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 March 31, 2001 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 April 30, 2001, 11,316,377 shares of common stock with a par value of $.00875 cents per share were outstanding.
TABLE OF CONTENTS <TABLE> <CAPTION> Page <S> <C> Part I Item 1. Financial Statements 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 Item 4. Submission of Matters to a Vote of Security Holders 16 Part II. Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17 </TABLE>
Part I ITEM 1. FINANCIAL STATEMENTS Statements of Consolidated Earnings WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES <TABLE> <CAPTION> - -------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, - -------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2001 2000 <S> <C> <C> Net Sales $170,176 $149,085 - -------------------------------------------------------------------------------- Costs and expenses: Cost of goods sold 128,585 116,340 Sales, general, and administrative expenses 17,007 20,148 Amortization of intangible assets 1,722 1,508 Interest expense 2,336 3,076 Interest income (289) (165) Other expense - net (26) (629) - -------------------------------------------------------------------------------- Total costs and expenses 149,335 140,278 - -------------------------------------------------------------------------------- Earnings before income taxes 20,841 8,807 Income taxes 8,169 3,435 - -------------------------------------------------------------------------------- Net earnings $ 12,672 $5,372 ================================================================================ Basic earnings per share $ 1.12 $ 0.48 ================================================================================ Diluted earnings per share $ 1.10 $ 0.48 ================================================================================ Weighted-average number of basic shares outstanding 11,316 11,241 ================================================================================ Weighted-average number of diluted shares outstanding 11,524 11,260 ================================================================================ Cash dividends per share $ 0.2325 $ 0.2325 ================================================================================ </TABLE> SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 1
Statements of Consolidated Earnings WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES <TABLE> <CAPTION> - -------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, - -------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2001 2000 - -------------------------------------------------------------------------------- <S> <C> <C> Net Sales $320,906 $282,677 Costs and expenses: Cost of goods sold 241,986 215,993 Sales, general, and administrative expenses 32,293 38,669 Amortization of intangible assets 3,367 3,175 Interest expense 4,515 5,885 Interest income (568) (339) Other expense - net 530 475 - -------------------------------------------------------------------------------- Total costs and expenses 282,123 263,858 - -------------------------------------------------------------------------------- Earnings before income taxes 38,783 18,819 Income taxes 15,203 7,440 - -------------------------------------------------------------------------------- Net earnings $ 23,580 $ 11,379 ================================================================================ Basic earnings per share $ 2.08 $ 1.01 ================================================================================ Diluted earnings per share $ 2.05 $ 1.01 ================================================================================ Weighted-average number of basic shares outstanding 11,316 11,258 ================================================================================ Weighted-average number of diluted shares outstanding 11,498 11,285 ================================================================================ Cash dividends per share $ 0.4650 $ 0.4650 ================================================================================ </TABLE> SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 2
Consolidated Balance Sheets WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES <TABLE> <CAPTION> =================================================================================== At March At September (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 31, 2001 30, 2000 - ----------------------------------------------------------------------------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $9,206 $9,315 Accounts receivable, less allowance for losses of $3,542 for March and $4,452 for September 107,329 105,153 Inventories 113,438 102,990 Deferred income taxes 16,903 16,835 - ----------------------------------------------------------------------------------- Total current assets 246,876 234,293 - ----------------------------------------------------------------------------------- Property, plant, and equipment, at cost: Land 5,814 6,032 Buildings and improvements 128,311 127,825 Machinery and equipment 235,656 233,188 Construction in progress 1,903 3,364 - ----------------------------------------------------------------------------------- 371,684 370,409 Accumulated depreciation 252,831 247,951 - ----------------------------------------------------------------------------------- Property, plant, and equipment - net 118,853 122,458 Intangibles - net 151,142 150,118 Other assets 9,874 8,450 Deferred income taxes 18,211 18,404 - ----------------------------------------------------------------------------------- TOTAL ASSETS $544,956 $533,723 =================================================================================== </TABLE> BALANCE SHEETS CONTINUED ON NEXT PAGE. 3
Consolidated Balance Sheets - Continued WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES <TABLE> <CAPTION> =================================================================================== At March At September (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 31, 2001 30, 2000 - ----------------------------------------------------------------------------------- <S> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 11,370 $ 21,284 Current portion of long-term debt 37,500 22,500 Accounts payable and accrued expenses 68,830 81,342 Income taxes payable 7,843 8,331 - ----------------------------------------------------------------------------------- Total current liabilities 125,543 133,457 - ----------------------------------------------------------------------------------- Long-term debt, less current portion 74,500 74,500 Other liabilities 51,302 50,142 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 13,352 13,295 Unearned ESOP compensation (5,552) (5,308) Accumulated other comprehensive earnings 2,648 3,045 Retained earnings 302,897 284,431 - ----------------------------------------------------------------------------------- 313,451 295,569 Less treasury stock, at cost 19,840 19,945 - ----------------------------------------------------------------------------------- Total shareholders' equity 293,611 275,624 - ----------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $544,956 $533,723 =================================================================================== </TABLE> SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4
Statements of Consolidated Cash Flows WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES <TABLE> <CAPTION> - -------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, - -------------------------------------------------------------------------------- (IN THOUSANDS OF DOLLARS) 2001 2000 - -------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $23,580 $11,379 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 16,628 14,899 Net (gain)/loss on sale of property, plant, and equipment 575 (183) Deferred income taxes 125 1,537 ESOP compensation expense (244) (179) Equity in loss of unconsolidated affiliate - 122 Changes in operating assets and liabilities, net of business acquisitions and sale: Accounts receivable (1,863) 21,256 Inventories (9,903) (5,361) Current liabilities, other than short- term borrowings and current portion of long-term debt (10,465) (16,048) Other - net (347) (710) - -------------------------------------------------------------------------------- Total adjustments (5,494) 15,333 - -------------------------------------------------------------------------------- Net cash provided by operating activities 18,086 26,712 - -------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for purchase of property, plant, and equipment (10,535) (14,270) Proceeds from sale of property, plant, and equipment 291 1,048 Payments associated with sale of business (2,821) - Business acquisitions, net of cash acquired (4,556) - - -------------------------------------------------------------------------------- Net cash used in investing activities (17,621) (13,222) - -------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid (5,262) (5,233) Proceeds from sales of treasury stock 162 803 Purchases of treasury stock - (1,762) Net proceeds from borrowings under revolving lines 14,767 5,786 Payments of long-term debt (10,000) (9,500) Tax benefit applicable to ESOP dividend and stock options 148 206 - -------------------------------------------------------------------------------- Net cash used in financing activities ( 185) (9,700) - -------------------------------------------------------------------------------- Effect of exchange rate changes on cash (389) (695) - -------------------------------------------------------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS ( 109) 3,095 Cash and cash equivalents, beginning of year 9,315 10,449 - -------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 9,206 $13,544 ================================================================================ SUPPLEMENTAL CASH FLOW INFORMATION: Interest expense paid $ 4,640 $ 6,510 Income taxes paid $15,186 $ 9,844 NONCASH INVESTING: Liabilities assumed in business acquisition (sale) - net $ (81) $ - </TABLE> SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 5
Notes to Consolidated Financial Statements (1) The consolidated balance sheet as of March 31, 2001, the statements of consolidated earnings for the three and six-month periods ended March 31, 2001 and 2000, and the statements of consolidated cash flows for the six-month periods ended March 31, 2001 and 2000, were prepared by the company without audit. The September 30, 2000, 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 March 31, 2001, the results of its operations for the three and six-month periods ended March 31, 2001 and 2000, and its cash flows for the six-month periods ended March 31, 2001 and 2000. All such adjustments were of a normal and recurring nature. The statements were prepared following the accounting policies described in the company's 2000 annual report on Form 10-K and should be read with the Notes to Consolidated Financial Statements on pages 26-33 of the 2000 annual report to shareholders. The statements of consolidated earnings for the three and six-month periods ended March 31, 2001, are not necessarily indicative of the results to be expected for other interim periods or for the full year. (2) In the statements of consolidated earnings, amounts reported under the caption other expense-net include our equity in loss of an unconsolidated affiliate. Prior to the first quarter of the year ending September 30, 2001, we reported our equity in loss of this unconsolidated affiliate as a separate line in the statement. Amounts reported for the three months and six months ended March 31, 2000, have been reclassified to be consistent with the current presentation. (3) On November 3, 2000, we acquired the stock of Hoeflich Controls, Inc., a manufacturer of ignition systems, and related assets for $5,050,000. The acquisition was accounted for using the purchase method of accounting and results of operations of the acquired company were included in our consolidated results from the acquisition date. The excess of the purchase price over the estimated fair value of tangible and identified intangible net assets acquired is being amortized over 15 years. Under terms of the purchase agreement, we could be required to make an additional payment of up to $1,200,000 in fiscal year 2004, contingent upon attaining certain investment and sales volumes, as defined by the agreement. We currently expect any additional payment to be accounted for as additional purchase price to be allocated among intangible assets acquired. Pro forma information of our consolidated results of operations as if the acquisition had been completed at the beginning of fiscal year 2000 have not been included as the resulting pro forma data would not be materially different from the results reported. 6
(4) Earnings per share: <TABLE> <CAPTION> -------------------------------------------------------------------------------- THREE MONTHS SIX MONTHS ENDED ENDED MARCH 31, MARCH 31, -------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2001 2000 2001 2000 -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net earnings (A) $12,672 $ 5,372 $23,580 $11,379 -------------------------------------------------------------------------------- Determination of shares: Weighted-average shares of common stock outstanding (B) 11,316 11,241 11,316 11,258 Assumed exercise of stock options 208 19 182 27 -------------------------------------------------------------------------------- Weighted-average shares of common stock outstanding assuming dilution (C) 11,524 11,260 11,498 11,285 ================================================================================ Basic earnings per share (A/B) $1.12 $0.48 $2.08 $ 1.01 Diluted earnings per share (A/C) $1.10 $0.48 $2.05 $ 1.01 ================================================================================ </TABLE> All outstanding stock options during the three months and six months ended March 31, 2001, were included in the above computation. The following stock options were outstanding during the three months and six months ended March 31, 2000, 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: 509,498 options at a weighted-average exercise price of $27.63 for the three-month period; and 362,898 options at a weighted-average exercise price of $29.30 for the six-month period. (5) Inventories: <TABLE> <CAPTION> -------------------------------------------------------------------------------- AT MARCH AT SEPTEMBER (IN THOUSANDS OF DOLLARS) 31, 2001 30, 2000 -------------------------------------------------------------------------------- <S> <C> <C> Raw materials $3,315 $3,056 Component parts 60,783 58,559 Work in process 31,699 27,315 Finished goods 17,641 14,453 -------------------------------------------------------------------------------- 113,438 103,383 Less progress payments - (393) -------------------------------------------------------------------------------- $113,438 $102,990 ================================================================================ </TABLE> (6) Included in accounts payable and accrued expenses are accounts payable of $21,340,000 at March 31, 2001, and $25,065,000 at September 30, 2000. (7) 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: 7
<TABLE> <CAPTION> -------------------------------------------------------------------------------- THREE MONTHS SIX MONTHS ENDED ENDED MARCH 31, MARCH 31, (IN THOUSANDS) 2001 2000 2001 2000 -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net earnings $12,672 $5,372 $23,580 $11,379 Other comprehensive gains (losses) 968 (2,369) (397) (3,494) -------------------------------------------------------------------------------- Total comprehensive earnings $13,640 $3,003 $23,183 $7,885 ================================================================================ </TABLE> (8) Segment information: <TABLE> <CAPTION> -------------------------------------------------------------------------------- THREE MONTHS SIX MONTHS ENDED ENDED MARCH 31, MARCH 31, (IN THOUSANDS) 2001 2000 2001 2000 -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Industrial Controls: External net sales $95,180 $83,717 $178,225 $161,015 Intersegment sales 372 291 549 398 Segment earnings 13,381 12,100 25,838 24,282 -------------------------------------------------------------------------------- Aircraft Engine Systems: External net sales $74,996 $65,368 $142,681 $121,662 Intersegment sales 1,080 336 1,614 601 Segment earnings 14,165 4,014 26,657 8,457 ================================================================================ </TABLE> Portions of Industrial Controls were previously reported as Aircraft Engine Systems or Other Segments. Amounts for 2000 in the information above have been restated to be consistent with the current composition of our segments. The reconciliation between the total of segment earnings and the statements of consolidated earnings follows: <TABLE> <CAPTION> -------------------------------------------------------------------------------- THREE MONTHS SIX MONTHS ENDED ENDED MARCH 31, MARCH 31, (IN THOUSANDS) 2001 2000 2001 2000 -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Total segment earnings $27,546 $16,114 $52,495 $32,739 Interest expense and interest income (2,047) (2,911) (3,947) (5,546) Unallocated corporate expenses (4,658) (4,396) (9,765) (8,374) Consolidated earnings before income taxes $20,841 $8,807 $38,783 $18,819 ================================================================================ </TABLE> Segment assets were as follows: <TABLE> <CAPTION> -------------------------------------------------------------------------------- AT MARCH AT SEPTEMBER (IN THOUSANDS) 31, 2001 30, 2000 -------------------------------------------------------------------------------- <S> <C> <C> Industrial Controls $234,198 $214,935 Aircraft Engine Systems 252,278 260,712 ================================================================================ </TABLE> 8
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS We 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 of our 2000 annual report to shareholders, which was filed with our Form 10-K for the year ended September 30, 2000. Statements in this discussion and analysis concerning the company's future sales, earnings, business performance, and prospects reflect current expectations and are forward-looking statements that involve risks and uncertainties. Actual results could differ materially from projections or any other forward-looking statement and we have no obligation to update our forward-looking statements. Factors that could affect performance and could cause results to differ materially from projections and forward-looking statements are described in the cautionary statement referred to above. Results of Operations Our results of operations are discussed and analyzed by segment. We have two segments--Industrial Controls and Aircraft Engine Systems. Industrial Controls provides energy control systems and components primarily to OEMs (original equipment manufacturers) of industrial engines and turbines. Aircraft Engine Systems provides energy control systems and components primarily to OEMs of aircraft engines. Portions of Industrial Controls, related to the manufacture and sale of fuel injection nozzles for industrial markets, control systems and related services for industrial users in retrofit situations, and products for small industrial engine markets, were previously reported as Aircraft Engine Systems or Other Segments. Prior-year amounts in the financial information that follows have been restated to be consistent with the current composition of our segments. The segment earnings reported in this discussion and analysis do not reflect allocations of corporate expenses, and are before interest and income taxes. These other items are separately discussed and analyzed. Industrial Controls <TABLE> <CAPTION> ====================================================================== Three months ended Six months ended March 31, March 31, ---------------------------------------------------------------------- IN THOUSANDS 2001 2000 2001 2000 ---------------------------------------------------------------------- <S> <C> <C> <C> <C> External net sales $95,180 $83,717 $178,225 $161,015 Segment earnings 13,381 12,100 25,838 24,282 ====================================================================== </TABLE> External net sales for Industrial Controls increased in both the three months and six months ended March 31, 2001 as compared to the corresponding periods last year. Included 9
in last year's amounts were sales from a portion of Industrial Controls that was divested on May 31, 2000. Although the actual amount of sales associated with this portion of our business has not been determined, we believe it had annual sales of approximately $50 million. We continue to manufacture and sell components used in the business to the buyer, accounting for approximately $2.4 million of sales in the three-month period and $4.4 million of sales in the six-month period this year. If adjusted for the effects of the divestiture, our sales increase in both the three-month and six-month periods was much higher than reflected above. This increase was broadly based both geographically and across Woodward's energy control technologies, led by gas turbine fuel systems and controls, as well as other systems and components used in power generation. While the power generation market is particularly active, demand in each of Industrial Controls' principal target markets is healthy and growing. Other key global markets for Industrial Controls include transportation, particularly marine propulsion, and process industries, notably oil and gas exploration. These markets are quite receptive to our systems and controls that can reduce operating costs and lower emissions. Segment earnings for Industrial Controls also increased in both the three months and six months ended March 31, 2001, as compared to the corresponding periods last year. The increases in earnings would have been higher if the divested operations, which last year generated earnings in proportion to sales similar to the rest of Industrial Controls, had been excluded from last year's comparison amounts. The earnings increase occurred despite major increases in new product development activity this year over the same periods last year, much of which represents adaptations of existing product platforms for specific OEM customers that will begin shipping later this year or in 2002. Also, in the second fiscal quarter, we incurred expenses related to the relocation of operations from our Oak Ridge, Tennessee facility to facilities in Colorado. This relocation was initiated to more closely align the small industrial engine operations, which were previously performed in Oak Ridge, with the remainder of Industrial Controls, and is expected to benefit earnings in future periods. We expect Industrial Controls' sales for the last half of the year will be about 15 percent higher than sales were in the first half of the year, with some improvement in gross margins (net sales less cost of sales). Aircraft Engine Systems <TABLE> <CAPTION> ====================================================================== Three months ended Six months ended March 31, March 31, ---------------------------------------------------------------------- IN THOUSANDS 2001 2000 2001 2000 ---------------------------------------------------------------------- <S> <C> <C> <C> <C> External net sales $74,996 $65,368 $142,681 $121,662 Segment earnings 14,165 4,014 26,657 8,457 ====================================================================== </TABLE> 10
External net sales for Aircraft Engine Systems increased in both the three months and six months ended March 31, 2001, as compared to the corresponding periods last year. This increase reflected strength in sales of both regional and narrow-body commercial jet engine fuel delivery systems, as well as higher volumes of military spare parts and commercial aftermarket activities. Segment earnings for Aircraft Engine Systems also increased significantly in both the three months and six months ended March 31, 2001, as compared to the corresponding periods last year. Included in both the three-month and six-month periods last year was a charge related to an early retirement program, which was partially offset by a reduction in certain accruals related to a prior business acquisition. Together, these items reduced last year's segment earnings by $2.5 million. The remainder of the improvement in earnings reflected the impact of higher sales and cost reduction actions initiated in the second quarter of fiscal 2000. In particular, our cost of goods sold was relatively high in the first half of fiscal 2000. Following last year's workforce management program, which aligned staffing levels with expected demand, and other cost reduction actions, our cost of goods sold as a percent of sales decreased to levels comparable to those in fiscal year 1999. We expect Aircraft Engine Systems' sales for the full year will be about 5 percent higher than sales last year (which totaled $266.4 million), with gross margins similar to those generated in the first half of this year. Nonsegment Expenses <TABLE> <CAPTION> ====================================================================== Three months Six months ended ended March 31, March 31, ---------------------------------------------------------------------- IN THOUSANDS 2001 2000 2001 2000 ---------------------------------------------------------------------- <S> <C> <C> <C> <C> Interest expense $2,336 $3,076 $4,515 $5,885 Interest income (289) (165) (568) (339) Corporate expenses 4,658 4,396 9,765 8,374 ====================================================================== </TABLE> Interest expense decreased in both the three months and six months ended March 31, 2001, as compared to the corresponding periods last year because we had lower levels of average outstanding debt this year. Corporate expenses not allocated to segments were higher in the three-month and six-month periods this year as compared to the same periods last year primarily because we capitalized certain ongoing member costs that were associated with a project involving our business system software as internal software development costs last year and we provided more for variable compensation plans this year as a result of improved companywide performance. Other corporate expenses, on a net basis, decreased from last year. 11
Net Earnings <TABLE> <CAPTION> ====================================================================== Three months Six months ended ended March 31, March 31, ---------------------------------------------------------------------- IN THOUSANDS EXCEPT PER SHARE AMOUNTS 2001 2000 2001 2000 ---------------------------------------------------------------------- <S> <C> <C> <C> <C> Earnings before income taxes $20,841 $8,807 $38,783 $18,819 Income taxes 8,169 3,435 15,203 7,440 ---------------------------------------------------------------------- Net earnings $12,672 $5,372 $23,580 $11,379 ====================================================================== Basic earnings per share $1.12 $ .48 $2.08 $1.01 Diluted earnings per share 1.10 .48 2.05 1.01 ====================================================================== </TABLE> Income taxes were provided at an effective rate of 39.2% of earnings in the six-month period ended March 31, 2001, compared to 39.5% for the same period last year, reduced because nondeductible expenses were less significant relative to pretax earnings this year than a year ago. Last year, our effective tax rate was 40.0% in the first quarter and was reduced to 39.5% for the first six months of the year. Net earnings increased in both the three months and six months ended March 31, 2001, as compared to the corresponding periods last year. Without the early retirement charge and the reduction in acquisition-related accruals in last year's second quarter, net earnings would have been $6.9 million ($0.61 per basic and diluted share) for the three months ended March 31, 2000, and $12.9 million ($1.14 per basic and diluted share) for the six months ended March 31, 2000. We believe that we are on track to achieve about 10 percent growth in net sales, without considering the impact of any new acquisitions, and 25 percent growth in net earnings, not including any one-time gains or expenses, for the year ended September 30, 2001, over the year ended September 30, 2000. However, ongoing investments in product development will tend to pressure third and fourth quarter results compared to relatively strong quarters in 2000. Long-term, we believe that our competitive strength in both Industrial Controls and Aircraft Engine Systems, combined with long, favorable cycles in a number of our target markets, particularly for power generation equipment, will enable us to deliver 15% annual growth on average in earnings per share, before one-time gains or expenses, over the next three or four years. 12
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. Assets <TABLE> <CAPTION> ------------------------------------------------------------------------ At March At September IN THOUSANDS 31, 2001 30, 2000 ------------------------------------------------------------------------ <S> <C> <C> Total segment assets: Industrial Controls $234,198 $214,935 Aircraft Engine Systems 252,278 260,712 Unallocated corporate property, plant, and equipment - net 4,286 5,072 Other unallocated assets 54,194 53,004 ------------------------------------------------------------------------ Total assets $544,956 $533,723 ======================================================================== </TABLE> Industrial Controls' total segment assets at March 31, 2001, increased over the amount at September 30, 2000, because of higher sales activity, which impacted both accounts receivable and inventories, and the first quarter 2001 acquisition of Hoeflich Controls, Inc. and related assets. Aircraft Engine Systems' total segment assets at March 31, 2001, decreased from the amount at September 30, 2000, primarily because of differences in sales volumes in the periods immediately preceding the balance sheet dates and the impact such changes have on accounts receivable balances. Other Balance Sheet Measures <TABLE> <CAPTION> ------------------------------------------------------------------------ At March At September IN THOUSANDS 31, 2001 30, 2000 ------------------------------------------------------------------------ <S> <C> <C> Total assets $544,956 $533,723 Working capital 121,333 100,836 Long-term debt, less current portion 74,500 74,500 Other liabilities 51,302 50,142 Commitments and contingencies - - Shareholders' equity $293,611 $275,624 ======================================================================== </TABLE> 13
Our balance sheet remained strong at March 31, 2001. The increase in working capital (current assets less current liabilities) over the September 30, 2000, amount was most significantly due to reductions in accounts payable and accrued expenses that included the impact of making annual payments associated with variable compensation plans and defined contribution benefit plans, and increases in inventory caused by anticipated sales growth. The increase in shareholders' equity over the September 30, 2000, amount was primarily due to the excess of net earnings over dividends. 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 in the notes to consolidated financial statements in our 2000 annual report to shareholders, which was filed with our Form 10-K for the year ended September 30, 2000. Cash Flows <TABLE> <CAPTION> --------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, --------------------------------------------------------------------- IN THOUSANDS 2001 2000 --------------------------------------------------------------------- <S> <C> <C> Net cash provided by operating activities $18,086 $26,712 Net cash used in investing activities (17,621) (13,222) Net cash used in financing activities (185) (9,700) ===================================================================== </TABLE> Net cash flows provided by operations decreased in the six months ended March 31, 2001 as compared to the same period last year. Although we generated more earnings in the current year, the timing of sales billings and collections was such that our accounts receivable did not decrease in the six-month period this year as much as last year. Other factors impacting operating cash flows were less significant. In both years, cash flows were impacted by annual payments associated with variable compensation plans and defined contribution benefit plans. Net cash flows used in investing activities increased in the six months ended March 31, 2001 as compared to the same period last year primarily because of the acquisition of Hoeflich Controls, Inc. and related assets in the first quarter of fiscal year 2001. Capital expenditures in the six-month period this year were $3.7 million lower than they were in the same period last year. Of this amount, $1.0 million related to internal software development costs that we capitalized last year. The project that those expenditures related to was completed last year. Currently, there are no ongoing or planned software development projects similar in size or scope to that project. The remaining difference is related to both normal quarterly variations in capital expenditure rates and an expectation for lower capital expenditures for the full fiscal year 2001 as compared to fiscal year 2000, to be more in line with depreciation expense. We also made payments totaling $2.8 million associated with amounts previously accrued for the May 31, 2000, sale of the turbine control retrofit business. 14
Net cash flows used in financing activities decreased in the six months ended March 31, 2001, as compared to the same period last year. In the six-month period this year, we borrowed, on a net basis, $4.8 million. Last year, we reduced debt, on a net basis, $3.7 million. In both periods, borrowings were used to maintain cash at a relatively stable level. Increases or decreases in debt, therefore, were related primarily to cash flows generated from operating and investing activities, as discussed above, less the payment of dividends (which were at similar amounts in both years). Future cash flows from operations and available revolving lines of credit are expected to be adequate to meet our 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. Recent Accounting Pronouncements In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." This bulletin provides interpretations and practices followed by the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the Federal securities laws regarding revenue recognition. It is effective for us no later than July 1, 2001. We have completed a review of our current revenue recognition practices and have not discovered any revenue recognition practices that would need to change in order to comply with this bulletin. As a result, compliance with this bulletin is not expected to have any impact on our consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk 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 on page 21 of our 2000 annual report to shareholders, which was filed with our Form 10-K for the year ended September 30, 2000. 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the January 24, 2001 Annual Meeting of Shareholders, the election of four Class II directors was submitted to a vote. The results of the voting were as follows: <TABLE> <CAPTION> ------------------------------------------------------------------ Number of Number of Shares Director Shares For Against/Withheld ------------------------------------------------------------------ <S> <C> <C> Vern H. Cassens 9,606,279 585,056 Thomas W. Heenan 9,945,413 245,922 Michael H. Joyce 9,991,811 199,524 Lou L. Pai 9,476,356 714,966 ================================================================== </TABLE> PART II ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Filed as Part of this Report. (3) (ii) By-laws, as amended (b) Reports Filed on Form 8-K During the Second Quarter of the Fiscal Year Ending September 30, 2001. None. 16
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 MAY 1, 2001 /s/John A. Halbrook - ------------------------------ John A. Halbrook, President and Chief Executive Officer MAY 1, 2001 /s/Stephen P. Carter - ------------------------------ Stephen P. Carter, Vice President, Chief Financial Officer and Treasurer 17