<Page> 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, 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 ----- ----- As of July 26, 2001, 11,320,858 shares of common stock with a par value of $.00875 cents per share were outstanding. <Page> 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 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 Part II. Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 </Table> <Page> Part I ITEM 1. FINANCIAL STATEMENTS Statements of Consolidated Earnings WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES <Table> <Caption> - -------------------------------------------------------------------------------- THREE MONTHS ENDED JUNE 30, - -------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2001 2000 - -------------------------------------------------------------------------------- <S> <C> <C> Net Sales $182,508 $155,496 - -------------------------------------------------------------------------------- Costs and expenses: Cost of goods sold 137,702 116,717 Sales, general, and administrative expenses 20,270 19,980 Amortization of intangible assets 1,701 1,631 Interest expense 1,652 2,842 Interest income (147) (214) Other expense - net (1,051) (5) Gain on sale of business - (25,244) - -------------------------------------------------------------------------------- Total costs and expenses, net of gain 160,127 (5) - -------------------------------------------------------------------------------- Earnings before income taxes 22,381 39,789 Income taxes 8,653 13,624 - -------------------------------------------------------------------------------- Net earnings $ 13,728 $ 26,165 ================================================================================ Basic earnings per share $ 1.21 $ 2.33 ================================================================================ Diluted earnings per share $ 1.18 $ 2.32 ================================================================================ Weighted-average number of basic shares outstanding 11,319 11,252 ================================================================================ Weighted-average number of diluted shares outstanding 11,603 11,275 ================================================================================ Cash dividends per share $ 0.2325 $ 0.2325 ================================================================================ </Table> SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 1 <Page> Statements of Consolidated Earnings WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES <Table> <Caption> - -------------------------------------------------------------------------------- NINE MONTHS ENDED JUNE 30, - -------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2001 2000 - -------------------------------------------------------------------------------- <S> <C> <C> Net Sales $503,414 $438,173 - -------------------------------------------------------------------------------- Costs and expenses: Cost of goods sold 379,688 332,710 Sales, general, and administrative expenses 52,563 58,649 Amortization of intangible assets 5,068 4,806 Interest expense 6,167 8,727 Interest income (715) (553) Other expense - net (521) 470 Gain on sale of business - (25,244) - -------------------------------------------------------------------------------- Total costs and expenses, net of gain 442,250 379,565 - -------------------------------------------------------------------------------- Earnings before income taxes 61,164 58,608 Income taxes 23,856 21,064 - -------------------------------------------------------------------------------- Net earnings $ 37,308 $ 37,544 ================================================================================ Basic earnings per share $ 3.30 $ 3.34 ================================================================================ Diluted earnings per share $ 3.23 $ 3.33 ================================================================================ Weighted-average number of basic shares outstanding 11,317 11,256 ================================================================================ Weighted-average number of diluted shares outstanding 11,541 11,284 ================================================================================ Cash dividends per share $ 0.6975 $ 0.6975 ================================================================================ </Table> SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 2 <Page> Consolidated Balance Sheets WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES <Table> <Caption> ================================================================================ At June At September (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 30, 2001 30, 2000 - -------------------------------------------------------------------------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 6,712 $ 9,315 Accounts receivable, less allowance for losses of $3,145 for June and $4,452 for September 112,689 105,153 Inventories 118,279 102,990 Deferred income taxes 17,662 16,835 - -------------------------------------------------------------------------------- Total current assets 255,342 234,293 - -------------------------------------------------------------------------------- Property, plant, and equipment, at cost: Land 7,741 6,032 Buildings and improvements 129,979 127,825 Machinery and equipment 240,850 233,188 Construction in progress 1,672 3,364 - -------------------------------------------------------------------------------- 380,242 370,409 Accumulated depreciation 253,892 247,951 - -------------------------------------------------------------------------------- Property, plant, and equipment - net 126,350 122,458 Intangibles - net 166,081 150,118 Other assets 10,605 8,450 Deferred income taxes 17,328 18,404 - -------------------------------------------------------------------------------- TOTAL ASSETS $575,706 $533,723 ================================================================================ </Table> BALANCE SHEETS CONTINUED ON NEXT PAGE. 3 <Page> <Table> <Caption> ============================================================================================ At June At September (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 30, 2001 30, 2000 - -------------------------------------------------------------------------------------------- <S> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 22,437 $ 21,284 Current portion of long-term debt 22,500 22,500 Accounts payable and accrued expenses 82,485 81,342 Income taxes payable 9,883 8,331 - -------------------------------------------------------------------------------------------- Total current liabilities 137,305 133,457 - -------------------------------------------------------------------------------------------- Long-term debt, less current portion 84,500 74,500 Other liabilities 51,530 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 13,434 13,295 Unearned ESOP compensation (5,674) (5,308) Accumulated other comprehensive earnings 118 3,045 Retained earnings 314,120 284,431 - -------------------------------------------------------------------------------------------- 322,104 295,569 Less treasury stock, at cost 19,733 19,945 - -------------------------------------------------------------------------------------------- Total shareholders' equity 302,371 275,624 - -------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $575,706 $533,723 ============================================================================================ </Table> SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4 <Page> Statements of Consolidated Cash Flows WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES <Table> <Caption> ========================================================================================= NINE MONTHS ENDED JUNE 30, - ----------------------------------------------------------------------------------------- (IN THOUSANDS) 2001 2000 - ----------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $37,308 $37,544 - ----------------------------------------------------------------------------------------- Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 24,669 23,014 Net (gain)/loss on sale of property, plant, and equipment 924 (148) Gain on sale of business - (25,244) Deferred income taxes 249 2,826 ESOP compensation expense (366) (269) Equity in loss of unconsolidated affiliate - 142 Changes in operating assets and liabilities, net of business acquisitions and sale: Accounts receivable (8,848) 10,947 Inventories (14,045) (3,912) Current liabilities, other than short- term borrowings and current portion of long-term debt 5,148 3,595 Other - net (814) (2,104) - ----------------------------------------------------------------------------------------- Total adjustments 6,917 8,847 - ----------------------------------------------------------------------------------------- Net cash provided by operating activities 44,225 46,391 - ----------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for purchase of property, plant, and equipment (17,019) (21,287) Proceeds from sale of property, plant, and equipment 343 1,121 Proceeds from sale of business - net of direct costs - 42,027 Payments associated with sale of business (3,886) - Business acquisitions, net of cash acquired (29,942) - - ----------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (50,504) 21,861 - ----------------------------------------------------------------------------------------- </Table> CASH FLOWS CONTINUED ON NEXT PAGE. 5 <Page> <Table> <Caption> =============================================================================================== NINE MONTHS ENDED JUNE 30, - ----------------------------------------------------------------------------------------------- (IN THOUSANDS) 2001 2000 - ----------------------------------------------------------------------------------------------- <S> <C> <C> CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid (7,893) (7,847) Proceeds from sales of treasury stock 351 1,423 Purchases of treasury stock - (1,762) Net proceeds (payments) from borrowings under revolving lines 26,308 (43,910) Payments of long-term debt (15,000) (11,250) Tax benefit applicable to ESOP dividend and stock options 274 314 - ----------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 4,040 (63,032) - ----------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (364) (1,270) - ----------------------------------------------------------------------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (2,603) 3,950 Cash and cash equivalents, beginning of year 9,315 10,449 - ----------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 6,712 $14,399 =============================================================================================== SUPPLEMENTAL CASH FLOW INFORMATION: Interest expense paid $ 6,437 $ 9,668 Income taxes paid $21,934 $12,506 NONCASH INVESTING: Liabilities assumed in business acquisitions (sale) - net $ 1,071 $(2,739) </Table> SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 6 <Page> Notes to Consolidated Financial Statements (1) The consolidated balance sheet as of June 30, 2001, the statements of consolidated earnings for the three and nine-month periods ended June 30, 2001 and 2000, and the statements of consolidated cash flows for the nine-month periods ended June 30, 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 June 30, 2001, the results of its operations for the three and nine-month periods ended June 30, 2001 and 2000, and its cash flows for the nine-month periods ended June 30, 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 nine-month periods ended June 30, 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, net of tax, as a separate line in the statements. Amounts reported for the three months and nine months ended June 30, 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 $5,184,000, including direct costs related to the acquisition. 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. If we had completed the acquisition on October 1, 1999, net sales and net earnings for the nine-month periods ended June 30, 2001 and 2000, would not have been materially different from amounts reported in the Statements 7 <Page> of Consolidated Earnings. (4) On June 29, 2001, we acquired certain assets and assumed certain liabilities of the Bryce diesel fuel injection business of Delphi Automotive Systems for $25,386,000, including direct costs related to the acquisition. The acquisition was accounted for using the purchase method of accounting. The excess of the purchase price over the estimated fair value of tangible and identified intangible net assets acquired is being amortized over 20 years. If we had completed the acquisition on October 1, 1999, net sales and net earnings for the nine-month periods ended June 30, 2001 and 2000, would not have been materially different from amounts reported in the Statements of Consolidated Earnings. (5) Earnings per share: <Table> <Caption> --------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, --------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2001 2000 2001 2000 --------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net earnings (A) $13,728 $26,165 $37,308 $37,544 --------------------------------------------------------------------------------------------------- Determination of shares: Weighted-average shares of common stock outstanding (B) 11,319 11,252 11,317 11,256 Assumed exercise of stock options 284 23 224 28 --------------------------------------------------------------------------------------------------- Weighted-average shares of common stock outstanding assuming dilution (C) 11,603 11,275 11,541 11,284 =================================================================================================== Basic earnings per share (A/B) $1.21 $2.33 $3.30 $ 3.34 Diluted earnings per share (A/C) $1.18 $2.32 $3.23 $ 3.33 =================================================================================================== </Table> The following stock options were outstanding during the three months and nine months ended June 30, 2001 and 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. <Table> <Caption> --------------------------------------------------------------------------------------------------- THREE MONTHS NINE MONTHS ENDED ENDED JUNE 30, JUNE 30, --------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 --------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Options - 330,635 167,374 329,218 Weighted-average exercise price N/A $29.04 $69.22 $29.55 =================================================================================================== </Table> 8 <Page> (6) Inventories: <Table> <Caption> ------------------------------------------------------------------------------------------ AT JUNE AT SEPTEMBER (IN THOUSANDS) 30, 2001 30, 2000 ------------------------------------------------------------------------------------------ <S> <C> <C> Raw materials $ 3,071 $ 3,056 Component parts 63,155 58,559 Work in process 31,537 27,315 Finished goods 20,619 14,453 ------------------------------------------------------------------------------------------ 118,382 103,383 Less progress payments (103) (393) ------------------------------------------------------------------------------------------ $118,279 $102,990 ========================================================================================== </Table> (7) Accounts payable and other accrued expenses: <Table> <Caption> ------------------------------------------------------------------------------------------ AT JUNE AT SEPTEMBER (IN THOUSANDS) 30, 2001 30, 2000 ------------------------------------------------------------------------------------------ <C> <C> <C> Accounts payable $22,742 $25,065 Salaries and other member benefits 35,655 28,153 Other items - net 24,088 28,124 ------------------------------------------------------------------------------------------ $82,485 $81,342 ========================================================================================== </Table> (8) 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) 2001 2000 2001 2000 ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Net earnings $13,728 $26,165 $37,308 $37,544 Other comprehensive losses (2,530) (1,844) (2,927) (5,338) ----------------------------------------------------------------------------------------- Total comprehensive earnings $11,198 $24,321 $34,381 $32,206 ========================================================================================= </Table> 9 <Page> (9) Segment information: <Table> <Caption> ----------------------------------------------------------------------------------------- THREE MONTHS NINE MONTHS ENDED ENDED JUNE 30, JUNE 30, ----------------------------------------------------------------------------------------- (IN THOUSANDS) 2001 2000 2001 2000 ----------------------------------------------------------------------------------------- <C> <C> <C> <C> <C> Industrial Controls: External net sales $104,113 $86,921 $282,338 $247,936 Intersegment sales 10 168 559 566 Segment earnings 16,108 10,912 41,946 35,194 ----------------------------------------------------------------------------------------- Aircraft Engine Systems: External net sales $78,395 $68,575 $221,076 $190,237 Intersegment sales 818 861 2,432 1,462 Segment earnings 15,227 11,190 41,884 19,647 ========================================================================================= </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 difference between the total of segment earnings and the statements of consolidated earnings follows: <Table> <Caption> ----------------------------------------------------------------------------------------- THREE MONTHS NINE MONTHS ENDED ENDED JUNE 30, JUNE 30, ----------------------------------------------------------------------------------------- (IN THOUSANDS) 2001 2000 2001 2000 ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Total earnings for reportable segments $31,335 $22,102 $83,830 $54,841 Interest expense, interest income, gain on sale of business (1,505) 22,616 (5,452) 17,070 Unallocated corporate expenses (7,449) (4,929) (17,214) (13,303) ----------------------------------------------------------------------------------------- Consolidated earnings before income taxes $22,381 $39,789 $61,164 $58,608 ========================================================================================= </Table> Segment assets were as follows: <Table> <Caption> ----------------------------------------------------------------------------------------- AT JUNE AT SEPTEMBER (IN THOUSANDS) 30, 2001 30, 2000 ----------------------------------------------------------------------------------------- <S> <C> <C> Industrial Controls $268,366 $214,935 Aircraft Engine Systems 250,888 260,712 ========================================================================================= </Table> 10 <Page> 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 gain on sale of business or allocations of corporate expenses, and are before interest and income taxes. These other items are separately discussed and analyzed. <Table> <Caption> Industrial Controls ---------------------------------------------------------------------------- Three months Nine months ended ended June 30, June 30, ---------------------------------------------------------------------------- IN THOUSANDS 2001 2000 2001 2000 ---------------------------------------------------------------------------- <S> <C> <C> <C> <C> External net sales $104,113 $86,921 $282,338 $247,936 Segment earnings 16,108 10,912 41,946 35,194 ============================================================================ </Table> 11 <Page> External net sales for Industrial Controls increased in both the three months and nine months ended June 30, 2001 as compared to the corresponding periods last year. Included 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. If adjusted for the effects of the divestiture, our sales increase in both the three-month and nine-month periods would have been higher than reflected above. Our sales increase in Industrial Controls reflects strong demand for turbine and engine control products throughout the world, as well as new product introductions and market share gains. We benefited from continued strength in key end-markets, particularly power generation. We continue to encounter strong demand for energy-efficient, environmentally friendly control systems for turbines and engines. To capitalize on new technologies and the demand for broader functionality, Industrial Controls continues to develop new products and product lines. We expect over 30 new products will have entered production by the end of the year. These new products will contribute to sales growth over the next several quarters. In the third quarter, Industrial Controls announced an alliance with Leonhard-Reglerbau for networked system solutions targeting distributed power and centrally generated power applications, ranging from 100 kilowatts to 50 megawatts. In addition, at the end of the quarter, Industrial Controls acquired the Bryce diesel fuel injection business of Delphi Automotive Systems, which extends and complements Woodward's existing products for the important medium-speed diesel market. Fuel injection systems are vital to diesel engines used in power generation, marine, and locomotive applications, and are key to reducing emissions and improving engine fuel efficiency. Segment earnings for Industrial Controls increased in both the three months and nine months ended June 30, 2001, as compared to the corresponding periods last year. Segment earnings also increased over adjusted amounts for last year in both periods. Last year, we incurred expenses that we associated with the decision to sell our turbine control retrofit business. We also incurred certain expenses associated with the sudden and unexpected business failure of a customer located in Germany. We do not believe these expenses, which totaled $2.5 million in both the three-month and nine-month periods, are indicative of normal operations. Without these expenses, segment earnings would have been $13.4 million in the three months ended June 30, 2000, and $37.3 million in the nine months ended June 30, 2000. 12 <Page> The increases in Industrial Controls' segment 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. Our acquisition of the Bryce diesel fuel injection business occurred at the end of the current quarter and had no impact on sales or earnings of the current three or nine-month periods. <Table> <Caption> Aircraft Engine Systems ============================================================================= Three months Nine months ended ended June 30, June 30, ----------------------------------------------------------------------------- IN THOUSANDS 2001 2000 2001 2000 ----------------------------------------------------------------------------- <S> <C> <C> <C> <C> External net sales $78,395 $68,575 $221,076 $190,237 Segment earnings 15,227 11,190 41,884 19,647 ============================================================================= </Table> External net sales for Aircraft Engine Systems increased in both the three months and nine months ended June 30, 2001, as compared to the corresponding periods last year. In addition to solid orders for products used in regional and narrow-body commercial jets, sales growth for both periods was driven by increased demand for some OEM products, aero derivative engine nozzles and controls for power generation applications, military spare parts, and commercial aftermarket sales. Although there has been good growth in Aircraft Engine Systems so far this year, we do not expect this growth trend to continue into the fourth quarter. Recent industry forecasts have suggested that aerospace industry growth rates may slow. Nevertheless, we are positioned well in the markets we serve and the large supply contracts won earlier this year, while requiring investment in product development, will provide a solid base for future sales. Segment earnings for Aircraft Engine Systems increased in both the three months and nine months ended June 30, 2001, as compared to the corresponding periods last year. Segment earnings also increased over adjusted amounts for last year in both periods. Last year, we incurred expenses related to a workforce realignment program, which was partially offset by a reduction in certain accruals related to a prior business acquisition. We do not believe these expenses, which totaled $1.4 million in the three months ended June 30, 2000, and $3.9 million in the nine months ended June 30, 2000, are indicative of normal operations. Without these expenses, our segment earnings would have been $12.6 million in the three months ended June 30, 2000, and $23.5 million in the nine months ended June 30, 2000. The improvement in Aircraft Engine Systems' segment earnings reflects 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, impacting the nine-month comparison. Following last year's workforce management 13 <Page> 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. <Table> <Caption> Nonsegment Expenses and Gain ========================================================================= Three months Nine months ended ended June 30, June 30, ------------------------------------------------------------------------- IN THOUSANDS 2001 2000 2001 2000 ------------------------------------------------------------------------- <S> <C> <C> <C> <C> Interest expense $1,652 $2,842 $6,167 $8,727 Interest income (147) (214) (715) (553) Corporate expenses 7,449 4,929 17,214 13,303 Gain on sale of business - (25,244) - (25,244) ========================================================================= </Table> Interest expense decreased in both the three months and nine months ended June 30, 2001, as compared to the corresponding periods last year because we had lower levels of average outstanding debt this year. Even with the recently completed acquisition of the Bryce diesel fuel injection business, our June 30, 2001, total debt balance is more than $40 million lower than it was immediately prior to the May 2000 sale of the turbine control retrofit business. Corporate expenses not allocated to segments were higher in the three-month and nine-month periods this year as compared to the same periods last year primarily because of increases in variable compensation expenses as a result of improved company profitability and increases in the market value of the company's common stock. <Table> <Caption> Net Earnings ============================================================================= Three months Nine months ended ended June 30, June 30, ---------------------------------------------------------------------------- IN THOUSANDS EXCEPT PER SHARE AMOUNTS 2001 2000 2001 2000 ---------------------------------------------------------------------------- <S> <C> <C> <C> <C> Earnings before income taxes $22,381 $39,789 $61,164 $58,608 Income taxes 8,653 13,624 23,856 21,064 ---------------------------------------------------------------------------- Net earnings $13,728 $26,165 $37,308 $37,544 ============================================================================= Basic earnings per share $ 1.21 $ 2.33 $ 3.30 $ 3.34 Diluted earnings per share 1.18 2.32 3.23 3.33 ============================================================================= </Table> Income taxes were provided at an effective rate of 39.0% of pre-tax earnings in the nine-month period ended June 30, 2001, compared to 35.9% for the same period last year. Last year's rate was impacted by the sale of our turbine control retrofit business, which allowed us to use capital loss carryforwards for which we previously provided valuation allowances. 14 <Page> Net earnings decreased in both the three months and nine months ended June 30, 2001, as compared to the corresponding periods last year. Net earnings last year included the following items: 1) An after-tax gain of $17.2 million for both the three-month and nine-month periods last year, related to our sale of the turbine control retrofit business ($1.53 per diluted share for the three-month period and $1.52 per diluted share for the nine-month period); and, 2) Certain expenses totaling $2.4 million in the three-month period last year and totaling $3.9 million in the nine-month period, primarily related to the retrofit business sale and to workforce realignment ($0.21 per diluted share for the three-month period and $0.34 per diluted share for the nine-month period). Without these items, net earnings would have been $11.3 million, or $1.00 per diluted share, for the three months ended June 30, 2000, and $24.2 million, or $2.15 per diluted share, for the nine months ended June 30, 2000. Looking forward to the remainder of the year, we clearly expect consolidated net sales for the year ending September 30, 2001, to exceed our previously stated sales growth goal of 10 percent over last year's sales of $597.4 million. In addition, we now expect net earnings for the year ending September 30, 2001, to increase at least 30 percent over last year, excluding certain gains and expenses. These gains and expenses included last year's gain on the sale of our turbine control retrofit business (which was $17.1 million, or $1.51 per diluted share) and last year's expenses associated with the retrofit business sale, workforce realignment, and other costs not believed to be indicative of normal operations (which totaled $6.7 million, or $0.59 per diluted share). Without these gains and expenses, net earnings last year would have been $36.6 million, or $3.23 per diluted share. (Reported net earnings for the full fiscal year last year were $47.0 million, or $4.15 per diluted share.) Beyond September 30, 2001, we continue to believe that we can sustain 15 percent earnings growth on average over the next three to four years. 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. 15 <Page> <Table> <Caption> Assets --------------------------------------------------------------------------- At March At September IN THOUSANDS 31, 2001 30, 2000 --------------------------------------------------------------------------- <S> <C> <C> Total segment assets: Industrial Controls $268,366 $214,935 Aircraft Engine Systems 250,888 260,712 Unallocated corporate property, plant, and equipment - net 4,145 5,072 Other unallocated assets 52,307 53,004 --------------------------------------------------------------------------- Total assets $575,706 $533,723 =========================================================================== </Table> Industrial Controls' total segment assets at June 30, 2001, increased over the amount at September 30, 2000, because of acquisitions and the impact to accounts receivable and inventory as a result of higher sales activity. <Table> <Caption> Other Balance Sheet Measures --------------------------------------------------------------------------- At March At September IN THOUSANDS 31, 2001 30, 2000 --------------------------------------------------------------------------- <S> <C> <C> Total assets $575,706 $533,723 Working capital 118,037 100,836 Long-term debt, less current portion 84,500 74,500 Other liabilities 51,530 50,142 Commitments and contingencies - - Shareholders' equity $302,371 $275,624 =========================================================================== </Table> The increase in working capital (current assets less current liabilities) over the September 30, 2000, amount was most significantly due to increases in accounts receivables and inventory caused by higher sales levels. Our long-term debt increased since September 30, 2000, because business acquisitions and other investing activities have required more cash than generated from operations in the first nine months of the year. 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. 16 <Page> <Table> <Caption> Cash Flows -------------------------------------------------------------------------- NINE MONTHS ENDED JUNE 30, -------------------------------------------------------------------------- IN THOUSANDS 2001 2000 -------------------------------------------------------------------------- <S> <C> <C> Net cash provided by operating activities $44,225 $46,391 Net cash provided by (used in) investing activities (50,504) 21,861 Net cash provided by (used in) financing activities 4,040 (63,032) ========================================================================== </Table> Net cash provided by operating activities remained strong, but down slightly. Exclusive of last year's sale of the turbine control retrofit business (the proceeds of which is considered an investing activity), earnings were higher in the nine months ended June 30, 2001, than they were in the same period last year. However, timing issues affecting accounts receivable and inventories impacted the nine-month comparison. These balances will be a source of future operating cash flows. Net cash flows for investing activities changed primarily because of differences in our business acquisition and divestiture activities. In the nine-month period this year, we completed two acquisitions. In the same nine-month period last year, we completed one divestiture. In addition, our capital expenditures were $4.3 million lower in the nine months this year as compared to the same period last year. Of this amount, $1.4 million is related to internal software development costs that we capitalized 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. We expect our capital expenditures for the year ending September 30, 2001, to be less than this year's expected depreciation expense of approximately $26 million. Net cash flows for financing activities also changed primarily because of differences in our business acquisition and divestiture activities. In the nine-month period ended June 30, 2001, we borrowed to finance our first-quarter and third-quarter acquisitions. In the nine-month period last year, we used the proceeds from the sale of the turbine control retrofit business to repay debt. 17 <Page> 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 June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets." Statement No. 141 primarily impacts accounting for acquisitions initiated or completed after June 30, 2001; however, there are transition provisions that may result in the reclassification of carrying values among existing goodwill and other intangible assets. Once adopted, Statement No. 142 prohibits amortization of goodwill, but requires transitional and annual impairment reviews that may result in the recognition of losses, among other requirements. Statement No. 142 and the transition provisions of Statement No. 141, which must be adopted at the same time, will be effective on October 1, 2002, or on October 1, 2001, if we elect to adopt early. While we have not yet completed our assessment of the impact of these statements on our financial statements, adoption will result in a reduction in our amortization expense. 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. We have completed a review of our revenue recognition practices and have not discovered any revenue recognition practices that needed to be changed in order to comply with this bulletin, which became effective no later than July 1, 2001. 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. 18 <Page> Part II ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Filed as Part of This Report None. (b) Reports Filed on Form 8-K During the Third Quarter of the Fiscal Year Ending September 30, 2001. None. 19 <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 30, 2001 /s/John A. Halbrook - ------------------------ John A. Halbrook, President and Chief Executive Officer July 30, 2001 /s/Stephen P. Carter - ------------------------ Stephen P. Carter, Vice President, Chief Financial Officer and Treasurer 20