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 June 30, 2004

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 July 23, 2004, 11,302,387 shares of common stock with a par value of $.00875 per share were outstanding.

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		16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		21
Item 4.	Controls and Procedures		22

PART II — OTHER INFORMATION
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		23
Item 6.	Exhibits and Reports on Form 8-K		23
Signatures			24
Certification
Certification
Certification

PART I — FINANCIAL INFORMATION


Item 1.	*Financial Statements*

Statements of Consolidated Earnings


	*Woodward Governor Company and Subsidiaries*



			Three Months Ended
			June 30,

			2004			2003


			(Unaudited)

			(In thousands except
			per share amounts)
Net Sales			$	180,496		$	141,637

Costs and expenses:
	Cost of goods sold			145,947			121,343
	Selling, general, and administrative expenses			18,303			16,958
	Amortization of intangible assets			1,713			1,043
	Interest expense			1,372			1,349
	Interest income			(135	)		(135	)
	Other expense — net			78			1,487

		Total costs and expenses		167,278			142,045

Earnings (loss) before income taxes				13,218			(408	)
Income taxes				5,005			(243	)

Net earnings (loss)			$	8,213		$	(165	)

Earnings (loss) per share:
Basic			$	0.73		$	(0.01	)
Diluted				0.71			(0.01	)

Weighted-average number of shares outstanding:
Basic				11,299			11,112
Diluted				11,608			11,112

Cash dividends per share			$	0.24		$	0.24

See accompanying Notes to Consolidated Financial Statements.

Statements of Consolidated Earnings

Woodward Governor Company and Subsidiaries



			Nine Months Ended
			June 30,

			2004			2003


			(Unaudited)

			(In thousands except
			per share amounts)
Net Sales			$	512,420		$	432,621

Costs and expenses:
	Cost of goods sold			412,494			361,723
	Selling, general, and administrative Expenses			52,308			47,044
	Amortization of intangible assets			5,143			3,089
	Interest expense			4,067			3,494
	Interest income			(921	)		(627	)
	Other expense (income) — net			(499	)		784

		Total costs and expenses		472,592			415,507

Earnings before income taxes				39,828			17,114
Income taxes				15,117			6,503

Net earnings			$	24,711		$	10,611

Earnings per share:
Basic			$	2.19		$	0.95
Diluted				2.14			0.94

Weighted-average number of shares outstanding:
Basic				11,279			11,190
Diluted				11,543			11,325

Cash dividends per share			$	0.72		$	0.7125

See accompanying Notes to Consolidated Financial Statements.

Consolidated Balance Sheets


	*Woodward Governor Company and Subsidiaries*


			At		At
			June 30,		September 30,
			2004		2003

			(Unaudited)

			(In thousands except
			per share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	27,861	$	24,058
	Accounts receivable, less allowance for losses of $2,016 for June and $2,601 for September			92,553		87,807
	Inventories			141,636		126,289
	Income taxes receivable			—		1,782
	Deferred income taxes			16,136		14,179
	Other current assets			3,582		5,157

		Total current assets		281,768		259,272

Property, plant, and equipment — net				118,779		124,144
Goodwill				131,398		133,620
Other intangibles — net				87,381		85,291
Deferred income taxes				2,174		6,429
Other assets				6,214		7,243

Total assets			$	627,714	$	615,999

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Short-term borrowings		$	5,413	$	5,774
	Current portion of long-term debt			—		30,000
	Accounts payable			36,824		26,703
	Accrued liabilities			46,822		45,533
	Income taxes payable			6,380		—

		Total current liabilities		95,439		108,010

Long-term debt, less current portion				88,495		89,970
Other liabilities				62,569		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			14,390		13,760
	Accumulated other comprehensive earnings			12,068		9,625
	Deferred compensation			4,438		4,377
	Retained earnings			378,668		361,382

				409,670		389,250
Less: Treasury stock, at cost, 858 shares for June and 901 shares for September				24,021		24,069
Treasury stock held for deferred compensation				4,438		4,377

		Total shareholders’ equity		381,211		360,804

Total liabilities and shareholders’ equity			$	627,714	$	615,999

See accompanying Notes to Consolidated Financial Statements.

Statements of Consolidated Cash Flows


	*Woodward Governor Company and Subsidiaries*



			Nine
			Months Ended
			June 30,

			2004			2003


			(Unaudited)

			(In thousands)
Cash flows from operating activities:
Net earnings			$	24,711		$	10,611

Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization				24,923			23,986
Net loss on sale of property, plant, and equipment				97			191
ESOP compensation expense				—			(436	)
Deferred income taxes				150			4,276
Reclassification of unrealized losses on derivatives to earnings				223			129
Changes in operating assets and liabilities:
	Accounts receivable			(3,020	)		5,325
	Inventories			(13,576	)		5,044
	Accounts payable and accrued liabilities			9,910			(11,331	)
	Income taxes payable			8,890			(588	)
	Other — net			5,719			4,127

		Total adjustments		33,316			30,723

Net cash provided by operating activities				58,027			41,334

Cash flows from investing activities:
Payments for purchase of property, plant, and equipment				(14,015	)		(12,149	)
Proceeds from sale of property, plant, and equipment				253			218
Business acquisitions, net of cash acquired				(2,310	)		(49,472	)
Receipts associated with business acquisitions				389			—

Net cash used in investing activities				(15,683	)		(61,403	)

Cash flows from financing activities:
Cash dividends paid				(8,120	)		(8,006	)
Proceeds from sales of treasury stock				2,225			697
Purchases of treasury stock				(1,547	)		(9,503	)
Net proceeds (payments) from borrowings under revolving lines				(30,640	)		31,513

Net cash provided by (used in) financing activities				(38,082	)		14,701

Effect of exchange rate changes on cash				(459	)		1,555

Net change in cash and cash equivalents				3,803			(3,813	)
Cash and cash equivalents, beginning of year				24,058			29,828

Cash and cash equivalents, end of period			$	27,861		$	26,015

Supplemental cash flow information:
Interest expense paid			$	5,639		$	4,303
Income taxes paid				10,761			2,369
Noncash investing:
Liabilities assumed in business acquisition				338			4,431

See accompanying Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Overview:

The consolidated balance sheet as of June 30, 2004, the statements of consolidated earnings for the three and nine-month periods ended June 30, 2004 and 2003, and the statements of consolidated cash flows for the nine-month periods ended June 30, 2004 and 2003, 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 June 30, 2004, the results of its operations for the three and nine-month periods ended June 30, 2004 and 2003, and its cash flows for the nine-month periods ended June 30, 2004 and 2003. 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 statements of consolidated earnings for the three and nine-month periods ended June 30, 2004, are 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						Nine Months
		Ended						Ended
		June 30,						June 30,

		2004			2003			2004			2003


		(In thousands except per share amounts)
Reported net earnings (loss)		$	8,213		$	(165	)	$	24,711		$	10,611
Stock-based compensation expense using the fair value method, net of income tax			(355	)		(272	)		(1,044	)		(795	)

Pro forma net earnings (loss)		$	7,858		$	(437	)	$	23,667		$	9,816

Reported net earnings (loss) per share amounts:
	Basic	$	0.73		$	(0.01	)	$	2.19		$	0.95
	Diluted		0.71			(0.01	)		2.14			0.94

Pro forma net earnings (loss) per share amounts:
	Basic	$	0.70		$	(0.04	)	$	2.10		$	0.88
	Diluted		0.68			(0.04	)		2.06			0.87

(3) Business Acquisitions:

In June 2004, we acquired assets and assumed certain liabilities of Adrenaline Research, Inc., specialists in advanced combustion electronics. On a preliminary

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