UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
{ X } QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from...............to...............
Commission file number 0-8408
WOODWARD GOVERNOR COMPANY
(Exact name of registrant as specified in its charter)
Delaware 36-1984010
(State or other jurisdiction of (I.R.S. Employer identification No.)
incorporation or organization)
5001 North Second Street, Rockford, Illinois 61125-7001
(Address of principal executive offices)
(815) 877-7441
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes... No...
As of June 30, 2000, 11,273,537 shares of common stock with a par value of
$.00875 cents per share were outstanding.
<PAGE>
WOODWARD GOVERNOR COMPANY
FORM 10-Q
For the Quarter Ended June 30, 2000
INDEX
Description
Part I. Financial Information
Item 1. Financial Statements
Statements of Consolidated Earnings for the
three months ended June 30, 2000 and 1999
Statements of Consolidated Earnings for the nine
months ended June 30, 2000 and 1999
Consolidated Balance Sheets as of June 30, 2000
and September 30, 1999
Statements of Consolidated Cash Flows for the nine
months ended June 30, 2000 and 1999
Notes to Consolidated Financial Statements
Item 2. Management Discussion and Analysis of Results of
Operations and Financial Condition
Part II. Other Information
Item 6. Reports on Form 8-K
Signatures
<PAGE>
<TABLE>
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS
for the three months ended June 30, 2000 and 1999
(in thousands except per share amounts)
(Unaudited)
<CAPTION>
2000 1999
<S> <C> <C>
Net billings for products and services $155,496 $139,239
Costs and expenses:
Cost of goods sold 116,717 100,245
Sales, general, and administrative expenses 19,980 19,914
Amortization of intangible assets 1,631 1,698
Interest expense 2,842 2,856
Interest income (214) (218)
Other expense/(income)--net (25) 779
Gain on sale of business (25,244) -
Total costs and expenses, net of gain 115,687 125,274
Earnings before income taxes and
equity in loss of unconsolidated affiliate 39,809 13,965
Income taxes 13,631 5,578
Earnings before equity in loss of
unconsolidated affiliate 26,178 8,387
Equity in loss of unconsolidated affiliate,
net of tax 13 308
Net earnings $26,165 $8,079
Basic earnings per share $2.33 $0.72
Diluted earnings per share $2.32 $0.72
Weighted-average number of basic shares
outstanding 11,252 11,258
Weighted-average number of diluted shares
outstanding 11,275 11,292
Cash dividends per share $0.2325 $0.2325
See accompanying Notes to Consolidated Financial Statements.
</TABLE?
<PAGE>
</TABLE>
<TABLE>
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS
for the nine months ended June 30, 2000 and 1999
(in thousands except per share amounts)
(Unaudited)
<CAPTION>
2000 1999
<S> <C> <C>
Net billings for products and services $438,173 $428,555
Costs and expenses:
Cost of goods sold 332,710 317,824
Sales, general, and administrative expenses 58,649 59,611
Amortization of intangible assets 4,806 5,104
Restructuring expense - 8,174
Interest expense 8,727 9,379
Interest income (553) (693)
Other expense--net 328 1,960
Gain on sale of business (25,244) -
Total costs and expenses, net of gain 379,423 401,359
Earnings before income taxes and
equity in loss of unconsolidated affiliate 58,750 27,196
Income taxes 21,116 10,870
Earnings before equity in loss of
unconsolidated affiliate 37,634 16,326
Equity in loss of unconsolidated affiliate,
net of tax 90 979
Net earnings $37,544 $15,347
Basic earnings per share $3.34 $1.36
Diluted earnings per share $3.33 $1.36
Weighted-average number of basic shares
outstanding 11,256 11,275
Weighted-average number of diluted shares
outstanding 11,284 11,292
Cash dividends per share $0.6975 $0.6975
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars except per share amounts)
<CAPTION>
JUNE SEPTEMBER
30, 2000 30, 1999
<S> (Unaudited)
Assets <C> <C>
Current assets:
Cash and cash equivalents $14,399 $10,449
Accounts receivable, less allowance
for losses of $5,118 for June
and $4,417 for September 90,768 115,517
Inventories 104,042 104,257
Deferred income taxes 16,657 17,221
Total current assets 225,866 247,444
Property, plant, and equipment, at cost:
Land 5,971 6,100
Buildings and improvements 128,765 128,668
Machinery and equipment 231,586 227,611
Construction in progress 2,234 3,534
368,556 365,913
Less allowance for depreciation 245,241 241,791
Property, plant, and equipment - net 123,315 124,122
Intangibles - net 151,757 156,802
Other assets 7,904 4,287
Deferred income taxes 15,747 18,009
Total assets $524,589 $550,664
Liabilities and shareholders' equity
Current liabilities:
Short-term borrowings $12,490 $7,303
Current portion of long-term debt 35,400 34,650
Accounts payable and accrued expenses 76,948 76,772
Taxes on income 9,212 4,327
Total current liabilities 134,050 123,052
Long-term debt, less current portion 77,000 139,000
Other liabilities 47,282 46,620
Commitments and contingencies - -
Shareholders' equity represented by:
Preferred stock, par value $.003 per share,
authorized 10,000 shares, no shares issued - -
Common stock, par value $.00875 per share,
authorized 50,000 shares, issued
12,160 shares 106 106
Additional paid-in capital 13,202 13,300
Unearned ESOP compensation (7,719) (7,450)
Accumulated other comprehensive earnings 4,105 9,351
Retained earnings 277,431 247,420
287,125 262,727
Less treasury stock, at cost 20,868 20,735
Total shareholders' equity 266,257 241,992
Total liabilities and shareholders' equity $524,589 $550,664
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
for the nine months ended June 30, 2000 and 1999
(in thousands of dollars)
(Unaudited)
<CAPTION>
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net earnings $37,544 $15,347
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 23,014 24,922
Net gain on sale of property, plant, and
equipment (148) (948)
Gain on sale of business (25,244) -
Deferred income taxes 2,826 (59)
ESOP compensation expense (269) (171)
Equity in loss of unconsolidated affiliate 142 1,574
Changes in operating assets and
liabilities, net of acquisitions and sale
of business:
Accounts receivable 10,947 11,817
Inventories (3,912) (3,866)
Current liabilities, other than
short-term borrowings and current
portion of long-term debt 3,595 (7,485)
Other--net (2,104) 223
Total adjustments 8,847 26,007
Net cash provided by operating activities 46,391 41,354
Cash flows from investing activities:
Payments for purchase of property, plant,
and equipment (21,287) (17,436)
Proceeds from sale of property, plant,
and equipment 1,121 4,144
Proceeds from sale of business - net of
direct costs 42,027 -
Investment in unconsolidated affiliate - (1,235)
Business acquisitions, net of cash - (62)
Net cash provided by (used in) investing
activities 21,861 (14,589)
Cash flows from financing activities:
Cash dividends paid (7,847) (7,864)
Proceeds from sales of treasury stock 1,423 -
Purchases of treasury stock (1,762) (1,029)
Net payments on borrowings under revolving
lines (43,910) (12,384)
Proceeds of long-term debt - -
Payments of long-term debt (11,250) (118)
Tax benefit applicable to ESOP dividend 314 286
Net cash used in financing activities (63,032) (21,109)
Effect of exchange rate changes on cash (1,270) (1,788)
Net change in cash and cash equivalents 3,950 3,868
Cash and cash equivalents, beginning of year 10,449 12,426
Cash and cash equivalents, end of period $14,399 $16,294
Supplemental cash flow information:
Interest expense paid $9,668 $9,211
Income taxes paid $12,506 $11,308
</TABLE>
<PAGE>
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) The consolidated balance sheet as of June 30, 2000, the
statements of consolidated earnings for the three and nine-month
periods ended June 30, 2000 and 1999, and the statements of
consolidated cash flows for the nine-month periods ended June 30,
2000 and 1999, were prepared by the company without audit. The
September 30, 1999 consolidated balance sheet was derived from
audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
Information in this 10-Q report is based in part on estimates and
is subject to year-end adjustments and audit. In our opinion,
the figures reflect all adjustments necessary to present fairly
the company's financial position as of June 30, 2000, the results
of its operations for the three and nine-month periods ended June
30, 2000 and 1999, and its cash flows for the nine-month periods
ended June 30, 2000 and 1999. All such adjustments were of a
normal and recurring nature. The statements were prepared
following the accounting policies described in the company's 1999
annual report on Form 10-K and should be read with the Notes to
Consolidated Financial Statements on pages 26-33 of the 1999
annual report to shareholders. The statements of consolidated
earnings for the three and nine-month periods ended June 30, 2000
are not necessarily indicative of the results to be expected for
other interim periods or for the full year.
(2) On May 31, 2000, we sold certain assets for cash and the
buyer assumed certain liabilities. These assets and liabilities
were associated with our turbine control retrofit business, and
the resulting gain on the sale is reported separately in the
statements of consolidated earnings. The amount of the gain is
an estimate, subject to final closing audit adjustments. The
actual amount of cash proceeds from the sale, net of direct costs
paid, is reported in the statement of consolidated cash flows.
We have accrued for cash amounts expected to be paid in future
periods, and such amounts will be recognized as investing cash
flows when paid.
<PAGE>
<TABLE>
(3) Earnings per share:
<CAPTION>
Three months Nine months
ended ended
June 30, June 30,
(In thousands, except per share
amounts) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net earnings (A) $26,165 $ 8,079 $37,544 $15,347
Determination of shares:
Weighted-average shares of common
stock outstanding (B) 11,252 11,258 11,256 11,275
Assumed exercise of stock options 23 34 28 17
Weighted-average shares of common
stock outstanding assuming
dilution (C) 11,275 11,292 11,284 11,292
Basic earnings per share (A/B) $ 2.33 $ 0.72 $ 3.34 $ 1.36
Diluted earnings per share (A/C) $ 2.32 $ 0.72 $ 3.33 $ 1.36
</TABLE>
The following stock options were outstanding during the three and
nine-months ended June 30, 2000 and 1999, but were not included
in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market
price of the common shares during the quarters.
<TABLE>
<CAPTION>
Three months Nine months
ended ended
June 30, June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Options 330,635 227,641 329,218 383,041
Weighted-average exercise price $29.04 $32.35 $29.55 $28.76
</TABLE>
<TABLE>
(4) Inventories:
<CAPTION>
June September
(In thousands) 30, 2000 30, 1999
<S> <C> <C>
Raw materials $3,815 $2,452
Component parts 56,906 64,059
Work in process 32,525 26,955
Finished goods 10,796 12,021
104,042 105,487
Less progress payments - (1,230)
$104,042 $104,257
</TABLE>
<PAGE>
(5) Included in accounts payable and accrued expenses are
accounts payable of $21,952,000 at June 30, 2000, and $20,923,000
at September 30, 1999. Also included in accounts payable and
accrued expenses are accrued restructuring expenses of $9,000 at
June 30, 2000, and $475,000 at September 30, 1999. Accrued
restructuring expense and its decrease are primarily due to
member termination benefits.
In the three months and nine months ended June 30, 2000, we
developed plans to reduce the number of people in an Industrial
Controls facility by 44, and accrued and expensed $1,229,000. By
June 30, 2000, 25 of the 44 had been terminated and paid. The
accrual for the remaining 19 people totaled $551,000 at June 30,
2000.
(6) The assets and liabilities of substantially all subsidiaries
outside the United States are translated to the United States
dollar at period-end rates of exchange, and earnings and cash
flow statements are translated at weighted-average rates of
exchange. Translation adjustments are accumulated with other
comprehensive earnings (losses) as a separate component of
shareholders' equity. We have no other components of other
comprehensive earnings. The company's total comprehensive
earnings were as follows:
<TABLE>
<CAPTION>
Three months Nine months
ended ended
June 30, June 30,
(In thousands) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net earnings $26,165 $8,079 $37,544 $15,347
Other comprehensive losses (1,844) (2,406) (5,338) (2,779)
Total comprehensive
earnings $24,321 $5,673 $32,206 $12,568
</TABLE>
<TABLE>
(7) Segment information:
<CAPTION>
Three months Nine months
ended ended
June 30, June 30,
(In thousands) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Aircraft Engine Systems:
External net billings $84,999 $73,097 $227,443 $235,626
Intersegment billings 852 274 1,410 1,004
Segment earnings 13,110 10,676 22,124 39,797
Industrial Controls:
External net billings $49,891 $47,573 $141,388 $140,095
Intersegment billings 3,508 7,541 14,514 18,547
Segment earnings 9,497 10,112 29,438 20,975
Other Segments:
External net billings $20,606 18,569 $69,342 $52,834
Intersegment billings 977 1,753 3,080 3,044
Segment earnings (losses) (505) (207) 3,309 (5,079)
</TABLE>
<PAGE>
The difference between the total of segment earnings (losses) and
the statements of consolidated earnings follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
(In thousands) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Total earnings for reportable
segments $22,607 $20,788 $51,562 $60,772
Other segments' earnings (losses) (505) (207) 3,309 (5,079)
Restructuring expense, interest
expense, interest income, and
gain on sale of business 22,616 (2,638) 17,070 (16,860)
Unallocated corporate expenses (4,909) (3,978) (13,191) (11,637)
Consolidated earnings before income
taxes and equity in loss of
unconsolidated affiliate $39,809 $13,965 $58,750 $27,196
</TABLE>
<TABLE>
Segment assets are as follows:
<CAPTION>
At June 30, At September 30,
(In thousands) 2000 1999
<S> <C> <C>
Aircraft Engine Systems $320,004 $330,299
Industrial Controls 113,676 126,344
Other segments 30,902 40,129
</TABLE>
<PAGE>
PART I - ITEM 2
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
MANAGEMENT DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
We have prepared the following discussion and analysis to help
you better understand our results of operations and financial
condition. This discussion should be read with the consolidated
financial statements, including the notes.
RESULTS OF OPERATIONS
Our results of operations are discussed and analyzed by
reportable segment. We have two reportable segments - Aircraft
Engine Systems and Industrial Controls. Aircraft Engine Systems
provides fuel control systems and components primarily to
original equipment manufacturers of aircraft engines. Industrial
Controls provides fuel control systems and components primarily
to original equipment manufacturers of industrial engines and
turbines.
Our other operations include Global Services and Automotive
Products. Global Services focused on providing control systems
and related services to industrial engine users in retrofit
situations. The turbine control retrofit portion of Global
Services was sold in the third quarter of fiscal year 2000.
Automotive Products focuses on products for the non-automotive
small engine markets that require low-cost, high-volume, high-
reliability manufacturing processes characteristic of suppliers
to the automotive industry.
Our business is currently in the process of being reorganized
around our Aircraft Engine Systems and Industrial Controls
segments. As a result, we expect the remaining portion of Global
Services and Automotive Products to be combined with Industrial
Controls in the fourth quarter of fiscal year 2000. In the
current quarter, however, they continue to be reported as other
operations.
The segment earnings reported for these segments in the
discussion and analysis that follows does not reflect
restructuring expense, interest expense, interest income, gain on
sale of business, and allocations of corporate expenses, and is
before income taxes and equity in loss of unconsolidated
affiliate. These other items are separately discussed and
analyzed.
<TABLE>
Aircraft Engine Systems
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
(In thousands) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
External net billings $84,999 $ 73,097 $227,443 $ 235,626
Segment earnings 13,110 10,676 22,124 39,797
</TABLE>
External net billings of Aircraft Engine Systems increased in the
three months ended June 30 and decreased in the nine months ended
June 30 in 2000 as compared to 1999. In addition to normal
period-to-period variability, we experienced increases in
<PAGE>
billings for industrial nozzles, particularly in the third
quarter, and decreases in billings related to aftermarket
revenues. The increase in industrial nozzle billings resulted
from strong demand for these components, which is expected to
continue over the next several quarters. We believe the decrease
in aftermarket revenues may be caused by broader industry trends,
including the lengthening of time between our customers'
discretionary repair and overhaul activities, increasing
competition from original equipment manufacturers that have
expanded their own aftermarket service offerings, and increasing
reliability of our components. In addition, in fiscal year 1999
our first quarter billings were relatively strong due in part to
shipments that were originally scheduled for delivery in the
fourth quarter of fiscal year 1998. With improvements in
delivery performance, we did not have similar shipments this
year, impacting our nine-months comparison.
Segment earnings of Aircraft Engine Systems were impacted by
early retirement and termination benefits totaling $1.4 million
for the three months ended June 30, 2000, and $4.8 million for
the nine months ended June 30, 2000. These benefits were offered
as part of a workforce management program to align staffing
levels with expected demand. Without the expenses related to
these benefits, segment earnings of Aircraft Engine Systems would
have been $14.5 million for the three months ended and $26.9
million for the nine months ended June 30, 2000.
Higher billing levels in the three-month period this year
compared to last year favorably impacted our earnings, as many of
our costs are relatively fixed in nature. In addition, the three-
month period benefited from reductions in our workforce. The
decrease in the nine-month period can be attributed to the
reduced billing levels this year as compared to last year,
especially related to aftermarket revenues, and higher expenses
in several areas that more than offset the benefits of the third-
quarter reductions in our workforce. Our expenses increased this
year over last year primarily because of ongoing product
development activities, specific warranty issues, and the rapid
expansion of our industrial nozzle business. Except for
warranty, we believe these costs will benefit future periods.
The early retirement and termination benefits were associated
with reductions in our workforce that were completed on or before
June 30, 2000. Currently, we are continuing to assess staffing
levels in each of our Aircraft Engine Systems operations.
<TABLE>
Industrial Controls
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
(In thousands) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
External net billings $49,891 $ 47,573 $141,388 $ 140,095
Segment earnings 9,497 10,112 29,438 20,975
</TABLE>
External net billings of Industrial Controls increased in both
the three months and nine months ended June 30 in 2000 as
compared to 1999. This increase is related to strong demand in
the power generation markets. We intend to gain market share by
<PAGE>
offering original equipment manufacturers high quality products
and competitive prices, as well as by introducing innovative new
products. In particular, we will focus on the growing demand for
new gas turbines. As an example, in the third quarter, 2000, we
signed a five-year contract to supply fuel and combustion control
systems and components for a customer's industrial gas turbines.
We expect billings associated with this contract to exceed $500
million over the next five years. While it is difficult to
quantify, we believe that about two-thirds of the sales under
this contract will represent new business relative to today's
sales volumes.
Segment earnings of Industrial Controls were impacted by
termination benefits totaling $1.2 million in both the three
months and nine months ended June 30, 2000. Without the expenses
associated with these benefits, segment earnings for Industrial
Controls would have been $10.7 million for the three months
ended, and $30.6 million for the nine months ended June 30, 2000.
Segment earnings of Industrial Controls were also adversely
affected by a provision for a company's uncollectible receivables
of $0.9 million in the three months and nine months ended June
30, 2000. Generally, Industrial Controls has benefited from our
March 1999 reorganization, which enabled it to lower costs and
increase its focus on engine and turbine manufacturers.
The termination benefits were associated with plans to reduce the
number of people in a facility that Industrial Controls shared
with our turbine control retrofit business, which was sold. By
June 30, 2000, 25 members of Industrial Controls had been
terminated and paid, and we identified and provided accruals
totaling $0.6 million for an additional 19.
<TABLE>
Other Segments
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
(In thousands) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
External net billings $20,606 $18,569 $69,342 $ 52,834)
Segment earnings (505) (207) 3,309 (5,079)
</TABLE>
On May 31, 2000, we sold the turbine control retrofit business of
Global Services. This sale resulted in a gain, which is
separately reported and excluded from segment earnings. While
this sale did not involve our Global Services business in its
entirety, it does impact both our three-month and nine-month
comparisons of external net billings and segment earnings of our
other segments.
External net billings of other segments increased in both the
three months and nine months ended June 30 in 2000 as compared to
1999. These increases primarily resulted from the turbine
control retrofit portion of Global Services, even though that
portion of our business was sold May 31, 2000. As a result of
this sale, our billings for these other segments are expected to
decrease by approximately 50% in the fourth quarter as compared
to the third quarter of 2000. However, the sale included a
product agreement for us to supply controls for application in
<PAGE>
the retrofit business that will increase external net billings of
Industrial Controls (and decrease its intersegment net billings).
Our other segments' results improved in the nine months ended
June 30 in 2000 as compared to 1999 primarily because of higher
billings and cost reductions in Global Services. In fiscal year
1999, that portion of our business generated losses. However,
following reorganization in March 1999 that resulted in an
increased focus on the control system retrofit needs of
industrial engine users, it improved its financial performance
and generated earnings in fiscal year 2000. Its results account
for most of the fiscal year 2000 improvement over fiscal year
1999. Improvements in Global Services were offset somewhat by
higher expenses in Automotive Products, primarily associated with
a more fully-developed selling and administrative infrastructure
for conducting business and the development of new products.
<TABLE>
Expenses (Income) Excluded From Segment Earnings
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
(In thousands) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Restructuring expense $ - $ - $ - $8,174
Interest expense 2,842 2,856 8,727 9,379
Interest income (214) (218) (553) (693)
Gain on sale of business (25,244) - (25,244) -
Corporate expenses 4,909 3,978 13,191 11,637
</TABLE>
Restructuring expense was recognized in the nine months ended
June 30, 1999, in connection with the March 1999 reorganization
and the consolidation of two of our facilities. Industrial
Controls was reorganized to separate the units serving engine and
turbine manufacturers from those that serve the retrofit market
to enable us to better focus on the precise needs of our
customers and to align staffing levels with expected demand. We
also consolidated two facilities.
Interest expense decreased in both the three months and nine
months ended June 30 in 2000 as compared to 1999 because we had
lower levels of average outstanding debt this year as compared to
last year, more than offsetting the effects of higher interest
rates. Most significantly, we reduced our debt toward the end of
our third quarter, 2000, as a result of proceeds generated from
the sale of our turbine control retrofit business. This
reduction will benefit future quarters.
In the third quarter, 2000, we sold certain assets for cash and
the buyer assumed certain liabilities. This transaction, which
was associated with our turbine control retrofit business,
resulted in a gain. The amount of the gain is an estimate,
subject to final closing audit adjustments. We expect the actual
amount of the gain to be finalized within the next few quarters.
Corporate expenses increased in the nine months ended June 30 in
2000 as compared to 1999 most significantly due to the
recognition of a gain of $1.0 million on the sale of non-
operating real estate last year.
<PAGE>
<TABLE>
Net Earnings
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
(In thousands, except
per share amounts) 2000 1999 2000 1999
<S> <C> <C> <C> <C>
Earnings before income
taxes and equity in
loss of unconsolidated
affiliate $39,809 $13,965 $58,750 $27,196
Income taxes 13,631 5,578 21,116 10,870
Equity in loss of
unconsolidated
affiliate, net of tax 13 308 90 979
Net earnings $26,165 $ 8,079 $37,544 $ 15,347
Basic earnings per share $2.33 $ .72 $3.34 $1.36
Diluted earnings per
share $2.32 $ .72 $3.33 $1.36
</TABLE>
The increase in earnings before income taxes and equity in loss
of unconsolidated affiliate resulted in an increase in income
taxes in both the three months and nine months ended June 30 in
2000 as compared to 1999. Our effective income tax rate
decreased primarily as a result of the sale of our turbine
control retrofit business, which will be taxed at an overall
effective rate that is lower than our business generally.
The equity in loss of unconsolidated affiliate reflects our share
of the losses generated by a 50/50 joint venture, GENXONT Power
Systems, LLC. Since its inception, most of the activities and
costs incurred were directly related to product development.
GENXON reduced the amount of development activities in both the
three months and nine months ended June 30 in 2000 as compared to
1999. GENXON is focused on the retrofit market for installed,
out-of-warranty industrial gas turbines, which we believed would
develop before the original equipment manufacturers markets
developed. However, the original equipment manufacturers have
shown strong interest in the technology and we continue to
monitor the direction of that market. In the meantime, GENXON's
costs will be significantly below the levels of those incurred in
fiscal year 1999.
Basic and diluted earnings per share increased in both the three
months and nine months ended June 30 in 2000 as compared to 1999
by approximately the same percentage as net earnings. Changes in
the weighted-average shares of common stock outstanding both
before and after the assumed exercise of outstanding stock
options were relatively small.
Without this year's gain on the sale of our turbine control
retrofit business and early retirement and other termination
benefits, net earnings for the three months ended June 30 would
have been $10.6 million ($0.94 per diluted share) in 2000
compared to $8.1 million ($0.72 per diluted share) in 1999. Also
without these items, and without last year's restructuring
expense and gain on the sale of real estate, net earnings for the
nine months ended June 30 would have been $24.1 million ($2.13
<PAGE>
per diluted share) in 2000 compared to $19.6 million ($1.74 per
diluted share) in 1999.
FINANCIAL CONDITION
Our discussion and analysis of our financial condition is
presented by segment for total segment assets, which consists of
accounts receivable, inventories, property, plant, and equipment-
net and intangibles-net. We also discuss and analyze our working
capital, noncurrent liabilities and shareholders' equity and cash
flows. Together, this discussion and analysis will help you
assess our liquidity and capital resources, as well as understand
changes in our financial condition.
<TABLE>
Assets
<CAPTION>
June 30, September
(In thousands) 2000 30, 1999
<S> <C> <C>
Aircraft Engine Systems $320,004 $ 330,299
Industrial Controls 113,676 126,344
Other Segments 30,902 40,129
Unallocated corporate property,
plant, and equipment-net and
intangibles-net 5,300 3,926
Other unallocated assets 54,707 49,966
Total assets $524,589 $ 550,664
</TABLE>
Aircraft Engine Systems' and Industrial Controls' total segment
assets at June 30, 2000, were lower than at September 30, 1999,
primarily because of decreases in accounts receivable. The
decreases in accounts receivable are principally attributable to
lower billing levels in the third quarter of fiscal year 2000 as
compared to the latter part of the fourth quarter of fiscal year
1999.
Included above with the other segments at September 30, 1999, are
assets related to the turbine control retrofit business we sold.
The total amount of segment assets sold is approximately $15
million.
<TABLE>
Selected Other Balance Sheet Items
<CAPTION>
June 30, September
(In thousands) 2000 30, 1999
<S> <C> <C>
Total assets $524,589 $550,664
Working capital (current assets less
current liabilities) 91,816 124,392
Long-term debt, less current portion 77,000 139,000
Other liabilities 47,282 46,620
Commitments and contingencies - -
Shareholders' equity 266,257 241,992
</TABLE>
Our balance sheet remained strong at June 30, 2000. Changes in
our balance sheet from September 30, 1999, included a reduction
in our long-term debt, made possible from cash flows generated
from ongoing operations and from the sale of our turbine control
retrofit business. Our working capital decreased primarily as a
result of reductions in Aircraft Engine Systems and Industrial
Controls accounts receivable (as indicated above) and from the
sale of our turbine control retrofit business.
<PAGE>
We are currently involved in matters of litigation arising from
the normal course of business, including certain environmental
and product liability matters. Further discussion of these
matters is in Note P to the Consolidated Financial Statements on
page 32 in our 1999 annual report to shareholders, which was
filed with our Form 10-K for the year ended September 30, 1999.
<TABLE>
Selected Cash Flow Items
<CAPTION>
Nine months ended
June 30,
(In thousands) 2000 1999
<S> <C> <C>
Net cash provided by operating activities $ 46,391 $ 41,354
Net cash provided by (used in) investing
activities 21,861 (14,589)
Net cash used in financing activities (63,032) (21,109)
</TABLE>
Net cash provided by operating activities improved in the nine
months ended June 30 in 2000 as compared to 1999, primarily as a
result of changes in accrued and deferred income taxes that
resulted from the gain on the sale of the turbine control
retrofit business. We expect to make higher tax payments in the
fourth quarter this year than we did last year as a result of
this gain.
Net cash provided by investing activities in the nine months
ended June 30, 2000, included proceeds from the sale of our
turbine control retrofit business. Excluding the proceeds from
this sale, net cash used in investing activities in the nine
months ended June 30, 2000, was $20.2 million. In the nine-month
period last year, we received cash from the sale of non-operating
real estate. In addition, our capital expenditures in the first
nine months of fiscal year 2000 were $3.9 million higher than
they were in the first nine months of fiscal year 1999. Of this
amount, approximately $1.4 million can be attributed to software
development costs not previously capitalized.
Net cash used for financing activities reflects our payment of
dividends and our reduction of debt, among other financing
activities, made possible by the net cash generated from
operating and investing activities. We reduced our debt by $55.2
million in the nine months ended June 30, 2000, and by $12.5
million in the nine months ended June 30, 1999. The most
significant reason for the increased debt reduction this year as
compared to last year is related to the sale of our turbine
control retrofit business.
Future cash flows from operations and available revolving lines
of credit are expected to be adequate to meet the investing and
financing cash requirements of our existing business during the
next twelve months. However, it is possible business
acquisitions could be made, during the next twelve months or in
the future, that would require amendments to existing debt
agreements and the need to obtain additional financing.
<PAGE>
OTHER MATTERS
Market Risks
Our long-term debt is sensitive to changes in interest rates.
Also, assets, liabilities and commitments that are to be settled
in cash and are denominated in foreign currencies are sensitive
to changes in currency exchange rates. These market risks are
discussed more fully in the Management Discussion and Analysis of
Results of Operations and Financial Condition on page 20 of our
1999 annual report to shareholders, which was filed with our Form
10-K for the year ended September 30, 1999.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal
Use." This statement provides guidance on accounting for the
costs of software developed or obtained for internal use and is
effective beginning October 1, 1999. As a result, we are now
capitalizing certain software development costs that we expensed
in the past. We have estimated that the effect of complying with
this statement for planned projects will be to increase net
earnings in fiscal year 2000 by approximately $0.8 million. Of
this amount, we have already recognized an increase in net
earnings of $0.7 million in the nine months ended June 30, 2000.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities." Following a
subsequent deferral of the original implementation date, it is
effective in fiscal year 2001. This statement establishes
accounting and reporting standards for derivative instruments and
for hedging activities. Among other requirements, it requires
that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at
fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative. The
company currently does not have any derivative instruments and
does not expect this new statement to have any significant impact
on our consolidated financial statements.
<PAGE>
PART II - OTHER INFORMATION
Item 6(b)
b) No Form 8-K was filed for the quarter ended June 30, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
WOODWARD GOVERNOR COMPANY
July 31, 2000 /s/ John A. Halbrook
John A. Halbrook, President
and Chief Executive Officer
July 31, 2000 s/ Stephen P. Carter
Stephen P. Carter, Vice President,
Chief Financial Officer and Treasurer
