e10vq

10-Q 1 c97168e10vq.htm FORM 10-Q e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended June 30, 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 July 22, 2005, 11,465,639 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 6.	Exhibits		25

Signatures			26

PART I — FINANCIAL INFORMATION


Item 1.	*Financial Statements*

Statements of Consolidated Earnings


	*Woodward Governor Company and Subsidiaries*


			Three Months Ended
			June 30,

			2005			2004

			(Unaudited)
			(In thousands except per
			share amounts)
Net sales			$	210,252		$	180,496

Costs and expenses:
	Cost of goods sold			158,867			135,428
	Selling, general, and administrative expenses			19,427			19,311
	Research and development costs			12,811			10,515
	Amortization of intangible assets			1,770			1,713
	Curtailment gain			(7,825	)		—
	Interest expense			1,461			1,372
	Interest income			(478	)		(135	)
	Other income			(1,947	)		(968	)
	Other expense			678			42

		Total costs and expenses		184,764			167,278

Earnings before income taxes				25,488			13,218
Income taxes				5,742			5,005

Net earnings			$	19,746		$	8,213

Earnings per share:
Basic			$	1.73		$	0.73
Diluted				1.68			0.71

Weighted-average number of shares outstanding:
Basic				11,423			11,299
Diluted				11,730			11,608

Cash dividends per share			$	0.25		$	0.24

See accompanying Notes to Consolidated Financial Statements.

Statements of Consolidated Earnings


	*Woodward Governor Company and Subsidiaries*


			Nine Months Ended
			June 30,

			2005			2004

			(Unaudited)
			(In thousands except per
			share amounts)
Net sales			$	610,196		$	512,420

Costs and expenses:
	Cost of goods sold			459,660			383,180
	Selling, general, and administrative expenses			57,683			54,221
	Research and development costs			35,106			29,310
	Amortization of intangible assets			5,326			5,143
	Curtailment gain			(7,825	)		—
	Interest expense			4,355			4,067
	Interest income			(1,515	)		(921	)
	Other income			(8,318	)		(2,827	)
	Other expense			906			419

		Total costs and expenses		545,378			472,592

Earnings before income taxes				64,818			39,828
Income taxes				20,098			15,117

Net earnings			$	44,720		$	24,711

Earnings per share:
Basic			$	3.93		$	2.19
Diluted				3.83			2.14

Weighted-average number of shares outstanding:
Basic				11,380			11,279
Diluted				11,686			11,543

Cash dividends per share			$	0.74		$	0.72

See accompanying Notes to Consolidated Financial Statements.

Consolidated Balance Sheets


	*Woodward Governor Company and Subsidiaries*


			At		At
			June 30,		September 30,
			2005		2004

			(Unaudited)
			(In thousands except
			per share amounts)
ASSETS
Current assets:
	Cash and cash equivalents		$	74,671	$	48,895
	Accounts receivable, less allowance for losses of $2,183 for June and $2,836 for September			94,812		99,277
	Inventories			155,423		138,708
	Income taxes receivable			3,811		—
	Deferred income taxes			19,239		16,852
	Other current assets			4,455		5,064

		Total current assets		352,411		308,796

Property, plant, and equipment — net				111,345		117,310
Goodwill				131,341		131,542
Other intangibles — net				80,348		85,711
Deferred income taxes				—		4,318
Other assets				10,196		6,617

Total assets			$	685,641	$	654,294


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Short-term borrowings		$	6,291	$	5,833
	Current portion of long-term debt			14,435		956
	Accounts payable			34,421		35,207
	Accrued liabilities			59,585		65,573
	Income taxes payable			—		3,703

		Total current liabilities		114,732		111,272

Long-term debt, less current portion				73,985		88,452
Other liabilities				68,064		68,709
Deferred income taxes				1,301		—
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			24,892		15,878
	Accumulated other comprehensive earnings			12,101		12,038
	Deferred compensation			5,369		4,461
	Retained earnings			417,759		381,458

				460,227		413,941
Less: Treasury stock, at cost, 709 shares for June and 844 shares for September				27,299		23,619
Treasury stock held for deferred compensation				5,369		4,461

		Total shareholders’ equity		427,559		385,861

Total liabilities and shareholders’ equity			$	685,641	$	654,294

See accompanying Notes to Consolidated Financial Statements.

Statements of Consolidated Cash Flows


	*Woodward Governor Company and Subsidiaries*


			Nine Months
			Ended
			June 30,

			2005			2004

			(Unaudited)
			(In thousands)
Cash flows from operating activities:
Net earnings			$	44,720		$	24,711

Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization				24,286			24,923
Curtailment gain				(7,825	)		—
Net loss (gain) on sale of property, plant, and equipment				(595	)		97
Deferred income taxes				3,322			150
Reclassification of unrealized losses on derivatives to earnings				240			223
Changes in operating assets and liabilities:
	Accounts receivable			3,894			(3,020	)
	Inventories			(16,718	)		(13,576	)
	Accounts payable and accrued liabilities			(5,717	)		9,910
	Income taxes payable			(7,786	)		8,890
	Other — net			7,792			5,719

		Total adjustments		893			33,316

Net cash provided by operating activities				45,613			58,027

Cash flows from investing activities:
Payments for purchase of property, plant, and equipment				(16,325	)		(14,015	)
Proceeds from sale of property, plant, and equipment				3,246			253
Business acquisitions, net of cash acquired				—			(2,310	)
Receipts associated with business acquisitions				—			389

Net cash used in investing activities				(13,079	)		(15,683	)

Cash flows from financing activities:
Cash dividends paid				(8,419	)		(8,120	)
Proceeds from sales of treasury stock				5,633			2,225
Purchases of treasury stock				(3,791	)		(1,547	)
Net proceeds (payments) from borrowings under revolving lines				609			(30,640	)

Net cash used in financing activities				(5,968	)		(38,082	)

Effect of exchange rate changes on cash				(790	)		(459	)

Net change in cash and cash equivalents				25,776			3,803
Cash and cash equivalents, beginning of year				48,895			24,058

Cash and cash equivalents, end of period			$	74,671		$	27,861

Supplemental cash flow information:
Interest expense paid			$	5,411		$	5,639
Income taxes paid				22,122			10,761
Noncash investing:
Liabilities assumed in business acquisition				—			338

See accompanying Notes to Consolidated Financial Statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)	Overview:

The consolidated balance sheet as of June 30, 2005, the statements of consolidated earnings for the three and nine-month periods ended June 30, 2005 and 2004, and the statements of consolidated cash flows for the nine-month periods ended June 30, 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 June 30, 2005, the results of its operations for the three and nine-month periods ended June 30, 2005 and 2004, and its cash flows for the nine-month periods ended June 30, 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 nine-month periods ended June 30, 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						Nine Months
		Ended						Ended
		June 30,						June 30,

		2005			2004			2005			2004

		(In thousands except per share amounts)
Reported net earnings		$	19,746		$	8,213		$	44,720		$	24,711
Stock-based compensation expense using the fair value method, net of income tax			(377	)		(355	)		(1,080	)		(1,044	)

Pro forma net earnings		$	19,369		$	7,858		$	43,640		$	23,667

Reported net earnings per share amounts:
	Basic	$	1.73		$	0.73		$	3.93		$	2.19
	Diluted		1.68			0.71			3.83			2.14

Pro forma net earnings per share amounts:
	Basic	$	1.70		$	0.70		$	3.83		$	2.10
	Diluted		1.66			0.68			3.75			2.06


(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 $0.02 per diluted share for the quarter ended June 30, 2005, $0.08 per diluted share for the nine months ended June 30, 2005, and $0.11 per diluted share for the year ended September 30, 2004. We expect to adopt this revised Statement effective with our fiscal year beginning October 1, 2005.


(5)	Income taxes:

Income taxes in the three months and nine months ended June 30, 2005, were affected by changes in estimates of income taxes for previous periods. The changes in estimates resulted from increases in the amount of certain credits claimed or expected to be claimed, and changes in the amount of certain deductions taken or expected to be taken. A reconciliation of our effective income tax rate for the year ended September 30, 2004, to the effective income tax rates for the three months and nine months ended June 30, 2005, follows:


	Three Months			Nine Months
	Ended June 30,			Ended June 30,
(Percent of pretax earnings)	2005			2005

Effective rate for the year ended September 30, 2004		36.3			36.3
Change in estimates of taxes for previous periods		(11.5	)		(3.0	)
Change in expected tax rate applicable for current periods		(2.3	)		(2.3	)

Effective rate		22.5			31.0

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(6) Earnings per share:


		Three Months				Nine Months
		Ended June 30,				Ended June 30,

		2005		2004		2005		2004

		(In thousands, except per share amounts)
Net earnings(A)		$	19,746	$	8,213	$	44,720	$	24,711

Determination of shares:
	Weighted-average shares of common stock outstanding(B)		11,423		11,299		11,380		11,279
	Assumed exercise of stock options		307		309		306		264
	Weighted-average shares of common stock outstanding assuming dilution(C)		11,730		11,608		11,686		11,543

Earnings before cumulative effect of accounting change:
	Basic per share amount (A/ B)	$	1.73	$	0.73	$	3.93	$	2.19
	Diluted per share amount (A/ C)	$	1.68	$	0.71	$	3.83	$	2.14

The following stock options were outstanding during the three and nine months ended June 30, 2005 and 2004, but were not included in the computation of diluted earnings per share because the options’ exercise prices were greater than the average market price of the common shares during the respective periods:


	Three Months				Nine Months
	Ended June 30,				Ended June 30,

	2005		2004		2005		2004

Options		—		11,660		102,300		15,391
Weighted-average exercise price			$	70.37	$	71.48	$	67.75

(7) Inventories:


	At		At
	June 30,		September 30,
	2005		2004

	(In thousands)
Raw materials	$	4,783	$	3,304
Component parts		98,271		88,760
Work in process		31,375		30,237
Finished goods		20,994		16,407

	$	155,423	$	138,708

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(8) Property, plant, and equipment:


	At		At
	June 30,		September 30,
	2005		2004

	(In thousands)
Land	$	9,976	$	10,380
Buildings and equipment		150,915		149,361
Machinery and equipment		241,888		237,677
Construction in progress		4,238		2,044

		407,017		399,462
Less accumulated depreciation		295,672		282,152

Property, plant, and equipment — net	$	111,345	$	117,310


	Three Months				Nine Months
	Ended				Ended
	June 30,				June 30,

	2005		2004		2005		2004

	(In thousands)
Depreciation expense	$	5,794	$	6,196	$	18,960	$	19,780

(9) Goodwill:


		(In thousands)

Industrial Controls:
	Balance at September 30, 2004	$	69,420
	Foreign currency exchange rate changes		(201	)

	Balance at June 30, 2005	$	69,219

Aircraft Engine Systems:
	Balance at September 30, 2004 and June 30, 2005	$	62,122

Consolidated:
	Balance at September 30, 2004	$	131,542
	Foreign currency exchange rate changes		(201	)

	Balance at June 30, 2005	$	131,341

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(10) Other intangibles — net:


			At			At
			June 30,			September 30,
			2005			2004

			(In thousands)
Industrial Controls:
	Customer relationships:
		Amount acquired	$	37,387		$	37,387
		Accumulated amortization		(8,164	)		(6,215	)

				29,223			31,172

	Other:
		Amount acquired		31,347			31,502
		Accumulated amortization		(9,587	)		(7,490	)

				21,760			24,012

	Total		$	50,983		$	55,184

Aircraft Engine Systems:
	Customer relationships:
		Amount acquired	$	28,547		$	28,547
		Accumulated amortization		(6,741	)		(6,027	)

				21,806			22,520

	Other:
		Amount acquired		11,785			11,785
		Accumulated amortization		(4,226	)		(3,778	)

				7,559			8,007

	Total		$	29,365		$	30,527

Consolidated:
	Customer relationships:
		Amount acquired	$	65,934		$	65,934
		Accumulated amortization		(14,905	)		(12,242	)

				51,029			53,692

	Other:
		Amount acquired		43,132			43,287
		Accumulated amortization		(13,813	)		(11,268	)

				29,319			32,019

	Total		$	80,348		$	85,711

Amortization expense associated with current intangibles is expected to be approximately $7,100,000 for 2005, $7,000,000 for 2006, $6,600,000 in 2007, $5,900,000 for 2008, and $5,500,000 for 2009.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(11) Accrued liabilities:


	At		At
	June 30,		September 30,
	2005		2004

	(In thousands)
Salaries and other member benefits	$	35,054	$	41,236
Warranties		5,680		6,401
Taxes, other than on income		3,588		4,214
Deferred compensation		2,350		2,278
Other items — net		12,913		11,444

	$	59,585	$	65,573

Salaries and other member benefits include accrued termination benefits totaling $6,527,000 at June 30, 2005 and $12,000,000 at September 30, 2004. These accrued termination benefits were for the Industrial Controls segment. Changes in accrued termination benefits for the nine months ended June 30, 2005 were as follows:


			(In thousands)

Industrial Controls:
	Balance at September 30, 2004		$	12,000
	Expense:
		Cost of goods sold		1,294
		Selling, general, and administrative expenses		53
	Payments			(4,674	)
	Accrual adjustments			(2,204	)
	Foreign currency exchange rate changes			58

	Balance at June 30, 2005		$	6,527

The amounts expensed during the nine-month period were for termination benefits earned by members over the period and are primarily related to the consolidation of two European manufacturing operations with existing operations. This action is being taken to streamline the organization by eliminating redundant manufacturing operations and is expected to be substantially complete by March 31, 2006. The total expense for this action is currently estimated to be approximately $15,400,000, of which $13,969,000 was recognized through June 30, 2005. The remaining estimated amount of $1,431,000 is for termination benefits that will be earned by members over their remaining service period and for other costs primarily associated with moving equipment and inventory to other locations. The accrual adjustments reflected in the preceding table were made as a result of changes in estimates for termination benefits payable. These estimates changed because of voluntary member resignations, the currently expected transfer of members to a third-party distributor, and more members electing early retirement options at a lower cost.

Provisions of our sales agreements include product warranties customary to such agreements. We establish accruals for specifically identified warranty issues that are probable to result in future costs. We also accrue for warranty costs on a non-specific basis whenever past experience indicates a normal and predictable

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

pattern exists. A reconciliation of accrued product warranties from September 30, 2004, to June 30, 2005, follows:


	(In thousands)

Balance at September 30, 2004	$	6,401
Accruals related to warranties issued during the period		3,900
Accruals related to pre-existing warranties		(1,073	)
Settlements of amounts accrued		(3,529	)
Foreign currency exchange rate changes		(19	)

Balance at June 30, 2005	$	5,680


(12)	Retirement benefits:

We provide various benefits to eligible members of our company, including pension benefits associated with defined benefit plans and retirement healthcare benefits. Components of net periodic benefit cost and company contributions for these plans were as follows:


		Three Months						Nine Months
		Ended						Ended
		June 30,						June 30,

		2005			2004			2005			2004

		(In thousands)
Retirement pension benefits — United States:
Components of net periodic benefit cost:
	Interest cost	$	270		$	220		$	810		$	802
	Expected return on plan assets		(272	)		(407	)		(816	)		(707	)
	Recognized losses		37			10			111			128

Net periodic benefit cost		$	35		$	(177	)	$	105		$	223

Contributions by the company		$	—		$	—		$	—		$	—

Retirement pension benefits — other countries:
Components of net periodic benefit cost:
	Service cost	$	471		$	427		$	1,480		$	1,264
	Interest cost		506			464			1,581			1,367
	Expected return on plan assets		(498	)		(415	)		(1,556	)		(1,222	)
	Amortization of unrecognized transition obligation		23			24			74			73
	Recognized losses		132			136			414			397
	Recognized prior service costs		(2	)		(2	)		(6	)		(7	)

Net periodic benefit cost		$	632		$	634		$	1,987		$	1,872

Contributions by the company		$	324		$	312		$	1,029		$	874

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


(12)	Retirement benefits (continued):


		For the						For the
		Three Months						Nine Months
		Ended						Ended
		June 30,						June 30,

		2005			2004			2005			2004

		(In thousands)
Retirement healthcare benefits:
Components of net periodic benefit cost:
	Service cost	$	285		$	472		$	1,611		$	1,670
	Interest cost		845			901			3,054			3,179
	Recognized losses		407			222			1,107			1,022
	Recognized prior service costs		(461	)		(127	)		(715	)		(381	)
	Curtailment gain		(7,825	)		—			(7,825	)		—

Net periodic benefit cost		$	(6,749	)	$	1,468		$	(2,768	)	$	5,490

Contributions by the company		$	677		$	666		$	1,598		$	1,820

The curtailment gain reflected above is related to amendments of one of our retirement healthcare benefit plans reducing the number of individuals who will qualify for benefits in future periods. These amendments will also reduce our future net periodic benefit cost over amounts that would have been recognized prior to the amendments. We currently expect the net periodic benefit cost associated with our retirement healthcare benefits to be approximately $620,000 over the remainder of 2005.


(13)	Accumulated other comprehensive earnings:

Accumulated other comprehensive earnings, which totaled $12,101,000 at June 30, 2005, consisted of the following items:


		At or for the
		Nine Months
		Ended
		June 30, 2005

		(In thousands)
Accumulated foreign currency translation adjustments:
	Balance at beginning of year	$	14,239
	Translation adjustments		(146	)
	Taxes associated with translation adjustments		56

	Balance at end of period	$	14,149

Accumulated unrealized derivative losses:
	Balance at beginning of year	$	(861	)
	Reclassification to interest expense		240
	Taxes associated with interest reclassification		(91	)

	Balance at end of period	$	(712	)

Accumulated minimum pension liability adjustments:
	Balance at beginning of year	$	(1,340	)
	Minimum pension liability adjustment		7
	Taxes associated with minimum pension liability adjustments		(3	)

	Balance at end of period	$	(1,336	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


(14)	Total comprehensive earnings:


		Three Months Ended						Nine Months Ended
		June 30,						June 30,

		2005			2004			2005			2004

		(In thousands)
Net earnings		$	19,746		$	8,213		$	44,720		$	24,711
Other comprehensive earnings:
	Foreign currency translation adjustments		(2,133	)		(860	)		(90	)		2,304
	Reclassification of unrealized losses on derivatives to earnings		51			48			149			139
	Minimum pension liability adjustment		—			—			4			—

Total comprehensive earnings		$	17,664		$	7,401		$	44,783		$	27,154

(15) Contingencies:

We are currently involved in pending or threatened litigation or other legal proceedings regarding employment, product liability, and contractual matters arising from the normal course of business. We accrued for individual matters that we believe are likely to result in a loss when ultimately resolved using estimates of the most likely amount of loss. There are also individual matters that we believe the likelihood of a loss when ultimately resolved is less than likely but more than remote, which were not accrued. While it is possible that there could be additional losses that have not been accrued, we currently believe the possible additional loss in the event of an unfavorable resolution of each matter is less than $5,000,000 in the aggregate.

We also file income tax returns in various jurisdictions worldwide, which are subject to audit. We have accrued for our estimate of the most likely amount of expenses that we believe will result from income tax audit adjustments.

We do not recognize contingencies that might result in a gain until such contingencies are resolved and the revenues are realized.

In the event of a change in control of the company, we may be required to pay termination benefits to certain executive officers.

(16) Segment information:


		Three Months Ended				Nine Months Ended
		June 30,				June 30,

		2005		2004		2005		2004

		(In thousands)
Industrial Controls:
	External net sales	$	136,592	$	113,130	$	394,978	$	314,781
	Intersegment sales		317		273		787		585
	Segment earnings		9,469		2,692		24,619		12,657

Aircraft Engine Systems:
	External net sales	$	73,660	$	67,366	$	215,218	$	197,639
	Intersegment sales		609		1,102		2,421		1,711
	Segment earnings		14,321		15,162		48,555		40,262

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The difference between the total of segment earnings and the statements of consolidated earnings follows:


	Three Months Ended						Nine Months Ended
	June 30,						June 30,

	2005			2004			2005			2004

	(In thousands)
Total segment earnings	$	23,790		$	17,854		$	73,174		$	52,919
Unallocated corporate expenses		(5,144	)		(3,399	)		(13,341	)		(9,945	)
Curtailment gain		7,825			—			7,825			—
Interest expense and income		(983	)		(1,237	)		(2,840	)		(3,146	)

Consolidated earnings before income taxes	$	25,488		$	13,218		$	64,818		$	39,828

Segment assets were as follows:


	At		At
	June 30,		September 30,
	2005		2004

	(In thousands)
Industrial Controls	$	367,215	$	364,584
Aircraft Engine Systems		203,778		205,580


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

We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations. This discussion should be read with the consolidated financial statements.

Overview

Our business is focused on the design, manufacture, and servicing of energy control systems and components for aircraft and industrial engines, turbines, and other power equipment. We use technologies in the areas of fuel systems, combustion control, electronic controls and software, and systems integration to develop components and integrated systems that we sell to OEMs (original equipment manufacturers) for use in power equipment for the power generation, process industries, transportation, and aerospace markets.

We have two operating segments — Industrial Controls and Aircraft Engine Systems. Industrial Controls provides energy control systems and components primarily to OEMs of industrial engines, turbines, and other power equipment. Aircraft Engine Systems provides energy control systems and components primarily to OEMs of aircraft turbines. We use segment information internally to assess the performance of each segment and to make decisions on the allocation of resources.

In recent years there has been volatility in the markets we serve and our results reflect that volatility. We have seen improved market conditions that began in the second half of 2004, which largely offset the declines that began in 2002. Our third quarter and first nine months of 2005 reflected improved market conditions over the corresponding periods a year ago.

The changes in our markets have affected our decisions in managing our workforce. We are implementing actions in 2005 and the first half of 2006 to consolidate certain manufacturing operations in The Netherlands, United Kingdom, and Japan with existing operations in the United States, Germany, and China. Once fully implemented, we expect these actions will generate annual savings of $9 million to $11 million on a pretax basis. The related cost for the actions is currently estimated at $15.4 million. We recognized approximately $14.0 million of this cost through the third fiscal quarter of 2005.

Our effective income tax rate for the three and nine months ended June 30, 2004, is below the rate that we expect will apply to the full year as a result of changes in estimates of income taxes provided for previous periods. The changes in estimates resulted from increases in the amount of certain credits claimed or expected to be claimed, and changes in the amount of certain deductions taken or expected to be taken. For the three-month period, the changes in estimates reduced reported income tax expense by $2.9 million, or the equivalent of 11.5% of pretax earnings. For the nine-month period, the changes in estimates reduced reported income tax expense by $1.9 million, or the equivalent of 3.0% of pretax earnings. We anticipate the applicable tax rate for our fourth quarter will be 34.0%.

In the sections that follow, we are providing information to help you better understand factors that may affect our future results, our critical accounting policies and market risks, our results of operations and financial condition, and the effects of recent accounting pronouncements.

Factors That May Affect Future Results

This Form 10-Q contains forward-looking statements, including:


	•	Projections of sales, earnings, cash flows, or other financial items;

	•	Descriptions of our plans and objectives for future operations;

	•	Forecasts of future economic performance; and

	•	Descriptions of assumptions underlying the above items.

Forward-looking statements do not reflect historical facts. Rather, they are statements about future events and conditions and often include words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,”

“plan,” “project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” or similar expressions. Such statements reflect our expectations about the future only as of the date they are made. We are not obligated to, and we might not, update our forward-looking statements to reflect changes that occur after the date they are made. Furthermore, actual results could differ materially from projections or any other forward-looking statement regardless of when they are made.

Important factors that could individually, or together with one or more other factors, affect our business, results of operations and/or financial condition are discussed more fully in the Management Discussion and Analysis on pages 15-16 of our 2004 annual report to shareholders, which was filed with our Form 10-K/ A Amendment No. 1 for the year ended September 30, 2004.

Critical Accounting Policies

We consider the accounting policies used in preparing our financial statements to be critical accounting policies when they are both important to the portrayal of our financial condition and results of operation, and require us to make difficult, subjective, or complex judgments. Critical accounting policies normally result from the need to make estimates about the effect of matters that are inherently uncertain. Management has discussed the development and selection of our critical accounting policies with the audit committee of the company’s Board of Directors. In each of the areas that were identified as critical accounting policies, our judgments, estimates, and assumptions are impacted by conditions that change over time. As a result, in the future there could be changes in our assets and liabilities, increases or decreases in our expenses, and additional losses or gains that are material to our financial condition and results of operations. Our critical accounting policies are discussed more fully in the Management Discussion and Analysis on pages 16-19 of our 2004 annual report to shareholders, which was filed with our Form 10-K/ A Amendment No. 1 for the year ended September 30, 2004.

Market Risks

Our long-term debt is sensitive to changes in interest rates. Also, assets, liabilities, and commitments that are to be settled in cash and are denominated in foreign currencies for transaction purposes are sensitive to changes in currency exchange rates. These market risks are discussed more fully in the Management Discussion and Analysis on page 19 of our 2004 annual report to shareholders, which was filed with our Form 10-K/ A Amendment No. 1 for the year ended September 30, 2004. However, we currently do not have any existing interest rate swap agreements.

Results of Operations


		Three Months Ended				Nine Months Ended
		June 30,				June 30,

		2005		2004		2005		2004

		(In thousands)
Sales
External net sales:
	Industrial Controls	$	136,592	$	113,130	$	394,978	$	314,781
	Aircraft Engine Systems		73,660		67,366		215,218		197,639

Consolidated net sales		$	210,252	$	180,496	$	610,196	$	512,420

Consolidated net sales increased in both the three months and nine months ended June 30, 2005, as compared to the same periods a year ago. Industrial Controls benefited from a broad industrial recovery that encompassed power generation and transportation, including the mobile industrial and marine markets. In particular, we have experienced higher demand for large gas turbine combustion products — the area affected most by the severe market declines of 2002 and 2003 — in the first nine months this year as compared to last year. The highest levels of increased demand have occurred in Asia and Eastern Europe, which was driven by infrastructure improvement projects in those regions.

Aircraft Engine Systems’ improvements reflect the favorable trends in commercial aviation. We experienced modest growth in commercial OEM sales, as Boeing and Airbus ramped up their production levels for narrow and wide body aircraft. Also, there has been increased demand for commercial aftermarket spare parts and repair and overhaul services.


	Three Months Ended						Nine Months Ended
	June 30,						June 30,

	2005			2004			2005			2004

	(In thousands)
Costs and Expenses
Cost of goods sold	$	158,867		$	135,428		$	459,660		$	383,180
Sales, general, and administrative expenses		19,427			19,311			57,683			54,221
Research and development costs		12,811			10,515			35,106			29,310
Curtailment gain		(7,825	)		—			(7,825	)		—
All other expense items		3,909			3,127			10,587			9,629
Interest and other income		(2,425	)		(1,103	)		(9,833	)		(3,748	)

Consolidated costs and expenses	$	184,764		$	167,278		$	545,378		$	472,592

Cost of goods sold increased in both the three months and nine months ended June 30, 2005, compared to the same periods last year, primarily as a result of increased sales. For the quarter, cost of goods sold represented 75.6% of sales this year and 75.0% last year. For the nine months, cost of goods sold represented 75.3% of sales this year and 74.8% last year. As a percent of sales, Industrial Controls’ cost of goods sold are higher than Aircraft Engine Systems and, for both the three-month and nine-month periods, Industrial Controls sales increased at a greater rate than Aircraft Engine Systems.

Research and development increased in both the three months and nine months ended June 30, 2005, as compared to the same periods last year. An increase in the level of research and development activities began in the last half of fiscal 2004. We continue to work closely with our customers and actively pursue opportunities that require development of new components and systems for future engines and turbines.

Curtailment gain refers to the amount recognized in this year’s third quarter to account for the immediate effects of amendments to one of our retirement healthcare benefit plans. The amendment eliminated retirement healthcare benefits for members that will not attain age 55 and 10 years of service by January 1, 2006. In addition to the immediate recognition of a curtailment gain, our future net periodic benefit costs will be reduced from amounts that would have been recognized prior to the amendments. For the fourth quarter of fiscal 2005, we expect the reduction to be approximately $1.4 million.

Interest and other income increased in both the three months and nine months ended June 30, 2005, compared to the same periods last year. The three-month increase was primarily related to gains on the sale of equipment and higher interest income due to increased cash balances. These factors affected the nine-month period as well. In addition, this year’s nine-month period was affected by the sale of rights to our aircraft propeller synchronizer product line to an unrelated third party, which resulted in a pre-tax gain of $3.8 million. Prior to the sale, the product line generated annual sales of approximately $2.0 million.


	Three Months Ended						Nine Months Ended
	June 30,						June 30,

	2005			2004			2005			2004

	(In thousands)
Workforce Management Actions
Member termination benefits — Industrial Controls	$	469		$	—		$	1,341		$	151
Related costs of facility consolidation — Industrial Controls		943			—			943			—
Member termination benefits adjustments — Industrial Controls		(83	)		(348	)		(2,198	)		(431	)

Total workforce management costs	$	1,329		$	(348	)	$	86		$	(280	)

Workforce management costs in the three months and nine months ended June 30, 2005, are primarily related to the consolidation of manufacturing operations in The Netherlands and United Kingdom with existing operations in the United States and Germany. We are also consolidating a small manufacturing operation in Japan with an existing operation in China and are making sales force reductions in The Netherlands. These actions are discussed more fully in the Management Discussion and Analysis on pages 24-25 of our 2004 annual report to shareholders, which was filed with our Form 10-K/ A Amendment No. 1 for the year ended September 30, 2004.

The amounts reflected in the preceding table for fiscal 2005 include costs for termination benefits earned by members during the three and nine-month service periods ended June 30, 2005, and for adjustments of amounts previously accrued for these actions. The accrual adjustments were made as a result of changes in estimates for termination benefits payable. These estimates changed because of voluntary member resignations, the transfer of members to a third-party distributor, and more members electing early retirement options at a lower cost. The related costs of facility consolidation consist of such items as moving and installing equipment, moving inventory, and travel for those members being trained in the transferred manufacturing processes.

The total expense for these current actions is currently estimated to be approximately $15.4 million, of which $14.0 million has been recognized through June 30, 2005. By fiscal year, we recognized $13.8 million of expense in 2004 and $0.2 million of expense in the first nine months of 2005. The remaining estimated amount of $1.4 million is for termination benefits that will be earned by members over their remaining service period and for other costs primarily associated with moving inventory and equipment to other locations. We expect to expense the $1.4 million over the next three quarters.

Our cash expenses for the 2004 actions are expected to total $13.6 million, and have been or will be paid from available cash balances in 2005 and 2006 without the need for additional borrowings. The remaining $1.8 million was for non-cash contractual pension termination benefits, which was recognized in last fiscal year’s fourth quarter.

Once fully implemented, our annual savings are expected to range from $9.0 million to $11.0 million as compared to amounts that would have been incurred prior to the actions. These savings are primarily related to reduced personnel costs, although we anticipate some savings in travel and other costs due to the reduced headcount. Of the total savings, approximately 90% is expected to affect cost of goods sold and 10% selling, general, and administrative expenses. Although some savings have occurred in the third quarter of fiscal 2005, increased savings will begin to be recognized in the fourth quarter of 2005, increasing gradually through the end of the second quarter of 2006 when we expect to begin realizing the full savings level.

We currently plan to continue to use the facilities and equipment located in The Netherlands, United Kingdom, and Japan after the actions are completed. We own all three facilities, and each of them will have ongoing sales and service activities. In addition, the facility in the United Kingdom will remain a key development site for diesel fuel injection products. We expect to move manufacturing equipment used by the three locations to other facilities.

The amounts reflected in the preceding table for the three and nine months ended June 30, 2004, were related to actions initiated in fiscal 2003, discussed more fully in the Management Discussion and Analysis on pages 24-25 of our 2004 annual report to shareholders, which was filed with our Form 10-K/ A Amendment No. 1 for the year ended September 30, 2004. We attributed last year’s accrual reduction to increased production levels and the decision to retain certain members to meet increased demand.


		Three Months Ended						Nine Months Ended
		June 30,						June 30,

		2005			2004			2005			2004

		(In thousands)
Earnings
Segment earnings:
	Industrial Controls	$	9,469		$	2,692		$	24,619		$	12,657
	Aircraft Engine Systems		14,321			15,162			48,555			40,262

Total segment earnings			23,790			17,854			73,174			52,919
Nonsegment expenses			(5,144	)		(3,399	)		(13,341	)		(9,945	)
Curtailment gain			7,825			—			7,825			—
Interest expense and income			(983	)		(1,237	)		(2,840	)		(3,146	)

Consolidated earnings before income taxes			25,488			13,218			64,818			39,828
Income taxes			5,742			5,005			20,098			15,117

Consolidated net earnings		$	19,746		$	8,213		$	44,720		$	24,711

Industrial Controls’ segment earnings increased in both the three months and nine months ended June 30, 2005, as compared to the same periods last year. The effects of higher sales were partially offset by higher research and development expenses for both the three and nine-month periods this year as compared to last year. In addition, selling, general, and administrative expenses were lower for this year’s three-month period.

Industrial Controls’ gross margin (external net sales less external cost of goods sold) increased by approximately $6.2 million in this year’s third quarter as compared to the same quarter last year. For the first nine months, the increase was $15.4 million over last year. For both periods, the higher gross margins were due to the year-over-year increase in sales.

Industrial Controls’ research and development costs increased approximately $1.4 million in this year’s third quarter and $4.1 million in this year’s first nine months as compared to the same periods a year ago, reflecting higher development activity and normal variations in the timing of project expenditures.

Industrial Controls’ selling, general, and administrative expenses decreased approximately $1.5 million in this year’s third quarter and increased $0.3 million in this year’s first nine months as compared to the same periods a year ago. These changes are primarily attributable to normal variations in legal and other professional services and gains and losses related to transactions denominated in foreign currencies. As a percent of sales, these expenses were 8.0% in this year’s third quarter, down from 11.0% from the third quarter last year, and 8.8% in this year’s first nine months, down from 11.0% in last year’s first nine months.

Industrial Controls’ workforce management actions resulted in $1.3 million of expense in this year’s third quarter. Because of adjustments made in the second quarter, the actions resulted in only $0.1 million of expense in the nine months ended June 30, 2005. These actions are discussed more fully in a separate section of this management’s discussion and analysis.

Aircraft Engine Systems’ segment earnings decreased in the three months ended June 30, 2005. The effects of higher sales were offset by quarterly variations in sales mix, which resulted in lower comparative gross margins as a percent of sales, and increased product development activity. Segment earnings increased in the nine months ended June 30, 2005, as compared to the same period last year. The increase was due to higher sales and a gain on the sale of certain product line rights, which more than offset the costs of increased product development activity.

Aircraft Engine Systems sold the rights to its propeller synchronizer product line in the first quarter this year, generating a gain of $3.8 million. Prior to the sale, the product line generated annual sales of approximately $2.0 million.

Aircraft Engine Systems’ research and development increased approximately $0.9 million in this year’s third quarter and $1.7 million in this year’s first nine months as compared to the same periods a year ago, reflecting higher development activity and normal variations in the timing of project expenditures.

Nonsegment expenses increased in both the three months and nine months ended June 30, 2005, as compared to the same periods a year ago. The most significant reasons for the increases are due to the assessment and audit of internal controls over financial reporting, which is required by the Sarbanes-Oxley Act of 2002, and higher variable compensation expense.

Curtailment gain was discussed in another section of this management’s discussion and analysis.

Income taxes in the three months and nine months ended June 30, 2005, were affected by changes in estimates of income taxes for previous periods. The changes in estimates resulted from increases in the amounts of certain credits claimed or expected to be claimed, and changes in the amounts of certain deductions taken or expected to be taken. These changes reduced reported income tax expense by 11.5% of pretax earnings, or $2,923,000, in the three months ended June 30, 2005, and by 3.0% of pretax earnings, or $1,940,000, in the nine months ended June 30, 2005. A reconciliation of our effective income tax rate for the year ended September 30, 2004, to the effective income tax rates for the three months and nine months ended June 30, 2005, follows:


	Three Months Ended			Nine Months Ended
(Percent of pretax earnings)	June 30, 2005			June 30, 2005

Effective rate for the year ended September 30, 2004		36.3			36.3
Change in estimates of taxes for previous periods		(11.5	)		(3.0	)
Change in expected tax rate applicable for current periods		(2.3	)		(2.3	)

Effective rate		22.5			31.0

We anticipate the applicable rate for our fourth quarter will be 34.0%.

Outlook: Over the past two years, our industrial and aircraft engine markets have experienced impressive recoveries in demand, which helped us increase revenues and improve earnings. Indications suggest that the strength will continue in both markets. However, some of our industrial customers are experiencing production capacity limitations and supply constraints from other suppliers. Although we are well positioned for increased capacity, these constraints may moderate the rate of sales growth we have seen over the past two years, which would influence our revenue growth.

We currently estimate that our earnings for fiscal year 2005 will be in the range of $4.70 to $4.85 per share. This represents an increase from the previous estimate included in our Form 10-Q last quarter. The increase was largely driven by the effects of the pretax curtailment gain of $7.8 million and the change in estimates of income taxes of $1.9 million that were recognized in the third quarter. The effect of the pretax gain on the sale of product line rights of $3.8 million that was recognized in the first quarter was included in both our previous estimate and our current estimate.

Financial Condition


	June 30,		September 30,
	2005		2004

	(In thousands)
Assets
Industrial Controls	$	367,215	$	364,584
Aircraft Engine Systems		203,778		205,580
Nonsegment assets		114,648		84,130

Consolidated total assets	$	685,641	$	654,294

Nonsegment assets increased in the nine months ended June 30, 2005, primarily because of an increase in cash and cash equivalents. Net cash flows provided by operations during the period exceeded net cash used in investing and financing activities.


	June 30,		September 30,
	2005		2004

	(In thousands)
Other Balance Sheet Measures
Working capital	$	237,679	$	197,524
Long-term debt, less current portion		73,985		88,452
Other liabilities		68,064		68,709
Shareholders’ equity		427,559		385,861

Working capital (current assets less current liabilities) increased in the nine months ended June 30, 2005, primarily as a result of increases in cash and cash equivalents and inventories, which were partially offset by increases in the current portion of long-term debt. Changes in cash and cash equivalents are directly observable in our statements of consolidated cash flows and are discussed in another section of this management’s discussion and analysis. Inventories have increased in anticipation of future sales. The increase in the current portion of long-term debt reflects changes due to the timing of the future payments. The first payments of the senior notes payable are due in October 2005. The related liability for these payments was classified as non-current at September 30, 2004, and as current at June 30, 2005.

Long-term debt decreased in the nine months ended June 30, 2005, as a result of the timing of future payments, as noted in the preceding paragraph. Required future principal payments of long-term debt and commitments under operating leases were as follows:


			2006/		2008/
In thousands for the year(s) ended September 30,	2005		2007		2009		Thereafter

Long-term debt	$	956	$	29,072	$	25,251	$	32,143
Operating leases		3,600		6,000		3,400		6,900

We currently have a revolving line of credit facility with a syndicate of U.S. banks totaling $100 million, with an option to increase the amount of the line to $175 million if we desire. The line of credit facility is set to expire on March 11, 2010. In addition, we have other lines of credit facilities, which totaled $26.4 million at September 30, 2004, that are generally reviewed annually for renewal.

Provisions of debt agreements include covenants customary to such agreements that require us to maintain specified minimum or maximum financial measures and place limitations on various investing and financing activities. The agreements also permit the lenders to accelerate repayment requirements in the event of a material adverse event. Our most restrictive covenants require us to maintain a minimum consolidated net worth, a maximum consolidated debt to consolidated operating cash flow, and a maximum consolidated debt to EBITDA, as defined in the agreements. We were in compliance with all covenants at June 30, 2005.

Commitments and contingencies at June 30, 2005, include various matters arising from the normal course of business. We are currently involved in pending or threatened litigation or other legal proceedings regarding employment, product liability and contractual matters. We accrued for individual matters that we believe are likely to result in a loss when ultimately resolved using estimates of the most likely amount of loss. There are also individual matters that we believe the likelihood of a loss when ultimately resolved is less than likely but more than remote, which were not accrued. While it is possible that there could be additional losses that have not been accrued, we currently believe the possible additional loss in the event of an unfavorable resolution of each matter is less than $5 million in the aggregate. In addition, consistent with generally accepted accounting principles, we do not recognize contingencies, which may result in gains.

We file income tax returns in various jurisdictions worldwide, which are subject to audit. We have accrued for our estimate of the most likely amount of expenses that we believe will result from income tax audit adjustments.

We do not recognize contingencies that might result in a gain until such contingencies are resolved and the revenues are realized.

In the event of a change in control of the company, we may be required to pay termination benefits to certain executive officers.

Shareholders’ equity increased in the nine months ended June 30, 2005, primarily as a result of net earnings for the first nine months. Dividend payments and repurchases of stock were mostly offset by the sale of treasury stock and the tax benefit applicable to stock options.

On January 26, 2005, the Board of Directors authorized the repurchase of up to $30 million of our outstanding shares of common stock on the open market and private transactions over a three-year period. We repurchased 49,909 shares at a cost of $3.8 million in the three months and nine months ended June 30, 2005, under this authorization.

Also, on July 27, 2005, the Board of Directors declared a cash dividend of $0.30 per share payable September 1, 2005, to shareholders of record at August 18, 2005. Cash dividends were $0.25 per share in each of the previous two quarters.


	Nine Months Ended
	June 30,

	2005			2004

	(In thousands)
Cash Flows
Net cash provided by operating activities	$	45,613		$	58,027
Net cash used in investing activities		(13,079	)		(15,683	)
Net cash used in financing activities		(5,968	)		(38,082	)

Net cash flows provided by operating activities decreased in the first nine months this year as compared to the first nine months last year. Both operating cash receipts and disbursements increased in the nine-month period this year compared to last year due to higher sales volume. However, cash paid to employees and suppliers increased at a greater rate than cash collected from customers, reflecting normal variations in payment and collection patterns. In addition, our income tax payments were higher in the nine-month period this year as compared to the same period last year.

Net cash flows used in investing activities decreased $2.6 million in the first nine months of fiscal 2005 compared to the same period last year. We completed a business acquisition in last year’s nine-month period for cash of $2.3 million. Also, proceeds from the sale of property, plant, and equipment were $3.0 million higher this year than a year ago, which was partially offset by an increase in capital expenditures of $2.3 million.

Net cash flows used in financing activities decreased $32.1 million in the first nine months this year compared to the first nine months last year. Our borrowings remained relatively stable in this year’s nine-month period compared to a reduction of $30.6 million in last year’s nine-month period.

Outlook: Future cash flows from operations and available revolving lines of credit are expected to be adequate to meet our cash requirements over the next twelve months. Payments of $64.3 million of senior notes are not due until the 2007-2012 timeframe. Also, we have a $100 million line of credit facility that includes an option to increase the amount of the line up to $175 million that does not expire until March 11, 2010. Despite these factors, it is possible business acquisitions could be made in the future that would require amendments to existing debt agreements and the need to obtain additional financing.

Recent Accounting Pronouncements

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 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 $0.02 per diluted share for the quarter ended June 30, 2005, $0.08 per diluted share for the nine months ended June 30, 2005, and $0.11 per diluted share for the year ended September 30, 2004. We expect to adopt this revised Statement effective with our fiscal year beginning October 1, 2005.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our long-term debt is sensitive to changes in interest rates. Also, assets, liabilities and commitments that are to be settled in cash and are denominated in foreign currencies for transactional purposes are sensitive to changes in currency exchange rates. These market risks are discussed more fully in the Management Discussion and Analysis on page 19 of our 2004 annual report to shareholders, which was filed with our Form 10-K/ A Amendment No. 1 for the year ended September 30, 2004. However, we currently do not have any existing interest rate swap agreements.

Item 4. Controls and Procedures

We have established disclosure controls and procedures, which are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Act is accumulated and communicated to management, including our principal executive officer (Thomas A. Gendron, president and chief executive officer) and principal financial officer (Stephen P. Carter, executive vice president, chief financial officer and treasurer), as appropriate to allow timely decisions regarding required disclosures.

Thomas A. Gendron, our president and chief executive officer, and Stephen P. Carter, our executive vice president, chief financial officer and treasurer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on their evaluation, they concluded that our disclosure controls and procedures were effective in achieving the objectives for which they were designed as described in the preceding paragraph.

Furthermore, there have been no changes in our internal control over financial reporting during the fiscal quarter covered by this Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION


Item 2.	*Unregistered Sales of Equity Securities and Use of Proceeds*

(d)

(c)

Approximate

Total number

dollar value

of shares

of shares that

(a)

(b)

purchased as part

may yet be

Total number

Average

of publicly

purchased

of shares

price paid

announced

under the

Period

purchased

per share

plans or programs

April 1, 2005 through April 30, 2005

—

30,000,000

May 1, 2005 through May 31, 2005

45,909

75.71

45,909

26,524,360

June 1, 2005 through June 30, 2005

4,443

75.98

4,000

26,208,982

Included in June are 443 shares purchased on the open market related to the reinvestment of dividends for treasury shares held for deferred compensation.

On January 26, 2005, the Board of Directors authorized the repurchase of up to $30 million of our outstanding shares of common stock on the open market and in private transactions over a three-year period. There have been no terminations or expirations since the approval date.

Sales of common stock issued from treasury to one of the company’s directors during the nine months ended June 30, 2005, consisted of the following:


	Total number
	of shares		Consideration
Date	purchased		received

December 1, 2004		82	$	5,934
January 31, 2005		57		4,054
April 29, 2005		87		5,952

The securities were sold in reliance upon the exemption contained in Section 4(2) of the Securities Act of 1933.

Item 6. Exhibits

(a) Exhibits Filed as Part of this Report:


	(3) (ii) Bylaws


	(31) (i) Certification of Thomas A. Gendron, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	(ii) Certification of Stephen P. Carter, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	(32) (i) Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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

Date: August 1, 2005		/s/ Thomas A. Gendron

		Thomas A. Gendron, President and Chief Executive Officer

Date: August 1, 2005		/s/ Stephen P. Carter

		Stephen P. Carter, Executive Vice President, Chief Financial Officer and Treasurer