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, 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

(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 21, 2005, 11,385,846 shares of common stock with a par value of $.00875 cents 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		14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		21
Item 4.	Controls and Procedures		21

PART II — OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 6.	Exhibits		22
Signatures			23
Certification
Certification
Certification

PART I — FINANCIAL INFORMATION


Item 1.	*Financial Statements*

Statements of Consolidated Earnings


	*Woodward Governor Company and Subsidiaries*



			Three Months Ended
			December 31,

			2004			2003


			(Unaudited)

			(In thousands except
			per share amounts)
Net Sales			$	189,325		$	158,973

Costs and expenses:
	Cost of goods sold			143,273			117,689
	Selling, general, and administrative expenses			18,697			18,011
	Research and development costs			10,605			9,626
	Amortization of intangible assets			1,776			1,610
	Interest expense			1,369			1,244
	Interest income			(635	)		(573	)
	Other income			(4,901	)		(961	)
	Other expense			101			306

		Total costs and expenses		170,285			146,952

Earnings before income taxes				19,040			12,021
Income taxes				7,045			4,628

Net earnings			$	11,995		$	7,393

Earnings per share:
Basic			$	1.06		$	0.66
Diluted				1.03			0.65

Weighted-average number of shares outstanding:
Basic				11,329			11,264
Diluted				11,638			11,456

Cash dividends per share			$	0.24		$	0.24

See accompanying Notes to Consolidated Financial Statements.

Consolidated Balance Sheets


	*Woodward Governor Company and Subsidiaries*


			At		At
			December 31,		September 30,
			2004		2004

			(Unaudited)

			(In thousands except
			per share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	54,959	$	48,895
	Accounts receivable, less allowance for losses of $2,826 for December and $2,836 for September			97,238		99,277
	Inventories			148,776		138,708
	Deferred income taxes			17,157		16,852
	Other current assets			5,554		5,064

		Total current assets		323,684		308,796

Property, plant, and equipment — net				117,066		117,310
Goodwill				132,907		131,542
Other intangibles — net				84,223		85,711
Deferred income taxes				541		4,318
Other assets				11,583		6,617

Total assets			$	670,004	$	654,294

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Short-term borrowings		$	6,146	$	5,833
	Current portion of long-term debt			12,771		956
	Accounts payable			32,024		35,207
	Accrued liabilities			62,705		65,573
	Income taxes payable			6,849		3,703

		Total current liabilities		120,495		111,272

Long-term debt, less current portion				77,268		88,452
Other liabilities				71,603		68,709
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			16,491		15,878
	Accumulated other comprehensive earnings			15,340		12,038
	Deferred compensation			4,485		4,461
	Retained earnings			390,735		381,458

				427,157		413,941
Less: Treasury stock, at cost				22,034		23,619
Treasury stock held for deferred compensation				4,485		4,461

		Total shareholders’ equity		400,638		385,861

Total liabilities and shareholders’ equity			$	670,004	$	654,294

See accompanying Notes to Consolidated Financial Statements.

Statements of Consolidated Cash Flows


	*Woodward Governor Company and Subsidiaries*



			Three Months
			Ended
			December 31,

			2004			2003


			(Unaudited)

			(In thousands)
Cash flows from operating activities:
Net earnings			$	11,995		$	7,393

Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization				8,291			8,312
Net loss on sale of property, plant, and equipment				9			157
Deferred income taxes				1,532			1,050
Reclassification of unrealized losses on derivatives to earnings				79			45
Changes in operating assets and liabilities:
	Accounts receivable			3,969			9,529
	Inventories			(7,784	)		(4,382	)
	Accounts payable and accrued liabilities			(12,580	)		(4,384	)
	Income taxes payable			3,612			6,976
	Other — net			2,160			750

		Total adjustments		(712	)		18,053

Net cash provided by operating activities				11,283			25,446

Cash flows from investing activities:
Payments for purchase of property, plant, and equipment				(4,360	)		(4,118	)
Proceeds from sale of property, plant, and equipment				29			84

Net cash used in investing activities				(4,331	)		(4,034	)

Cash flows from financing activities:
Cash dividends paid				(2,718	)		(2,701	)
Proceeds from sales of treasury stock				1,568			179
Net payments from borrowings under revolving lines				(118	)		(1,585	)

Net cash used in financing activities				(1,268	)		(4,107	)

Effect of exchange rate changes on cash				380			320

Net change in cash and cash equivalents				6,064			17,625
Cash and cash equivalents, beginning of year				48,895			24,058

Cash and cash equivalents, end of period			$	54,959		$	41,683

Supplemental cash flow information:
Interest expense paid			$	2,497		$	2,630
Income taxes paid				4,091			2,245

See accompanying Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Overview:

The consolidated balance sheet as of December 31, 2004, the statements of consolidated earnings for the three-month periods ended December 31, 2004 and 2003, and the statements of consolidated cash flows for the three-month periods ended December 31, 2004 and 2003, were prepared by the company without audit. The September 30, 2004, consolidated balance sheet included in this Form 10-Q 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, 2004, the results of its operations for the three-month periods ended December 31, 2004 and 2003, and its cash flows for the three-month periods ended December 31, 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 2004 annual report on Form 10-K and should be read with the Notes to Consolidated Financial Statements on pages 36-51 of the 2004 annual report to shareholders. The statement of consolidated earnings for the three-month period ended December 31, 2004, 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,

		2004			2003


		(In thousands except
		per share amounts)
Reported net earnings		$	11,995		$	7,393
Stock-based compensation expense using the fair value method, net of income tax			(344	)		(237	)

Pro forma net earnings		$	11,651		$	7,156

Reported net earnings per share amounts:
	Basic	$	1.06		$	0.66
	Diluted		1.03			0.65

Pro forma net earnings per share amounts:
	Basic	$	1.03		$	0.64
	Diluted		1.00			0.63

(3) 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 service facilities. Sales terms for distributors, dealers, and independent service facilities are identical to our

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

sales terms for direct customers. We account for payments made to customers as a reduction of revenue unless they are made in exchange for identifiable goods or services with fair values that can be reasonably estimated. These reductions in revenues are recognized immediately to the extent that the payments relate to past sales and are recognized in future periods to the extent that the payments relate to future sales, based on the specific facts and circumstances underlying each payment.

(4) New Accounting Standards:

In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 151, “Inventory Costs.” The Statement clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) should be recognized as current-period charges. This Statement also requires that allocations of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The Statement becomes effective for our fiscal year beginning October 1, 2005. We currently do not expect that application of this Statement will have any material effect on our financial statements.

In December 2004, the Financial Accounting Standards Board issued a revised Statement of Financial Accounting Standards No. 123, “Share-Based Payment”. Among its provisions, the revised Statement will require us to measure the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize the cost over the requisite service period. This revised Statement becomes effective for our interim period beginning July 1, 2005. As described in Note 2 to these financial statements, we currently use the intrinsic value method to account for stock-based employee compensation. As a result, adoption of this revised Statement is expected to reduce our net earnings in interim and annual periods after adoption. We believe the best indication of the approximate immediate net earnings effect of adopting the provisions of this revised Statement may be determined by reviewing Note 2 to these financial statements and Note 1 to Consolidated Financial Statements on page 36 of the 2004 annual report to shareholders. These notes show that net earnings would have decreased by $0.03 per diluted share for the quarter ended December 31, 2004, and by $0.11 per diluted share for the year ended September 30, 2004. Also, upon adoption we will be allowed to, but not required to, restate prior interim periods or prior years in accordance with a prescribed modified retrospective method. We have not yet determined whether we will restate prior periods.

(5) Earnings per share:



		Three Months Ended
		December 31,

		2004		2003


		(In thousands except
		per share amounts)
Net earnings(A)		$	11,995	$	7,393

Determination of shares:
	Weighted-average shares of common stock outstanding(B)		11,329		11,264
	Assumed exercise of stock options		309		192

	Weighted-average shares of common stock outstanding assuming dilution(C)		11,638		11,456

Net earnings:
	Basic per share amount(A/B)	$	1.06	$	0.66
	Diluted per share amount(A/C)	$	1.03	$	0.65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following stock options were outstanding during the three months ended December 31, 2004 and 2003, 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,

	2004		2003

Options		59,718		23,479
Weighted-average exercise price	$	71.26	$	62.83


(6)	Inventories:


	At		At
	December 31,		September 30,
	2004		2004


	(In thousands)
Raw materials	$	3,320	$	3,304
Component parts		91,109		88,760
Work in process		34,108		30,237
Finished goods		20,239		16,407

	$	148,776	$	138,708


(7)	Property, plant, and equipment:


	At		At
	December 31,		September 30,
	2004		2004


	(In thousands)
Land	$	10,810	$	10,380
Buildings and equipment		152,206		149,361
Machinery and equipment		243,004		237,677
Construction in progress		1,399		2,044

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