10-Q 1 woodhead060605_10q.htm FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2005 Woodhead Industries, Inc. Form 10-Q dated December 31, 2005

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

FORM 10-Q

(Mark One)
x Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the Quarterly Period Ended 12/31/2005

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: 0-5971

WOODHEAD INDUSTRIES, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or Other Jurisdiction
of Incorporation or Organization)

36-1982580
(IRS Employer
Identification No.)

Three Parkway North #550
Deerfield, IL 60015
(Address of Principal Executive Offices)

(847) 236-9300
(Registrant’s Telephone Number,
Including Area Code)

Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 x No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer o Accelerated filer x Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

The number of shares outstanding as of January 27, 2006 was 12,378,895.

TABLE OF CONTENTS


Part I – FINANCIAL INFORMATION

Item 1 – Financial Statements
Consolidated Balance Sheets				3
Consolidated Statements of Income				4
Consolidated Statements of Cash Flows				5
Consolidated Statements of Comprehensive Income				6
Notes to Financial Statements				7
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations				15
Item 3 – Quantitative and Qualitative Disclosures about Market Risk				19
Item 4 – Internal Controls and Procedures				19

Part II – OTHER INFORMATION

Item 1 – Legal Proceedings				20
Item 6 – Exhibits				21
Signatures				22

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Part I – FINANCIAL INFORMATION

Item 1 – Financial Statements

Woodhead Industries, Inc.
Consolidated Balance Sheets
As of December 31, 2005 and October 1, 2005
(Amounts in Thousands)

Assets	Unaudited 12/31/2005		10/1/2005

Current Assets
Cash and short-term investments	$	17,080	$	13,887
Accounts receivable, net		36,109		39,040
Inventories		21,512		21,173
Prepaid expenses		6,041		5,785
Refundable income taxes		836		2,097
Deferred income taxes		2,516		2,164

Total current assets		84,094		84,146
Property, plant and equipment, net		53,172		54,758
Other intangible assets, net		546		568
Goodwill		35,232		35,730
Deferred income taxes		2,526		2,746
Other assets		464		432

Total Assets	$	176,034	$	178,380

Liabilities and Stockholders’ Investment
Current Liabilities
Accounts payable	$	9,320	$	11,080
Accrued expenses		11,556		11,531
Income taxes payable		737		1,053
Current portion of long-term debt		5,700		5,700

Total current liabilities		27,313		29,364
Long-term debt		19,500		19,500
Deferred income taxes		4,618		4,698
Other liabilities		3,900		4,139

Total Liabilities		55,331		57,701

Stockholders’ Investment:
Common stock at par (shares issued: 12,380 at 12/31/05
And 12,260 at 10/1/05)		12,172		12,260
Additional paid-in capital		21,572		21,596
Deferred stock compensation		—		(397	)
Accumulated other comprehensive income		3,475		4,726
Retained earnings		83,484		82,494

Total stockholders’ investment		120,703		120,679

Total Liabilities and Stockholders’ Investment	$	176,034	$	178,380

The accompanying notes are an integral part of these statements.

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Woodhead Industries, Inc.
Consolidated Statements of Income
For the Three Months ended December 31, 2005 and January 1, 2005
(Amounts in Thousands, except per share data, unaudited)

	Three Months Ended

	12/31/2005			1/1/2005

Net Sales	$	53,439		$	48,676
Cost of Sales		33,283			31,954

Gross Profit		20,156			16,722
Operating Expenses		16,527			16,496

Income From Operations		3,629			226
Other Expenses
Interest Expense		358			545
Interest Income		(54	)		(59	)
Other (Income) / Expenses, Net		(155	)		(1,818	)

Income Before Taxes		3,480			1,558
Provision For Income Taxes		1,264			342

Net Income	$	2,216		$	1,216

Earnings per share
Basic	$	0.18		$	0.10
Diluted	$	0.18		$	0.10

Weighted-average common shares outstanding
Basic		12,163			12,071
Diluted		12,295			12,306
Dividends Per Share	$	0.10		$	0.10

The accompanying notes are an integral part of these statements.

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Woodhead Industries, Inc.
Consolidated Statements of Cash Flows
For the Three Months ended December 31, 2005 and January 1, 2005
(Amounts in Thousands, unaudited)

	Three Months Ended

	12/31/2005			1/1/2005

Cash flows from operating activities:
Net income for the period	$	2,216		$	1,216
Adjustments to reconcile net income to net
Cash flows from operating activities:
Depreciation and amortization		3,094			3,055
Stock compensation		172			—
Excess tax benefit from stock-based compensation		(7	)		—
Deferred tax expense		(145	)		(22	)
(Increase) Decrease in:
Accounts receivable		2,605			2,453
Inventories		(507	)		(2,293	)
Prepaid expenses		422			(499	)
Other assets		1,557			435
(Decrease) Increase in:
Accounts payable		(1,643	)		1,654
Accrued expenses		(995	)		(2,718	)
Income taxes payable		(606	)		50
Other liabilities		504			228

Net cash flows provided by operating activities		6,667			3,559

Cash flows from investing activities:
Purchases of property, plant & equipment		(1,538	)		(2,028	)
Retirements or sale of property, plant & equipment		86			101

Net cash used in investing activities		(1,452	)		(1,927	)

Cash flows from financing activities:
Excess tax benefit from stock-based compensation		7			—
Proceeds from exercise of stock options		105			859
Dividend payments		(1,226	)		(1,221	)

Net cash used in financing activities		(1,114	)		(362	)

Effect of exchange rates		(908	)		(837	)

Net increase in cash and short-term investments		3,193			433

Cash and short-term investments at beginning of period		13,887			16,709
Cash and short-term investments at end of period	$	17,080		$	17,142

Supplemental cash flow data
Cash paid during the period for:
Interest	$	—		$	—
Income taxes	$	453		$	—

The accompanying notes are an integral part of these statements.

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Woodhead Industries, Inc.
Consolidated Statements of Comprehensive Income
For the Three Months ended December 31, 2005 and January 1, 2005
(Amounts in Thousands, unaudited)

	Three Months Ended

	12/31/2005			1/1/2005

Net income	$	2,216		$	1,216
Other comprehensive income:
Accumulated foreign currency translation
Adjustment		(1,237	)		5,635
Unrealized loss on cash flow hedging
Instrument		(14	)		(60	)

Comprehensive income, net	$	965		$	6,791

The accompanying notes are an integral part of these statements.

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Woodhead Industries, Inc.
Notes to Financial Statements
(Amounts in Thousands, except per share data, unaudited)

BASIS OF PRESENTATION

Our consolidated financial statements include the accounts of all our wholly owned subsidiaries, including those operating outside the United States. All material intercompany transactions have been eliminated in consolidation. We prepare our financial statements in conformity with United States Generally Accepted Accounting Principles. In preparing the financial statements, we must use some estimates and assumptions that may affect reported amounts and disclosures. Among others, we use estimates when accounting for depreciation, amortization, employee benefits, asset valuation allowances, and loss contingencies. We are also subject to risks and uncertainties that may cause actual results to differ from those estimates. Interim results are not necessarily indicative of results for a full year. Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.

The accompanying unaudited, consolidated financial statements have been prepared pursuant to rules and regulations of the Securities and Exchange Commission and, therefore, do not include all information and footnote disclosures normally included in audited financial statements. In the opinion of management, all normal and necessary adjustments have been made to ensure a fair statement of the results for the interim period.

The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Financial Statements and Notes thereto included in the Woodhead Industries, Inc. 2005 Form 10-K.

RECENT ACCOUNTING PRONOUNCEMENTS

In November 2004 the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151 Inventory Costs, an amendment to ARB No. 43, Chapter 4. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facilities, freight, handling costs and spoilage and requires these items to be recognized as current period expenses. Also, SFAS No. 151 requires fixed overhead costs be allocated to inventories based on normal production capacity. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We were required to adopt SFAS No. 151 in the first quarter of fiscal 2006 and it did not have an impact on our financial position and results of operations for the quarter ended December 31, 2005.

In December 2004 FASB issued the revised SFAS No. 123, Share-Based Payment (SFAS No. 123(R)). SFAS No. 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements. Generally, compensation cost will be measured based on the grant-date fair value of the equity or liability instrument issued. In addition, the equity or liability awards will be remeasured each reporting period. Compensation cost will be recognized over the requisite service period, generally as the award vests. We were required to adopt SFAS No. 123(R) in the first quarter of fiscal 2006. SFAS No. 123(R) applies to all awards granted after June 30, 2005 and to previously granted awards unvested as of the adoption date.

In May 2005 the FASB issued SFAS No. 154 Accounting Changes and Error Corrections – a replacement of Accounting Principles Board Opinion (APB) No. 20 and SFAS No. 3. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle and applies to all voluntary changes in accounting principle. SFAS No. 154 also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

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INVENTORIES

Inventories at the balance sheet dates were comprised of the following:

	12/31/05			10/1/05
Inventories valued using FIFO	$	12,917		$	12,435

Inventories valued using LIFO:
At FIFO cost		10,968			11,057
Less: Reserve to reduce to LIFO		(2,373	)		(2,319	)

LIFO Inventories		8,595			8,738

Total Inventories	$	21,512		$	21,173


Inventory composition using FIFO
Raw materials		13,331			12,894
Work-in-process and finished goods		10,554			10,598

Total Inventories at FIFO	$	23,885		$	23,492

Had we used the FIFO method for all inventories, net income would have been substantially the same for the quarters ended December 31, 2005 and January 1, 2005.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at the balance sheet date were the following:

	12/31/05			10/1/05
Property, plant and equipment, at cost	$	160,426		$	159,449
Less: Accumulated depreciation and amortization		(107,254	)		(104,691	)

Property, plant and equipment, net	$	53,172		$	54,758

During the first three months of fiscal 2006 we purchased $1.5 million of property, plant and equipment compared to $2.0 million in the first three months of fiscal 2005.

LONG TERM DEBT

On April 28, 2004 we entered into a new three-year revolving credit agreement with our existing bank that provides for borrowings up to $25.0 million at the bank’s prime or offered rate. This agreement will expire on April 28, 2007. This revolving credit agreement states that the maximum ratio of debt to EBITDA, as defined, shall be no greater than 2.5 to 1.0 and minimum interest coverage ratio, as defined, shall be no less than 2.5 to 1.0. We are in compliance with all provisions of our credit agreement. On December 31, 2005 and October 1, 2005 we had no borrowings under the revolving credit agreement.

Included in our financial statements is a $13.2 million 6.64% senior guaranteed note, which is held by a subsidiary and has a parental guarantee. In addition, there is a $12.0 million 6.81% senior guaranteed note held by the parent company, which is guaranteed by our U.S. subsidiaries. We are in compliance with all provisions of our senior guaranteed notes.

As of December 31, 2005 and October 1, 2005 we had no short-term borrowings.

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EARNINGS PER SHARE

Basic earnings per share exclude dilution, and diluted earnings per share reflect the potential dilution from non-vested shares and stock options. The reconciliation between basic and diluted earnings per share is as follows:

	Three Months Ended
	12/31/05		1/1/05
Net Income	$	2,216	$	1,216
Earnings per share
Basic	$	0.18	$	0.10
Diluted	$	0.18	$	0.10


Weighted-average number of shares outstanding		12,163		12,071
Dilutive common stock options and non-vested stock		132		235

Weighted-average number of shares outstanding
Plus dilutive common stock options and non-vested stock		12,295		12,306

CAPITAL STOCK

Our total authorized stock is 40,000,000 shares, consisting of 10,000,000 shares of preferred stock, par value $0.01 per share, and 30,000,000 shares of common stock, par value $1.00 per share. No shares of preferred stock have been issued to date. Common stock issued was 12,172,000 and 12,260,000 on December 31, 2005 and October 1, 2005, respectively. At December 31, 2005 the common stock issued of 12,172,000 did not include non-vested shares of 208,000.

Prior to October 2, 2005 we applied APB Opinion No. 25: Accounting for Stock Issued to Employees, and related interpretations (Opinion 25) including FIN 44: Accounting for Certain Transactions Involving Stock Compensation in accounting for the plans. Accordingly, we did not recognize compensation expense related to option grants. In December 2002, we adopted SFAS No. 148: Accounting for Stock Based Compensation, which amended SFAS No. 123: Accounting for Stock Based Compensation. The following table, per SFAS No. 148, summarizes results as if we had recorded compensation expense for option grants during the three months ended January 1, 2005:

	1/1/2005
Net Income
As reported	$	1,216
Stock based employee compensation cost		(435	)

Pro forma	$	781
Basic earnings per share
As reported	$	0.10
Stock based employee compensation cost		(0.04	)

Pro forma	$	0.06
Diluted earnings per share
As reported	$	0.10
Stock based employee compensation cost		(0.04	)

Pro forma	$	0.06

Effective October 2, 2005, we adopted SFAS No. 123(R) which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options based on estimated fair values. We adopted SFAS No. 123(R) using the modified prospective transition method, which requires the application of this standard as of October 2, 2005, the first day of fiscal 2006. Our financial statements for the three months ended December 31, 2005 reflect the impact of SFAS No. 123(R). In accordance with the modified prospective transition method our financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R).

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As a result of adopting SFAS No. 123(R) on October 2, 2005 our income before income taxes and net income for the period ended December 31, 2005 were $39 and $25 lower, respectively, than if we had continued to account for share-based compensation under Opinion 25. Basic and diluted earnings per share for the period ended December 31, 2005 would have remained unchanged at $0.18 had we not adopted SFAS No. 123(R). Prior to the adoption of SFAS No. 123(R) we had presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. Beginning on October 2, 2005 we changed our cash flow presentation in accordance with SFAS No. 123(R) which requires the cash flows resulting from tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows.

SFAS No. 123(R) requires us to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. Under this method, compensation cost for the first quarter of fiscal 2006 includes the portion of the share based compensation vesting in the period for (a) all share-based payments granted prior to, but not vested as of October 1, 2005, based on grant date fair value estimated using the Black-Scholes option pricing model and (b) all share based payments granted subsequent to October 1, 2005, based on the grant date fair value estimated using the Black-Scholes option pricing model.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model, which determines inputs as shown in the following table.

	Grant Date
	10/30/02			11/2/02			12/12/02
Dividend Yield		3.55	%		2.85	%		3.72	%
Volatility		47.59	%		47.92	%		48.11	%
Risk Free Interest Rate		4.00	%		4.14	%		4.00	%
Expected Life		8			8			8

Black-Scholes Value		3.98			5.26			3.49

The summary of our stock option activity as of December 31, 2005 and changes during the first quarter of fiscal 2006 is presented in the following table:

Options			Weighted Average Exercise Price			Aggregate Intrinsic Value
Outstanding at October 1, 2005	1,775		$	14.64
Exercised	(15	)		11.39
Expired or cancelled	(207	)		16.42
Outstanding at December 31, 2005	1,553			14.43	6.46	$	1,254

Vested or expected to vest at December 31, 2005	1,553			14.43	6.46		1,254

Exercisable at December 31, 2005	1,418		$	14.72		$	988

The intrinsic value for stock options is defined as the difference between the current market price and the grant price. The intrinsic value of options exercised during the first quarter of fiscal 2006 was $39. As of December 31, 2005 there was $226 of unrecognized compensation cost related to stock options outstanding.

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Non-vested share grants consist of our common stock and generally vest over one to three years. All non-vested share grants are cliff vested. Generally, the fair value of each non-vested share grant is equal to the market price of our stock on the date of grant. A summary of our non-vested share activity as of December 31, 2005, and changes during the first quarter of fiscal 2006 is presented in the following table:

Non-Vested Shares		Weighted Average Grant-Date Fair Value
Non-vested at October 1, 2005	98	$	12.32
Granted	110		12.97
Vested	—		—

Non-vested at December 31, 2005	208	$	12.66

Stock-based compensation expense related to non-vested shares recognized under SFAS No. 123(R) for the first quarter of 2006 was $0.1 million. This expense included stock-based compensation for grants that were issued before the adoption of SFAS No. 123(R) and expense related to the non-vested shares granted on December 2, 2005. For the quarter ended December 31, 2005 only one month of the new grant was included in stock-based compensation cost. As of December 31, 2005 there was $1.7 million of unrecognized compensation cost related to the non-vested stock grants that is expected to be recognized over a weighted average period of 1.8 years.

As of December 31, 2005 there were 523,669 shares available for grant.

SEGMENT AND GEOGRAPHIC DATA

Segment reporting is presented in accordance with SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. SFAS No. 131 requires us to report certain financial information in a manner similar to the way we report it to the chief operating decision maker for the purpose of evaluating performance and allocating resources to the various business segments. We identified the Chief Executive Officer as the chief operating decision maker.

Our operating segments are based on the organization of business groups comprised of similar products and services. Revenues in our Industrial Communications and Connectivity Products Segment (Connectivity Segment) are primarily derived from sales of system components to devices in open networks for automated manufacturing and distribution applications. Revenues in our Electrical Safety & Industrial Products Segment (Electrical Segment) are primarily derived from sales of specialized products to support enhanced safety and productivity on the factory floor.

Sales between segments were not significant. Sales in geographic areas were determined by customer location. For the quarter ending December 31, 2005 only Canada accounted for 10 percent or more of our total revenue and therefore was the only foreign country to meet the minimum disclosure requirements. We did not allocate certain corporate expenses, primarily those related to the overall management of the corporation, to the segments or geographic areas. Both segments share certain production facilities and equipment (PP&E). These assets, and related additions and depreciation, were allocated based on unit production. Geographic data on assets is based on the physical location of those assets. Corporate assets were primarily investments in subsidiaries and cash.

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Three Months
(Amounts in Thousands, unaudited)
Segment data

	Net Sales					Income from Operations
	Three Months Ended					Three Months Ended
	12/31/2005			1/1/2005		12/31/2005		1/1/2005
Connectivity	$	40,377		$	36,886	$	1,708	$	61
Electrical		13,062			11,790		1,247		300
Corporate and other		—			—		674		(135	)

Total	$	53,439		$	48,676	$	3,629	$	226


	Additions to long-lived assets					Depreciation and Amortization
	Three Months Ended					Three Months Ended
	12/31/2005			1/1/2005		12/31/2005		1/1/2005
Connectivity	$	645		$	895	$	2,534	$	2,526
Electrical		1,034			1,114		544		495
Corporate and other		(141	)		19		16		34

Total	$	1,538		$	2,028	$	3,094	$	3,055


	Total Assets
	12/31/2005			10/1/2005
Connectivity	$	134,328		$	136,926
Electrical		31,272			31,917
Corporate and other		10,434			9,537

Total	$	176,034		$	178,380

	Three Months Ended
Reconciliation of Income from Operations to Net Income	12/31/2005			1/1/2005
Income from operations	$	3,629		$	226
Less: Interest income (expense), net		(304	)		(486	)
Other income (expense), net		155			1,818
Income taxes		(1,264	)		(342	)

Net Income	$	2,216		$	1,216

Geographic Data

	Net Sales
	Three Months Ended					Total Assets
	12/31/2005		1/1/2005			12/31/2005		10/1/2005
United States	$	29,759	$	26,606	United States	$	52,167	$	50,083
Canada		6,646		4,258	Italy		32,844		33,390
All other countries		17,034		17,812	France		24,553		21,369
					Canada		21,968		25,188
Total	$	53,439	$	48,676	Mexico		20,514		23,120
					All other countries		23,988		25,230

					Total	$	176,034	$	178,380

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INCOME TAX EXPENSE

Our effective tax rate for the quarter ending December 31, 2005 was 36.3% compared to 22.0% for the quarter ending January 1, 2005. The lower effective tax rate for the quarter ending January 1, 2005 was due mainly to the favorable tax treatment on the exchange gain on the U.S. Dollar loan held by our Canadian subsidiary.

10.

BENEFIT PLANS

The following table provides the components of net periodic benefit cost for our non-union plans for the three months ended December 31, 2005 and January 1, 2005:

	Pension Benefits
	Three Months Ended
Components of Net Periodic Benefit Costs:	12/31/05			1/1/05
Service Cost	$	202		$	132
Interest Cost		152			127
Recognized actuarial loss		115			75
Expected return on plan assets		(145	)		(126	)
Amortization of prior service costs		7			3

Net periodic benefit cost	$	331		$	211

It has been our policy to fund our pension costs by making annual contributions based upon minimum funding provisions of the Employee Retirement Security Act of 1974. We previously disclosed in our financial statements for the year ended October 1, 2005 that we did not expect to contribute to our non-union qualified plan in 2006 and as of December 31, 2005 we have made no contributions.

11.

CONTINGENT LIABILITIES

We are subject to federal and state hazardous substance cleanup laws that impose liability for the costs of cleaning up contamination resulting from past spills, disposal or other releases of hazardous substances. In this regard, we have incurred, and expect to incur, assessment, remediation and related costs at one of our former facilities. In 1991, we reported to state regulators a release at that site from an underground storage tank (“UST”). The UST and certain contaminated soil subsequently were removed and disposed of at an off-site disposal facility.

We have been conducting an investigation of soil and groundwater at the site with oversight by the state Department of Environmental Quality (“DEQ”). The investigation indicates that, unrelated to the UST release, additional soil and groundwater at the site have been impaired by chlorinated solvents, including tetrachloroethane and trichloroethylene, and other compounds. Also, our investigation revealed that the previous owners of the site had used a portion of the site as a disposal area. We have remediated the soils in this area but we believe that it is a source of contamination of groundwater, both on-site and off-site. Our investigation indicates that there were releases by the previous owners in areas over which additions were subsequently built. These releases have impacted groundwater that has migrated off-site. We have implemented a groundwater remediation system for the on-site contamination. We continue to monitor and analyze conditions to determine the continued efficacy of the system. We also have implemented a groundwater remediation system for the off-site contamination. We continue to analyze other remedial alternatives for the off-site groundwater contamination and are reviewing these alternatives with the DEQ.

We previously filed a complaint in federal district court seeking contribution from the previous owners of the site for the cost of the investigation and remediation of the site. We settled that litigation through a consent judgment against the former owners. Also, we asserted claims against insurers of the former owners for the amounts specified in the consent judgment. The insurers denied coverage and three of them filed a declaratory judgment action to that effect against us in federal district court. In July 2004 the federal district court entered an Order and Judgment on cross motions for summary judgment resolving the claims in favor of the insurers. We filed an appeal to the U.S. Court of Appeals for the Sixth Circuit, and following the Court’s per curium affirmance in November 2005 we filed a petition for rehearing en banc.

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We have a reserve for the $1.5 million of investigation and remediation expenses we have estimated to be incurred over the next 13 years to address the environmental issue at our site in Michigan. We based our estimate on the future costs expected to be incurred to investigate, monitor and remediate the site. Our cost estimate continues to be subject to substantial uncertainty because of the extent of the contamination area, the variety and nature of geological conditions throughout the contamination area, changes in remediation technology and the state’s Department of Environmental Quality feedback. Funding this activity will come from operating cash flows and only changes to the reserve estimate will affect the results of operations.

We indemnify certain customers with regard to product liability. We have insurance policies to cover this exposure, which includes a minimal deductible to be paid by us.

12.

LEGAL SETTLEMENT

On November 11, 2005 one of our subsidiaries (the “Subsidiary”) entered into an agreement to settle litigation with another party (the “Defendant”) relating to allegations of breach of contract filed by the Subsidiary and to counterclaims alleged by the Defendant against the Subsidiary relating to allegations of breach of a related contract. As a result of this settlement the Subsidiary recorded $1.6 million of revenue during the first quarter of fiscal 2006.

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

Overview

Woodhead Industries develops, manufactures and markets network and electrical infrastructure products engineered for performance in demanding, harsh, or hazardous environments. We are known in the global industrial market by our recognized brands which include Brad Harrison^®, BradPower™, BradControl™, SST™, Daniel Woodhead^®,mPm^®, applicom^®, Aero-Motive^® and RJ-Lnxx^®. Our expertise extends from mechanical, electrical and electronics products to communication software products and technologies.

Woodhead operates from twenty-one locations in ten countries spanning North America, Europe and Asia/Pacific.

Results of Operations

First quarter fiscal 2006 results compared with First quarter fiscal 2005 results

SALES
Sales in the quarter ended December 31, 2005 were $53.4 million, an increase of 9.8% compared to sales of $48.7 million for the quarter ended January 1, 2005. This improvement in sales was due to strong performances in both our Connectivity and Electrical segments. The North America Connectivity business continues to post strong results with another solid period of double-digit growth with revenue increasing 21.9% in the first quarter when compared to last year. This growth in North America coupled with the improving results from our European operations, which was up 7.4% in local currency, enabled us to post another quarter of strong growth in our Connectivity segment. In Connectivity, foreign exchange rates changes negatively impacted sales by $1.8 million for the quarter ending December 31, 2005 when compared to last year. However, this negative impact was largely offset by the receipt of $1.6 million related to a previously disclosed legal settlement. For the first quarter 2006 Connectivity sales were $40.4 million, a 9.5% increase over the $36.9 million in sales reported for the first quarter 2005. In local currencies sales in North America, Europe and Asia increased 21.3%, 7.4% and 3.2%, respectively when compared to the first quarter of 2005. Connectivity sales represented 75.6% of our total first quarter sales, which reflects our continued focus on the growth of this segment. Electrical sales were $13.1 million in the quarter December 31, 2005 and $11.8 million last year, a 10.8% increase. Electrical sales represented 24.4% of our total first quarter sales.

SALES BY REGION
In the United States, sales were $29.8 million in the first quarter of fiscal 2006 compared to $26.6 million in the first quarter of 2005. We recorded 44% of our revenues in foreign currencies during the first quarter of fiscal 2006 compared to 45% in the first quarter of 2005. Our international revenue was up 7.3% in the first quarter of fiscal 2006 when compared to last year. This increase was mainly due to the operating performance of our businesses in Canada, Europe and Japan. In local currencies, sales in Canada, Europe and Japan increased 28.5%, 7.4% and 12.4%, respectively, when compared to the first quarter of 2005. The large increase in Canada was the result of the $1.6 million legal settlement that occurred in the first quarter of fiscal 2006. In local currencies European sales increased in France, Germany and Italy by 17.1%, 12.8% and 3.3%, respectively with a 4.9% decline in the U.K. In local currencies sales in Japan increased 12.4%.

BACKLOG
The backlog of unfilled orders stood at $18.3 million at the end of this quarter as compared to $19.0 million a year ago, which translates to 21 and 23 average days of sales in 2006 and 2005, respectively. Our backlog has improved 11.7% compared to the 2005 year-end levels of $16.3 million.

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GROSS PROFIT
Gross profit as a percent of sales was 37.7% in the first quarter of fiscal 2006 up 3.3 points from last years gross profit of 34.4%. The legal settlement accounted for 1.9 points of the first quarter 2006 gross profit. Our core product gross margin was up compared to last year’s gross margin and it should be noted that the first quarter is seasonably the lowest margin quarter of the year. While price increases have been more difficult to realize than anticipated we were able to increase gross profits in both segments by increasing volume and implementing tight cost controls, particularly in our Electrical segment, which recorded very low margins in the first quarter of fiscal 2005. Electrical gross margins increased from 33.0% in the first quarter of fiscal 2005 to 35.9% in the first quarter of 2006 while Connectivity gross margins increased from 34.8% to 38.3%.

OPERATING EXPENSES
Operating expenses were $16.5 million in both the first fiscal quarters 2006 and 2005. These expenses were 30.9% of sales in the first quarter of 2006 compared to last year’s 33.9%. This decrease as a percentage of sales was due wholly to the increased sales levels in the first quarter of 2006. Changes in foreign exchange rates had a positive effect of $0.4 million on operating expenses in the first quarter of 2006 when compared to the first quarter of 2005 and was offset by increases in first quarter Sarbanes-Oxley and stock compensation costs. Stock compensation costs will continue to be higher than 2005 levels due to the adoption of Statement of Financial Accounting Standards (SFAS) 123, Share-Based Payment (SFAS 123(R)) in the first quarter of fiscal 2006. We adopted SFAS No. 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of October 2, 2005, the first day of fiscal 2006. In lieu of issuing stock options we issued 110,500 shares of non-vested stock during the first quarter of 2006. Stock compensation expense during the first quarter of 2006 was $0.2 million of which $0.1 million related to the non-vested stock granted during the quarter and the balance related to prior stock options, which are now required to be expensed as a result of SFAS No. 123(R). Unrecognized compensation cost at December 31, 2005 was $1.9 million.

SEGMENT OPERATING INCOME
Income from operations in the first quarter of 2006 was $1.7 million in the Connectivity segment compared to $0.1 million in 2005. The full impact of foreign exchange rate changes and the legal settlement are reflected in the Connectivity segment revenues. Although these factors largely offset one another on the revenue line, the legal settlement accounted for $0.6 million of the increase in income from operations. This $0.6 million benefit is after a $1.0 million charge to the segment’s operating expenses to reflect the multi-year total of legal fees associated with the settlement. $0.8 million of these costs had been charged to corporate over the past several years and as a result there was a corresponding credit to our corporate general and administrative expense line in the first quarter of 2006. Profitability improvement in this segment on a year-over-year basis was the result of increased revenue and improved gross margins. The Electrical segment recorded income from operations in the first quarter of 2006 of $1.2 million compared to $0.3 million in 2005. This significant improvement is due mainly to increased revenue, tight cost controls and the business improvements made during the last three quarters of fiscal 2005.

MISCELLANEOUS INCOME/EXPENSE
Other income in the first quarter of 2006 was $0.2 million compared to other income of $1.8 million in the first quarter of 2005. Other income in the first quarter of 2005 was due mainly to the $1.3 million gain realized from exchange rate changes, due primarily to the U.S. Dollar denominated loan held in Canada. Also included in first quarter 2005 miscellaneous income were the earn-out fees of $0.3 million received from the sale of the Aero-Motive product line in the first quarter of 2004 and the $0.2 million from the sale of a small product line in Germany.

NET INCOME
Net income in the first quarter of 2006 was $2.2 million compared to $1.2 million in 2005. Our effective tax rate was 36.3% and 22.0% for 2006 and 2005, respectively. The lower effective tax rate for the quarter ending January 1, 2005 was due mainly to the favorable tax treatment on the exchange gain on the U.S. Dollar loan held by our Canadian subsidiary.

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Financial Condition, Liquidity and Capital Resources

On December 31, 2005 we had $17.1 million in cash and short-term investments, up $3.2 million from our year-end amount of $13.9 million. This increase in cash was due mainly to the operating cash flow of $6.5 million, which includes the previously mentioned legal settlement. This increase was partially offset by spending for property, plant and equipment and the quarterly dividends.

Working capital increased to $56.8 million on December 31, 2005 compared to $54.8 million on October 1, 2005. The increase in working capital was due mainly to the increase in cash, which resulted from higher sales, due partially to the legal settlement and the improved collection of receivables. Also contributing to this increase was the decrease in accounts payable, which was the result of shorter payment cycles when compared to year-end levels.

We continue to invest in property and equipment. For the first three months of fiscal 2006 we invested $1.5 million compared to $2.0 million in the first three months of fiscal 2005. The purchases made during the first quarter of 2006 were the result of continued investment the world-wide ERP system, which will begin to roll out in North America in April 2006.

Our cash, short-term investments and the revolver are available for strategic investments, acquisitions, and other potential cash needs that may arise. We believe that existing cash, short-term investments and the revolver, together with funds generated from operations, will be sufficient to meet our operating requirements through the current fiscal year.

On December 31, 2005 we had $25.2 million of long-term debt outstanding ($5.7 million shown as current debt) and we had unused credit facilities that provide for additional borrowings of up to $25.0 million. On April 28, 2004 we entered into a new three-year revolving credit agreement with our existing bank that will provide for borrowings up to $25.0 million at the bank’s prime or offered rate. This agreement will expire on April 28, 2007. This revolving credit agreement provides that the maximum ratio of debt to EBITDA, as defined, shall be no greater than 2.5 to 1.0 and minimum interest coverage ratio, as defined, shall be no less than 2.5 to 1.0. We are in compliance with all provisions of our funding agreement. At December 31, 2005 and October 1, 2005 we had no short-term borrowings.

We do not have any exposures to off-balance sheet arrangements, including special purpose entities, or activities that include non-exchange-traded contracts accounted for at fair value.

Contractual Obligations

Our contractual obligations for long-term debt, purchase obligations, capital leases and operating leases on the balance sheet remained substantially unchanged as of December 31, 2005 from the amounts disclosed as of October 1, 2005 in our Form 10-K.

Contingent Liabilities and Environmental Matters

Our operations are subject to international, federal, state and local environmental laws and regulations. We are party to an environmental matter, which obligates us to investigate, remediate or mitigate the effects on the environment of the release of certain substances at one of our manufacturing facilities. It is possible that this matter could affect cash flows and results of operations. For additional details on contingent liabilities and the environmental exposure, see Footnote No. 11.

Critical Accounting Policies

The preparation of this Quarterly Report requires management’s judgment to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

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Our significant accounting policies are described in the Management’s Discussion and Analysis of Financial Condition and Results of Operation in our Form 10-K for the year ended October 1, 2005. There have been no significant changes to those accounting policies subsequent to October 1, 2005.

FORWARD-LOOKING STATEMENTS

The Securities and Exchange Commission encourages companies to disclose forward-looking information, so that investors can better understand a company’s future prospects, and make informed investment decisions. This report, and other written and oral statements that we make from time to time, contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements set out anticipated results based on management’s plans and assumptions. We have tried, wherever possible, to identify such statements by using words such as “anticipate”, “estimate”, “expect”, “plan”, “believe”, and words and terms of similar substance, in connection with any discussion of future operating or financial performance.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties, and inaccurate assumptions.

In particular, such risks include statements relating to future actions, prospective products, future performance or results of current or anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, general economic and business conditions, currency fluctuations, and competition.

International-based revenues and substantial international assets result in our exposure to currency exchange rate fluctuations. We continue to evaluate the economic and operational impact of all foreign currencies, including its impact on competition, pricing, and foreign currency exchange risks. There is no guarantee, however, that all problems have been foreseen and corrected, or that no material disruption will occur in our businesses.

Growth in costs and expenses, changes in product mix, and the impact of acquisitions, restructuring, divestitures and other unusual items that could result from evolving business strategies could affect future results. Changes in the U.S. tax code and the tax laws in other countries can affect our net earnings. Claims have been brought against us and our subsidiaries for various legal, environmental, and tax matters, and additional claims arise from time to time. It is possible that our cash flows and results of operations could be affected by the resolution of these matters.

Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements.

This discussion of potential risks and uncertainties is by no means complete but is designed to highlight important factors that may impact our outlook. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise.

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Item 3 – Quantitative and Qualitative Disclosures about Market Risk

In our global operating activities and in the normal course of our business, we are exposed to changes in foreign currency exchange rates, which may adversely affect our results of operations and financial condition. We seek to minimize those risks through our regular operating activities and, when deemed appropriate, through the use of derivative financial instruments. We use financial instruments to selectively hedge our foreign currency risk and do not use financial instruments for speculative purposes.

In 1998 we entered into a foreign currency swap agreement with an AA- rated counter-party to hedge a portion of our cash flows from our Italian subsidiary. We base the fair value for our cross-currency swap on the total cost estimate to terminate the agreement. The fair value of the swap on December 31, 2005 was recorded as a $0.2 million liability.

In 2005 our Canadian subsidiary entered into three foreign currency forward contracts to cover its debt obligations under a U.S. Dollar denominated loan. These forward contracts will reduce the exposure to fluctuations in foreign currency exchange rates, since gains and losses on these contracts offset losses and gains on the underlying positions. We have elected not to treat these instruments as hedges for accounting purposes and, accordingly, both realized and unrealized gains and losses on these instruments have been recorded in miscellaneous income and expense on our Canadian subsidiary’s general ledger.

All of our $25.2 million of long-term debt is denominated in U.S. Dollars and carries fixed interest. We base the fair value of our long-term debt on market, or dealer quotes. The difference between fair and carrying values of our financial instruments, other than the swap, were not material at the balance sheet dates.

Item 4 – Internal Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. This information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, including our principal executive officer and our principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures within 90 days of the filing date of this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in alerting them on a timely basis to material information required to be disclosed in our periodic filings.

As a result of the material weakness identified at October 1, 2005 management has instituted procedures to verify that inventory reconciliations are completed on a timely basis and operating effectively. We have made the appropriate changes to our internal controls and now all accounts are reconciled on a timely basis.

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PART II — OTHER INFORMATION

Item 1 – Legal Proceedings

We indemnify certain customers with regard to product liability. We have insurance policies to cover this exposure, which includes a minimal deductible to be paid by us.

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PART II — OTHER INFORMATION

Item 6 – Exhibits

Exhibits

Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by Philippe Lemaitre – President and C.E.O.

Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by Robert H. Fisher – Vice President, Finance and Chief Financial Officer.

Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Under the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, this report was signed on behalf of the Registrant by the authorized persons below.

WOODHEAD INDUSTRIES, INC.

Date: February 9, 2006

BY: /s/ Robert H. Fisher		BY: /s/ Joseph P. Nogal
Robert H. Fisher Vice President, Finance and C.F.O. (Principal Financial Officer)		Joseph P. Nogal Vice President, Treasurer/Controller (Principal Accounting Officer)