WOODWARD GOVERNOR CO - 10-Q Quarterly Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended December 31, 2003

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to

Commission file number 0-8408

Woodward Governor Company

(Exact name of registrant as specified in its charter)


Delaware		36-1984010
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

(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 þ No o

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

As of January 23, 2004, 11,146,758 shares of common stock with a par value of $.00875 cents per share were outstanding.

TABLE OF CONTENTS


PART I -- FINANCIAL INFORMATION
	Item 1. Financial Statements
SIGNATURES
Certification of John A Halbrook
Certification of Stephen P. Carter
Section 906 Certification

TABLE OF CONTENTS


		Page

PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements		2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		19
Item 4.	Controls and Procedures		19
PART II — OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K		20
Signatures			21

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Statements of Consolidated Earnings

Woodward Governor Company and Subsidiaries



			Three Months Ended
			December 31,

			2003			2002


			(Unaudited)

			(In thousands except
			per share amounts)
Net Sales			$	158,973		$	144,825

Costs and expenses:
	Cost of goods sold			127,317			118,266
	Selling, general, and administrative expenses			17,176			14,797
	Amortization of intangible assets			1,610			1,017
	Interest expense			1,244			1,194
	Interest income			(573	)		(109	)
	Other expense (income)- net			178			(444	)

		Total costs and expenses		146,952			134,721

Earnings before income taxes				12,021			10,104
Income taxes				4,628			3,839

Net earnings			$	7,393		$	6,265

Earnings per share:
Basic			$	0.66		$	0.55
Diluted				0.65			0.55

Weighted-average number of shares outstanding:
Basic				11,264			11,306
Diluted				11,456			11,457

Cash dividends per share			$	0.24		$	0.2325

See accompanying Notes to Consolidated Financial Statements.

Consolidated Balance Sheets

Woodward Governor Company and Subsidiaries


			At		At
			December 31,		September 30,
			2003		2003

			(Unaudited)

			(In thousands except
			per share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	41,683	$	24,058
	Accounts receivable, less allowance for losses of $2,196 for December and $2,601 for September			79,850		87,807
	Inventories			132,178		126,289
	Income taxes receivable			—		1,782
	Deferred income taxes			14,362		14,179
	Other current assets			6,006		5,157

		Total current assets		274,079		259,272

Property, plant, and equipment — net				123,456		124,144
Goodwill				134,329		133,620
Other intangibles — net				83,974		85,291
Deferred income taxes				3,507		6,429
Other assets				6,460		7,243

Total assets			$	625,805	$	615,999

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Short-term borrowings		$	9,405	$	5,774
	Current portion of long-term debt			25,000		30,000
	Accounts payable			28,347		26,703
	Accrued liabilities			40,560		45,533
	Income taxes payable			5,138		—

		Total current liabilities		108,450		108,010

Long-term debt, less current portion				89,743		89,970
Other liabilities				58,989		57,215
Commitments and contingencies
Shareholders’ equity represented by:
	Preferred stock, par value $.003 per share, authorized 10,000 shares, no shares issued			—		—
	Common stock, par value $.00875 per share, authorized 50,000 shares, issued 12,160 shares			106		106
	Additional paid-in capital			13,797		13,760
	Accumulated other comprehensive earnings			12,530		9,625
	Deferred compensation			4,406		4,377
	Retained earnings			366,117		361,382

				396,956		389,250
Less: Treasury stock, at cost				23,927		24,069
Treasury stock held for deferred compensation				4,406		4,377

		Total shareholders’ equity		368,623		360,804

Total liabilities and shareholders’ equity			$	625,805	$	615,999

See accompanying Notes to Consolidated Financial Statements.

Statements of Consolidated Cash Flows


	*Woodward Governor Company and Subsidiaries*



			Three Months Ended
			December 31,

			2003			2002


			(Unaudited)

			(In thousands)
Cash flows from operating activities:
Net earnings			$	7,393		$	6,265

Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization				8,312			7,740
Net loss on sale of property, plant, and equipment				157			47
ESOP compensation expense				—			(146	)
Deferred income taxes				1,050			1,827
Reclassification of unrealized losses on derivatives to earnings				45			43
Changes in operating assets and liabilities:
	Accounts receivable			9,529			7,634
	Inventories			(4,382	)		2,155
	Accounts payable and accrued liabilities			(4,384	)		(14,310	)
	Income taxes payable			6,976			773
	Other — net			750			(23	)

		Total adjustments		18,053			5,740

Net cash provided by operating activities				25,446			12,005

Cash flows from investing activities:
Payments for purchase of property, plant, and equipment				(4,118	)		(2,865	)
Proceeds from sale of property, plant, and equipment				84			85

Net cash used in investing activities				(4,034	)		(2,780	)

Cash flows from financing activities:
Cash dividends paid				(2,701	)		(2,635	)
Proceeds from sales of treasury stock				179			185
Purchases of treasury stock				—			(6,679	)
Net payments from borrowings under revolving lines				(1,585	)		(2,063	)

Net cash used in financing activities				(4,107	)		(11,192	)

Effect of exchange rate changes on cash				320			235

Net change in cash and cash equivalents				17,625			(1,732	)
Cash and cash equivalents, beginning of year				24,058			29,828

Cash and cash equivalents, end of period			$	41,683		$	28,096

Supplemental cash flow information:
Interest expense paid			$	2,630		$	570
Income taxes paid				2,245			1,294

See accompanying Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Overview:

The consolidated balance sheet as of December 31, 2003, the statements of consolidated earnings for the three-month periods ended December 31, 2003 and 2002, and the statements of consolidated cash flows for the three-month periods ended December 31, 2003 and 2002, were prepared by the company without audit. The September 30, 2003, 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 December 31, 2003, the results of its operations for the three-month periods ended December 31, 2003 and 2002, and its cash flows for the three-month periods ended December 31, 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 2003 annual report on Form 10-K and should be read with the Notes to Consolidated Financial Statements on pages 34-46 of the 2003 annual report to shareholders. The statement of consolidated earnings for the three-month period ended December 31, 2003, is not necessarily indicative of the results to be expected for other interim periods or for the full year.

(2) Stock-based compensation policy:

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:



		Three Months
		Ended December 31,
		2003			2002


		(In thousands except
		per share amounts)
Reported net earnings		$	7,393		$	6,265
Stock-based compensation expense using the fair value method, net of income tax			(237	)		(255	)

Pro forma net earnings		$	7,156		$	6,010

Reported net earnings per share amounts:
	Basic	$	0.66		$	0.55
	Diluted		0.65			0.55

Pro forma net earnings per share amounts:
	Basic	$	0.64		$	0.53
	Diluted		0.63			0.53

(3) New Accounting Standards:

In December 2003, the Financial Accounting Standards Board issued a revised Statement of Financial Accounting Standards No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” The revised Statement requires additional disclosures to those in the original Statement No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The interim-period disclosure requirements of the revised Statement are effective beginning this quarter, and our disclosures may be found in note 10 to the consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The remaining disclosure requirements of the revised Statement are effective for our year ending September 30, 2004.

(4) Earnings per share:



			Three Months
			Ended December 31,
			2003		2002


			(In thousands except
			per share amounts)
Net earnings (A)			$	7,393	$	6,265

Determination of shares:
	Weighted-average shares of common stock outstanding (B)			11,264		11,306
		Assumed exercise of stock options		192		151

	Weighted-average shares of common stock outstanding assuming dilution (C)			11,456		11,457

Net earnings:
	Basic per share amount (A/B)		$	0.66	$	0.55
	Diluted per share amount (A/C)		$	0.65	$	0.55

The following stock options were outstanding during the three months ended December 31, 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 during the respective periods:



	Three Months Ended
	December 31,

	2003		2002

Options		23,479		292,979
Weighted-average exercise price	$	62.83	$	49.64

(5) Inventories:


	At		At
	December 31,		September 30,
	2003		2003


	(In thousands)
Raw materials	$	4,065	$	6,017
Component parts		78,784		76,151
Work in process		28,691		27,237
Finished goods		20,638		16,884

	$	132,178	$	126,289

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(6) Property, plant, and equipment:


	At		At
	December 31,		September 30,
	2003		2003


	(In thousands)
Land	$	10,405	$	10,049
Buildings and equipment		147,631		145,779
Machinery and equipment		248,230		247,767
Construction in progress		2,684		2,239

		408,950		405,834
Less accumulated depreciation		285,494		281,690

Property, plant, and equipment — net	$	123,456	$	124,144

(7) Goodwill:


		(In thousands)

Industrial Controls:
	Balance at September 30, 2003	$	71,498

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