-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sd/ei0Xy2LhcVO4aRMhA5v8H1BTYnYkhrmy2Vfo/2rOVydbPfnEHWVM6vfRwKxdM f0pYkj2RcO8sKHao7gI2aQ== 0000108312-99-000002.txt : 19990215 0000108312-99-000002.hdr.sgml : 19990215 ACCESSION NUMBER: 0000108312-99-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WOODWARD GOVERNOR CO CENTRAL INDEX KEY: 0000108312 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL INDUSTRIAL APPARATUS [3620] IRS NUMBER: 361984010 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-08408 FILM NUMBER: 99533530 BUSINESS ADDRESS: STREET 1: 5001 N SECOND ST STREET 2: P O BOX 7001 CITY: ROCKFORD STATE: IL ZIP: 61125-7001 BUSINESS PHONE: 8158777441 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q { X } QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended December 31, 1998 Commission File #0-8408 OR { } TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 WOODWARD GOVERNOR COMPANY (Exact name of registrant as specified in its charter) Delaware 36-1984010 (State or other jurisdiction of I.R.S. Employer identification No.) incorporation or organization) 5001 North Second Street, Rockford, Illinois 61125-7001 (Address of principal executive offices) Registrant's telephone number - (815) 877-7441 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 As of January 31, 1999, 11,269,357 shares of common stock with a par value of .00875 cents per share were outstanding. WOODWARD GOVERNOR COMPANY FORM 10-Q For the Quarter Ended December 31, 1998 INDEX Description Part I. Financial Information Item 1. Financial Statements Statements of Consolidated Earnings for the three months ended December 31, 1998 and 1997 Consolidated Balance Sheets as of December 31, 1998 and September 30, 1998 Statements of Consolidated Cash Flows for the three months ended December 31, 1998 and 1997 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Part II. Other Information Item 6. Exhibits and Reports on Form 8-K. Signatures WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED EARNINGS for the three months ended December 31, 1998 and 1997 (in thousands except per share amounts) (Unaudited)
1998 1997 Net billings for products and services $144,908 $98,140 Costs and expenses: Cost of goods sold 110,015 73,059 Sales, service, and administrative expenses 19,850 18,719 Amortization of intangible assets 1,705 259 Interest expense 3,241 341 Interest income (168) (199) Other expense--net 939 487 Total costs and expenses 135,582 92,666 Earnings before income taxes and equity in loss of unconsolidated affiliate 9,326 5,474 Income taxes 3,730 2,135 Earnings before equity in loss of unconsolidated affiliate 5,596 3,339 Equity in loss of unconsolidated affiliate, net of tax 392 881 Net earnings $5,204 $2,458 Basic and diluted earnings per share $0.46 $0.21 Average number of basic shares outstanding 11,299 11,448 Average number of diluted shares outstanding 11,310 11,500 Cash dividends per share $0.2325 $0.2325 See accompanying notes to consolidated financial statements.
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars)
DECEMBER SEPTEMBER 31, 1998 30, 1998 (Unaudited) Assets Current assets: Cash and cash equivalents $18,024 $12,426 Accounts receivable, less allowance for losses of $4,143 for December and $4,451 for September 102,196 108,212 Inventories 105,568 106,404 Deferred income taxes 19,999 20,001 Total current assets 245,787 247,043 Property, plant and equipment, at cost: Land 6,499 6,127 Buildings and improvements 128,507 127,054 Machinery and equipment 216,935 215,358 Construction in progress 3,040 2,855 354,981 351,394 Less allowance for depreciation 226,568 221,342 Property, plant and equipment - net 128,413 130,052 Intangibles - net 160,446 162,229 Other assets 4,468 4,540 Deferred income taxes 19,648 19,571 Total assets $558,762 $563,435 Liabilities and shareholders' equity Current liabilities: Short-term borrowings $17,172 $12,927 Current portion of long-term debt 25,033 25,033 Accounts payable and accrued expenses 60,115 82,916 Taxes on income 6,929 6,661 Total current liabilities 109,249 127,537 Long-term debt, less current portion 185,685 175,685 Other liabilities 40,111 40,111 Commitments and contingencies - - Shareholders' equity represented by: Preferred stock - - Common stock 106 106 Additional paid-in capital 13,304 13,304 Unearned ESOP compensation (9,780) (9,723) Accumulated other comprehensive earnings 10,849 9,849 Retained earnings 229,408 226,736 243,887 240,272 Less treasury stock, at cost 20,170 20,170 223,717 220,102 Total liabilities and shareholders' equity $558,762 $563,435 See accompanying notes to consolidated financial statements.
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS for the three months ended December 30, 1998 and 1997 (in thousands of dollars) (Unaudited)
1998 1997 Cash flows from operating activities: Net earnings $ 5,204 $ 2,458 Adjustments to reconcile net earnings to net cash provided (used) by operating activities, Depreciation and amortization 8,470 6,404 Deferred income taxes (78) - Equity in loss of unconsolidated affiliate 643 1,445 Changes in assets and liabilities, net of effect of business acquisitions: Accounts receivable 5,968 20,741 Inventories 959 (2,586) Current liabilities, other than short-term borrowings and current portion of long-term debt (22,412) (20,349) Other, net 68 (1,308) Total adjustments (6,382) 4,347 Net cash provided by (used in) operating activities (1,178) 6,805 Cash flows from investing activities: Payments for purchase of property, plant, and equipment (5,316) (4,677) Investment in unconsolidated affiliate (575) (1,300) Other 770 67 Net cash used in investing activities (5,121) (5,910) Cash flows from financing activities: Cash dividends paid (2,627) (2,662) Proceeds from sales of treasury stock - 24 Purchases of treasury stock - - Borrowings on revolving lines of credit 10,000 - Payments of long-term debt - - Net proceeds from short-term borrowings 4,279 512 Tax benefit applicable to ESOP dividend 95 93 Net cash provided by (used in) financing activities 11,747 (2,033) Effect of exchange rate changes on cash 150 (1,685) Net change in cash and cash equivalents 5,598 (2,823) Cash and cash equivalents, beginning of year 12,426 14,999 Cash and cash equivalents, end of period $18,024 $12,176 Supplemental cash flow information: Interest expense paid $ 2,982 $ 235 Income taxes paid $ 6,057 $ 3,629 See accompanying notes to consolidated financial statements.
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) The consolidated balance sheet as of December 31, 1998, and the statements of consolidated earnings and cash flows for the three month periods ended December 31, 1998 and 1997, have been prepared by Woodward Governor Company (the company), without audit. The September 30, 1998 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Information furnished in this 10-Q report is based in part on approximations and is subject to year-end adjustment and audit. The figures do reflect all adjustments necessary, in the opinion of management, to present fairly the company's financial position as of December 31, 1998, and the results of its operations for the three months ended December 31, 1998 and 1997, and cash flows for the three months then ended. All such adjustments are of a normal and recurring nature. The statements have been prepared in accordance with accounting policies set forth in the Company's 1998 Annual Report on Form 10-K and should be read in conjunction with the Notes to Consolidated Financial Statements therein. The statement of consolidated earnings for the three month period ended December 31, 1998 is not necessarily indicative of the results to be expected for other interim periods or for the full year. (2) The following is a reconciliation of the numerators and denominators for the computation of basic and diluted earnings per share:
Three months ended December 31, (in thousands except per share amounts) 1998 1997 Net earnings (numerator) $ 5,204 $ 2,458 Basic Earnings per Share: Weighted average number of common shares (denominator) 11,299 11,448 Basic per share amount $.46 $ .21 Diluted Earnings per Share: Weighted average number of common shares 11,299 11,448 Effect of dilutive securities: Stock options 11 52 Diluted weighted average number of common shares (denominator) 11,310 11,500 Diluted per share amount $.46 $ .21
The following options to purchase common stock were outstanding during the quarters ended December 31, 1998 and 1997 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 quarter:
Three months ended December 31, 1998 1997 Exercise Number of Exercise Number of Price Shares Price Shares 23.500 155,400 33.750 1,000 30.954 12,600 34.875 20,000 32.000 55,701 32.250 138,340 33.750 1,000 34.875 20,000
3) Property, plant, and equipment placed in service after September 30, 1998 are depreciated using the straight-line method of depreciation over the estimated useful lives of the assets. Assets placed in service as of and prior to September 30, 1998 are depreciated principally using the declining-balance method. This change in accounting principle conformed the company policy to common industry practice. It should also better reflect improvements in preventative maintenance practices that have generally resulted in more uniform productive capacities and maintenance costs of machinery and equipment over the useful life of an asset. Although the effect on net earnings of this change will be based on the level of future capital spending, the change is expected to improve after- tax results by approximately $700,000 for the year ended September 30, 1999. (4) The company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", as of October 1, 1998. This Statement requires that all items recognized under accounting standards as components of comprehensive earnings be reported in an annual financial statement that is displayed with the same prominence as other annual financial statements. Currency translation adjustments, which prior to adoption were reported by the company separately in shareholders' equity, are now included in other comprehensive earnings. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. The company's total comprehensive earnings were as follows:
Three months ended December 31, (in thousands except per share amounts) 1998 1997 Net earnings $5,204 $2,458 Other comprehensive earnings (loss) 1,000 (818) Total comprehensive earnings $6,204 $1,640
PART I - ITEM 2 WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The first quarter of fiscal 1999 reflects progress in broadening the company's revenue base and improving profitability when compared to the results reported for the same period a year ago. Lower than anticipated shipments, coupled with costs that do not vary with shipment levels, were the principal reasons for the lower results last year. Results of Operations For the three-month period ended December 31, 1998, net billings for products and services were $144,908,000, up 48 percent from $98,140,000 a year earlier. The increase was due to the acquisitions of Woodward FST, Inc. and Baker Electrical Products, Inc. during the third quarter of fiscal 1998, as well as to growth in our existing businesses. Aircraft Engine Systems reported shipments of $80,513,000, up 91 percent from a year ago, driven by a stronger-than-expected contribution from FST and increased aftermarket revenues. FST, which experienced increased demand for fuel nozzles from both its core aircraft markets and the large power turbine segment of its industrial business, reported shipments of $32,267,000. In the Industrial Controls group, net billings for the quarter were $58,288,000, a 4 percent increase from a year ago, despite the effects on our customers of economic weakness in Asia and in the energy sector. Helping to offset those trends were accelerating demand for small power turbines and continued growth in many of our European markets. Net billings of the Automotive Products group, which was formed last May at the time of the Baker acquisition, were $6,107,000 for the quarter. In addition to serving as Woodward's center of excellence for high-volume, low- cost production, the new group targets innovative control systems for small industrial engines with less than 300 horsepower. On a consolidated basis, costs and expenses for the quarter increased 46 percent over the same quarter in fiscal 1998, less than the 48 percent growth in revenues. The resulting decrease in costs and expenses as a percentage of net billings primarily reflects the impact of revenue growth and productivity gains in Aircraft Engine Systems. Changes in depreciation methods as discussed in the Notes to the Consolidated Financial Statements, reduced expenses by approximately $175,000. Sales, service, and administrative costs increased only 6 percent over the same quarter last year. As a percent of billings, cost of goods sold was 76 percent versus 74 percent a year earlier. These higher product costs were primarily due to changes in product mix. Interest expense and amortization expense also increased, due to last year's acquisitions. Earnings before income taxes and equity in loss of the GENXON Power Systems, LLC joint venture were $9,326,000 in the first quarter compared with $5,474,000 a year earlier. For the three-month period ended December 31, 1998, the impact of the joint venture was a $392,000 loss, net of income tax benefits, compared to a $881,000 loss for the same quarter in the previous year. Development efforts of the joint venture continue at a slower rate. Including Woodward's share of GENXON's losses in both periods, net earnings were $5,204,000, or $0.46 per diluted share in the current quarter, compared with $2,458,000, or $0.21 per diluted share in the same quarter a year ago. The company's effective tax rate for the three months ended December 31, 1998 and 1997 was 40% and 39%, respectively. The effective tax rate for the fiscal year ended September 30, 1998 was 40.5%. Differences among the rates relate primarily to effects of foreign losses and foreign tax rate differences, and involve estimates. Our primary growth strategy is to expand Woodward's contribution to customers' engine and turbine programs--through acquisitions such as FST as well as through internal new product development. In addition, our ongoing focus on total customer satisfaction, incorporating aggressive company-wide goals for quality, truly responsive customer service, and cost management, is contributing to growth in both revenues and earnings. The response of our members to the Six Sigma methodology for continuous quality improvement has been very positive. The Six Sigma approach is grounded in the quantification of product and service performance as defined by customers, followed by disciplined data-gathering and statistical analysis, with the long-term goal of improving all business processes and driving the number of defects down to ultra-low levels. Six Sigma will not only enhance customer satisfaction with the company's products but will also provide the framework for continuous productivity and profitability improvements. Financial Condition The financial condition of the company remained strong as of September 30, 1998, with total shareholders' equity of $223,717,000, long-term debt of $185,685,000, and total assets of $558,762,000. Current assets at December 31, 1998 were $245,787,000, within 1 percent of the September 30, 1998 balance. Current liabilities at December 31, 1998 were $109,249,000, representing a decrease of $18,288,000 from the September 30, 1998 balance, primarily as a result of payment of the previously accrued expenses associated with member compensation and benefits. Property, plant, and equipment - net decreased by $1,639,000 to $128,413,000 at December 31, 1998 as compared to September 30, 1998 mainly due to capital expenditures being less than depreciation expense. Intangibles - net decreased by $1,783,000 to $160,446,000 at December 31, 1998 as compared to September 30, 1998 primarily due to amortization. Cash flows from operations and available revolving lines of credit are expected to be adequate to meet the company's operating, investing, and financing cash requirements during 1999. However, certain provisions of current loan agreements could impact decisions involving relatively large business acquisitions. On January 19, 1999, the Board of Directors declared a quarterly dividend of twenty-three and one-quarter cents ($.2325) per share. The dividend is payable on March 1, 1999 to shareholders of record at the close of business on February 5, 1999. Year 2000 Readiness Woodward recognizes the potential problems associated with the year 2000. In May 1997, the company formed a task force, with representation from each business unit and location, to address this risk. The mission statement adopted by the task force is: We will provide year 2000 compliant products, work with customers who have existing products to validate year 2000 compliance, and provide other year 2000 services. We intend to provide uninterrupted, normal operation of business-critical systems at all Woodward locations before, during, and after the turn of the century and we will manage the problems associated with non-critical systems. In addition, we will encourage similar compliance from customers, suppliers, and partners as appropriate and we will work with them to achieve this goal. The company has identified its year 2000 risks in three categories: products, internal systems, and external noncompliance by partners and suppliers. The company has evaluated its manufactured products, has determined the year 2000 compliance of such products, and informed its customers and end- users through the company's internet website and by other appropriate means. As a stand-alone product and operating system, Woodward will continue to determine year 2000 compliance, by testing and other means, to validate our product's compliance. However, products with time-date function(s) have the capability of being programmed, configured or otherwise modified for their particular applications, prior to or following installation. Woodward may or may not have had any involvement in, or responsibility for, these modifications. Additionally, in certain cases, our systems have included auxiliary hardware and software (providing time- date functions) not manufactured by the company, but provided by third party suppliers. While Woodward remains committed to supporting and assisting its customers and end-users as they assess such systems, limitations imposed by license agreement restrictions, in some cases, and non-access to source code, in other cases, make it generally impossible for the company to determine (except by testing individual systems) the year 2000 compliance of third party supplied hardware and software not manufactured by the company. Regarding internal systems, inclusive of information systems, manufacturing equipment and facilities, the company has completed its awareness, assessment, inventory, and prioritization tasks. Most mission- critical systems are year 2000 compliant today. Those that are not have been scheduled for upgrade or remediation to be completed by March 1999. Testing of mission-critical systems and contingency plan development tasks are now planned to be completed during the second quarter of fiscal 1999. We are also contacting partners and suppliers with requests for their year 2000 project status to determine if they will be adversely affected by the year 2000 and consequently cause disruption to our operations. We will create contingency plans for critical partners and suppliers as necessary. The company has applied the newly available and beneficial provisions of the federal "Year 2000 Information and Readiness Disclosure Act" (the "Act"). Statements such as the mission statement and other comments above, should be regarded as being "Year 2000 Statements" and "Year 2000 Readiness Disclosures," as applicable, within the meaning of, and subject to, the exclusions prescribed by the Act. External costs of corrective efforts, principally system reprogramming and upgrades, are not anticipated to be material and are currently estimated to be less than $1,000,000. Total external costs incurred for corrective efforts through December 31, 1998 were $35,000, with remaining budgeted year 2000 costs anticipated to be incurred in fiscal 1999. Even though management feels that planned corrective efforts should adequately address year 2000 issues, there can be no assurance that unforeseen difficulties will not arise. There is no assurance that the failure of any external party to resolve its year 2000 issues would not have an adverse effect on the company. Euro Introduction The company does not expect the recent introduction of the Euro by the European Monetary Union to have any significant impact on competitive position or operations. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income" to be effective in fiscal year 1999. This statement which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in the financial statements, was adopted on October 1, 1998. Related disclosures have been included in the Notes to the Consolidated Financial Statements as of and for the three months ended December 31, 1998. Also in June, 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", effective in fiscal year 1999. This statement revises standards for public companies to report information about segments of their business and also requires disclosure of selected segment information in quarterly financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The company has not yet determined the impact SFAS No. 131 may have on disclosures in the consolidated financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective in fiscal year 2000. This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. Among other requirements, it requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative. The company has not yet determined the impact this new statement may have on disclosures in the consolidated financial statements. Forward-looking Statements This quarterly report contains forward-looking statements, including financial projections, management plans and objectives for future operations, expectations of future economic performance, and various other assumptions relating to the future. While such statements reflect management's current expectations, all such statements involve risks and uncertainties. Actual results could differ materially from projections or any other forward-looking statement. Important factors that could cause results to differ materially from those projected or otherwise stated include the following: unanticipated global or regional economic developments, particularly in, but not limited to, Asia; changes in business cycles of particular industries served by our company; fluctuations in currency exchange rates of U.S. and foreign countries, primarily those located in Europe and Asia; fluctuations in interest rates, primarily LIBOR, which affect the cost of borrowing under the company's lines of credit facilities; timing and acceptance of new products and product enhancements; competitor actions that adversely impact company orders or pricing; adverse changes in the business acquisition climate; effects of any business acquisitions or divestitures; changes in U.S. and other country laws and regulations involving acquisitions, the environment, and taxes; relative success of quality and productivity initiatives, such as the Six Sigma initiative; business interruptions caused by incomplete or ineffective remediation of computer problems associated with the year 2000 throughout the company's supply chain; the outlook for GENXON products and markets and its funding requirements; unusual or extraordinary events or developments involving litigation or other potential liabilities. PART I - ITEM 3 WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the quantitative and qualitative disclosures about market risk from the end of the preceding fiscal year as reported in Form 10-K for the fiscal year ended September 30, 1998. PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 27. Financial Data Schedule (b) No Form 8-K was filed for the quarter ended December 31, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WOODWARD GOVERNOR COMPANY February 11, 1999 /s/ John A. Halbrook John A. Halbrook, Chairman and Chief Executive Officer /s/ Stephen P. Carter February 11, 1999 Stephen P. Carter, Vice President, Chief Financial Officer and Treasurer EX-27 2
5 This schedule contains summary financial information extracted from the Consolidated Financial Statements for the first quarter ended December 31, 1998, included herein and is qualified in its entirety by reference to such financial statements. 1000 3-MOS SEP-30-1999 DEC-31-1998 18024 0 106339 4143 105568 245787 354981 226568 558762 109249 185685 0 0 106 223611 558762 144908 144908 110015 131570 771 0 3241 9326 3730 5596 0 0 0 5204 .46 .46
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