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 March 31, 2005

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 April 22, 2005, 11,412,628 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		16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24
Item 4.	Controls and Procedures		24

PART II — OTHER INFORMATION
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		25
Item 4.	Submission of Matters to a Vote of Security Holders		25
Item 6.	Exhibits		25

Signatures			26
Amended and Restated Credit Agreement
Certification
Certification
Certification

PART I — FINANCIAL INFORMATION


Item 1.	*Financial Statements*

Statements of Consolidated Earnings


	*Woodward Governor Company and Subsidiaries*


			Three Months Ended
			March 31,

			2005			2004

			(Unaudited)
			(In thousands except
			per share amounts)
Net sales			$	210,619		$	172,951

Costs and expenses:
	Cost of goods sold			157,520			130,063
	Selling, general, and administrative expenses			19,559			16,899
	Research and development costs			11,690			9,169
	Amortization of intangible assets			1,780			1,820
	Interest expense			1,525			1,451
	Interest income			(402	)		(213	)
	Other income			(1,470	)		(898	)
	Other expense			127			71

		Total costs and expenses		190,329			158,362

Earnings before income taxes				20,290			14,589
Income taxes				7,311			5,484

Net earnings			$	12,979		$	9,105

Earnings per share:
Basic			$	1.14		$	0.81
Diluted				1.11			0.79

Weighted-average number of shares outstanding:
Basic				11,390			11,276
Diluted				11,703			11,557

Cash dividends per share			$	0.25		$	0.24

See accompanying Notes to Consolidated Financial Statements.

Statements of Consolidated Earnings


	*Woodward Governor Company and Subsidiaries*


			Six Months Ended
			March 31,

			2005			2004

			(Unaudited)
			(In thousands except
			per share amounts)
Net sales			$	399,944		$	331,924

Costs and expenses:
	Cost of goods sold			300,793			247,752
	Selling, general, and administrative expenses			38,256			34,910
	Research and development costs			22,295			18,795
	Amortization of intangible assets			3,556			3,430
	Interest expense			2,894			2,695
	Interest income			(1,037	)		(786	)
	Other income			(6,371	)		(1,859	)
	Other expense			228			377

		Total costs and expenses		360,614			305,314

Earnings before income taxes				39,330			26,610
Income taxes				14,356			10,112

Net earnings			$	24,974		$	16,498

Earnings per share:
Basic			$	2.20		$	1.46
Diluted				2.14			1.43

Weighted-average number of shares outstanding:
Basic				11,359			11,269
Diluted				11,672			11,507

Cash dividends per share			$	0.49		$	0.48

See accompanying Notes to Consolidated Financial Statements.

Consolidated Balance Sheets


	*Woodward Governor Company and Subsidiaries*


			At		At
			March 31,		September 30,
			2005		2004

			(Unaudited)
			(In thousands except
			per share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	65,024	$	48,895
	Accounts receivable, less allowance for losses of $2,468 for March and $2,836 for September			99,613		99,277
	Inventories			153,372		138,708
	Deferred income taxes			18,842		16,852
	Other current assets			4,280		5,064

		Total current assets		341,131		308,796

Property, plant, and equipment — net				113,983		117,310
Goodwill				132,308		131,542
Other intangibles — net				82,333		85,711
Deferred income taxes				781		4,318
Other assets				10,431		6,617

Total assets			$	680,967	$	654,294


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Short-term borrowings		$	4,945	$	5,833
	Current portion of long-term debt			13,715		956
	Accounts payable			38,451		35,207
	Accrued liabilities			62,331		65,573
	Income taxes payable			880		3,703

		Total current liabilities		120,322		111,272

Long-term debt, less current portion				75,708		88,452
Other liabilities				73,051		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			21,876		15,878
	Accumulated other comprehensive earnings			14,183		12,038
	Deferred compensation			4,495		4,461
	Retained earnings			400,865		381,458

				441,525		413,941
Less: Treasury stock, at cost, 750 shares for March and 844 shares for September				25,144		23,619
Treasury stock held for deferred compensation				4,495		4,461

		Total shareholders’ equity		411,886		385,861

Total liabilities and shareholders’ equity			$	680,967	$	654,294

See accompanying Notes to Consolidated Financial Statements.

Statements of Consolidated Cash Flows


	*Woodward Governor Company and Subsidiaries*


			Six Months
			Ended
			March 31,

			2005			2004

			(Unaudited)
			(In thousands)
Cash flows from operating activities:
Net earnings			$	24,974		$	16,498

Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization				16,722			17,014
Net loss (gain) on sale of property, plant, and equipment				(257	)		143
Deferred income taxes				286			297
Reclassification of unrealized losses on derivatives to earnings				158			147
Changes in operating assets and liabilities:
	Accounts receivable			838			5,550
	Inventories			(13,317	)		(8,311	)
	Accounts payable and accrued liabilities			(5,717	)		6,996
	Income taxes payable			(1,673	)		9,386
	Other — net			6,264			5,120

		Total adjustments		3,304			36,342

Net cash provided by operating activities				28,278			52,840

Cash flows from investing activities:
Payments for purchase of property, plant, and equipment				(9,686	)		(9,361	)
Proceeds from sale of property, plant, and equipment				853			124
Business acquisitions, net of cash acquired				—			389

Net cash used in investing activities				(8,833	)		(8,848	)

Cash flows from financing activities:
Cash dividends paid				(5,567	)		(5,408	)
Proceeds from sales of treasury stock				3,153			1,198
Net payments from borrowings under revolving lines				(1,160	)		(26,837	)

Net cash used in financing activities				(3,574	)		(31,047	)

Effect of exchange rate changes on cash				258			(34	)

Net change in cash and cash equivalents				16,129			12,911
Cash and cash equivalents, beginning of year				48,895			24,058

Cash and cash equivalents, end of period			$	65,024		$	36,969

Supplemental cash flow information:
Interest expense paid			$	2,766		$	3,036
Income taxes paid				18,647			4,498

See accompanying Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)	Overview:

The consolidated balance sheet as of March 31, 2005, the statements of consolidated earnings for the three and six-month periods ended March 31, 2005 and 2004, and the statements of consolidated cash flows for the six-month periods ended March 31, 2005 and 2004, were prepared by the company without audit. The September 30, 2004, 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 March 31, 2005, the results of its operations for the three and six-month periods ended March 31, 2005 and 2004, and its cash flows for the six-month periods ended March 31, 2005 and 2004. 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/ A Amendment No. 1 and should be read with the Notes to Consolidated Financial Statements on pages 38-58 of the 2004 annual report to shareholders. The statements of consolidated earnings for the three and six-month periods ended March 31, 2005, 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						Six Months
		Ended						Ended
		March 31,						March 31,

		2005			2004			2005			2004

		(In thousands except per share amounts)
Reported net earnings		$	12,979		$	9,105		$	24,974		$	16,498
Stock-based compensation expense using the fair value method, net of income tax			(359	)		(452	)		(703	)		(689	)

Pro forma net earnings		$	12,620		$	8,653		$	24,271		$	15,809

Reported net earnings per share amounts:
	Basic	$	1.14		$	0.81		$	2.20		$	1.46
	Diluted		1.11			0.79			2.14			1.43

Pro forma net earnings per share amounts:
	Basic	$	1.11		$	0.77		$	2.14		$	1.40
	Diluted		1.08			0.75			2.09			1.38


(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 sales terms for direct customers. We account for payments made to customers as a reduction of revenue unless

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 cannot be attributed to expected future 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. In accordance with a Securities and Exchange Commission rule issued in April 2005, this revised statement becomes effective for our fiscal year beginning October 1, 2005, although early adoption is allowed. 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 39 of the 2004 annual report to shareholders, which was filed with our Form 10-K/ A Amendment No. 1 for the year ended September 30, 2004. These notes show that net earnings would have decreased by $0.03 per diluted share for the quarter ended March 31, 2005, $0.05 per diluted share for the six months ended March 31, 2005, and $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 years in accordance with a prescribed modified retrospective method or, in the event of early adoption of the revised statement this fiscal year, restate prior interim periods in accordance with a prescribed modified retrospective method. We have not yet determined whether we will adopt the revised statement this fiscal year or wait until the required effective date of next fiscal year and we have not yet determined whether we will restate prior periods.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


(5)	Earnings per share:


		Three Months Ended				Six Months Ended
		March 31,				March 31,

		2005		2004		2005		2004

		(In thousands, except per share amounts)
Net earnings(A)		$	12,979	$	9,105	$	24,974	$	16,498

Determination of shares:
	Weighted-average shares of common stock outstanding(B)		11,390		11,276		11,359		11,269
	Assumed exercise of stock options		313		281		313		238

	Weighted-average shares of common stock outstanding assuming dilution(C)		11,703		11,557		11,672		11,507

Earnings before cumulative effect of accounting change:
	Basic per share amount(A/ B)	$	1.14	$	0.81	$	2.20	$	1.46
	Diluted per share amount(A/ C)	$	1.11	$	0.79	$	2.14	$	1.43

The following stock options were outstanding during the three and six months ended March&nb

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents