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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2003

OR

For the transition period from                               to                              

Commission file number 0-8408

WOODWARD GOVERNOR COMPANY
(Exact name of registrant as specified in its charter)

5001 North Second Street, Rockford, Illinois 61125-7001
(Address of principal executive offices)

(815) 877-7441
(Registrant's telephone number, including area code)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

        As of July 28, 2003, 11,130,213 shares of common stock with a par value of $.00875 cents per share were outstanding.

TABLE OF CONTENTS

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PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements

Statements of Consolidated Earnings
Woodward Governor Company and Subsidiaries

See accompanying Notes to Consolidated Financial Statements.

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Statements of Consolidated Earnings
Woodward Governor Company and Subsidiaries

See accompanying Notes to Consolidated Financial Statements.

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Consolidated Balance Sheets
Woodward Governor Company and Subsidiaries

Consolidated balance sheets continued on next page.

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Consolidated Balance Sheets—Continued
Woodward Governor Company and Subsidiaries

See accompanying Notes to Consolidated Financial Statements.

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Statements of Consolidated Cash Flows
Woodward Governor Company and Subsidiaries

See accompanying Notes to Consolidated Financial Statements.

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Notes to Consolidated Financial Statements

(1)   Overview:

        The consolidated balance sheet as of June 30, 2003, the statements of consolidated earnings for the three and nine-month periods ended June 30, 2003 and 2002, and the statements of consolidated cash flows for the nine-month periods ended June 30, 2003 and 2002, were prepared by the company without audit. The September 30, 2002, consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Information in this 10-Q report is based in part on estimates and is subject to year-end adjustments and audit. In our opinion, the figures reflect all adjustments necessary to present fairly the company's financial position as of June 30, 2003, the results of its operations for the three and nine-month periods ended June 30, 2003 and 2002, and its cash flows for the nine-month periods ended June 30, 2003 and 2002. All such adjustments were of a normal and recurring nature. The statements were prepared following the accounting policies described in the company's 2002 annual report on Form 10-K and should be read with the Notes to Consolidated Financial Statements on pages 33-43 of the 2002 annual report to shareholders. The statements of consolidated earnings for the three and nine-month periods ended June 30, 2003, are not necessarily indicative of the results to be expected for other interim periods or for the full year.

(2)   Business acquisitions:

        On May 30, 2003, we acquired 100 percent of the common stock of Synchro-Start Products, Inc. and its results were included in the consolidated financial statements since that date. Synchro-Start designs and manufactures actuators, solenoids, and controls for industrial engines and equipment. We made the acquisition to expand our position in the small, high-speed diesel engine market.

        The purchase price for the shares, which was paid in cash, was $49,750,000. This price may increase or decrease based on a purchase price adjustment procedure customary to share purchase agreements. We expect cash settlement of any purchase price adjustment will be completed before the end of December 2003.

        Our allocation of the purchase price has not been completed. In addition to a potential purchase price adjustment, we are in the process of obtaining third-party valuations for property, plant, and equipment and other intangibles. As a result, our preliminary allocation of the purchase price is subject to change. On a preliminary basis, the fair values of the assets acquired and liabilities assumed at the date of acquisition were estimated as follows:

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        Goodwill was assigned to Industrial Controls and is expected to be fully deductible for income taxes purposes.

        If we had completed the acquisition on October 1, 2002, results of operations would not have been materially different from amounts reported in the statements of consolidated earnings.

(3)   Cumulative effect of accounting change:

        We adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," and the transition provisions of Statement of Financial Accounting Standards No. 141, "Business Combinations," on October 1, 2001. As a result of adopting these new standards, we completed the transitional goodwill impairment reviews required by the new standards and recognized an aftertax loss of $2,489,000 as a cumulative effect of an accounting change in 2002. In performing our impairment reviews, we estimated the fair values of the various reporting units using a present value method that discounted future cash flows as we expect marketplace participants would, and we further assessed the reasonableness of the estimates by using valuation methods based on market multiples. The resulting loss, which was related to an Industrial Controls reporting unit, was incurred to reduce goodwill to its implied fair value.

(4)   Earnings per share:

        The following stock options were outstanding during the three and nine months ended June 30, 2003 and 2002, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares or because the effect of a net loss was antidilutive during the respective periods:

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(5)   Inventories:

(6)   Goodwill:

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(7)   Other intangibles—net:

        Amortization expense associated with current intangibles is expected to be approximately $4,100,000 for each year 2003-2006 and approximately $3,900,000 in 2007.

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(8)   Accounts payable and other accrued expenses:

        Included in salaries and other member benefits are accrued termination benefits totaling $2,965,000 for 109 members at June 30, 2003, and $1,389,000 for 36 members at September 30, 2002. The table below indicates the termination benefits activity for the nine months ended June 30, 2003.

        Termination benefits accrued by Industrial Controls impacted various manufacturing, selling, and administrative expenses at locations worldwide and were made to better align staffing levels with

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expected demands. For Aircraft Engine Systems, the majority of the accrued termination benefits were associated with the consolidation of our servovalve manufacturing operations in Buffalo, New York, into our Rockford, Illinois, manufacturing facility to achieve additional production cost efficiencies. The remaining reductions were made to better align staffing levels with expected demand. We expect all terminations to be completed before December 31, 2003.

        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 for warranty costs on a non-specific basis whenever past experience indicates a normal and predictable pattern exists. A reconciliation of accrued product warranties from September 30, 2002, to June 30, 2003, follows:

(9)   Deferred Compensation Plan

        We maintain a deferred compensation plan for key management members of the company. Individual member balances are accounted for as if they were held in specified investments, including common stock of the company. Deferred compensation balances are payable upon the retirement or other termination of a participating member, or as otherwise specified by plan documents. To the extent that balances are deemed invested in the common stock of the company, these payments are payable in actual shares of common stock. All remaining balances are payable in cash.

        Deferred compensation obligations are reported as a component of equity or as an accrued expense. In 2003, we contributed 123,771 shares of common stock of the company into a trust established for the future settlement of deferred compensation obligations that are payable in actual shares of our common stock. Common stock held by the trust is reflected in the consolidated balance sheet as treasury stock for deferred compensation, and the related deferred compensation obligation is reflected as a separate component of equity. The amounts recognized in both equity accounts are equal to the fair value of the common shares at the date of contribution, and neither account will be adjusted for subsequent changes in fair value. All deferred compensation balances payable in cash are reflected in the consolidated balance sheet as an accrued liability at fair value.

(10) Stock option plan:

        We have a stock option plan covering key management members and directors of the company. Options granted under the plan generally have a term of 10 years and vest evenly at the end of each year over four years from the date of grant. There were 2,100,000 shares of common stock authorized for issuance under the plan at June 30, 2003. 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

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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:

(11) Accumulated other comprehensive earnings:

        Accumulated other comprehensive earnings, which totaled $8,596,000 at June 30, 2003, consisted of the following items:

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(12) Total comprehensive earnings:

(13) Contingencies

        We have entered into agreements with certain executive officers under which we would pay termination benefits under certain circumstances in the event of a change in control of the company.

        We are currently involved in matters of litigation arising from the normal course of business, including certain environmental and product liability matters. We have accruals of approximately $1,000,000 at June 30, 2003, related to such matters. These accruals are based on our current estimate of the most likely amount of losses that we believe will be incurred. These amounts have been included in accounts payable and accrued expenses.

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

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

(14) Segment information:

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        The difference between the total of segment earnings and the statements of consolidated earnings follows:

        Segment assets were as follows:

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Item 2    Management's Discussion and Analysis of Financial Condition and Results of Operations

        We prepared the following discussion and analysis to help you better understand our results of operations and financial condition. This discussion should be read with the consolidated financial statements.

        This discussion and analysis should also be read with the cautionary statement of our 2002 annual report to shareholders, which was filed with our Form 10-K for the year ended September 30, 2002. This discussion and analysis contains forward-looking statements, including financial projections, our plans and objectives for the future, expectations for future economic performance, and various other assumptions relating to the future. While such statements reflect our current expectations, all such statements involve risks and uncertainties. Actual results could differ materially from projections or any other forward-looking statement, and we have no obligation to update our forward-looking statements. Important factors that could cause results to differ materially from those projected or otherwise stated are identified in the cautionary statement of our 2002 annual report to shareholders.

Results of Operations

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

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

Industrial Controls

        External net sales for Industrial Controls decreased in both the three months and nine months ended June 30, 2003, as compared to the same periods last year. This decrease was the result of a severe decline in domestic capital spending on power generation equipment—particularly large turbines—and a downturn in industrial markets generally.

        Industrial Controls had segment losses in the three months and nine months ended June 30, 2003, as compared to segment earnings in the same periods last year. Results were significantly impacted by the reverse leverage effect of reduced sales volume versus fixed costs and development costs considered necessary to satisfy core customers' current and future requirements.

        Included as part of segment earnings (loss) were certain workforce management costs that we incurred in connection with reductions in our workforce. This year, the reductions impacted various manufacturing, selling, and administrative functional areas at locations worldwide, and were made to better align staffing levels with expected demands. Last year, the reductions were primarily the result of consolidating certain manufacturing and administrative locations into fewer locations. Our workforce

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management costs were reflected in the following financial lines of the statements of consolidated earnings:

        In addition, we expensed $1.1 million for the write-off of certain advance license fees and $0.7 million associated with the transfer of an overseas pension to a different plan in the three months and nine months ended June 30, 2003. The write-off of advance license fees was related to licensed technology we are no longer using. We also expensed $1.0 million for lease termination expenses in the nine months ended June 30, 2003.

        On May 30, 2003, we acquired Synchro-Start Products Inc. to expand our position in the small, high-speed diesel engine market. Synchro-Start designs and manufactures actuators, solenoids, and controls for industrial engines and equipment. The acquired business is expected to add approximately $30,000,000 of revenue in fiscal year 2004 and is expected to be accretive to earnings in the first full year.

        Our cost of Synchro-Start totaled $49.8 million and we recorded $40.0 million as goodwill, which is expected to be fully deductible for income tax purposes. However, we have not yet completed a final allocation of the purchase price and a further price adjustment is possible under the terms of the purchase agreement. As a result, the amounts recorded are subject to adjustment. We do not anticipate adjustments to the purchase price to be significant. However, we are in the process of obtaining third-party valuations for property, plant, and equipment and other intangibles. As a result, it is possible that the amount allocated to these assets could change, which would increase or reduce the amount of goodwill.

Aircraft Engine Systems

        External net sales for Aircraft Engine Systems decreased in both the three months and nine months ended June 30, 2003, as compared to the same periods last year. These decreases reflect weakness in the commercial aviation industry. This weakness was exacerbated by the war in Iraq as well as concerns about Severe Acute Respiratory Syndrome (SARS). Generally, commercial aftermarket sales have held up better than OEM sales, and military sales accounted for a slightly increased proportion of external net sales.

        Aircraft Engine Systems' segment earnings decreased in both the three months and nine months ended June 30, 2003, as compared to the same periods last year. These decreases were attributed to the lower sales volumes. Cost management and productivity initiatives taken during 2002 enabled margins to remain at the levels reported, despite continuing pricing pressures.

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        Included as part of segment earnings were certain workforce management costs that we incurred in connection with reductions in our workforce. The majority of the reductions for 2003 are associated with the consolidation of our servovalve manufacturing operations in Buffalo, New York, into our Rockford, Illinois, manufacturing facility to achieve additional production cost efficiencies. The remaining reductions in 2003, as well as 2002, were made to better align staffing levels with expected demand. Our workforce management costs were reflected in the following financial lines of the statements of consolidated earnings: