STRONG
AND FOCUSED
Our strengths lie within our people, our technologies,
and our customer relationships. We apply our broad
portfolio of technologies to solve complex fuel and
combustion control applications.
Engine and turbine original equipment manufacturers (OEMs) depend on Woodward
to address their market needs for lower emissions, higher reliability, and lower costs.
Today and in the future, Woodward will continue to develop and deliver systems,
30
0
20
40
15
10
35
25
5
Woodward Governor Company
5001 North Second Street, P.O. Box 7001
Rockford, Illinois 61125-7001 USA
815-877-7441
www.woodward.com
components, and services to meet unique aerospace, power generation, process
industries, and transportation needs.
Power Generation
Transportation
Process Industries
Aerospace (Military)
Aerospace (Commercial)
Market Segment Sales
32%
33%
37%
21%
2004 — FY2004 Sales $709,805 (in thousands)
2003 — FY2003 Sales $586,682 (in thousands)
2002 — FY2002 Sales $679,991 (in thousands)
13%
13%
9%
11%
10%
12%
11%
10%
26%
32%
30%
Business Description
Woodward designs, manufactures, and services energy
control systems and components for aircraft and industrial
engines and turbines. Leading OEMs throughout the world
use our products and services in the power generation,
Contents
1
Financial Highlights
2–5 Dear Shareholders
6–12 Strong and Focused
13–55 Financial Review
process industries, transportation, and aerospace markets.
56
Officer and Investor Information
IBC Board of Directors
W O O D W A R D G O V E R N O R C O M P A N Y
2 0 0 4 A n n u a l R e p o r t
STRONG
AND FOCUSED
Our strengths lie within our people, our technologies,
and our customer relationships. We apply our broad
portfolio of technologies to solve complex fuel and
combustion control applications.
Engine and turbine original equipment manufacturers (OEMs) depend on Woodward
to address their market needs for lower emissions, higher reliability, and lower costs.
Today and in the future, Woodward will continue to develop and deliver systems,
30
0
10
20
40
25
15
35
5
Woodward Governor Company
5001 North Second Street, P.O. Box 7001
Rockford, Illinois 61125-7001 USA
815-877-7441
www.woodward.com
components, and services to meet unique aerospace, power generation, process
industries, and transportation needs.
Power Generation
Transportation
Process Industries
Aerospace (Military)
Aerospace (Commercial)
Market Segment Sales
32%
33%
37%
21%
2004 — FY2004 Sales $709,805 (in thousands)
2003 — FY2003 Sales $586,682 (in thousands)
2002 — FY2002 Sales $679,991 (in thousands)
13%
13%
9%
11%
10%
12%
11%
10%
26%
32%
30%
Business Description
Woodward designs, manufactures, and services energy
control systems and components for aircraft and industrial
engines and turbines. Leading OEMs throughout the world
use our products and services in the power generation,
Contents
1
Financial Highlights
2–5 Dear Shareholders
6–12 Strong and Focused
13–55 Financial Review
process industries, transportation, and aerospace markets.
56
Officer and Investor Information
IBC Board of Directors
W O O D W A R D G O V E R N O R C O M P A N Y
2 0 0 4 A n n u a l R e p o r t
■
We use our energy control technologies to develop and produce components that we integrate
into systems. Our systems and components help our customers satisfy their needs for reliable
and cost effective power equipment that meets strict air quality standards.
MARKET STRATEGY
T E C H N O L O G I E S :
WHAT DRIVES
OUR BUSINESS
■
Technologies and components are integrated
into energy control systems specifically
designed for power equipment, focusing on
emissions, reliability, cost, and service.
■
Woodward systems and components
are used in equipment that powers the
world’s infrastructure. Original equipment
manufacturers rely on Woodward as a
single-source supplier for their critical fuel
and combustion control needs.
■
By delivering integrated control solutions,
Woodward is a global leader in the aerospace,
process industries, transportation, and power
generation markets.
EMISSIONS
Achieving environmental standards. Global emissions
regulations demand cleaner air now and in the future, while
world economic factors necessitate improved fuel economy
and use of alternative fuel sources. Woodward’s systems and
component solutions help our power equipment customers meet
environmental standards with improved reliability and efficiency.
GLOBALIZATION
Conducting global business locally. Business is changing
as economies around the world become more connected.
Woodward knows that doing business in a customer’s language
and time zone enables us to better understand and serve them.
With locations in China, India, and around the world, we are
positioned to serve rapidly growing markets as well as other
established economies.
SYSTEM SOLUTIONS
Solving challenges with innovation and integration.
Customers demand technical solutions that meet their needs
for efficiency, reliability, and cost. Our market strategy helps
us deliver integrated systems and advanced components that
meet stringent aerospace and industrial requirements. With
experience in fuel and combustion control systems for engines
and turbines of every size and application, Woodward is ready
to solve tomorrow’s challenges.
FUEL
SYSTEMS
COMBUSTION
CONTROL SYSTEMS
ELECTRONIC CONTROLS
AND SOFTWARE
SYSTEMS
INTEGRATION
SERVICES
C O M P O N E N T S :
TURBINE VALVES AND ACTUATORS
ENGINE VALVES AND ACTUATORS
DIESEL FUEL INJECTION EQUIPMENT
FUEL METERING UNITS
ENGINE AND TURBINE ELECTRONIC
CONTROLS
GENSET AND SWITCHGEAR
CONTROLS
GAS TURBINE FUEL NOZZLES
IGNITION SYSTEMS
FUEL PUMPS
SERVOVALVES
GOVERNORS
I N T E G R AT E D S Y S T E M S :
TOTAL SYSTEM SOLUTIONS FOR POWER EQUIPMENT APPLICATIONS
P O W E R E Q U I P M E N T:
INDUSTRIAL DIESEL AND
GAS ENGINES
INDUSTRIAL GAS TURBINES
STEAM TURBINES
COMPRESSORS
GENSETS AND SWITCHGEAR
AIRCRAFT GAS TURBINES
FUEL CELLS
O U R C U S T O M E R S I N C L U D E :
CATERPILLAR
CUMMINS
KUBOTA
YANMAR
MITSUBISHI
MAN
GE
SIEMENS
DRESSER-RAND
INGERSOLL-RAND
DAEWOO
HYUNDAI
ROLLS-ROYCE
PRATT & WHITNEY
US GOVERNMENT
MAJOR AIRLINES WORLDWIDE
WÄRTSILÄ
DAIMLERCHRYSLER
M A R K E T A P P L I C AT I O N S :
POWER GENERATION TRANSPORTATION PROCESS INDUSTRIES AEROSPACE
Paul Donovan
Larry E. Rittenberg
John D. Cohn
James R. Rulseh
Michael T. Yonker
Michael H. Joyce
Mary L. Petrovich
John A. Halbrook
DIRECTORS
John A. Halbrook
Chairman and Chief Executive Officer,
Woodward Governor Company
Mary L. Petrovich
Chief Executive Officer,
AxelTech International
John D. Cohn
Senior Vice President, Strategic
Development and Communications,
Rockwell Automation, Inc.
Larry E. Rittenberg
Ernst & Young Professor of
Accounting & Information Systems,
University of Wisconsin
Paul Donovan
Retired Executive Vice President
and Chief Financial Officer,
Wisconsin Energy Corporation
Michael H. Joyce
President and Chief Operating Officer,
Twin Disc, Incorporated
James R. Rulseh
Group Vice President,
Modine Manufacturing Company
Michael T. Yonker
Retired President and
Chief Executive Officer, Portec, Inc.
FINANCIAL HIGHLIGHTS
(In thousands except per share amounts and other year-end data)
Operating Results
Net sales
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
W O O D WA R D
Fiscal year ended September 30,
2004
2003
2002
$709,805
31,382
2.78
2.71
0.96
$586,682
12,346
1.10
1.08
0.9525
$679,991
45,170
3.99
3.90
0.93
197,524
654,294
88,452
385,861
151,262
615,999
89,970
360,804
155,440
582,395
78,192
354,901
33.36
3,287
1,529
31.68
3,273
1,576
30.66
3,337
1,592
Net Sales
(Dollars in Millions)
Earnings Before Cumulative Effect
of Accounting Change*
(Dollars in Millions)
Earnings Before Cumulative Effect
of Accounting Change and Cash
Dividends Per Share*
(In Dollars)
800
600
400
200
0
$800
60
$600
45
$400
30
$200
15
0
0
$60
5.00
$45
3.75
$30
2.50
$15
1.25
0
0.00
$5.00
$3.75
$2.50
$1.25
0
’00
’01
’02
’03
’04
’00
’01
’02
’03
’04
’00
’01
’02
’03
’04
Earnings before cumulative effect of
accounting change per diluted share
Cash dividends per share
* Earnings before cumulative effect of accounting change for 2000 and 2001 includes goodwill-related amortization, net of income taxes, of $2.7 million or $0.24
per diluted share in 2000 and $2.9 million or $0.25 per diluted share in 2001. Beginning in 2002, goodwill was no longer amortized. In addition, earnings before
cumulative effect of accounting change for 2000 included a gain from the sale of business, net of income taxes, of $17.1 million or $1.51 per diluted share.
1
2 0 0 4 A N N U A L R E P O R T
2 0 0 4 A N N U A L R E P O R T
DEAR
SHAREHOLDERS
2004 was a turnaround
year for Woodward. We
experienced solid growth in
most of our markets, after two consecutive years of decline.
However, the strength of the markets has not returned to the
vigorous levels of 2000. The prospects of demand returning to
2000 levels within the next two years, assuming the economy
cooperates, are reasonably good with the exception of large
industrial gas turbines, which we believe will continue to
strengthen, but most likely not return to the boom years of
2000 and 2001.
We converted this market growth into much improved
operating margins for 2004. Our aircraft segment showed
significant improvement year-over-year as a result of a
higher mix of aftermarket business as well as efficiency
John A. Halbrook
Chairman and
Chief Executive Officer
Thomas A. Gendron
President and
Chief Operating Officer
Stephen P. Carter
Executive Vice President,
Chief Financial Officer
and Treasurer
2
W O O D WA R D
W O O D WA R D
improvements from the 2003 closure and integration of
We believe these actions and locations will best serve our
our Buffalo, New York servovalve operation into our
customers and investors as we continue to integrate our
Rockford, Illinois plant.
recent acquisitions and expand our global presence for end
While we made improvements in our industrial business, we
were not able to convert the additional sales into targeted
operating margins. Supply chain problems, acquisition
integration issues, and inefficiencies caused by the fast
ramp-up in orders prevented the expected operating
leverage from flowing through to the bottom line. Correcting
these problems has been and will continue to be a primary
focus in 2005.
markets and sourcing of components.
Our Strategy
Reducing emissions, improving operating efficiencies, and
lowering costs remain the dominant drivers in our markets. To
that end, through acquisitions, our own product development,
and licensing agreements, we have put together a technology
portfolio that gives us critical mass to meet these market
challenges. Most recently, through the acquisition of Adrenaline
In addition to these efforts, we recently announced our
Research, which had developed proprietary combustion
intention to consolidate our European businesses to eliminate
sensing expertise, we added crucial technology to remain
two manufacturing operations and to integrate the work into
a leader in energy control solutions.
other Woodward facilities.
To leverage this knowledge, we have also committed to
We will also reduce our sales and service resources
investing in a new combustion test facility at our Zeeland,
in Europe. This will improve our margins and allow
Michigan location. We believe combustion control is key to
us to reallocate our resources from Europe, where
achieving emission regulations in 2010 and beyond. Coupled
engine manufacturing is declining, so we can focus
with our existing strengths, the world-class test facility will
more resources in Asia, where engine manufacturers
support future systems development that focuses on the
are moving and markets are growing.
components necessary for aircraft and industrial combustion
control. Building construction has begun, and we expect the
facility to be completed by April 2005.
Along with our facility in Tomisato, Japan and
sales offices located throughout Asia, we have two
wholly-owned operations in China, located in Tianjin and
Suzhou. Through these facilities, we support our western
original equipment manufacturers (OEM) activities in
China, develop relationships with Chinese OEMs, and
establish sourcing in the region.
3
2 0 0 4 A N N U A L R E P O R T
2 0 0 4 A N N U A L R E P O R T
“ We have strong, solid
relationships with our
foundation customers, who
are the world’s major engine
and turbine manufacturers.”
4
Helping Customers Meet Demands
We have strong, solid relationships with our foundation
customers, who are the world’s major engine and turbine
manufacturers. Our customers face many issues—emissions
regulations, the need for high fuel efficiency, the drive for
lower cost products, and the ability to respond quickly to
the global market. We work closely with our customers early
in the development and design stages, which enables us to
anticipate their needs and deliver products to meet their
specifications. In fiscal year 2004, we invested approximately
$40 million, or about 6 percent of sales, in developing
systems and products that will secure our future.
For example, we recently announced our role as fuel systems
integrator with GE Transportation–Aircraft Engines for the
new GEnx turbofan engine for the Boeing 7E7 Dreamliner.
The Boeing 7E7, scheduled for entry into service in 2008, is
expected to revolutionize widebody aircraft travel.
The GEnx contract win solidifies our role as a systems
integrator, demonstrates the value of our new product
development efforts, and continues our strong position with
GE on their aircraft engine product lines. Industry analysts
estimate the potential for our total fuel system program will
exceed $400 million over the life of the program.
We engineer systems that enhance the competitiveness of
our customers’ products by meeting stringent emissions
regulations. For instance, we are developing the next
generation of an engine control system for compressed
natural gas (CNG) vehicles, the OH-2. Primarily for Asian
markets, this system reduces emissions and increases fuel
efficiency on urban bus and commercial truck engines
without sacrificing driveability.
W O O D WA R D
W O O D WA R D
Similarly, we developed the MI-04 engine control system to
Second, Larry E. Rittenberg, Ph.D., CIA, CPA, was elected
meet 2004 emissions requirements for the mobile industrial
as a director of the company, effective September 1, 2004.
engine market, and we are currently developing the MI-07
Professor Rittenberg is recognized for his knowledge and
to meet more stringent 2007 emission standards. These
insight regarding corporate governance and internal auditing,
systems use proven products that reduce emissions, increase
areas that are a major focus in today’s business environment.
engine performance, and offer ease of maintainability. By
investing in the small engine market, we now can offer our
customers total system solutions for their engines that
power forklifts and other off-road vehicles.
Looking at 2004 and Beyond
Total company sales for 2004 were $709,805,000 and
earnings were $31,382,000 or $2.71 per diluted share. The
2004 results included pretax workforce management costs
of $12,868,000 related primarily to the consolidation of two
manufacturing operations in Europe into existing operations.
On November 18, 2004, Woodward announced plans for
the transition of our chief financial officer role. Executive
Vice President, CFO and Treasurer Stephen P. Carter has
decided to retire from Woodward following the appointment
and transition of his successor. During his 18-year tenure,
Steve’s achievements and contributions were exemplary,
including helping to manage our transformation to full public
company status. Steve has been an outstanding colleague
and advisor, and we will miss his strategic vision, broad range
of capabilities, and professionalism.
From our current vantage point, we believe our markets will
I want to thank our Board of Directors for their guidance
continue to show growth over the next year and into 2006,
and our leaders and members for their hard work this year.
and we are dedicated and positioned to capture the revenue
They are the reason we had a successful year in building on
and earnings growth opportunities.
our strengths and strategies for growth.
The Sarbanes-Oxley Act has raised the visibility of corporate
Woodward sets the standard for energy control system
governance, which holds a place of high importance to our
solutions for aerospace, industrial power systems, power
shareholders and has always been an area of focus for
generation, transportation, and process industries. We will
Woodward. We are actively working on requirements
continue to work within our strategies and structure to build
related to internal controls over financial reporting for
a strong future.
Section 404 of the Act, and we are on target to meet the
2005 deadline.
This year brought a couple of changes to our Board of
Directors. First, Rodney O’Neal resigned from our Board in
March 2004 because he was unable to commit the time he
felt was appropriate. We will miss his valuable participation
John A. Halbrook
Chairman of the Board and Chief Executive Officer
in our strategic and operational deliberations.
December 8, 2004
5
2 0 0 4 A N N U A L R E P O R T
2 0 0 4 A N N U A L R E P O R T
STRONG IN OUR
TECHNOLOGIES
Our core technologies focus on fuel delivery and combustion
control for aircraft and industrial engines and turbines. Our
engineers translate their knowledge and expertise into systems
and components that help our customers provide reliable,
low-cost, and low-emission energy control equipment.
We leveraged technologies from our small industrial turbine
and engine applications and extended those technologies into
aircraft engine control. Ultimately, we simplified the control
system, which reduced component count, weight, and cost
while enhancing engine performance.
In cooperation with Pratt & Whitney Canada (P&WC), an
aircraft turbine manufacturer, Woodward evaluated and
developed a technology concept for an engine fuel delivery
system for the general aviation market. As the engine went
from thought to creation, it became the P&WC PW600
engine family program.
As the system integrator, Woodward is responsible to
provide the fuel pump, metering unit, sensors, harness,
actuator, and ignition system for the PW610F, which
will power the twin-engine Eclipse 500 business jet.
Eclipse Aviation Corporation has experienced a strong
demand for the entry-level jet for the general aviation and
new “air taxi” marketplaces.
Page 6 (left–right): Woodward technicians Jason Jerome, Terry Roby, and Ronda
Hermann study results of a development test for fuel control system components for
the Pratt & Whitney Canada PW610F engine. Page 7 (left–right): At a f low test
stand, Woodward technician Tom Collard and engineer George Sanchez examine a
6
prototype gas valve assembly for GE’s new LMS100™ gas turbine.
As engines and aircraft become more sophisticated, their
systems require more information sharing and greater heat
management capability. By developing, acquiring, and
applying our technologies, we are finding solutions and
contributing to the industry’s efforts to offer aircraft that
are safer, easier, and less expensive to operate.
As the first new power generation concept in more than
a decade, GE’s 100-megawatt LMS100 is a simple-cycle,
high efficiency gas turbine. It is designed to provide fast
starts, high availability and reliability, and low emissions.
The LMS100 represents a significant change in power
generation technology. When developing the turbine, GE
used technologies from its aeroderivative and industrial gas
turbine experience.
W O O D WA R D
W O O D WA R D
Likewise, Woodward drew upon technologies from its aircraft
and industrial business segments to provide the gas and
liquid fuel metering system, water metering valves, liquid fuel
pumps, variable-geometry servovalve actuators, and fuel
nozzle premixers.
GE required a supplier with systems engineering expertise,
the ability to meet its technical requirements, and the talent
to design and manufacture reliable systems and components.
To meet GE’s requirements, Woodward tapped into
expertise from operations that spanned the company,
including technologies associated with pumps, pre-mixers,
and valves. We also developed new digital driver and electric
actuation technologies that are leveraged across the fuel
metering system on the LMS100.
Through our advanced technologies, Woodward is able to
meet GE’s fuel and actuation system needs for the world’s
most efficient simple-cycle gas turbine.
FOCUSED
on SYSTEM SOLUTIONS
Woodward offers single-source system solutions to original equipment
manufacturers for their fuel and combustion control needs, increasing our
content per engine while lowering their costs.
7
2 0 0 4 A N N U A L R E P O R T
2 0 0 4 A N N U A L R E P O R T
STRONG IN OUR
MARKETS
Serving leading engine and turbine original equipment
manufacturers, Woodward solves key issues that drive their
businesses—emissions, globalization, reliability, and cost.
In the last decade, Woodward developed and successfully
marketed three generations of the OH-1 engine control
system for heavy-duty CNG engines.
The need for clean air and energy independence has resulted
in new government requirements worldwide that expand the
use of low-emission natural gas vehicles.
Particularly in China and other parts of Asia, governments
are requiring urban bus and vehicle fleets to use compressed
natural gas (CNG) or propane-fueled engines to increase
reliance on locally available energy supplies and to
reduce emissions.
To meet the next round of engine emissions requirements
and to serve the escalating Asian market, Woodward is
introducing the next generation control system, the OH-2.
With upgraded features, it will provide improved fuel, air,
and combustion control for lower emissions, better fuel
efficiency, and enhanced system performance.
Page 8: The OH-2 engine control system, being tested in Woodward’s dynamometer lab,
will help customers meet upcoming emissions requirements. Inset: We will provide a suite
of components for the GP7200 engine for the Airbus A380 jet, part of the widebody
commercial aircraft market. Page 9: The commercial and military aircraft aftermarkets
remained strong for Woodward in 2004. Test Stand Operator Pam Lindsey inspects a
8
combustion control component for the US Air Force.
LEADER
in VITAL GLOBAL MARKETS
Woodward’s advanced systems and component solutions address key
drivers in the aerospace, power generation, transportation, and process
industries markets. We continue to gain market share by providing
solutions for our customers.
W O O D WA R D
W O O D WA R D
In the aerospace market, Woodward is represented on
military engines that will power the frontline fighters of the
future. We supply an augmentor spraybar for the F119 engine
on the F/A-22 Raptor, and we are developing combustion
components for the main and augmentor portions of the
Pratt & Whitney F135 engine for the F-35 Joint Strike Fighter.
In recent years, we have been expanding our presence in the
widebody aircraft market. We produce a hydromechanical
unit for the GE90-115B, the exclusive engine on the Boeing
777-300ER and -200LR, and we developed a suite of
components for the GP7200 engine for the Airbus A380
superjumbo jet.
We manufacture fuel nozzles, fuel metering units, and air
modulating valves for the IAE V2500 engine used on the
popular narrow body Airbus A319/320/321 family of aircraft.
We are gaining market share in the commercial and military
aftermarkets by focusing on repair, overhaul, and replacement
of both Woodward and non-Woodward components.
For example, we are repairing Woodward components
and replacing competitors’ components for the IAE V2500
engine. Also, the US Air Force is updating the engine
configurations for F15 and F16 fighter jets, and we are
supplying combustion control components.
Additionally, we developed a repair and overhaul process
for an engine combustion system component for the
KC-135 fuel delivery tanker and B52 long-range bomber.
Our strength in vital global markets positions us to offer
solutions to issues that drive our customers’ businesses.
LEADER
in VITAL GLOBAL MARKETS
Woodward’s advanced systems and component solutions address key
drivers in the aerospace, power generation, transportation, and process
industries markets. We continue to gain market share by providing
solutions for our customers.
9
2 0 0 4 A N N U A L R E P O R T
2 0 0 4 A N N U A L R E P O R T
STRONG IN OUR
RELATIONSHIPS
Strong customer relationships are a Woodward hallmark.
As a supplier, we cultivate our relationships by listening to
the needs of our engine and turbine customers and by
offering solutions that benefit them and their end users.
For decades, Woodward and our customers have worked
together to provide fuel control system solutions for the
industrial and aircraft markets. We support GE with on-site
representatives at their aircraft engine facility, and our
industrial combustion system operation is located near one
of their plants.
Woodward’s on-site representatives focus on current
and future development efforts, ensuring the voice of the
customer is heard. Our engineers have earned increasing
levels of responsibility in the joint development of Woodward
components for both GE Transportation and GE Energy.
Our relationship with GE Transportation–Aircraft Engines
contributed to our successful bid to be the fuel system
integrator for the new GEnx turbofan engine for the
widebody Boeing 7E7 Dreamliner.
DEDICATED
to our CUSTOMER BASE
Our customer relationships are built on trust because we first listen, then
analyze, suggest, develop, and manufacture advanced engine fuel control
systems and components.
10
As system integrator, Woodward is responsible for the
specifications, development, certification, production
and support of the fuel system, which manages fuel
pumping and metering, engine actuation and control,
heat management, and fuel filtration.
In building strong relationships, we have worked with
Daewoo Heavy Industries and Machinery and NGVI,
an engine packager, for almost a decade. By coupling
technical expertise with our team approach, we have
helped Daewoo and NGVI solve many complex challenges
in the heavy-duty industrial engine market.
Woodward teamed with Daewoo and NGVI to develop
the MI-04 engine control system for the small mobile
industrial engine market. The system helps engine and
equipment manufacturers reduce emissions and increase
engine performance.
W O O D WA R D
W O O D WA R D
With the MI-04 system, Woodward extended the
relationship beyond our system and component
development scope to support Daewoo and NGVI in
the field.
Before production release of the system, we worked
together to develop a training program for Daewoo’s
distributors and sales and service managers. The training
program also educates service managers on use and
maintenance of the advanced MI-04 system.
With a thorough knowledge of Woodward’s engine
control features and benefits, Daewoo’s sales and service
organization can address questions about the mobile
equipment more effectively.
Currently, we are developing the MI-07 engine control
system to meet more stringent 2007 emission standards.
The close relationship forged between Woodward, Daewoo,
and NGVI has been instrumental to our mutual success.
Page 10 and center: Every action we take is customer-focused, from
Page 10 and center: Our customer-focused activities range from
Page 10 and center: Every action we take is customer-focused, from
concurrent design engineering to proactive production meetings.
concurrent design engineering to proactive production meetings. Page 11:
concurrent design engineering to proactive production meetings.
Building on our close relationship with Daewoo, we solve many complex
This page: Building on our close relationship with Daewoo, we solve many
This page: Building on our close relationship with Daewoo, we solve many
challenges in the small mobile industrial engine market.
complex challenges in the heavy-duty industrial engine market.
complex challenges in the heavy-duty industrial engine market.
11
2 0 0 4 A N N U A L R E P O R T
STRONG
FINANCIALLY
A strong financial base affords a company the resources to
invest in its future. At Woodward, it allows us the flexibility to
fund new product development, to execute our acquisition
strategy, and to attract and retain talented employees who
are recognized as a competitive advantage in the industry.
As a financially secure company, we can concentrate on key
initiatives that will help us continue to address our customers’
needs now and in the future. One of many plans in progress
is establishing a common set of product design tools and
processes that incorporate Six Sigma and lean approaches
across our aircraft and industrial businesses.
This type of standardization and discipline leads to ongoing
improvements in our product development efforts, which
enables us to offer our customers market-leading solutions.
Sound investments lay the groundwork for future
opportunities with our customers. To support the
growth of our systems capabilities, test facilities are
under construction for both combustion and fuel systems.
When completed in fiscal year 2005, we will use these
facilities to test innovative products and control solutions
that will lead to improved efficiencies and reduced emissions.
With a strategic partner mindset and continued investments
in technologies, products, and people, we set the global
standard for energy control system solutions.
FOCUSED
on the FUTURE
As we successfully leverage our investments across our core
markets, we bring added value to our customers and shareholders.
12
W O O D WA R D
FINANCIAL
REVIEW
14 – Management’s Discussion and Analysis
31 – Consolidated Financial Statements
52 – Report of Independent Registered Public Accounting Firm
53 – Selected Quarterly Financial Data
54 – Selected Financial Data
Management’s Responsibility for Financial Statements
Management is responsible for the accompanying
The audit committee of the company’s Board of
financial statements and believes that the financial
Directors, which consists of directors who are not
statements accurately and consistently present the
officers or employees of the company, meets with
financial position, results of operations, and cash
management and PricewaterhouseCoopers LLP to
flows of the company in accordance with accounting
review and discuss the audited financial statements,
principles generally accepted in the United States.
along with other matters.
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 registered public accounting firm, audit
the company’s financial statements in accordance with
the standards of the Public Company Accounting
Oversight Board (United States). Their report on
these financial statements follows the notes to
consolidated financial statements.
John A. Halbrook
Chairman and
Chief Executive Officer
Stephen P. Carter
Executive Vice President,
Chief Financial Officer and Treasurer
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Management’s Discussion and Analysis
We prepared the following discussion and analysis to help
While we saw improved market conditions in 2004,
you better understand our financial condition, changes
they were still not at the levels they were before the
in our financial condition, and results of operations.
declines began.
This discussion should be read with the consolidated
financial statements.
Overview
Our business is focused on the design, manufacture, and
servicing of energy control systems and components for
aircraft and industrial engines, turbines, and other power
equipment. We use technologies in the areas of fuel
With our fixed cost base and our decision to maintain our
research and development activities at similar levels, the
effect of sales changes on our earnings in 2004 and 2003
was significant. As sales decreased in 2003, the ratio
of fixed costs to variable costs increased and reduced
earnings. As sales returned in 2004, the ratio of fixed
costs to variable costs decreased, increasing earnings.
systems, combustion control, electronic controls and
The changes in our markets have also affected our
software, and systems integration to develop components
decisions in managing our workforce. Over the last
and integrated systems that we sell to OEMs (original
three years, we have taken actions to better align
equipment manufacturers) for use in power equipment
staffing levels with expected demand and to consolidate
for the power generation, process industries, transportation,
manufacturing operations to streamline our organization
and aerospace markets.
We have 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 turbines. We use segment information internally
to assess the performance of each segment and to make
decisions on the allocation of resources.
There has been a lot of volatility in the markets we
serve in recent years, and our sales and earnings reflect
the results of that volatility. Virtually all of our OEM
customers had lower shipment volumes in 2003 as
compared to 2002. These decreases were most evident
among customers shipping large gas turbines used in
power generation, which experienced decreases of over
40%. Our markets were affected by bankruptcies and
financial difficulties of certain large utility companies,
the aftermath of the events of September 2001, and
uncertainty about the economy in general. As a result,
and gain production cost efficiencies. The most recent
actions will be implemented in 2005 and the first half of
2006, and primarily involve the consolidation of certain
manufacturing operations in The Netherlands, United
Kingdom, and Japan with existing operations in the United
States, Germany, and China. Once fully implemented,
we expect the most recent actions will generate annual
savings of $9 million to $11 million on a pretax basis. The
related cost for the actions is estimated at $17 million, of
which $14 million was recognized in 2004.
In the sections that follow, we are providing information
to help you better understand factors that may affect our
future results, our critical accounting policies and market
risks, our results of operations and financial condition,
and the effects of recent accounting pronouncements.
Factors That May Affect Future Results
This annual report contains forward-looking statements,
including:
• Projections of sales, earnings, cash flows, or other
financial items;
purchases of discretionary capital equipment decreased.
• Descriptions of our plans and objectives for
future operations;
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W O O D WA R D
W O O D WA R D
• Forecasts of future economic performance; and
• Descriptions of assumptions underlying the above items.
Forward-looking statements do not reflect historical
facts. Rather, they are statements about future events
and conditions and often include words such as
“anticipate,” “believe,” “estimate,” “expect,” “intend,”
“plan,” “project,” “target,” “can,” “could,” “may,”
“should,” “will,” “would” or similar expressions. Such
statements reflect our expectations about the future
only as of the date they are made. We are not obligated
to, and we might not, update our forward-looking
statements to reflect changes that occur after the date
they are made. Furthermore, actual results could differ
• Changes in the legal environment of the United States
and other countries in which we operate, including
changes in the areas of taxation, business acquisitions,
and environmental matters;
• Changes in competitive conditions, including the
availability of new products and services, the
introduction of new channels of distribution, and
changes in OEM and aftermarket pricing;
• Reliability of customer and third-party forecasts
of sales volumes and purchase requirements in
our markets, including aircraft engines (OEM and
aftermarket), power generation, transportation,
and process industries markets;
materially from projections or any other forward-looking
• Our ability to continue to develop innovative new
statement regardless of when they are made.
Important factors that could individually, or together
with one or more other factors, affect our business,
results of operations and/or financial condition include,
but are not limited to, the following:
• General business and economic conditions, including
the strength of the global economy (particularly the
economies of the United States, Europe, and Asia),
fluctuations in exchange rates of foreign currencies
against the United States dollar (primarily currencies
of European and Asian countries), and fluctuations in
interest rates (primarily LIBOR), which affect our cost
of borrowings;
• Industry-specific business and economic conditions,
including the strength of manufacturers of industrial
engines, turbines and other power equipment for power
generation, transportation, and process industries
markets, manufacturers of aircraft turbines for
commercial and military markets, commercial airlines,
and generators of electric power;
• Significant geopolitical events and actions that impact
business and economic conditions, including acts or
threats of terrorism, actions taken by the United
States or other governments in response to acts or
threats of terrorism, and trade embargoes;
products and product enhancements that are accepted
by our customers and markets in accordance with our
project schedules and resource plans;
• Our ability to consolidate manufacturing operations in
The Netherlands, United Kingdom, and Japan with
existing operations in the United States, Germany,
and China in accordance with the timeframes, cost
estimates, and annual savings estimates anticipated;
• Effects of business acquisitions and/or divestitures,
including the incremental effects of the business
acquired or divested, the completion of integration
activities within planned timeframes and at planned
cost levels, and the achievement of planned operating
efficiencies;
• Effects of quality and productivity initiatives, including
achievement of expected results from Six Sigma and
other ongoing improvement programs and maintenance
of supplier designation levels with key customers;
• Effects of changes in accounting policies resulting from
new accounting pronouncements and/or changes in
the selection and application of accounting methods
necessary to implement accounting policies;
• Effects of unusual or extraordinary events, or of
other events and unforeseen developments involving
litigation or other contingencies.
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Management’s Discussion and Analysis (continued)
Critical Accounting Policies
We consider the accounting policies used in preparing
To assess the effect on our annual impairment tests
in 2004 if different assumptions had been used, we
our financial statements to be critical accounting policies
separately measured the effects of a hypothetical 20%
when they are both important to the portrayal of our
reduction in estimated cash flows, a 20% increase in
financial condition and results of operations, and require
the discount rates used, and a 20% reduction in the
us to make difficult, subjective, or complex judgments.
transaction multiples used. While each of these changes
Critical accounting policies normally result from the need
would have reduced the estimated fair value of reporting
to make estimates about the effect of matters that are
units within the company, none of them individually
inherently uncertain. Management has discussed the
would have resulted in an impairment loss in 2004.
development and selection of our critical accounting policies
with the audit committee of the company’s Board of
Directors, and the audit committee has reviewed the
disclosures that follow.
Other long-lived assets
As discussed here, our other long-lived assets consist of
property, plant, and equipment, and other intangibles,
which are included in the segment assets of both Industrial
In each of the following areas, our judgments, estimates,
Controls and Aircraft Engine Systems. Long-lived assets
and assumptions are impacted by conditions that change
totaled $203.0 million at September 30, 2004, and
over time. As a result, in the future there could be changes
represented 31% of total assets. To the extent a long-lived
in our assets and liabilities, increases or decreases in our
asset was acquired in a business acquisition, its initial
expenses, and additional losses or gains that are material
cost is equal to its estimated fair value. In 2004, the
to our financial condition and results of operations.
Goodwill
Goodwill, which is included in the segment assets of both
Industrial Controls and Aircraft Engine Systems, totaled
$131.6 million at September 30, 2004, representing 20%
of total assets. We began testing goodwill for impairment
on an annual basis in 2002 and we test goodwill for
impairment more often if circumstances require. As a
result of adopting new accounting standards on October 1,
2001, we recognized a pretax impairment loss of $4.0
total amount of long-lived assets acquired in business
acquisitions totaled $6.0 million. We depreciate or
amortize long-lived assets over their estimated useful
lives. Depreciation expense and amortization expense
associated with these assets totaled $32.8 million in 2004,
$32.4 million in 2003, and $32.1 million in 2002. We also
test long-lived assets for recoverability whenever events
or changes in circumstances indicate that the carrying
values may not be recoverable. We recognized an
impairment loss of $3.0 million in 2002.
million to reduce goodwill of an Industrial Controls
Judgment is required to determine the fair value of
reporting unit to its implied fair value. Subsequent annual
long-lived assets acquired in business acquisitions. The
impairment tests in 2002, 2003, and 2004 did not result
valuation of land and buildings and improvements
in any impairment losses.
Estimates and assumptions, the most important of which
are used to estimate the fair value of reporting units
within the company, impact the results of our goodwill
impairment tests. 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.
16
considers factors such as the size, condition, and
utility of the property and sales prices of similar
property in the approximate vicinity of the acquired
property. The valuation of machinery and equipment
considers factors such as the estimated replacement
cost of the equipment less deductions for loss of value
arising from condition, utility, and age of the equipment.
W O O D WA R D
W O O D WA R D
The valuation of identifiable intangible assets is based on
Deferred income tax asset valuation allowances
techniques that are dependent upon factors such as
Valuation allowances for deferred income tax assets
expected future cash flows, estimated fair value royalty
totaled $18.6 million at September 30, 2004, representing
rates, and discount rates. For our 2004 acquisition, we
26% of deferred income tax assets before the allowances.
determined the fair value of tangible and identifiable
The net changes in the valuation allowances increased
intangible assets acquired were approximately equal to
income tax expense by $2.1 million in 2004 and $4.5
our cost of the acquisition and we did not record any
million in 2003.
goodwill. While we believe our valuations of long-lived
assets is appropriate, we also believe the valuations of
long-lived assets acquired in our 2004 business acquisition
could reasonably have been up to 20% higher or lower—
or $1.2 million—than the actual amounts determined.
If our fair value determinations had been lower, we
would have recorded goodwill. However, there would
not have been a significant change had our fair value
determinations been higher.
We establish valuation allowances to reflect the
estimated amount of deferred tax assets that might
not be realized. Both positive and negative evidence
are considered in forming our judgment as to whether a
valuation allowance is appropriate. Our current valuation
allowances are primarily for deferred tax assets associated
with foreign net operating loss carryforwards. Remaining
deferred tax assets are expected to be realized through
future earnings. If we had made different judgments
The selection of useful lives for depreciation and
regarding the realizability of deferred tax assets associated
amortization purposes requires judgment. If we had
with foreign net operating loss carryforwards, our
increased the remaining useful life of all assets being
valuation allowance and income tax expense would have
depreciated and amortized by one year, depreciation and
decreased. If we had made different judgments regarding
amortization expense would have decreased, and the
the realizability of other deferred tax assets, our valuation
year-end carrying value of long-lived assets would have
allowance and income tax expense would have increased.
increased, by approximately $4.2 million in 2004. Similarly,
if we had decreased the remaining useful lives by one
year, depreciation and amortization expense would have
increased, and the year-end carrying value of long-lived
assets would have decreased, by approximately $5.7
million in 2004. (The results of this sensitivity analysis
ignore the impact of individual assets that might have
become fully depreciated or amortized during 2004 had
these hypothetical changes been made.)
The carrying value of a long-lived asset, or related group
of assets, is reduced to its fair value whenever estimates
of future cash flows are insufficient to indicate the
carrying value is recoverable. We form judgments as to
whether recoverability should be assessed, we estimate
future cash flows and, if necessary, we estimate fair
value. Fair value estimates are most often based on
estimated future cash flows and assumed discount rates.
Retirement healthcare benefits
The cost of retirement healthcare benefits is recognized
over employee service periods using an actuarial-based
attribution approach. Our liability at September 30,
2004, consisted of a benefit obligation of $82.7 million,
unamortized prior service cost of $8.4 million, and
unrecognized net losses of $36.3 million, resulting in a
recorded net accrued benefit of $54.8 million, representing
20% of total liabilities. Our expense in 2004 consisted of
service and interest costs totaling $6.4 million and other
costs netting to an increase of $0.8 million, resulting in
a net periodic benefit cost of $7.2 million.
To determine our net accrued benefit and net periodic
benefit cost, we form judgments about the best estimate
for each assumption used in the actuarial computation.
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Management’s Discussion and Analysis (continued)
The two most important assumptions that impact the
Under these agreements, we are swapping fixed rate
computation are the healthcare cost trend rate and
interest payments for interest payments at rates that vary
the discount rate.
We assumed net healthcare cost trend rates of 10.00%
in 2005, decreasing gradually to 5.00% in 2010, and
remaining at 5.00% thereafter. A 1.00% increase in
assumed healthcare cost trend rates would have
increased the benefit obligation at the end of 2004 by
$15.7 million and the total of the service and interest
costs by $1.3 million in 2004. Likewise, a 1.00% decrease
in the assumed healthcare cost trend rates would have
decreased the benefit obligation by $12.1 million and the
total of service and interest costs by $1.0 million in 2004.
We assumed discount rates of 5.79% to determine our
benefit obligation at September 30, 2004, and 6.00%
to determine our service and interest costs in 2004.
A 1.00% increase in these discount rates would have
decreased the benefit obligation at the end of 2004 by
$12.8 million and the total of service and interest costs
by $0.7 million in 2004. Likewise, a 1.00% decrease in
these discount rates would have increased the benefit
obligation by $16.9 million and the total of service and
interest costs by $0.8 million in 2004.
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,
2004, our long-term debt was denominated principally
with LIBOR. As measured at September 30, 2004, a
hypothetical 1% immediate increase in interest rates
would adversely affect our 2005 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 $1.8 million. Last
year, a hypothetical 1% immediate increase in interest rates
would have adversely affected our 2004 net earnings and
cash flows by approximately $0.4 million and reduced
the fair value of our long-term debt and interest rate
swap agreements by approximately $2.8 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,
2004, balances, would adversely affect our 2005 net
earnings and cash flows by approximately $0.7 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 2004 net
earnings and cash flows by $0.5 million.
Results of Operations
in United States dollars and consisted of fixed rate
Sales
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.
In thousands for the year
ended September 30,
External net sales:
Industrial Controls
Aircraft Engine Systems
2004
2003
2002
$439,801
$408,665
$332,755
270,004 253,927 271,326
Consolidated net sales
$709,805 $586,682 $ 679,991
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2004 Compared to 2003
acquisition into existing operations and did not separately
Consolidated net sales increased 21% in 2004 compared
measure the effect on sales, although we considered the
to 2003, attributable to the following (in millions):
effect insignificant.
• Industrial Controls’ sales volume changes
$53
• Incremental sales from business acquisitions
• Foreign currency translation rate changes
• Aircraft Engine Systems’ sales volume changes
• Price changes
41
16
14
(1)
Industrial Controls’ sales volume changes: Incremental
sales associated with the manufacture of diesel fuel
injectors and pumps for one of our major customers
accounted for approximately $42 million of the increase
in Industrial Controls’ sales volume. We believe our
acquisition of the Bryce diesel fuel injection business of
Delphi Automotive Systems in June 2001 provided us
with the capabilities that ultimately allowed us to pursue
this opportunity. Sales of the injectors and pumps began in
late 2003. The remaining $11 million increase in Industrial
Controls’ sales volume, as measured before the effects
of business acquisitions, resulted from increased demand
across many product lines in Asia and North America.
Incremental sales from business acquisitions: We
Aircraft Engine Systems’ sales volume changes: External
net sales of Aircraft Engine Systems increased 6% in
2004 from 2003. We attribute most of the increase to
higher revenue passenger miles experienced by airlines,
which has driven greater utilization of aircraft and higher
aftermarket sales for us. Even at the increased levels,
however, we believe commercial aircraft production and
commercial airline traffic were both low in 2004 relative
to recent periods—in particular, periods immediately
preceding the events of September 2001. We estimate
approximately half of our total sales were aftermarket
sales in 2004 and 2003.
2003 Compared to 2002
Consolidated net sales decreased 14% in 2003 compared
to 2002, attributable to the following (in millions):
• Industrial Controls’ sales volume changes
$(104)
• Incremental sales from business acquisitions
• Aircraft Engine Systems’ sales volume changes
• Foreign currency translation rate changes
19
(18)
15
(5)
completed two acquisitions in 2003 that, on an incremental
• Price changes
basis, increased sales by approximately $41 million in
2004 over 2003. Both acquisitions were accounted for
in Industrial Controls.
Industrial Controls’ sales volume changes: Virtually all
of our OEM customers had lower shipment volumes in
2003 as compared to 2002. These decreases were most
Our acquisitions in 2003 expanded our position in the
evident among customers shipping large gas turbines
small, high-speed diesel engine market. Synchro-Start
used in power generation. The decrease in our large gas
Products, Inc., acquired in May 2003, designed and
turbine combustion product sales was in excess of 40%.
manufactured actuators, solenoids, and controls for
Utility companies in the United States were investing in
industrial engines and equipment. Barber-Colman
new power generation equipment at increasing levels in
Dyna Products, acquired in August 2003, manufactured
the few years preceding 2002 and began decreasing their
and distributed controls for off-highway diesel and gas
investments in 2002. Our largest customer referred to
engines and mobile industrial equipment.
this dynamic as the “U.S. power bubble,” which peaked
We also completed an acquisition of Adrenaline Research,
Inc. in June 2004 to enhance our capabilities in advanced
combustion electronics. We immediately integrated this
in 2002. They also reported that their sales of large gas
turbines were 43% lower in calendar year 2003 than in
2002. We believe the rapid decrease in demand from the
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Management’s Discussion and Analysis (continued)
peak sales was influenced by bankruptcies and financial
manufactured and sold natural gas and propane fuel
difficulties of certain large utility companies, which
systems for small industrial engines.
impacted the investment plans of many utility companies.
Not only were utility companies placing orders for power
equipment at lower rates, but they were canceling orders
already placed and paying cancellation fees to power
equipment manufacturers.
Aircraft Engine Systems’ sales volume changes: External
net sales of Aircraft Engine Systems decreased 6% in
2003 from 2002. The low levels of commercial aircraft
production and low levels of commercial airline traffic
relative to recent periods—in particular, periods
Industrial Controls’ sales of products other than large gas
immediately preceding the events of September 2001—
turbine combustion products decreased an average of
affected the demand for our products, reducing our sales
20%. Companies have considerable discretion over the
volume. The most notable decrease in sales volumes
timing of capital equipment purchases and, as a result
began in the second fiscal quarter of 2002. Generally,
of general economic conditions and uncertainty about
commercial aftermarket sales held up better than OEM
the future, were making fewer investments in 2003 than
sales in 2003. We estimate about 51% of our total sales
in 2002. Decreased demand for capital equipment in
were aftermarket sales in 2003, compared to 46% in 2002.
numerous areas—such as marine, locomotive, off-highway
equipment, alternative-fuel trucks and buses, oil and gas
processing, petrochemical processing, paper processing,
and sugar processing—all affected our sales.
Incremental sales from business acquisitions: We
completed four acquisitions in 2003 and 2002 that
increased sales by $19 million in 2003 over 2002. All
four acquisitions were made by Industrial Controls.
Our acquisitions in 2003 expanded our position in the
Costs and Expenses
In thousands for the year
ended September 30,
2004
2003
2002
Cost of goods sold
$542,240
$450,676
$502,396
Selling, general, and
administrative
expenses
Research and
70,949
67,310
61,857
development costs
All other expense items
40,057
12,942
Interest and other income
(5,675)
41,565
13,536
(6,344)
36,734
12,582
(4,258)
small, high-speed diesel engine market. Synchro-Start
Consolidated costs
Products, Inc., acquired in May 2003, designed and
manufactured actuators, solenoids, and controls for
industrial engines and equipment. Barber-Colman Dyna
Products, acquired in August 2003, manufactured and
distributed controls for off-highway diesel and gas
engines and mobile industrial equipment.
Our acquisitions in 2002 enhanced our capabilities
using technologies that can be leveraged to existing
systems, power equipment, and market applications.
Leonhard-Reglerbau Dr.-Ing. Adolf Leonhard GmbH,
acquired in January 2002, specialized in the design,
manufacture, and sales of control, protection, and
monitoring devices for power generation equipment.
Nolff ’s Carburetion, Inc., acquired in March 2002,
20
and expenses
$660,513
$566,743
$609,311
2004 Compared to 2003
Cost of goods sold increased 20% in 2004 as compared
to 2003, attributable to the following (in millions):
• Increase in net sales
• Cost effects associated primarily with the
lower ratio of fixed costs to variable costs
• Changes in segment sales mix
• Higher performance-based variable
compensation
• Other factors, net
$ 95
(15)
4
6
2
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Cost of goods sold would have increased $95 million in
2003 Compared to 2002
2004 over 2003 had the increase been proportional to
the 21% increase in net sales. However, cost of sales
includes both variable and fixed cost components. The
most significant reason cost of goods sold did not increase
by $95 million was due to the operating leverage effect
of the increased sales versus fixed costs.
The percent increase in Industrial Controls sales was
greater than the percent increase in Aircraft Engine
Systems sales. However, Industrial Controls’ average
margins are not as high as those of Aircraft Engine
Cost of goods sold decreased 10% in 2003 as compared
to 2002, attributable to the following (in millions):
• Reduction in net sales
• Cost effects associated primarily with the
higher ratio of fixed costs to variable costs
• Other factors, net
$(69)
18
(1)
Cost of goods sold would have decreased $69 million in
2003 from 2002 had the decrease been proportional to
the 14% decrease in net sales. However, cost of sales
Systems. As a result, the relative change in the sales mix
includes both variable and fixed cost components. The
from one segment to the other increased our cost of
goods sold by approximately $4 million in 2004 as
compared to 2003.
most significant reason cost of goods sold did not decrease
by $69 million was due to the reverse operating leverage
effect of the reduced sales versus fixed costs.
Among the other factors affecting cost of goods sold
Among the other factors affecting cost of goods sold
were workforce management costs totaling $12.4 million
were workforce management costs and related facility
in 2004 and workforce management costs and related
consolidation costs totaling $10.1 million in 2003 and
facility consolidation costs totaling $10.1 million in 2003.
workforce management costs totaling $6.9 million
Selling, general, and administrative expenses increased
in 2002.
5% in 2004 as compared to 2003, attributable to the
Selling, general, and administrative expenses increased
following (in millions):
9% in 2003 as compared to 2002, attributable to the
• Incremental expenses of businesses acquired
$ 3.7
following (in millions):
• Higher performance-based variable
compensation
• Other factors, net
3.5
(3.6)
Among the other factors affecting selling, general, and
administrative expenses were workforce management
costs totaling $0.5 million in 2004 and $1.8 million in 2003.
Research and development costs decreased 4% in 2004
from 2003 due to normal variations in the timing of
project expenditures.
• Incremental expenses of businesses acquired
• Other factors, net
$3.6
1.9
Among the other factors affecting selling, general, and
administrative expenses were workforce management
costs totaling $1.8 million in 2003 and $1.2 million in 2002.
Research and development costs increased 13% in
2003 over 2002 primarily due to increased expenditure
levels for the further development of combustion control
technologies and electronic controls and software
technologies, including activities related to businesses
acquired in 2001 and 2002.
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Management’s Discussion and Analysis (continued)
Interest and other income increased by $2.1 million in
The total expense for the 2004 actions is estimated to be
2003 over 2002 primarily due to gains realized in 2003
approximately $17.0 million, of which $13.8 million was
on the sale of certain product line rights ($1.2 million)
recognized in 2004. In addition, we reduced accrued
and on the sale of marketable securities ($0.8 million).
member termination benefits from the previous year’s
Workforce Management Actions
actions by $0.7 million as a direct result of decisions to
discontinue the remaining actions from the previous year
In thousands for the year
ended September 30,
Member termination benefits:
2004
2003
2002
given the newly-formed consolidation plans in 2004. The
termination benefits that have been expensed in 2004
Industrial Controls
$12,151
$ 5,092
$4,032
are related to ongoing termination benefit plans that
Aircraft Engine Systems
Nonsegment
—
—
3,956
343
4,013
—
12,151
9,391
8,045
Contractual pension
termination benefits—
Industrial Controls
1,800
—
Related costs of facility
consolidation—
Aircraft Engine Systems
—
2,560
Member termination benefits
adjustments—
—
—
we provide to our members and reflect expense for
member service through September 30, 2004. The
contractual pension termination benefits in 2004 are
related to provisions of one of our retirement pension
benefit plans that provide for early retirement benefits
for certain plan participants in the event of a workforce
management action. The remaining estimated amount of
$3.2 million is for termination benefits that will be earned
by members over their remaining service period and for
Industrial Controls
(1,083)
—
—
other costs primarily associated with moving equipment
Total costs of workforce
and inventory to other locations. We expect to expense
management actions
$12,868
$11,951 $8,045
the $3.2 million in 2005 and 2006.
2004 Actions
The actions in 2004 are primarily related to the
consolidation of manufacturing operations in The
Netherlands and United Kingdom with existing
Our cash expenses for the 2004 actions are expected
to total $15.2 million, and will be paid from available
cash balances in 2005 and 2006 without the need
for additional borrowings. The contractual pension
operations in the United States and Germany. We are
termination benefits are non-cash expenses.
also consolidating a small manufacturing operation in
Japan with an existing operation in China and are
making sales force reductions in The Netherlands.
These actions are being taken to streamline the
organization by eliminating redundant manufacturing
operations and to adjust the sales force in response to
recent market shifts from Europe to Asia and North
America. In total, approximately 250 positions will be
eliminated from the three locations. We expect to
substantially complete these actions by March 31, 2006.
Once fully implemented, annual savings are expected to
range from $9.0 million to $11.0 million. These savings are
primarily related to reduced personnel costs, although
we anticipate some savings in travel and other costs
due to the reduced headcount. Of the total savings,
approximately 90% is expected to affect cost of goods
sold and 10% selling, general, and administrative expenses.
We currently expect to realize about half of the estimated
savings level in the third quarter of 2005, increasing
gradually thereafter through the second quarter of 2006
when virtually all of the savings is expected to be realized.
22
W O O D WA R D
W O O D WA R D
We currently plan to continue to use the facilities and
totaled $3.9 million in 2003 and $0.1 million in 2004.
equipment located in The Netherlands, United Kingdom,
Other costs directly associated with the consolidation
and Japan after the actions are completed. We own all
of our servovalve operations totaled $2.6 million and
three facilities, and each of them will have ongoing sales
were expensed and paid in 2003.
and service activities. In addition, the facility in the United
Kingdom will remain a key development site for diesel fuel
injection products. We expect to move manufacturing
The benefits of the 2003 actions have been reflected in
our 2004 results.
equipment used by the three locations to other facilities.
2002 Actions
2003 Actions
Industrial Controls’ actions in 2003 were made to align
staffing levels with expected demand and involved plans to
eliminate 172 positions in various manufacturing, selling,
and administrative functions worldwide. Payments
associated with these actions totaled $3.1 million in
2003 and $1.1 million in 2004. In addition, the ending
accrual for 2003 was reduced in 2004 by $1.1 million.
We attributed $0.4 million of the accrual reduction to
increased production levels and the decision to retain
Actions taken in 2002 were made to align staffing levels
with expected demand and involved the elimination of
233 positions in Industrial Controls and 202 positions
in Aircraft Engine Systems. The eliminated positions
were predominately involved with direct and indirect
manufacturing functions, although some selling and
administrative functions were affected as well. Payments
associated with these actions totaled $6.6 million in
2002 and $1.4 million in 2003. The benefits of these
actions have been reflected in our 2004 results.
certain members to meet the increased demand. The
Earnings
remaining accrual adjustment of $0.7 million was related
to members of the European operations affected by the
2004 actions and reflects the decision to discontinue
the remaining 2003 actions given the newly-formed
consolidation plans.
Aircraft Engine Systems’ actions in 2003 were primarily
associated with the consolidation of our servovalve
operations into our Rockford, Illinois, manufacturing
facility to achieve production cost efficiencies. In total,
165 positions were eliminated, predominately involving
direct and indirect manufacturing positions in Buffalo,
New York. Payments associated with these actions
In thousands for the year
ended September 30,
Segment earnings (loss):
2004
2003
2002
Industrial Controls
$ 6,437
$(11,588)
$ 33,294
Aircraft Engine Systems
59,192
47,615
57,226
Total segment earnings
65,629
36,027
90,520
Nonsegment expenses
(12,100)
(12,323)
(15,366)
Interest expense and income
(4,237)
(3,765)
(4,474)
Consolidated earnings
before income taxes
and cumulative effect
of accounting change
Income taxes
Cumulative effect of
accounting change
49,292
17,910
19,939
7,593
70,680
25,510
—
—
(2,489)
Consolidated net earnings
$ 31,382
$ 12,346
$ 42,681
23
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2 0 0 4 A N N U A L R E P O R T
Management’s Discussion and Analysis (continued)
2004 Compared to 2003
Industrial Controls’ segment earnings were $6.4 million
in 2004 compared to a segment loss of $11.6 million in
2003. The change was attributable to the following
(in millions):
• Increase in net sales
• Cost effects associated primarily with the
lower ratio of fixed costs to variable costs
• Workforce management actions, net
• Incremental expenses of businesses acquired
• Lower research and development costs
• Higher performance-based variable
compensation
• Other factors, net
$20
8
(8)
(6)
5
(4)
3
Industrial Controls’ segment earnings would have increased
by approximately $20 million in 2004 over 2003 if the
change in gross margin (measured as external net sales
less external cost of goods sold) had been proportional
to the 32% increase in net sales. However, cost of goods
sold includes both variable and fixed cost components and
timing of project expenditures, particularly for combustion
control technologies that had relatively high expenditure
levels in 2003.
Variable compensation was primarily driven by
consolidated results in 2004 and 2003.
Among the other factors affecting the comparison of
Industrial Controls’ segment earnings between 2004
and 2003 were the following items recognized in 2003:
$1.1 million for the write-off of certain advance license
fees, $1.0 million for lease termination expenses, and
$0.7 million of expense for the transfer of an overseas
pension to a different plan.
Aircraft Engine Systems’ segment earnings increased
24% in 2004 as compared to 2003, attributable to the
following (in millions):
• Increase in net sales
• Cost effects associated primarily with the
lower ratio of fixed costs to variable costs
• Workforce management actions, net
• Higher performance-based variable
$ 4.7
4.8
6.5
(4.4)
other expenses affecting segment earnings are relatively
compensation
fixed. As a result, segment earnings benefited from the
operating leverage effect of the increased sales versus
fixed costs.
Industrial Controls’ workforce management actions
resulted in the recognition of $12.9 million of expense in
2004 and $5.1 million in 2003, netting to a $7.8 million
increase in 2004 over 2003.
Our business acquisitions in 2003 and 2004 resulted
in increases in selling, general, and administrative
expenses of approximately $3.7 million and in
amortization expense of approximately $2.0 million
in 2004 over 2003.
Aircraft Engine Systems’ segment earnings would have
increased by approximately $4.7 million in 2004 over
2003 if the change in gross margin had been proportional
to the 6% increase in net sales. However, cost of goods
sold includes both variable and fixed cost components
and other expenses affecting segment earnings are
relatively fixed. As a result, segment earnings benefited
from the operating leverage effect of the increased sales
versus fixed costs.
Aircraft Engine Systems’ workforce management actions
resulted in the recognition of $6.5 million of expense in
2003. There were no actions or expense in 2004.
Industrial Controls’ research and development costs
decreased in 2004 from 2003 due to variations in the
Variable compensation was primarily driven by consolidated
results in 2004 and 2003.
24
W O O D WA R D
W O O D WA R D
Income taxes were provided at an effective rate on
Among the other factors affecting the comparison of
earnings before income taxes of 36.3% in 2004 compared
Industrial Controls’ segment earnings between 2003
to 38.1% in 2003. The effective rate change is primarily
and 2002 were the following: $5.1 million for workforce
due to changes in the distribution of taxable earnings and
management actions, $1.1 million for the write-off of
losses by country.
2003 Compared to 2002
Industrial Controls’ segment loss was $11.6 million in
2003 compared to segment earnings of $33.3 million
in 2002. This change was attributable to the following
(in millions):
• Decrease in net sales
$(17)
• Effects associated primarily with the
higher ratio of fixed costs to variable costs
(11)
• Changes in selling prices
• Increases in research and development costs
• Incremental expenses of businesses acquired
• Other factors, net
(5)
(5)
(5)
(2)
Industrial Controls’ segment earnings would have
decreased by approximately $17 million in 2003 from
2002 if the change in gross margin had been proportional
to the 19% decrease in net sales. However, cost of goods
sold includes both variable and fixed cost components
and other expenses affecting segment earnings are
relatively fixed. As a result, the reverse operating
leverage effect of the decreased sales versus fixed costs
negatively affected segment earnings.
Industrial Controls’ research and development costs
increased in 2003 over 2002 primarily due to increased
expenditure levels for the further development of
combustion control technologies and electronic controls
and software technologies.
Our business acquisitions in 2002 and 2003 resulted
in increases in selling, general, and administrative
expenses of approximately $3.6 million and in
amortization expense of approximately $1.1 million
in 2003 over 2002.
certain advance license fees, $1.0 million for lease
termination expenses, and $0.7 million for the transfer
of an overseas pension to a different plan in 2003; and
$4.0 million for workforce management actions and $3.0
million for an impairment loss on equipment in 2002.
Aircraft Engine Systems’ segment earnings decreased
17% in 2003 from 2002 attributable to the following
(in millions):
• Decrease in net sales
$(5.4)
• Effects associated primarily with the
higher ratio of fixed costs to variable costs
(4.6)
• Lower performance-based variable
compensation
• Workforce management actions, net
2.9
(2.5)
Aircraft Engine Systems’ segment earnings would have
decreased by approximately $5.4 million in 2003 from
2002 if the change in gross margin had been proportional
to the 6% decrease in net sales. However, cost of goods
sold includes both variable and fixed cost components
and other expenses affecting segment earnings are
relatively fixed. As a result, the reverse operating leverage
effect of the decreased sales versus fixed costs negatively
affected segment earnings.
Aircraft Engine Systems’ variable compensation was
primarily driven by consolidated results in 2003 and
segment results in 2002.
Aircraft Engine Systems’ workforce management actions
and related costs of facility consolidation resulted in the
recognition of $6.5 million of expense in 2003 and $4.0
million in 2002, netting to a $2.5 million increase in 2003
over 2002.
25
2 0 0 4 A N N U A L R E P O R T
2 0 0 4 A N N U A L R E P O R T
Management’s Discussion and Analysis (continued)
Nonsegment expenses decreased in 2003 from 2002
period to offset the realized capital loss, we reversed the
primarily due to changes in deferred compensation
valuation allowance that same quarter.
expense. Certain key management members have
elected to defer the payment of a portion of their
compensation to future periods. Individual unfunded
deferred compensation obligations that are payable in
cash have been accounted for on an accrual basis by
increasing or decreasing the amount of the obligation,
as necessary, to reflect our actual obligation at each
balance sheet date in accordance with the terms
of the underlying contract. The decrease in deferred
compensation expense was related to changes in these
obligations, which were reflected as accrued liabilities
in our consolidated balance sheets.
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 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
Income taxes were provided at an effective rate on
discounted future cash flows as we expect marketplace
earnings before income taxes of 38.1% in 2003 compared
participants would, and we further assessed the
to 36.1% in 2002. The most significant reason for the
reasonableness of the estimates by using valuation
lower rate in 2002 was related to a sale of our interest in
methods based on market multiples.
a joint venture, which allowed us to reduce valuation
allowances provided on deferred tax assets associated
Outlook
with a capital loss carryback.
The tax basis of the joint venture investment that was
sold in 2002 exceeded its carrying value for financial
reporting purposes by $3 million. Prior to the quarter of
the sale, we recognized a deferred tax asset for this basis
difference and, at the same time, reduced the deferred
tax asset by a valuation allowance because it was more
likely than not that the deferred tax asset would not
be realized.
The sale of our investment in the second quarter of 2002
resulted in a slight gain for financial reporting purposes
and a taxable loss of approximately $3 million. Given that
we had sufficient capital gain income in the carryback
Sales and earnings are expected to increase in 2005 as
compared to 2004. In particular, we anticipate higher
sales volume as a result of improved market conditions
for capital equipment purchases in power generation,
transportation, and process industries. These higher sales
are expected to result in improved segment earnings for
Industrial Controls and improved consolidated earnings.
For Aircraft Engine Systems, we currently anticipate
sales volume to be approximately the same in 2005 as
compared to 2004. At this level, our earnings could be
lower in 2005 than in 2004 as a result of changes in
sales mix and development expenditures for future
OEM programs. However, any decrease in earnings is
expected to be more than offset by increased earnings
in Industrial Controls.
26
W O O D WA R D
W O O D WA R D
While the consolidation of manufacturing operations in
2003 Compared to 2002
Europe and Asia will result in additional costs in 2005,
we expect these costs will be offset by savings related
to the consolidations and have minimal impact on
2005 earnings.
Financial Condition
Assets
In thousands at September 30,
2004
2003
2002
Industrial Controls
Aircraft Engine Systems
$364,584
205,580
$336,654
$286,302
217,685
219,480
Nonsegment assets
84,130
61,660
76,613
Consolidated total assets
$654,294 $615,999 $582,395
2004 Compared to 2003
Industrial Controls’ segment assets at September 30,
2004, increased over the prior year, driven by higher
levels of business activity near the end of 2004 as
compared to 2003, which resulted in higher accounts
receivable and inventories.
Aircraft Engine Systems’ segment assets at September
30, 2004, decreased from the prior year. Accounts
receivable and inventories both decreased, despite higher
levels of business activity in 2004 as compared to 2003,
which we attribute to normal variability in the timing
of customer payments and to actions taken to improve
Industrial Controls’ segment assets at September 30,
2003, increased from the prior year due to assets acquired
in business acquisitions. The resulting increases, which
totaled $63.1 million in 2003, were partially offset by
decreases among other assets. Lower levels of business
activity near the end of 2003 as compared to 2002
resulted in lower accounts receivable and inventories.
Also, depreciation of property, plant, and equipment
exceeded the level of capital expenditures in 2003.
Aircraft Engine Systems’ segment assets at September 30,
2003, were near the prior year’s levels. Higher
accounts receivable, attributed to higher sales near
the end of 2003 as compared to 2002, were offset by
reductions in inventories, and property, plant, and
equipment. Normal variability of inventory balances
accounted for the reductions in inventories and
depreciation of property, plant, and equipment
exceeded the level of capital expenditures in 2003.
Nonsegment assets at September 30, 2003, decreased
from the prior year primarily because of reductions in net
deferred income tax assets.
Other Balance Sheet Measures
In thousands at September 30,
2004
2003
Working capital
$197,524
$151,262
88,452
68,709
89,970
57,215
inventory turnover. In addition, depreciation of property,
Long-term debt, less current portion
plant, and equipment exceeded the level of capital
Other liabilities
expenditures in 2004.
Nonsegment assets at September 30, 2004, increased
from the prior year primarily because of increases in
cash and cash equivalents. Net cash flows provided by
operating activities exceeded net cash flows used in
investing and financing activities in 2004.
Commitments and contingencies
Shareholders’ equity
385,861 360,804
Working capital (total current assets less total current
liabilities) at September 30, 2004, increased over the
previous year primarily as a result of increases in cash
and cash equivalents and reductions in the current portion
of long-term debt. Our cash and debt positions at
September 30, 2004, reflect the results of cash flows
during the year and the fact that most of our debt is
represented by senior notes payable in 2006 through 2012.
27
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2 0 0 4 A N N U A L R E P O R T
Management’s Discussion and Analysis (continued)
Long-term debt at September 30, 2004, was near the
Commitments and contingencies at September 30, 2004,
prior year’s level. Required future payments for long-term
include various matters arising from the normal course
debt principal and operating lease commitments at
of business. We are currently involved in pending or
September 30, 2004, were as follows:
threatened litigation or other legal proceedings
In thousands for the year(s)
ended September 30,
2006/
2005
2007
2008/
2009 Thereafter
Long-term debt
$ 956
$29,072
$25,251
Operating leases
3,600
6,000
3,400
$32,143
6,900
We currently have a revolving line of credit facility with
a syndicate of U.S. banks totaling $100 million, with an
option to increase the amount of the line to $175 million
if we desire. The line of credit facility expires on March 14,
2006. In addition, we have other line of credit facilities,
which totaled $26.4 million at September 30, 2004, that
are generally reviewed annually for renewal. The total
amount of borrowing under all facilities was $5.8 million
at September 30, 2004.
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
regarding employment, product liability, and contractual
matters. We accrued for individual matters that we
believe are likely to result in a loss when ultimately
resolved using estimates of the most likely amount of
loss. There are also individual matters that we believe
the likelihood of a loss when ultimately resolved is less
than likely but more than remote, which were not accrued.
While it is possible that there could be additional losses
that have not been accrued, we currently believe the
possible additional loss in the event of an unfavorable
resolution of each matter is less than $5 million in
the aggregate.
We file income tax returns in various jurisdictions
worldwide, which are subject to audit. We have accrued
for our estimate of the most likely amount of expenses
that we believe will result from income tax audit
adjustments.
financing activities. The agreements also permit the
In the event of a change in control of the company, we
lenders to accelerate repayment requirements in the event
may be required to pay termination benefits to certain
of a material adverse event. Our most restrictive covenants
executive officers.
require us to maintain a minimum consolidated net worth,
a maximum consolidated debt to consolidated operating
cash flow, a maximum consolidated debt to EBITDA, and
a minimum EBIT to consolidated interest expense ratio,
as defined in the agreements. We were in compliance
with all covenants at September 30, 2004.
Shareholders’ equity at September 30, 2004, increased
7% over the previous year. Increases due to net earnings,
sales of treasury stock, and favorable foreign currency
translation adjustments were partially offset by cash
dividend payments and purchases of treasury stock. We
purchased $1.5 million of our common stock in 2004 and
Other liabilities at September 30, 2004, increased over
$9.5 million in 2003 under a November 20, 2002, Board
the previous year primarily as a result of changes in net
of Directors’ authorization to repurchase up to $20
accrued retirement healthcare benefits and retirement
million of our common stock in open market and
pension benefits. Our expenses associated with these
private transactions. The authorization period ended
plans totaled $11.9 million and our contributions totaled
November 20, 2004.
$5.6 million in 2004. In addition, changes in foreign
currency translation rates increased these liabilities by
$1.1 million.
28
W O O D WA R D
W O O D WA R D
Cash Flows
In thousands for the year
ended September 30,
Net cash provided by
2004
2003
2002
operating activities
$ 85,215
$ 60,775
$ 91,394
Net cash used in
2003 Compared to 2002
Net cash flows provided by operating activities
decreased by 34% in 2003 from 2002. Both operating
cash receipts and disbursements decreased in 2003
from 2002 due to lower sales volume. However, cash
investing activities
(20,272)
(75,701)
(48,211)
collections from customers decreased at a greater
Net cash provided
by (used in)
financing activities
(39,895)
8,325
(24,514)
2004 Compared to 2003
Net cash flows provided by operating activities
increased 40% in 2004 over 2003. Both operating
cash receipts and disbursements increased in 2004
over 2003 due to higher sales volume. However, cash
collected from customers increased at a greater rate
than cash paid to employees and other suppliers,
reflecting increased earnings and normal variations
in collection and payment patterns.
rate than cash paid to employees and other suppliers,
reflecting decreased earnings and normal variations
in collection and payment patterns. Lower income
tax payments in 2003 as compared to 2002 offset
approximately half of the decrease.
Net cash flows used in investing activities increased
by $27.5 million in 2003 as compared to 2002. This
change primarily resulted from Industrial Controls’
business acquisitions, for which payments totaling $57.7
million were made in 2003 compared to $25.8 million
in 2002. We also reduced our capital expenditures in
Industrial Controls by $3.0 million and in Aircraft
Net cash flows used in investing activities decreased
Engine Systems by $1.3 million.
by $55.4 million in 2004 as compared to 2003. This
change primarily resulted from Industrial Controls’
business acquisitions, for which payments totaling
$2.3 million were made in 2004 compared to $57.7
million in 2003.
Net cash flows for financing activities changed by $32.8
million between 2002 and 2003. Our net borrowings
increased in 2003 by $27.5 million, compared to a
reduction of $13.9 million in 2002. The higher borrowings
are primarily related to the increase in cash used for
Net cash flows for financing activities changed by
business acquisitions in 2003 as compared to 2002. In
$48.2 million between 2003 and 2004. Our net
repayment of borrowings totaled $30.4 million in
addition, we acquired $9.5 million of treasury stock in
2003. These stock purchases were made in connection
2004 compared to increased net borrowings totaling
with a November 20, 2002, authorization by the Board
$27.5 million in 2003. The higher borrowings in 2003
of Directors to repurchase up to $20 million of our
were primarily related to the use of cash for business
common stock from time to time in open market and
acquisitions in 2003. In addition, we used $1.5 million of
private transactions over the two years following the
cash to acquire treasury stock in 2004, down from $9.5
authorization. Dividends were approximately the same
million in 2003. These stock purchases were made in
in both years.
connection with a November 20, 2002, authorization by
the Board of Directors to repurchase up to $20 million
of our common stock from time to time in open market
and private transactions over the two years following the
authorization. Dividends were approximately the same
in both years.
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.
29
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2 0 0 4 A N N U A L R E P O R T
Management’s Discussion and Analysis (continued)
Payments of our $75 million of senior notes are not due
In May 2004, the Financial Accounting Standards Board
until the 2006–2012 timeframe. Also, we have a $100
issued FASB Staff Position 106-2, “Accounting and
million line of credit facility that includes an option to
Disclosure Requirements Related to the Medicare
increase the amount of the line up to $175 million that
Prescription Drug, Improvement and Modernization
does not expire until March 14, 2006. Despite these
Act of 2003.” The Staff Position provides guidance on
factors, it is possible business acquisitions could be
accounting for the effects of the Act, which introduced a
made in the future that would require amendments
federal subsidy to sponsors of retiree healthcare benefit
to existing debt agreements and the need to obtain
plans that provide a prescription drug benefit that is at
additional financing.
Recent Accounting Pronouncements
In December 2003, the Financial Accounting Standards
least actuarially equivalent to Medicare Part D, among
other provisions. For all public companies, the guidance
of the Staff Position became effective for the first interim
or annual period beginning after June 15, 2004, with
Board issued a revised Statement of Financial Accounting
earlier adoption encouraged. We adopted the guidance
Standards No. 132, “Employers’ Disclosures about
of the Staff Position in our quarter ended June 30, 2004.
Pensions and Other Postretirement Benefits.” The
Disclosures about the effects of the subsidy on our benefit
revised Statement requires additional disclosures about
obligation and net periodic benefit cost are included in
the assets, obligations, cash flows, and net periodic
Note 13 to the consolidated financial statements.
benefit cost of defined benefit pension plans and other
defined benefit postretirement plans that were not
required by the original Statement. The revised
Statement became effective in our first quarter 2004.
Our disclosures may be found in Note 13 to the
consolidated financial statements.
30
Statements of Consolidated Earnings
(In thousands except per share amounts)
Net sales
Costs and expenses:
Cost of goods sold
Selling, general, and administrative expenses
Research and development costs
Amortization of intangible assets
Interest expense
Interest income
Other income
Other expense
Total costs and expenses
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
Net earnings
Basic per share amounts:
Earnings before cumulative effect of accounting change
Cumulative effect of accounting change, net of income taxes
Net earnings
Diluted per share amounts:
Earnings before cumulative effect of accounting change
Cumulative effect of accounting change, net of income taxes
Net earnings
Weighted-average number of basic shares outstanding
Weighted-average number of diluted shares outstanding
See accompanying Notes to Consolidated Financial Statements.
W O O D WA R D
W O O D WA R D
Year Ended September 30,
2004
2003
2002
$ 709,805
$ 586,682
$ 679,991
542,240
450,676
502,396
70,949
40,057
6,905
5,332
(1,095)
(4,580)
705
67,310
41,565
4,870
4,635
(870)
(5,474)
4,031
61,857
36,734
3,748
5,109
(635)
(3,623)
3,725
660,513
566,743
609,311
49,292
17,910
19,939
7,593
31,382
12,346
—
—
70,680
25,510
45,170
(2,489)
$ 31,382
$ 12,346
$ 42,681
$
2.78
$
1.10
$
3.99
—
—
(0.22)
$
2.78
$
1.10
$
3.77
$
2.71
$
1.08
$
3.90
—
—
(0.21)
$
2.71
$
1.08
$
3.69
11,286
11,565
11,246
11,389
11,325
11,577
31
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2 0 0 4 A N N U A L R E P O R T
2 0 0 4 A N N U A L R E P O R T
Consolidated Balance Sheets
(In thousands except per share amounts)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for losses of $2,836 for 2004 and $2,601 for 2003
Inventories
Income taxes receivable
Deferred income taxes
Other current assets
Total current assets
Property, plant, and equipment—net
Goodwill
Other intangibles—net
Deferred income taxes
Other assets
Total assets
Liabilities and shareholders’ equity
Current liabilities:
Short-term borrowings
Current portion of long-term debt
Accounts payable
Accrued liabilities
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
Accumulated other comprehensive earnings
Deferred compensation
Retained earnings
Less: Treasury stock, at cost
Treasury stock held for deferred compensation
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying Notes to Consolidated Financial Statements.
32
At September 30,
2004
2003
$ 48,895
99,277
138,708
—
16,852
5,064
$ 24,058
87,807
126,289
1,782
14,179
5,157
308,796 259,272
117,310
131,542
85,711
4,318
6,617
124,144
133,620
85,291
6,429
7,243
$ 654,294 $ 615,999
$ 5,833
956
35,207
65,573
3,703
$ 5,774
30,000
26,703
45,533
—
111,272 108,010
88,452
68,709
89,970
57,215
—
106
15,878
12,038
4,461
—
106
14,234
9,625
4,377
381,458 360,908
413,941
23,619
4,461
389,250
24,069
4,377
385,861 360,804
$ 654,294 $ 615,999
Statements of Consolidated Cash Flows
(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
Contractual pension termination benefits
Impairment loss on equipment
Net loss on sale of property, plant, and equipment
ESOP compensation expense
Deferred income taxes
Reclassification of unrealized losses on derivatives to earnings
Changes in operating assets and liabilities, net of business acquisitions:
Accounts receivable
Inventories
Accounts payable and accrued liabilities
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
Receipts associated with business acquisition
Business acquisitions, net of cash acquired
Net cash 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 provided by (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 activities:
Liabilities assumed in business acquisitions
W O O D WA R D
W O O D WA R D
W O O D WA R D
Year Ended September 30,
2004
2003
2002
$ 31,382
$ 12,346
$ 42,681
—
32,761
1,800
—
319
—
(1,988)
300
(9,639)
(10,592)
26,751
6,298
7,823
—
32,418
—
—
1,613
1,418
8,540
279
(1,759)
13,725
(6,031)
(4,695)
2,921
2,489
32,088
—
3,000
354
1,879
1,243
154
29,287
9,028
(20,635)
(14,563)
4,389
53,833
48,429
48,713
85,215
60,775
91,394
(18,698)
367
395
(2,336)
(18,802 )
770
—
(57,669)
(22,898)
439
—
(25,752)
(20,272)
(75,701)
(48,211)
(10,832)
2,875
(1,547)
(30,391)
—
—
(39,895)
(10,707)
1,043
(9,503)
24,393
5,099
(2,000)
(10,731)
389
(286)
(25,149)
75,000
(63,737)
8,325
(24,514)
(211)
831
617
24,837
24,058
(5,770)
29,828
19,286
10,542
$ 48,895
$ 24,058
$ 29,828
$ 5,696
9,919
$ 4,884
3,399
$ 2,982
38,140
505
5,832
5,040
See accompanying Notes to Consolidated Financial Statements.
33
2 0 0 4 A N N U A L R E P O R T
2 0 0 4 A N N U A L R E P O R T
2 0 0 4 A N N U A L R E P O R T
Statements of Consolidated Shareholders’ Equity
(In thousands except per share amounts)
Common stock
Beginning and ending balance
Additional paid-in capital
Beginning balance
Sales of treasury stock
Deferred compensation transfer
Tax benefit applicable to stock options
Ending balance
Unearned ESOP compensation
Beginning balance
ESOP compensation expense
Ending balance
Accumulated other comprehensive earnings
Beginning balance
Foreign currency translation adjustments, net of reclassification to earnings
Reclassification of unrealized losses on derivatives to earnings
Minimum pension liability adjustment
Ending balance
Deferred compensation
Beginning balance
Deferred compensation invested in the company‘s common stock
Deferred compensation settled with the company‘s common stock
Ending balance
Retained earnings
Beginning balance
Net earnings
Cash dividends—$.96 per common share in 2004, $.9525 per common share
in 2003, and $.93 in 2002
Cash dividend paid by subsidiary to minority shareholder
Tax benefit applicable to ESOP dividend
Ending balance
Treasury stock, at cost
Beginning balance
Purchases of treasury stock
Sales of treasury stock
Deferred compensation transfer
Ending balance
Statements of Consolidated Shareholders’ Equity continued on next page
34
Year Ended September 30,
2004
2003
2002
$
106
$
106
$
106
$ 14,234
878
—
766
$ 13,850
(117)
335
166
$ 13,586
102
—
162
$ 15,878
$ 14,234
$ 13,850
$
$
— $ 1,418
—
(1,418)
$ 3,297
(1,879)
—
$
—
$ 1,418
$ 9,625
2,628
186
(401)
$ 2,823
6,368
173
261
$ 1,046
2,823
154
(1,200)
$ 12,038
$ 9,625
$ 2,823
$ 4,377
120
(36)
$
— $
4,377
—
$ 4,461
$ 4,377
$
—
—
—
—
$ 360,908
31,382
$ 359,248
12,346
$ 327,130
42,681
(10,832)
—
—
(10,707)
—
21
(10,533)
(198)
168
$ 381,458
$ 360,908
$ 359,248
$ 24,069
1,547
(1,997)
—
$ 19,708
9,503
(1,160)
(3,982)
$ 19,709
286
(287)
—
$ 23,619
$ 24,069
$ 19,708
(In thousands except per share amounts)
Treasury stock held for deferred compensation
Beginning balance
Deferred compensation transfer
Share distributions
Automatic dividend reinvestment
Ending balance
Total shareholders’ equity
Beginning balance
Effect of changes among components of shareholders’ equity:
Additional paid-in capital
Unearned ESOP compensation
Accumulated other comprehensive earnings
Deferred compensation
Retained earnings
Treasury stock, at cost
Treasury stock held for deferred compensation
Total effect of changes among components of shareholders’ equity
Ending balance
Total comprehensive earnings
Net earnings
Other comprehensive earnings:
Foreign currency translation adjustments, net of reclassification to earnings
Reclassification of unrealized losses on derivatives to earnings
Minimum pension liability adjustment
Total other comprehensive earnings
Total comprehensive earnings
Common stock, number of shares
Beginning and ending balance
Treasury stock, number of shares
Beginning balance
Purchases of treasury stock
Sales of treasury stock
Deferred compensation transfer
Ending balance
Treasury stock held for deferred compensation, number of shares
Beginning balance
Deferred compensation transfer
Share distributions
Automatic dividend reinvestment
Ending balance
See accompanying Notes to Consolidated Financial Statements.
W O O D WA R D
W O O D WA R D
W O O D WA R D
Year Ended September 30,
2004
2003
2002
$
$ 4,377
—
(36)
120
$
—
4,317
—
60
$ 4,461
$ 4,377
$
—
—
—
—
—
$ 360,804
$ 354,901
$ 318,862
1,644
—
2,413
84
20,550
450
(84)
25,057
384
1,418
6,802
4,377
1,660
(4,361)
(4,377)
264
1,879
1,777
—
32,118
1
—
5,903
36,039
$ 385,861
$ 360,804
$ 354,901
$ 31,382
$ 12,346
$ 42,681
2,628
186
(401)
2,413
6,368
173
261
6,802
2,823
154
(1,200)
1,777
$ 33,795
$ 19,148
$ 44,458
12,160
12,160
12,160
901
24
(81)
—
844
124
—
(1)
2
125
832
229
(37)
(123)
901
—
123
—
1
124
838
4
(10)
—
832
—
—
—
—
—
35
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2 0 0 4 A N N U A L R E P O R T
Notes to Consolidated Financial Statements
(In thousands of dollars except per share amounts)
Note 1. Significant accounting policies:
service facilities. Sales terms for distributors, dealers, and
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 generally 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
independent service facilities are identical to our sales
terms for direct customers.
Stock-based compensation: We use the intrinsic
value method to account for stock-based employee
compensation under 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. The following table presents
a reconciliation of reported net earnings and per share
information to pro forma net earnings and per share
information that would have been reported if the fair
value method had been used to account for stock-based
employee compensation:
Year ended September 30,
2004
2003
2002
Reported net earnings
$ 31,382
$ 12,346
$ 42,681
Compensation expense using
the fair value method, net
earnings as a separate component of shareholders’ equity
of income tax benefits
1,400
1,025
910
and are presented net of tax effects in the statements
Pro forma net earnings
$ 29,982 $ 11,321 $ 41,771
of consolidated shareholders’ equity. The effect of
changes in exchange rates on loans between consolidated
Reported net earnings per
share amounts:
subsidiaries that are not expected to be repaid in the
foreseeable future are also accumulated with other
comprehensive earnings.
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. We consider
product delivery to have occurred when the customer
has taken title and assumed the risks and rewards of
ownership of the products. Most of our sales are made
directly to customers that use our products, although we
also sell products to distributors, dealers, and independent
Basic
Diluted
$ 2.78
$ 1.10
$ 3.77
2.71
1.08
3.69
Pro forma net earnings per
share amounts:
Basic
Diluted
$ 2.66
$ 1.01
$ 3.69
2.60
0.99
3.61
Research and development costs: Expenditures related
to new product development activities are expensed
when incurred and are separately reported in the
statements of consolidated earnings.
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
36
W O O D WA R D
W O O D WA R D
W O O D WA R D
if undistributed earnings of overseas subsidiaries were
acquired and liabilities assumed. Goodwill is tested for
to be remitted to the United States, except for those
impairment on an annual basis (as of April 1) and more
earnings that we consider to be permanently reinvested.
often if an event occurs or circumstances change that
Cash equivalents: Highly liquid investments purchased
with an original maturity of three months or less are
would more likely than not reduce the fair value of a
reporting unit below its carrying amount.
considered to be cash equivalents.
The goodwill impairment test is a two-step process.
Accounts receivable: Virtually all our sales are made on
credit and result in accounts receivable, which are recorded
at the amount invoiced. In the normal course of business,
not all accounts receivable are collected and, therefore,
we provide an allowance for losses of accounts receivable
equal to the amount that we believe ultimately will not
be collected. We consider customer-specific information
related to delinquent accounts, past loss experience, and
current economic conditions in establishing the amount of
our allowance. Accounts receivable losses are deducted
from the allowance and the related accounts receivable
balances are written off when the receivables are deemed
uncollectible. Recoveries of accounts receivable previously
written off are recognized when received.
Inventories: Inventories are valued at the lower of cost
or market, with cost being determined on a first-in,
first-out basis.
The first step compares the fair value of a reporting
unit with its carrying amount, including goodwill. If the
carrying amount exceeds the fair value, the goodwill
of the reporting unit is considered potentially impaired
and the second step of the impairment test must be
performed. The second step of the goodwill impairment
test compares the implied fair value of the goodwill of the
reporting unit to the carrying amount of that goodwill.
If the carrying amount of goodwill exceeds the implied
fair value of goodwill, an impairment loss is recognized to
reduce the carrying amount to its implied fair value. In
performing this step, the implied fair value is determined
in the same manner as the amount of goodwill recognized
when a business combination is determined.
A reporting unit is the level at which goodwill is tested
for impairment. A reporting unit is an operating segment
or a component one level below an operating segment
if the component constitutes a business for which
Property, plant, and equipment: Property, plant, and
discrete financial information is available and segment
equipment are recorded at cost and are depreciated over
management regularly reviews the operating results of
the estimated useful lives of the assets, ranging from
that component. Furthermore, two or more components
5 to 45 years for buildings and improvements and 3 to
would be aggregated and considered a single reporting
15 years for machinery and equipment. Assets placed in
unit if the components have similar economic conditions.
service after September 30, 1998, are depreciated using
In our most recent impairment test, we determined our
the straight-line method and assets placed in service as
operating segments were our reporting units for purposes
of and prior to September 30, 1998, are depreciated
of our impairment tests.
principally using accelerated methods. Assets are tested
for recoverability whenever events or circumstances
occur that indicate the carrying value is not recoverable.
Other intangibles: Other intangibles are recognized
apart from goodwill whenever an acquired intangible
asset arises from contractual or other legal rights,
Goodwill: Goodwill represents the excess of the cost of
or whenever it is capable of being separated or
an acquired entity over the net amount assigned to assets
divided from the acquired entity and sold, transferred,
37
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2 0 0 4 A N N U A L R E P O R T
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except per share amounts)
licensed, rented, or exchanged, either individually
effective portion of a gain or loss in the value of a derivative
or in combination with a related contract, asset, or
designated as a cash flow hedge is initially reported as
liability. An intangible other than goodwill is amortized
a component of other comprehensive earnings and is
over its estimated useful life unless that life is determined
subsequently reclassified into earnings when the future
to be indefinite. Currently, all of our intangibles have an
interest payments affect earnings. The ineffective portion
estimated useful life and are being amortized. Impairment
of the gain or loss in the value of a derivative designated
losses are recognized if the carrying amount of an
as a cash flow hedge is reported in earnings immediately.
intangible subject to amortization exceeds its fair value.
ESOP debt guarantee: We guaranteed the payment of
Deferred compensation: Deferred compensation obligations
a loan obtained by the company’s Member Investment
will be settled either by delivery of a fixed number of
and Stock Ownership Plan, a qualified employee stock
shares of the company’s common stock (in accordance
ownership plan (ESOP), in June 1992. The proceeds
with certain eligible members’ irrevocable elections) or
of the loan were used by the plan to buy 1,027,224
in cash. We have contributed shares of common stock
shares of the company’s common stock. The original
of the company into a trust established for the future
amount of the ESOP debt was included in the company’s
settlement of deferred compensation obligations that
consolidated balance sheet as long-term debt and unearned
are payable in shares of the company’s common stock.
ESOP compensation, a component of shareholders’ equity.
Common stock held by the trust is reflected in the
Long-term debt was reduced as loan payments were
consolidated balance sheet as treasury stock held for
made. Unearned ESOP compensation was reduced as
deferred compensation, and the related deferred
shares were allocated to plan participants using the
compensation obligation is reflected as a separate
shares-allocated method. At September 30, 2003, all
component of equity in amounts equal to the fair value
debt had been repaid and all shares had been allocated.
of the common stock at the dates of contribution. These
accounts are not adjusted for subsequent changes in
fair value of the common stock. Deferred compensation
obligations that will be settled in cash are accounted for
on an accrual basis in accordance with the terms of the
underlying contract and are reflected in the consolidated
Reclassifications: Certain reclassifications have been
made in the 2003 and 2002 consolidated financial
statements to conform to the 2004 presentation. Most
significantly, research and development costs are now
presented separately from cost of goods sold.
balance sheet as an accrued expense.
Cumulative effect of accounting change: We adopted
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
Statement of Financial Accounting Standards No. 142,
“Goodwill and Other Intangible Assets,” and the transition
provisions of Statement No. 141, “Business Combinations,”
both issued by the Financial Accounting Standards Board,
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 2002. In performing
our impairment reviews, we estimated the fair values
38
W O O D WA R D
W O O D WA R D
W O O D WA R D
of the various reporting units using a present value
or annual period beginning after June 15, 2004, with
method that discounted future cash flows as we expect
earlier adoption encouraged. We adopted the guidance
marketplace participants would, and we further assessed
of the Staff Position in our quarter ended June 30, 2004.
the reasonableness of the estimates by using valuation
Disclosures about the effects of the subsidy on our
methods based on market multiples. The resulting loss,
benefit obligation and net periodic benefit cost are
which was related to an Industrial Controls reporting
included in Note 13.
unit, was incurred to reduce goodwill to its implied
fair value.
Adoption of these 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 standards reduced
amortization expense in 2002, 2003, and 2004 by
approximately $4,900 per year.
Note 2. Business acquisitions:
In June 2004, we acquired assets and assumed certain
liabilities of Adrenaline Research, Inc., specialists in
advanced combustion electronics. Our cost for this
acquisition totaled $2,896, and we recognized $3,139
as other intangibles in the Industrial Controls segment.
We are using an amortization period of seventeen years
for these intangibles. If we had completed this acquisition
on October 1, 2001, net sales and net earnings for
New accounting standards: In December 2003, the
2004, 2003, and 2002 would not have been materially
Financial Accounting Standards Board issued a revised
different from amounts reported in the statements
Statement of Financial Accounting Standards No. 132,
of consolidated earnings.
“Employers’ Disclosures about Pensions and Other
Postretirement Benefits.” The revised Statement requires
additional disclosures about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement
plans that were not required by the original statement.
The revised Statement became effective in our first
quarter 2004. Our disclosures may be found in Note 13.
In May 2003, we acquired 100 percent of the common
stock of Synchro-Start Products, Inc., and in August
2003, we acquired assets and assumed certain liabilities
of Barber-Colman Dyna Products, a division of Invensys
Building Systems, Inc. Synchro-Start Products, Inc.
specializes in the design and manufacture of actuators,
solenoids, and controls for industrial engines and
equipment. Barber-Colman Dyna Products manufactures
In May 2004, the Financial Accounting Standards Board
and distributes controls for off-highway diesel and gas
issued FASB Staff Position 106-2, “Accounting and
engines and mobile industrial equipment. Our cost for
Disclosure Requirements Related to the Medicare
these acquisitions totaled $58,084, of which $12,329
Prescription Drug, Improvement and Modernization
was recognized as goodwill, $20,607 was recognized as
Act of 2003.” The Staff Position provides guidance on
customer relationships, and $5,940 was recognized as
accounting for the effects of the Act, which introduced a
other intangibles, all in the Industrial Controls segment.
federal subsidy to sponsors of retiree healthcare benefit
We are using weighted-average amortization periods of
plans that provide a prescription drug benefit that is at
eleven years for customer relationships, nine years for
least actuarially equivalent to Medicare Part D, among
other intangibles, and eleven years in the aggregate. The
other provisions. For all public companies, the guidance
total amount of goodwill is expected to be fully deductible
of the Staff Position became effective for the first interim
for income tax purposes. If we had completed these
39
2 0 0 4 A N N U A L R E P O R T
2 0 0 4 A N N U A L R E P O R T
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except per share amounts)
acquisitions on October 1, 2001, net sales and net
earnings for 2003 and 2002 would not have been
materially different from amounts reported in the
statements of consolidated earnings.
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
Note 4. Income taxes:
Income taxes consisted of the following:
Year ended September 30,
2004
2003
2002
Current:
Federal
State
Foreign
Deferred
$12,400
$
2,481
6,148
(3,119)
606
292
2,294
4,401
$16,784
2,288
5,125
1,313
$17,910
$ 7,593
$25,510
Earnings before income taxes and cumulative effect of
accounting change by geographical area consisted of
the following:
industrial engines. Our cost for these acquisitions totaled
Year ended September 30,
2004
2003
2002
$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.
Note 3. Impairment loss on equipment:
In 2002, we reduced the carrying value of certain
Industrial Controls manufacturing equipment to its
estimated fair value, which was based on a present value
technique involving multiple cash flow scenarios. The
United States
Other countries
$39,054
10,238
$22,279
$65,463
(2,340)
5,217
$49,292
$19,939
$70,680
Deferred income taxes presented in the consolidated
balance sheets are related to the following:
At September 30,
2004
2003
Deferred tax assets:
Postretirement and early
retirement benefits
$ 20,304
$ 18,579
Foreign net operating loss
carryforward
Inventory
Other
18,629
8,531
23,623
16,528
7,490
20,077
Valuation allowance
(18,629)
(16,528)
Total deferred tax assets, net
of valuation allowance
52,458
46,146
Deferred tax liabilities:
Intangibles—net
Other
(19,190)
(12,098)
(15,185)
(10,353)
resulting loss totaled $3,000 and was recognized as other
Total deferred tax liabilities
(31,288)
(25,538)
expense in the statement of consolidated earnings. We
Net deferred tax assets
$ 21,170
$ 20,608
sold this manufacturing equipment in 2003.
We are currently studying the impact of the one-time
favorable foreign dividend provisions recently enacted
as part of the American Jobs Creation Act of 2004.
However, at September 30, 2004, based on the tax laws
40
W O O D WA R D
W O O D WA R D
W O O D WA R D
in effect at that time, it was our intention to continue to
Note 5. Earnings per share:
indefinitely reinvest $20,503 of our undistributed foreign
earnings. We have not provided for taxes on these
undistributed foreign earnings, which could become
Year ended September 30,
2004
2003
2002
Earnings before cumulative
effect of accounting
subject to income taxes if they are remitted as dividends,
change (A)
$31,382
$ 12,346 $45,170
are loaned to the company, or if we sell our stock in
Determination of shares,
the subsidiaries. However, we believe that foreign tax
in thousands:
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 due to foreign net operating loss carryforwards.
Under existing laws, these net operating losses may be
Weighted-average
shares of common
stock outstanding (B)
11,286
11,246
11,325
Assumed exercise of
stock options
279
143
252
Weighted-average
shares of common
stock outstanding
carried forward indefinitely. However, we are uncertain
assuming dilution (C)
11,565
11,389 11,577
whether we will generate taxable earnings in the
particular tax jurisdictions necessary to benefit from
these carryforwards. All other deferred tax assets are
expected to be realized through future earnings. The
changes in the valuation allowance were as follows:
Year ended September 30,
2004
2003
Beginning balance
$(16,528)
$(12,033)
Foreign net operating loss carryforward
(2,101)
(4,999)
State net operating loss carryforward
State capital loss utilization
—
—
414
90
Ending balance
$(18,629)
$(16,528)
Earnings before cumulative
effect of accounting change:
Basic per share amount (A/B)
Diluted per share amount (A/C)
$ 2.78
2.71
$ 1.10
$ 3.99
1.08
3.90
In 2004, the weighted-average shares of common stock
outstanding includes 124,965 shares for deferred
compensation obligations that are payable in actual
shares of our common stock.
The following stock options were outstanding during
2004, 2003, and 2002 but were not included in the
computation of diluted earnings per share because
The reasons for the differences between our effective
the options’ exercise prices were greater than the
income tax rate and the United States statutory federal
average market price of the common shares during the
income tax rate were as follows:
respective periods:
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
ESOP dividends on allocated shares
Capital loss utilization
Other items, net
2004
2003
2002
35.0
35.0
35.0
3.6
2.1
—
(3.4)
(1.1)
—
0.1
3.0
9.7
(3.3)
(3.9)
(2.7)
—
0.3
2.6
2.2
(1.1)
(1.6)
—
(1.5)
0.5
Effective rate
36.3
38.1
36.1
Year ended September 30,
2004
2003
2002
Options
Weighted-average exercise price
11,648
$70.37
435,230
$47.12
12,543
$70.28
Note 6. Inventories:
At September 30,
Raw materials
Component parts
Work in process
Finished goods
2004
2003
$ 3,304
$ 6,017
88,760
30,237
16,407
76,151
27,237
16,884
$138,708
$126,289
41
2 0 0 4 A N N U A L R E P O R T
2 0 0 4 A N N U A L R E P O R T
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except per share amounts)
Note 7. Property, plant, and equipment:
Note 9. Other intangibles—net:
At September 30,
Land
Buildings and improvements
Machinery and equipment
Construction in progress
Less accumulated depreciation
149,361
237,677
2,044
399,462
282,152
145,779
247,767
2,239
405,834
281,690
2004
2003
At September 30,
2004
2003
$ 10,380
$ 10,049
Industrial Controls:
Customer relationships:
Amount acquired
$ 37,387
$33,610
Accumulated amortization
(6,215)
(3,615)
Other:
Property, plant, and equipment—net
$117,310
$124,144
Amount acquired
Depreciation expense totaled $25,856 in 2004, $27,548
in 2003, and $28,340 in 2002.
Note 8. Goodwill:
Year ended September 30,
Industrial Controls:
Beginning balance
Goodwill acquired
Reclassification
Foreign currency exchange
rate changes
Ending balance
Aircraft Engine Systems:
2004
2003
$ 71,498
—
(3,491)
$ 53,143
16,496
—
1,413
1,859
$ 69,420
$ 71,498
Beginning and ending balance
$ 62,122
$ 62,122
Consolidated:
Beginning balance
Goodwill acquired
Reclassification
Foreign currency exchange
rate changes
Ending balance
$133,620
$115,265
—
16,496
(3,491)
—
1,413
1,859
$131,542
$133,620
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
We finalized accounting for an August 2003 business
Total
31,172
29,995
31,502
(7,490)
27,815
(4,594)
24,012
23,221
$ 55,184
$53,216
$ 28,547
(6,027)
$28,547
(5,075 )
22,520
23,472
11,785
(3,778)
11,785
(3,182)
8,007
8,603
$ 30,527
$32,075
$ 65,934
$62,157
(12,242)
(8,690)
53,692
53,467
43,287
(11,268)
39,600
(7,776)
32,019
31,824
$ 85,711
$85,291
acquisition in 2004, which resulted in a reclassification
of amounts from goodwill primarily to other intangibles.
Amortization expense associated with current intangibles
is expected to be approximately $7,100 for 2005, $7,000
for 2006, $6,600 for 2007, $5,900 for 2008, and $5,500
for 2009.
42
W O O D WA R D
W O O D WA R D
W O O D WA R D
Note 10. Short-term borrowings:
Short-term borrowings reflect borrowings under certain
We have effectively offset our exposure to changes in
the fair value of a portion of the senior notes by entering
bank lines of credit. The total amount available under
into interest rate swap agreements. Under these
these lines of credit, including outstanding borrowings,
agreements, we are swapping interest payments related
totaled $26,426 at September 30, 2004, and $30,608
to a notional amount of $40,000 at a fixed rate of 6.39%
at September 30, 2003. Interest on borrowings under
for rates that vary with LIBOR. The timing of these
the lines of credit is based on various short-term rates.
payments corresponds directly with interest payments
Several of the lines assess commitment fees. The lines,
due under the senior notes and we have assessed the
generally reviewed annually for renewal, are subject to
swaps as having no hedge ineffectiveness. As a result,
the usual terms and conditions applied by the banks.
the fair value of these swap agreements is shown as an
The weighted-average interest rate for outstanding
adjustment of long-term debt.
borrowings was 2.8% at September 30, 2004, 3.2% at
September 30, 2003, and 4.1% at September 30, 2002.
Note 11. Long-term debt:
At September 30,
Senior notes—6.39%
Term note—5.75%
Revolving line of credit facility
Fair value hedge adjustments:
Interest rate swap agreements
Unrecognized discontinued hedge gains
Less current portion
We also discontinued certain interest rate swaps that
were previously designated as fair value hedges of
long-term debt. These actions resulted in gains that are
recognized as a reduction of interest expense over the
2004
2003
term of the associated hedged debt using the effective
$75,000
12,422
—
$ 75,000
11,655
30,000
(895)
2,881
(256)
3,571
89,408
119,970
956
30,000
$88,452
$ 89,970
interest method. The unrecognized portion of the gain
is presented as an adjustment to long-term debt.
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
The senior notes, which are held by multiple institutions,
event of a material adverse event. Our most restrictive
and the term note, which is held by a bank in Germany,
covenants require us to maintain a minimum consolidated
are uncollateralized. Required future principal payments
net worth, a maximum consolidated debt to consolidated
of the senior notes and the term note at September 30,
operating cash flow, a maximum consolidated debt to
2004, are $956 in 2005, $14,536 in 2006, $14,536 in 2007,
EBITDA, and a minimum EBIT to consolidated interest
$14,537 in 2008, $10,714 in 2009, and $32,143 thereafter.
expense ratio, as defined in the agreements.
The revolving line of credit facility involves uncollateralized
financing arrangements with a syndicate of U.S. banks.
Note 12. Accrued liabilities:
We have $100,000 available under the revolving line of
At September 30,
credit facility and an option to increase the amount of
the line to $175,000. This line of credit expires March 14,
2006. Interest rates on borrowings under the line vary
with LIBOR, the money market rate, or the prime rate.
At September 30, 2004, there were no outstanding
borrowings against the line.
Salaries and other member benefits
Warranties
Taxes, other than on income
Deferred compensation
Other items—net
2004
2003
$41,236
6,401
4,214
2,278
11,444
$19,066
6,113
3,591
2,328
14,435
$65,573
$45,533
43
2 0 0 4 A N N U A L R E P O R T
2 0 0 4 A N N U A L R E P O R T
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except per share amounts)
Salaries and other member benefits include accrued
two European manufacturing operations with existing
termination benefits totaling $12,000 at September 30,
operations. This action is being taken to streamline the
2004, and $2,199 at September 30, 2003. Changes in
organization by eliminating redundant manufacturing
accrued termination benefits were as follows:
operations and is expected to be substantially complete
Year ended September 30,
Industrial Controls:
Beginning balance
Expense:
Cost of goods sold
Selling, general, and
administrative expenses
Accrual adjustments
Foreign currency exchange
rate changes
Payments
Ending balance
Aircraft Engine Systems:
Beginning balance
Expense:
Cost of goods sold
Selling, general, and
administrative expenses
Payments
Ending balance
Nonsegment:
Beginning balance
Expense:
Selling, general, and
administrative expenses
Payments
Ending balance
Consolidated:
Beginning balance
Expense:
Cost of goods sold
Selling, general, and
administrative expenses
Accrual adjustments
Foreign currency exchange
rate changes
Payments
Ending balance
2004
2003
by March 31, 2006. The total expense for this action
is estimated to be approximately $17,000, of which
$ 2,037
$ 1,349
$13,800 was recognized in 2004. In addition to the
11,611
3,832
540
(1,083)
1,260
—
170
(1,275)
—
(4,404)
$12,000
$ 2,037
$12,000 reflected in the preceding table, we recognized
contractual pension termination benefits of $1,800 in
2004. The remaining estimated amount of $3,200 is for
termination benefits that will be earned by members
over their remaining service period and for other costs
primarily associated with moving equipment and inventory
to other locations.
$
104
$
40
Accrued termination benefits that were expensed in
—
3,682
—
(104)
274
(3,892)
$ —
$ 104
$
58
$ —
—
(58)
343
(285)
$ —
$
58
2003 were related to actions to better align staffing
levels with expected demand in Industrial Controls and
to consolidate our servovalve manufacturing operations
in Buffalo, New York, with existing manufacturing
operations in Rockford, Illinois, to achieve cost efficiencies.
The accrual for the actions in Industrial Controls was
adjusted in 2004 by $1,083 and both actions are now
complete. We attributed $431 of the accrual reduction
to increased production levels and the decision to retain
certain members to meet the increased demand. The
remaining accrual adjustment of $652 was related
$ 2,199
$ 1,389
to members of the European operations now being
11,611
7,514
540
(1,083)
1,877
—
170
(1,437)
—
(8,581)
$12,000
$ 2,199
consolidated and reflects the decision to discontinue
the remaining 2003 actions given the newly-formed
consolidation plans.
Provisions of our sales agreements include product
warranties customary to such agreements. We establish
accruals for specifically identified warranty issues that
are probable to result in future costs. We also accrue
Accrued termination benefits that were expensed in
for warranty costs on a non-specific basis whenever
2004 were primarily related to the consolidation of
past experience indicates a normal and predictable
44
W O O D WA R D
W O O D WA R D
W O O D WA R D
pattern exists. Changes in accrued product warranties
percentage of the fair value of total plan assets for
were as follows:
Year ended September 30,
Beginning balance
retirement pension benefits were as follows:
2004
2003
United States
Other Countries
$ 6,113
$ 6,356
At September 30,
2004
2003
2004
2003
Accruals related to warranties issued
during the period
6,913
5,747
Accruals related to pre-existing
warranties
Settlements of amounts accrued
Foreign currency exchange rate changes
Ending balance
(1,998)
(4,798)
171
(949)
(5,315)
274
$ 6,401
$ 6,113
Note 13. 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.
Equity securities
Fixed income securities
Insurance contracts
Other
Total
60.1% 58.8%
39.4% 39.7%
—
0.5% 1.5%
—
71.6% 67.8%
12.0% 13.6%
12.7% 15.4%
3.7% 3.2%
100.0% 100.0%
100.0% 100.0%
Estimated benefit payments to be made over the next
ten years, with retirement healthcare benefit payments
presented net of estimated participant contributions,
are as follows:
Retirement
Pension Benefits
Retirement
United
Other
Healthcare
The amount of expense associated with defined
Year ending September 30,
States
Countries
Benefits
contribution plans totaled $11,623 in 2004, $11,010 in
2003, and $11,927 in 2002. Information regarding our
retirement pension benefits and retirement healthcare
benefits, using a September 30 measurement date, is
2005
2006
2007
2008
2009
$ 400
$ 818
$ 3,329
420
451
487
519
889
1,120
1,220
1,291
3,564
3,286
3,412
3,583
provided in the tables that follow.
2010–2014
3,805
9,260
24,251
Policies have been established for the investment of
We expect contributions by the company for retirement
plan assets for retirement pension benefits. In the United
pension benefits will be $0 in the United States and $1,909
States, our strategy is to balance the rewards of long-term
in other countries in 2005. We also expect contributions
growth with the risks of adverse, short-term market
by the company for retirement healthcare benefits will
behavior. Our investments are broadly diversified so
be $2,594 in 2005.
as to limit the impact on the total portfolio of losses
in individual securities. Target ranges for our assets
are 40% –50% for United States equity investments,
12%–18% for foreign equity investments, and 35%–45%
We recognized contractual pension termination benefits
of $1,800 in 2004 as a result of workforce reductions that
are probable during 2005 and 2006.
for fixed income investments. In other countries, we
As part of our retirement healthcare benefits, we provide
adhere to investment strategies which are consistent
a prescription drug benefit that is at least actuarially
with the practices of similar pension plans. Formal
equivalent to Medicare Part D. As a result, we are
investment policies in other countries are being considered.
entitled to a federal subsidy that was introduced by
The assumptions we used for the expected long-term
the Medicare Prescription Drug, Improvement and
rate of return on plan assets was based on historical
Modernization Act of 2003. The effect of the subsidy
performance and adjusted to estimate the potential range
reduced our accumulated postretirement benefit
of returns for the current asset allocations. The actual
obligation by $7,934 at January 1, 2004, the date the
45
2 0 0 4 A N N U A L R E P O R T
2 0 0 4 A N N U A L R E P O R T
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except per share amounts)
Act became effective. It also reduced our net periodic
thereafter. A 1.00% increase in assumed healthcare cost
postretirement benefit cost for 2004 by $843, which
trend rates would have increased the total of the service
consisted of $189 for service cost, $356 for interest cost,
and interest cost components by $1,262 and increased
and $298 for recognized actuarial gains.
the benefit obligation at the end of the year by $15,726 in
For retirement healthcare benefits, we assumed net
healthcare cost trend rates of 10.00% in 2005, decreasing
gradually to 5.00% in 2010, and remaining at 5.00%
2004. Likewise, a 1.00% decrease in the assumed rates
would have decreased the total of service and interest
cost components by $973 and decreased the benefit
obligation by $12,149 in 2004.
At or for the year ended September 30,
Changes in benefit obligation:
Retirement Pension Benefits
United States
Other Countries
Retirement
Healthcare Benefits
2004
2003
2004
2003
2004
2003
Benefit obligation at beginning of year
$ 17,994
$ 17,215
$ 39,787
$ 35,545
$ 70,349
$ 58,550
Service cost
Interest cost
Contribution by plan participants
Net actuarial losses (gains)
Foreign currency exchange rate changes
Benefits paid
Contractual termination benefits
—
1,070
—
180
—
(389)
—
—
1,110
—
39
—
(370)
—
1,694
1,835
251
2,312
2,487
(1,199)
1,800
1,590
1,600
223
(40)
2,638
(1,769)
—
2,206
4,204
2,937
8,326
208
1,717
3,863
2,833
9,796
111
(5,505)
(6,521)
—
—
Benefit obligation at end of year
18,855
17,994
48,967
39,787
82,725
70,349
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
11,587
1,228
—
1,400
—
(389)
9,052
1,439
—
1,466
—
(370)
27,689
23,484
2,780
1,614
1,681
251
(1,199)
2,525
1,868
1,358
223
(1,769)
—
—
—
2,568
2,937
(5,505)
—
—
—
3,688
2,833
(6,521)
Fair value of plan assets at end of year
13,826
11,587
32,816
27,689
—
—
Funded status
Unamortized prior service cost
Unrecognized net losses
Unamortized transition obligation
Intangible asset
(5,029)
(6,407)
(16,151)
(12,098)
(82,725)
(70,349)
7
7
4,040
4,317
—
—
—
—
(84)
11,124
572
(488)
(682)
(93)
9,701
666
—
(292)
(8,380)
36,286
(8,888)
29,247
—
—
—
—
—
—
Accumulated other comprehensive income
(1,513)
(1,273)
Net accrued benefit
$ (2,495)
$ (3,356)
$ (5,709)
$ (2,116)
$ (54,819)
$ (49,990)
Accumulated benefit obligation
$ 16,321
$ 14,943
$ 36,309
$ 29,267
46
W O O D WA R D
W O O D WA R D
W O O D WA R D
Year ended September 30,
2004
2003
2002
2004
2003
2002
2004
2003
2002
Retirement Pension Benefits
United States
Other Countries
Retirement
Healthcare Benefits
Components of net periodic
benefit cost:
Service cost
Interest cost
$ — $ — $ —
1,035
1,110
1,070
$ 1,694
$ 1,590
$ 1,301
$2,206
$1,717
$1,208
1,835
1,600
1,378
4,204
3,863
3,443
Expected return on plan assets
(942)
(741)
(801)
(1,641)
(1,293)
(1,318)
Amortization of unrecognized
transition obligation
Recognized losses
Recognized prior service costs
Contractual termination benefits
Settlement or curtailment
—
170
1
—
—
235
1
—
—
1
—
—
98
533
(9)
1,800
losses (gains)
—
—
—
—
89
593
(8)
—
—
—
—
1,343
(508)
—
—
—
767
(508)
—
—
—
22
—
—
85
—
(8)
—
357
—
—
(304)
Net periodic benefit cost
$ 299
$ 605
$ 235
$ 4,310 $ 2,571
$ 1,795
$7,245
$5,839
$4,369
Increase (decrease) in minimum
pension liability adjustment
included in other comprehensive
earnings
$ 240
$ 185
$1,088
$ 390
$
(556)
$ 848
$ —
$ —
$ —
Weighted-average assumptions used
to determine benefit obligation at
September 30:
Discount rate
Rate of compensation increase
Weighted-average assumptions used
to determine net periodic benefit
cost for years ended September 30:
Discount rate
Rate of compensation increase
Expected long-term rate of
5.80% 6.00% 6.50%
5.00% 5.00% 5.00%
4.36%
3.02%
4.06% 4.29%
2.91% 3.65%
6.00% 6.50% 7.25%
5.00% 5.00% 5.00%
4.06%
2.91%
4.29% 2.50%
3.65% 3.50%
5.79% 6.00% 6.75%
—
—
—
6.00% 6.75% 7.25%
—
—
—
return on plan assets
8.25% 8.25%
8.25 %
5.44%
5.36% 2.50%
—
—
—
47
2 0 0 4 A N N U A L R E P O R T
2 0 0 4 A N N U A L R E P O R T
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except per share amounts)
Note 14. Stock option plan:
We have a stock option plan covering key management
The weighted-average estimated fair value of options
granted during the year, as measured at their grant date,
members and directors of the company. Options granted
was $15.68 in 2004, $14.85 in 2003, and $16.03 in 2002.
under the plan generally have a term of 10 years and
These estimates were determined using the Black-Scholes
vest evenly at the end of each year over four years from
option-pricing model and the following weighted-average
the date of grant. There were 2,100,000 shares of
assumptions by grant year:
Year ended September 30,
2004
2003
Risk-free interest rate
3.7%
3.4%
2002
4.5%
Expected life
Expected volatility
Expected dividend yield
7 years
7 years
7 years
37.0%
2.6%
35.0%
2.5%
35.0%
2.8%
Information about outstanding stock options at
September 30, 2004 is provided in the table below.
There were 681,937 stock options exercisable at
September 30, 2003, with a weighted-average exercise
price of $29.36, and 604,068 at September 30, 2002,
with a weighted-average exercise price of $27.08.
common stock authorized for issuance under the plan
at September 30, 2004.
Changes in outstanding stock options were as follows:
Weighted-Average
Number
Exercise Price
Balance at September 30, 2001
Options granted
Options exercised
Options forfeited
Options expired
Balance at September 30, 2002
Options granted
Options exercised
Options forfeited
780,818
178,500
(9,100)
(13,000)
(1,000)
936,218
125,000
(34,706)
(21,750)
Balance at September 30, 2003
1,004,762
Options granted
Options exercised
Options forfeited
Options expired
169,000
(81,248)
(5,250)
(3,000)
$28.96
49.42
29.50
41.40
69.00
32.64
46.86
27.31
44.96
34.33
46.94
35.01
49.25
55.74
Balance at September 30, 2004
1,084,264
$36.11
Options Outstanding
at September 30, 2004
Options Exercisable
at September 30, 2004
Weighted-Average
Weighted-Average
Remaining Life
Weighted-Average
Exercise Price
in Years
Number
Exercise Price
$22.34
$36.28
$48.01
$70.44
$36.11
3.3
4.6
8.1
6.6
5.5
393,850
231,935
110,249
10,979
747,013
$22.34
$35.64
$49.22
$70.44
$31.14
Number
393,850
258,810
420,625
10,979
1,084,264
Exercise Price Range
$16.625– $24.750
$30.594– $41.813
$46.420– $59.000
$69.220– $73.700
48
W O O D WA R D
W O O D WA R D
W O O D WA R D
Note 15. Shareholder rights plan:
We have a shareholder rights plan to protect shareholders
against unsolicited attempts to acquire control of the
Note 16. Accumulated other
comprehensive earnings:
Accumulated other comprehensive earnings, which
company that do not offer what the Board of Directors
totaled $12,038 at September 30, 2004, and $9,625 at
believes to be an adequate price to all shareholders. In
September 30, 2003, consisted of the following items:
connection with this plan, a dividend of one preferred
stock purchase right for each outstanding share of
Year ended September 30,
2004
2003
Accumulated foreign currency translation
common stock was paid to shareholders in February 1996.
Each right entitles its holder to purchase from the company
adjustments:
Beginning balance
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
Translation adjustments
Taxes associated with translation
adjustments
Ending balance
Accumulated unrealized
derivative losses:
Beginning balance
Reclassification to interest expense
Taxes associated with interest
reclassification
Ending balance
Accumulated minimum pension liability
adjustments:
Beginning balance
in whole (but not in part) at a redemption price of $.003
Minimum pension liability
$11,611
$ 5,243
4,237
10,271
(1,609)
(3,903)
$14,239
$11,611
$ (1,047)
300
$ (1,220)
279
(114)
(106)
$
(861)
$ (1,047)
$
(939)
$ (1,200)
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.
adjustment
(680)
421
Taxes associated with minimum
pension liability adjustments
279
(160)
Ending balance
$ (1,340)
$
(939)
Note 17. 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 approximately $3,600 in 2005, $3,300 in 2006, $2,700
in 2007, $1,800 in 2008, $1,600 in 2009, and $6,900
thereafter. Rent expense for all operating leases totaled
$4,239 in 2004, $4,125 in 2003, and $4,507 in 2002.
49
2 0 0 4 A N N U A L R E P O R T
2 0 0 4 A N N U A L R E P O R T
Notes to Consolidated Financial Statements (continued)
(In thousands of dollars except per share amounts)
Note 18. Contingencies:
We are currently involved in pending or threatened
litigation or other legal proceedings regarding
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
employment, product liability, and contractual matters
interest rates is repriced frequently at market rates of
arising from the normal course of business. We accrued
interest. Interest rate swap agreements are carried at their
for individual matters that we believe are likely to result
fair value, which is estimated based on proprietary models
in a loss when ultimately resolved using estimates of the
used by financial institutions that rely on assumptions
most likely amount of loss. There are also individual
regarding past, present, and future market conditions.
matters that we believe the likelihood of a loss when
The fair value of long-term debt at fixed interest rates
ultimately resolved is less than likely but more than
was estimated based on a model that discounted future
remote, which were not accrued. While it is possible
principal and interest payments at interest rates available
that there could be additional losses that have not been
to the company at the end of the year for similar debt
accrued, we currently believe the possible additional loss
of the same maturity. The weighted-average interest
in the event of an unfavorable resolution of each matter
rates used to estimate the fair value of long-term debt
is less than $5,000 in the aggregate.
We file income tax returns in various jurisdictions
worldwide, which are subject to audit. We have accrued
for our estimate of the most likely amount of expenses
that we believe will result from income tax audit
adjustments.
at fixed interest rates were 4.28% at September 30,
2004, and 4.62% at September 30, 2003.
Note 20. 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
In the event of a change in control of the company, we
Engine Systems. Industrial Controls provides energy
may be required to pay termination benefits to certain
control systems and components primarily to OEMs of
executive officers.
Note 19. Financial instruments:
The estimated fair values of our financial instruments
were as follows:
At September 30,
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 1. Intersegment sales and
2004
2003
transfers are made at established intersegment selling
Cash and cash equivalents
$ 48,895
$ 24,058
prices generally intended to approximate selling prices to
Interest rate swap agreements
Short-term borrowings
Long-term debt, including
(895)
(5,833)
(256)
(5,774)
current portion
(93,947)
(123,521)
The fair values 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.
unrelated parties. Our determination of segment earnings
does not reflect allocations of certain corporate expenses,
which we designate as nonsegment expenses, and is
before interest expense, interest income, income taxes,
and the cumulative effect of accounting change.
50
W O O D WA R D
W O O D WA R D
W O O D WA R D
Segment assets consist of accounts receivable,
inventories, property, plant, and equipment—net,
goodwill, and other intangibles—net. Summarized
financial information for our segments follows:
At or for the year ended
September 30,
Industrial Controls:
2004
2003
2002
External net sales
$ 439,801
$ 332,755
$ 408,665
Intersegment sales
849
697
842
Segment
earnings (loss)
Segment assets
Depreciation and
amortization
Capital expenditures
Aircraft Engine
Systems:
External net sales
Intersegment sales
Segment earnings
Segment assets
Depreciation and
amortization
Capital expenditures
6,437
364,584
(11,588)
33,294
336,654
286,302
21,341
13,564
18,914
11,601
16,657
14,585
$ 270,004
2,193
59,192
205,580
$ 253,927
$ 271,326
2,016
47,615
2,752
57,226
217,685
219,480
10,276
4,281
11,464
5,775
13,076
7,038
At September 30,
2004
2003
2002
Total segment assets
$ 570,164
$ 554,339
$ 505,782
Unallocated corporate
property, plant, and
equipment—net
Other unallocated assets
2,384
81,746
2,812
58,848
3,385
73,228
Consolidated total assets $ 654,294
$ 615,999
$ 582,395
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 individually accounted for more than
10% of consolidated net sales in each of the years 2002
through 2004. These sales were made by both of our
segments and totaled approximately $156,000 in 2004,
$151,000 in 2003, and $212,000 in 2002. In addition, a
second customer individually accounted for more than
10% of consolidated net sales in 2004. These sales
were made by Industrial Controls and totaled $83,000
In addition, Industrial Controls recognized contractual
in 2004.
pension termination benefits of $1,800 in 2004, which
External net sales by geographical area, as determined by
reduced segment earnings.
the location of the customer invoiced, were as follows:
The differences between the total of segment amounts
and the consolidated financial statements were as follows:
Year ended September 30,
2004
2003
2002
Total segment
net sales and
intersegment sales
$ 712,847
$ 589,395
$ 683,585
Elimination of
intersegment sales
(3,042)
(2,713)
(3,594)
Year ended September 30,
2004
2003
2002
United States
Other countries
$ 413,901
$ 332,986
$ 403,864
295,904
253,696
276,127
$ 709,805
$ 586,682
$ 679,991
Property, plant, and equipment—net by geographical
area, as determined by the physical location of the assets,
were as follows:
Consolidated net sales
$ 709,805
$ 586,682
$ 679,991
At September 30,
Total segment earnings
$ 65,629
$ 36,027
$ 90,520
Nonsegment expenses
Interest expense and
(12,100)
(12,323)
(15,366)
income
(4,237)
(3,765)
(4,474)
United States
Other countries
2004
2003
$ 84,091
$ 92,326
33,219
31,818
$ 117,310
$ 124,144
Consolidated earnings
before income taxes
and cumulative effect
of accounting change
$ 49,292
$ 19,939
$ 70,680
51
2 0 0 4 A N N U A L R E P O R T
2 0 0 4 A N N U A L R E P O R T
2 0 0 4 A N N U A L R E P O R T
Report of Independent Registered Public Accounting Firm
To the 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, 2004 and 2003, and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 2004 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, 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 1 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
November 1, 2004
52
Selected Quarterly Financial Data (Unaudited)
W O O D WA R D
W O O D WA R D
(In thousands except
per share amounts)
Net sales
Gross profit
Earnings (loss) before
income tax
Net earnings (loss)
Net earnings (loss):
Per basic share
Per diluted share
Cash dividends
per share
Common stock price
per share:
High
Low
Close
Notes:
2004 Fiscal Quarters
2003 Fiscal Quarters
First
Second
Third
Fourth
First
Second
Third
Fourth
$158,973
$172,951
$180,496
$197,385
$144,825
$146,159
$141,637
$154,061
41,284
42,888
45,064
38,329
35,881
34,929
30,845
34,351
12,021
7,393
14,589
9,105
13,218
8,213
0.66
0.65
0.81
0.79
0.73
0.71
9,464
6,671
0.59
0.57
10,104
6,265
0.55
0.55
7,418
4,511
0.40
0.40
(408)
(165)
(0.01)
(0.01)
2,825
1,735
0.15
0.15
0.24
0.24
0.24
0.24
0.2325
0.24
0.24
0.24
57.65
43.02
56.83
65.00
54.26
63.74
73.72
59.04
72.11
72.69
54.75
67.49
49.45
35.00
43.50
44.68
32.81
34.83
44.43
34.04
43.01
50.30
40.19
43.39
1. Gross profit represents net sales less cost of goods sold. Certain reclassifications have been made to cost of goods sold on a quarterly basis to
conform to the presentation in our statements of consolidated earnings for the year ended September 30, 2004.
2. Earnings (loss) before income taxes included the effects of workforce management actions in 2003 and 2004 to consolidate certain facilities and
better align staffing levels with expected demand. Our workforce management costs consisted of the following:
2004 Fiscal Quarters
2003 Fiscal Quarters
(In thousands)
First
Second Third
Fourth
First
Second
Third
Fourth
Member termination benefits
$ 151
$ —
$ — $12,000
$2,854
$2,200
$1,841
$2,496
Contractual pension termination benefits
Related costs of facility consolidation
Member termination benefits adjustments
—
—
(83)
—
—
(348)
—
—
—
1,800
—
(652)
—
—
—
500
—
1,500
—
—
—
—
560
—
Total workforce management costs
$ 68
$(348)
$ —
$13,148
$2,854
$2,700
$3,341
$3,056
Amount of workforce management costs
affecting gross profit
$ 50
$(288)
$ —
$12,612
$2,742
$1,750
$2,905
$2,677
53
2 0 0 4 A N N U A L R E P O R T
2 0 0 4 A N N U A L R E P O R T
2 0 0 4 A N N U A L R E P O R T
Selected Financial Data
(In thousands of dollars except per share amounts)
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
Net sales
Earnings (loss) before cumulative effect of accounting change
Goodwill-related amortization, net of income taxes
$709,805
$ 586,682
31,382
12,346
—
—
$ 679,991
$ 678,791
$ 597,385
$ 596,904
$ 490,476
$ 442,216
$ 417,290
$ 379,736
$ 333,207
45,170
—
53,068
2,875
46,976 *
2,660
30,829
2,770
21,592
1,293
18,140
22,178
11,936
(3,273)
578
346
245
307
Adjusted earnings (loss) before cumulative effect of accounting change
31,382
12,346
45,170
55,943
49,636
33,599
22,885
18,718
22,524
12,181
(2,966)
For the Year Ended September 30,
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
Income taxes
Interest expense, net of interest income
Depreciation expense
Amortization expense
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
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
2.78
—
2.78
2.71
—
2.71
0.96
17,910
4,237
25,856
6,905
18,698
36.3%
4.4%
8.7%
1.10
—
1.10
1.08
—
1.08
0.9525
7,593
3,765
27,548
4,870
18,802
38.1%
2.1%
3.5%
3.99
—
3.99
3.90
—
3.90
0.93
25,510
4,474
28,340
3,748
22,898
36.1%
6.6%
14.2%
4.69
0.25
4.94
4.59
0.25
4.84
0.93
32,887
6,587
25,677
7,055
26,903
38.3%
8.2%
20.3%
4.17*
0.24
4.41
4.15*
0.24
4.39
0.93
27,116
10,127
24,001
6,418
27,416
36.6%
8.3%
20.5%
2.74
0.24
2.98
2.73
0.25
2.98
0.93
20,390
11,919
25,267
6,769
22,789
39.8%
5.6%
15.3%
1.90
0.12
2.02
1.90
0.11
2.01
0.93
14,946
4,519
23,715
2,927
20,862
40.5%
4.7%
10.9%
1.58
0.05
1.63
1.57
0.05
1.62
0.93
13,305
1,602
21,854
983
1.92
0.03
1.95
1.92
0.03
1.95
0.93
13,003
2,500
22,786
608
1.03
0.02
1.05
1.03
0.02
1.05
0.93
8,247
3,270
23,334
452
(0.28)
0.03
(0.25)
(0.28)
0.03
(0.25)
0.93
(1,922)
3,233
26,114
500
21,152
21,163
18,988
16,515
38.6%
4.2%
9.0%
37.0%
5.4%
11.4%
40.9%
3.2%
6.3%
37.0%
(0.9)%
(1.4)%
11,286
11,565
11,246
11,389
11,325
11,577
11,318
11,561
11,263
11,318
11,272
11,292
11,340
11,379
11,482
11,525
11,570
11,570
11,623
11,623
11,765
11,765
At September 30,
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
$197,524
$ 151,262
654,294
615,999
88,452
95,241
385,861
33.36
89,970
125,744
360,804
31.68
19.8%
25.8%
3,287
1,529
3,273
1,576
$ 155,440
$ 123,744
$ 100,836
$ 124,392
$ 119,506
$ 124,827
$ 121,103
$ 116,364
$ 113,751
582,395
584,628
533,723
550,664
563,435
348,110
348,798
349,599
323,318
78,192
96,377
77,000
74,500
139,000
175,685
105,061
118,284
180,953
213,645
17,717
30,604
22,696
42,868
27,796
62,960
32,665
61,591
354,901
318,862
275,624
241,992
220,102
210,614
207,995
197,903
193,846
30.66
27.58
24.35
21.43
19.34
18.27
18.01
17.05
16.57
21.4%
24.8%
30.0%
42.8%
49.3%
12.7%
17.1%
24.1%
24.1%
3,337
1,592
3,709
1,652
3,302
1,742
3,791
1,866
3,994
1,907
3,246
1,994
3,211
2,029
3,071
2,179
3,439
2,256
* Earnings before cumulative effect of accounting change 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.
54
W O O D WA R D
W O O D WA R D
W O O D WA R D
(In thousands of dollars except per share amounts)
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
Net sales
Earnings (loss) before cumulative effect of accounting change
Goodwill-related amortization, net of income taxes
$709,805
$ 586,682
31,382
12,346
—
—
$ 679,991
$ 678,791
$ 597,385
$ 596,904
$ 490,476
$ 442,216
$ 417,290
$ 379,736
$ 333,207
45,170
—
53,068
2,875
46,976 *
2,660
30,829
2,770
21,592
1,293
18,140
22,178
11,936
(3,273)
578
346
245
307
Adjusted earnings (loss) before cumulative effect of accounting change
31,382
12,346
45,170
55,943
49,636
33,599
22,885
18,718
22,524
12,181
(2,966)
For the Year Ended September 30,
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
Interest expense, net of interest income
Cash dividends per share
Income taxes
Depreciation expense
Amortization expense
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
Working capital
Total assets
Total debt
Shareholders’ equity
Long-term debt, less current portion
Shareholders’ equity per diluted share
Percent of debt to debt–equity
Worker members
Registered shareholder members
2.78
—
2.78
2.71
—
2.71
0.96
17,910
4,237
25,856
6,905
18,698
36.3%
4.4%
8.7%
1.10
—
1.10
1.08
—
1.08
0.9525
7,593
3,765
27,548
4,870
18,802
38.1%
2.1%
3.5%
$197,524
$ 151,262
654,294
615,999
88,452
95,241
385,861
33.36
89,970
125,744
360,804
31.68
19.8%
25.8%
3,287
1,529
3,273
1,576
3.99
—
3.99
3.90
—
3.90
0.93
25,510
4,474
28,340
3,748
22,898
36.1%
6.6%
14.2%
4.69
0.25
4.94
4.59
0.25
4.84
0.93
32,887
6,587
25,677
7,055
26,903
38.3%
8.2%
20.3%
4.17*
0.24
4.41
4.15*
0.24
4.39
0.93
27,116
10,127
24,001
6,418
27,416
36.6%
8.3%
20.5%
2.74
0.24
2.98
2.73
0.25
2.98
0.93
20,390
11,919
25,267
6,769
22,789
39.8%
5.6%
15.3%
1.90
0.12
2.02
1.90
0.11
2.01
0.93
14,946
4,519
23,715
2,927
20,862
40.5%
4.7%
10.9%
1.58
0.05
1.63
1.57
0.05
1.62
0.93
13,305
1,602
21,854
983
1.92
0.03
1.95
1.92
0.03
1.95
0.93
13,003
2,500
22,786
608
1.03
0.02
1.05
1.03
0.02
1.05
0.93
8,247
3,270
23,334
452
(0.28)
0.03
(0.25)
(0.28)
0.03
(0.25)
0.93
(1,922)
3,233
26,114
500
21,152
21,163
18,988
16,515
38.6%
4.2%
9.0%
37.0%
5.4%
11.4%
40.9%
3.2%
6.3%
37.0%
(0.9)%
(1.4)%
11,286
11,565
11,246
11,389
11,325
11,577
11,318
11,561
11,263
11,318
11,272
11,292
11,340
11,379
11,482
11,525
11,570
11,570
11,623
11,623
11,765
11,765
At September 30,
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
$ 155,440
$ 123,744
$ 100,836
$ 124,392
$ 119,506
$ 124,827
$ 121,103
$ 116,364
$ 113,751
582,395
584,628
533,723
550,664
563,435
348,110
348,798
349,599
323,318
78,192
96,377
77,000
74,500
139,000
175,685
105,061
118,284
180,953
213,645
17,717
30,604
22,696
42,868
27,796
62,960
32,665
61,591
354,901
318,862
275,624
241,992
220,102
210,614
207,995
197,903
193,846
30.66
27.58
24.35
21.43
19.34
18.27
18.01
17.05
16.57
21.4%
24.8%
30.0%
42.8%
49.3%
12.7%
17.1%
24.1%
24.1%
3,337
1,592
3,709
1,652
3,302
1,742
3,791
1,866
3,994
1,907
3,246
1,994
3,211
2,029
3,071
2,179
3,439
2,256
* Earnings before cumulative effect of accounting change 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.
55
2 0 0 4 A N N U A L R E P O R T
OFFICER AND INVESTOR INFORMATION
Officers
John A. Halbrook
Chairman and Chief Executive Officer
Thomas A. Gendron
President and Chief Operating Officer
Stephen P. Carter
Executive Vice President,
Chief Financial Officer and Treasurer
Dennis M. Benning
Vice President, General Manager
Fluid Systems and Controls
Donald J. Bergholz
Vice President, General Manager
Turbine Combustion Systems
Martin V. Glass
Vice President, General Manager
Aircraft Engine Systems
Gerhard Lauffer
Vice President, General Manager
Electronic Controls
Timothy Loyd
Vice President
Chad R. Preiss
Vice President, General Manager
Industrial Controls
Gerard Willemsen
Vice President, General Manager
Diesel Fuel Systems and European
Operations
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 on this page.
Annual Meeting
January 26, 2005, 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
2004 annual report on Securities and
Exchange Commission Form 10-K
upon written request to the Corporate
Secretary, Woodward Governor
Company, Rockford, Illinois.
Stock Exchange
Nasdaq National Market
Ticker Symbol: WGOV
SEC filings are available
on our website at
www.woodward.com
An Equal Opportunity Employer
It is Woodward’s policy to provide equal
employment opportunity for all qualified
members and applicants without regard
to race, color, religion, age, sex, national
origin, disability, veteran’s or marital status,
and to base all employment decisions so as
to further this principle of equal employment
opportunity.
56
■
We use our energy control technologies to develop and produce components that we integrate
into systems. Our systems and components help our customers satisfy their needs for reliable
and cost effective power equipment that meets strict air quality standards.
MARKET STRATEGY
T E C H N O L O G I E S :
WHAT DRIVES
OUR BUSINESS
■
Technologies and components are integrated
into energy control systems specifically
designed for power equipment, focusing on
emissions, reliability, cost, and service.
■
Woodward systems and components
are used in equipment that powers the
world’s infrastructure. Original equipment
manufacturers rely on Woodward as a
single-source supplier for their critical fuel
and combustion control needs.
■
By delivering integrated control solutions,
Woodward is a global leader in the aerospace,
process industries, transportation, and power
generation markets.
EMISSIONS
Achieving environmental standards. Global emissions
regulations demand cleaner air now and in the future, while
world economic factors necessitate improved fuel economy
and use of alternative fuel sources. Woodward’s systems and
component solutions help our power equipment customers meet
environmental standards with improved reliability and efficiency.
GLOBALIZATION
Conducting global business locally. Business is changing
as economies around the world become more connected.
Woodward knows that doing business in a customer’s language
and time zone enables us to better understand and serve them.
With locations in China, India, and around the world, we are
positioned to serve rapidly growing markets as well as other
established economies.
SYSTEM SOLUTIONS
Solving challenges with innovation and integration.
Customers demand technical solutions that meet their needs
for efficiency, reliability, and cost. Our market strategy helps
us deliver integrated systems and advanced components that
meet stringent aerospace and industrial requirements. With
experience in fuel and combustion control systems for engines
and turbines of every size and application, Woodward is ready
to solve tomorrow’s challenges.
FUEL
SYSTEMS
COMBUSTION
CONTROL SYSTEMS
ELECTRONIC CONTROLS
AND SOFTWARE
SYSTEMS
INTEGRATION
SERVICES
C O M P O N E N T S :
TURBINE VALVES AND ACTUATORS
ENGINE VALVES AND ACTUATORS
DIESEL FUEL INJECTION EQUIPMENT
FUEL METERING UNITS
ENGINE AND TURBINE ELECTRONIC
CONTROLS
GENSET AND SWITCHGEAR
CONTROLS
GAS TURBINE FUEL NOZZLES
IGNITION SYSTEMS
FUEL PUMPS
SERVOVALVES
GOVERNORS
I N T E G R AT E D S Y S T E M S :
TOTAL SYSTEM SOLUTIONS FOR POWER EQUIPMENT APPLICATIONS
P O W E R E Q U I P M E N T:
INDUSTRIAL DIESEL AND
GAS ENGINES
INDUSTRIAL GAS TURBINES
STEAM TURBINES
COMPRESSORS
GENSETS AND SWITCHGEAR
AIRCRAFT GAS TURBINES
FUEL CELLS
O U R C U S T O M E R S I N C L U D E :
CATERPILLAR
CUMMINS
KUBOTA
YANMAR
MITSUBISHI
MAN
GE
SIEMENS
DRESSER-RAND
INGERSOLL-RAND
DAEWOO
HYUNDAI
ROLLS-ROYCE
PRATT & WHITNEY
US GOVERNMENT
MAJOR AIRLINES WORLDWIDE
WÄRTSILÄ
DAIMLERCHRYSLER
M A R K E T A P P L I C AT I O N S :
POWER GENERATION TRANSPORTATION PROCESS INDUSTRIES AEROSPACE
Paul Donovan
Larry E. Rittenberg
John D. Cohn
James R. Rulseh
Michael T. Yonker
Michael H. Joyce
Mary L. Petrovich
John A. Halbrook
DIRECTORS
John A. Halbrook
Chairman and Chief Executive Officer,
Woodward Governor Company
Mary L. Petrovich
Chief Executive Officer,
AxelTech International
John D. Cohn
Senior Vice President, Strategic
Development and Communications,
Rockwell Automation, Inc.
Larry E. Rittenberg
Ernst & Young Professor of
Accounting & Information Systems,
University of Wisconsin
Paul Donovan
Retired Executive Vice President
and Chief Financial Officer,
Wisconsin Energy Corporation
Michael H. Joyce
President and Chief Operating Officer,
Twin Disc, Incorporated
James R. Rulseh
Group Vice President,
Modine Manufacturing Company
Michael T. Yonker
Retired President and
Chief Executive Officer, Portec, Inc.
STRONG
AND FOCUSED
Our strengths lie within our people, our technologies,
and our customer relationships. We apply our broad
portfolio of technologies to solve complex fuel and
combustion control applications.
Engine and turbine original equipment manufacturers (OEMs) depend on Woodward
to address their market needs for lower emissions, higher reliability, and lower costs.
Today and in the future, Woodward will continue to develop and deliver systems,
30
0
35
15
25
10
40
20
5
Woodward Governor Company
5001 North Second Street, P.O. Box 7001
Rockford, Illinois 61125-7001 USA
815-877-7441
www.woodward.com
components, and services to meet unique aerospace, power generation, process
industries, and transportation needs.
Power Generation
Transportation
Process Industries
Aerospace (Military)
Aerospace (Commercial)
Market Segment Sales
32%
33%
37%
21%
2004 — FY2004 Sales $709,805 (in thousands)
2003 — FY2003 Sales $586,682 (in thousands)
2002 — FY2002 Sales $679,991 (in thousands)
13%
13%
9%
11%
10%
12%
11%
10%
26%
32%
30%
Business Description
Woodward designs, manufactures, and services energy
control systems and components for aircraft and industrial
engines and turbines. Leading OEMs throughout the world
use our products and services in the power generation,
Contents
1
Financial Highlights
2–5 Dear Shareholders
6–12 Strong and Focused
13–55 Financial Review
process industries, transportation, and aerospace markets.
56
Officer and Investor Information
IBC Board of Directors
W O O D W A R D G O V E R N O R C O M P A N Y
2 0 0 4 A n n u a l R e p o r t