fuel Systems results.
A financial instrument which potentially exposes Fuel Systems to
concentration of credit risk is accounts receivable, as relatively
few customers account for a significant portion of Fuel Systems
revenues. Fuel Systems regularly monitors the creditworthiness of
its customers and believes that it has adequately provided for any
exposure to potential credit losses.
8. Parent Company's Investment
Parent company's investment includes the shareholder's equity of
Fuel Systems, representing the original investment by Textron, plus
accumulated income and net advances, withdrawals and dividends.
Cash receipts are transferred to Textron by daily cash sweeps and
Textron makes funds available for operating expenses.
9. Research and Development
Research and development costs are expensed as incurred and totaled
approximately $1.9 million, $1.4 million and $1.4 million in 1997,
1996 and 1995, respectively.
10. Leases
Fuel Systems leases certain machinery, office equipment and
automobiles under operating leases. Rental expense was $.2
million, $.1 million and $.1 million in 1997, 1996 and 1995,
respectively. The future minimum lease payments are as follows (in
millions):
1998 $ .3
1999 .3
2000 .3
2001 .2
2002 .2
$ 1.3
11. Performance share units and stock options
Textron's 1994 Long-Term Incentive Plan authorizes awards to key
employees in two forms: (a) performance share units and (b) options
to purchase Textron common stock.
Performance share units and employee stock option grants are
accounted for in accordance with APB 25, "Accounting for Stock
Issued to Employees." Under APB 25, because the exercise price of
employee stock options equals the market price on the date of
grant, no compensation expense is recognized for stock option
awards. Compensation expense for performance share units is
measured based on the value of Textron stock underlying the awards.
<PAGE>
Compensation expense under Textron's performance share program for
Fuel Systems was approximately $.1 million in 1997 and 1996, and
less than $.1 million in 1995. During 1997, 1996 and 1995 certain
employees of Fuel Systems were granted stock options under
Textron's stock option plans.
Pro forma information regarding net income is required by SFAS 123,
"Accounting for Stock-Based Compensation" and has been determined
under the fair value method of that Statement. For the purpose of
developing the pro forma information, the fair values of options
granted after 1995 are estimated at the date of grant using the
Black-Scholes option-pricing model. The estimated fair values are
amortized to expense over the options' vesting period. Using this
methodology, net income would have been reduced by $.2 million in
1997, $.1 million in 1996 and the impact would have been immaterial
in 1995. The pro forma effect on net income is not necessarily
representative of the effect in future years because it does not
take into consideration pro forma compensation expense related to
grants made prior to 1995.
The assumptions used to estimate the fair value of an option
granted in 1997, 1996 and 1995, respectively, are approximately as
follows: dividend yield of 2%; expected volatility of 16%; risk-
free interest rates of 6%, 6%, and 5%; and weighted average
expected lives of 3.5 years. Under these assumptions, the weighted-
average fair value of an option to purchase one share granted in
1997, 1996, and 1995, respectively, was approximately $14, $10 and
$8.
12. Employee Benefit Plans
Fuel Systems employees are included in Textron's sponsored defined
benefit pension plans. Fuel Systems has accounted for its
participation in the Textron plans as a participation in a multi-
employer plan. These benefit costs are allocated to Fuel Systems
based on eligible employees participating in the plans. This
pension asset represents the accumulated pension income allocated
to Fuel Systems by Textron. Pension income related to these plans
amounted to $.3 million, $.2 million and $.2 million in 1997, 1996
and 1995, respectively. Fuel Systems also has a defined
contribution plan, the cost of which was immaterial.
Fuel Systems offers health care and life insurance benefits
primarily for certain retired employees. Postretirement benefit
costs other than pension-related expenses in 1997, 1996, and 1995
included the components shown in the following table. Fuel Systems'
postretirement benefit plans other than pensions are unfunded.
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
<S> <C> <C> <C>
Service cost - benefits earned during the year $ - $ - $ -
Interest cost on accumulated postretirement
benefit obligation .2 .2 .3
Net amortization - - -
Postretirement benefit costs $ .2 $ .2 $ .3
</TABLE>
<PAGE>
The following table sets forth the status of these plans at the end
of 1997 and 1996:
<TABLE>
<CAPTION>
January 3, December 28,
(In millions) 1998 1996
<S> <C> <C>
Actuarial present value of benefits attributed
to:
Retirees $ 2.6 $ 2.5
Fully eligible active plan
participants .1 .1
Other active plan participants .1 .1
Accumulated postretirement benefit
obligation 2.8 2.7
Unrecognized net actuarial gains .4 .4
Postretirement benefit liability recognized on
the balance sheet $ 3.2 $ 3.1
</TABLE>
The discount rates used to determine postretirement benefit costs
other than pensions and the status of those plans were between
7.25% and 8.25%.
The 1997 health care cost trend rate, which is the weighted average
annual assumed rate of increase in the per capita cost of covered
benefits, was 6.5% for retirees age 65 and over and 7.5% for
retirees under age 65. Both rates are assumed to decrease gradually
to 5.5% by 2001 and 2003, respectively, and then remain at that
level. Increasing the health care cost trend rates by one
percentage point in each year would have increased the accumulated
postretirement benefit obligation as of year-end 1997 and the
aggregate of the service and interest cost components of
postretirement benefit costs for 1997 by immaterial amounts.
13. Income Taxes
The operations of Fuel Systems are included in the consolidated tax
returns of Textron Inc. and its subsidiaries. Fuel Systems has no
formal or informal tax sharing agreement with Textron. For
purposes of the accompanying financial statements, income taxes are
determined on the "separate return" method.
Fuel Systems recognizes deferred income taxes for temporary
differences between the financial reporting basis and income tax
basis of assets and liabilities based on enacted tax rates expected
to be in effect when amounts are likely to be realized or settled.
Income tax expense is summarized as follows:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $ 5.5 $ 4.7 $ 2.9
State .7 .7 .6
Deferred (Benefit):
Federal .1 (.9) (.1)
Income tax expense $ 6.3 $ 4.5 $ 3.4
</TABLE>
<PAGE>
Reconciliation of effective tax rate to federal statutory income
tax rate:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal statutory income tax rate 35.0% 35.0% 35.0%
State income taxes 2.9% 3.9% 5.0%
Amortization of goodwill 2.0% 3.0% 4.2%
Nondeductible expenses 0.2% 0.2% 0.2%
Effective income tax rate 40.1% 42.1% 44.4%
Components of deferred tax assets (liabilities) were as follows:
</TABLE>
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
<S> <C> <C> <C>
Obligation for postretirement benefits other
than pensions $ 1.0 $ 1.1 $ 1.1
Inventory (1.7) (1.8) (1.9)
Insurance .1 .1 .1
Fixed assets (.5) (.4) (.5)
Deferred compensation .3 .2 .4
Other, principally timing of other
expense deductions (.1) - (.9)
$ (.9) $ (.8) $ (1.7)
</TABLE>
14. Related Party Transactions
The statement of income includes the costs of certain
administrative and other services provided by Textron and allocated
to Fuel Systems. These services include executive operations
management, legal, environmental, benefits administration and
audit. The charge to Fuel Systems for corporate administration was
$.5 million, $.3 million and $.1 million in 1997, 1996 and 1995,
respectively.
Various insurance coverages are provided to Fuel Systems through
Textron's consolidated programs. Health care, auto, property,
product liability, workers compensation and other insurance costs
incurred by Textron are charged to Fuel Systems based on specific
direct costs, as applicable, and various allocation methods
depending on the nature of the expense and Textron's overall cost.
The charge to Fuel Systems for insurance coverages was $1.2
million, $1.1 million and $1.0 million in 1997, 1996 and 1995,
respectively.
Certain costs, including interest expense, allocated to Fuel
Systems by Textron for tax purposes, are not included in these
statements, as they did not relate primarily to the business
conducted by Fuel Systems.
Costs that have been allocated are on a basis which management
believes is reasonable.
15. Contingencies
Fuel Systems is involved in several legal matters, which are
considered normal to its business. Fuel Systems also has various
contracts with the government, which are subject to audit. On the
basis of information presently available, Fuel Systems believes
that any liability for these suits and proceedings would not have a
material effect on Fuel Systems net income or financial condition.
<PAGE>
6. Unaudited Balance Sheet as of April 4, 1998 and Statement of Income
and Changes in Parent Company's Investment and Statement of Cash Flows
for the interim three month periods ended April 4, 1998 and March 29,
1997
<TABLE>
FUEL SYSTEMS TEXTRON INC.
Statement of Income
and Changes in Parent Company's Investment (unaudited)
(Dollars in millions)
<CAPTION>
April 4, March 29,
For the three month periods ended 1998 1997
<S> <C> <C>
Total revenues $ 23.7 $ 17.7
Costs and expenses
Cost of sales 17.7 13.4
Selling and administrative 1.2 .9
Goodwill amortization .2 .2
Total costs and expenses 19.1 14.5
Income before income taxes 4.6 3.2
Income taxes 1.8 1.3
Net income 2.8 1.9
Parent Company's investment, beginning of period 39.0 39.2
Advances, withdrawals and dividends, net .6 1.1
Parent Company's investment, end of period $ 42.4 $ 42.2
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
FUEL SYSTEMS TEXTRON INC.
Balance Sheet (unaudited)
(Dollars in millions)
<CAPTION>
April 4,
1998
<S> <C>
Assets
Cash $ -
Receivables - net 8.7
Inventories 13.4
Other current assets .3
Current assets 22.4
Property, plant, and equipment - net 10.1
Pension asset 2.1
Goodwill 26.0
Total assets $ 60.6
Liabilities and Parent Company's Investment
Liabilities
Accounts payable $ 6.8
Accrued liabilities (including income taxes) 6.9
Current liabilities 13.7
Other long-term liabilities 1.3
Accrued postretirement benefits other than pensions 3.2
Total liabilities 18.2
Parent Company's Investment 42.4
Total Liabilities and Parent Company's Investment $ 60.6
</TABLE>
See notes to financial statements.
<PAGE>
<TABLE>
FUEL SYSTEMS TEXTRON INC.
Statement of Cash Flows (Unaudited)
(In millions)
<CAPTION>
April 4, March 29,
For the three month periods ended 1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2.8 $ 1.9
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation .4 .4
Amortization .2 .2
Changes in assets and liabilities:
Decrease (increase) in receivables (2.7) (3.5)
Decrease (increase) in inventories (.8) (.9)
Decrease (increase) in other current assets (.1) -
Decrease (increase) in pension asset - -
Increase (decrease) in accounts payable .4 .7
Increase (decrease) in accrued liabilities .2 (.1)
Increase (decrease) in other long-term
liabilities .2 .3
Increase (decrease) in accrued postretirement
benefits other than pensions - -
Net cash provided (used) by operating
activities .6 (1.0)
Cash flows from investing activities:
Capital expenditures (1.2) (.1)
Net cash (used) by investing activities (1.2) (.1)
Cash flows from financing activities - change in
parent company's investment for advances,
withdrawals and dividends .6 1.1
Net increase (decrease) in cash - -
Cash at beginning of period - -
Cash at end of period $ - $ -
</TABLE>
See notes to financial statements.
<PAGE>
FUEL SYSTEMS TEXTRON INC.
Notes to Financial Statements (unaudited)
1. Basis of Presentation
The financial statements should be read in conjunction with the
Fuel Systems Textron Inc. (Fuel Systems) historical financial
statements for the year ended January 3, 1998. The financial
statements reflect all adjustments, which in the opinion of
management, are necessary for a fair presentation of Fuel Systems
financial position at April 4, 1998 and March 29, 1997 and its
results of operations and cash flows for the three-month periods
ended April 4, 1998 and March 29, 1997.
The accompanying financial statements may not necessarily be
indicative of the financial position, results of operations or cash
flows of Fuel Systems for the full year or what the financial
position, results of operations or cash flows would have been had
Fuel Systems been a separate independent company during the periods
presented.
2. Contingencies
Fuel Systems is involved in several legal matters, which are
considered normal to its business. Fuel Systems also has various
contracts with the government, which are subject to audit. On the
basis of information presently available, Fuel Systems believes
that any liability for these suits and proceedings would not have a
material effect on Fuel Systems net income or financial condition.
<PAGE>
Item 7(b) PRO FORMA FINANCIAL INFORMATION
1. Pro forma Financial Information - Introduction
The accompanying unaudited pro forma condensed financial statements
(pro forma statements) illustrate the effect of the acquisition of Fuel
Systems Textron Inc. (Fuel Systems) on financial position and results
of operations of Woodward Governor Company (Woodward) . The unaudited
pro forma condensed balance sheet as of March 31, 1998 is based upon
the unaudited historical balance sheets of Woodward as of March 31,
1998 and of Fuel Systems as of April 4, 1998 and assumes the
acquisition took place on March 31, 1998. The unaudited pro forma
condensed statement of earnings for the fiscal year ended September 30,
1997 is based on the audited historical statements of earnings of
Woodward for the fiscal year ended September 30, 1997 and of Fuel
Systems for the fiscal year ended January 3, 1998 and has been prepared
assuming the acquisition took place October 1, 1996. The unaudited
pro forma condensed statement of earnings for the interim six month
period ended March 31, 1998 is based on the unaudited historical
statements of earnings of Woodward for the interim six month period
ended March 31, 1998 and of Fuel Systems for the interim six-month
period ended April 4, 1998 and has been prepared assuming the
acquisition took place October 1, 1996. The unaudited pro forma
condensed financial statements do not purport to be indicative of the
results of operations or financial position of Woodward that would have
actually occurred had the acquisition been completed on October 1,
1996, or which may occur in the future.
The acquisition will be accounted for by the purchase method of
accounting. Under purchase accounting, the total purchase price will be
allocated to the tangible and intangible assets and liabilities of Fuel
Systems based upon their respective fair values as of the effective
time of the acquisition based on valuations and other studies which are
not yet complete. A preliminary allocation of the purchase price has
been made to major categories of assets and liabilities in the
accompanying pro forma statements based on available information and is
subject to change. The actual allocation of purchase price and the
resulting effect on income from operations may differ from the
unaudited pro forma amounts included herein. The pro forma adjustments
are described in the accompanying notes and represent Woodward's
preliminary determination of purchase accounting adjustments based upon
available information and certain assumptions that Woodward believes
are reasonable. The accompanying unaudited pro forma statements should
be read in connection with the separate historical financial statements
and notes thereto of Woodward and Fuel Systems.
The accompanying unaudited pro forma condensed financial statements
exclude the May 1998 acquisition of Baker Electrical Products, Inc. as
this acquisition did not meet the criteria for preparation of pro forma
information.
<PAGE>
2. Unaudited Pro Forma Condensed Balance Sheet as of March 31, 1998
Woodward Governor company
Unaudited Pro Forma Condensed Balance Sheet
As of March 31, 1998
[CAPTION]
Woodward Fuel
Governor Systems Pro Forma
(in 000's) Company Textron Inc. Adjustments Total
[S] [C] [C] [C] [C]
ASSETS:
Cash and cash equiv. $ 7,727 $ - $ - $ 7,727
Accounts receivable 81,454 8,700 - 90,154
Inventories 89,177 13,400 404 (a) 102,981
Deferred income taxes 19,651 - - 19,651
Other current assets - 300 - 300
Total current assets 198,009 22,400 404 220,813
Property, plant and
equipment, net 106,995 10,100 6,587 (a) 123,682
Intangibles and other
assets 8,688 28,100 (26,000)(a) 165,297
151,009 (a)
2,500 (a)
1,000 (h)
Deferred income taxes 18,490 - - 18,490
Total assets $332,182 $ 60,600 $135,500 $528,282
LIABILITIES:
Short-term borrowings $ 10,295 $ - $ 63,500 (b)$ 87,295
13,500 (c)
Current portion of
long-term debt 4,979 - - 4,979
Accounts payable and
accrued expenses 52,466 13,700 900 (d) 67,066
Taxes on income 7,753 - - 7,753
Total current liabilities 75,493 13,700 77,900 167,093
Long-term debt 17,679 - 100,000 (b) 117,679
Other liabilities 34,901 4,500 - 39,401
Commitments and
contingencies - - - -
128,073 18,200 177,900 324,173
Shareholders' equity:
Preferred stock - - - -
Common stock 106 - - 106
Additional paid in
capital 13,297 - - 13,297
Unearned ESOP compen-
sation (12,176) - - (12,176)
Currency translation
adjustment 7,599 - - 7,599
Retained earnings 215,356 - - 215,356
Parent Company's
investment - 42,400 (42,400)(m) -
224,182 42,400 (42,400) 224,182
Less treasury stock,
at cost 20,073 - - 20,073
204,109 42,400 (42,400) 204,109
Total liabilities and
shareholders' equity $332,182 $ 60,600 $135,500 $528,282
See notes to unaudited pro forma condensed financial statements.
<PAGE>
3. Unaudited Pro Forma Condensed Statements of Earnings for fiscal year
ended September 30, 1997 and the six month interim period ended March
31, 1998
<TABLE>
Woodward Governor company
Unaudited Pro Forma Condensed Statement of Earnings
for the fiscal year ended September 30, 1997
<CAPTION>
Woodward Fuel
(in 000's except for Governor Systems Pro Forma
per share amounts) Company Textron, Inc. Adjustments Total
<S> <C> <C> <C> <C>
Net billings for products
and services $ 442,216 $ 82,100 $ - $ 524,316
Costs and expenses:
Cost of goods sold 325,837 61,400 184 (e)387,825
404 (k)
Sales, service and
administrative 72,295 4,100 - 76,395
Other:
Interest expense 2,382 - 200 (h) 14,087
11,505 (i)
Interest income (780) - - (780)
Other expense, net 2,794 900 5,034 (f) 8,328
500 (g)
(900)(l)
Total costs and expenses 402,528 66,400 16,927 485,855
Earnings before income
taxes and equity in loss of
unconsolidated affiliate 39,688 15,700 (16,927) 38,461
Income taxes 15,339 6,300 (7,131)(j) 14,508
Earnings before equity in
loss of unconsolidated
affiliate 24,349 9,400 (9,796) 23,953
Equity in loss of
unconsolidated affilate,
net of tax 6,209 - - 6,209
Net earnings $18,140 $ 9,400 $(9,796) $ 17,744
Basic earnings per share $1.58 $1.55
Average number of basic
shares outstanding 11,482 11,482
Diluted earnings per share $1.57 $1.54
Average number of diluted
shares outstanding 11,525 11,525
</TABLE>
See notes to unaudited pro forma condensed financial statements
<PAGE>
<TABLE>
Woodward Governor Company
Unaudited Pro Forma Condensed Staement of Earnings
for the six month period ended March 31, 1998
<CAPTION>
Woodward Fuel
(in 000's except for Governor Systems Pro Forma
per share amounts) Company Textron Inc. Adjustments Total
<S> <C> <C> <C> <C>
Net billings for products
and services $ 211,300 $ 47,000 $ - $258,300
Costs and expenses:
Cost of goods sold 154,622 35,800 92 (e) 190,514
Sales, service and
administrative 38,131 2,500 - 40,631
Other expense:
Interest expense 785 - 100 (h) 6,638
5,753 (i)
Interest income (424) - - (424)
Other expense, net 2,015 400 2,517 (f) 4,782
250 (g)
(400)(l)
Total costs and expenses 195,129 38,700 8,312 242,141
Earnings before income taxes
and equity in loss of
unconsolidated affiliate 16,171 8,300 (8,312) 16,159
Income taxes 6,449 3,300 (3,485)(j) 6,264
Earnings before equity in
loss of unconsolidated
affiliate 9,722 5,000 (4,827) 9,895
Equity in loss of uncon-
solidated affilate, net
of tax 1,849 - - 1,849
Net earnings $ 7,873 $ 5,000 $ (4,827) $ 8,046
Basic earnings per share $0.69 $0.71
Average number of basic
shares outstanding 11,381 11,381
Diluted earnings per share $0.69 $0.70
Average number of diluted
shares outstanding 11,427 11,427
(/TABLE>
See notes to unaudited pro forma condensed financial statements
<PAGE>
4. Notes to Unaudited Pro Forma Financial Information
(a) The estimated purchase price and preliminary adjustments to
historical book value of Fuel Systems as a result of the acquisition are
as follows (dollars in thousands):
</TABLE>
<TABLE>
<S> <C>
Purchase price $160,000
Estimated purchase price adjustment payable for
Section 338(h)(10) election 13,500
Acquisition fees and expenses 2,500
Total purchase price 176,000
Book value of net assets acquired 42,400
Purchase price in excess of net assets acquired $133,600
Preliminary allocation of purchase price in excess of
book value of net assets acquired:
Increase in inventory to estimated fair value $ 404
Increase in property, plant and equipment to estimated
fair value 6,587
Intangibles and other assets:
Eliminate existing unamortized goodwill recorded
at Fuel Systems Textron, Inc. (26,000)
Record excess of purchase price over fair value of
tangible net assets acquired 151,009
Capitalized acquisition costs 2,500
Increase in current liabilities for estimated
exit costs (900)
$133,600
</TABLE>
(b) Reflects the estimated sources and uses of funds for the
acquisition as follow, assuming the acquisition occurred as of March 31,
1998 (dollars in thousands):
<TABLE>
<S> <C>
Sources of funds:
Term loan facility $100,000
Revolving line of credit facility 63,500
Additional estimated borrowing on revolving line
of credit 13,500
$177,000
Use of funds:
Cash consideration for Fuel Systems Textron Inc. $160,000
Section 338(h)(10) purchase price adjustment payable 13,500
Loan origination fees and expenses (capitalized debt
issue costs) 1,000
Acquisition fees and expenses (capitalized
acquisition costs) 2,500
$177,000
</TABLE>
(c) In accordance with the acquisition agreement, Woodward has the
option under Internal Revenue Code (IRC) Section 338(h)(10) to treat the
transaction as an asset purchase for tax purposes. As per the
agreement, Woodward must notify Textron Inc. of this election by
September 1, 1998 and will be required to make an additional payment to
Textron, not to exceed $13,500,000, as compensation for the additional
tax liability Textron would recognize under this election. Woodward
expects to elect Section 338(h)(10) treatment, as the estimated future
tax benefits outweigh the maximum required payment to Textron. The
estimated additional purchase price of $13,500,000 has been recorded in
the excess of purchase price over the fair value of tangible net assets
acquired and is assumed to be funded by additional borrowings on the
revolving line of credit.
<PAGE>
(d) Woodward adopted a plan to consolidate the manufacturing operations
of Fuel Systems' Harvard, Illinois facility into that of its Rockford,
Illinois facility. Estimated costs to exit this operation of $900,000
(principally severance compensation) have been recorded in purchase
accounting.
(e) Fuel Systems historically depreciated the $26,800,000 of historical
cost of its property, plant and equipment appearing on the March 31,
1998 balance sheet over lives ranging from 3 to 40 years resulting in
$1,400,000 of annual depreciation, accumulated depreciation of
$16,700,000 and a net book value of $10,100,000. Upon consummation of
the Fuel Systems acquisition, the fair value of property, plant and
equipment acquired is currently estimated to be approximately
$16,687,000. This amount is being depreciated over 25 years for
buildings and 10 years for equipment, consistent with Woodward's
depreciation policy and estimate of the remaining economic life of the
assets ($1,584,000 of annual depreciation expense). The estimated pro
forma depreciation adjustment is $184,000 per year ($1,584,000 less
$1,400,000) or $92,000 for six months.
(f) Intangible assets for goodwill, customer relationships, process
technology, assembled workforce and patents are currently being
amortized over an estimated weighted average life of 30 years. For pro
forma purposes, this results in an estimated pro forma intangible
amortization of $5,034,000 per year ($151,009,000/30 years) or
$2,517,000 for six months. The allocation to specific intangible assets
is preliminary.
(g) Capitalized acquisition costs, including professional fees for
legal, accounting and investment banking, will be amortized over a 5
year life. Estimated pro forma amortization is $500,000 per year
($2,500,000/5 years) or $250,000 for six months.
(h) Debt issue costs, including loan underwriting fees and associated
costs, are being amortized over a 5 year life. Estimated pro forma
amortization is $200,000 per year ($1,000,000/5 years) or $100,000 for
six months.
(i) The transaction was financed by a $100,000,000 term loan and a
revolving line of credit facility up to a maximum amount of
$150,000,000. Interest rates for borrowings under the revolving line of
credit vary with the LIBOR rate, money market rate or the prime rate
The revolving line of credit carries a facility fee of 0.25%.
This adjustment reflects additional interest expense assuming the Fuel
Systems acquisition and associated borrowing occurred on October 1,
1996. Interest expense for acquisition related borrowing under the term
loan is $6,500,000 per year ($100,000,000 @ 6.5%) or $3,250,000 for six
months. Interest expense for acquisition related borrowing under the
revolving line of credit is $5,005,000 per year ($77,000,000 @ 6.5%) or
$2,503,000 for six months. Total annual interest expense for
acquisition related borrowing is $11,505,000 per year or $5,753,000 for
six months.
(j) Reflects income tax effects of the pro forma adjustments assuming
an effective statutory income tax rate of 40%, except with respect to
the pro forma adjustment indicated in note (l) which has no tax effect
as it related to non-deductible goodwill amortization. This also assumes
the 338(h)(10) election is made.
(k) Reflects additional cost of sales resulting from the write up of
inventory to fair value.
(l) Reflects elimination of amortization of goodwill related to the
Textron Inc. acquisition of Fuel Systems. Unamortized goodwill from
this transaction is eliminated from the balance sheet in pro forma
note (a).
<PAGE>
(m) Reflects elimination of Fuel Systems Parent Company's investment.
The amounts recorded relating to the acquisitions are currently subject
to adjustment as Woodward has not yet completed the final allocation of
the purchase price.
The unaudited pro forma condensed financial statements do not reflect
any future benefits associated with integrating Fuel Systems with
Woodward.
<PAGE>
Item 7(c) Exhibits
1. 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 August 14, 1998, on our audits
of the financial statements of Fuel Systems Textron Inc. as of January
3, 1998 and December 28, 1996, and for each of the three years in the
period ended January 3, 1998, which report is included in this Form 8-
K/A.
PricewaterhouseCoopers LLP
Chicago, Illinois
August 28, 1998
