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.
<PAGE>
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
<PAGE>
<TABLE>
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)
<CAPTION>
1998 1997
<S> <C> <C>
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.
</TABLE>
<PAGE>
<TABLE>
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
<CAPTION>
DECEMBER SEPTEMBER
31, 1998 30, 1998
(Unaudited)
<S> <C> <C>
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.
</TABLE>
<PAGE>
<TABLE>
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)
<CAPTION>
1998 1997
<S> <C> <C>
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.
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
Three months ended December 31,
(in thousands except per share amounts) 1998 1997
<S> <C> <C>
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
</TABLE>
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
<PAGE>
prices were greater than the average market price of the common shares
during the quarter:
<TABLE>
<CAPTION>
Three months ended December 31,
1998 1997
Exercise Number of Exercise Number of
Price Shares Price Shares
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Three months ended December 31,
(in thousands except per share amounts) 1998 1997
<S> <C> <C>
Net earnings $5,204 $2,458
Other comprehensive earnings (loss) 1,000 (818)
Total comprehensive earnings $6,204 $1,640
</TABLE>
<PAGE>
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
<PAGE>
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.
<PAGE>
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,
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 18024
<SECURITIES> 0
<RECEIVABLES> 106339
<ALLOWANCES> 4143
<INVENTORY> 105568
<CURRENT-ASSETS> 245787
<PP&E> 354981
<DEPRECIATION> 226568
<TOTAL-ASSETS> 558762
<CURRENT-LIABILITIES> 109249
<BONDS> 185685
0
0
<COMMON> 106
<OTHER-SE> 223611
<TOTAL-LIABILITY-AND-EQUITY> 558762
<SALES> 144908
<TOTAL-REVENUES> 144908
<CGS> 110015
<TOTAL-COSTS> 131570
<OTHER-EXPENSES> 771
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3241
<INCOME-PRETAX> 9326
<INCOME-TAX> 3730
<INCOME-CONTINUING> 5596
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5204
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
</TABLE>
