Woodward Annual Report 2002

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FY2002 Annual Report · Woodward

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WOODWARD GOVERNOR COMPANY

A N N U A

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2

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P O R T
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ST R AT E G I C • G R O W T H

Business Description

Woodward designs, manufactures, and services energy control systems

and components for aircraft and industrial engines, turbines, and other power

equipment. Leading OEMs (original equipment manufacturers) throughout

the world use our products and services in the power generation, process

industries, transportation, and aerospace markets.

Contents

Financial Highlights 1

To Our Shareholders 2

Board of Directors 5

Market Drivers Shape Our Strategy 6

Financial Review 17

Officers and Investor Information 47

F i n a n c i a l H i g h l i g h t s
Fiscal year ended September 30,

(In thousands except per share amounts and other year-end data)
Operating Results

Net sales
Adjusted earnings before cumulative effect of accounting change*

Basic per share amount*
Diluted per share amount*

Cash dividends per share
Year-end Financial Position

Working capital
Total assets
Long-term debt, less current portion
Shareholders’ equity
Other Year-end Data

Shareholders’ equity per diluted share
Worker members
Registered shareholder members

2002

2001

2000

$679,991
45,170
3.99
3.90
.93

152,312
582,395
78,192
354,901

30.66
3,337
1,592

$678,791
55,943
4.94
4.84
.93

123,744
584,628
77,000
318,862

27.58
3,709
1,652

$597,385

49,636 **
4.41 **
4.39 **
.93

100,836
533,723
74,500
275,624

24.35
3,302
1,742

* Adjusted earnings before cumulative effect of accounting change reflects the elimination of goodwill-related amortization and associated income taxes
from amounts reported in the financial statements.

** In 2000, adjusted earnings includes a gain from the sale of business, net of tax, of $17,082 or $1.52 per basic share and $1.51 per diluted share.
Without this item, adjusted earnings would have been $32,554 or $2.89 per basic share and $2.88 per diluted share.

Net Sales
Dollars in Millions

Adjusted Earnings before Cumulative
Effect of Accounting Change*
Dollars in Millions

Adjusted Earnings before Cumulative
Effect of Accounting Change and
Cash Dividends Per Share*

In Dollars

700

630

560

490

420

350

280

210

140

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

00
■ Adjusted earnings before

cumulative effect of accounting
change per diluted share
■ Cash dividends per share

To Our Shareholders

Our engineering capabilities have
provided our customers with
innovative, practical, and cost-effective
systems solutions and have resulted
in a full pipeline of projects for new
products and applications, many of
which are direct requests from our
customers. No other supplier of energy
control components can provide the
complete range of technologies that
Woodward offers.

We are working toward balance in
three primary global markets—the
United States, Europe, and Asia. Over
the past year, we increased our global
presence with an acquisition of a
company in Europe that provides us
with power management control
system capability. We are also initiating
a presence in China to repair and
overhaul aircraft engine components.

In March, we acquired Nolff’s
Carburetion and formed a joint venture
with MotoTron to become a major
supplier of energy control technology
products to engine manufacturers for
small mobile industrial equipment.
The true driver for our success in this
$300 million market is our ability to
help our customers cost effectively
meet anticipated emissions standards
while maintaining high standards of
system performance.

Customer satisfaction builds loyalty
and is a key measurement of our
success. In June, our Rockton, Illinois,
facility became the 24th out of more
than 3,000 suppliers to achieve
Platinumsm supplier status with
American Airlines. The Department
of Defense recognized Aircraft Engine
Systems with a Quality and Delivery
Performance Award. In addition, Pratt
& Whitney Canada presented
Woodward with their Externals,

(from left) Woodward’s Core Executive Team: Stephen P. Carter, Vice President, Chief Financial Officer
and Treasurer; Thomas A. Gendron, President and Chief Operating Officer; John A. Halbrook, Chairman and
Chief Executive Officer; and C. Phillip Turner, Vice President and General Manager, Aircraft Engine Systems.

ough years can provide an opportunity
for those who have the insight and
resilience to advance with thoughtful
strategies. The game of chess is an
appropriate symbol of Woodward’s
ability to respond to challenges and
achieve its long-term goals.

In 2002, two of our largest markets,
power generation and aerospace, faced
major slowdowns and the industrial
markets generally were impacted by a
weakened economy. Despite these
adverse conditions, we remained
committed to our underlying strategy

of making solid moves to build
profitable market share. The strength
of these moves will be evident when
the growth of the economy resumes.

Increasing market share

Woodward continues to increase its
market share by developing new
products, acquiring complementary
technologies, and building customer
loyalty. We debuted 70 new products
in Industrial Controls in fiscal year
2002 that expand our core technology
platforms into new applications and
systems, and we intend to maintain
that development pace.

Controls, and Nacelles Supplier of
the Year Award. Because we provide
them with the cost-effective quality
products they need, delivered on time,
our customers increasingly turn to
Woodward as a single source for energy
control solutions.

Strategic wins

While the sales volume in our industrial
markets declined in 2002, Woodward
gained share in a number of areas.

Content we provide on large industrial
gas turbines has increased over the past
few years from nothing to an array of fuel
nozzles, valves, and actuators that are
placed on almost every new turbine
developed, from the 5 megawatt GE-5 to
the 150 megawatt GE Frame 9. The
value of our products on these large
turbines today ranges from $500,000 to
over $1 million.

On smaller gas engines for power
generation, we now provide the throttle
body, bypass and waste gate valves
(including actuators), gas-metering
valves, and ignition systems.

In our aircraft engine markets, we
executed multi-year extensions on
contracts with most of our key original
equipment manufacturer customers,
including GE Aircraft Engines, and in
several instances, expanded the
content we provide on each engine
with manifolds and actuators. These
agreements enable Woodward to team
with our customers at the planning
stage of new engines and proactively
offer customized solutions for fuel-
efficient, cost-effective, and reliable
engine systems.

The aftermarket, repair, and overhaul
portion of our aircraft engine business
has been stronger than anticipated, as
Woodward has more engine content on

Phil Turner, a key player on my
management team with more than four
decades of service, will help integrate
Aircraft Engine Systems into the global
business structure and plans to retire as
the process nears completion. I would
like to thank Phil for his countless
contributions, including his effective
management of the aircraft engine
business in the months following
September 11, 2001.

Ron Fulkrod, a vice president who
served in many valuable roles since
1961, will retire at the end of calendar
2002. I want to thank him for his
tireless efforts and sincere
commitment to the company.

All public companies were challenged
to demonstrate their standards of
corporate governance in the wake
of malfeasance by a few high-profile
companies. The Sarbanes-Oxley Act of
2002 imposed a number of regulations
designed to protect shareholders
through improved governance,
accountability, and disclosure.

the newer aircraft that remain flying
even with decreased commercial
activity. On the military side, we have
been included on both the F135 and
F136 engines for the Joint Strike
Fighter program, and military repair,
overhaul, and spare parts sales have
been strong this year.

Board and Senior Management

Woodward pursues excellence in its
evolving board and management teams.
Three new members have joined the
board in 2002 to build the skills and
strength required in today’s business
environment. John Cohn, Mary
Petrovich, and James Rulseh have
outstanding experience in industrial
manufacturing and exemplify the
qualities of integrity and commitment
we seek in our board members.

Vern Cassens and Tom Heenan retired
from the Board of Directors on September
30, 2002, and we appreciate their many
years of diligent service.

In September, Tom Gendron, who has
served 12 years with Woodward in both
Industrial Controls and Aircraft Engine
Systems, was promoted to president
and chief operating officer. This
change was part of our shift to
integrate all our technologies across
the organization to ensure a more
global approach to the range
of markets we serve.

S T R ATE G I C • G R O W T H
Market conditions will remain challenging
through 2003. We are confident in our ability to face
those challenges head-on and succeed.

Adverse external events impacted
almost all businesses this year. The
effects of the attacks of September
2001 sent an already weakened
commercial aircraft industry into
severe decline. We reacted swiftly by
accelerating planned cost-cutting
measures early in the year and
maintained strong earnings despite the
drop in sales.

Turbulence in the domestic wholesale
electricity market slowed spending for
new power generation equipment,
including a notable increase in project
cancellations as the year progressed.
In addition, macroeconomic
uncertainties and a subdued outlook
contributed to a decline in orders
across all our industrial markets.

In late fiscal year 2002, we
implemented cost-cutting measures
designed to stabilize margins, while
preserving an infrastructure that will
allow us to continue to serve customers
well, even in tough times, and resume
growth quickly as conditions improve.

Executing the strategy

Market conditions will remain
challenging through 2003. We are
confident in our ability to face those
challenges head-on and succeed.
We will stay focused on building the
long-term value of our business
through winning an increased share
of a growing number of profitable
niche markets.

Our plans call for careful cost
management and continuous
improvement initiatives that should
allow fiscal year 2003 earnings to
approximate those of fiscal 2002,
despite lower sales.

Industrial Controls is improving its
cost base through productivity gains
and global purchasing initiatives that
allow us to consolidate our supplier
base. While sales will likely be down
from fiscal year 2002, we believe these
activities, as well as more favorable
product mix, should help improve
earnings in 2003.

Aircraft Engine Systems achieved a
number of long-term contract wins that
allow us to supply additional content
on multiple engine platforms for a
number of years to come.

We believe sales for this segment in
fiscal year 2003 will be below 2002
levels. But, our proven ability to
manage costs and increase productivity
should partially offset the effect of
lower sales and will also be beneficial
when the aerospace markets begin to
normalize and our growth resumes.

We will continue to make the right
moves to ensure our success. We have
a very talented and highly motivated
workforce, advanced technologies, and
the financial resources to effectively
execute our strategy, capture market
share, and position ourselves well for
the future.

John A. Halbrook
Chairman of the Board
and Chief Executive Officer

December 6, 2002

We will continue
to make the right moves

to ensure our success.

Woodward has always fostered a
culture of integrity and has conducted
its financial business in an open and
understandable manner. We are
easily reaching compliance with all
the new standards, many of which
were already our typical practices. It
is our longstanding belief that our
shareholders, customers, and members
deserve honesty and respect, along
with excellent performance.

Financial performance

Our total company sales for fiscal
2002 rose slightly to $679,991,000.
Earnings fell, however, to $45,170,000
or $3.90 per diluted share, before the
cumulative effect of accounting change,
from $53,943,000, or $4.84 per share
in fiscal year 2001, as adjusted to
eliminate goodwill-related amortization.

Board of Directors

J. Grant Beadle
Retired Chairman and
Chief Executive Officer
Union Special Corporation

John D. Cohn
Senior Vice President
Strategic Development and
Communications
Rockwell Automation, Inc.

Paul Donovan
Executive Vice President and
Chief Financial Officer
Wisconsin Energy Corporation

Retired from Board

Lawrence E. Gloyd
Chairman Emeritus and
Retired Chairman and
Chief Executive Officer
CLARCOR, Inc.

John A. Halbrook
Chairman and
Chief Executive Officer
Woodward Governor Company

J. Peter Jeffrey
Retired Vice President
Development
Father Flanagan’s Boys’ Home

Michael H. Joyce
President and Chief
Operating Officer
Twin Disc, Incorporated

Rodney O'Neal
Executive Vice President
Delphi Automotive Systems
and President
Safety, Thermal, and
Electrical Architecture Sector

Mary L. Petrovich
Chief Executive Officer
AxleTech International

James R. Rulseh
Group Vice President
Modine Manufacturing Company

Michael T. Yonker
Retired President and
Chief Executive Officer
Portec, Inc.

Vern H. Cassens

Thomas W. Heenan

Market Drivers Shape Our Energy
Control Technologies Strategy

E M I S S I O N S

R E L I A B I L I T Y

C O S T

G L O B A L
S O U R C I N G

Power Generation

Transportation

Process Industries

Aerospace

• Power Plants

• Marine Propulsion

• Oil and Gas

• Distributed Power

• Locomotive

• Petro Chemical

• Commercial

• Military

• Back-Up Power

• Off-Highway Equipment

• Paper

• Business/General Aviation

• Alternative Fuel Trucks

• Sugar

and Buses

• Aftermarket Services

and Support

Our customers include:

Caterpillar
Caterpillar Kiel
Cummins
General Motors EMD
GE Transportation Systems
MAN Group
Wärtsilä

Dresser-Rand
Ebara
GE Power Systems
Mitsubishi
Rolls-Royce

GE Aircraft Engines
Honeywell
Pratt & Whitney
Pratt & Whitney Canada
Rolls-Royce
Rolls-Royce Deutschland
U.S. Government
Williams International
Major airlines worldwide

Alstom
Caterpillar
Emerson Electric
GE Power Systems
Kawasaki
Mitsubishi
Pratt & Whitney
Siemens-Westinghouse
Wärtsilä

C H N O L O G I

Fuel and
Gas
Delivery

Combustion
Control

Electronic
Controls and
Software

Catalytic
and Electro
Chemical Process
Control

Systems

Integration

Services

▼
COMPONENTS

▼

INTEGRATED SYSTEMS

▼

AIRCRAFT ENGINES AND INDUSTRIAL POWER EQUIPMENT

▼

MARKET APPLICATIONS

We use our energy control technologies to develop and produce
components that we integrate into systems. Our systems and
components help original equipment manufacturers satisfy
their marketplace needs for reliable and low-cost power
equipment that meets strict air quality standards.

Implementing Customer-Focused Plans For Strategic Growth

C hess is the ultimate competition between two minds. To skillfully use the

sixteen chessmen to win the game, players must execute their moves with

planning and foresight. In business, leaders of companies must demonstrate

the same skills applied by tournament-level chess players.

As in chess, Woodward never
underestimates its rivals. Our goal is to
always be several moves ahead of the
competition. To do this, we rely on our
thorough understanding of the aircraft
engine and industrial power
equipment markets. We develop and
use strategies that are focused and
aligned to meet the needs of our
customers. Moreover, we adapt our
plans, when necessary, to fit the ever-
changing market environment.

Our market drivers

Our customers are faced with meeting
new, stringent air quality standards to
reduce air pollution. Internationally,
the Kyoto Protocol mandates that
industrialized countries reduce their
emissions of greenhouse gasses, while
clean air acts adopted in North

America, Europe, and Asia direct other
emissions reductions over the next five
years. These air quality standards will
drive the increased use of natural gas and
high-efficiency engines and turbines.

Meanwhile, pressures have increased on
engine and turbine manufacturers to
lower their cost structures. Additionally,
customers are demanding continuous
quality and reliability improvements for
their power equipment.

Finally, global sourcing influences how
Woodward works with its original
equipment manufacturer (OEM)
customers, who produce products in
multiple manufacturing facilities around
the world. These customers need their
supply chain to be located near their
plants to help reduce costs, achieve faster
turn-around times, and access product
support locally.

Power Generation

Transportation

13%

Process Industries

10%

11%

Aerospace ■ Military
10%
9%

Aerospace ■ Commercial

2002

2001

37%

40%

FY2002 Sales
$679,991
(in thousands)

FY2001 Sales
$678,791
(in thousands)

30%

31%

This chart provides a general breakdown of percent of sales by market.
It is not intended to be an exact representation of sales dollars.

▼

Jim Covert in Fort Collins, Colo.,
assembles a ProAct™ ITB throttle valve
for natural gas engines for the power
generation and process industries. This
low-cost, electrically actuated valve is a
key component in total control system
solutions for two of the most advanced
natural gas engines under development
in Europe and the United States.

▼

(far left) At our Greenville, S.C., facility, a member
welds a fuel nozzle for an industrial gas turbine. The
fuel nozzle, perhaps the most critical component of a
gas turbine fuel delivery system, allows maximum
power output and minimum exhaust emissions.

▼

Paired with a Woodward water valve, the EML100
linear actuator is used by our customers in water
injection systems that drastically reduce harmful
exhaust emissions from industrial gas turbines.

▼

At Woodward's Development Lab in Rockford, Ill., Bobby Cates tests the engine
control system for the Pratt & Whitney PW600 engine family program. By developing
and integrating the system, Woodward helps the customer achieve its challenging cost,
weight, and reliability goals.

Meeting market demands with
systems and components

Woodward uses its sophisticated
technologies to develop and produce
an extensive line of components.
Often, we integrate the components
into complete engine fuel control and
combustion systems.

The systems approach simplifies our
customers’ supply chain and system
testing activities, decreases
development engineering resource
requirements, and consolidates
component testing. Our customized
solutions address the critical needs of
our customers—emissions, reliability,
cost, and global sourcing.

The Pratt & Whitney PW600 engine
family program represents the most
comprehensive aircraft engine
application of Woodward’s Energy
Control Technologies strategy. While
maintaining system level responsibility,
Woodward teamed with Hispano-Suiza
to develop and integrate the electronic

engine control. Additionally, Woodward
is combining other electrical products
with its core fuel system products to
provide a fully integrated engine
control system.

The systems approach, demonstrated
in the PW600 program, applies
throughout our business. We had great
success this year with sales of our OH1
comprehensive engine control system
for on-highway vehicles powered by
compressed natural gas. Similar
Woodward solutions are being designed
into our customers’ newest and most
advanced engines and turbines.

Emissions regulations make an engine
or turbine control system more
complicated by necessity. Woodward’s
smart network approach enables its
customers to meet these tough
standards in the simplest and most
cost-effective way possible, with the
reliability and durability required in
today’s marketplace.

Woodward’s strategies at the
component level correspond with our
systems approach. The GS16 valve
demonstrates our networked control
strategies in action. The valve is
designed to precisely control gas fuel
flow on aeroderivative and industrial
gas turbines for GE, Rolls-Royce,
Pratt & Whitney, and other OEMs.

The electrically actuated valve with
integral driver electronics reduces our
customers’ total installed costs by
eliminating the need for separate
hydraulic or electrical driver systems.
The GS16 networks easily with the
turbine control system to minimize
installation and start-up costs.

The GS16 gas fuel metering valve precisely
controls gas fuel flow on aeroderivative and
industrial gas turbines. With its integral
electronics and network communications
capabilities, the GS16 significantly reduces
our customers' total installed cost.

Our customized solutions address the
critical needs of our customers—emissions,

reliability, cost, and global sourcing.

Developing and acquiring key technologies over the past five years has
been instrumental in giving Woodward the flexibility to offer a variety

of products that meet the fuel delivery system needs of our customers.

Another of our all-electric solutions for
turbine control, the EML100 linear
actuator, provides accurate, closed-loop
position control of steam and fuel
valves. When paired with Woodward’s
3151A water valve, the unit meters
water flow into the turbine combustion
chamber to reduce emissions and
increase power output.

Our low-cost ProAct™ ITB throttle
valve is simple for OEM customers to
install and set up. It is a key element
in a total controls solution for two of
the most advanced natural gas engines
under development in Europe and
the United States. With only one
moving part, it provides the
dependability and durability
demanded in today’s marketplace.

In fiscal year 2002, Woodward signed
a developmental agreement with
GE Aircraft Engines (GEAE) to
design, engineer, and manufacture the
fuel manifold ring for the LV100 gas
turbine, which will power the U.S.
Army’s M2 Abrams main battle tank.

Developing and acquiring key
technologies over the past five years
has been instrumental in giving
Woodward the flexibility to offer a
variety of products that meet the fuel
delivery system needs of our customers.

To increase our aerospace aftermarket
offerings and engine content,
Woodward expanded its scope beyond
those products normally provided to the
OEM market. For example, we won a
competitive bid in fiscal year 2002 to
provide the F100 flameholder for the
U.S. Air Force.

The flameholder controls air flow
through an augmentor to ensure proper
afterburner combustion. Although we
do not provide the original equipment,
the manufacturing and quality
requirements are well within the core
competencies of our combustion
product activities. The flameholder
adds to the products and services
Woodward provides to support F-15
and F-16 fighter aircraft.

▼

Woodward expanded its position in the
power systems control market with the
acquisition of Leonhard-Reglerbau,
Stuttgart, Germany. Myriam Neunreuther
from Stuttgart inserts components in a
circuit board for a generator set control
for diesel and gas engines.

At our facility in Zeeland, Mich., Gary Bloomfield
runs a flow test on a fuel manifold ring for an
LV100 gas engine, which will power the U.S.
Army's M2 Abrams main battle tank.

While using a coordinate measurement machine, Matt Furtaw
from Zeeland, Mich., checks the dimensions of the F100 flameholder.

▼

(far left) Jon Stastny in Fort Collins, Colo.,
assembles fuel pressure regulators for small
gas engines used in the mobile industrial
equipment market.

▼

A Woodward member in Stuttgart, Germany,
carefully inspects a circuit board destined for
installation in Woodward's newest range of
networked power management controls.

Meeting market demands
with exceptional performance

Meeting market demands through
business development activities

Growth is directly tied to customer
satisfaction. We know that through
continuous improvements, we will
retain our existing customers, attract
new ones, and increase market share.

By emphasizing lean manufacturing
principles and practicing Six Sigma
methodologies, we have laid the
foundation to consistently improve and
aggressively manage costs. Within the
confines of a data-driven Six Sigma
environment, we view our business
and our suppliers’ businesses as a
system of processes that must first be
understood then controlled.

Our metrics demonstrate positive
results: dramatic on-time delivery
improvements, reduced quality defects
from suppliers, significant productivity
improvements, shortened lead times,
and improvements in our quality.

Woodward is committed to providing
a level of quality, delivery, cost, and
responsiveness that is unsurpassed in
our industries, and we are being
recognized for achieving these goals.
In fiscal year 2002, Woodward achieved
Platinumsm supplier status from
American Airlines as a top performing
supplier. Only 24 of their 3,000
suppliers have achieved this status.

Additionally, this year the U.S.
Government honored Woodward with
a quality and delivery performance
award. Woodward supplies various
products and services to the
Department of Defense and other
government agencies, including the
repair and overhaul of fuel flow
governors, main engine controls, and
fuel injectors.

Acquisitions, alliances, and partnerships
remain vital strategies to help Woodward
meet its growth objectives. We use these
strategic business development activities
to acquire key technologies and to enter
new, growing markets.

After working together for a year with
great success under a product sales
agreement, Woodward acquired
Leonhard-Reglerbau in fiscal year
2002. It is operating as Woodward’s
center for power management control
systems. Now, we are positioned to
pursue a much wider cross-section of
the power management controls market.
The integrated generator set controls,
generator voltage regulators, and
protective relay technologies are critical
to the expansion of the distributed
generation market.

In March 2002, Woodward acquired
Nolff’s Carburetion, Inc. and formed
a joint venture with MotoTron
Corporation, a subsidiary of Brunswick
Corp. These transactions were key to
accelerating Woodward’s strategy to
develop and provide integrated control
systems for an almost $300 million
mobile industrial equipment market.
With this capability, Woodward is strongly
positioned as a major supplier to small
gas and diesel engine manufacturers and
packagers for lift trucks, aerial lift
platforms, aircraft cargo tractors, and
other mobile equipment.

While focusing on market drivers,
Woodward concentrates on developing
strong relationships with its foundation
OEM customers. This fiscal year,
Woodward signed a long-term agreement
with GE Aircraft Engines, its largest
aerospace customer, for all non-
combustion products we supply to them.

▼

Brian Scott from Drafting in Rockford, Ill. manipulates a solid model
representation of a fuel control design. The fuel control will help optimize
engine performance for the new Airbus A380.

Acquisitions, alliances, and
partnerships remain vital

strategies to help Woodward

meet its growth objectives.

The agreement was expanded to include
fuel metering units on the GP7200
engine, which will power the newly
developed Airbus A380. GEAE and
Pratt & Whitney are jointly producing
the engine for this superjumbo jet.

A key Woodward strategy is to align its
technology plans with those of its
customers. We are developing control
and combustion system technologies to
support the special reliability and
performance requirements of the single
engine F-35 Joint Strike Fighter (JSF)
aircraft. The U.S. Navy, Air Force, and
Marines, the United Kingdom Royal
Air Force and Royal Navy, and U.S.
allies will use the JSF, the next
generation strike fighter.

Woodward is committed
to setting itself apart

from its competitors by

developing and delivering

integrated systems

and components that

meet our customers’

demands and anticipate

their future needs.

Woodward will be the supplier of the
augmentor spray bar manifold assembly,
the fuel nozzle assemblies, and the pilot
burner fuel nozzle for Pratt & Whitney’s
F135 engine for the JSF. Deliveries to
support the engine development
program are slated for 2003. Woodward
will supply Rolls-Royce Corporation
with fuel injectors for the GE/Rolls-
Royce F136 engine, the alternate engine
that will power the JSF.

Sustaining our growth

Expanding our focus from prime mover
controls and governors to energy
control technologies is the key to our
increased market share. As we continue
to develop closer relationships with our
foundation customers earlier in the
product development cycle, we can
offer better, more cost-effective
networked solutions that increase our
content on engines and turbines.

Woodward will keep executing its
strategies by offering systems solutions
to aircraft and industrial engine,
turbine and power equipment
manufacturers. We will gain new
technologies and expand into new
markets through our development
activities and through acquisitions,
alliances, and partnerships. Also, we
will continue to introduce upgrades
and new services for our aftermarket
customers. Most importantly, we will
not relent in our vision to improve
customer satisfaction levels in all
aspects of our business.

Like a well-played game of chess,
winning at business depends on
successful plans. Strategies must
be executed with great precision.
Woodward will set itself apart from
its competitors by developing
and delivering integrated systems
and components that meet our
customers’ demands and anticipate
their future needs.

F I N A N C I A L R E V I E W

C o n t e n t s

Management’s Discussion and Analysis

Consolidated Financial Statements 28

Report of Independent Accountants 43

Selected Financial Data 44

Selected Quarterly Financial Data 46

Cautionary Statement 46

Management’s Responsibility for Financial Statements

Management is responsible for the accompanying financial statements and believes that the financial statements accurately and
consistently present the financial position, results of operations, and cash flows of the company in accordance with accounting
principles generally accepted in the United States.

Management makes what it believes to be reasonable and prudent judgments and estimates where necessary, and has a system
of internal accounting controls designed to provide reasonable assurance that its financial records are accurate, assets are
safeguarded, and transactions are executed in accordance with management’s authorizations. Self-monitoring of the internal
accounting control system, along with selective testing, is a part of our control environment. Corrective actions are taken
whenever deficiencies in our internal accounting control system are identified.

PricewaterhouseCoopers LLP, the company’s independent accountants, audit the company’s financial statements in accordance
with generally accepted auditing standards. Their report on these financial statements follows the notes to consolidated
financial statements.

The audit committee of the company’s Board of Directors, which consists of directors who are not officers or employees of the
company, meets with management and PricewaterhouseCoopers LLP to review and discuss the audited financial statements,
along with other matters.

John A. Halbrook
Chairman and
Chief Executive Officer

Stephen P. Carter
Vice President,
Chief Financial Officer and Treasurer

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

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 and cautionary
statement.

Results of Operations

Our results of operations are discussed and analyzed by
segment. We have two operating segments—Industrial
Controls and Aircraft Engine Systems. Industrial
Controls provides energy control systems and
components primarily to OEMs (original equipment
manufacturers) of industrial engines, turbines, and other
power equipment. Aircraft Engine Systems provides
energy control systems and components primarily to
OEMs of aircraft engines.

We use segment earnings internally to assess the
performance of each segment and to make decisions on
the allocation of resources. Total segment earnings do
not reflect all expenses and gains of the company, and
are before the cumulative effect of an accounting
change. Nonsegment expenses and gains, including
income taxes, and the accounting change are separately
discussed and analyzed.

Among the effects of the accounting change is that
goodwill is no longer amortized after September 30,
2001. Therefore, to provide the most meaningful
comparison of earnings and income tax expense between
periods, various earnings measures and income tax
expense are analyzed and discussed on an adjusted basis.
Any amount in this discussion and analysis labeled
“adjusted” reflects the elimination of goodwill-related
amortization and associated income taxes from amounts
reported in the financial statements.

Industrial Controls

In thousands for the year
ended September 30,

2002

2001

2000

External net sales
Adjusted segment earnings

$408,665
33,294

$384,145
59,601

$330,962
42,983

2002 Compared to 2001 and Outlook

External net sales of Industrial Controls increased 6% in
2002 over 2001. Businesses acquired in 2001 and 2002
accounted for about $24 million of the increase.
Without these acquisitions, our external net sales in
2002 would have been about the same as in 2001.

• Virtually all of our OEM customers had lower

shipment volumes in 2002 as compared to 2001.
These decreases were most evident among customers
shipping large gas turbines, particularly
aeroderivative turbines, which are used in power
generation. As a result, despite increases in market
share across most of our product lines, sales of our
core manufactured products decreased.

• Decreases in sales among our core manufactured

products were largely offset by a series of shipments
that included lower-profit purchased components.
These shipments were completed substantially in our
second and third quarters.

• Price changes from 2001 levels reduced sales in
2002 by approximately 1%. Changes in foreign
currency exchange rates did not have a significant
impact on sales.

In 2002, we acquired the capital stock of Leonhard-
Reglerbau Dr.-Ing. Adolf Leonhard GmbH and certain
net assets of Nolff’s Carburetion, Inc. These
acquisitions enhanced our capabilities using
technologies that can be leveraged to existing systems,
power equipment, and market applications. Leonhard-
Reglerbau specializes in the design, manufacture, and
sales of control, protection, and monitoring devices for
power generation equipment. Nolff’s Carburetion
manufactures and sells natural gas and propane fuel
systems for small industrial engines.

Industrial Controls’ segment earnings, as adjusted to
eliminate goodwill-related amortization, decreased 44%
in 2002 from 2001. This earnings decrease was the result
of reduced segment earnings margins, which more than
offset the effect of higher sales.

• Changes in our sales mix reduced our average gross
margins (which we measure as net sales less cost of
goods sold as a percent of net sales) in 2002 as
compared to 2001. Reduced sales of our core
manufactured products, the series of shipments that
included lower-profit purchased components, and the
lower average margins from the businesses we acquired
in 2002 and 2001 all contributed to this decline.

• Reductions in our workforce in 2002, resulting in
total expense of $4.0 million, were made to align
staffing levels with expected demand. These
reductions occurred throughout the year, but slightly
more than half of them occurred toward the end of
the fourth quarter.

• Product development activities increased in 2002 over
2001. We continued to actively pursue opportunities
to gain market share, often working in conjunction
with our customers’ own development programs.

• A charge of $3.0 million was recognized in the fourth
quarter of 2002 to reduce the carrying value of certain
manufacturing equipment to its estimated fair value.
This equipment is no longer in service and is to be
disposed of.

• Amortization expense, as adjusted to eliminate

goodwill-related amortization from 2001, increased
from $1.0 million to $2.2 million. This increase is
directly related to the business acquisitions that were
completed in 2001 and 2002. Among the assets
acquired were intangible assets other than goodwill
that are being amortized over periods ranging from
five to eight years.

Outlook: While it remains difficult to project the timing
of economic recovery, we believe Industrial Controls’ net
sales will decrease in 2003 as compared to 2002, with
growing volume in the second half of the year. Despite
this decrease, we believe the actions we have taken to
reduce our costs and increase productivity, along with a
more favorable sales mix, should result in improved
Industrial Controls segment earnings in 2003.

2001 Compared to 2000

External net sales of Industrial Controls increased 16%
in 2001 over 2000. Increases in sales volumes more than
offset the impact of the sale of our turbine control
retrofit business and negative foreign currency
translation effects.

• Strong demand for turbine and engine control
products throughout the world, as well as new
product introductions and market share gains,
accounted for most of our volume increase. We
benefited from continued strength in key end-
markets, particularly power generation. Prices
averaged about 1% higher.

• Businesses acquired in November 2000 and June

2001 accounted for approximately $9 million of our
volume increase.

• The sale of our turbine control retrofit business
four months prior to our fiscal year-end in 2000
reduced our sales by an undetermined amount. We
believe this business had annual sales approaching
$50 million.

• The strengthening of the dollar against most foreign

currencies reduced our sales by 3%.

Several key actions in 2001 broadened the functionality
and scope of our integrated energy control systems.

• We acquired the Bryce diesel fuel injection business
of Delphi Automotive Systems, which extended and
complemented our existing products for the
important medium-speed diesel market.

• We acquired Hoeflich Controls, Inc. and entered

into a licensing agreement with Adrenaline
Research to add to our ignition systems technology
for gas engines.

• We formed an alliance with Leonhard-Reglerbau for
networked system solutions targeting distributed
power and centrally generated power applications,
ranging from a few kilowatts to 300 megawatts.

• We formed an alliance with Edward King AG of

Switzerland, to design, develop, supply, and service
integrated fuel skids for gas turbines.

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

Industrial Controls’ segment earnings, as adjusted to
eliminate goodwill-related amortization, increased 39%
in 2001 from 2000. In 2000, expenses of approximately
$4.2 million that we associate with the decision to sell
our turbine control retrofit business reduced segment
earnings. These expenses primarily involved the
relocation of certain ongoing business activities.
Without these expenses, our segment earnings would
have been $47.2 million in 2000, and our increase in
2001 over 2000 would have been 26%. This earnings
increase was the result of higher sales and improved
segment earnings margins.

• Exclusive of the impact of the sale of our turbine
control retrofit business, our selling, general, and
administrative expenses are relatively independent of
changes in sales volumes.

• The sale of our turbine control retrofit business four
months prior to our fiscal year-end in 2000 impacted
our segment earnings margin by an undetermined
amount. While the retrofit business generated higher
gross margins than our remaining business, it also
incurred more selling, general, and administrative
expenses as a percent of sales.

Aircraft Engine Systems

In thousands for the year
ended September 30,

2002

2001

2000

External net sales
Adjusted segment earnings

$271,326
57,226

$294,646
56,172

$266,423
40,662

2002 Compared to 2001 and Outlook

External net sales of Aircraft Engine Systems decreased
8% in 2002 from 2001. The decrease in sales is
attributed to the effects of reduced commercial airline
traffic since September 2001 on both OEM and
aftermarket sales, although demand for our aftermarket
services has been better than we expected. Also,
increased military sales have partially offset sales
declines in our commercial markets. While most of our
sales are to OEMs, we estimate that about 36% of our
sales resulted from the aftermarket in 2002 compared to
39% in 2001. The impact of changes in selling prices
and changes in foreign currency exchange rates was
insignificant.

Aircraft Engine Systems’ segment earnings, as adjusted
to eliminate goodwill-related amortization, increased
2% in 2002 over 2001. This earnings increase was the
result of improved segment earnings margins.

• Aggressive productivity enhancements and cost-

control measures were initiated in our first quarter in
response to decreased sales volumes, benefiting both
cost of goods sold and selling, general, and
administrative expenses.

• Reductions in our workforce in 2002, resulting in total
expense of $4.0 million, were made to align staffing
levels with expected demand. These reductions
occurred predominantly in the first quarter.

• Expenses for accounts receivable collection losses

decreased in 2002. In 2001, we recognized additional
expense due to increased uncertainty about receivable
collections following the September 2001 terrorist
attacks. While we are continuing to maintain
allowances for losses higher than we would have
immediately preceding those events, our allowances
at September 30, 2002, are below those of
September 30, 2001.

Outlook: With continued weakness in commercial
markets due to reduced airline traffic, we believe
Aircraft Engine Systems’ net sales will remain at
volumes that are relatively consistent with the second
half of 2002, resulting in a full-year decrease in 2003
as compared to 2002. Proportionately, Aircraft Engine
Systems’ segment earnings are likely to decrease
slightly more than sales due to a less favorable
sales mix. However, we are continuing to pursue
greater efficiencies and productivity improvements
to minimize the impact on margins.

2001 Compared to 2000

External net sales of Aircraft Engine Systems increased
11% in 2001 over 2000. In addition to solid orders for
products used in regional and narrow-body commercial
jets, sales growth was driven by increased demand for
some OEM products, aeroderivative engine nozzles and
controls for power generation applications, military
spare parts, and commercial aftermarket sales. While
most of our sales are to OEMs, we estimate that about
39% of our sales resulted from the aftermarket in 2001
compared to 42% in 2000. The impact of changes in
selling prices and changes in foreign currency exchange
rates was insignificant.

Aircraft Engine Systems’ segment earnings, as adjusted
to eliminate goodwill-related amortization, increased
38% in 2001 over 2000. In 2000, segment earnings
were impacted by expenses totaling $5.1 million
associated with a workforce management program to
align staffing levels with expected demand. Without
these expenses, adjusted segment earnings would have
been $45.8 million in 2000, and our increase in 2001
over 2000 would have been 23%. This earnings increase
was the result of higher sales and improved segment
earnings margins.

• Cost of goods sold was relatively high in the first half

of 2000. Near the end of the second quarter, we
implemented our workforce management program to
align staffing levels with expected demand. Our cost
of goods sold in 2001, as a percent of sales, was
relatively close to the comparable percent in the last
half of 2000.

• Selling, general, and administrative activities are

relatively independent of changes in sales volumes
and did not increase proportionally with sales.

• Partially offsetting the items above, in 2001, we
recognized additional expense due to increased
uncertainty about receivable collections following the
September 2001 terrorist attacks, and we had higher
losses on disposals of equipment. In 2000, we
reduced certain acquisition-related accruals and
recognized insurance proceeds that settled certain
matters from previous years as a reduction in expense.

Nonsegment Expenses and Gain

In thousands for the year
ended September 30,

Interest expense
Interest income
Corporate expenses
Gain on sale of business

2002 Compared to 2001

2002

2001

2000

$ 5,109
(635)
15,366
—

$ 7,554
(967)
18,753
—

$10,897
(770)
20,689
(25,500)

Interest expense decreased in 2002 from 2001 primarily
because average interest rates were lower in 2002 as
compared to 2001. Our average outstanding debt was
also lower.

Corporate expenses decreased in 2002 from 2001
primarily because of reductions in variable
compensation expense, due to a decline in overall
financial performance of the company.

2001 Compared to 2000

Interest expense decreased in 2001 from 2000 primarily
because we had lower levels of average outstanding debt
in 2001 as compared to 2000. Average interest rates
were also lower.

Corporate expenses were 3% of consolidated net sales in
both 2001 and 2000.

The gain on the sale of business in 2000 relates to a
sale on May 31, 2000, of certain assets associated with
our turbine control retrofit business for cash, with the
buyer assuming certain liabilities. The resulting gain
was reported separately in the statements of
consolidated earnings.

The net sales and earnings of the turbine control retrofit
business were included as part of Industrial Controls
and could not be separately identified. However, we
believe annual sales of this business were approaching
$50 million at the time of the sale.

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

Consolidated Earnings

In thousands, except per share
amounts, for the year
ended September 30,

Adjusted earnings before

income taxes and cumulative
effect of accounting change

Adjusted income taxes

Adjusted earnings before
cumulative effect of
accounting change
Cumulative effect of
accounting change,
net of income taxes

2002

2001

2000

$70,680
25,510

$90,433
34,490

$78,329
28,693

45,170

55,943

49,636

(2,489)

—

Adjusted net earnings

$42,681

$55,943

$49,636

$ 3.99
3.77

$ 4.94
4.94

$ 4.41
4.41

Basic earnings per share amounts:
Adjusted earnings before
cumulative effect of
accounting change
Adjusted net earnings

Diluted earnings
per share amounts:

Adjusted earnings before
cumulative effect of
accounting change
Adjusted net earnings

exceeded its estimated implied fair value. The
cumulative effect of accounting change reflects the
write-down of the goodwill, net of income taxes, to
its implied fair value. In performing our impairment
reviews, we estimated the fair value of the various
reporting units using a present value method that
discounted future cash flows as we expect marketplace
participants would, and we further assessed the
reasonableness of the estimates by using valuation
methods based on market multiples.

Outlook: We believe our sales volume will begin to
recover from the relatively low level we experienced in
our fourth quarter 2002, but we expect consolidated net
sales for the full year will be lower in 2003 as compared
to 2002. Benefits from actions taken in late 2002 to
reduce costs, as well as continued productivity gains and
an improved sales mix, should improve margins. As a
result, we believe that consolidated earnings in 2003 will
approximate earnings of 2002, as measured before the
cumulative effect of the accounting change made in
2002.

$ 3.90
3.69

$ 4.84
4.84

$ 4.39
4.39

2001 Compared to 2000

2002 Compared to 2001 and Outlook

Earnings before the cumulative effect of accounting
change and net earnings, as adjusted to eliminate
goodwill-related amortization and associated income
taxes, decreased in 2002 from 2001. Income taxes were
provided at an effective rate on adjusted earnings before
income taxes of 36.1% in 2002 compared to 38.1% in
2001. The most significant reason for the lower rate in
2002 was related to a transfer of our interest in a joint
venture, which allowed us to reduce valuation
allowances provided on deferred tax assets associated
with a capital loss carryback.

The cumulative effect of accounting change is related to
our October 1, 2001, adoption of Financial Accounting
Standards No. 142, “Goodwill and Other Intangible
Assets.” We completed the transitional goodwill
impairment reviews required by the new standard and
determined that one of our Industrial Controls’
reporting units had a goodwill carrying value that

Earnings before the cumulative effect of accounting
change and net earnings, as adjusted to eliminate
goodwill-related amortization and associated income
taxes, increased in 2001 over 2000. Income taxes were
provided at an effective rate on adjusted earnings before
income taxes of 38.1% in 2001 compared to 36.6% in
2000. The most significant reason for the lower rate in
2000 was related to the sale of our turbine control
retrofit business, which allowed us to use capital loss
carryforwards for which we previously provided
valuation allowances. The spread between basic and
diluted earnings per share increased in 2001 as
compared to 2000, primarily because of increases in the
price for our common stock during 2001.

Results for 2000 included a gain on sale of the turbine
control retrofit business, net of tax, of $17.1 million or
$1.52 per basic share and $1.51 per diluted share.
Without this gain, adjusted net earnings would have
been $32.6 million or $2.89 per basic share and $2.88
per diluted share for 2000. Our results in 2000 also
included costs to streamline operations after the sale,
costs associated with reductions in our workforce, and
certain other costs not indicative of normal operations
which totaled, net of tax, $6.7 million or $0.60 per basic
share and $0.59 per diluted share.

Financial Condition

2001 Compared to 2000

Industrial Controls’ segment assets at September 30,
2001, were 32% higher than a year earlier. Business
acquisitions accounted for about half of the increase.
The remaining increase resulted from changes in
accounts receivable, inventories, and property, plant,
and equipment associated with the level of business
activity. Industrial Controls’ sales were 23% higher in
the fourth quarter 2001 than in the fourth quarter 2000
and we anticipated higher sales volumes in following
quarters. Goodwill and other intangibles decreased by
the amount of amortization for the year.

Aircraft Engine Systems’ segment assets at September
30, 2001, were 8% lower than a year earlier. This
decrease primarily resulted from negotiating accelerated
pay agreements with several of our customers and better
collection experience generally, reducing accounts
receivable. Also affecting receivables, Aircraft Engine
Systems’ sales were 3% lower in the fourth quarter 2001
than in the fourth quarter 2000 and we increased our
allowance for losses by $1.5 million following the
terrorist attacks in September 2001. Other contributing
factors to the decrease in segment assets are that
goodwill and other intangibles decreased by the amount
of amortization for the year and capital expenditures
were below depreciation levels. Increases in inventories
made in anticipation of first quarter 2002 sales partially
offset these decreases.

Our discussion and analysis of financial condition is
presented by segment for assets. We also separately
discuss and analyze other balance sheet measures 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.

Assets

In thousands at September 30,

2002

2001

2000

Segment assets:

Industrial Controls
Aircraft Engine Systems

Nonsegment assets

$286,302
219,480
76,613

$283,072
241,002
60,554

$214,935
260,712
58,076

Total assets

$582,395

$584,628

$533,723

2002 Compared to 2001

Industrial Controls’ segment assets at September 30,
2002, were near last year’s levels. Increases in goodwill
and other intangibles, attributable to business
acquisitions, were largely offset by reductions in
accounts receivable. The reductions in accounts
receivable were primarily related to changes in the level
of sales activity immediately prior to the end of the year.
Industrial Controls’ sales were 11% lower in the fourth
quarter 2002 than in the fourth quarter 2001.

Aircraft Engine Systems’ segment assets at September
30, 2002, were 9% lower than a year earlier. Reductions
in accounts receivable and inventories, both attributable
to changes in the level of business activity, account for
most of the decrease. Aircraft Engine Systems’ sales
were 16% lower in the fourth quarter 2002 than in the
fourth quarter 2001.

Nonsegment assets at September 30, 2002,
increased over the prior year primarily because of
higher cash balances.

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

Other Balance Sheet Measures

In thousands at September 30,

2002

2001

2000

Working capital
Long-term debt, less
current portion

Other liabilities
Commitments and contingencies
Shareholders’ equity

$152,312

$123,744

$100,836

78,192
52,928
—
354,901

77,000
51,042
—
318,862

74,500
50,142
—
275,624

2002 Compared to 2001

Working capital (current assets less current liabilities) at
September 30, 2002, increased over the prior year
primarily as a result of financing activities that provided
$75 million of new long-term debt in 2002, none of
which is current. Principal of this new debt is payable in
seven equal annual installments beginning in 2006. As a
result, our cash and cash equivalents exceeded our
current debt by $11.6 million at September 30, 2002,
whereas last year our current debt exceeded our cash and
cash equivalents by $17.5 million.

At September 30, 2002, required future principal
payments of long-term debt and commitments under
operating leases were as follows:

In thousands for the year(s)
ending September 30,

2003

2004/
2005

2006/
2007 Thereafter

Long-term debt
Operating leases

$ 2,000
3,235

$ — $21,428 $53,572
2,348
2,721

4,037

We currently have a revolving line of credit facility with
a syndicate of U.S. banks totaling $150 million that
expires on June 15, 2003. In addition, we have other
lines of credit facilities, which totaled $56.4 million at
September 30, 2002, that are generally reviewed
annually for renewal.

Provisions of debt agreements include covenants
customary to such agreements that require us to
maintain specified minimum or maximum financial
measures and place limitations on various investing and
financing activities. The agreements also permit the
lenders to accelerate repayment requirements in the
event of a material adverse event. Our most restrictive
covenants require us to maintain a minimum
consolidated net worth and a maximum consolidated
debt to consolidated operating cash flow, as defined in
the agreements. At September 30, 2002, we had the
ability to pay dividends and purchase the company’s
common stock up to $109.2 million.

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 Q in the notes to
consolidated financial statements.

Shareholders’ equity increased 11%, resulting
primarily from 2002 net earnings in excess of cash
dividend payments.

2001 Compared to 2000

Increases in working capital were most significantly
attributed to increases in Industrial Controls’
inventories in anticipation of higher sales volumes in
upcoming quarters and to reductions in short-term
borrowings made possible by the excess of operating
cash flows over our investing cash flows. Shareholders’
equity increased 16%, resulting primarily from 2001 net
earnings in excess of cash dividend payments.

Cash Flows

In thousands for the year
ended September 30,

Net cash provided by
operating activities

Net cash provided by (used in)

investing activities

Net cash used in

financing activities

2002

2001

2000

$91,394

$87,293

$55,717

(48,211)

(61,699)

15,736

(24,514)

(23,521)

(71,299)

2002 Compared to 2001 and Outlook

Net cash flows provided by operations increased by 5%
in 2002 over 2001. This improvement is predominantly
due to relative changes in cash flows associated with
accounts receivable and inventories, which more than
offset relative changes in cash flows associated with
income tax payments and other accruals. While net
earnings for 2002 were lower than 2001, the 2002
measure included additional non-cash charges for the
cumulative effect of an accounting change and an
equipment impairment loss, reducing the cash flow
impact of the decline.

Net cash flows used for investing activities decreased by
$13.5 million in 2002 as compared to 2001. This
change primarily resulted from business acquisition and
divestiture activities of Industrial Controls. We made
payments associated with Industrial Controls’
acquisitions and divestitures totaling $25.8 million in
2002 compared to $35.2 million in 2001. We also
reduced Aircraft Engine Systems’ capital expenditures
by $2.7 million.

Net cash flows used in financing activities were
approximately the same in 2002 as in 2001. As
previously indicated, we received proceeds from long-
term debt totaling $75 million in 2002, which we
principally used to repay debt that was due in 2002 and
2003. Under the terms of the new senior notes, the new
debt is payable in seven equal annual installments
beginning in 2006.

Outlook: Future cash flows from operations and
available revolving lines of credit are expected to be
adequate to meet our cash requirements over the next
twelve months. Our financing activities in 2002 have
enhanced our liquidity for several years by delaying

principal payment requirements for $60 million of debt
from the 2002-2003 timeframe to the 2006-2012
timeframe, and by adding an additional $15 million of
debt to the extended timeframe. We also expect to
replace the current $150 million revolving line of credit
facility, none of which was outstanding at September
30, 2002, with a new facility prior to its expiration on
June 15, 2003. Despite these factors, 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.

2001 Compared to 2000

Net cash flows provided by operations increased by
58% in 2001 over 2000. This improvement is
predominantly due to increased net earnings, exclusive
of the pretax gain from the sale of our turbine control
retrofit business in 2000. For purposes of preparing the
statement of consolidated cash flows, the proceeds from
the sale of the retrofit business were not considered an
operating activity, but the associated income tax
payments were.

Net cash flows for investing activities changed by
$77.4 million in 2001 as compared to 2000. This
change resulted from Industrial Controls’ business
acquisition and divestiture activities. In 2001, we made
payments associated with two acquisitions totaling
$31.2 million and made payments associated with the
prior year’s sale of our turbine control retrofit business
of $4.0 million. In 2000, we received proceeds from the
sale of our retrofit business of $41.7 million.

Net cash flows used in financing activities decreased by
$47.8 million in 2001 from 2000. This decrease is
primarily associated with lower levels of debt reductions
due to two business acquisitions, despite higher levels of
operating cash flows. In 2000, we also used proceeds
received from the sale of the turbine control retrofit
business to reduce debt.

M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s

Other Matters

Critical Accounting Policies

We consider the accounting policies used in preparing
our financial statements to be critical accounting policies
when they are both important to the portrayal of our
financial condition and results of operation, and require
us to make difficult, subjective, or complex judgments.
Critical accounting policies normally result from the
need to make estimates about the effect of matters that
are inherently uncertain. Our most critical accounting
policies are related to our accounting for goodwill, other
long-lived assets, deferred tax asset valuation allowances,
and retirement healthcare benefits.

We test goodwill for impairment on an annual basis
and more often if circumstances require. Estimates
and assumptions, the most important of which are
used to estimate the fair value of reporting units within
the company, impact our test results. To estimate the
fair value of reporting units, we estimate future cash
flows, discount rates, and transaction multiples that we
believe a marketplace participant would use in an arm’s
length transaction.

We test other long-lived assets, including property,
plant, and equipment and other intangibles, for
recoverability whenever events or changes in
circumstances indicate that the carrying values may not
be recoverable. The carrying value of a long-lived asset
is reduced to its fair value whenever estimates of future
cash flows are insufficient to indicate the carrying value
is recoverable. To account for long-lived assets, we form
judgments as to whether recoverability should be
assessed, we estimate future cash flows, and we estimate
fair value. Fair value estimates are most often based on
estimated future cash flows and assumed discount rates.

We establish valuation allowances to reflect the
estimated amount of deferred tax assets that might not
be realized. Our current valuation allowances are
generally for deferred tax assets associated with state
and foreign net operating loss carryforward limitations.
We consider both positive and negative evidence in
forming our judgment as to whether a valuation
allowance is appropriate.

We recognize the cost of retirement healthcare benefits
over employee service periods using an actuarial-based
attribution approach. To determine our net periodic
benefit cost and net accrued benefit, we form judgments
about the best estimate for each assumption used in the
actuarial computation. The two most important
assumptions that impact the computation are the
healthcare cost trend rate and the discount rate.

Our judgments, estimates, and assumptions for
goodwill, other long-lived assets, deferred tax asset
valuation allowances, and retirement healthcare benefits
are impacted by conditions that change over time. As a
result, in the future we could incur impairment charges,
changes to our deferred tax asset valuation allowances,
or changes in our retirement healthcare benefit costs
and accruals that are material to our financial condition
and results of operations.

Market Risks

Our long-term debt and interest rate swap agreements
are sensitive to changes in interest rates. We monitor
trends in interest rates as a basis for determining
whether to enter into fixed rate or variable rate debt
agreements, the duration of such agreements, and
whether to use hedging strategies. Our primary
objective is to minimize our long-term costs of
borrowing. At September 30, 2002, all long-term
debt was denominated in United States dollars and
consisted of fixed rate agreements. However, to
effectively offset our exposure to changes in the fair
value of a portion of our long-term debt, we have
entered into interest rate swap agreements. Under
these agreements, we are swapping fixed rate interest
payments for interest payments at rates that vary with
LIBOR. As measured at September 30, 2002, a
hypothetical 1% immediate increase in interest rates
would adversely affect our 2003 net earnings and cash
flows by approximately $0.3 million and reduce the
combined fair value of our long-term debt and interest
rate swap agreements by approximately $4.2 million.
Last year, a hypothetical 1% immediate increase in
interest rates would have adversely affected our 2002 net
earnings and cash flows by approximately $0.4 million
and reduced the fair value of our long-term debt by
approximately $0.5 million.

Assets, liabilities, and commitments that are to be
settled in cash and are denominated in foreign
currencies for transaction purposes are sensitive to
changes in currency exchange rates. We monitor trends
in foreign currency exchange rates and our exposure to
changes in those rates as a basis for determining
whether to use hedging strategies. Our primary
exposures are to the European Monetary Union euro
and the Japanese yen. We do not have any derivative
instruments associated with foreign currency exchange
rates. A hypothetical 10% immediate increase in the
value of the United States dollar relative to all other
currencies, when applied to September 30, 2002,
balances, would adversely affect our expected 2003 net
earnings and cash flows by approximately $1.1 million.
Last year, a hypothetical 10% immediate increase in the
value of the United States dollar relative to all other
currencies would have adversely affected our expected
2002 net earnings and cash flows by $1.9 million.

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, Statement No. 141 also contains transition
provisions that may result in the reclassification of
carrying values among existing goodwill and other
intangibles. We began applying the provisions of
Statement No. 142 and the transition provisions of
Statement No. 141 on October 1, 2001. Had we not
elected early adoption of these standards at that date, we
would have been required to adopt these standards on
October 1, 2002. Adoption of these new accounting
standards had the following effects on our consolidated
financial statements:

• We recognized an increase in goodwill and a decrease
in other intangibles of $4.4 million on October 1,
2001. This reclassification resulted from the
transition provisions of Statement No. 141, which,
among its other provisions, prohibited the
recognition of an assembled workforce as an
intangible asset apart from goodwill.

• Based on goodwill existing at October 1, 2001,
amortization expense decreased by $4.9 million
in 2002, which increased net earnings in 2002
by approximately $3.1 million. Upon adoption,
Statement No. 142 prohibits amortization
of goodwill.

• We recognized a cumulative effect of an accounting

change, which reduced 2002 net earnings by
$2.5 million. This item resulted from a goodwill
impairment charge, net of income taxes, for an
Industrial Controls reporting unit.

• Disclosures are made in the consolidated financial
statements that adjust certain amounts reported in
prior periods to eliminate goodwill-related
amortization and associated income taxes. Had the
new accounting standards for goodwill and other
intangibles been adopted at the beginning of 2000,
net earnings would have been $2.9 million higher in
2001 and $2.7 million higher in 2000.

In August 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets,” which established a
single accounting model to be used to account for the
impairment of long-lived assets to be disposed of by sale
and which broadened the presentation of discontinued
operations to include more disposal transactions. The
standard also resolved various implementation issues
related to Statement No. 121, which it superseded. We
began applying the provisions of Statement No. 144 in
2002, and it had no impact on our financial statements.
Had we not elected early adoption, we would have been
required to adopt the standard at the beginning of 2003.

In June 2002, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 146, “Accounting for Costs Associated
with Exit or Disposal Activities.” Under this new
standard, a liability for a cost associated with an exit or
disposal activity is to be recognized at its fair value when
the liability is incurred. We began applying the
provisions of Statement No. 146 in 2002, and it had no
material impact on our financial statements. Had we not
elected early adoption, we would have been required to
adopt the standard for exit or disposal activities initiated
after December 31, 2002.

St a t e m e n t s o f C o n s o l i d a t e d E a r n i n g s
Woodward Governor Company and Subsidiaries

(In thousands except per share amounts)

Net sales

Costs and expenses:

Cost of goods sold
Selling, general, and administrative expenses
Amortization of intangible assets
Interest expense
Interest income
Other expense—net

Gain on sale of business

Total costs and expenses, net of gain

Earnings before income taxes and

cumulative effect of accounting change

Income taxes

Earnings before cumulative effect of accounting change
Cumulative effect of accounting change, net of income taxes

Year Ended September 30,

2002

2001

2000

$679,991

$678,791

$597,385

539,130
58,765
3,748
5,109
(635)
3,194
—

609,311

70,680
25,510

45,170
(2,489)

511,027
67,437
7,055
7,554
(967)
730
—

592,836

85,955
32,887

53,068
—

453,538
77,463
6,418
10,897
(770)
1,247
(25,500)

523,293

74,092
27,116

46,976
—

Net earnings

$ 42,681

$ 53,068

$ 46,976

Reconciliation of reported to adjusted earnings:
Reported earnings before cumulative effect of accounting change
Goodwill-related amortization, net of income taxes

$ 45,170
—

$ 53,068
2,875

$ 46,976
2,660

Adjusted earnings before cumulative effect of accounting change

$ 45,170

$ 55,943

$ 49,636

Reported net earnings
Goodwill-related amortization, net of income taxes

Adjusted net earnings

Statements of Consolidated Earnings continued on next page.

$ 42,681
—

$ 53,068
2,875

$ 46,976
2,660

$ 42,681

$ 55,943

$ 49,636

St a t e m e n t s o f C o n s o l i d a t e d E a r n i n g s — c o n t i n u e d
Woodward Governor Company and Subsidiaries

(In thousands except per share amounts)

2002

2001

2000

Year Ended September 30,

Basic per share amounts:
Reported earnings before cumulative effect of accounting change
Goodwill-related amortization, net of income taxes

Adjusted earnings before cumulative effect of accounting change

Reported earnings before cumulative effect of accounting change
Cumulative effect of accounting change, net of income taxes

Reported net earnings
Goodwill-related amortization, net of income taxes

Adjusted net earnings

Diluted per share amounts:
Reported earnings before cumulative effect of accounting change
Goodwill-related amortization, net of income taxes

Adjusted earnings before cumulative effect of accounting change

Reported earnings before cumulative effect of accounting change
Cumulative effect of accounting change, net of income taxes

Reported net earnings
Goodwill-related amortization, net of income taxes

Adjusted net earnings

$3.99
—

$3.99

$3.99
(.22)

3.77
—

$3.77

$3.90
—

$3.90

$3.90
(.21)

3.69
—

$3.69

$4.69
.25

$4.94

$4.69
—

4.69
.25

$4.94

$4.59
.25

$4.84

$4.59
—

4.59
.25

$4.84

$4.17
.24

$4.41

$4.17
—

4.17
.24

$4.41

$4.15
.24

$4.39

$4.15
—

4.15
.24

$4.39

Weighted-average number of basic shares outstanding
Weighted-average number of diluted shares outstanding

11,325
11,577

11,318
11,561

11,263
11,318

See accompanying Notes to Consolidated Financial Statements.

C o n s o l i d a t e d B a l a n c e S h e e t s
Woodward Governor Company and Subsidiaries

(In thousands except per share amounts)

Assets

Current assets:

Cash and cash equivalents
Accounts receivable, less allowance for losses
of $2,717 for 2002 and $4,720 for 2001

Inventories
Deferred income taxes

Total current assets

Property, plant, and equipment, at cost:

Land
Buildings and improvements
Machinery and equipment
Construction in progress

Less accumulated depreciation

Property, plant, and equipment—net
Goodwill
Other intangibles—net
Other assets
Deferred income taxes

At September 30,

2002

2001

$ 29,828

$ 10,542

76,406
127,112
15,340

248,686

8,046
136,771
242,487
3,312

390,616
266,994

123,622
115,265
66,762
10,175
17,885

102,008
131,160
17,758

261,468

7,966
131,761
242,266
4,762

386,755
256,179

130,576
95,704
69,131
11,571
16,178

Total assets

$582,395

$584,628

Liabilities and shareholders’ equity

Current liabilities:

Short-term borrowings
Current portion of long-term debt
Accounts payable and accrued expenses
Income taxes payable

Total current liabilities

Long-term debt, less current portion
Other liabilities
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

Additional paid-in capital
Unearned ESOP compensation
Accumulated other comprehensive earnings
Retained earnings

Less treasury stock, at cost

Total shareholders’ equity

$ 16,185
2,000
74,995
3,194

96,374

78,192
52,928
—

$ 5,561
22,500
91,180
18,483

137,724

77,000
51,042
—

—

106
13,542
(1,418)
2,823
359,556

374,609
19,708

354,901

106
13,440
(3,297)
1,046
327,276

338,571
19,709

318,862

Total liabilities and shareholders’ equity

$582,395

$584,628

See accompanying Notes to Consolidated Financial Statements.

St a t e m e n t s o f C o n s o l i d a t e d S h a re h o l d e r s ’ E q u i t y
Woodward Governor Company and Subsidiaries

Unearned
ESOP
Compensation

Accumulated Other
Comprehensive
Earnings

(In thousands except per share amounts)

Balance at September 30, 1999

Net earnings

Other comprehensive earnings—

Foreign currency translation adjustments

Total comprehensive earnings

Purchases of treasury stock

Sales of treasury stock

Issuance of stock to ESOP

ESOP compensation expense

Cash dividends—$.93 per common share

Tax benefit applicable to ESOP dividend and stock options

Balance at September 30, 2000

Net earnings

Other comprehensive earnings:

Foreign currency translation adjustments,
net of reclassification to earnings

Unrealized losses on derivatives

Total comprehensive earnings

Sales of treasury stock

ESOP compensation expense

Cash dividends—$.93 per common share

Tax benefit applicable to ESOP dividend and stock options

Balance at September 30, 2001

Net earnings

Other comprehensive earnings:

Foreign currency translation adjustments

Reclassification of unrealized losses on
derivatives to earnings

Minimum pension liability adjustment

Total comprehensive earnings

Purchases of treasury stock

Sales of treasury stock

ESOP compensation expense

Cash dividends—$.93 per common share

Cash dividend paid by subsidiary to minority shareholder

Tax benefit applicable to ESOP dividend and stock options

Common
Stock

$106

—

106

—

106

—

Additional
Paid-in
Capital

$13,300

—

(12)

—

13,295

—

145

—

$ (7,450)

—

2,142

—

(5,308)

—

2,011

—

13,440

(3,297)

—

102

—

1,879

—

Retained
Earnings

$247,420

46,976

—

(10,472)

507

284,431

53,068

—

(10,526)

303

327,276

42,681

—

(10,533)

(198)

330

Treasury Stock

Amount

Total
Amount

890

—

(101)

(5)

—

848

—

(10)

—

838

—

(10)

—

$(20,735)

$241,992

—

(1,762)

2,423

129

—

46,976

(6,306)

40,670

(1,762)

2,411

136

2,142

(10,472)

507

(19,945)

275,624

—

53,068

—

236

—

(625)

(1,374)

51,069

381

2,011

(10,526)

303

(19,709)

318,862

—

(286)

287

—

42,681

2,823

154

(1,200)

44,458

(286)

389

1,879

(10,533)

(198)

330

$9,351

—

(6,306)

—

3,045

—

(625)

(1,374)

—

1,046

—

2,823

154

(1,200)

—

Balance at September 30, 2002

$106

$13,542

$ (1,418)

$ 2,823

$359,556

832

$(19,708)

$354,901

See accompanying Notes to Consolidated Financial Statements.

St a t e m e n t s o f C o n s o l i d a t e d C a s h F l ow s
Woodward Governor Company and Subsidiaries

(In thousands)

Cash flows from operating activities:
Net earnings

Adjustments to reconcile net earnings to net
cash provided by operating activities:
Cumulative effect of accounting change, net of income taxes
Depreciation and amortization
Impairment loss on equipment
Net loss on sale of property, plant, and equipment
ESOP compensation expense
Deferred income taxes
Unrealized losses on derivatives
Reclassification of unrealized losses on derivatives to earnings
Equity in loss of unconsolidated affiliate
Gain on sale of business
Changes in operating assets and liabilities,
net of business acquisitions and sale:

Accounts receivable
Inventories
Accounts payable and accrued expenses
Income taxes payable
Other—net

Total adjustments

Net cash provided by operating activities

Cash flows from investing activities:
Payments for purchase of property, plant, and equipment
Proceeds from sale of property, plant, and equipment
Proceeds from sale of business—net of direct costs
Payments associated with sale of business
Investment in unconsolidated affiliate
Business acquisitions, net of cash acquired

Net cash provided by (used in) investing activities

Cash flows from financing activities:
Cash dividends paid
Proceeds from sales of treasury stock
Purchases of treasury stock
Net proceeds (payments) from borrowings under revolving lines
Proceeds from long-term debt
Payments of long-term debt

Net cash used in financing activities

Effect of exchange rate changes on cash

Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

Supplemental cash flow information:
Interest expense paid
Income taxes paid

Noncash investing:
Liabilities assumed in business acquisitions (sale)—net

See accompanying Notes to Consolidated Financial Statements.

Year Ended September 30,

2002

2001

2000

$42,681

$53,068

$46,976

2,489
32,088
3,000
354
1,879
1,243
—
154
—
—

29,287
9,028
(20,635)
(14,563)
4,389

48,713

91,394

—
32,732
—
1,445
2,011
1,303
(1,374)
—
—
—

3,096
(25,126)
12,219
10,271
(2,352)

34,225

87,293

(26,903)
(22,898)
404
439
—
—
—
(3,985)
— —
(31,215)

(25,752)

(48,211)

(61,699)

(10,731)
389
(286)
(25,149)
75,000
(63,737)

(24,514)

617

19,286
10,542

(10,526)
381
—
9,124
—
(22,500)

(23,521)

(846)

1,227
9,315

—
30,419
—
411
2,142
(9)
—
—
271
(25,500)

(3,997)
(3,746)
3,994
4,305
451

8,741

55,717

(27,416)
1,700
41,742
—
(290)
—

15,736

(10,472)
2,411
(1,762)
(39,826)
—
(21,650)

(71,299)

(1,288)

(1,134)
10,449

$29,828

$10,542

$ 9,315

$ 2,982
38,140

$ 8,058
19,769

$11,854
22,656

5,040

501

(1,430)

N o t e s t o C o n s o l i d a t e d F i n a n c i a l St a t e m e n t s
(In thousands of dollars except per share amounts)

A. Significant accounting policies:

Principles of consolidation: The consolidated financial
statements include the accounts of the company and its
majority-owned subsidiaries. Transactions within and
between these companies are eliminated. Results of joint
ventures in which the company does not have a
controlling financial interest are included in the financial
statements using the equity method of accounting.

Use of estimates: Financial statements prepared in
conformity with accounting principles generally accepted
in the United States require the use of estimates and
assumptions that affect amounts reported. Actual results
could differ materially from our estimates.

Foreign currency translation: The assets and liabilities of
substantially all subsidiaries outside the United States are
translated at year-end rates of exchange, and earnings
and cash flow statements are translated at weighted-
average rates of exchange. Translation adjustments are
accumulated with other comprehensive earnings as a
separate component of shareholders’ equity and are
presented net of tax in the statements of consolidated
shareholders’ equity.

Revenue recognition: We recognize sales when delivery
of product has occurred or services have been rendered
and there is persuasive evidence of a sales arrangement,
selling prices are fixed or determinable, and collectibility
from the customer is reasonably assured.

Research and development costs: Expenditures related
to new product development are charged to expense
when incurred and totaled approximately $36,700 in
2002, $30,400 in 2001, and $29,100 in 2000.

Income taxes: Deferred income taxes are provided for the
temporary differences between the financial reporting
basis and the tax basis of the company’s assets and
liabilities. We provide for taxes that may be payable if
undistributed earnings of overseas subsidiaries were to be
remitted to the United States, except for those earnings
that we consider to be permanently reinvested.

Cash equivalents: Highly liquid investments purchased
with an original maturity of three months or less are
considered to be cash equivalents.

Inventories: Inventories are valued at the lower of cost
or market, with cost being determined on a first-in,
first-out basis.

Property, plant, and equipment: Property, plant, and
equipment are recorded at cost and are depreciated over
the estimated useful lives of the assets, ranging from 5
to 45 years for buildings and improvements and 3 to 15
years for machinery and equipment. Assets placed in
service after September 30, 1998, are depreciated using
the straight-line method and assets placed in service as
of and prior to September 30, 1998, are depreciated
principally using accelerated methods. Assets are tested
for recoverability whenever events or circumstances
occur that indicate the carrying value is not recoverable.

Goodwill: Goodwill represents the excess of the cost of
an acquired entity over the net amount assigned to
assets acquired and liabilities assumed. Goodwill is
tested for impairment on an annual basis and more
often if circumstances require. Impairment losses are
recognized whenever the implied fair value of goodwill
is less than its carrying value. Prior to October 1, 2001,
goodwill was amortized over periods of up to 30 years.
Beginning October 1, 2001, goodwill is not amortized.

Other intangibles: Other intangibles are recognized
apart from goodwill whenever an acquired intangible
asset arises from contractual or other legal rights, or
whenever it is capable of being separated or divided
from the acquired entity and sold, transferred, licensed,
rented, or exchanged, either individually or in
combination with a related contract, asset, or liability.
An intangible other than goodwill is amortized over its
estimated useful life unless that life is determined to be
indefinite. Currently, all of our intangibles have an
estimated useful life and are being amortized.
Impairment losses are recognized if the carrying amount
of an intangible subject to amortization is not
recoverable from expected future cash flows and its
carrying amount exceeds its fair value.

N o t e s t o C o n s o l i d a t e d F i n a n c i a l St a t e m e n t s
(In thousands of dollars except per share amounts)

Derivatives: We recognize derivatives, which are used
to hedge risks associated with interest rates, as assets or
liabilities at fair value. These derivatives are designated
as hedges of our exposure to changes in the fair value of
long-term debt or as hedges of our exposure to variable
cash flows of future interest payments. The gain or loss
in the value of a derivative designated as a fair value
hedge is recognized in earnings in the period of change
together with an offsetting loss or gain on long-term
debt. The effective portion of a gain or loss in the value
of a derivative designated as a cash flow hedge is
initially reported as a component of other
comprehensive earnings and is subsequently reclassified
into earnings when the future interest payments affect
earnings. The ineffective portion of the gain or loss in
the value of a derivative designated as a cash flow hedge
is reported in earnings immediately.

Reclassifications: Certain reclassifications were made to
the 2000 and 2001 financial statements to conform to
the 2002 presentation.

Cumulative Effect of Accounting Change: We adopted
Statement No. 142, “Goodwill and Other Intangible
Assets,” and the transition provisions of Statement No.
141, “Business Combinations,” on October 1, 2001. As
a result of adopting these new standards, we completed
the transitional goodwill impairment reviews required
by the new standards and recognized an aftertax loss of
$2,489 as a cumulative effect of an accounting change.
In performing our impairment reviews, we estimated
the fair values of the various reporting units using a
present value method that discounted future cash flows
as we expect marketplace participants would, and we
further assessed the reasonableness of the estimates by
using valuation methods based on market multiples.
The resulting loss, which was related to an Industrial
Controls’ reporting unit, was incurred to reduce
goodwill to its implied fair value.

Adoption of these new standards also resulted in the
reclassification of $4,426 from other intangibles to
goodwill on October 1, 2001. This amount was
related to an assembled workforce. Based on goodwill
that existed at September 30, 2001, these new
standards reduced amortization expense in 2002 by
approximately $4,900.

New Accounting Standards: In August 2001, the
Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144,
“Accounting for the Impairment or Disposal of Long-
Lived Assets,” which established a single accounting
model to be used to account for the impairment of long-
lived assets to be disposed of by sale and which
broadened the presentation of discontinued operations
to include more disposal transactions. The standard also
resolved various implementation issues related to
Statement No. 121, which it superseded. We began
applying the provisions of Statement No. 144 in 2002,
and it had no impact on our financial statements. Had
we not elected early adoption, we would have been
required to adopt the standard at the beginning of 2003.

B. Business acquisitions and sale:

In January 2002, we acquired the capital stock of
Leonhard-Reglerbau Dr.-Ing. Adolf Leonhard GmbH,
and in March 2002, we acquired certain assets and
assumed certain liabilities of Nolff’s Carburetion, Inc.
Leonhard-Reglerbau specializes in the design,
manufacture, and sale of control, protection, and
monitoring devices for power generation equipment.
Nolff’s manufactures and sells natural gas and propane
fuel systems for small industrial engines. Our cost for
these acquisitions totaled $25,313, of which $17,484
was recognized as goodwill, $1,000 was recognized as
customer relationships, and $4,227 was recognized as
other intangibles, all in the Industrial Controls segment.
We are using weighted-average amortization periods of
five years for customer relationships, six years for other
intangibles, and six years in the aggregate. The amount
of goodwill expected to be fully deductible for income
tax purposes is $11,391. If we had completed the
acquisitions on October 1, 2001, net sales and net
earnings for 2002 would not have been materially
different from amounts reported in the statements of
consolidated earnings.

In November 2000, we acquired the stock of Hoeflich
Controls, Inc., a manufacturer of ignition systems, and
certain related assets, and in June 2001, we acquired
certain assets and assumed certain liabilities of the Bryce
diesel fuel injection business of Delphi Automotive
Systems. These acquisitions, which cost a total of
$31,844, were accounted for using the purchase method
of accounting. In 2001, acquired goodwill was
amortized based on an amortization period of 15 years.
Beginning October 1, 2001, goodwill is no longer
amortized. Under terms of the Hoeflich purchase
agreement, we could be required to make an additional
payment of up to $1,200 in fiscal year 2004, contingent
upon attaining certain investment and sales volumes, as
defined by the agreement. If we had completed the
acquisitions on October 1, 1999, net sales and net
earnings for 2001 and 2000 would not have been
materially different from amounts reported in the
statements of consolidated earnings.

At the time of our acquisition from Delphi, one of
our directors was an executive vice president with
Delphi Automotive Systems and served as president
in a sector other than the one containing diesel fuel
injection businesses.

C. Impairment loss on equipment:

In 2002, we reduced the carrying value of certain
Industrial Controls manufacturing equipment to its
estimated fair value. This equipment is no longer in
service and is to be disposed of. The resulting loss,
which totaled $3,000, was recognized as other expense
in the statement of consolidated earnings. A present
value technique involving multiple cash flow scenarios
was used to estimate the fair value of the equipment.

D. Income taxes:

Income taxes consisted of the following:

Year ended September 30,

2002

2001

2000

Current:
Federal
State
Foreign
Deferred

$16,784
2,288
5,125
1,313

$23,884
3,064
6,603
(664)

$17,947
2,202
5,456
1,511

$25,510

$32,887

$27,116

Deferred income taxes presented in the consolidated
balance sheets are related to the following:

At September 30,

Deferred tax assets:

Postretirement and

early retirement benefits
Foreign net operating loss

and state tax credits

Inventory
Other
Valuation allowance

Total deferred tax assets,

net of valuation allowance

Deferred tax liabilities:
Intangibles—net
Other

Total deferred tax liabilities

Net deferred tax assets

2002

2001

$17,933

$17,853

11,943
7,219
26,899
(12,033)

9,796
6,105
24,961
(10,936)

51,961

47,779

(11,401)
(7,335)

(8,084)
(5,759)

(18,736)

(13,843)

$33,225

$33,936

We have not provided for taxes on $11,595 of
undistributed foreign earnings that we consider
permanently reinvested. These earnings could become
subject to income taxes if they are remitted as dividends,
are loaned to the company, or if we sell our stock in the
subsidiaries. However, we believe that foreign tax
credits would largely offset any income tax that might
otherwise be due.

We recorded a valuation allowance to reflect the
estimated amount of deferred tax assets that may not be
realized primarily due to foreign net operating loss
carryforward limitations. Remaining deferred tax assets
are expected to be realized through future earnings. The
changes in the valuation allowance were as follows:

Year ended September 30,

Beginning balance
Foreign net operating loss carryforward
State net operating loss carryforward
Capital loss carryback utilization

Ending balance

2002

2001

$(10,936)
(2,137)
(10)
1,050

$(11,168)
25
177
30

$(12,033)

$(10,936)

N o t e s t o C o n s o l i d a t e d F i n a n c i a l St a t e m e n t s
(In thousands of dollars except per share amounts)

F. Inventories:

At September 30,

Raw materials
Component parts
Work in process
Finished goods

G. Goodwill:

At September 30,

Industrial Controls:
Beginning balance
Goodwill acquired
Reclassification of assembled workforce
Cumulative effect of accounting change
Foreign currency exchange rate changes
Amortization expense

Ending balance

Aircraft Engine Systems:

2002

2001

$ 5,499
77,004
27,095
17,514

$ 4,638
74,595
33,472
18,455

$127,112

$131,160

2002

2001

$ 37,849
17,784
159
(4,015)
1,366
—

$ 31,008
8,382
—
—
343
(1,884)

$ 53,143

$ 37,849

Beginning balance
Reclassification of assembled workforce
Amortization expense

$ 57,855
4,267
—

$ 60,245
—
(2,390)

Ending balance

$ 62,122

$ 57,855

Beginning balance
Goodwill acquired
Reclassification of assembled workforce
Cumulative effect of accounting change
Foreign currency exchange rate changes
Amortization expense

Ending balance

$ 95,704
17,784
4,426
(4,015)
1,366
—

$ 91,253
8,382
—
—
343
(4,274)

$115,265

$ 95,704

Consolidated amortization expense associated with
assembled workforce totaled $204 in 2001, consisting
of $7 for Industrial Controls and $197 for Aircraft
Engine Systems.

The reasons for the differences between our effective
income tax rate and the United States statutory federal
income tax rate were as follows:

Percent of pretax earnings,
year ended September 30,

Statutory rate
State income taxes, net
of federal tax benefit

Foreign loss effect
Foreign tax rate differences
Foreign sales benefits
Other items, net
Capital loss utilization

Effective rate

E. Earnings per share:

2002

35.0

2.6
2.2
(1.1)
(1.6)
0.5
(1.5)

36.1

2001

35.0

2.2
1.5
0.1
(1.1)
0.6
—

38.3

2000

35.0

2.1
2.4
0.1
(1.6)
0.2
(1.6)

36.6

Year ended September 30,

2002

2001

2000

$45,170

$53,068

$46,976

Earnings before cumulative

effect of accounting
change (A)

Determination of shares,
in thousands:

Weighted-average shares

of common stock
outstanding (B)
Assumed exercise of

stock options

Weighted-average shares of
common stock outstanding
assuming dilution,
in thousands (C)

Earnings before cumulative

effect of accounting change:
Basic per share amount (A/B)
Diluted per share amount (A/C)

The following stock options were outstanding during
2002, 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:

Year ended September 30,

2002

Options
Weighted-average exercise price

12,543
$70.28

2001

4,884
$69.73

2000

203,429
$32.22

11,325

11,318

11,263

Consolidated:

252

243

11,577

11,561

11,318

$ 3.99
3.90

$ 4.69
4.59

$ 4.17
4.15

H. Other intangibles—net:

J. Long-term debt:

At September 30,

2002

2001

At September 30,

2002

2001

Industrial Controls:

Customer relationships:

Amount acquired
Accumulated amortization

Other:

Amount acquired
Accumulated amortization

Total

Aircraft Engine Systems:
Customer relationships:

Amount acquired
Accumulated amortization

Other:

Amount acquired
Accumulated amortization

Total

Consolidated:

Customer relationships:

Amount acquired
Accumulated amortization

Other:

Amount acquired
Accumulated amortization

Total

$16,780
(2,379)

$15,780
(1,753)

14,401

14,027

20,487
(1,749)

16,444
(778)

18,738

15,666

$33,139

$29,693

$28,547
(4,124)

$28,547
(3,172)

24,423

25,375

11,785
(2,585)

16,708
(2,645)

9,200

14,063

$33,623

$39,438

$45,327
(6,503)

$44,327
(4,925)

38,824

39,402

32,272
(4,334)

33,152
(3,423)

27,938

29,729

$66,762

$69,131

Amortization expense associated with current
intangibles is expected to be approximately $4,100 for
each year 2003-2006 and approximately $3,900 in 2007.

I. Short-term borrowings:

Short-term borrowings reflect borrowings under certain
bank lines of credit. The total amount available under
these lines of credit, including outstanding borrowings,
totaled $56,432 at September 30, 2002, and $43,483 at
September 30, 2001. Interest on borrowings under the
lines of credit is based on various short-term rates.
Several of the lines require compensating balances or
commitment fees. The lines, generally reviewed
annually for renewal, are subject to the usual terms and
conditions applied by the banks. The weighted-average
interest rate for outstanding borrowings was 4.1% at
September 30, 2002, 4.8% at September 30, 2001, and
6.5% at September 30, 2000.

Senior notes—6.39%
ESOP debt guarantee—8.01%
Term note
Revolving line of credit facility
Fair value hedge adjustments:

Interest rate swap agreements
Unrecognized discontinued hedge gains

Less current portion

$75,000
2,000
—
—

1,334
1,858

80,192
2,000

$ —
4,500
60,000
35,000

—
—

99,500
22,500

$78,192

$77,000

The senior notes, which are held by multiple
institutions, are uncollateralized.

In June 1992, the company’s Member Investment and
Stock Ownership Plan (a qualified employee stock
ownership plan) borrowed $25,000 for a term of eleven
years and used the proceeds to buy 1,027,224 shares of
common stock from the company. We guaranteed the
payment of the loan and agreed to make future
contributions to the plan sufficient to repay the loan.
Accordingly, the original amount of the loan was
recorded as long-term debt and unearned ESOP
compensation. The consolidated balance sheets reflect
the outstanding balance of the loan in long-term debt
and the remaining unearned ESOP compensation as a
component of shareholders’ equity. Unearned ESOP
compensation has been reduced using the shares
allocated method for shares allocated to plan
participants. The unallocated shares were 58,276 at
September 30, 2002; 135,472 at September 30, 2001;
and 218,076 at September 30, 2000.

Required future principal payments of the senior notes
and ESOP debt guarantee at September 30, 2002, are
$2,000 in 2003, $10,714 in 2006, $10,714 in 2007, and
$53,572 thereafter.

We have effectively offset our exposure to changes in
the fair value of a portion of the senior notes by entering
into interest rate swap agreements. Under these
agreements, we are swapping interest payments related
to a notional amount of $50,000 at a fixed rate of 6.39%
for rates that vary with LIBOR. The timing of these
payments corresponds directly with interest payments
due under the senior notes and we have assessed the
swaps as having no hedge ineffectiveness. As a result,
the fair value of these swap agreements is shown as an
adjustment of long-term debt.

N o t e s t o C o n s o l i d a t e d F i n a n c i a l St a t e m e n t s
(In thousands of dollars except per share amounts)

We also discontinued certain interest rate swaps that
were previously designated as fair value hedges of long-
term debt. This action resulted in a gain that will be
recognized as a reduction of interest expense over the
term of the associated hedged debt using the interest rate
method of amortization. The unrecognized portion of
the gain is presented as an adjustment to long-term debt.

The revolving line of credit facility involves
uncollateralized financing arrangements with a
syndicate of U.S. banks. A maximum amount of
$150,000 is available under the revolving line of credit
facility, which expires June 15, 2003. Interest rates on
borrowings under the line vary with LIBOR, the money
market rate, or the prime rate. Similar financing
arrangements were associated with the term note, which
was repaid in 2002.

Provisions of the debt agreements include covenants
customary to such agreements that require us to
maintain specified minimum or maximum financial
measures and place limitations on various investing and
financing activities. The agreements also permit the
lenders to accelerate repayment requirements in the
event of a material adverse event. Our most restrictive
covenants require us to maintain a minimum
consolidated net worth and a maximum consolidated
debt to consolidated operating cash flow ratio, as
defined in the agreements. At September 30, 2002, we
had the ability to pay dividends and purchase the
company’s common stock up to $109,220.

K. Accounts payable and accrued expenses:

At September 30,

Accounts payable
Salaries and other member benefits
Deferred compensation
Taxes, other than on income
Other items—net

2002

2001

$22,739
19,846
7,701
4,058
20,651

$27,613
31,872
7,481
4,586
19,628

$74,995

$91,180

Included in salaries and other member benefits are
accrued termination benefits for 36 members totaling
$1,389 at September 30, 2002. Termination benefits
were provided in connection with workforce
management programs to better align our workforce
with expected demand. Expenses for these termination
benefits totaled $8,045 in 2002, of which Industrial
Controls incurred $4,032 for 233 members and Aircraft

Engine Systems incurred $4,013 for 202 members.
Both cost of goods sold and selling, general, and
administrative expense were affected. We paid $6,656
of these expenses in 2002, and the remaining accrual
is expected to be paid predominantly in the first
quarter of 2003.

Certain key management members may elect to defer
the payment of a portion of their compensation to
future periods. These deferrals are recorded as deferred
compensation, and individual member balances are
increased or decreased as if they were held in specified
investments, including common stock of the company.
Deferred compensation balances are payable upon the
retirement or other termination of a participating
member, or as otherwise specified by plan documents.

L. Retirement benefits:

We provide various benefits to eligible members of our
company, including contributions to various defined
contribution plans, pension benefits associated with
defined benefit plans, and retirement healthcare
benefits. The amount of expense associated with
defined contribution plans totaled $11,927 in 2002,
$11,239 in 2001, and $11,062 in 2000. Information
regarding our retirement pension benefits and
retirement healthcare benefits are provided in the tables
that follow.

Among the changes in the retirement pension benefit
obligation and plan assets are increases due to a
business acquisition that occurred in 2001. In the table
that follows, these increases are reflected in 2002,
which is the year the amounts were determined. Plan
amendments to retirement healthcare benefits in 2002
relate to changes in cost-sharing provisions.

For retirement healthcare benefits, we assumed net
healthcare cost trend rates of 10.00% in 2003,
decreasing gradually to 4.50% in 2008, and remaining
at 4.50% thereafter. A 1.00% increase in assumed
healthcare cost trend rates would have increased the
total of the service and interest cost components by
$1,137 and increased the benefit obligation at the end
of the year by $9,862 in 2002. Likewise, a 1.00%
decrease in the assumed rates would have decreased the
total of service and interest cost components by $863
and decreased the benefit obligation by $8,522 in 2002.

At or for the year ended September 30,

Changes in benefit obligation:

Benefit obligation at beginning of year
Service cost
Interest cost
Contribution by plan participants
Net actuarial losses (gains)
Foreign currency exchange rate changes
Benefits paid
Plan amendments
Business acquisition
Curtailment loss
Settlement gains

Retirement Pension Benefits

United States

2002

2001

Other Countries
2002

2001

Retirement
Healthcare Benefits
2002

2001

$14,369
—
1,035
—
2,117
—
(315)
9
—
—
—

$12,907
—
995
—
724
—
(257)
—
—
—
—

$15,424
1,301
1,378
172
2,990
1,323
(2,371)
—
14,971
357
—

$16,386
698
370
—
(353)
(1,568)
(109)
—
—
—
—

$ 49,996
1,208
3,443
3,150
17,458
117
(7,122)
(9,396)
—
—
(304)

$ 39,631
894
3,019
3,082
9,931
—
(6,561)
—
—
—
—

Benefit obligation at end of year

17,215

14,369

35,545

15,424

58,550

49,996

Changes in plan assets:

Fair value of plan assets at beginning of year
Actual return on plan assets
Foreign currency exchange rate changes
Contributions by the company
Contributions by plan participants
Benefits paid
Business acquisition
Settlements

Fair value of plan assets at end of year

Funded status
Unamortized prior service cost
Unrecognized net losses
Unamortized transition obligation
Accumulated other comprehensive income

9,839
(872)
—
400
—
(315)
—
—

9,052

(8,163)
8
5,211
—
(1,088)

11,488
(1,392)
—
—
—
(257)
—
—

12,372
(4,304)
1,305
1,339
172
(2,371)
14,971
—

16,114
(2,721)
(1,525)
613
—
(109)
—
—

9,839

23,484

12,372

(4,530)
—
1,421
—
—

(12,061)
(92)
10,965
691
(848)

(3,052)
(103)
2,305
798
—

—
—
—
3,972
3,150
(6,818)
—
(304)

—

(58,550)
—
10,802
—
—

—
—
—
3,479
3,082
(6,561)
—
—

—

(49,996)
—
2,769
—
—

Net accrued benefit

$(4,032)

$(3,109)

$(1,345)

$ (52)

$(47,748)

$(47,227)

Year ended September 30,

Components of net periodic benefit cost:

Service cost
Interest cost
Expected return on plan assets
Amortization of unrecognized transition obligation
Recognized losses (gains)
Recognized prior service costs
Settlement or curtailment losses (gains)

Retirement Pension Benefits

United States
2001

2000

2002

Other Countries
2001

2000

2002

Retirement
Healthcare Benefits
2001

2002

2000

$ — $ — $ — $1,301
1,378
(1,318)
85
—
(8)
357

1,035
(801)
—
1
—
—

995
(943)
—
(23)
—
—

956
(893)
—
—
—
—

$ 698
370
(363)
89
—
(8)
—

$ 781
396
(337)
100
9
(9)
—

$1,208
3,443
—
—
22
—
(304)

$ 894
3,019
—
—
(69)
—
—

$1,051
2,758
—
—
(142)
—
(964)

Net periodic benefit cost

$ 235

$ 29

$ 63

$1,795

$ 786

$ 940

$4,369

$3,844

$2,703

Increase in minimum pension liability adjustment

included in other comprehensive earnings

$1,088

$ — $ — $ 848

$ — $ — $ — $ — $ —

Applicable weighted-average assumptions:

Discount rate
Rate compensation
Expected long-term rate of return on plan assets

6.50%
5.00%
8.25%

7.25%
5.00%
8.25%

7.75%
5.00%
8.25%

4.29%
5.98%
3.22%

2.50%
3.50%
2.50%

6.75%

7.25%

7.75%

N o t e s t o C o n s o l i d a t e d F i n a n c i a l St a t e m e n t s
(In thousands of dollars except per share amounts)

M. Stock option plan:

Changes in outstanding stock options were as follows:

We have a stock option plan covering key management
members and directors of the company. Options
granted under the plan generally have a term of 10 years
and vest evenly at the end of each year over four years
from the date of grant. There were 2,100,000 shares of
common stock authorized for issuance under the plan
at September 30, 2002. We account for options in
accordance with Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to Employees,”
and therefore we do not recognize compensation
expense in association with options granted at or above
the market price of our common stock at the date of
grant. As required by Statement of Financial
Accounting Standards No. 123, “Accounting for
Stock-Based Compensation,” the following table
presents pro forma net earnings and per share
information that has been prepared as if compensation
for these options was recognized:

Year ended September 30,

2002

2001

2000

Net earnings
Basic earnings per share
Diluted earnings per share

$41,771
3.69
3.61

$52,420
4.63
4.53

$46,850
4.16
4.14

The determination of compensation expense for this pro
forma information was based upon the estimated fair
value of the options granted on the date of their grant.
The weighted-average estimated fair value of options
granted was $16.03 in 2002, $16.05 in 2001, and $6.82
in 2000. These estimates were determined using the
Black-Scholes option pricing model and the following
weighted-average assumptions by grant year:

Year ended September 30,

Risk-free interest rate
Expected life
Expected volatility
Expected dividend yield

2002

4.5%
7 years
35.0%
2.8%

2001

5.8%
7 years
30.0%
1.7%

2000

6.9%
7 years
26.4%
3.7%

Balance at September 30, 1999

Options granted
Options exercised
Options canceled

Balance at September 30, 2000

Options granted
Options exercised
Options canceled

Balance at September 30, 2001

Options granted
Options exercised
Options canceled

Weighted-
Average
Exercise
Price

$25.33
24.75
23.38
30.46

25.06
44.08
28.68
29.77

28.96
49.42
29.50
43.38

Number

641,415
145,100
(100,990)
(55,353)

630,172
162,979
(5,533)
(6,800)

780,818
178,500
(9,100)
(14,000)

Balance at September 30, 2002

936,218

$32.64

Stock options outstanding at September 30, 2002,
consisted of the following:

Options Outstanding

Options Exercisable

Exercise
Price
Range

$16.625-$24.750
$30.594-$41.813
$49.000-$73.700

Average
Exercise
Price

$22.41
$36.63
$50.75

Number

446,600
304,139
185,479

936,218

$32.64

Weighted- Weighted-

Average
Remaining
Life In Years Number Price

Weighted-
Average
Exercise

5.3
6.5
8.9

6.4

390,200 $22.06
199,889 $33.92
13,979 $67.28

604,068 $27.08

There were 541,043 stock options exercisable at
September 30, 2001, and 501,972 at September 30, 2000.

N. Shareholder rights plan:

We have a shareholder rights plan to protect
shareholders against unsolicited attempts to acquire
control of the company that do not offer what the
Board of Directors believes to be an adequate price to
all shareholders. In connection with this plan, a
dividend of one preferred stock purchase right for each
outstanding share of common stock was paid to
shareholders in February 1996. Each right entitles its
holder to purchase from the company one-four
hundredth of a share of Series A Preferred Stock, par
value $.003 per share, at a price of $75.00 (subject to

adjustment, and restated for the January 1997 stock
split). The rights may not be exercised or transferred
apart from the company’s common stock until 10 days
after it is announced that a person or group has acquired
15% or more of the outstanding common stock or 15
business days after it is announced that there is an offer
(or an intent to make an offer) by a person or group to
acquire 15% or more of the outstanding common stock.
The Board of Directors may extend the 15 business day
period referred to above and may redeem the rights in
whole (but not in part) at a redemption price of $.003
per right at any time prior to an acquisition of 15% or
more of the outstanding common stock by a person or
group. The rights expire on January 17, 2006.

O. Accumulated other comprehensive earnings:

Accumulated other comprehensive earnings, which
totaled $2,823 at September 30, 2002, and $1,046 at
September 30, 2001, consisted of the following items:

At or for the year ended September 30,

2002

2001

Accumulated foreign currency
translation adjustments:

Balance at beginning of year
Translation adjustments
Reclassification adjustment for

$ 2,420
4,553

$ 3,045
358

substantial liquidation of subsidiary

—

500

Taxes associated with translation

adjustments

Balance at end of year

(1,730)

(1,483)

$ 5,243

$ 2,420

Accumulated unrealized derivative losses:

Balance at beginning of year
Unrealized losses on derivatives
Taxes associated with unrealized losses
Reclassification to interest expense
Taxes associated with interest reclassification

$(1,374)
—
—
248
(94)

$ —
(2,217)
843
—
—

Balance at end of year

$(1,220)

$(1,374)

Accumulated minimum pension
liability adjustments:

Balance at beginning of year
Minimum pension liability adjustment
Taxes associated with minimum
pension liability adjustments

Balance at end of year

$ —
(1,936)

$ —
—

736

—

$(1,200)

$ —

P. Leases:

We have entered into operating leases for certain
facilities and equipment with terms in excess of one
year. Future minimum rental payments required under
these leases are: $3,235 in 2003, $2,242 in 2004, $1,795
in 2005, $1,489 in 2006, $1,232 in 2007, and $2,348
thereafter. Rent expense for all operating leases totaled
$4,507 in 2002, $4,430 in 2001, and $4,845 in 2000.

Q. Contingencies:

We are currently involved in matters of litigation arising
from the normal course of business, including certain
environmental and product liability matters. We have
accruals of approximately $1,000 at September 30, 2002
and 2001, related to such matters. These accruals are
based on our current estimate of the most likely amount
of losses that we believe will be incurred. These
amounts have been included in accounts payable and
accrued expenses.

We have been designated a “de minimis potentially
responsible party” with respect to the cost of
investigation and environmental cleanup of certain
third-party sites. Our current accrual for these matters is
based on costs incurred to date that we have been
allocated and our estimate of the most likely future
investigation and cleanup costs. There is, as in the case
of most environmental litigation, the possibility that
under joint and several liability we could be required to
pay more than our allocated share of costs.

It is our opinion, after consultation with legal counsel,
that additional liabilities, if any, resulting from these
matters are not expected to have a material adverse
effect on our financial condition, although such matters
could have a material effect on our quarterly or annual
operating results and cash flows when resolved in a
future period.

N o t e s t o C o n s o l i d a t e d F i n a n c i a l St a t e m e n t s
(In thousands of dollars except per share amounts)

At or for the
year ended September 30,

Industrial Controls:
External net sales
Intersegment sales
Segment earnings
Goodwill-related amortization

2002

2001

2000

$408,665
842
33,294
—

$384,145
808
57,710
1,891

$330,962
700
41,258
1,725

Adjusted segment earnings

33,294

59,601

42,983

Segment assets
Depreciation and amortization
Capital expenditures

286,302
16,657
15,536

283,072
14,850
15,582

214,935
13,322
14,631

Aircraft Engine Systems:

External net sales
Intersegment sales
Segment earnings
Goodwill-related amortization

$271,326
2,752
57,226
—

$294,646
2,919
53,585
2,587

$266,423
2,010
38,150
2,512

Adjusted segment earnings

57,226

56,172

40,662

Segment assets
Depreciation and amortization
Capital expenditures

219,480
13,076
7,038

241,002
15,704
9,711

260,712
15,318
10,071

The differences between the total of segment amounts
and the consolidated financial statements were as follows:

Year ended September 30,

2002

2001

2000

Total segment net sales

and intersegment sales

Elimination of

intersegment sales

$683,585

$682,518

$600,095

(3,594)

(3,727)

(2,710)

Consolidated net sales

$679,991 $678,791

$597,385

Total segment earnings
Unallocated corporate expenses
Gain on sale of business
Interest expense and income

$ 90,520
(15,366)
—
(4,474)

$111,295
(18,753)
—
(6,587)

$ 79,408
(20,689)
25,500
(10,127)

Consolidated earnings

before income taxes and
cumulative effect of
accounting change

$ 70,680

$ 85,955

$ 74,092

At September 30,

2002

2001

2000

Total segment assets
Unallocated corporate property,
plant, and equipment—net

Other unallocated assets

$505,782

$524,074

$475,647

3,385
73,228

4,505
56,049

5,072
53,004

Consolidated total assets

$582,395

$584,628

$533,723

R. Financial instruments:

The estimated fair values of our financial instruments
were as follows:

At September 30,

2002

2001

Cash and cash equivalents
Interest rate swap agreements
Short-term borrowings
Long-term debt, including current portion

$29,828
1,334
(16,185)
(83,897)

$10,542
—
(5,561)
(99,637)

The fair value of cash and cash equivalents, short-term
borrowings, and long-term debt at variable interest rates
were assumed to be equal to their carrying amounts.
Cash and cash equivalents have short-term maturities,
short-term borrowings have short-term maturities and
market interest rates, and long-term debt at variable
interest rates is repriced frequently at market rates of
interest. Interest rate swap agreements are carried at
their fair value, which is estimated based on proprietary
models used by financial institutions that rely on
assumptions regarding past, present, and future market
conditions. The fair value of long-term debt at fixed
interest rates was estimated based on a model that
discounted future principal and interest payments at
interest rates available to the company at the end of the
year for similar debt of the same maturity.

S. Segment information:

Our operations are organized based on the nature of
products and related services provided and consist of
two operating segments—Industrial Controls and
Aircraft Engine Systems. Industrial Controls provides
energy control systems and components primarily to
OEMs of industrial engines, turbines, and other power
equipment. Aircraft Engine Systems provides energy
control systems and components primarily to OEMs of
aircraft engines.

The accounting policies of the segments are the same as
those described in Note A. Intersegment sales and
transfers are made at established intersegment selling
prices generally intended to approximate selling prices
to unrelated parties. Our determination of segment
earnings does not reflect gain on sale of business and
allocations of corporate expenses, and is before interest
expense, interest income, income taxes, and the
cumulative effect of accounting change. Segment assets
consist of accounts receivable, inventories, property,
plant, and equipment—net, goodwill, and other
intangibles—net. Summarized financial information for
our segments follows:

Differences between total depreciation and amortization
and capital expenditures of our segments and the
corresponding consolidated amounts reported in the
statements of consolidated cash flows are due to
unallocated corporate amounts.

One customer accounted for more than 10% of
consolidated net sales, impacting both the Industrial
Controls and Aircraft Engine Systems segments
totaling approximately $212,000 in 2002, $219,000 in
2001, and $147,000 in 2000.

External net sales by geographical area, as determined by
the location of the customer invoiced, were as follows:

Year ended September 30,

2002

2001

2000

United States
Other countries

$403,864
276,127

$429,020
249,771

$372,773
224,612

$679,991

$678,791

$597,385

Property, plant, and equipment—net by geographical
area, as determined by the physical location of the
assets, were as follows:

At September 30,

United States
Other countries

2002

2001

$ 97,137
26,485

$105,945
24,631

$123,622

$130,576

Re p o r t o f I n d e p e n d e n t A c c o u n t a n t s

To Board of Directors and Shareholders
Woodward Governor Company

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, cash
flows, and shareholders’ equity present fairly, in all material respects, the financial position of Woodward Governor
Company and its subsidiaries at September 30, 2002 and 2001, and the results of their operations and their cash flows
for each of the three years in the period ended September 30, 2002, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the responsibility of the Company’s
management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

As discussed in Note A to the consolidated financial statements, effective October 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142).

PricewaterhouseCoopers LLP
Chicago, Illinois
October 31, 2002

Se l e c t e d F i n a n c i a l D a t a
(In thousands of dollars except per share amounts)

for the year ended September 30,

Net sales

2002

2001

2000

$679,991

$678,791

$597,385

Earnings (loss) before cumulative effect of accounting change

Goodwill-related amortization, net of income taxes

Adjusted earnings (loss) before cumulative effect of accounting change

Basic per share amounts:

Earnings (loss) before cumulative effect of accounting change

Goodwill-related amortization, net of income taxes

Adjusted earnings (loss) before cumulative effect of accounting change

Diluted per share amounts:

Earnings (loss) before cumulative effect of accounting change

Goodwill-related amortization, net of income taxes

Adjusted earnings (loss) before cumulative effect of accounting change

Cash dividends per share

Depreciation expense

Amortization expense

EBITDA**

Capital expenditures

Effective income tax rate

Adjusted earnings (loss) as percent of sales

Adjusted earnings (loss) as percent of beginning shareholders’ equity

Weighted-average basic shares outstanding in thousands

Weighted-average diluted shares outstanding in thousands

at September 30,

Working capital

Total assets

Long-term debt, less current portion

Total debt

Shareholders’ equity

Shareholders’ equity per diluted share

Percent of debt to debt-equity

Worker members

Registered shareholder members

45,170

—

45,170

3.99

—

3.99

3.90

—

3.90

0.93

28,340

3,748

107,242

22,898

36.1%

6.6%

14.2%

11,325

11,577

53,068

2,875

55,943

4.69

0.25

4.94

4.59

0.25

4.84

0.93

25,677

7,055

125,274

26,903

38.3%

8.2%

20.3%

11,318

11,561

46,976 *

2,660

49,636

4.17 *

0.24

4.41

4.15 *

0.24

4.39

0.93

24,001

6,418

114,638 *

27,416

36.6%

8.3%

20.5%

11,263

11,318

$152,312

$123,744

$100,836

582,395

78,192

96,377

354,901

30.66

21.4%

3,337

1,592

584,628

77,000

105,061

318,862

27.58

533,723

74,500

118,284

275,624

24.35

24.8%

30.0%

3,709

1,652

3,302

1,742

*Earnings before cumulative effect of accounting change and EBITDA for 2000 include a gain from the sale of business of $25,500 before income taxes
and $17,082 after income taxes, or $1.52 per basic share and $1.51 per diluted share.

**EBITDA represents earnings before interest (expense and income), income taxes, depreciation, and amortization, and before cumulative effect of
accounting change. Although EBITDA is a common financial measure, it is not a measure that is reported in financial statements prepared in accordance
with accounting principles generally accepted in the United States.

1999

1998

1997

1996

1995

1994

1993

1992

$596,904

$490,476

$442,216

$417,290

$379,736

$333,207

$331,156

$374,173

30,829

2,770

33,599

2.74

0.24

2.98

2.73

0.25

2.98

0.93

25,267

6,769

95,174

22,789

39.8%

5.6%

15.3%

11,272

11,292

21,592

1,293

22,885

1.90

0.12

2.02

1.90

0.11

2.01

0.93

23,715

2,927

67,699

20,862

40.5%

4.7%

10.9%

11,340

11,379

18,140

578

18,718

1.58

0.05

1.63

1.57

0.05

1.62

0.93

21,854

983

55,884

21,152

38.6%

4.2%

9.0%

11,482

11,525

22,178

346

22,524

11,936

245

12,181

1.92

0.03

1.95

1.92

0.03

1.95

0.93

22,786

608

61,075

21,163

37.0 %

5.4%

11.4%

11,570

1.03

0.02

1.05

1.03

0.02

1.05

0.93

23,334

452

47,239

18,988

40.9%

3.2%

6.3%

11,623

(3,273)

307

(2,966)

(0.28)

0.03

(0.25)

(0.28)

0.03

(0.25)

0.93

26,114

500

24,652

16,515

37.0%

(0.9)%

(1.4)%

11,765

13,389

204

13,593

1.13

0.01

1.14

1.13

0.01

1.14

0.93

24,837

419

50,314

18,335

42.0%

4.1%

6.2%

11,889

20,212

216

20,428

1.81

0.02

1.83

1.81

0.02

1.83

0.92

22,241

392

57,652

52,684

38.7%

5.5%

9.8%

11,179

$124,392

$119,506

$124,827

$121,103

$116,364

$113,751

$107,809

$103,818

550,664

139,000

180,953

241,992

21.43

42.8%

3,791

1,866

563,435

175,685

213,645

220,102

19.34

348,110

17,717

30,604

210,614

18.27

348,798

349,599

323,318

332,461

331,653

22,696

42,868

207,995

18.01

27,796

62,960

197,903

17.05

32,665

61,591

193,846

16.57

36,246

58,258

206,222

17.36

40,135

64,375

219,690

18.48

49.3%

12.7%

17.1%

24.1%

22.0%

22.7%

3,994

1,907

3,246

1,994

3,211

2,029

3,071

2,179

3,439

2,256

3,264

2,301

3,632

2,301

Se l e c t e d Q u a r t e r l y F i n a n c i a l D a t a
(Unaudited)

(In thousands except per share data)

First

2002 Fiscal Quarters
Second

Third

Fourth

First

Second

Third

Fourth

2001 Fiscal Quarters

Net sales
Gross profit*

$180,653
39,285

$174,864
38,570

$171,888
38,246

$152,586
24,760

$150,730
37,329

$170,176
41,591

$182,508
44,806

$175,377
44,038

Reported earnings before cumulative

effect of accounting change
Goodwill-related amortization,

net of income taxes

Adjusted earnings before cumulative

13,719

13,623

14,611

3,217

10,908

12,672

13,728

15,760

—

681

694

698

802

effect of accounting change

$ 13,719

$ 13,623

$ 14,611

$ 3,217

$ 11,589

$ 13,366

$ 14,426

$ 16,562

Basic per share amounts:
Reported earnings before cumulative

effect of accounting change
Goodwill-related amortization,

net of income taxes

Adjusted earnings before cumulative

$ 1.21

$ 1.20

$ 1.29

$ 0.28

$ 0.96

$ 1.12

$ 1.21

$ 1.39

—

0.06

0.07

effect of accounting change

$ 1.21

$ 1.20

$ 1.29

$ 0.28

$ 1.02

$ 1.18

$ 1.27

$ 1.46

Diluted per share amounts:
Reported earnings before cumulative

effect of accounting change
Goodwill-related amortization,

net of income taxes

Adjusted earnings before cumulative

$ 1.19

$ 1.18

$ 1.26

$ 0.28

$ 0.95

$ 1.10

$ 1.18

$ 1.36

—

0.06

0.07

effect of accounting change

$ 1.19

$ 1.18

$ 1.26

$ 0.28

$ 1.01

$ 1.16

$ 1.24

$ 1.43

Cash dividends per share
Common stock price per share

High
Low
Close

$ 0.2325

60.10
46.50
58.25

72.77
53.50
68.80

74.65
54.40
59.12

60.22
44.85
47.40

49.00
35.75
44.75

57.73
40.00
51.38

91.00
49.00
84.35

86.85
42.06
48.45

*Gross profit represents net sales less cost of goods sold as reported in our statements of consolidated earnings.

C a u t i o n a r y St a t e m e n t

This annual report contains forward-looking statements, including financial projections, our plans and objectives for future
operations, expectations of future economic performance, and various other assumptions relating to the future. While such
statements reflect our current expectations, all such statements involve risks and uncertainties. Actual results could differ
materially from projections or any other forward-looking statement, and we have no obligation to update our forward-looking
statements. Important factors that could cause results to differ materially from those projected or otherwise stated include the
following: unanticipated global or regional economic developments, particularly in, but not limited to, Asia, Europe, and the
United States; political risks, military actions, or trade embargoes affecting customers’ markets, including the possibility of a
war in Iraq; other changes in business cycles of particular industries served by our company, primarily OEMs of aircraft
engines, both commercial and military, and industrial engines, turbines, and other power equipment, particularly in power
generation, transportation, and process industries markets; fluctuations in currency exchange rates of U.S. and foreign
countries, primarily those located in Europe and Asia; fluctuations in interest rates, primarily LIBOR, which affect the cost of
borrowings; timing and acceptance of new products and product enhancements, including, but not limited to, products that
integrate energy control technologies of recently-acquired companies; competitor actions that adversely impact our orders or
pricing, including, but not limited to, aftermarket sales; reliability of customer forecasts of their sales volumes and purchase
requirements; adverse changes in the business acquisition climate; effects of any business acquisitions or divestitures; changes
in U.S. and other country laws and regulations involving acquisitions, the environment, and taxes; relative success of quality
and productivity initiatives, such as the Six Sigma initiative and supplier designation levels with key customers; and unusual or
extraordinary events or developments involving litigation or other potential liabilities.

Annual Meeting
January 22, 2003, at 10:00 A.M.
NIU-Rockford
8500 E. State Street
Rockford, IL 61108

Annual Report on Form 10-K
Shareholders may obtain, without charge,
a single copy of Woodward’s 2002 annual
report on Securities and Exchange
Commission Form 10-K upon written request
to the Corporate Secretary, Woodward
Governor Company, Rockford, Ill.

Stock Exchange
Nasdaq National Market
Ticker Symbol: WGOV
SEC filings are also available on our
website at www.woodward.com

Officers

John A. Halbrook
Chairman and
Chief Executive Officer

Thomas A. Gendron
President and
Chief Operating Officer

Stephen P. Carter
Vice President
Chief Financial Officer
and Treasurer

C. Phillip Turner
Vice President
General Manager
Aircraft Engine Systems

Ronald E. Fulkrod
Vice President

Carol J. Manning
Corporate Secretary

Investor Information

Woodward Governor Company
Corporate Headquarters
5001 North Second Street
P.O. Box 7001
Rockford, IL 61125-7001
1-815-877-7441
www.woodward.com

Transfer Agent and Registrar
American Stock Transfer & Trust Company
New York, NY
1-800-937-5449

Correspondence and transfer requests
should be sent to the following:
American Stock Transfer & Trust Company
Shareholder Services
59 Maiden Lane
New York, NY 10038

Shareholder Account Assistance
Shareholders who wish to change the address
or ownership of stock, report lost certificates,
eliminate duplicate mailings or for other account
registration procedures and assistance should
contact the Transfer Agent at the address or
phone number above.

Dividend Reinvestment Plan and
Direct Deposit of Dividends
Woodward offers shareholders of record a
convenient Dividend Reinvestment and
Direct Stock Purchase and Sale Plan. Through
this Plan, shareholders have options to
purchase or sell shares of Woodward stock,
have their dividends automatically reinvested
in Woodward common stock and to make
periodic supplemental cash payments to
purchase additional shares.

For further information and an authorization
form, contact the Transfer Agent at the address
or phone number above.

An Equal Opportunity Employer
It is Woodward’s policy to take affirmative action to provide equal employment
opportunity to all members and applicants for employment without regard to race, age,
religion, gender, national origin, sexual orientation, disability, veteran’s or handicapped
status, and to base all employment decisions to further this principle of equal
employment opportunity.