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
Act of 1934
For the fiscal year ended September 30, 1999 Commission file number 0-8408
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
WOODWARD GOVERNOR COMPANY
(Exact name of registant 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: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.00875 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
There were 11,274,223 shares of common stock with a par value
of $.00875 per share outstanding at November 30, 1999. The aggregate
market value of the voting stock held by non-affiliates was approximately
$219,445,335 at November 30, 1999 (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 our annual report to shareholders for the fiscal year ended
September 30, 1999 (1999 Annual Report), are incorporated by
reference into Parts I, II and IV of this filing, to the extent indicated.
Portions of our proxy statement dated December 6, 1999, are
incorporated by reference into Part III of this filing, to the extent
indicated.
<PAGE>
TABLE OF CONTENTS
Page
Part I Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of
Shareholders 7
Part II Item 5. Market for the Registrant's Common
Stock and Related Shareholder Matters 7
Item 6. Selected Financial Data 7
Item 7. Management Discussion and Analysis of Results
of Operations and Financial Condition 8
Item 7a. Quantitative and Qualitative Disclosures
About Market Risk 8
Item 8. Financial Statements and Supplementary Data 9
Item 9. Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure 8
Part III Item 10. Directors and Executive Officers of the
Registrant 8
Item 11. Executive Compensation 9
Item 12. Security Ownership of Certain Beneficial
Owners and Management 9
Item 13. Certain Relationships and Related
Transactions 9
Part IV Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 10
Signatures 13
2
<PAGE>
Part I
Item 1. Business
Woodward Governor Company, established in 1870 and incorporated
in 1902, provides innovative engine controls and fuel delivery
systems designed for a wide variety of applications. Serving
global markets from locations worldwide, we are a leading
producer of fuel control systems and components for aircraft and
industrial engines and turbines. Our products and services are
used in the aviation, marine, locomotive, large off-road vehicle,
power generation, gas generation, and oil and gas process
industries.
Our operations are organized based on the nature of products and
services provided. In 1999, we adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Under this statement, we
have two reportable segments - Aircraft Engine Systems and
Industrial Controls. Aircraft Engine Systems provides fuel
control systems and components primarily to original equipment
manufacturers of aircraft engines. Industrial Controls provides
fuel control systems and components primarily to original
equipment manufacturers of industrial engines and turbines.
Our other operations include Global Services and Automotive
Products. Global Services, which resulted because of a change in
the structure of our internal Industrial Controls organization in
1999, focuses on providing control systems and related services
to industrial engine users in retrofit situations. Automotive
Products, which began in 1998, focuses on products for small
industrial engines that require low-cost, high-volume, high-
reliability manufacturing processes characteristic of suppliers
to the automotive industry.
Information about our operations in 1999 and outlook for the
future, including certain segment information, is included in
"Management Discussion and Analysis of the Results of Operations
and Financial Condition" on pages 14 through 21 of our 1999
Annual Report, incorporated here by reference. Additional
segment information and certain geographical information is
included in Note R to the Consolidated Financial Statements, on
pages 32 through 33 of our 1999 Annual Report, incorporated here
by reference. Other information about our business follows.
Aircraft Engine Systems
We provide fuel control systems and components through Aircraft
Engine Systems, primarily to original equipment manufacturers of
aircraft engines for use in those engines. We also sell
components as spares or replacements, and provide repair and
overhaul services to these customers and other customers.
3
<PAGE>
Certain components with broader applications are also sold to
original equipment manufacturers of industrial engines. In 1999,
our largest customers were General Electric Company and United
Technologies Corporation, together accounting for about 50% of
Aircraft Engine Systems billings.
We generally sell Aircraft Engine Systems products and services
directly to our customers, although we also generate aftermarket
sales through distributors, dealers, and independent service
facilities. We carry certain finished goods and component parts
inventory to meet rapid delivery requirements of customers,
primarily for aftermarket needs. We do not believe Aircraft
Engine Systems sales are subject to significant seasonal
variation.
We believe Aircraft Engine Systems has a significant competitive
position within the market for fuel control systems and
components for aircraft engines. We compete with several other
manufacturers, including divisions of original equipment
manufacturers of aircraft engines. While published information
is not available in sufficient detail to enable an accurate
assessment, we do not believe any company holds a dominant
competitive position. Companies compete principally on price,
quality and customer service. In our opinion, our prices are
generally competitive, and our quality and customer service are
favorable competitive factors.
Aircraft Engine Systems backlog orders were $192 million at
November 30, 1999, approximately 69% of which we expect to fill
by September 30, 2000. Last year, Aircraft Engine Systems
backlog orders were $211 million at November 30, 1998,
approximately 77% of which we expected to fill by September 30,
1999. Backlog orders are not necessarily an indicator of future
billing levels because of variations in lead times.
Aircraft Engine Systems products make use of several patents and
trademarks of various durations that we believe are collectively
important. However, we do not consider our business dependent
upon any one patent or trademark. Our products consist of
mechanical, electronic, and electromagnetic components.
Mechanical components are machined primarily from aluminum, iron,
and steel. Generally there are numerous sources for the raw
materials and components used in our products, and they are
believed to be sufficiently available to meet all Aircraft Engine
Systems requirements.
Industrial Controls
We provide fuel control systems and components through Industrial
Controls, primarily to original equipment manufacturers of
industrial engines and turbines. We also sell components as
spares or replacements, and provide other related services to
these customers and other customers. In 1999, our largest
customer was General Electric Company, accounting for 11% of
Industrial Controls billings.
We generally sell Industrial Controls products and services
directly to our customers, although we also generate sales
through distributors, dealers, and independent service
facilities. We carry certain finished goods and component parts
inventory to meet rapid delivery requirements of customers,
primarily for aftermarket needs. We do not believe Industrial
Controls sales are subject to significant seasonal variation.
We believe Industrial Controls has a significant competitive
position within the market for fuel control systems and
components for industrial engines. We compete with as many as 10
other independent manufacturers and with the in-house control
operations of original equipment manufacturers. While published
information is not available in sufficient detail to enable an
accurate assessment, we believe we hold a strong position among
the independent manufacturers for small steam turbines, diesel
and gas engines, and gas turbine markets. Companies compete
principally on price, quality and customer service. We also see
increasing demand for products that result in lower environmental
emissions, particularly in gas turbine applications. In our
4
<PAGE>
opinion, our prices are generally competitive and our quality,
customer service and technology used in products to reduce
emissions are favorable competitive factors.
Industrial Controls backlog orders were $41 million at November
30, 1999, approximately 96% of which we expect to fill by
September 30, 2000. Last year, Industrial Controls included the
operations of Global Services. On a combined basis, Industrial
Controls' and Global Services' backlog orders were $60 million at
November 30, 1999, 96% of which we expect to fill by September
30, 2000 and $74 million at November 30, 1998, approximately 90%
of which we expected to fill by September 30, 1999. Backlog
orders are not necessarily an indicator of future billing levels
because of variations in lead times.
Industrial Controls products make use of several patents and
trademarks of various durations that we believe are collectively
important. However, we do not consider our business dependent
upon any one patent or trademark. Our products consist of
mechanical, electronic and electromagnetic components.
Mechanical components are machined primarily from aluminum, iron,
and steel. Generally there are numerous sources for the raw
materials and components used in our products, and they are
believed to be sufficiently available to meet all Industrial
Controls requirements.
Other Operations
Our other operations include Global Services and Automotive
Products. Global Services provides control systems and related
services to industrial engine users in retrofit situations.
These industrial engine users are principally involved in power
generation or oil and gas processing. Automotive Products
focuses on products for small industrial engines, although
products are also sold to original equipment manufacturers in the
automotive industry.
Products and services of Global Services and Automotive Products
are sold directly to customers. We do not believe sales are
subject to significant seasonal variation. Although power
generators plan retrofit activities around periods of peak energy
usage, these periods vary by location.
The industrial engine retrofit market is a competitive market
with about 15 major competitors. None of the competitors hold a
dominant position. We compete effectively by providing what we
believe is the best technical evaluation of retrofit needs in the
industry, strong product performance, and high levels of customer
services from locations worldwide. Our sales price is
competitive, but rarely will our price be the lowest.
We have a small, but growing, position in the small industrial
engines market. Automotive Products began in May 1998 and is now
designing products that use low-cost, high-volume, high-
reliability manufacturing processes characteristic of suppliers
to the automotive industry. We believe this will enable us to
strengthen our competitive position in markets that compete
principally on price, quality and customer service.
Combined backlog orders for Global Services and Automotive
Products were $21 million at November 30, 1999, approximately 97%
of which we expect to fill by September 30, 2000. Last year,
Global Services was included with Industrial Controls. Backlog
orders for Automotive Products alone were $2.0 million at
November 30, 1999, all of which we expect to fill by September
30, 2000 and were $1.1 million at November 30, 1998, all of which
5
<PAGE>
we expected to fill by September 30, 1999. Backlog orders are
not necessarily an indicator of future billings levels because of
variations in lead times.
Global Services and Automotive Products generally assemble their
products using purchased components that are readily available
from multiple sources. Many components for Global Services are
purchased from Industrial Controls. In addition to purchased
components, Automotive Products uses wire and plastics in its
coil winding and injection molding operations. These materials
are also readily available from multiple sources.
Other Matters
We spent approximately $24.6 million for company-sponsored
research and development activities in 1999, $18.5 million in
1998, and $11.3 million in 1997.
We are currently involved in matters of litigation arising from
the normal course of business, including certain environmental
matters. These matters are discussed in Note P to the
Consolidated Financial Statements on page 32 of our 1999 Annual
Report, incorporated here by reference. We do not believe that
compliance with provisions regulating the discharge of materials
into the environment, or otherwise relating to the protection of
the environment, will have any material effect on our financial
condition and competitive position, although such matters could
have a material effect on our quarterly or annual operating
results and cash flows (including capital expenditures) in a
future period. We are not aware of any material capital
expenditures that we will make for environmental control
facilities through September 30, 2001.
We employed about 3,765 people at November 30, 1999.
This report and the 1999 Annual Report, sections of which have
been incorporated by reference, contain forward-looking
statements and should be read with the "Cautionary Statement" on
page 35 of the 1999 Annual Report, incorporated here by
reference.
Item 2. Properties
Our principal plants are as follows:
United States
Fort Collins, Colorado - Industrial Controls manufacturing
Loveland, Colorado - Industrial Controls and Global Services
manufacturing
Rockford, Illinois - Aircraft Engine Systems manufacturing
and corporate offices
Rockton, Illinois - Aircraft Engine Systems manufacturing and
repair and overhaul
Memphis, Michigan (leased) - Automotive Products
manufacturing
Zeeland, Michigan - Aircraft Engine Systems manufacturing
Buffalo, New York - Aircraft Engine Systems manufacturing
Greenville, South Carolina (leased) - Aircraft Engine Systems
manufacturing
Oak Ridge, Tennessee (leased) - Automotive Products
manufacturing
6
<PAGE>
Other Countries
Aken, Germany (leased) - Industrial Controls manufacturing
Tomisato, Chiba, Japan - Industrial Controls manufacturing
Hoofddorp, The Netherlands - Industrial Controls
manufacturing
Rotterdam, The Netherlands - Automotive Products
manufacturing
Reading, England, United Kingdom (leased) - Industrial
Controls manufacturing
Prestwick, Scotland, United Kingdom (leased) - Aircraft
Engine Systems repair and overhaul
Our principal plants are suitable and adequate for the
manufacturing and other activities performed at those plants, and
we believe our utilization levels are generally high. However,
with continuing advancements in manufacturing technology and
operational improvements, we believe we can continue to increase
production in our existing plants. Also, following our
Industrial Controls reorganization in 1999, we changed the way
our Fort Collins and Loveland, Colorado, plants were used. The
primary effect of this change was to reduce our utilization of
the Loveland plant. Currently, approximately one-third of the
space in the Loveland plant is not being used.
In addition to the principal plants listed above, we lease
several facilities in locations worldwide, used primarily for
sales and service activities.
Item 3. Legal Proceedings
We are currently involved in environmental litigation. These
matters are discussed in Note P to the Consolidated Financial
Statements on ppage 30 of our 1999 Annual Report,
incorporated here by reference.
Item 4. Submission of Matters to a Vote of Shareholders
There were no matters submitted to a vote of shareholders during
the fourth quarter of the year ended September 30, 1999.
Part II
Item 5. Market for the Registrant's
Common Stock and Related Shareholder Matters
Our common stock is listed on the Nasdaq National Market and at
November 30, 1999, there were 1,844 holders of record. Cash
dividends were declared quarterly during 1999 and 1998. The
amount of cash dividends per share and the high and low sales
price per share for our common stock for each fiscal quarter in
1999 and 1998 are included in the "Selected Quarterly Financial
Data" on page 35 of the 1999 Annual Report, incorporated here by
reference.
Item 6. Selected Financial Data
Selected financial data is included in the "Summary of
Operations/Eleven-Year Record" on page 36 of our 1999 Annual
Report, incorporated here by reference.
7
<PAGE>
Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition
"Management Discussion and Analysis of Results of Operations and
Financial Condition" is included on pages 14 through 21 of
our 1999 Annual Report, incorporated here by reference. This
discussion should be read with the consolidated financial
statements on pages 22-33 of our 1999 Annual Report and the
"Cautionary Statement" on page 35 of our 1999 Annual Report, both
incorporated here by reference.
Item 7.A. Quantitative and Qualitative Disclosures About Market Risk
Disclosures about market risk are included under the captions
"Other Matters - Market Risks" on page 20 of our 1999 Annual
Report, incorporated here by reference.
Item 8. Financial Statements and Supplementary Data
Consolidated financial statements and schedules, as listed in
Item 14(a) and excluding the two items listed under the caption
"Other Financial Statement Schedules", are incorporated
here by reference.
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
There have been no changes in or disagreements on accounting
principles and financial disclosure. PricewaterhouseCoopers LLP,
or its predecessors, have been our independent accountants since
1940.
Part III
Item 10. Directors and Executive Officers of the Registrant
Executive Officers:
John A. Halbrook, age 54 - chairman and chief executive officer
since January 1995; chief executive officer and president
November 1993 through January 1995; president November 1991
through November 1993.
Stephen P. Carter, age 48 - vice president, chief financial
officer, and treasurer since January 1997; vice president and
treasurer September 1996 through January 1997; and assistant
treasurer January 1994 through September 1996.
Gary D. Larrew, age 49 - vice president and manager of business
development since June 1997; in the past five years has been in
management positions.
C. Phillip Turner, age 59 - vice president and general manager of
Aircraft Engine Systems since 1988.
Carol J. Manning, age 50 - secretary since June 1991.
All executive officers were elected to their current positions at
the January 19, 1999 Board of Directors' meeting to serve until
the January 18, 2000 Board of Directors meeting, or until their
successors have been elected.
8
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance:
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our executive officers, directors and holders of more
than 10% of the common stock to file with the Securities and
Exchange Commission initial reports of ownership and reports of
changes in ownership of common stock and other equity securities
of the company. We believe that during the fiscal year ended
September 30, 1999, with the exception of the following, our
executive officers, directors and holders of more than 10% of the
common stock complied with all Section 16(a) filing requirements.
Messrs. Halbrook, Carter, Larrew and Turner filed Amended Form
5's correcting the failure to file Form 4's with respect to
acquired grants of phantom stock under the Unfunded Deferred
Compensation Plan No. 2. In making these statements, we have
relied upon the written representations of our executive officers
and directors.
Other information regarding our directors and executive officers
is included in our proxy statement dated December 6, 1999,
incorporated here by reference.
Item 11. Executive Compensation
Executive compensation is under the caption "Executive
Compensation" on Pages 12 through 14 of our proxy statement
dated December 6, 1999, incorporated here by reference.
Item 12. Security Ownership of Certain
Beneficial Owners and Management
Security ownership of certain beneficial owners and management is
under the captions "Share Ownership of Management" and "Persons
Owning More than Five Percent of Woodward Stock" on Pages 9
through 10 of our proxy statement dated December 6, 1999,
incorporated here by reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related
transactions is under the caption "Compensation Committee
Interlocks and Insider Participation" on Page 8 of our proxy
statement dated December 6, 1999, incorporated here by
reference.
9
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Index to Consolidated Financial Statements and Schedules
Reference
Form 10-K Annual Report
Annual Report to Shareholders
Page Page
Annual report to shareholder for the
fiscal year ended September 30, 1999
filed as Exhibit 13 to this Form 10-K
and incorporated by reference:
Statements of Consolidated Earnings
for the years ended September 30,
1999, 1998, and 1997 22
Consolidated Balance Sheets at
September 30, 1999 and 1998 23
Statements of Consolidated Share-
holders' Equity for the years ended
September 30, 1999, 1998, and 1997 24
Statements of Consolidated Cash
Flows for the years ended September
30, 1999, 1998, and 1997 25
Notes to Consolidated Financial
Statements 26-33
Management's Responsibility for
Financial Statements 34
Report of Independent Accountants 34
Selected Quarterly Financial Data 35
Separate financial statements of
subsidiaries not consolidated and
fifty percent-or-less-owned persons,
included with this filing:
GENXON Power Systems, L.L.C.
Financial Statements and Report of
Independent Accountants for the
period from October 21, 1996
(date of inception) to
September 30, 1997 S-1 - S-11
10
<PAGE>
Reference
Form 10-K Annual Report
Annual Report to Shareholders
Page Page
Other Financial Statement Schedules:
Report of Independent Accountants S-12
Valuation and Qualifying Accounts S-13
Financial statements and schedules other than those listed above
are omitted for the reason that they are not applicable, are not
required, or the information is included in the financial
statements or the footnotes.
With the exception of the consolidated financial statements and
the reports of indendepent accountants listed in the above index,
the information referred to in Items 1, 3, 5, 6, 7, and 8, and
the supplementary quarterly financial information referred to in
Item 8, all of which is included in the 1999 Annual Report to
Shareholders of Woodward Governor Company and incorporated by
reference into this Form 10-K Annual Report, the 1999 Annual
Report to Shareholders is not to be deemed "filed" as part of
this report.
(b) Reports Filed on Form 8-K During the Fourth Quarter of the
Fiscal Year Ended September 30, 1999. None
(c) Exhibits Filed as Part of This Report
(3)(i) Certificaterticles of
Incorporation Filed as an exhibit.
(3)(ii) By-laws, amended Filed as an exhibit.
(4) Instruments defining Instruments with respect
the rights of security to long-term debt and the ESOP
holders, including debt guarantee are not being
indentures filed as they do not individually
exceed 10 percent of our
assets. We agree to furnish a
copy of each instrument to the
Commission upon request.
(10) Material contracts A
$250,000,000 credit agreement
dated June 15, 1998 is
included in exhibits filed
with Form 10-Q for the quarter
ended June 30, 1998,
incorporated here by
reference.
Purchase and sale
agreement on the acquisition
of Wooward FST dated June 15,
1998 is included in exhibits
filled with Form 8-K on June
30, 1998, incorporated here by
reference.
11
<PAGE>
(11) Statement re computation of Filed as an exhibit hereto.
per share earnings
(13) Annual report to shareholders Except specifically incorporated
for the fiscal year by reference, report is
September 30, 1999 furnished solely for
the information of the
Commission and is not deemed
"filed" as part of this
report.
(21) Subsidiaries Filed as an exhibit.
(23) Consents of Independent
Accountants Filed as an exhibit.
(27) Financial data schedule Filed as an exhibit.
(99) Additional exhibit -
description of annual
report graphs Filed as an exhibit.
12
<PAGE>
SIGNATURES
This report has been prepared in accordance with the rules and regulations
of the Securities and Exchange Commission and the financial statements
referenced 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 Stephen P. Carter, vice president, chief financial officer
and treasurer. The consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants, as indicated in their
report in the annual report to shareholders for the fiscal year ended
September 30, 1999.
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.
WOODWARD GOVERNOR COMPANY
/s/ John A. Halbrook Director, Chairman of the
John A. Halbrook Board and Chief Executive
Officer
/s/ Stephen P. Carter Vice President, Chief
Stephen P. Carter Financial Officer and
Treasurer
Date: December 18, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Woodward
Governor Company on the dates indicated:
Signature Title Date
/s/ J. Grant Beadle Director December 21, 1999
J. Grant Beadle
/s/ Vern H. Cassens Director December 21, 1999
Vern H. Cassens
/s/ Carl J. Dargene Director December 21, 1999
Carl J. Dargene
/s/ Lawrence E. Gloyd Director December 22, 1999
Lawrence E. Gloyd
/s/ Thomas W. Heenan Director December 20, 1999
Thomas W. Heenan
_____________________ Director
J. Peter Jeffrey
/s/ Rodney O' Neal Director December 22, 1999
Rodney O'Neal
_____________________ Director
Lou L. Pai
_____________________ Director
Michael T. Yonker
13
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NOTE: THE FOLLOWING FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT
ACCOUNTANTS OF OUR FIFTY PERCENT-OWNED JOINT VENTURE, WHICH IS NOT
CONSOLIDATED, IS REQUIRED TO BE FILED AS PART OF THIS FORM 10-K IN
ACCORDANCE WITH REGULATION S-X, RULE 3-09.
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
FINANCIAL STATEMENTS
for the period October 21, 1996
(date of inception) to September 30, 1997
S-1
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
FINANCIAL STATEMENTS
for the period from October 21, 1996
(date of inception) to September 30, 1997
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Managers and Members
GENXON Power Systems, L.L.C.:
We have audited the accompanying balance sheet of GENXON Power Systems,
L.L.C. (a Delaware limited liability company) as of September 30, 1997, and
the related statements of operations, members' capital and cash flows for
the period from October 21, 1996 (date of inception) to September 30, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of GENXON Power Systems,
L.L.C. as of September 30, 1997, and the results of its operations and its
cash flows for the period from October 21, 1996 (date of inception) to
September 30, 1997 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered losses from operations and
has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
San Jose, California
October 17, 1997
S-2
<PAGE>
<TABLE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
BALANCE SHEET, September 30, 1997
<CAPTION>
ASSETS
<S> <C>
Current assets :
Cash and cash equivalents $ 54,366
Inventory 233,977
Prepaid expenses 358,482
Total current assets 646,825
Property and equipment 557,362
Total assets $ 1,204,187
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Payable to Woodward Governor Company$ 89,483
Payable to Catalytic Combustion Systems,Inc. 315,580
Accounts payable 1,852,014
Accrued liabilities 433,261
Total current liabilities 2,690,338
Commitments and contingencies (Note 3)
Members' capital (1,486,151)
Total liabilities and members' capital $1,204,187
The accompanying notes are an integral part of these financial statements.
</TABLE>
S-3
<PAGE>
<TABLE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
STATEMENT OF OPERATIONS
for the period from October 21, 1996
(date of inception) to September 30, 1997
<CAPTION>
Revenues:
<S> <C>
Research contract$ $268,000
Operating expenses:
Research and development 8,656,442
Selling, general and administrative expenses 2,147,797
10,804,239
Loss from operations (10,536,239)
Other income (expense):
Interest income, net 50,088
Net loss $ 10,486,151
The accompanying notes are an integral part of these financial statements.
</TABLE>
S-4
<PAGE>
<TABLE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
STATEMENT OF MEMBERS' CAPITAL
for the period from October 21, 1996
(date of inception) to September 30, 1997
Woodward Catalytica
Governor Combustion
Company Systems, Inc. Total
<CAPTION>
<S> <C> <C> <C>
Capital contributions $7,100,000 $1,900,000 $ 9,000,000
Net loss (8,243,076) (2,243,075) (10,486,151)
Members' capital,
September 30, 1997 $(1,143,076) $(343,075) $(1,486,151)
</TABLE>
The accompanying notes are an integral part of these financial statements.
S-5
<PAGE>
<TABLE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
STATEMENT OF CASH FLOWS
for the period from October 21, 1996
(date of inception) to September 30, 1997
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net loss $(10,486,151)
Adjustments to reconcile net loss to net
cash used in operating activities:
Changes in assets and liabilities:
Inventory (233,977)
Prepaid expenses (358,482)
Payable to members 405,063
Accounts payable 1,852,014
Accrued liabilities 433,261
Net cash used in operating activities (8,388,272)
Cash flows from investing activities:
Acquisition of property and equipment (557,362)
Cash flows from financing activities:
Members' capital contributions 9,000,000
Net increase in cash and cash equivalents 54,366
Cash and cash equivalents, beginning of period _
Cash and cash equivalents, end of period$ 54,366
The accompanying notes are an integral part of these financial statements.
</TABLE>
S-6
<PAGE>
GENXON POWER SYSTEMS, L.L.C.
(a Delaware limited liability company)
NOTES TO FINANCIAL STATEMENTS
1.Formation and Business of the Company:
GENXON Power Systems, L.L.C. (the Company), a Delaware limited liability
company, was formed on October 21, 1996 to develop and sell products and
services to a wide range of users of out-of-warranty gas turbines which
require reductions in emissions, overhaul or upgrade. Except as provided
for in the Limited Liability Operating Agreement, the existence of the
Company will be perpetual.
Investor members in GENXON Power Systems, L.L.C. received a percentage
interest in the Company based on the amount of cash and the agreed-upon
fair value of certain technology licenses contributed to the Company.
There were two initial investor members, each receiving a 50 percent
interest in the Company. Their initial capital commitments were as
follows:
<TABLE>
<CAPTION>
Cash Technology
Commitment Licenses Total
<S> <C> <C> <C>
Catalytica Combustion Systems,
Inc.(Catalytica) $2,000,000 $8,000,000 $10,000,000
Woodward Governor Company
(Woodward) $8,000,000 $2,000,000 $10,000,000
</TABLE>
At September 30, 1997, each member had contributed its agreed-upon
technology licenses and cash in the total amount of $9 million.
Subsequent to year-end, the members contributed the balance of their
initial cash commitment and an additional $1,200,000 in cash.
Additional future cash contributions will be at the discretion of
each of the members, but will generally be in proportion to their
respective percentage interests in the Company and will be governed
by the terms of the Operating Agreement. For financial statement
purposes only, the fair value of the technology licenses has not been
recorded.
S-7
<PAGE>
1. Formation and Business of the Company, continued:
The Operating Agreement generally provides that profits and losses
in any fiscal year, or other applicable period, shall be allocated
to each member in proportion to their respective percentage
interest. In the event that a member's cumulative capital account,
including the fair value of the technology licenses contributed, is
reduced to zero, losses will be reallocated to members having
positive capital account balances until all members' capital
accounts have been reduced to zero. Thereafter, losses will again
be allocated to the members based on their respective percentage
interests. Such "reallocated" losses shall first be restored by an
allocation of profits before any additional profits are allocated to
the members. Under the terms of the Operating Agreement, the
Company is required to make cash distributions to each member in the
amount of the estimated tax liability for the net taxable income and
gains allocated to such member during the fiscal year. Any
additional distributions of cash or property will be at the
discretion of the Board of Managers as provided for in the Operating
Agreement. At September 30, 1997, cumulative capital account
balances determined in accordance with the Operating Agreement are
as follows:
<TABLE>
Catalytica Woodward Total
<CAPTION>
<S> <C> <C> <C>
Cash contributed $1,900,000 $7,100,000 $9,000,000
Technology licenses contributed 8,000,000 2,000,000 10,000,000
Allocation of net loss (5,243,075) (5,243,076) (10,486,151)
Capital account balances $4,656,925 $3,856,924 $8,513,849
</TABLE>
2. Summary of Significant Accounting Policies:
Basis of Presentation:
The Company's financial statements have been prepared on a basis of
accounting assuming that it is a going concern, which contemplates
realization of assets and satisfaction of liabilities in the normal
course of business. The Company has reported a net loss for the
period from October 21, 1996 (date of inception) to September 30,
1997 in the amount of $10,486,151. Management plans to obtain
additional capital contributions from its members or other
additional investors to meet its current and ongoing obligations.
Continued existence of the Company is dependent on the Company's
ability to ensure the availability of adequate funding and the
establishment of profitable operations. The financial statements
do not include adjustments that might result from the outcome of
this uncertainty.
S-8
<PAGE>
2. Summary of Significant Accounting Policies, continued:
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with
original or remaining maturities of three months or less at the date
of purchase to be cash equivalents. Substantially all of the
Company's excess cash is invested in money market accounts with a
major investment company.
Fair Value of Financial Instruments:
Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts payable and other
accrued liabilities approximate fair value due to their short
maturities.
Inventory:
Inventory, consisting of purchased and manufactured parts to be used
in the overhaul and upgrade of gas turbine engines, is stated at the
lower of cost or market.
Property and Equipment:
Property and equipment are stated at cost and will be depreciated
using the straight-line method over their estimated useful lives,
generally 3 to 10 years. Gains and losses from the disposal of
property and equipment will be taken into income in the year of
disposition. At September 30, 1997, property and equipment consists
solely of tooling costs incurred in the construction of the
Company's manufacturing equipment. As this equipment has not yet
been completed or placed in service, no depreciation costs have been
recorded.
S-9
<PAGE>
2. Summary of Significant Accounting Policies, continued:
Income Taxes:
The financial statements include no provision for income taxes
since the Company's income and losses are reported in the members'
separate tax returns.
Recent Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 (SFAS 130),
Reporting Comprehensive Income. This statement establishes
requirements for disclosure of comprehensive income and becomes
effective for the Company for its fiscal year 1999, with reclass-
ification of earlier financial statements for comparative purposes.
Comprehensive income generally represents all changes in members'
capital except those resulting from investments or contributions by
members. The Company is evaluating alternative formats for
presenting this information, but does not expect this pronouncement
to materially impact the Company's results of operations.
In June 1997, The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 (SFAS 131),
Disclosures about Segments of an Enterprise and Related Information.
This statement establishes standards for disclosure about operating
segments in annual financial statements and selected information in
interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas
and major customers. This statement supersedes Statement of
Financial Accounting Standards No. 14, Financial Reporting for
Segments of a Business Enterprise. The new standard becomes
effective for the Company's fiscal year 1999, and requires that
comparative information from earlier years be restated to conform to
the requirements of this standard. The Company is evaluating the
requirements of SFAS 131 and the effects, if any, on the Company's
current reporting and disclosures.
S-10
<PAGE>
3. Commitments and Contingencies
The Company entered into an exclusive agreement with Agilis Group,
Inc. (Agilis) to provide assistance and advice in the development
and design of the combustor and combustor related hardware for the
Company's proprietary catalytic combustion technology. Under the
terms of the agreement, Agilis has responsibility as to the details,
methods, and means of performing its services. Subject to the
Company's approval and on its behalf, Agilis may enter into purchase
commitments and contracts with outside vendors to provide materials
and services to complete the projects. At September 30, 1997, the
Company has approximately $2.3 million in open purchase commitments
through Agilis. The agreement will expire on the later of the
completion of all services described in the agreement or December
31, 1999, unless extended in writing and agreed to by both parties.
The Company has entered into a technical services agreement with the
City of Glendale, California to retrofit an FT4 gas turbine engine
which was provided by the City. Under the terms of the agreement,
the retrofit will include adding the Company's proprietary
combustion system and a digital control system for a total turnkey
price of $700,000, and must be completed by December 1999. In the
event that the Company is unable to complete the agreed upon
retrofit on time or damages the engine in the process, the agreement
requires the Company to return the engine to its original state or
replace it with a similar engine, for which the Company has recorded
a reserve of $134,000.
4. Related Party Transactions:
The Company has entered into a services agreement with Catalytica
and Woodward to provide the Company with management support,
technical services support and administrative services. For the
period from October 21, 1996 (date of inception) through September
30, 1997, the Company incurred general and administrative support
costs from Catalytica in the amount of $1,355,308 and research and
development costs totaling $3,450,077. For the same period, the
Company incurred $65,192 of general and administrative support costs
from Woodward and $513,487 for research and development services.
The Company has also entered into supply agreements with both
Catalytica and Woodward to supply combustion system products and
control system products to be used by the Company in its business of
retrofitting installed and operating gas turbine engines.
S-11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Woodward Governor Company
Our audits of the consolidated financial statements referred to in our
report dated November 9, 1999 appearing on page 34 in the 1999 Annual
Report to Shareholders of Woodward Governor Company and Subsidiaries (which
report and consolidated financial statements are incorporated by reference
in this Annual Report on Form 10-K) also included an audit of the financial
statement schedule listed in Item 14(a) of this Form 10-K. In our
opinion, the financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with
the related consolidated financial statements.
PricewaterhouseCoopers LLP
Chicago, Illinois
November 9, 1999
S-12
<PAGE
<TABLE>
<CAPTION>
Col A. Col. B Col. C Col. D Col. E
Additions Balance
Balance at Charged to Charged to at End
Beginning Costs and Other of
Description of Year Expenses Accounts (B) Deductions (A) Year
<S> <C> <C> <C> <C> <C>
1999:
Allowance for
Doubtful
accounts $4,451 $1,593 $49 $1,676 $4,417
1998:
Allowance for
Doubtful
accounts $2,757 $1,869 $368 $543 $4,451
1997:
Allowance for
Doubtful
accounts $2,755 $539 $136 $673 $2,757
</TABLE>
S-13
Exhibit 3(i)
Certificate of Incorporation
Composite Certificate of Incorporation
Of
Woodward Governor Company
A Delaware Corporation
(The Corporation was Originally Incorporated
Under the General Corporation Law of Delaware
On November 18, 1976, as "New Wood Company")
First. The name of the Corporation is Woodward Governor
Company.
Second. The address of the registered office of the
Corporation in the State of Delaware is 300 South State Street,
in the City of Dover, County of Kent. The name of its registered
agent at that address is United States Corporation Company.
Third. The purpose of the Corporation is to engage in any
lawful act or activity for which a corporation may be organized
under the General Corporation Law of Delaware as set forth in
Title 8 of the Delaware Code.
Without limiting in any manner the scope and generality of
the foregoing, the nature of the business or purposes to be
conducted or promoted by the Corporation includes:
A. To carry on and conduct any and every kind of manufacturing,
distribution and service business; to manufacture, process,
fabricate, rebuild, service, purchase or otherwise acquire, to
design, invent or develop, to import or export, and to
distribute, lease, sell, assign or otherwise dispose of and
generally deal in and with raw materials, products, goods, wares,
merchandise and real and personal property of every kind and
character; and to provide services of every kind and character.
B. To acquire, own hold, use, lease, mortgage, pledge, sell,
convey, or otherwise dispose of and deal in lands, leaseholds,
and any interest, estates and rights in real property, any
personal or mixed property, and any tangible or intangible
property, legal and equitable.
C. In general, to possess and exercise all the powers and
privileges granted by the General Corporation Law of Delaware or
by any other law of Delaware or by this Certificate of
Incorporation together with any powers incidental thereto, so far
as such powers and privileges are necessary or convenient to the
conduct, promotion or attainment of the business or purposes of
the Corporation.
Fourth. The total number of shares of all classes of
stock which the Corporation shall have authority to issue is
60,000,000, of which 50,000,000 shares shall be Common Stock
with a par value of $0.00875 per share, and 10,000,000
shares shall be Preferred Stock with a par value of $0.003
per share. The Preferred Stock may be issued from time to
time in one or more series, with each such series to consist
of such number of shares and to have such voting powers (whether less
than, equal to or greater than one vote per share), or limited
voting powers or no voting powers, and such designations,
preferences and relative, participating, optional or their
special rights, and qualifications, limitations or
restrictions thereof, as shall be stated in the resolution
or resolutions providing for the issue of such series
adopted by the Board of Directors, and the Board of
Directors is expressly vested with authority to the full
extent now or hereafter provided by law, to adopt any such
resolution or resolutions. The number of authorized shares
of Preferred Stock may be increased or decreased (but no
below the number of shares then outstanding) by the
affirmative vote of the holders of two-thirds of the
outstanding shares of Common Stock without a vote of the
holders of the shares of Preferred Stock, or of any series
thereof, unless a vote of any such holders is required
pursuant to the resolution or resolutions of the Board of
Directors providing for the issue of the series of Preferred
Stock.
Fifth. The affirmative vote of the holders of two-
thirds of the outstanding shares of Common Stock of the
Corporation shall be required (i) for the adoption of any
amendment, alteration, change or repeal of any provision of
this Certificate of Incorporation, (ii) for the adoption of
any agreement for the merger or consolidation of the
Corporation with or into any assets of the Corporation, or
(iv) to authorize the dissolution of the Corporation. Such
affirmative vote shall be required notwithstanding the fact
that no vote may be required, or that some lesser percentage
may be specified, by law or in any agreement to which the
Corporation is a party.
Sixth. The holders of Common Stock of the Corporation
shall be entitled to cumulative voting rights in the
election of directors, which means that in each election of
directors each holder of Common Stock shall be entitled to
cast as many votes as the number of shares of Common Stock
held by such holder multiplied by the number of directors to
be elected any may cast all such votes for the election of
one nominee or distribute such votes among two or more
nominees as such holder chooses.
Seventh. The following provisions are inserted for the
management of the business and the conduct of the affairs of
the Corporation, and for further definition, limitation and
regulation of the powers of the Corporation and of its
directors and stockholders:
A. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors. In
connection with such management the directors shall be guided by
the philosophy and concepts of human and industrial association
of the Corporation as expressed in its Constitution. The Board
of Directors shall have the sole power to establish the rights,
qualifications, powers, duties, rules and procedures that from
time to time shall govern the Board of Directors and each of its
members and that from time to time shall affect the power of the
Board of Directors to manage the business and affairs of the
Corporation. Without limiting in any manner the scope and
generality of the foregoing, the Board of Directors shall have
the sole power (i) to elect and empower the officers of the
Corporation, (ii) to designate and empower committees of the
Board of Directors, (iii) to determine the time, place, notice,
quorum and voting requirements of meetings of the Board of
Directors and any committee thereof, and (iv) to determine the
manner in which action by the Board of Directors may be taken.
B. The Board of Directors shall have concurrent power with
the stockholders to adopt, amend or repeal the By-Laws of the
Corporation; provided, however, that (i) the By-Laws of the
Corporation shall not be adopted, amended or repealed by the
stockholders except by the affirmative vote of the holders of two-
thirds of the outstanding shares of Common Stock of the
Corporation, and (ii) no By-Law may be adopted by the
stockholders which shall impair or impede the power of the Board
of Directors under paragraph A of this Article Seventh.
C. The number of directors of the Corporation which shall
constitute the whole Board of Directors shall be not less than
six, the exact number of directors and the exact number of
directors in each class to be determined from time to time by the
Board of Directors. Election of directors need not be by written
ballot unless the By-Laws so provide.
(1) The Board of Directors shall
be divided into three classes, Class I, Class II,
and Class III, which shall be as nearly equal in
number as possible. Each director shall serve for
a term ending on the date of the third annual
meeting of stockholders following the annual
meeting at which such director was elected;
provided, however, that each initial director in
Class I shall hold office until the annual meeting
of stockholders next ensuing, each initial
director in Class II shall hold office until the
annual meeting of stockholders one year
thereafter, and each initial director in Class III
shall hold office until the annual meeting of
stockholders two years thereafter.
(2) If the number of directors is
changed, any increase or decrease shall be
apportioned among the three classes so as to
maintain the number of directors in each class as
nearly equal as possible. In no case will a
decrease in the number of directors shorten the
term of any incumbent director.
(3) Should a vacancy occur or be
created, whether arising through resignation,
retirement, removal from office, disqualification,
or death or through an increase in the number of
directors, such vacancy shall be filled by a
majority of the directors then in office although
less than a quorum, or by the sole remaining
director. Any director elected to fill a vacancy
shall hold office for the remaining term of the
class in which the vacancy shall have occurred or
shall have been created.
(4) Notwithstanding any of the
foregoing provisions of this paragraph C of
Article Seventh, each director shall serve until
his or her successor is elected and qualified or
until his or her earlier resignation, retirement,
removal from office, disqualification or death.
(5) Any director or the entire
Board of Directors may be removed from office at
any time, but only for cause and only by the
affirmative vote of the holders of two-thirds of
the outstanding shares of Common Stock of the
Corporation.
D. All action by stockholders shall be taken at a
meeting duly called and held. The stockholders of the
Corporation may not act by written consent.
E. Special meetings of the stockholders for any
proper purpose or purposes may be called by the Board of
Directors or by the Chairman of the Board of Directors, and
shall be called upon a request in writing therefore stating
the purpose or purposes thereof signed by the holders of two-
thirds of the outstanding shares of Common Stock of the
Corporation.
Eighth. The books of the Corporation may be kept (subject
to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time
to time by the Board of Directors or in the By-Laws of the
Corporation.
Ninth. The Corporation shall indemnify each director,
officer, employee or agent of the Corporation and each person who
is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise in the
manner and to the extent provided in the By-Laws of the
Corporation as the same may be amended from time to time.
Tenth. A director of the corporation shall not be liable
to the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director except to the extent such
exemption from liability or limitation thereof is not permitted
under the Delaware General Corporation Law as the same exists or
may hereafter be amended.
Eleventh. Subject to the provisions of Article Fifth of this
Certificate of Incorporation, the Corporation reserves the right
to amend, alter, change or repeal any provision contained in this
Certificate of Incorporation, in the manner now or thereafter
prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
Certificate of Designations
Of
Series A Preferred Stock
Of
Woodward Governor Company
(Pursuant to Section 151(g) of the
General Corporation Law of the State of Delaware)
Woodward Governor Company, a corporation organized and existing
under the General Corporation Law of the State of Delaware
(hereinafter referred to as the "Corporation"), hereby certifies
that the following resolution was adopted by the Board of
Directors of the Corporation (hereinafter referred to as the
"Board of Directors") pursuant to Section 151(g) of the General
Corporation Law of the State of Delaware at a meeting of the
Board of Directors held on January 17, 1996:
RESOLVED, that pursuant to the authority granted to and vested in
the Board of Directors in accordance with the provisions of the
Certificate of Incorporation of the Corporation, the Board of
Directors hereby creates a series of the Preferred Stock, par
value $.01 per share (hereinafter referred to as the "Preferred
Stock"), of the Corporation and hereby states the designation and
number of shares, and fixes the relative rights, preferences and
limitations thereof as follows:
SERIES A PREFERRED STOCK:
Section 1. Designation and Amount. The shares of such
series shall be designated as "Series A Preferred Stock"
(hereinafter referred to as the "Series A Preferred Stock") and
the number of shares constituting the Series A Preferred Stock
shall be 250,000. Such number of shares may be increased or
decreased by resolution of the Board of Directors; provided,
however, that no decrease shall reduce the number of shares of
Series A Preferred Stock to a number less than the number of
shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities
issued by the Corporation convertible into Series A Preferred
Stock.
Section 2. Dividends and Distributions. (A) Subject to
the rights of the holders of any shares of any series of
Preferred Stock (or any similar stock) ranking prior and superior
to the shares of any series of Preferred Stock (or any similar
stock) ranking prior and superior to the Series A Preferred Stock
with respect to dividends, the holders of shares of Series A
Preferred Stock, in preference to the holders of Common Stock,
par value $.0625 per share (hereinafter referred to as the
"Common Stock"), of the Corporation, and of any other junior
stock, shall be entitled to receive, when, as and if declared by
the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable in cash on the first day of
March, June, September and December in each year (each such date
being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the
first issuance of a share or fraction of a share of Series A
Preferred Stock, in an amount per share (rounded to the nearest
cent) equal to the greater of (a) $1.00 or (b) subject to the
provision for adjustment hereinafter set forth, 100 times the
aggregate per share amount of all cash dividends,
and 100 times the aggregate per share amount (payable in kind) of
all non-cash dividends or other distributions, other than a
dividend payable in shares of Common Stock or a subdivision of
the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock since the immediately
preceding Quarterly Dividend Payment Date or, with respect to the
first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a share of Series A Preferred Stock.
In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock,
or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the amount to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such
event under clause (b) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction, the numerator
of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding
immediately prior to such event.
(B.) The Corporation shall declare a dividend or
distribution on the Series A Preferred Stock as provided in
paragraph (A) of this Section immediately after it declares a
dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that, in
the event no dividend or distribution shall have been declared on
the Common Stock during the period between any Quarterly Dividend
Payment Date and the next subsequent Quarterly Dividend Payment
Date, a dividend of $1.00 per share on the Series A Preferred
Stock shall nevertheless by payable on such subsequent Quarterly
Dividend Payment Date.
(C.) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly
Dividend Payment Date next preceding the date of issue of such
shares, unless the date of issue of such shares is prior to the
record date for the first Quarterly Dividend Payment Date, in
which case dividends on such shares shall begin to accrue from
the date of issue of such shares, or unless the date of issue is
a Quarterly Dividend Payment Date or is a date after the record
date for the determination of holders of shares of Series A
Preferred Stock entitled to receive a quarterly dividend and
before such Quarterly Dividend Payment Date, in either of which
events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid
dividends shall not bear interest. Dividends paid on the shares
of Series A Preferred Stock in an amount less than the pro rata
on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for
the determination of holders of shares of Series A Preferred
Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be not more than 60
days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. The holders of shares of Series
A Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall entitle the
holder thereof to 100 votes on all matters submitted to a vote
of the stockholders of the Corporation. In the event the
Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than
by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in
each such case the number of votes per share to which holders of
shares of Series A Preferred Stock were entitled immediately
prior to such event shall be adjusted by multiplying such
number by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein, in any other
Certificate of Designations creating a series of Preferred
Stock or any similar stock, or by law, the holders of shares
of Series A Preferred Stock and the holders of shares of
Common Stock and any other capital stock of the Corporation
having general voting rights shall vote together as one
class on all matters submitted to a vote of stockholders of
the Corporation.
(C) Except as set forth herein, or as otherwise
provided by law, holders of Series A Preferred Stock shall
have no special voting rights and their consent shall not be
required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for the
taking of any corporate action.
Section 4. Certain Restrictions. (A) Whenever
quarterly dividends or other dividends or distributions payable
on the Series A Preferred Stock as provided in Section 2 are in
arrears, thereafter and until all accrued and unpaid dividends
and distributions, whether or not declared, on shares of Series A
Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either
as to dividends or upon liquidation, dissolution or winding
up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, except
dividends paid ratably on the Series A Preferred Stock and
all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding up)
to the Series A Preferred Stock, provided that the
Corporation may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for
shares of any stock of the Corporation ranking junior
(either as to dividends or upon dissolution, liquidation or
winding up) to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or any
shares of stock ranking on a parity with the Series A
Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration
any shares of stock of the Corporation unless the Corporation
could, under paragraph (A) of this Section 4, purchase or
otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A
Preferred Stock purchased or otherwise acquired by the
Corporation in any manner whatsoever shall be retired and
cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock and may be reissued as part of
a new series of Preferred Stock subject to the conditions and
restrictions on issuance set forth herein, in the Certificate of
Incorporation or in any other Certificate of Designations
creating a series of Preferred Stock or any similar stock or as
otherwise required by law.
Section 6. Liquidation, Dissolution or Winding Up. Upon
any liquidation, dissolution or winding up of the Corporation, no
distribution shall be made (1) to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock
unless, prior thereto, the holders of shares of Series A
Preferred Stock distributions thereon, whether or not declared,
to the date of such payment, provided that the holders of shares
of Series A Preferred Stock shall be entitled to receive an
aggregate amount per share, subject to the provision for
adjustment hereinafter set forth, equal to 100 times the
aggregate amount to be distributed per share to holders of shares
of Common Stock, or (2) to the holders of shares of stock
ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series A Preferred Stock,
except distributions made ratably on the Series A Preferred Stock
and all such parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up. In the event the
Corporation shall at any time declare or pay any dividend on the
Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater
or lesser number of shares of Common Stock, then in each such
case the aggregate amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event
under the proviso in clause (1) of the preceding sentence shall
be adjusted by multiplying such amount by a fraction the
numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the
Corporation shall enter into any consolidation, merger,
combination or other transaction in which the shares of Common
Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case
each share of Series A Preferred Stock shall at the same time be
similarly exchanged or changed into an amount per share, subject
to the provision for adjustment hereinafter set forth, equal to
100 times the aggregate amount of stock, securities, cash and/or
any other property (payable in kind), as the case may be, into
which or for which each share of Common Stock is changed or
exchanged. In the event the Corporation shall at any time
declare or pay any dividend on the Common Stock payable in shares
of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in
shares of Common Stock) into a greater or lesser number of shares
of Common Stock, then in each such case the amount set forth in
the preceding sentence with respect to the exchange or change of
shares of Series A Preferred Stock shall be adjusted by
multiplying such amount by a fraction, the numerator of which is
the number of shares of Common Stock outstanding immediately
after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to
such event.
Section 8. No Redemption. The shares of Series A
Preferred Stock shall not be redeemable.
Section 9. Rank. The Series A Preferred Stock shall
rank, with respect to the payment of dividends and the
distribution of assets, junior to all series of any other class
of the Preferred Stock of the Corporation.
Section 10. Amendment. The Certificate of Incorporation
of the Corporation shall not be amended in any manner which would
materially alter or change the powers, preferences or special
rights of the Series A Preferred Stock so as to affect them
adversely without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of Series A Preferred Stock,
voting together as a single class.
IN WITNESS WHEREOF, this Certificate of Designations is
executed on behalf of the Corporation by its Chairman of the
Board and attested by its Secretary this 17th day of January,
1996, who do hereby affirm, under penalties of perjury, that the
foregoing Certificate of Designations is the act and deed of the
Corporation and that the facts stated therein are true.
WOODWARD GOVERNOR COMPANY
By
________________________________
John A. Halbrook, Chairman,
Chief Executive Officer and
President
Attest:
By ______/s/ Carol J. Manning________
Carol J. Manning, Secretary
Exhibit 3(ii)
Bylaws, as amended
ARTICLE I
SECTION 1.1. REGISTERED OFFICE
The registered office shall be established and maintained as
prescribed in the Certificate of Incorporation of the
Corporation.
SECTION 1.2. OTHER OFFICES
The corporation may have other offices, either within or
outside of the State of Delaware, at such place or places as
the Board of Directors may from time to time appoint or the
business of the corporation may require.
ARTICLE II
SECTION 2.1. PLACE OF MEETINGS
All meetings of the stockholders for the election of
directors shall be held in the City of Rockford, State of
Illinois, at such place as may be fixed from time to time by
the Board of Directors, or at such other place either within
or without the State of Illinois as shall be designated from
time to time by the Board of Directors and stated in the
notice of the meeting. Meetings of stockholders for any
other purpose may be held at such time and place, within or
without the State of Illinois, as shall be stated in the
notice of the meeting or in a duly executed waiver of notice
thereof.
SECTION 2.2. ANNUAL MEETING OF STOCKHOLDERS
The annual meeting of stockholders for the election of
directors and for such other business as may be stated in
the notice of the meeting shall be held, in each year,
commencing in 1999, by the third Wednesday following January
2 at 10:00 A.M., local time, or such other date and time as
shall be designated from time to time by the Board of
Directors and stated in the notice of the meeting.
SECTION 2.3. VOTING
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 2.4. LIST OF STOCKHOLDERS
The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before
every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name
of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to
the meeting, during ordinary business hours, for a period of
at least ten days prior to the meeting, either at a place
within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not
so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may
be inspected by any stockholder who is present.
SECTION 2.5. QUORUM
The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person
or represented by proxy, shall constitute a quorum at all
meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the
Certificate of Incorporation. If, however, such quorum shall
not be present or represented at any meeting of the
stockholders, the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power
to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall
be present or represented. At such adjourned meeting at
which a quorum shall be present or represented any business
may be transacted which might have been transacted at the
meeting as originally notified. If the adjournment is for
more than thirty days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
SECTION 2.6. SPECIAL MEETINGS
Special meetings of the stockholders for any proper purpose
or purposes may be called by the Board of Directors or by
the Chairman of the Board of Directors, and shall be called
upon a request in writing therefore stating the purpose or
purposes thereof signed by the holders of two-thirds of the
outstanding shares of Common Stock of the Corporation.
SECTION 2.7. NOTICE OF MEETINGS
Except as otherwise provided by law, written notice, stating
the place, date and time of the meeting, and the general
nature of the business to be considered, shall be given to
each stockholder entitled to vote thereat at his address as
it appears on the records of the corporation either
personally or by mail, not less than ten nor more than sixty
days before the date of the meeting. If mailed, such notice
shall be deemed to be given at the time when the same shall
be deposited in the United States mail. No business other
than that stated in the notice shall be transacted at any
meeting without the unanimous consent of all the
stockholders entitled to vote thereat.
SECTION 2.8. NOMINATIONS FOR DIRECTOR
Nominations for election to the Board of Directors may be
made by the Board of Directors or by any stockholder
entitled to vote for the election of directors. Nominations
other than those made by the Board of Directors shall be
made by notice in writing, delivered or mailed by registered
or certified United States mail, return receipt requested,
postage prepaid, to the Secretary of the Corporation, not
less than 20 days nor more than 50 days prior to any meeting
of stockholders called for the election of directors;
provided, however, if less than 21 days' notice of the
meeting is given to stockholders, such written notice shall
be delivered or mailed, as prescribed, not later than the
close of business on the seventh day following the day on
which the notice of meeting was mailed to the stockholders.
Each such written notice shall contain the following
information: (a) The name and residence address of the
stockholder making the nomination; (b) Such information
regarding each nominee as would have been required to be
included in a proxy statement filed pursuant to the proxy
rules of the Securities and Exchange Commission had the
nominee been nominated by the Board of Directors; and (c)
The signed consent of each nominee to serve as a member of
the Board of Directors if elected, and the signed agreement
of each nominee that if elected he or she will be guided by
the philosophy and concepts of human and industrial
association of the Corporation as expressed in its
Constitution in connection with the nominee's service as a
member of the Board of Directors.
Unless otherwise determined by the Chairman of the Board of
Directors or by a majority of the directors then in office,
any nomination which is not made in accordance with the
foregoing procedure shall be defective, and any votes which
may be cast for the defective nominee shall be disregarded.
ARTICLE III
SECTION 3.1. GENERAL POWERS
The business and affairs of the corporation shall be managed
by or under the direction of its Board of Directors. The
Board of Directors shall exercise all of the powers of the
corporation except such as are by law, or by the Certificate
of Incorporation of the corporation or by these bylaws
conferred upon or reserved to the stockholders.
SECTION 3.2. NUMBER AND TERM
The Board of Directors shall be divided into three classes,
Class I, Class II and Class III, which shall be as nearly
equal in number as possible. The number of directors which
shall constitute the whole Board of Directors shall be ten,
consisting of three Class I directors, four Class II
directors, and three Class III directors. Except as provided
in Section 3.4 hereof, each director shall serve for a term
ending on the date of the third annual meeting of
stockholders following the annual meeting at which such
director was elected; provided, however, that each initial
director in Class I shall hold office until the annual
meeting of stockholders next ensuing, each initial director
in Class II shall hold office until the annual meeting of
stockholders one year thereafter, and each initial director
in Class III shall hold office until the annual meeting of
stockholders two years thereafter. If the number of
directors is changed, any increase or decrease shall be
apportioned among the three classes so as to maintain the
number of directors in each class as nearly equal as
possible. In no case will a decrease in the number of
directors shorten the term of any incumbent director.
SECTION 3.3. VACANCIES
Vacancies in the Board of Directors and newly created
directorships resulting from any increase in the authorized
number of directors shall be filled by a majority of the
directors then in office, although less than a quorum, or by
the sole remaining director. Except as provided in Section
3.4 hereof, any director elected to fill a vacancy shall
hold office for the remaining term of the class in which the
vacancy shall have occurred or shall have been created.
SECTION 3.4. QUALIFICATIONS
Unless otherwise determined by the Board of Directors, the
term of any director shall end on September 30th next
following said director's seventieth birthday. No person may
serve as a director unless such person agrees in writing
that in connection with such service he or she will be
guided by the philosophy and concepts of human and
industrial association of the corporation as expressed in
its Constitution.
SECTION 3.5. DIRECTOR EMERITUS
Any director who requests that he be appointed a director
emeritus and any director who is not re-elected by the
stockholders may, with the approval of the Board of
Directors, be a director emeritus until the next annual
meeting of the Board of Directors. A director emeritus may
attend directors' meetings and counsel the directors but
will not be a member of the Board of Directors and will not
have the voting rights of a director.
SECTION 3.6. INCREASE OR DECREASE OF NUMBER
The number of directors may be increased or decreased from
time to time by amendment of these bylaws.
SECTION 3.7. REMOVAL
Any director or the entire Board of Directors may be removed
from office at any time, but only for cause and only by the
affirmative vote of the holders of two-thirds of the
outstanding shares of Common Stock of the Corporation.
SECTION 3.8. REGULAR MEETINGS
The first regular meeting of each newly elected Board of
Directors shall be held immediately after, and at the same
place as, the Annual Meeting of Stockholders. Thereafter
regular meetings of the Board of Directors shall be held at
such times as the Board of Directors may from time to time
establish. Regular meetings shall be held at the corporate
office at 5001 North Second Street, Rockford, Illinois
unless otherwise noted by prior written notice. Regular
meetings of the Board of Directors will be held without
other notice than this bylaw. Any such regular meeting other
than the first regular meeting may be cancelled by the
person or persons authorized to call special meetings of the
Board of Directors. Any such cancellation shall be
accomplished by giving notice in accordance with Section
3.11 of these bylaws.
SECTION 3.9. SPECIAL MEETINGS
Special meetings of the Board of Directors may be called by
or at the request of the Chairman of the Board of Directors
or any two directors. The person or persons authorized to
call special meetings of the Board of Directors may fix the
place of any meeting called by such person or persons.
SECTION 3.10. MINIMUM SCHEDULE OF MEETINGS
During each calendar quarter, the Board of Directors shall
conduct at least one meeting. Each regular meeting and each
special meeting shall be regarded as one meeting. For the
purposes of this Section 3.10, action without meeting
pursuant to Section 3.15 of these bylaws shall not be
regarded as a meeting.
SECTION 3.11. NOTICE
Notice of any special meeting or the cancellation of any
regular meeting shall be given to each director by letter
delivered at least two days before the meeting, or by
telegram delivered at least one day before the meeting, or
by such shorter telephone or other notice as the person or
persons calling or canceling the meeting may deem
appropriate in the circumstances. If mailed, such notice
shall be deemed to be delivered when deposited in the United
States mail in a sealed envelope with postage thereon
prepaid. If notice be given by telegram, such notice shall
be deemed to be delivered when the telegram is delivered to
the telegraph company. Neither the business to be transacted
at nor the purpose of any special meeting need be specified
in the notice thereof.
SECTION 3.12. PRESIDING OFFICER
Meetings of the stockholders and the Board of Directors
shall be presided over by the Chairman of the Board of
Directors, or if he is not present, by the Vice Chairman of
the Board of Directors, or if he is not present, by the
President, or if he is not present, by a Vice President, or
if neither the Chairman of the Board of Directors, nor the
Vice Chairman of the Board of Directors, nor the President,
nor a Vice President is present, then by a presiding officer
to be chosen by a majority of the directors present.
SECTION 3.13. QUORUM
A majority of the directors shall constitute a quorum for
the transaction of business, and the act of a majority of
the directors present at any meeting at which there is a
quorum shall be the act of the Board of Directors, except as
may be otherwise specifically provided by statute. If at any
meeting of the board there shall be less than a quorum
present, a majority of these present may adjourn the meeting
from time to time until a quorum is obtained, and no further
notice thereof need be given other than by announcement at
the meeting which shall be so adjourned.
SECTION 3.14. COMPENSATION
The Board of Directors shall have authority to fix the
compensation of all directors and directors emeritus. By
resolution of the Board of Directors expenses of attendance,
if any, may be allowed for attendance by each director and
director emeritus at each regular or special meeting of the
Board of Directors. Nothing herein shall be construed to
preclude any director or director emeritus from serving the
corporation in any other capacity and receiving compensation
therefor.
SECTION 3.15. ACTION WITHOUT MEETING
Any action required or permitted to be taken at any meeting
of the Board of Directors, may be taken without a meeting if
all members of the board consent thereto in writing, and the
writing or writings are filed with the minutes of
proceedings of the board.
SECTION 3.16. MEETINGS BY CONFERENCE TELEPHONE
Members of the Board of Directors may participate in a
meeting of such board by means of conference telephone or
similar communications equipment by means of which all
persons participating in the meeting can hear each other,
and participation in such meetings shall constitute presence
in person at such meeting.
ARTICLE IV
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 as 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.
SECTION 4.2. ELECTION OF COMMITTEE MEMBERS
The members of each committee shall be elected by the Board
of Directors and shall serve until the first meeting of the
Board of Directors after the annual meeting of stockholders
and until their successors are elected and qualified or
until their earlier resignation or removal. The Board of
Directors may designate the chairman of each committee other
than the Executive Committee and may designate one or more
directors as alternate members of any committee who may
replace any absent or disqualified member at any meeting of
the committee. In the absence or disqualification of a
member and all alternate members who may serve in the place
and stead of such member, the member or members thereof
present at any meeting and not disqualified from voting,
whether or not such member or members constitute a quorum,
may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such
absent or disqualified member.
SECTION 4.3. COMMITTEE RULES AND PROCEDURES
The Chairman of the Board of Directors, the chairman of any
committee, or a majority of the members of any committee,
may call a meeting of that committee. Unless the Board of
Directors otherwise provides, each committee may make, alter
and repeal rules and procedures for the conduct of its
business. In the absence of such rules and procedures, each
committee shall conduct its business in the same manner as
the Board of Directors conducts its business pursuant to
Article III of these bylaws, except that a quorum of the
Management Operations Committee for the transaction of
business shall consist of one member so long as such
committee consists of two members.
SECTION 4.4. EXECUTIVE COMMITTEE
During the intervals between meetings of the Board of
Directors, the Executive Committee shall have and may
exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of
the corporation upon any matter which in the opinion of the
Chairman of the Board of Directors should not be postponed
until the next previously scheduled meeting of the Board of
Directors. The Executive Committee shall have the power and
authority to declare cash dividends. Notwithstanding the
foregoing, as provided by law the Executive Committee shall
not have power or authority in reference to amending the
Certificate of Incorporation, adopting an agreement of
merger or consolidation, recommending to the stockholders
the sale, lease or exchange of all or substantially all of
the corporation's property and assets, recommending to the
stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending these bylaws.
SECTION 4.5. AUDIT COMMITTEE
The Audit Committee shall have the power to recommend to the
Board of Directors the selection and engagement of
independent accountants to audit the books and accounts of
the corporation and the discharge of the independent
accountants. The Audit Committee shall review the scope and
approach of the annual audit as recommended by the
independent accountants, the scope and approach of internal
audits of the corporation, the system of internal accounting
controls of the corporation, and shall review the reports to
the Audit Committee of the independent accountants and the
internal auditors.
SECTION 4.6. COMPENSATION COMMITTEE
The Compensation Committee shall have the power to recommend
to the Board of Directors the compensation of the officers
and key personnel of the corporation.
SECTION 4.7. SELECTION COMMITTEE
The Selection Committee shall have the power to recommend to
the Board of Directors candidates for election to the Board
of Directors.
SECTION 4.8. MANAGEMENT OPERATIONS COMMITTEE
The Management Operations Committee shall have the power to
authorize and approve such routine matters arising in the
ordinary course of business of the corporation as the Board
of Directors shall establish from time to time by
resolution. The Management Operations Committee shall have
no power or authority to declare cash dividends and shall
have no power denied to the Executive Committee in Section
4.4 hereof.
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 working members in accordance with
the terms of the Long-Term Incentive Plan.
ARTICLE V
SECTION 5.1. OFFICERS
The officers of the corporation shall be a Chairman of the
Board of Directors, a President, one or more Vice Presidents
(the number thereof to be determined by the Board of
Directors), a Treasurer and a Secretary, all of whom shall
be elected by the Board of Directors. In addition, the Board
of Directors may elect a Vice Chairman of the Board of
Directors and one or more Assistant Treasurers and Assistant
Secretaries.
SECTION 5.2. OTHER OFFICERS AND AGENTS
The Board of Directors may appoint such other officers and
agents as it may deem advisable, who shall hold their
offices for such terms and shall exercise such powers and
perform such duties as shall be determined from time to time
by the Board.
SECTION 5.3. QUALIFICATIONS
Except for the Chairman of the Board of Directors, and
unless otherwise determined by the Board of Directors, each
officer of the corporation shall be under the age of 65 at
the time of election. None of the officers of the
corporation, except the Chairman of the Board of Directors
and the Vice Chairman of the Board of Directors, need be a
Director.
SECTION 5.4. ELECTION AND TERM OF OFFICE
The officers of the corporation shall be elected annually by
the Board of Directors at the first meeting of the Board of
Directors held after each annual meeting of shareholders. If
the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as
conveniently may be. Vacancies may be filled or new offices
created and filled at any meeting of the Board of Directors.
Each officer shall hold office until his successor shall
have been duly elected and shall have qualified or until his
death or until he shall resign or shall have been removed in
the manner hereinafter provided.
SECTION 5.5. REMOVAL
Any officer or agent elected or appointed by the Board of
Directors may be removed by the Board of Directors whenever
in its judgment the best interests of the corporation would
be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so
removed.
SECTION 5.6. CHAIRMAN
The Chairman of the Board of Directors shall be elected from
among the members of the Board of Directors. He shall be
the chief executive officer of the corporation, and he shall
have general supervision of the business affairs and
property of the corporation and over its several officers,
subject, however, to the control of the Board of Directors.
He shall, subject to the direction and control of the Board
of Directors, be its representative and medium of
communication; he shall, to the best of his ability, see
that the acts of the officers conform to the policies of the
corporation as determined by the Board of Directors, and
shall perform such duties as may from time to time be
assigned to him by the Board of Directors.
SECTION 5.7. VICE CHAIRMAN
The Board of Directors may from time to time elect a Vice
Chairman of the Board of Directors. Such Vice Chairman shall
be a director and shall serve as Vice Chairman until his
term of office as director concludes, or until his successor
as Vice Chairman shall have been elected and qualified,
whichever event shall first occur. The Vice Chairman shall
perform the duties and exercise all the powers of the
Chairman of the Board of Directors, when, and for so long as
the Chairman of the Board of Directors so directs in
writing. The Vice Chairman shall perform such other duties
as may from time to time be assigned to him by the Board of
Directors.
SECTION 5.8. PRESIDENT
The President shall be the chief operating officer of the
corporation.
SECTION 5.9. VICE PRESIDENTS
Each Vice President shall have such duties and powers as
shall be assigned to him or her by the President or by the
Board of Directors.
SECTION 5.10. TREASURER
If required by the Board of Directors, the Treasurer shall
give a bond for the faithful discharge of his duties in such
sum and with such surety or sureties as the Board of
Directors shall determine. He shall: (a) have charge and
custody of and be responsible for all funds and securities
of the corporation; receive and give receipts for monies due
and payable to the corporation from any source whatsoever,
and deposit all such monies in the name of the corporation
in such banks, trust companies, or other depositories as
shall be selected by the Board of Directors; and (b) in
general perform all the duties incident to the office of
Treasurer and such other duties as from time to time may be
assigned to him by the President or by the Board of
Directors.
SECTION 5.11. SECRETARY
The Secretary shall: (a) keep the minutes of the meetings of
the stockholders and of the Board of Directors in one or
more books provided for the purpose; (b) see that all
notices are duly given in accordance with the provisions of
these bylaws or as required by law; (c) be custodian of the
corporate records and of the seal of the corporation and see
that the seal of the corporation is affixed to all
certificates for shares prior to the issue thereof and to
all documents, the execution of which on behalf of the
corporation under its seal is duly authorized in accordance
with the provisions of these bylaws; (d) keep a register of
the post office address of each stockholder which shall be
furnished to the secretary by such stockholder; (e) sign
with the Chairman or Vice Chairman of the Board of
Directors, the President, or a Vice President, certificates
for shares of the corporation, the issue of which shall have
been authorized by resolution of the Board of Directors; (f)
have general charge of the stock transfer books of the
corporation; (g) in general perform all duties incident to
the office of Secretary and such other duties as from time
to time may be assigned to him by the President or by the
Board of Directors.
SECTION 5.12. ASSISTANT TREASURERS AND ASSISTANT
SECRETARIES
The Assistant Treasurers shall respectively, if required by
the Board of Directors, give bonds for the faithful
discharge of their duties in such sums and with such
sureties as the Board of Directors shall determine. The
Assistant Secretaries, as thereunto authorized by the Board
of Directors, may sign with the Chairman or Vice Chairman of
the Board of Directors, the President or a Vice President
certificates for shares of the corporation, the issue of
which shall have been authorized by a resolution of the
Board of Directors. The Assistant Treasurers and Assistant
Secretaries, in general, shall perform such duties as shall
be assigned to them by the Treasurer or the Secretary
respectively, or by the President or the Board of Directors.
SECTION 5.13. SALARIES
The salaries of the officers shall be fixed from time to
time by the Board of Directors and no officer shall be
prevented from receiving such salary by reason of the fact
that he is also a director of the corporation.
ARTICLE VI
SECTION 6.1. CERTIFICATES OF STOCK
Every holder of stock in the corporation shall be entitled
to have a certificate signed by, or in the name of the
corporation, by the Chairman or the Vice Chairman of the
Board of Directors, or the President or a Vice President,
and by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the corporation,
certifying the number of shares owned by him in the
corporation. Any of or all the signatures on the certificate
and the seal of the corporation if one be used may be a
facsimile. In case any officer, transfer agent, or registrar
who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer,
transfer agent, or registrar before such certificate is
issued, it may be issued by the corporation with the same
effect as if he were such officer, transfer agent, or
registrar at the date of issue.
SECTION 6.2. TRANSFER OF STOCK
Transfer of shares of the corporation shall be made only on
the books of the corporation by the registered holder
thereof, by his attorney thereunto authorized, by power of
attorney duly executed and filed with the Secretary of the
corporation, and on surrender for cancellation of the
certificate for such shares properly endorsed and with all
taxes thereon paid. The person in whose name shares stand on
the books of the corporation shall be deemed the owner
thereof for all purposes as regards the corporation.
However, if any transfer of shares is made only for the
purpose of furnishing collateral security and such fact is
made known to the Secretary of the corporation, or to the
corporation's transfer clerk or transfer agent, the entry of
the transfer shall record such fact.
SECTION 6.3. TRANSFER AGENT AND REGISTRAR
The Board of Directors may appoint one or more transfer
agents and registrars, and thereafter it may require all
stock certificates to bear the signature of a transfer agent
and a registrar or a facsimile thereof.
SECTION 6.4. RULES OF TRANSFER
The Board of Directors shall have the power and authority to
make all such rules and regulations as it may deem expedient
concerning the issue, transfer and registration of
certificates for the shares of the corporation.
SECTION 6.5. LOST CERTIFICATE
Any person claiming a certificate for shares of the
corporation to have been lost, stolen, or destroyed shall
make an affidavit of the fact and lodge such affidavit with
the Secretary of the corporation, accompanied by a signed
application for a new certificate. Any such person shall
give the corporation a bond of indemnity with one or more
sureties satisfactory to the Board of Directors and in an
amount which in its judgment, shall be sufficient to save
the corporation from loss, and thereupon, the proper
officers may cause to be issued a new certificate of like
tenor with the one alleged to have been lost, stolen, or
destroyed, but the Board of Directors may refuse the
issuance of such new certificate.
SECTION 6.6. DIVIDENDS
Subject to the provisions of the Certificate of
Incorporation, the Board of Directors may, out of funds
legally available therefor, at any regular or special
meeting, declare dividends upon the capital stock of the
corporation as and when it deems expedient. Before declaring
any dividend there may be set apart out of any funds of the
corporation available for dividends, such sum or sums as the
directors from time to time in their discretion deem proper
for working capital or as a reserve fund to meet
contingencies or for equalizing dividends or for such other
purposes as the directors shall deem conducive to the
interests of the corporation.
ARTICLE VII
SECTION 7.1.
(a)The corporation shall indemnify, subject to the
requirements of subsection (d) of this Section, any person
who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of
the corporation), by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation, or
is or was serving at the request of the corporation as a
director, officer, employee, fiduciary or agent of another
corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against expenses
(including attorneys' fees), judgments, fines, penalties,
taxes and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which
he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful.
(b)The corporation shall indemnify, subject to the
requirements of subsection (d) of this Section, any person
who was or is a party or is threatened to be made a party to
any threatened, pending or completed action or suit by or in
the right of the corporation to procure a judgment in its
favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director,
officer, employee, fiduciary or agent of another
corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise against expenses (including
attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of
the corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which
such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of
Chancery of the State of Delaware or the court in which such
action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of
all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the
Court of Chancery of the State of Delaware or such other
court shall deem proper.
(c)To the extent that a director, officer, employee or
agent of the corporation, or a director, officer, employee,
fiduciary or agent of any other enterprise serving at the
request of the corporation, has been successful on the
merits or otherwise in defense of any action, suit or
proceeding referred to in subsections (a) and (b) of this
Section, or in defense of any claim, issue or matter
therein, the corporation shall indemnify him against
expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d)Any indemnification under subsections (a) and (b) of
this Section (unless ordered by a court) shall be made by
the corporation only as authorized in the specific case upon
a determination that indemnification of the director,
officer, employee, fiduciary or agent is proper in the
circumstances because he has met the applicable standard of
conduct set forth in subsections (a) and (b) of this
Section. Such determination shall be made (1) by the Board
of Directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or
proceeding, or (2) if such a quorum is not obtainable, or,
even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion,
or (3) by the stockholders.
(e)Expenses (including attorney's fees) incurred by a
director, officer, employee, fiduciary or agent in defending
any civil, criminal, administrative or investigative action,
suit or proceeding may be paid by the corporation in advance
of the final disposition of such action, suit or proceeding
upon receipt of an undertaking by or on behalf of the
director, officer, employee, fiduciary or agent to repay
such amount if it shall ultimately be determined that he is
not entitled to be indemnified by the corporation as
authorized in this Section.
(f)The indemnification and advancement of expenses
provided by, or granted pursuant to the other subsections of
this Section shall not limit the corporation from providing
any other indemnification permitted by law nor shall it be
deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled
under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in
his official capacity and as to action in another capacity
while holding such office.
(g)The provisions of this Section shall be applicable to
all actions, suits or proceedings pending at the time or
commenced after the adoption of this Section, whether
arising from acts or omissions to act occurring, or based on
claims asserted, before or after the adoption of this
Section. A finding that any provision of this Section is
invalid or of limited application shall not affect any other
provision of this Section nor shall a finding that any
portion of any provision of this Section is invalid or of
limited application affect the balance of such provision.
The adoption of this Section shall not impair the rights any
person may have had under Article XII of the bylaws of
Woodward Governor Company, an Illinois corporation, so that
if such person is not entitled to the benefit of the
provisions of this Section with respect to any action, suit
or proceeding, he shall continue to be entitled to the
benefit of the provisions of Article XII of the bylaws of
Woodward Governor Company, an Illinois corporation, with
respect to such action, suit or proceeding.
(h)The corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer,
employee, fiduciary or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or
other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of
his status as such, whether or not the corporation would
have the power to indemnify him against such liability under
the provisions of this Section.
(i)For the purposes of this Section, references to Othe
corporationO shall include, in addition to the resulting
corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors,
officers, and employees or agents, so that any person who is
or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request
of such constituent corporation as a director, officer,
employee, fiduciary or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or
other enterprise, shall stand in the same position under the
provisions of this Section with respect to the resulting or
surviving corporation as he would have with respect to such
constituent corporation if its separate existence had
continued.
(j)The indemnification and advancement of expenses
provided by, or granted pursuant to, this Section shall
continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of
the heirs, executors and administrators of such a person.
ARTICLE VIII
SECTION 8.1. CONTRACTS
The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or
execute and deliver any instrument in the name of and on
behalf of the corporation, and such authority may be general
or confined to specific instances.
SECTION 8.2. LOANS
No loans shall be contracted on behalf of the corporation
and no evidence of indebtedness shall be issued in its name
unless authorized by a resolution of the Board of Directors.
Such authority may be general or confined to specific
instances.
SECTION 8.3. CHECKS
All checks, drafts, or other orders for payment of money,
notes, or other evidences of indebtedness issued in the name
of the corporation, shall be signed by such officer or
officers, agent or agents of the corporation and in such
manner as shall from time to time be determined by
resolution of the Board of Directors.
SECTION 8.4. DEPOSITS
All funds of the corporation not otherwise employed shall be
deposited from time to time to the credit of the corporation
in such banks, trust companies, or other depositories as the
Board of Directors may select.
ARTICLE IX
SECTION 9.1. SEAL
The corporate seal of the corporation shall be circular in
form and shall contain the name of the corporation and the
words: ORockford, Illinois. Incorporated June 1902.O Said
seal may be used by causing it or a facsimile thereof to be
impressed, affixed, or reproduced.
SECTION 9.2. FISCAL YEAR
The fiscal year of the corporation shall commence on the
first day of October and shall end of the thirtieth day of
September in each year.
SECTION 9.3. RESIGNATIONS
Any director or officer may resign at any time. Such
resignation shall be made in writing and shall take effect
at the time specified therein, and if no time be specified,
at the time of its receipt by the Chairman of the Board of
Directors, the Vice Chairman of the Board of Directors, the
President, or the Secretary. The acceptance of a resignation
shall not be necessary to make it effective.
SECTION 9.4. WAIVER OF NOTICE
Whenever any notice is required to be given under the
provisions of the statutes or of the Certificate of
Incorporation or of these bylaws, a written waiver thereof,
signed by the person or persons entitled to said notice,
whether before or after the time stated therein, shall be
deemed equivalent thereto. Attendance of a person at a
meeting shall constitute a waiver of notice of such meeting,
except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to
the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special
meeting of the stockholders, directors or members of a
committee of directors need be specified in any written
waiver of notice.
ARTICLE X
SECTION 10.1. BYLAW AMENDMENTS
The Board of Directors shall have concurrent power with the
stockholders to adopt, amend or repeal these bylaws;
provided, however, that (i) these bylaws shall not be
adopted, amended or repealed by the stockholders except by
the affirmative vote of the holders of two-thirds of the
outstanding shares of Common Stock of the Corporation, and
(ii) no bylaw may be adopted by the stockholders which shall
impair or impede the power of the Board of Directors under
paragraph A of Article SEVENTH of the Certificate of
Incorporation of the Corporation.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Fiscal year ended September 30, 1999 1998 1997
<S> <C> <C> <C>
(In thousands of dollars except per share amounts and other year-
end data)
Operating Results
Net billings for products
and services $596,904 $490,476 $442,216
Net earnings 30,829* 21,592* 18,140*
Basic earnings per share 2.74* 1.90* 1.58*
Diluted earnings per share 2.73* 1.90* 1.57*
Cash dividends per share .93 .93 .93
Year-end Financial Position
Working capital 124,392 119,506 124,827
Total assets 550,664 563,435 348,110
Long-term debt 139,000 175,685 17,717
Shareholders' equity 241,992 220,102 210,614
Other Year-end Data
Shareholders' equity per
diluted share $21.43 $19.34 $18.27
Worker members 3,791 3,994 3,246
Registered shareholder members 1,866 1,907 1,994
</TABLE>
*Net earnings includes a reduction for the equity in loss of an
unconsolidated affiliate, net of tax, of $1,287 or $.11 per basic
and diluted share for 1999, $3,028 or $.27 per basic share and
$.26 per diluted share for 1998, and $6,209 or $.54 per basic and
diluted share for 1997. Without this item, net earnings would
have been $32,116 or $2.85 per basic share and $2.84 per diluted
share for 1999, $24,620 or $2.17 per basic share and $2.16 per
diluted share for 1998, and $24,349 or $2.12 per basic share and
$2.11 per diluted share for 1997.
<PAGE>
CONTENTS
To All Shareholders 2
Focus on Our Members 5
Financial Section 13
Board of Directors 37
Board of Directors, Officers, and Investor Information 38
BUSINESS DESCTIPTION
Woodward provides innovative engine controls and fuel delivery
systems designed for a wide variety of applications. Serving
global markets from locations worldwide, Woodward is a leading
producer of fuel control systems and components for aircraft and
industrial engines and turbines.
Our products and services are used in the aviation, marine,
locomotive, large off-road vehicle, power generation, gas
generation, and oil and gas process industries.
<PAGE>
At Woodward we are responsive to the needs of our key
stakeholders: our shareholders, our customers, our suppliers, and
our members. We focus on both short- and long-term goals to
ensure positive performance and growth. We constantly encourage
our members to reach across business lines to share their
experience and innovative ideas. The result-products that
provide solutions for our customers.
<PAGE>
TO ALL SHAREHOLDERS
We achieved record sales and earnings in fiscal 1999, primarily
through our intense focus on Six Sigma initiatives that improved
quality, productivity, and costs, coupled with billings generated
by our Woodward FST business. Our strong financial results also
reflect the repositioning of our Industrial Controls business and
the introduction of new products. It is clear that the growth
strategies we have put in place over the past few years are
producing results.
As we continued to invest in programs to sustain growth, we
achieved significant milestones in a number of new, major product
programs in our aircraft and industrial businesses. In addition,
customers have responded positively to our small industrial
engine business, which was launched last year.
2
<PAGE>
FINANCIAL PERFORMANCE
Our net earnings rose 43 percent in 1999 to $30.8 million or
$2.73 per diluted share, from $21.6 million, or $1.90 per diluted
share in 1998. Results for 1999 included a restructuring expense
of $0.42 per diluted share and gains on sales of real estate
totaling $0.15 per diluted share. Without the restructuring
expense and gains on sales of real estate, earnings for 1999
would have been $3.00 per diluted share.
Our improved earnings reflect our strong increase in net
billings, up 22 percent to $596.9 million in 1999 from $490.5
million in 1998. Aircraft Engine Systems billings increased to
$325.9 million from $234.2 million last year, primarily related
to contributions from Woodward FST, which we acquired in June
1998. Woodward FST has experienced impressive growth in billings
in 1999 beyond its full-year pro forma 1998 levels. Industrial
Controls billings decreased to $191.6 million from $207.4 million
in 1998, due to softness in Asian markets and the oil and gas
sectors. Our other operations saw billings increase to $79.4
million in 1999, from $48.9 million in 1998, largely due to
contributions from the small industrial engine business, which
was formed in May 1998 following our acquisition of Baker
Electrical Products, Inc.
A WINNING COMBINATION
This year, we successfully integrated Woodward FST after
acquiring it in June 1998. As a global leader in fuel spray
technologies, Woodward FST strengthens both our aircraft and
industrial businesses. Woodward FST also created significant
cross-selling opportunities for our existing businesses.
The acquisition increased our presence in the thriving large, gas
turbine industrial market and moved us a major step closer to
offering complete, integrated fuel control and delivery systems
for the aircraft engine market.
As part of the integration, we consolidated a Woodward FST
facility in Harvard, Illinois, to our Rockford, Illinois,
facility to significantly reduce operating costs.
REPOSITIONING TO STRENGTHEN PERFORMANCE
We have seen positive results from the reorganization of
Industrial Controls into two separate businesses, initiated at
the end of the second quarter. Now, each business, Industrial
Controls and Global Services, can tailor their operations around
their distinct target markets.
Industrial Controls will continue to benefit from its streamlined
cost structure and from growing recognition of its capabilities
by engine original equipment manufacturers (OEMs).
Developing and manufacturing core fuel and combustion control
products remains Industrial Controls' primary strategy. Advanced
technologies and precision engineered products position
Industrial Controls to partner with OEMs to develop high-
performance, low-cost engines and turbines for the growing gas
and power generation markets. Industrial Controls has earned the
preferred supplier status with some OEMs and continues to develop
these kinds of relationships with all its customers to increase
revenues, profitability, and shareholder value.
Global Services will address the needs of the end-user markets.
Global Services provides engineered control systems for retrofit
and aftermarket applications.
With one business focusing on OEMs and the other on end users,
both are realizing greater efficiencies and improved financial
performance. More importantly, we are strengthening our
credibility with our customers, which gives us the opportunity to
build our market share and sustain our growth.
NEW PRODUCT INTRODUCTIONS
The backbone of Woodward's growth strategy is new products that
will enhance our customers' competitive positions in the
marketplace. In fiscal 1999, we achieved significant milestones
in the development and validation of product platforms and
systems.
Williams International ordered Woodward's new integrated main
fuel pump and control for an engine under development for a class
of light, affordable business jets. Late in the year, our
advanced Hydraulic Multiplexing Unit (HMUX), which replaces up to
a dozen actuators and
3
<PAGE>
valves on an aircraft engine, operated successfully on a General
Electric Aircraft Engines test rig. The HMUX, designed to reduce
cost and weight, was developed with the assistance of Lockheed
Martin Control Systems, Woodward's AESYS joint venture partner.
In addition to marketing the products introduced over the past
few years, Industrial Controls accelerated work on platforms for
distributed "smart" on-engine fuel systems for engines and
turbines that will replace cabinet-mounted, off-engine controls.
By combining advanced digital electronics and the latest hydro-
mechanical components, this generation of products will provide
significant advantages in performance, reliability, and cost.
Our new product development efforts for the small industrial
engine markets were well received by existing and prospective
customers. This has confirmed the market needs and opportunities
that we identified before launching our small industrial engine
business. In fiscal 1999, we worked closely with customers to
design three new products for gas engines that will start
production in fiscal 2000.
A PASSION FOR CUSTOMER SATISFACTION
In fiscal 1999, our customers responded favorably as we improved
our product quality, on-time delivery, responsiveness, and cost.
We are determined to produce better products at a lower cost and
at a faster pace than our competitors by continuing to implement
Six Sigma methodologies.
This year, more than 27 members and 9 supplier representatives
earned the distinction of Six Sigma Black Belts, bringing the
company-wide total to over 60. As our Black Belts continue to
advise and guide our teams, we fully expect to see further
process improvements that will lead to additional productivity
gains.
Also, this year, we trained hundreds of our members to use basic
Six Sigma tools to help their teams reach their process
improvement goals. Woodward extensively uses this basic method of
measuring, analyzing, improving, and controlling processes to
help eliminate waste from the business. By instilling the Six
Sigma philosophy and tools among all our members, we will
continue to raise Woodward to even higher performance levels. Not
only has Six Sigma contributed to Woodward's financial success
through improved profitability, it has generated a growing
enthusiasm among our members as they personally contribute to our
business.
A BRIGHT FUTURE
We look ahead with optimism. We are positioned to grow in our
aircraft and industrial markets. We are delivering new products
and new technologies, expanding our presence on customers'
engines and turbines, and translating continuous quality
improvements into competitive advantages, increased market share,
and profitability improvements.
We have good momentum as we move into fiscal 2000. First, global
economic conditions continue to improve. Second, we are
participating in the fast-growing regional and small business
aircraft markets, as well as the expanding industrial power
generation markets. And, we remain firmly committed to broadening
our product offerings and services to achieve our growth targets
in these markets.
I want to thank our Board of Directors for their wisdom and
guidance in matters crucial to Woodward's performance, our
members for their enthusiasm and willingness to put our customers
first, and our shareholders for their continued support. We look
forward to the challenges and opportunities that lie ahead.
John A. Halbrook
Chairman of the Board
and Chief Executive Officer
December 6, 1999
4
<PAGE>
Around the world, people depend on Woodward-probably more than
they realize.
Globally, every three seconds an airplane with our products takes
off. With our aircraft engine fuel delivery systems and
components, people rely on our products for on-time flight
departures.
Every day, our products help light, heat, and air condition
homes. With our systems and components for gas engines and
turbines, we help to produce the electricity used in people's
homes.
In emergency energy situations, hospitals depend on our products.
With our controls for stand-by emergency power generator sets,
patients are assured that when utility power is not available,
services are not disrupted.
At Woodward, we are focused on developing and producing quality
products because we understand people depend on them. So, we
listen to our customers; we learn from their experiences; and we
create innovative solutions to meet their critical needs.
5
<PAGE>
AIRCRAFT MARKET TRENDS
With a renewed corporate jet industry and with passenger air
miles projected to continue rising among regional airlines,
aircraft manufacturers, such as Airbus, Boeing, and Bombardier,
are relying heavily on engine manufacturers to provide complex
propulsion systems to power their planes. In turn, engine
manufacturers turn to Woodward for integrated engine fuel
delivery systems, as well as subsystems and components.
Both Woodward and engine original equipment manufacturers (OEMs)
benefit from a systems approach, especially as OEMs are
consolidating their supplier base by as much as 75 percent.
Woodward offers fuel delivery systems to ensure our position as a
preferred supplier, to increase our content on aircraft engines,
and to help OEMs in their supplier consolidation efforts.
As a systems provider, Woodward developed an integrated aircraft
fuel pump and control in fiscal 1999. Williams International
selected it for their FJ33 and FJ44 turbofan engines, which are
being developed to power a new class of small business jets.
The Woodward fuel pump and control will also be used by Pratt &
Whitney Canada (P&WC) on PW200, PT6C, and PT6T engines to power a
variety of helicopter applications. In addition, the PT6C is
being developed for the revolutionary Bell Agusta BA609
Tiltrotor. The BA609 combines the vertical lift capability of a
helicopter with the cruise speed of a fixed-wing aircraft.
In addition, Woodward's systems expertise is represented with the
new hydraulic multiplexer unit (HMUX), which was successfully
tested on a test rig for General Electric Aircraft Engines. The
HMUX streamlines the engine fuel system by replacing up to a
dozen actuators and valves with a lighter, more reliable, and
less expensive unit.
AIRCRAFT AFTERMARKET SERVICES
In the aftermarket arena, regional airlines continue to log more
air miles than ever before, which is increasing the demand for
spare parts, maintenance, overhaul, and retrofit services. We are
proud to be known as a premier source for the overhaul and repair
of engine fuel system accessories.
6
<PAGE>
[PICTURES]
7
<PAGE>
The acquisition of Fuel Systems Textron in 1998 strengthened
Woodward's maintenance capabilities. Now, we offer our customers
a complete fuel system repair and overhaul package to include
fuel metering units, pumps, actuators, specialty valves, and fuel
nozzles.
In fiscal 1999, AESYS, a joint venture between Lockheed Martin
Control Systems and Woodward, was awarded a portion of the
largest private maintenance contract in U.S. military history-the
Propulsion Business Area at Kelly Air Force Base in Texas.
The AESYS team is performing repair and overhaul of General
Electric TF39 engine fuel accessories-the electronic and
mechanical systems that control engine fuel distribution-for the
C-5 Galaxy transport aircraft. By combining Lockheed Martin's
electronics expertise with Woodward's hydro-mechanical technology
and fuel system integration expertise, AESYS provides more
complete aircraft engine systems and services than either company
could do separately.
Also, this year, Woodward introduced a unique aftermarket program
for propeller controls, Woodward ExpressT. Woodward knows its
customers must keep their engines running with fast exchanges.
So, our program offers solutions-exchange units within 24 hours
and at competitive prices.
8
<PAGE>
INDUSTRIAL MARKET TRENDS
Similar to the aircraft market, industrial market trends are
rapidly changing. In 1990, the use of natural gas for power
generation was at two percent with coal power generation in the
forefront. In 1997, natural gas use in gas power generation rose
to 27 percent and it is expected to continue to increase.
Deregulation of the energy market in the U.S. and Europe is a
major catalyst for growth in this dynamic market. Also, stringent
environmental laws governing emissions favor gas engine and
turbine technology because natural gas is clean burning and
efficient.
Global leaders such as Caterpillar, General Electric, MHI,
Wartsila, and others want suppliers who can provide core fuel
controls that lower exhaust emissions and provide better fuel
efficiency. And, some OEMs have capacity issues that are
requiring them to outsource more than ever before. So, in fiscal
1999, Woodward developed a product strategy to introduce a
revitalized line of on-engine electronics and fuel systems. By
narrowing our product focus around core fuel and combustion
control components, we are at the forefront of industrial market
trends that favor electronic fuel injection systems and the
emerging "networked" engine.
Our broad product offerings, systems knowledge, and ability to
address engine and turbine core fuel control applications are
unmatched in the industrial market. We are the only manufacturer
with a complete range of injection devices for diesel and gas
engines and gas turbines, plus a complete offering of valves,
actuators, electronic controls, and software. Once again, we are
there meeting our customers' systems needs-offering products that
help them sell more engines.
9
<PAGE>
Three products, two introduced in fiscal 1999, greatly enhance
industrial gas engines-the TecJetT, the Fire Fly, and the EGS.
Woodward has partnered with OEMs to supply these products as
standard offerings on their gas engines.
The TecJet, an electronic gas injection valve, precisely
controls fuel flow.
The Fire Fly, an engine knock sensor, allows the engine to
operate with greater efficiency and safety by detecting and
compensating for knock before engine damage occurs.
The EGS, an engine gas management system, calculates the gas
flow desired for any load or speed the engine requires.
Woodward is the first to offer an innovative, single-stage,
solenoid-operated gas admission valve, the SOGAVT, which improves
fuel efficiency and reduces emissions in industrial gas engines.
The valve enables engine manufacturers with multi-port injection
to more precisely control the timing and amount of gas entering
the combustion chamber. In fiscal 1999, Cummins Wartsila and
Wartsila NSD offered the SOGAV as standard for a number of its
engines, and it was tested successfully for use by MAN B&W.
We are also leveraging our expertise and responding to
opportunities in the growing small industrial gas engine markets
of less than 300 horsepower. In fiscal 1999, Woodward developed
several new products for small industrial engines. Launched this
year, the LCS (low-cost speed controller), an electromagnetic
actuator control, is used for power generation applications,
welders, and refrigeration units. In addition, the new OH1.2 gas
engine control system provides low emissions with excellent fuel
economy and "diesel equivalent" power. These products are
expected to begin high-volume production in fiscal 2000.
OPERATIONAL EXCELLENCE
While Woodward's commitment to quality has always been in the
forefront, over the past two years, we have intensified our
focus. With the company-wide adoption of Six Sigma principles, a
methodology used by leading industrial companies such as GE and
Motorola, Woodward is striving to attain the highest level of
customer satisfaction.
Six Sigma concepts are based on measuring, analyzing, improving,
and controlling manufacturing processes along with gaining a firm
understanding of the customers' needs. Throughout Woodward, more
than 60 members have been trained as Six Sigma Black Belts-a
process that entails at least four weeks of specialized training.
10
<PAGE>
Black Belts focus their daily efforts on applying Six Sigma
concepts to quality improvement projects. For instance, in fiscal
1999, at our facility in Fort Collins, Colorado, members of the
Mechanical Manufacturing Department reduced their scrap dollars
to the lowest level ever recorded in the department's history.
The average monthly scrap dollar fell by 32 percent from fiscal
1998 levels.
At our facility in Rockton, Illinois, the number of rejects from
final test for a part assembled in the Small Gas Assembly and
Test area dropped dramatically. With a Black Belt as the project
leader, the team reduced the variations in assembly without
redesigning the part. Test stand rejects dropped to 0 percent
while on-time delivery rose to almost 100 percent.
Focusing on root causes, relying on Black Belts, and using Six
Sigma tools make these quality achievements possible. Ultimately,
Six Sigma methods are helping us improve product designs, reduce
cycle times, and refine processes, which adds to the bottom line
by reducing costs.
During fiscal 1999, Woodward repositioned Industrial Controls by
separating it into two businesses. Now, Industrial Controls is
concentrating on the needs of OEMs while Global Services is
focusing on designing and delivering flexible, customized control
systems along with retrofit services for engine and turbine
operators and aftermarket support services.
To strengthen its position as a solutions provider for complex
fuel systems, Woodward continually explores possibilities for
obtaining complementary technology and manufacturing expertise
through acquisitions, joint ventures, and alliances. For
instance, this year Woodward successfully completed integrating
the acquisitions it made in the later half of fiscal 1998-Fuel
Systems Textron, now Woodward FST, and Baker Electrical Products.
By adding Woodward FST nozzles to our product line along with our
newly developed pumps and long-established fuel metering units,
we can offer aircraft OEMs fully integrated engine fuel delivery
systems. As part of our integration efforts, operations at our
Woodward FST plant in Harvard, Illinois, were
consolidated with our Rockford, Illinois, facility to generate
additional cost savings. Acquiring Baker Electrical Products has
provided Woodward low-cost, high-volume manufacturing capacity in
solenoids, which accelerated product development and production
capacity for the growing small industrial engine control market.
A STRATEGIC ADVANTAGE-OUR MEMBERS
Industry trends, short- and long-term strategies, and new product
introductions are just part of the equation for success. The
foundation of Woodward's business is our members. This diverse
group of men and women, who are located in facilities throughout
the world, are the primary reason for our success. This is why we
devote significant resources to recruiting, training, and
retaining our members.
11
<PAGE>
With the implementation of Six Sigma, training has moved far
beyond typical task-specific skills. Now, members use their
problem-solving abilities to approach product design,
manufacturing processes, supplier coordination, and customer
service. Workers are developing into accountable leaders-leaders
who work individually and belong to interdependent, supportive
teams.
At Woodward, it's our skilled members who design and produce
innovative engine fuel delivery systems and components for
aircraft and industrial markets. It is our members who are
focused on our financial and operating performance and who are
dedicated to customer satisfaction. It is our talented and
motivated workforce who give us an unmatched strategic advantage
in the marketplace.
12
<PAGE>
FINANCIAL SECTION
WOODWARD GOVERNOR COMPANY
CONTENTS
Management Discussion and Analysis
of Results of Operations and Financial Condition 14
Consolidated Financial Statements 22
Management's Responsibility for Financial Statements 34
Report of Independent Accountants 34
Selected Quarterly Financial Data 35
Cautionary Statement 35
Summary of Operations/Eleven-Year Record 36
13
<PAGE>
MANAGEMENT DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
INTRODUCTION
We have prepared the following discussion and analysis to help
you better understand our results of operations and financial
condition. This discussion should be read with the consolidated
financial statements, including the notes, and the cautionary
statement on page 35.
RESULTS OF OPERATIONS
Our results of operations are discussed and analyzed by
reportable segment. We have two reportable segments-Aircraft
Engine Systems and Industrial Controls. Aircraft Engine Systems
provides fuel control systems and components primarily to
original equipment manufacturers of aircraft engines. Industrial
Controls provides fuel control systems and components primarily
to original equipment manufacturers of industrial engines and
turbines.
Our other operations include Global Services and Automotive
Products. Global Services, which resulted because of a change in
the structure of our internal Industrial Controls organization in
mid-1999, focuses on providing control systems and related
services to industrial engine users in retrofit situations.
Automotive Products, which began in 1998 following the
acquisition of Baker Electrical Products, Inc., focuses on
products for the non-automotive small engine markets which
require low-cost, high-volume, high-reliability manufacturing
processes characteristic of suppliers to the automotive industry.
Under our new basis of segmentation, Global Services and
Automotive Products have been combined and are discussed and
analyzed as "other segments." However, for comparative purposes,
we also provide discussion and analysis under our old basis of
segmentation before our organizational change, in which Global
Services was combined with Industrial Controls.
The segment earnings reported for these segments in the
discussion and analysis that follows do not reflect restructuring
expense, interest expense, interest income, and allocations of
corporate expenses, and are before income taxes and equity in
loss of unconsolidated affiliate. These other items are
separately discussed
and analyzed.
<TABLE>
Aircraft Engine Systems
<OPTION>
In thousands for the year
ended September 30, 1999 1998 1997
<S> <C> <C> <C>
External net billings $325,915 $234,173 $198,963
Segment earnings 57,752 39,202 30,442
</TABLE>
1999 Compared to 1998
External net billings of Aircraft Engine Systems increased 39% in
1999 over 1998. Most of this increase was due to the June 1998
acquisition of Fuel Systems Textron, Inc., which we subsequently
named Woodward FST, Inc. Woodward FST designs, develops and
manufactures fuel injection nozzles, spray manifolds, and fuel
metering and distribution valves for gas turbine engines in both
aircraft and industrial markets. In 1999, Woodward FST generated
billings 18% higher than the full year pro forma billings in
1998. Much of this increase was in industrial markets. Exclusive
of Woodward FST, billings of Aircraft Engine Systems increased 3%
in 1999. Billings from our domestic locations other than Woodward
FST increased 2%, related to both price and volume changes. Our
foreign locations generated billing increases of 38%, primarily
related to increased volume. We believe the increase overseas is
due to the positive impact of the 1998 consolidation of our
European overhaul and service centers to a location in Prestwick,
Scotland. We estimate that about 60% of our billings result from
sales to original equipment manufacturers and 40% from the
aftermarket.
We are anticipating modest growth in Aircraft Engine Systems'
billings in 2000. Overall, aircraft markets are expected to be
flat to down in 2000. However, we expect to be suppliers for
certain aircraft engine programs that are strengthening, which
will help offset those that are weakening. Long-term, we believe
that regional airlines will continue to log more air miles than
ever before, which will increase the demand for spare parts,
maintenance, overhaul, and retrofit services. Increases in
billings of fuel injection nozzles to industrial markets that we
saw in 1999 are also expected to continue in 2000 and for the
next several years.
Segment earnings of Aircraft Engine Systems increased 47% in
1999 over 1998. About 83% of our increase in earnings can be
directly attributed to the increase in net billings, using 1998's
segment earnings as a percent of net billings. The remaining
difference is primarily related to the following: 1) Our selling,
general, and administrative activities are relatively independent
14
<PAGE>
of changes in billing volumes. As a result, our total selling,
general, and administrative expenses increased only slightly on
the 39% increase in billings. Domestically, our selling, general,
and administrative expenses increased 6%. We actually reduced
selling, general, and administrative expenses overseas by 35%,
primarily because activities related to the start up of our
Prestwick, Scotland, location were completed in 1998. 2) Included
in the selling, general, and administrative expenses discussed
above, and also in cost of goods sold, is depreciation expense.
In 1999, we changed our depreciation methods from principally
accelerated methods to the straight-line method for newly-
acquired assets. This change reduced our 1999 cost of goods sold
and selling, general, and administrative expenses by a total of
about $1,080,000. 3) Amortization expense increased by $3,665,000
because we recognized expense associated with our June 1998
acquisition of Fuel Systems Textron, Inc. for a full 12-month
period in 1999 as compared to 4 months in 1998.
1998 Compared to 1997
External net billings of Aircraft Engine Systems increased 18% in
1998 over 1997. The most significant reason for the increase was
the June 1998 acquisition of Fuel Systems Textron, Inc. Excluding
the effects of this acquisition, the increase would have been 2%.
We estimate that about 60% of our billings result from sales to
original equipment manufacturers and 40% from the aftermarket.
Segment earnings increased 29% in 1998 over 1997. About 61% of
our increase in earnings can be directly attributed to the
increase in net billings, using 1997's segment earnings as a
percent of net billings. The remaining difference is primarily
related to reductions in cost of goods sold as a percent of net
billings, partially offset by higher amortization expense.
Improvements in cost of goods sold as a percent of billings were
achieved because of changes in sales mix, including the impact of
the June 1998 acquisition of Fuel Systems Textron, Inc., and cost
reductions generated through various operational improvement
initiatives. Amortization expense increased by $1,799,000 because
of the impact of the June 1998 acquisition of Fuel Systems
Textron, Inc.
<TABLE>
Industrial Controls
<OPTION>
In thousands for the year
ended September 30, 1999 1998 1997
<S> <C> <C> <C>
New basis of segmentation:
External net billings $191,568 $207,403 $200,809
Old basis of segmentation:
External net billings 244,235 250,224 243,253
Intersegment net billings 8,728 457 631
Segment earnings 35,378 24,267 23,302
</TABLE>
1999 Compared to 1998
External net billings for Industrial Controls under our new basis
of segmentation, as restated for the mid-1999 change in the
structure of the company's internal organization, decreased 8% in
1999 from 1998. Billings from our foreign locations, accounting
for 60% of our 1999 billings, decreased 3%. Without the effects
of foreign currency translation adjustments, the decrease
overseas would have been 6%. Billings from our domestic location,
accounting for 40% of our 1999 billings, decreased 15%. We
believe these decreases, both foreign and domestic, are
attributable to softness in Asian markets and in the oil and gas
sectors.
There are a number of signs that indicate to us the potential
for increased sales in 2000 and beyond. The Asian markets are
beginning to rebound, the price of oil has been increasing in
recent months, and activities involving large gas turbines is
very strong. In addition, the change in the structure of our
internal organization is making it easier for us to focus on the
specific needs of original equipment manufacturers. We believe
this increased focus will help us succeed in becoming involved in
more of the programs of original equipment manufacturers.
The change in the organizational structure referred to above
relates to the formation of Global Services, which focuses on
providing control systems and related services to industrial
engine users in retrofit situations. Prior to the change, Global
Services was an integral part of Industrial Controls.
External net billings of Industrial Controls under the old
basis of segmentation, which included Global Services, decreased
2% in 1999 from 1998. In 1999, 55% of our billings were generated
from our foreign locations and 45% from our domestic locations.
Billings from our foreign locations decreased 3%. Without the
effects of foreign currency translation adjustments, billings
from our foreign locations would have decreased 5%. Billings from
our domestic locations decreased 2% in 1999. Without estimated
price increases, associated primarily with the Global Services
portion of this segment, billings from our domestic locations
would have decreased 5%. We believe these decreases, both
domestic and foreign, are attributable to softness in Asian
15
<PAGE>
markets and in the oil and gas sectors. However, we were able to
somewhat offset the decrease of our domestic locations by
completing several large contracts for control system upgrades.
Intersegment sales of Industrial Controls under the old basis
of segmentation increased substantially in 1999 over 1998 due to
sales of inventory to Automotive Products, which is included in
other segments discussed below.
Segment earnings of Industrial Controls under the old basis of
segmentation increased 46% in 1999 over 1998. This increase
resulted primarily from the following: 1) In the second quarter
1999, we terminated 197 members in connection with the change in
our internal organization that resulted in the formation of
Global Services. Most of the terminations occurred in our
domestic locations, affecting all job functions to varying
degrees. As a result of these and other cost control actions, we
were able to reduce both our cost of goods sold and our selling,
general, and administrative expenses at our domestic locations by
approximately 10% for 1999 as compared to 1998. These reductions
were offset somewhat by increases at our foreign locations,
primarily in selling, general, and administrative expenses.
Overall, our cost of goods sold decreased 6% on a sales decrease
of 2% for 1999. This decrease in costs included reductions
associated with the change in our depreciation methods from
principally accelerated methods to the straight-line method for
newly-acquired assets. 2) The 1999 change in our depreciation
method reduced cost of goods sold and selling, general, and
administrative expenses by a total of about $430,000. 3) We sold
land located in The Netherlands, which resulted in a gain of
$1,914,000 in 1999. 4) In 1998, we incurred expenses related to
the consolidation and integration of operations at one of our
foreign locations that we did not incur in 1999. 5) Foreign
currency transaction gains in Japan improved segment earnings by
approximately $800,000 for 1999 as compared to 1998.
We believe the favorable impact of the changes in our internal
organization which began in the third quarter of 1999 will
continue in 2000 and beyond. Not only did this change result in a
reduced cost structure, but it will enable us to better focus on
the divergent needs of original equipment manufacturers and end
users in retrofit situations.
1998 Compared to 1997
External net billings of Industrial Controls, under our new basis
of segmentation which excludes Global Services, increased 3% in
1998 over 1997. Billings from our foreign locations, representing
57% of total billings in 1998, increased by 9%. Excluding foreign
currency translation adjustments, most significantly from the
currencies of Japan and The Netherlands, the billings increase
from foreign locations would have been 16%. This growth was
primarily the result of a strong engine controls market in
Europe. Billings from our domestic location, accounting for 43%
of total billings in 1998, decreased by 4% due to softening
market conditions.
External net billings of Industrial Controls, under the old
basis of segmentation which includes Global Services, also
increased 3% in 1998 over 1997. Billings from our foreign
locations accounted for 55% of 1998 billings and increased 8%
over 1997. The increase from our foreign locations would have
been 16% without considering the impacts of foreign currency
translation adjustments, most significantly from the currencies
of Japan and The Netherlands. This growth was primarily the
result of a strong engine controls market and higher shipments of
engineered systems in Europe. Net billings from our domestic
locations accounted for 45% of 1998 billings and decreased 3%
from 1997 due to softening market conditions.
Segment earnings of Industrial Controls under the old basis of
segmentation increased 4% in 1998 over 1997. This increase
resulted primarily from a decrease in cost of goods sold as a
percent of net billings. Overall, our cost of goods sold
increased 1% on a 3% increase in billings, reflecting the net of
sales mix and cost changes. This earnings increase was offset
somewhat in that we incurred expenses related to the
consolidation and integration of operations at one of our foreign
locations in 1998 that we did not incur in 1997.
<TABLE>
Other Segments
<OPTION>
In thousands for the year
ended September 30, 1999 1998 1997
<S> <C> <C> <C>
New basis of segmentation:
External net billings $79,421 $48,900 $42,444
Old basis of segmentation:
External net billings 26,754 6,079 -
Segment loss (2,911) (2,587) -
</TABLE>
1999 Compared to 1998
External net billings of other segments under our new basis of
segmentation, as restated for the 1999 change in the structure of
the company's internal organization, increased 62% in 1999 over
1998. Of the total billings reported for this segment in 1999,
71% was generated by domestic locations and 29% by foreign
locations. Net billings from domestic locations increased 96% in
1999. This increase was due to the following: 1) In May 1998, we
acquired Baker Electrical Products, Inc. Billings in 1999 reflect
sales for a full 12-month period compared to a 5-month
16
<PAGE>
period in 1998. 2) Global Services has increased its sales
volumes over 1998 by completing several large contracts for
control system upgrades. 3) Automotive Products, which was formed
at the time of the Baker acquisition, has begun to generate sales
of new products in 1999. 4) Global Services has increased some of
its prices.
Net billings by foreign locations increased 15% in 1999. This
increase is primarily related to the establishment of an
Automotive Products location in Europe to generate sales in that
area of the world.
We believe there are a number of factors that will generate
higher sales for our other segments in 2000 and beyond. First,
with demands high, independent power producers are likely to
consider the possibility of retrofitting equipment rather than
installing new equipment in their facilities. With our increased
focus on the retrofit markets following the 1999 change in our
organization, we are poised to take advantage of these
opportunities. We have also developed a number of products in our
Automotive Products group that will begin shipping in 2000. We
are encouraged by the market acceptance of both our products and
our company as a supplier to small industrial engine
manufacturers.
External net billings of other segments under the old basis of
segmentation, which excluded Global Services, increased 340% in
1999 over 1998. In May 1998, we acquired Baker Electrical
Products, Inc. Billings in 1999 reflect sales for a full 12-month
period compared to a 5-month period last year. Also, Automotive
Products, which was formed at the time of the Baker acquisition,
has begun to generate sales of new products in 1999.
Segment losses of other segments under the old basis of
segmentation were slightly higher in 1999 as compared to 1998.
The impact of the 1999 change in depreciation method from
principally accelerated methods to the straight-line method for
newly-acquired assets reduced our loss in 1999 by about $190,000
from what it would have been under our previous methods. However,
in 1999, as was the case in 1998, our sales volumes were
insufficient to cover our costs of continuing investments in
developing new products for this relatively new operation. We
plan to continue to make investments in developing new products
in 2000 to benefit future periods.
1998 Compared to 1997
External net billings of other segments under our new basis of
segmentation increased 15% in 1998 over 1997. This increase was
primarily due to the May 1998 acquisition of Baker Electrical
Products, Inc., which generated 1998 billings of $6,079,000.
Global Services experienced only a slight increase in sales, from
its foreign locations, in 1998.
External net billings and segment losses of other segments
under our old basis of segmentation would have consisted solely
of Automotive Products, which was formed following the May 1998
acquisition of Baker Electrical Products, Inc.
<TABLE>
Expenses Excluded From Segment Earnings
<OPTION>
In thousands for the year
ended September 30, 1999 1998 1997
<S> <C> <C> <C>
Restructuring expense $ 7,889 $ - $ -
Interest expense 12,746 5,227 2,382
Interest income (827) (708) (780)
Unallocated corporate expenses 17,113 15,017 12,454
</TABLE>
1999 Compared to 1998
We incurred restructuring expense in 1999 primarily in connection
with a change in the structure of our internal Industrial
Controls organization. We terminated 197 members, impacting all
job functions to varying degrees. Most of the terminations were
in Fort Collins and Loveland, Colorado. As part of this
organization change, we formed Global Services, which focuses on
providing control systems and related services to industrial
engine users in retrofit situations.
Interest expense increased in 1999 because we had higher
levels of average outstanding debt in 1999 over 1998, resulting
from borrowings for business acquisitions made in May 1998 and
June 1998.
Unallocated corporate expenses increased in 1999 over 1998
because of increases in corporate activities in support of the
company, offset somewhat by a gain of $1,013,000 on the sale of
non-operating real estate in Stevens Point, Wisconsin. Excluding
this gain, unallocated corporate expenses were 3% of consolidated
net billings in both 1999 and 1998. The impact of the 1999 change
in depreciation method from principally accelerated methods to
the straight-line method for newly-acquired assets reduced our
unallocated corporate expenses in 1999 by about $240,000.
1998 Compared to 1997
Interest expense increased in 1998 because we had higher levels
of average outstanding debt in 1998 over 1997, resulting from
borrowings for business acquisitions made in May 1998 and June
1998. Unallocated corporate expenses increased in 1998 over 1997
primarily because of increases in business development
activities. Unallocated corporate expenses were 3% of
consolidated net billings in both 1998 and 1997.
17
<PAGE>
<TABLE>
Net Earnings
<OPTION>
In thousands, except per share
amounts, for the year
ended September 30, 1999 1998 1997
<S> <C> <C> <C>
Earnings before income
taxes and equity in loss
of unconsolidated affiliate $53,298 $41,346 $39,688
Income taxes 21,182 16,726 15,339
Equity in loss of
unconsolidated affiliate,
net of tax 1,287 3,028 6,209
Net earnings $30,829 $21,592 $18,140
Basic earnings per share $ 2.74 $ 1.90 $ 1.58
Diluted earnings per share 2.73 1.90 1.57
</TABLE>
1999 Compared to 1998
The increase in earnings before income taxes and equity in loss
of unconsolidated affiliate, which consists of the segment
earnings and expenses previously discussed, resulted in an
increase in 1999 income taxes. Income taxes were provided at an
effective rate in 1999 only slightly lower than the effective
rate in 1998.
The equity in loss of unconsolidated affiliate reflects our
share of the losses generated by GENXON(tm) Power Systems, LLC, a
50/50 joint venture. Since its inception, most of the activities
and costs incurred were directly related to product development.
GENXON reduced the amount of development activities in 1999 from
1998. GENXON is focused on the retrofit market for installed, out-
of-warranty industrial gas turbines, which we believed would
develop before the original equipment manufacturer markets.
However, the original equipment manufacturers have shown strong
interest in the technology, and we are assessing our
participation in that market. In the meantime, GENXON's costs
will be significantly below the levels of those incurred in 1999.
Basic and diluted earnings per share both increased about 44%
on a net earnings increase of 43% in 1999 as compared to 1998.
This difference is due to slight decreases in the weighted-
average shares of common stock outstanding both before and after
the assumed exercise of outstanding stock options.
1998 Compared to 1997
The increase in earnings before income taxes and equity in loss
of unconsolidated affiliate resulted in an increase in 1998
income taxes. Income taxes were provided at a higher effective
rate in 1998 than in 1997 due to the effects of foreign losses
that provided no tax benefit and foreign tax rate differences.
The equity in loss of unconsolidated affiliate reflects our
share of the losses generated by GENXON Power Systems, LLC, a
50/50 joint venture. Since its inception, most of the activities
and costs incurred were directly related to product development.
GENXON reduced the amount of development activities in 1998 from
1997.
Basic earnings per share increased about 20% and diluted
earnings per share increased about 21% on a net earnings increase
of 19% in 1998 as compared to 1997. This difference is due to
slight decreases in the weighted-average shares of common stock
outstanding both before and after the assumed exercise of
outstanding stock options.
FINANCIAL CONDITION
Our discussion and analysis of financial condition is presented
by segment for total segment assets, which consists of accounts
receivable, inventories, property, plant, and equipment-net and
intangibles-net. We also discuss and analyze other balance sheet
and cash flow items. Together, this discussion and analysis will
help you assess our liquidity and capital resources, as well as
understand changes in our financial condition.
<TABLE>
Assets
<CAPTION>
In thousands at September 30, 1999 1998 1997
<S> <C> <C> <C>
Total segment assets-
old basis of segmentation:
Aircraft Engine Systems $330,299 $321,646 $137,913
Industrial Controls 148,600 163,819 146,059
Other Segments 17,873 13,994 -
Unallocated corporate
property, plant, and
equipment-net and
intangibles-net 3,926 7,438 7,326
Other unallocated assets 49,966 56,538 56,812
Total assets $550,664 $563,435 $348,110
</TABLE>
1999 Compared to 1998
Aircraft Engine Systems total segment assets at September 30,
1999, were 3% higher than a year earlier. Increases in accounts
receivable and inventory attributable to increased business
activity were offset somewhat by reductions in intangibles due to
amortization expense, net of additions to goodwill. Additions to
goodwill totaled $2,459,000 in 1999, most of which were related
to recording accrued pension benefit costs assumed as part of the
June 1998 acquisition of Fuel Systems Textron, Inc.
18
<PAGE>
Industrial Controls total segment assets at September 30,
1999, were 9% lower than a year earlier. Domestic inventory
balances were reduced from relatively high levels at the end of
1998. Also, total capital expenditures in 1999 were at about 50%
of total depreciation expense for the year and $2,628,000 lower
than in 1998. We do not expect to maintain this low level of
capital expenditures in the future.
Total segment assets of our other segmants increased during
1999 due to increased business activity in Automotive Products.
1998 Compared to 1997
Aircraft Engine Systems total segment assets at September 30,
1998, were $183,733,000 higher than a year earlier primarily
because of the June 1998 acquisition of Fuel Systems Textron,
Inc. Exclusive of segment assets at September 30, 1998, that are
associated with this acquired business, total segment assets
would have decreased 9%. These reductions were achieved primarily
in accounts receivable and inventories.
Industrial Controls total segment assets at September 30,
1998, were 12% higher than a year earlier. Accounts receivable
balances in Europe increased due to higher shipments and
lengthened collection periods, partially offset by increases in
allowance for losses of accounts receivable. Inventory balances
in the United States were also increased in anticipation of 1999
shipments.
Total segment assets of our other segments at September 30,
1998, resulted from the May 1998 acquisition of Baker Electrical
Products, Inc.
<TABLE>
Selected Other Balance Sheet Items
<CAPTION>
In thousands at September 30, 1999 1998 1997
<S> <C> <C> <C>
Total assets $550,664 $563,435 $348,110
Working capital (current
assets less current liabilities)124,392 119,506 124,827
Long-term debt, less
current portion 139,000 175,685 17,717
Other liabilities 46,620 40,111 34,901
Commitments and contingencies - - -
Shareholders' equity 241,992 220,102 210,614
</TABLE>
1999 Compared to 1998
Our balance sheet remained strong at September 30, 1999. Changes
in our balance sheet from 1998 included an increase in working
capital and a reduction in long-term debt, made possible from
operating cash flows. Other liabilities increased in 1999 due to
pension benefit obligations assumed as part of the June 1998
acquisition of Fuel Systems Textron, Inc. and other changes in
postemployment and retirement obligations. Shareholders' equity
increased 10%, resulting from 1999 net earnings in excess of cash
dividend payments.
We are currently involved in matters of litigation arising
from the normal course of business, including certain
environmental and product liability matters. Further discussion
of these matters are in Note P in the Notes to Consolidated
Financial Statements.
1998 Compared to 1997
Our balance sheet remained strong at September 30, 1998. Changes
in our balance sheet from 1997 included a significant increase in
total assets and long-term debt, both driven primarily by the May
and June 1998 business acquisitions. Working capital decreased
only slightly from the prior year. Other liabilities increased in
1998 due to retirement healthcare benefit obligations assumed as
part of the June 1998 acquisition of Fuel Systems Textron, Inc.
and other changes in retirement obligations. Shareholders' equity
increased 5%, resulting from 1999 net earnings in excess of cash
dividend payments.
<TABLE>
Selected Cash Flow Items
<CAPTION>
In thousands for the year
ended September 30, 1999 1998 1997
<S> <C> <C> <C>
Net cash provided by
operating activities $59,932 $43,053 $56,079
Net cash used in
investing activities (17,963) (207,945) (28,579)
Net cash provided by (used in)
financing activities (42,982) 162,626 (25,179)
</TABLE>
1999 Compared to 1998
Net cash flows provided by operations increased by 39% in 1999
over 1998. This increase is primarily driven by increased net
earnings before noncash expenses. The most significant of these
noncash expenses is depreciation and amortization, which
increased largely due to intangibles associated with the May and
June 1998 business acquisitions and deferred income taxes.
Net cash flows used in investing activities decreased by
$189,982,000 in 1999 as compared to 1998. Without the cash flows
associated with the May and June 1998 business acquisitions, the
decrease would have been $8,239,000. This change is primarily
related to proceeds from the 1999 sale of non-operating real
estate in Stevens Point, Wisconsin, and land in The Netherlands,
and to reduced losses associated with our equity in the GENXON
Power Systems, LLC joint venture. Based on current operating
conditions, we expect an increase in capital expenditures in 2000
over 1999 more in line with depreciation expense.
19
<PAGE>
Net cash flows for financing activities changed by
$205,608,000 in 1999 as compared to 1998. Without the cash flows
associated with 1998 borrowings under a term note and a revolving
line of credit made because of the May and June 1998 business
acquisitions, the change would have been $22,608,000. Net cash
flows provided by operations in excess of net cash flows used in
investing activities enabled us to reduce our debt by a greater
amount than in 1998.
Future cash flows from operations and available revolving
lines of credit are expected to be adequate to meet our investing
and financing cash requirements during the next twelve months.
However, it is possible business acquisitions could be made in
the future that would require amendments to existing debt
agreements and the need to obtain additional financing.
1998 Compared to 1997
Net cash flows provided by operating activities decreased in 1998
compared to 1997 primarily due to relative changes in working
capital, assets, and liabilities in 1998 compared to 1997.
Net cash flows used in investing activities increased in 1998
over 1997 mainly due to the 1998 business acquisitions. Capital
expenditure levels in 1998 were 1.4% lower than in 1997.
Net cash flows related to financing activities changed by
$187,805,000 in 1998 compared to 1997. Borrowing, both short-term
and long-term, were the primary sources of cash during 1998.
Without the cash flows associated with 1998 borrowings under a
term note and a revolving line of credit made because of the May
and June 1998 business acquisitions, the change would have been
$4,805,000.
OTHER MATTERS
Market Risks
Our long-term debt is sensitive to changes in interest rates. We
monitor trends in interest rates as a basis for determining
whether to enter into fixed rate or variable rate debt agreements
and for the basis of determining the duration of such agreements.
Our primary objective is to minimize our long-term costs of
borrowing. Currently, all long-term debt is denominated in U.S.
dollars and consists primarily of variable rate agreements
associated with LIBOR market rates. We do not have any derivative
instruments associated with interest rates. A hypothetical 1%
immediate increase in interest rates would adversely affect our
2000 net earnings and cash flows by approximately $900,000 and
reduce the fair value of our long-term debt, as measured at
September 30, 1999, by approximately $250,000. Last year, a
hypothetical 1% immediate increase in interest rates would have
adversely affected our 1999 net earnings and cash flows by
approximately $975,000 and reduced the fair value of our long-
term debt by approximately $425,000.
Assets, liabilities, and commitments that are to be settled in
cash and are denominated in foreign currencies for transaction
purposes are sensitive to changes in currency exchange rates. We
monitor trends in foreign currency exchange rates and our
exposure to changes in those rates as a basis for determining
whether to use hedging strategies. Our primary exposures are to
the European Monetary Union euro, the British pound and the
Japanese yen. We do not have any derivative instruments
associated with foreign currency exchange rates. A hypothetical
10% immediate decrease in the value of the United States dollar
relative to all other currencies, when applied to September 30,
1999, balances, would adversely affect our expected 2000 net
earnings and cash flows by approximately $1,780,000. Last year, a
hypothetical 10% immediate decrease in the value of the United
States dollar relative to all other currencies would have
adversely affected our expected 1999 net earnings and cash flows
by $1,750,000.
Year 2000 Readiness
We recognize the potential problems associated with the year
2000. In May 1997, we formed a task force, with representation
from each location, to address this risk. The mission statement
adopted by the task force is:
We will provide year 2000 compliant products, work with
customers who have existing products to validate year 2000
compliance, and provide other year 2000 services. We intend to
provide uninterrupted, normal operation of business-critical
systems at all Woodward locations before, during, and after the
turn of the century and we will manage the problems associated
with non-critical systems. In addition, we will encourage similar
compliance from customers, suppliers, and partners as
appropriate, and we will work with them to achieve this goal.
We identified our year 2000 risks in three categories:
products, internal systems, and external noncompliance by
partners and suppliers.
We evaluated our manufactured products, have determined the
year 2000 compliance of such products, and informed our customers
and end-users through our Internet site and by other appropriate
means. As a stand-alone product and operating system, we will
continue to determine year 2000 compliance, by testing and other
means, to validate our product's
20
<PAGE>
compliance. However, products with time-date functions have the
capability of being programmed, configured or otherwise modified
for their particular applications, prior to or following
installation. We may or may not have had any involvement in, or
responsibility for, these modifications. Additionally, in certain
cases, our systems have included auxiliary hardware and software
with time-date functions not manufactured by us, but provided by
third party suppliers. While we remain committed to supporting
and assisting our customers and end-users as they assess such
systems, limitations imposed by license agreement restrictions,
in some cases, and non-access to source code, in other cases,
make it generally impossible for us to determine (except by
testing individual systems) the year 2000 compliance of third
party supplied hardware and software not manufactured by us.
Regarding internal systems, including information systems,
manufacturing equipment and facilities, we completed our
awareness, inventory, assessment, and prioritization tasks. We
have completed the upgrade/remediation, compliance validation,
and contingency plan development tasks associated with mission-
critical systems. Non-critical internal systems are being
addressed now. Each non-critical system has been assigned a
priority rating. The higher priority systems have been addressed.
Medium and high priority systems will be addressed by December
31, 1999.
We have contacted partners and suppliers with requests for
their year 2000 project status to determine if they will be
adversely affected by the year 2000 and consequently cause
disruption to our operations. We are using phone audits for
follow-up and have developed contingency plans for our high-risk
critical suppliers.
We have applied available and beneficial provisions of the
federal "Year 2000 Information and Readiness Disclosure Act."
Statements such as the mission statement and other comments above
should be regarded as being "Year 2000 Statements" and "Year 2000
Readiness Disclosures," as applicable, within the meaning of, and
subject to, the exclusions prescribed by this Act.
External costs of corrective efforts, principally system
reprogramming and upgrades, are not anticipated to be material
and are currently estimated to be less than $600,000. Total
external costs incurred for corrective efforts through September
30, 1999, were $247,000, with remaining budgeted year 2000 costs
anticipated to be incurred in the first quarter of fiscal 2000.
Even though management feels that planned corrective efforts
should adequately address year 2000 issues, there can be no
assurance that unforeseen difficulties will not arise. There is
no assurance that the failure of any external party to resolve
its year 2000 issues would not have an adverse effect on the
company.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal
Use." This statement provides guidance on accounting for the
costs of software developed or obtained for internal use and is
effective in fiscal year 2000. We have determined that we will
need to capitalize certain software development costs that we
have expensed in the past. We have estimated that the effect of
complying with this statement for planned projects will be to
increase net earnings in 2000 by approximately $650,000.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities." Following a
subsequent deferral of the original implementation date, it is
effective in fiscal year 2001. This statement establishes
accounting and reporting standards for derivative instruments and
for hedging activities. Among other requirements, it requires
that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at
fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative. We
currently do not have any derivative instruments and do not
expect this new statement to have any significant impact on our
consolidated financial statements.
21
<PAGE>
<TABLE>
STATEMENTS OF CONSOLIDATED EARNINGS
Woodward Governor Company and Subsidiaries
<CAPTION>
Year Ended September 30,
(In thousands except per
share amounts) 1999 1998 1997
<S> <C> <C> <C>
Net billings for products and
services $596,904 $490,476 $442,216
Costs and expenses:
Cost of goods sold 437,121 356,802 325,837
Sales, general, and
administrative expenses 79,043 79,332 72,295
Amortization of
intangible assets 6,769 2,927 983
Restructuring expense 7,889 - -
Interest expense 12,746 5,227 2,382
Interest income (827) (708) (780)
Other expense-net 865 5,550 1,811
Total costs and expenses 543,606 449,130 402,528
Earnings before income taxes and equity in loss
of unconsolidated affiliate 53,298 41,346 39,688
Income taxes 21,182 16,726 15,339
Earnings before equity in loss
of unconsolidated affiliate 32,116 24,620 24,349
Equity in loss of unconsolidated
affiliate, net of tax 1,287 3,028 6,209
Net earnings $30,829 $21,592 $18,140
Basic earnings per share $ 2.74 $ 1.90 $ 1.58
Diluted earnings per share $ 2.73 $ 1.90 $ 1.57
Weighted-average number of basic
shares outstanding 11,272 11,340 11,482
Weighted-average number of
diluted shares outstanding 11,292 11,379 11,525
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
22
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
Woodward Governor Company and Subsidiaries
<CAPTION>
(In thousands except per share At September 30,
amounts) 1999 1998
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 10,449 $ 12,426
Accounts receivable, less
allowance for losses of $4,417
for 1999 and $4,451 for 1998 115,517 108,212
Inventories 104,257 106,404
Deferred income taxes 17,221 20,001
Total current assets 247,444 247,043
Property, plant, and equipment, at cost:
Land 6,100 6,127
Buildings and improvements 128,668 127,054
Machinery and equipment 227,611 215,358
Construction in progress 3,534 2,855
365,913 351,394
Less allowance for depreciation 241,791 221,342
Property, plant, and equipment-net 124,122 130,052
Intangibles-net 156,802 162,229
Other assets 4,287 4,540
Deferred income taxes 18,009 19,571
Total assets $550,664 $563,435
Liabilities and shareholders' equity
Current liabilities:
Short-term borrowings $ 7,303 $ 12,927
Current portion of long-term debt 34,650 25,033
Accounts payable and accrued
expenses 76,772 82,916
Taxes on income 4,327 6,661
Total current liabilities 123,052 127,537
Long-term debt, less current portion139,000 175,685
Other liabilities 46,620 40,111
Commitments and contingencies - -
Shareholders' equity represented by:
Preferred stock, par value $.003 per
share, authorized 10,000 shares, no
shares issued - -
Common stock, par value $.00875 per
share, authorized 50,000 shares,
issued 12,160 shares 106 106
Additional paid-in capital 13,300 13,304
Unearned ESOP compensation (7,450) (9,723)
Accumulated other comprehensive
earnings 9,351 9,849
Retained earnings 247,420 226,736
262,727 240,272
Less treasury stock, at cost 20,735 20,170
Total shareholders' equity 241,992 220,102
Total liabilities and shareholders'
equity $550,664 $563,435
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
23
<PAGE>
<TABLE>
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
Woodward Governor Company and Subsidiaries
<CAPTION>
(In thousands Accum.
of dollars Other
except per Add'l ESOP Compre-
share Common Paid-in Compen- hensive Retained Treasurey Stock Total
amounts) Stock Capital sation Earnings Earnings Shares Amount Amount
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30,
1996 $106 $13,249 $(14,665) $13,620 $207,392 612,584 $(11,707) $207,995
Net earnings - - - - 18,140 - - 18,140
Other
comprehensive
earnings - - - (4,229) - - - (4,229)
Total
comprehensive
earnings 13,911
Purchases of
treasury
stock - - - - - 109,600 (3,761) (3,761)
Sales of
treasury
stock - 28 - - - (7,042) 168 196
Issuance of
stock to ESOP- 6 - - - (2,108) 51 57
ESOP compensation
expense - - 2,537 - - - - 2,537
Cash dividends-$.93
per common
share - - - - (10,681) - - (10,681)
Tax benefit applicable to
ESOP
dividend - - - - 360 - - 360
Balance at
September 30,
1997 106 13,283 (12,128) 9,391 215,211 713,034 (15,249) 210,614
Net earnings - - - - 21,592 - - 21,592
Other
comprehensive
earnings - - - 458 - - - 458
Total
comprehensive
earnings 22,050
Purchases of
treasury
stock - - - - - 160,413 (5,174) (5,174)
Sales of
treasury
stock - 10 - - - (8,580) 206 216
Issuance of
stock to
ESOP - 11 - - - (1,977) 47 58
ESOP
compensation
expense - - 2,405 - - - - 2,405
Cash dividends-$.93
per common
share - - - - (10,543) - - (10,543)
Tax benefit
applicable to
ESOP
dividend - - - - 476 - - 476
Balance at
September 30,
1998 106 13,304 (9,723) 9,849 226,736 862,890 (20,170) 220,102
Net earnings - - - - 30,829 - - 30,829
Other comprehensive
earnings - - - (498) - - - (498)
Total comprehensive
earnings 30,331
Purchases of
treasury
stock - - - - - 46,700 (1,029) (1,029)
Sales of
treasury
stock - (3) - - - (13,049) 313 310
Issuance of
stock to
ESOP - (1) - - - (6,287) 151 150
ESOP compensation
expense - - 2,273 - - - - 2,273
Cash dividends-$.93
per common
share - - - - (10,484) - - (10,484)
Tax benefit
applicable
to ESOP
dividend and
stock
options - - - - 339 - - 339
Balance at
September 30,
1999 $106 $13,300 $ (7,450) $ 9,351 $247,420 890,254 $(20,735) $241,992
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
24
<PAGE>
<TABLE>
STATEMENTS OF CONSOLIDATED CASH FLOWS
<CAPTION>
Woodward Governor Company and Subsidiaries
Year Ended September 30,
(In thousands of dollars) 1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $30,829 $21,592 $18,140
Adjustments to reconcile net earnings to
Net cash provided by operating activities:
Depreciation and amortization 32,036 26,642 22,837
Net (gain) loss on sale of property,
plant, and equipment (2,848) 7 (258)
Deferred income taxes 4,342 (1,046) 44
ESOP compensation expense 2,273 2,405 2,537
Equity in loss of unconsolidated
affiliate 2,079 4,808 8,243
Changes in operating assets and
liabilities, net of acquisitions:
Accounts receivable (8,015) (5,489) (13,070)
Inventories 2,145 (8,313) 7,262
Current liabilities, other than
short-term borrowings and current
portion of long-term debt (7,228) (3,893) 10,164
Other-net 4,319 6,340 180
Total adjustments 29,103 21,461 37,939
Net cash provided by operating
activities 59,932 43,053 56,079
Cash flows from investing activities:
Payments for purchase of property, plant,
and equipment (22,789) (20,862) (21,152)
Proceeds from sale of property, plant,
and equipment 6,293 1,305 1,022
Investment in unconsolidated
affiliate (1,405) (5,462) (8,243)
Business acquisitions, net of cash
acquired (62) (181,805) -
Other - (1,121) (206)
Net cash used in investing
activities (17,963) (207,945) (28,579)
Cash flows from financing activities:
Cash dividends paid (10,484) (10,543) (10,681)
Proceeds from sales of treasury stock 310 216 196
Purchases of treasury stock (1,029) (5,174) (3,761)
Net proceeds (payments) from borrowings
under revolving lines (23,050) 87,768 (6,431)
Proceeds from long-term debt 75,000 100,000 -
Payments of long-term debt (84,068) (10,117) (4,862)
Tax benefit applicable to ESOP dividend
and stock options 339 476 360
Net cash provided by (used in)
financing activities (42,982) 162,626 (25,179)
Effect of exchange rate changes
on cash (964) (307) (392)
Net change in cash and cash
equivalents (1,977) (2,573) 1,929
Cash and cash equivalents, beginning of
year 12,426 14,999 13,070
Cash and cash equivalents, end
of year $10,449 $12,426 $14,999
Supplemental cash flow information:
Interest expense paid $12,675 $ 3,797 $ 2,434
Income taxes paid $19,024 $11,255 $ 8,629
Noncash investing and financing activities:
Liabilities assumed in business
acquisitions $ 1,994 $25,527 $ -
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars except per share amounts)
A. Significant accounting policies:
Principles of consolidation: The consolidated financial
statements include the accounts of the company and its majority-
owned subsidiaries. Transactions within and between these
companies are eliminated. Results of joint ventures are included
in the financial statements using the equity method of
accounting.
Use of estimates: Financial statements prepared in conformity
with generally accepted accounting principles require the use of
estimates and assumptions that affect amounts reported. Actual
results could differ materially from our estimates.
Foreign currency translation: The assets and liabilities of
substantially all subsidiaries outside the United States are
translated at year-end rates of exchange and earnings and cash
flow statements are translated at weighted average rates of
exchange. Translation adjustments are accumulated with other
comprehensive earnings as a separate component of shareholders'
equity and are presented net of tax in the statements of
consolidated shareholders' equity. We have no other components of
accumulated other comprehensive earnings.
Revenue recognition: Billings for products and services are
recognized when products are shipped or services are provided to
the customer.
Research and development costs: Expenditures related to new
product development are charged to expense when incurred and
totaled approximately $24,600 in 1999, $18,500 in 1998, and
$11,300 in 1997.
Income taxes: Deferred income taxes are provided for the
temporary differences between the financial reporting basis and
the tax basis of the company's assets and liabilities. We provide
for taxes which may be payable if undistributed earnings of
overseas subsidiaries were to be remitted to the United States.
Cash equivalents: Highly liquid investments purchased with an
original maturity of three months or less are considered to be
cash equivalents.
Inventories: Inventories are valued at the lower of cost or
market, with cost being determined on a first-in, first-out
basis.
Property, plant, and equipment: Property, plant, and equipment
are recorded at cost and are depreciated over the estimated
useful lives of the assets, ranging from 5 to 45 years for
buildings and improvements and 3 to 15 years for machinery and
equipment. Assets placed in service as of and prior to September
30, 1998, are depreciated principally using accelerated methods.
Assets placed in service after September 30, 1998, are
depreciated using the straight-line method. This change was made
to better reflect improvements in preventative maintenance
practices that have generally resulted in more uniform productive
capabilities and maintenance costs of machinery and equipment
over the useful life of an asset. Net earnings in 1999 were
increased by approximately $1,150 as a result of this change in
depreciation method. Beginning October 1, 1999, we will
capitalize certain costs associated with developing software to
be used by us. Previously we expensed such costs as incurred.
This change is being made to adopt the provisions of Statement of
Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," issued by the American
Institute of Certified Public Accountants in March 1998. The
effect of this change is expected to increase net earnings in
2000 by approximately $650.
Intangibles: Intangibles are amortized over the periods estimated
to be benefited using the straight-line method. No amortization
period exceeds 30 years. We apply impairment losses on long-lived
assets first to related goodwill. Impairment losses are
recognized whenever expected operating cash flows are less than
the carrying values of specific groups of property, plant and
equipment, identifiable intangibles and related goodwill.
B. Business acquisitions: In May 1998, we acquired the net
assets of Baker Electrical Products, Inc., a manufacturer of
electromagnetic coils for anti-lock braking systems, for $7,096.
In June 1998, we acquired the stock of Fuel Systems Textron, Inc.
(subsequently renamed Woodward FST, Inc.), a leading designer,
developer, and manufacturer of fuel injection nozzles, spray
manifolds, and fuel metering and distribution valves for gas
turbine engines, for $174,771. These acquisitions were financed
utilizing borrowings under a term loan and a revolving line of
credit. Both of the acquisitions were accounted for using the
purchase method of accounting and results of operations of the
acquired companies were included in our consolidated results from
their acquisition dates. The excess of the purchase price over
the estimated fair value of tangible and identifiable intangible
net assets acquired is being amortized over 15 years for Baker
Electrical Products, Inc. and 30 years for Fuel Systems Textron,
Inc.
The following unaudited pro forma information summarizes the
results of operations for 1998 and 1997 as if the acquisition of
Fuel Systems Textron, Inc. had been completed on October 1, 1996,
26
<PAGE>
the beginning of the 1997 fiscal year. This information reflects
the actual operating results prior to the acquisition and
adjustments to reflect estimated interest, depreciation,
amortization of intangibles, and income taxes. These pro forma
amounts should not be considered indicative of the results that
would have actually been obtained if the acquisition had occurred
on October 1, 1996, or that may be obtained in the future. (The
pro forma information excludes the acquisition of Baker
Electrical Products, Inc. as the resulting pro forma data would
not have been materially different from the results reported.)
<TABLE>
<CAPTION>
Year ended September 30, 1998 1997
<S> <C> <C>
Net billings $558,630 $524,316
Earnings before equity in loss of
unconsolidated affiliate 24,627 23,953
Net earnings 21,599 17,744
Basic earnings per share 1.90 1.55
Diluted earnings per share 1.90 1.54
</TABLE>
C. Restructuring expense: We incurred restructuring expense of
$7,889 during 1999 in connection with a change in the structure
of our internal Industrial Controls organization (described more
fully in Note R) and the consolidation of two of our facilities.
This amount reflects a $285 fourth quarter reduction of the
amount originally recognized in our second quarter ended March
31, 1999. The amount of restructuring expense accrued at
September 30, 1999, totaled $475 and is related to member
termination benefits.
Restructuring expense for termination benefits and other
termination related costs totaled $7,351 and related to the
termination of 197 members in 1999. The terminations impacted all
job functions to varying degrees, primarily in Fort Collins and
Loveland, Colorado, where 148 members were terminated.
Restructuring expense associated with the consolidation of two of
our facilities was primarily for the exit from one of those
facilities and totaled $538.
D. Equity in loss of unconsolidated affiliate: The equity in
loss of unconsolidated affiliate is related to our 50% interest
in GENXON Power Systems, LLC, and is presented net of tax benefit
of $792 in 1999, $1,780 in 1998 and $2,034 in 1997. This venture
combines our proprietary fuel metering and control technology
with an unique catalytic combustion technology to offer an ultra-
low NOx emission control system. To date, most of the activities
and costs incurred were directly related to product development,
resulting in joint venture pretax losses of $4,157 in 1999,
$9,615 in 1998 and $10,486 in 1997. At September 30, 1999, the
joint venture had total assets of $608 and total liabilities of
$646. At September 30, 1998, the joint venture had total assets
of $2,095 and total liabilities of $786.
E. Income taxes: Income taxes, which are presented in the
statement of consolidated earnings exclusive of the tax benefits
associated with the unconsolidated affiliate GENXON Power
Systems, LLC, consisted of the following:
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
<S> <C> <C> <C>
Currently payable:
Federal $11,242 $10,165 $ 6,504
State 1,484 1,768 1,551
Foreign 3,929 6,586 6,474
Deferred 4,527 (1,793) 810
$21,182 $16,726 $15,339
</TABLE>
Deferred income taxes presented in the consolidated balance
sheets are related to the following:
<TABLE>
<CAPTION>
At September 30, 1999 1998
<S> <C> <C>
Deferred tax assets:
Postretirement and
early retirement benefits $18,560 $17,927
Foreign net operating loss
and state tax credits 9,255 8,833
Inventory 8,624 8,609
Other 18,748 20,400
Valuation allowance (11,716) (11,296)
Total deferred tax assets,
net of valuation allowance 43,471 44,473
Deferred tax liabilities:
Intangibles-net (4,734) (2,026)
Other (3,507) (2,875)
Total deferred tax liabilities (8,241) (4,901)
Net deferred tax assets $35,230 $39,572
</TABLE>
We recorded a valuation allowance to reflect the estimated amount
of deferred tax assets which may not be realized primarily due to
capital loss carryforwards and foreign net operating loss
carryforward limitations. Remaining deferred tax assets are
expected to be realized through future earnings. The changes in
the valuation allowance were as follows:
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998
<S> <C> <C>
Beginning balance $(11,296) $ (9,703)
Foreign net operating loss carryforward (376) (1,646)
State net operating loss carryforward (44) (36)
Capital loss carryforward - 89
Ending balance $(11,716) $(11,296)
</TABLE>
27
<PAGE>
The reasons for the differences between our effective income tax
rate and the United States statutory federal income tax rate were
as follows:
<TABLE>
<CAPTION>
Percent of pre-tax earnings,
year ended September 30, 1999 1998 1997
<S> <C> <C> <C>
Statutory rate 35.0 35.0 35.0
State income taxes, net
of federal tax benefit 2.5 2.5 2.2
Foreign loss effect 2.3 2.6 (0.1)
Foreign tax rate differences2.1 1.8 0.4
Foreign sales corporation (1.6) (1.5) (0.8)
Other items, net (0.6) 0.1 1.9
Effective rate 39.7 40.5 38.6
</TABLE>
F. Earnings per share:
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
<S> <C> <C> <C>
Net earnings (A) $30,829 $21,592 $18,140
Determination of shares,
in thousands:
Weighted-average shares
of common stock
outstanding (B) 11,272 11,340 11,482
Assumed exercise of
stock options 20 39 43
Weighted-average shares
of common stock outstanding
assuming dilution,
in thousands (C) 11,292 11,379 11,525
Basic earnings per share (A/B) $ 2.74 $ 1.90 $ 1.58
Diluted earnings per share (A/C) $ 2.73 $ 1.90 $ 1.57
</TABLE>
The following stock options were outstanding during 1999, 1998,
and 1997 but were not included in the computation of diluted
earnings per share because the options' exercise prices were
greater than the average market price of the common shares during
the respective periods:
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
<S> <C> <C> <C>
Options 220,375 181,935 266
Weighted-average exercise price $ 32.34 $ 32.46 $ 33.75
</TABLE>
G. Inventories:
<TABLE>
<CAPTION>
At September 30, 1999 1998
<S> <C> <C>
Raw materials $ 2,452 $ 2,397
Component parts 64,059 65,707
Work in process 26,955 26,994
Finished goods 12,021 13,256
105,487 108,354
Less progress payments (1,230) (1,950)
$104,257 $106,404
</TABLE>
H. Intangibles-net:
<TABLE>
<CAPTION>
At September 30, 1999 1998
<S> <C> <C>
Goodwill $ 95,552 $ 97,479
Customer relationships 42,357 43,834
Other 18,893 20,916
$156,802 $162,229
</TABLE>
Intangibles are shown net of accumulated amortization of $10,732
in 1999 and $5,424 in 1998.
I. Short-term borrowings: Short-term borrowings reflect
borrowings under certain bank lines of credit. The total amount
available under these lines of credit, including outstanding
borrowings, totaled $46,280 at September 30, 1999, and $49,949 at
September 30, 1998. Interest on borrowings under the lines of
credit is based on various short-term rates. Several of the lines
require compensating balances or commitment fees. The lines,
generally reviewed annually for renewal, are subject to the usual
terms and conditions applied by the banks. The weighted-average
interest rate for outstanding borrowings was 4.4% at September
30, 1999, 5.1% at September 30, 1998, and 4.7% at September 30,
1997.
J. Long-term debt:
<TABLE>
<CAPTION>
At September 30, 1999 1998
<S> <C> <C>
Term note $ 96,250 $100,000
Borrowings under revolving line
of credit facility 65,000 83,000
ESOP debt guarantee-8.01% 9,500 12,000
Unsecured note-9.45% 2,900 5,600
Other - 118
173,650 200,718
Less current portion 34,650 25,033
$139,000 $175,685
</TABLE>
During the third quarter of 1998, we entered into
uncollateralized financing arrangements with a syndicate of U.S.
banks, including a $100,000 term note and a revolving line of
credit facility up to a maximum amount of $150,000. The interest
rate on borrowings under the term note varies with LIBOR and was
5.94% at September 30, 1999. The revolving line of credit
facility carries a facility fee of 0.25%, with outstanding
borrowings due 5 years from the inception of the agreement. The
interest rate on borrowings under the revolving line of credit
facility varies with LIBOR, the money market rate or the prime
rate, and was 5.87% at September 30, 1999.
In June 1992, the company's Member Investment and Stock Ownership
Plan (a qualified employee stock ownership plan) borrowed $25,000
for a term of 11 years and used the proceeds to buy 1,027,224
shares of common stock from the company. We guaranteed the
payment of the
28
<PAGE>
loan and agreed to make future contributions to the plan
sufficient to repay the loan. Accordingly, the original amount of
the loan was recorded as long-term debt and unearned ESOP
compensation. The consolidated balance sheets reflect the
outstanding balance of the loan in long-term debt and the
remaining unearned ESOP compensation as a component of
shareholders' equity. Unearned ESOP compensation has been reduced
using the shares allocated method for shares allocated to plan
participants. The unallocated shares were 306,088 at September
30, 1999, 399,492 at September 30, 1998, and 498,304 at September
30, 1997.
Exclusive of the revolving line of credit facility, required
future principal payments of long-term debt are: $21,650 in 2000,
$22,500 in 2001, $22,500 in 2002, and $42,000 in 2003. At
September 30, 1999, we classified $13,000 of borrowings under the
revolving line of credit facility as current. The remaining
borrowings of $52,000 are classified as long-term as we have both
the intent and ability, through the company's revolving line of
credit facility, to refinance this amount on a long-term basis.
Provisions of the debt agreements require us to maintain a
minimum fixed-charge coverage ratio, current ratio, consolidated
net worth, and a maximum funded debt to total capitalization
ratio, as defined in the agreements and permit the lenders to
accelerate repayment requirements in the event of a material
adverse event. In addition, the agreements require us to make a
prepayment of all net proceeds from future indebtedness and 50%
of the net proceeds from future issuance of equity instruments.
Further provisions limit our ability to incur debt, pay cash
dividends, sell certain assets, acquire other businesses, and
purchase the company's capital stock, among other things. At
September 30, 1999, we had the ability to pay dividends and
purchase the company's common stock up to $32,630.
K. Accounts payable and accrued expenses:
<TABLE>
<CAPTION>
At September 30, 1999 1998
<S> <C> <C>
Accounts payable $20,923 $24,432
Salaries and other member benefits 27,706 24,656
Taxes, other than on income 5,479 7,255
Other items-net 22,664 26,573
$76,772 $82,916
</TABLE>
L. Retirement benefits: We provide various benefits to eligible
members of our company, including retirement healthcare benefits,
pension benefits, and contributions to various defined
contribution plans.
Currently, approximately 56% of our members may become eligible
for healthcare benefits, generally after reaching age 55 with 10
years of service or after reaching age 65. We pay 80% to 100% of
eligible healthcare expenses of retired members, their dependents
and survivors which are not paid by Medicare, up to maximum
amounts established under the plans. Plan participants share in
the cost of these benefits in varying amounts based on years of
service, and we have the right to modify or terminate the plans.
The plans are not funded and there are no plan assets. Changes in
the benefit obligations, the unfunded status of the
plans, and the amount of accrued benefit costs for our retirement
healthcare plans were as follows:
<TABLE>
<CAPTION>
At or for the year ended September 30, 1999 1998
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $40,651 $34,632
Service cost 1,103 1,054
Interest cost 2,587 2,551
Contributions by plan participants 2,208 2,581
Net actuarial losses (gains) (6,325) 1,560
Benefits paid (3,405) (4,120)
Business acquisition - 2,393
Benefit obligation at end of year
and unfunded status 36,819 40,651
Unrecognized net actuarial gains 7,785 1,460
Total accrued benefit cost 44,604 42,111
Portion of accrued benefit cost
included in accrued expenses 2,000 2,000
Portion of accrued benefit cost
included in other liabilities $42,604 $40,111
</TABLE>
The components of the net periodic benefit cost associated with
the retirement healthcare plans were as follows:
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
<S> <C> <C> <C>
Service cost $1,103 $1,054 $ 923
Interest cost 2,587 2,551 2,388
Amortization of unrecognized
net gain - (33) (24)
Net periodic benefit cost $3,690 $3,572 $3,287
</TABLE>
29
<PAGE>
In accounting for the retirement healthcare plans, we assumed the
weighted-average discount rate was 7.50% in 1999, 6.75% in 1998,
and 7.50% in 1997. We also assumed net healthcare cost trend
rates of 6.70% to 7.00% in 2000, decreasing gradually to 4.50% in
2005, and remaining at 4.50% thereafter. A 1.00% change in
assumed healthcare cost trend rates would have had the following
effects on amounts reported in 1999:
<TABLE>
<CAPTION>
1.00% Increase 1.00% Decrease
<S> <C> <C>
Effect on total of service and
interest cost components $ 839 $ (634)
Effect on benefits obligation
at end of year 6,294 (4,975)
</TABLE>
Approximately 14% of our members are currently covered under
defined benefit pension plans. Benefits paid under these plans
vary primarily due to members' length of service and
compensation. However, effective September 30, 1999, the years of
service factor was frozen for participants in one of our pension
plans. Changes in benefit obligations and plan assets, and the
funded status and the amount of accrued benefit costs for our
pension plans were as follows:
<TABLE>
<CAPTION>
At or for the year ended September 30, 1999 1998
<S> <C> <C>
Change in benefit obligations:
Benefit obligation at beginning of year $10,212 $10,985
Service cost 1,490 467
Interest cost 1,575 413
Net actuarial losses (gains) 839 (187)
Foreign currency exchange rate changes 2,987 (1,222)
Benefits paid (711) (244)
Business acquisition 12,069 -
Benefit obligation at end of the year 28,461 10,212
Change in plan assets:
Fair value of assets at beginning of year 10,386 11,621
Actual return on plan assets 1,259 (420)
Foreign currency exchange rate changes 2,794 (1,092)
Contributions by the company 566 521
Benefit paid (711) (244)
Business acquisition 10,075 -
Fair value of assets at the end of the year 24,369 10,386
Funded status (4,092) 174
Unamortized prior service cost (133) (112)
Unrecognized net losses (gains) 512 (665)
Unamortized transition obligation 1,088 938
Net prepaid (accrued) benefit cost (2,625) 335
Portion of net prepaid (accrued) benefit
cost included in other assets 391 335
Portion of net prepaid (accrued) benefit
cost included in other liabilities $ (3,016) $ -
</TABLE>
The business acquisition referred to above relates to the June
1998 acquisition of Fuel Systems Textron, Inc. (more fully
described in Note B). The actuarial valuation associated with the
assumed defined benefit pension plan was not completed until
1999.
The components of the net periodic benefit cost associated with
the pension plans were as follows:
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
<S> <C> <C> <C>
Service cost $1,490 $467 $484
Interest cost 1,575 413 438
Expected return on plan assets (1,529) (420) (464)
Amortization of prior service cost (8) (7) (8)
Recognized net gains - - (14)
Amortization of transition obligation 90 80 90
Net periodic pension cost $1,618 $533 $526
</TABLE>
The following weighted-average assumptions, reflecting rates
appropriate in the United States and Japan, were used in
accounting for pension plans:
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
<S> <C> <C> <C>
Discount rate 5.3% 4.0% 4.0%
Rate of compensation increase 4.3% 3.5% 3.5%
Expected long-term rate of
return on plan assets 5.2% 4.0% 4.0%
</TABLE>
Approximately 78% of our members are currently eligible for one
or more defined contribution plans. Contributions to these plans
are discretionary. However, we do have a qualified employee stock
ownership plan that has outstanding borrowings which have been
guaranteed by the company. We have agreed to make future
contributions to the plan sufficient to repay the loan. The
proceeds of the borrowing were used by the plan to purchase
common stock from the company, the shares of which are allocated
to plan participants as contributions are made to the plan.
Amounts charged to expense for defined contribution plans totaled
$10,551 in 1999, $9,512 in 1998, and $9,082 in 1997.
L. Stock Option Plan: In 1996, shareholders approved a plan in
which options to purchase shares of common stock could be granted
to key management members of the company. This plan reserved
800,000 shares of common stock for issuance. Granted options
under the plan generally have a term of 10 years and generally
vest immediately. These options are accounted for in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and therefore we do not recognize
compensation expense in association with options granted at or
above the market price of our common stock at the date of grant.
30
<PAGE>
As required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the following table
presents pro forma net earnings and per share information that
has been prepared as if compensation for these options was
recognized:
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
<S> <C> <C> <C>
Net earnings $30,298 $20,814 $17,723
Basic earnings per share 2.69 1.84 1.54
Diluted earnings per share 2.68 1.83 1.54
</TABLE>
The determination of compensation expense for this pro-forma
information was based upon the estimated fair value of the
options granted on the date of their grant using the Black-
Scholes option pricing model and the following weighted-average
assumptions by grant year:
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
<S> <C> <C> <C>
Risk-free interest rate 4.9% 5.8% 6.1%
Expected life 7 years 7 years 7 years
Expected volatility 23.0% 21.9% 19.7%
Expected dividend yield 4.2% 4.2% 4.6 %
</TABLE>
Option activity was as follows:
<TABLE>
<OPTION>
Weighted-
Average
Exercise
Options Price
<S> <C> <C>
Balance at September 30, 1996 97,000 $16.63
Options granted 162,200 23.59
Options exercised (9,820) 16.63
Options canceled (17,540) 16.63
Balance at September 30, 1997 231,840 21.97
Options granted 226,641 32.33
Options exercised (5,800) 23.50
Balance at September 30, 1998 452,681 26.88
Options granted 200,000 22.00
Options exercised (4,000) 22.00
Options canceled (7,266) 32.18
Balance at September 30, 1999 641,415 $25.33
</TABLE>
The weighted-average fair value of options granted was $4.27 in
1999, $6.45 in 1998 and $4.26 in 1997. The number of options
exercisable were 616,465 at September 30, 1999, 419,331 at
September 30, 1998, and 230,840 at September 30, 1997.
The exercise prices and weighted-average contractual lives of
stock options outstanding at September 30, 1999, were as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Remaining
Options Contractual Options
Exercise Price Outstanding Life in Years Exercisable
<S> <C> <C> <C>
$16.625 69,640 5.0 69,640
22.000 196,000 9.0 196,000
23.500 155,400 6.1 155,400
30.594 12,600 8.7 3,150
32.000 53,716 7.5 53,716
32.250 133,059 7.3 133,059
33.750 1,000 7.7 500
34.875 20,000 8.0 5,000
641,415 7.3 616,465
</TABLE>
N. Shareholder Rights Plan: We have a shareholder rights plan to
protect shareholders against unsolicited attempts to acquire
control of the company that do not offer what the Board of
Directors believes to be an adequate price to all shareholders.
In connection with this plan, a dividend of one preferred stock
purchase right for each outstanding share of common stock was
paid to shareholders in February 1996. Each Right entitles its
holder to purchase from the company one-four hundredth of a share
of Series A Preferred Stock, par value $.003 per share, at a
price of $75.00 (subject to adjustment, and restated for the
January 1997 stock split). The rights may not be exercised or
transferred apart from the company's common stock until 10 days
after it is announced that a person or group has acquired 15% or
more of the outstanding common stock or 15 business days after it
is announced that there is an offer (or an intent to make an
offer ) by a person or group to acquire 15% or more of the
outstanding common stock. The Board of Directors may increase the
15 business day period referred to above and may redeem the
rights in whole (but not in part) at a redemption price of $.003
per right at any time prior to an acquisition of 15% or more of
the outstanding common stock by a person or group. The rights
expire on January 17, 2006.
O. Leases: We have entered into leases for certain facilities.
Future minimum rental commitments under these operating leases
are: $2,965 in 2000, $2,737 in 2001, $2,586 in 2002, $1,973 in
2003, and $1,828 in 2004. Rent expense for facilities was
approximately $2,634 in 1999, $1,740 in 1998, and $1,423 in 1997.
31
<PAGE>
P. Contingencies: We are currently involved in matters of
litigation arising from the normal course of business, including
certain environmental and product liability matters. We have
accruals of approximately $1,200 at September 30, 1999, and
$1,572 at September 30, 1998. These accruals are based on our
current estimate of the most likely amount of losses that we
believe will be incurred. These amounts, which are expected to be
paid over the next several years, have been included in accounts
payable and accrued expenses.
We have been designated a "de minimis potentially responsible
party" with respect to the cost of investigation and
environmental cleanup of certain third-party sites. Our current
accrual for these matters is based on costs incurred to date that
we have been allocated and our estimate of the most likely future
investigation and cleanup costs. There is, as in the case of most
environmental litigation, the possibility that under joint and
several liability we could be required to pay more than our
allocated share of costs.
It is our opinion, after consultation with legal counsel, that
additional liabilities, if any, resulting from these matters are
not expected to have a material adverse effect on our financial
condition, although such matters could have a material effect on
our quarterly or annual operating results and cash flows when
resolved in a
future period.
Q. Financial instruments: The estimated fair values of our
financial instruments were as follows:
<TABLE>
<CAPTION>
At September 30, 1999 1998
<S> <C> <C>
Cash and cash equivalents $10,449 $12,426
Short-term borrowings (7,303) (12,927)
Long-term debt, including current portion (173,645) (202,227)
</TABLE>
The fair value of cash and cash equivalents, short-term
borrowings and long-term debt at variable interest rates were
assumed to be equal to their carrying amounts. Cash and cash
equivalents have short-term maturities, short-term borrowings
have short-term maturities and market interest rates, and long-
term debt at variable interest rates is repriced frequently at
market rates of interest. The fair value of long-term debt at
fixed interest rates was estimated based on a model that
discounted future principal and interest payments at interest
rates available to the company at year end for similar debt of
the same maturity.
R. Segment information: Our operations are organized based on
the nature of products and services provided. In 1999, we adopted
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information." Under
this statement, we have two reportable segments-Aircraft Engine
Systems and Industrial Controls. Aircraft Engine Systems provides
fuel control systems and components primarily to original
equipment manufacturers of aircraft engines. Industrial Controls
provides fuel control systems and components primarily to
original equipment manufacturers of industrial engines and
turbines.
Our other operations include Global Services and Automotive
Products, which are reported as other segments in the information
which follows. Global Services, which resulted because of a
change in the structure of our internal Industrial Controls
organization in 1999, focuses on providing control systems and
related services to industrial engine users in retrofit
situations. Certain summarized financial information presented
below for Global Services has not been restated for 1998 and 1997
because a restatement was not practicable. Such information has
been marked "na." Comparative information has been provided using
the old basis of segmentation in which Global Services was
combined with Industrial Controls. Automotive Products, which
began in 1998 following the acquisition of Baker Electrical
Products, Inc., focuses on products for the small industrial
engine markets which require low-cost, high-volume, high-
reliability manufacturing processes characteristic of suppliers
to the automotive industry.
The accounting policies of the segments are the same as those
described in Note A. Intersegment billings and transfers are made
at established intersegment selling prices generally intended to
approximate selling prices to unrelated parties. Our
determination of segment earnings does not reflect restructuring
expense, interest expense, interest income and allocations of
corporate expenses, and is before income taxes and equity in loss
of unconsolidated affiliate. Segment assets consist of accounts
receivable, inventories, property, plant, and equipment-net, and
intangible assets-net. Summarized financial information for the
new basis in segmentation, reflecting the restatement of certain
financial information in 1998 and 1997 related to the change in
our internal structure in 1999, follows:
32
<PAGE>
<TABLE>
<CAPTION>
At or for the year ended September 30, 1999 1998 1997
<S> <C> <C> <C>
Aircraft Engine Systems:
External net billings $325,915 $234,173 $198,963
Intersegment net billings 1,564 1,706 1,603
Segment earnings 57,752 39,202 30,442
Segment assets 330,299 321,646 137,913
Depreciation and amortization 17,663 11,959 9,144
Capital expenditures 13,049 10,407 9,497
Industrial Controls:
External net billings $191,568 $207,403 $200,809
Intersegment net billings 13,297 na na
Segment earnings 36,008 na na
Segment assets 126,344 na na
Depreciation and amortization 9,918 10,974 11,147
Capital expenditures 4,831 6,135 7,804
Other Segments:
External net billings $ 79,421 $ 48,900 $ 42,444
Intersegment net billings 4,534 na na
Segment losses (3,541) na na
Segment assets 40,129 na na
Depreciation and amortization 2,797 1,734 919
Capital expenditures 2,879 2,924 1,459
</TABLE>
Summarized financial information for the old basis in
segmentation, which ignores the impact of the change in our
internal structure in 1999, follows:
<TABLE>
<CAPTION>
At or for the year ended September 30, 1999 1998 1997
<S> <C> <C> <C>
Aircraft Engine Systems:
External net billings $325,915 $234,173 $198,963
Intersegment net billings 1,564 1,706 1,603
Segment earnings 57,752 39,202 30,442
Segment assets 330,299 321,646 137,913
Depreciation and amortization 17,663 11,959 9,144
Capital expenditures 13,049 10,407 9,497
Industrial Controls:
External net billings $244,235 $250,224 $243,253
Intersegment net billing s 8,728 457 631
Segment earnings 35,378 24,267 23,302
Segment assets 148,600 163,819 146,059
Depreciation and amortization 10,981 12,048 12,066
Capital expenditures 5,150 7,778 9,263
Other Segments:
External net billings $ 26,754 $ 6,079 $ -
Intersegment net billings 883 - -
Segment losses (2,911) (2,587) -
Segment assets 17,873 13,994 -
Depreciation and amortization 1,734 660 -
Capital expenditures 2,560 1,281 -
The differences between the total of segment amounts, as measured
using the old basis of segmentation, and the consolidated
financial statements were as follows:
</TABLE>
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
<S> <C> <C> <C>
Total net billings for
reportable segments $580,442 $486,560 $444,450
Other net billings 27,637 6,079 -
Elimination of intersegment
net billings (11,175) (2,163) (2,234)
Consolidated net billings $596,904 $490,476 $442,216
Total earnings for
reportable segments $ 93,130 $ 63,469 $ 53,744
Other losses (2,911) (2,587) -
Restructuring expense, interest
expense and interest income (19,808) (4,519) (1,602)
Unallocated corporate expenses (17,113) (15,017) (12,454)
Consolidated earnings before
income taxes and equity in
loss of unconsolidated affiliate $ 53,298 $ 41,346 $ 39,688
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1999 1998 1997
<S> <C> <C> <C>
Total assets for reportable
segments $478,899 $485,465 $283,972
Other assets 17,873 13,994 -
Unallocated corporate property,
plant, and equipment-net,
and intangibles-net 3,926 7,438 7,326
Other unallocated assets 49,966 56,538 56,812
Consolidated total assets $550,664 $563,435 $348,110
</TABLE>
Differences between total depreciation and amortization and
capital expenditures of reportable segments and the corresponding
consolidated amounts are due to other segments and unallocated
corporate amounts.
One customer accounted for more than ten percent of consolidated
net billings, impacting both the Aircraft Engine Controls and
Industrial Controls segments, and totaled approximately $130,000
in 1999, $76,500 in 1998, and $75,000 in 1997.
External net billings by geographical area, as determined by the
location of the company invoiced, were as follows:
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
<S> <C> <C> <C>
United States $350,999 $271,265 $245,536
Other countries 245,905 219,211 196,680
$596,904 $490,476 $442,216
</TABLE>
Property, plant and equipment-net by geographical area, as
determined by the physical location of the assets, were as
follows:
<TABLE>
<CAPTION>
At September 30, 1999 1998 1997
<S> <C> <C> <C>
United States $106,325 $111,478 $ 94,035
Other countries 17,797 18,574 16,913
$124,122 $130,052 $110,948
</TABLE>
33
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The management of Woodward Governor Company has prepared, and is
responsible for the accuracy and consistency of, the financial
statements and other information included in this annual report.
Management believes that the financial statements have been
prepared in conformity with generally accepted accounting
principles and has made what it believes to be reasonable and
prudent jugements and estimates where necessary.
The company has developed a system of internal accounting control
designed to provide reasonable assurance that its financial
records are accurate, assets are safeguarded, transactions are
executed in accordance with management's authorizations, and
financial statements fairly present the financial position and
results of operations of the company. The internal accounting
control system is tested, monitored, and revised as necessary.
The Board of Directors has an audit committee comprised of
outside directors, who meet periodically with management and the
company's independent auditors to review internal accounting
control, auditing, and financial reporting matters. The
independent auditors have unrestricted access to the audit
committee and may meet with or without management being present.
The company's independent accountants, PricewaterhouseCoopers
LLP, audited the financial statements prepared by the management
of Woodward Governor Company. Their opinion on these financial
statements is presented below.
John A.Halbrook Stephen P. Carter
Chariman and Chief Executive Officer Vice President, Chief
Financial Officer And Treasurer
REPORT OF INDEPENDENT ACCOUNTANTS
To Board of Directors and Shareholders
Woodward Governor Company
In our opinion, the accompanying consolidated balance sheets and
the related statements of consolidated earnings, shareholders'
equity and cash flows present fairly, in allmaterial respects,
the financial position of Woodward Governor Company and its
subsidiaries at September 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years
in the period ended September 30, 1999, in conformity with
generally accepted accounting principles. These financial
statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing
standards which required that we plan and perofrm the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
As discussed in Note A to the consolidated financial statements,
as of October 1, 1998, the Company changed from depreciating
newly-acquired assets using principally accelerated methods to
the straight-line method.
PricewaterhouseCoopers LLP
Chicago, Illinois
November 9, 1999
34
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
(Unaudited)
1999 Fiscal Quarters
(In thousands except
per share data) First Second Third Fourth
<S> <C> <C> <C> <C>
Net billings
for products
and services $144,908 $144,408 $139,239 $168,349
Gross profit 34,893 36,844 38,994 49,052
Earnings before
equity in loss
of unconsolidated
affiliate 5,596 2,343 8,387 15,790
Net earnings 5,204 2,064** 8,079 15,482
Net earnings per
basic share 0.46 0.18** 0.72 1.37
Net earnings per
diluted share 0.46 0.18** 0.72 1.37
Cash dividends per
diluted share 0.2325 0.2325 0.2325 0.2325
Common stock price per share:
High $ 25.56 $ 25.50 $ 27.25 $ 26.63
Low 20.00 20.50 23.00 24.00
Close 22.00 25.00 26.00 24.94
1998 Fiscal Quarters
(In thousands except
per share data) First Second Third Fourth
Net billings for
products and
services $ 98,140 $113,160 $119,399 $159,777
Gross
profit* 25,081 31,597 32,213 44,783
Earnings before equity
in loss of
unconsolidated
affiliate 3,339 6,383 5,521 9,377
Net earnings 2,458 5,415 4,891 8,828
Net earnings per
basic share 0.21 0.48 0.43 0.78
Net earnings per
diluted share 0.21 0.48 0.43 0.78
Cash dividends per
share 0.2325 0.2325 0.2325 0.2325
Common stock price
per share
High $ 35.75 $ 33.00 $ 31.00 $ 32.00
Low 30.87 25.25 27.50 20.50
Close 32.38 27.88 30.88 23.00
</TABLE>
* Gross profit represents net billings for products and services
less cost of goods sold as reported in our statements of
consolidated earnings.
** We incurred restructuring expense, net of tax, of $4,904 in
the second quarter 1999. Without this restructuring expense, our
net earnings in the second quarter 1999 would have been $6,968 or
$0.62 per basic and diluted share.
CAUTIONARY STATEMENT
This annual report contains forward-looking statements, including
financial projections, our plans and objectives for future
operations, expectations of future economic performance, and
various other assumptions relating to the future. While such
statements reflect our current expectations, all such statements
involve risks and uncertainties. Actual results could differ
materially from projections or any other forward-looking
statement. Important factors that could cause results to differ
materially from those projected or otherwise stated include the
following: unanticipated global or regional economic
developments, particularly in, but not limited to, Asia; changes
in business cycles of particular industries served by our
company, primarily original equipment manufacturers of aircraft
engines and industrial engines and turbines; fluctuations in
currency exchange rates of U.S. and foreign countries, primarily
those located in Europe and Asia; fluctuations in interest rates,
primarily LIBOR, which affect the cost of borrowing under our
term note and line of credit facilities; timing and acceptance of
new products and product enhancements; competitor actions that
adversely impact our orders or pricing; adverse changes in the
business acquisition climate; effects of any business
acquisitions or divestitures; changes in U.S. and other country
laws and regulations involving acquisitions, the environment, and
taxes; relative success of quality and productivity initiatives,
such as the Six Sigma initiative; business interruptions caused
by incomplete or ineffective remediation of computer problems
associated with the year 2000 throughout the company's supply
chain; the outlook for GENXON products and markets and its
funding requirements; and unusual or extraordinary events or
developments involving litigation or other potential liabilities.
35
<PAGE>
<TABLE>
Net Billings, Costs, and Earnings
<CAPTION>
Net Earnings (Loss)
For Net Billings Per Per % of Beginning For
the for Products Income Basic Diluted Shareholders' the
Year and Services Taxes Amount Share Share % of Sales Equity Year
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 $596,904 $21,182 $30,829** $ 2.74** $ 2.73** 5.2 14.0 1999
1998 490,476 16,726 21,592** 1.90** 1.90** 4.4 10.3 1998
1997 442,216 15,339 18,140** 1.58** 1.57** 4.1 8.7 1997
1996 417,290 13,003 22,178 1.92 1.92 5.3 11.2 1996
1995 379,736 8,247 11,936 1.03 1.03 3.1 6.2 1995
1994 333,207 (1,922) (3,273) (0.28) (0.28) (1.0) (1.6) 1994
1993 331,156 9,695 13,389* 1.13* 1.13* 4.0 6.1 1993
1992 374,173 12,764 20,212 2.22 1.81 5.4 9.7 1992
1991 361,924 13,724 24,293 1.81 2.22 6.7 12.5 1991
1990 340,128 16,776 29,439 2.68 2.68 8.7 17.0 1990
1989 299,789 15,627 25,503 2.32 2.32 8.5 16.3 1989
</TABLE>
<TABLE>
Dividends, Expenditures, and Other Data
<CAPTION>
Weighted Cash Dividends
Average At
For Shares Registered the
the Diluted Capital Deprec. Worker Shareholder Year
Year Outstanding Amount Per Share Expenditures Expense Members Members End
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 11,292 $10,484 $0.93 $22,789 $25,267 3,791 1,866 1999
1998 11,379 10,543 0.93 20,862 23,715 3,994 1,907 1998
1997 11,525 10,681 0.93 21,152 21,854 3,246 1,994 1997
1996 11,570 10,758 0.93 21,163 22,786 3,211 2,029 1996
1995 11,623 10,811 0.93 18,988 23,334 3,071 2,179 1995
1994 11,765 10,956 0.93 16,515 26,114 3,439 2,256 1994
1993 11,889 11,057 0.93 18,335 24,837 3,264 2,301 1993
1992 11,179 10,330 0.92 52,684 22,241 3,632 2,301 1992
1991 10,967 10,145 0.92 33,075 18,236 3,953 2,303 1991
1990 10,966 9,181 0.84 22,057 15,397 3,673 2,209 1990
1989 10,996 7,971 0.72 31,190 13,165 3,317 2,084 1989
</TABLE>
<TABLE>
Financial Position
<CAPTION>
At At
the Plant and Shareholders' Equity the
Year Working Current Equipment Total Long-term Per Diluted Year
End Capital Ratio Net Assets Debt Amount Share End
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 $124,392 2.0 to 1 $124,122 $550,664 $139,000 $241,992 $21.43 1999
1998 119,506 1.9 to 1 130,052 563,435 175,685 220,102 19.34 1998
1997 124,827 2.5 to 1 110,948 348,110 17,717 210,614 18.27 1997
1996 121,103 2.4 to 1 114,213 348,798 22,696 207,995 18.01 1996
1995 116,364 2.3 to 1 118,066 349,599 27,796 197,903 17.05 1995
1994 113,751 2.7 to 1 122,911 323,318 32,665 193,846 16.57 1994
1993 107,809 2.7 to 1 144,016 332,461 36,246 206,222 17.36 1993
1992 103,818 2.5 to 1 151,126 331,653 40,135 219,690 18.48 1992
1991 105,213 2.4 to 1 118,417 306,534 17,300 208,564 19.02 1991
1990 115,737 3.3 to 1 101,985 269,221 18,700 194,081 17.70 1990
1989 83,009 2.2 to 1 96,075 249,833 - 173,241 15.74 1989
</TABLE>
Management's Financial Summary and Analysis is on pages 14-21.
*Net earnings for 1993 is before cumulative effect of accounting
changes.
**Net earnings includes a reduction for the equity in loss of an
unconsolidated affiliate, net of tax, of $1,287 or $.11 per basic
and diluted share for 1999, $3,028 or $.27 per basic share and
$.26 per diluted share for 1998, and $6,209 or $.54 per basic and
diluted share for 1997.
36
<PAGE>
[BOARD OF DIRECTORS PICTURES]
37
<PAGE>
BOARD OF DIRECTORS
J. GRANT BEADLE
Retired Chairman and
Chief Executive Officer
Union Special Corporation
VERN H. CASSENS
Retired Senior Vice President
and Chief Financial Officer
Woodward Governor Company
CARL J. DARGENE
Chairman of the Board
AMCORE Financial, Inc.
LAWRENCE E. GLOYD
Chairman and
Chief Executive Officer
CLARCOR Inc.
JOHN A. HALBROOK
Chairman and
Chief Executive Officer
Woodward Governor Company
THOMAS W. HEENAN
Retired Partner
Chapman and Cutler law firm
J. PETER JEFFREY
Retired Vice President Development
Father Flanagan's Boys' Home
RODNEY O'NEAL
Vice President
Delphi Automotive Systems and
President
Delphi Interior Systems
LOU L. PAI
Chairman and Chief Executive Officer
Enron Energy Services
MICHAEL T. YONKER
Retired President and
Chief Executive Officer
Portec, Inc.
OFFICERS
JOHN A. HALBROOK
Chairman and
Chief Executive Officer
STEPHEN P. CARTER
Vice President
Chief Financial Officer
and Treasurer
RONALD E. FULKROD
Vice President
General Manager
Industrial Controls
North America
GARY D. LARREW
Vice President
Business Development
C. PHILLIP TURNER
Vice President
General Manager
Aircraft Engine Systems
CAROL J. MANNING
Corporate Secretary
INVESTOR INFORMATION
WOODWARD GOVERNOR COMPANY
Corporate Headquarters
5001 North Second Street
P.O. Box 7001
Rockford, IL 61125-7001 U.S.A.
www.woodward.com
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
New York, NY
1-800-937-5449
Correspondence and transfer requests
should be sent to the following:
American Stock Transfer & Trust Company
Shareholder Services
40 Wall Street
New York, NY 10005 U.S.A.
SHAREHOLDER ACCOUNT ASSISTANCE
Shareholders who wish to change the address or ownership of
stock, report lost certificates, eliminate duplicate mailings or
for other account registration procedures and
assistance should contact the Transfer Agent
at the address or phone number above.
DIVIDEND REINVESTMENT PLAN AND DIRECT DEPOSIT OF DIVIDENDS
Woodward offers shareholders of record a
convenient Dividend Reinvestment Plan whereby dividends can be
automatically
reinvested in Woodward's common stock. The plan also provides for
a voluntary quarterly cash deposit option for the purchase of
additional stock.
For further information and authorization forms, contact the
Transfer Agent at the address or phone number above.
ANNUAL MEETING
January 18, 2000, at 10:00 A.M.
Woodward Auditorium
5001 North Second Street
Rockford, IL
ANNUAL REPORT ON FORM 10-K
Shareholders may obtain, without charge, a single copy of
Woodward's 1999 annual report on Securities and Exchange
Commission Form 10-K upon written request to the Corporate
Secretary, Woodward Governor Company,
Rockford, IL.
STOCK EXCHANGE
Nasdaq National Market
Ticker Symbol: WGOV
AN EQUAL OPPORTUNITY EMPLOYER
It is Woodward's policy to take affirmative action to provide
equal employment opportunity to all members and applicants for
employment without regard to race, color, religion, sex, national
origin, disability, veteran's or handicapped status, and to base
all employment decisions so as to further this principle of equal
employment opportunity.
38
Exhibit 21
Woodward Governor Company
Subsidiaries of the Registrant
Woodward Governor Nederland B.V.
Hoofddorp, The Netherlands
Woodward Governor (U.K.) Limited
Reading, England, United Kingdom
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, Germany
Woodward HSC, Inc.
Buffalo, New York
Woodward Governor de Mexico S.A. de C.V.
Mexico City, Mexico
Woodward Governor Company (New Zealand) Limited
Christchurch, New Zealand
Woodward Governor India PTE. LTD.
Ballabgarh, India
Woodward Aircraft Controls Prestwick, Inc.
Prestwick, Scotland, United Kingdom
Woodward Foreign Sales Corporation
St. Thomas, U.S. Virgin Islands
Baker Electrical Products, Inc.
Memphis, Michigan
Woodward FST, Inc.
Zeeland, Michigan
Woodward Tianjin Controls Company Limited
Tianjin, China
<PAGE>
Exhibit 23.1
Woodward Governor Company
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statement on Form S-8 (File No. 333-10409) of
Woodward Governor Company and Subsidiaries of our report
dated November 9, 1999 relating to the consolidated
financial statements, which appears in the Annual Report to
Shareholders, which is incorporated in this Annual Report on
Form 10-K. We also consent to the incorporation by
reference of our report dated November 9, 1999 relating to
the financial statement schedule, which appears in this Form
10-K.
PricewaterhouseCoopers LLP
Chicago, Illinois
December 22, 1999
<PAGE>
Exhibit 23.2
Woodward Governor Company
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Registration Statement on Form S-8 (File No. 333-10409) of
Woodward Governor Company and Subsidiaries of our report
dated October 17, 1997 relating to the financial statements
of GENXON Power Systems, L.L.C., as of September 30, 1997
and for the period from October 21, 1996 (date of inception)
to September 30, 1997, which report appears in this Form
10-K.
PricewaterhouseCoopers LLP
San Jose, California
December 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements for the year ended September 30, 1999,
incorporated by reference.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 10449
<SECURITIES> 0
<RECEIVABLES> 119934
<ALLOWANCES> 4417
<INVENTORY> 104257
<CURRENT-ASSETS> 247444
<PP&E> 365913
<DEPRECIATION> 241791
<TOTAL-ASSETS> 550664
<CURRENT-LIABILITIES> 123052
<BONDS> 139000
0
0
<COMMON> 106
<OTHER-SE> 241886
<TOTAL-LIABILITY-AND-EQUITY> 550664
<SALES> 596904
<TOTAL-REVENUES> 596904
<CGS> 437121
<TOTAL-COSTS> 516164
<OTHER-EXPENSES> 14696
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12746
<INCOME-PRETAX> 53298
<INCOME-TAX> 21182
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30829
<EPS-BASIC> 2.74
<EPS-DILUTED> 2.73
</TABLE>
Exhibit 99
Woodward Governor Company
Additional Exhibit - Description of
Annual Report Graphs
Below is a description of the graphs appearing under
"Financial Highlights on page 1 of our 1999 Annual Report.
NET BILLINGS:
This bar graph shows consolidated net billings for
products and services in millions of dollars for the
fiscal years ended 1995 through 1999. Consolidated
plot points are $380, $417, $442, $490, and $597 with
the first plot point for 1995.
NET EARNINGS:
The bar graph for consolidated net earnings is in
millions of dollars for fiscal years 1995 through 1999.
The plot points beginning with 1995 are $12, $22, $18,
$22, and $31. A second plot point reflecting earnings
before equity in loss of an unconsolidated affiliate,
beginning in 1997 is $24 in 1997, $25 in 1998, and $32
in 1999.
NET EARNINGS AND CASH DIVIDENDS PER SHARE:
The bar graph for consolidated net earnings and cash
dividends per diluted share is for fiscal years ended
1995 through 1999. Beginning with 1995, plot points
for net earnings per diluted share are $1.03, $1.92
$1.57, $1.90, and $2.73. Plot points for cash
dividends per diluted share, beginning with 1995, are
$.93 for all years.
