UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,June 30, 2006
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 | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
5001 North Second Street, Rockford, Illinois 61125-7001
(Address of principal executive offices)
(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. Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | |
Large accelerated filero | | Accelerated filerþ | | Large accelerated filero Accelerated filerþNon-accelerated filero |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of12b-2of the Exchange Act). Yeso Noþ
As of AprilJuly 21, 2006, 34,588,67734,206,737 shares of common stock with a par value of $.002917 cents per share were outstanding.
PART I –— FINANCIAL INFORMATION
Item 1. | | Financial Statements |
| | |
| | |
Consolidated Statements of Earnings | | WOODWARD |
|
| | | | | | | | | | | | | | | | |
| | (Unaudited) | | (Unaudited) |
| | Three months | | Three months |
| | ended March 31, | | ended June 30, |
(In thousands except per share amounts) | | 2006 | | 2005 | | 2006 | | 2005 |
| Net sales | | $ | 208,917 | | $ | 210,619 | | | $ | 217,053 | | $ | 210,252 | |
| Costs and expenses: | | |
Cost of goods sold | | 152,027 | | 157,520 | | | 154,089 | | 158,867 | |
Selling, general, and administrative expenses | | 25,257 | | 19,559 | | | 23,234 | | 19,427 | |
Research and development costs | | 13,069 | | 11,690 | | | 16,793 | | 12,811 | |
Amortization of intangible assets | | 1,758 | | 1,780 | | | 1,717 | | 1,770 | |
Curtailment gain | | | — | | | (7,825 | ) |
Interest expense | | 1,305 | | 1,525 | | | 1,299 | | 1,461 | |
Interest income | | | (598 | ) | | | (402 | ) | | | (754 | ) | | | (478 | ) |
Other income | | | (1,163 | ) | | | (1,470 | ) | | | (1,072 | ) | | | (1,947 | ) |
Other expense | | 85 | | 127 | | | 168 | | 678 | |
| Total costs and expenses | | 191,740 | | 190,329 | | | 195,474 | | 184,764 | |
| Earnings before income taxes | | 17,177 | | 20,290 | | | 21,579 | | 25,488 | |
Income taxes | | 5,711 | | 7,311 | | | | (7,339 | ) | | 5,742 | |
| Net earnings | | $ | 11,466 | | $ | 12,979 | | | $ | 28,918 | | $ | 19,746 | |
| | | |
Earnings per share: | | |
Basic | | $ | 0.33 | | $ | 0.38 | | | $ | 0.84 | | $ | 0.58 | |
Diluted | | 0.32 | | 0.37 | | | 0.82 | | 0.56 | |
| | | |
Weighted-average number of shares outstanding: | | |
Basic | | 34,508 | | 34,170 | | | 34,410 | | 34,269 | |
Diluted | | 35,369 | | 35,109 | | | 35,254 | | 35,190 | |
| | | |
Cash dividends per share | | $ | 0.10 | | $ | 0.0833 | | | $ | 0.10 | | $ | 0.08 | |
|
See accompanying Notes to Consolidated Financial Statements.
1
| | |
| | |
Consolidated Statements of Earnings | | WOODWARD |
|
| | | | | | | | | | | | | | | | |
| | (Unaudited) | | (Unaudited) |
| | Six months | | Nine months |
| | ended March 31, | | ended June 30, |
(In thousands except per share amounts) | | 2006 | | 2005 | | 2006 | | 2005 |
| Net sales | | $ | 404,551 | | $ | 399,944 | | | $ | 621,604 | | $ | 610,196 | |
| Costs and expenses: | | |
| |
Cost of goods sold | | 293,966 | | 300,793 | | | 448,055 | | 459,660 | |
Selling, general, and administrative expenses | | 46,314 | | 38,256 | | | 69,548 | | 57,683 | |
Research and development costs | | 24,979 | | 22,295 | | | 41,772 | | 35,106 | |
Amortization of intangible assets | | 3,513 | | 3,556 | | | 5,230 | | 5,326 | |
Curtailment gain | | | — | | | (7,825 | ) |
Interest expense | | 2,602 | | 2,894 | | | 3,901 | | 4,355 | |
Interest income | | | (1,241 | ) | | | (1,037 | ) | | | (1,995 | ) | | | (1,515 | ) |
Other income | | | (2,191 | ) | | | (6,371 | ) | | | (3,263 | ) | | | (8,318 | ) |
Other expense | | 313 | | 228 | | | 481 | | 906 | |
| Total costs and expenses | | 368,255 | | 360,614 | | | 563,729 | | 545,378 | |
| Earnings before income taxes | | 36,296 | | 39,330 | | | 57,875 | | 64,818 | |
Income taxes | | 12,403 | | 14,356 | | | 5,064 | | 20,098 | |
| Net earnings | | $ | 23,893 | | $ | 24,974 | | | $ | 52,811 | | $ | 44,720 | |
| | | |
Earnings per share: | | |
Basic | | $ | 0.69 | | $ | 0.73 | | | $ | 1.53 | | $ | 1.31 | |
Diluted | | 0.68 | | 0.71 | | | 1.50 | | 1.28 | |
| | | |
Weighted-average number of shares outstanding: | | |
Basic | | 34,427 | | 34,077 | | | 34,421 | | 34,140 | |
Diluted | | 35,269 | | 35,016 | | | 35,268 | | 35,058 | |
| | | |
Cash dividends per share | | $ | 0.20 | | $ | 0.1633 | | | $ | 0.30 | | $ | 0.24 | |
|
See accompanying Notes to Consolidated Financial Statements.
2
| | |
| | |
Consolidated Balance Sheets | | WOODWARD |
|
| | | | | | | | | | | | | | | | |
| | (Unaudited) | | | | (Unaudited) | | |
| | At March | | At September | | At June | | At September |
(In thousands except per share amounts) | | 31, 2006 | | 30, 2005 | | 30, 2006 | | 30, 2005 |
| Assets | | |
Current assets: | | |
Cash and cash equivalents | | $ | 76,653 | | $ | 84,597 | | | $ | 66,938 | | $ | 84,597 | |
Accounts receivable, less allowance for losses of $2,313 for March and $1,965 for September | | 103,206 | | 107,403 | | |
Accounts receivable, less allowance for losses of $2,430 for June and $1,965 for September | | | 109,930 | | 107,403 | |
Inventories | | 156,663 | | 149,336 | | | 157,623 | | 149,336 | |
Income taxes receivable | | 4,240 | | 5,330 | | | 2,897 | | 5,330 | |
Deferred income taxes | | 20,992 | | 18,700 | | | 21,261 | | 18,700 | |
Other current assets | | 3,645 | | 4,207 | | | 5,230 | | 4,207 | |
| Total current assets | | 365,399 | | 369,573 | | | 363,879 | | 369,573 | |
| Property, plant, and equipment – net | | 115,514 | | 114,787 | | |
Property, plant, and equipment — net | | | 117,066 | | 114,787 | |
Goodwill | | 130,883 | | 131,035 | | | 131,748 | | 131,035 | |
Other intangibles – net | | 75,033 | | 78,564 | | |
Other intangibles — net | | | 73,427 | | 78,564 | |
Deferred income taxes | | 1,069 | | 2,310 | | | 12,469 | | 2,310 | |
Other assets | | 9,122 | | 9,197 | | | 8,657 | | 9,197 | |
| Total assets | | $ | 697,020 | | $ | 705,466 | | | $ | 707,246 | | $ | 705,466 | |
|
Consolidated balance sheets continued on next page.
3
| | |
| | |
Consolidated Balance Sheets –— Continued | | WOODWARD |
|
| | | | | | | | | | | | | | | | |
| | (Unaudited) | | | | (Unaudited) | | |
| | At March | | At September | | At June | | At September |
(In thousands except per share amounts) | | 31, 2006 | | 30, 2005 | | 30, 2006 | | 30, 2005 |
| Liabilities and shareholders’ equity | | |
Current liabilities: | | |
Short-term borrowings | | $ | 12,476 | | $ | 8,419 | | | $ | — | | $ | 8,419 | |
Current portion of long-term debt | | 14,413 | | 14,426 | | | 14,590 | | 14,426 | |
Accounts payable | | 36,197 | | 37,015 | | | 36,705 | | 37,015 | |
Accrued liabilities | | 48,692 | | 68,647 | | | 57,672 | | 68,647 | |
| Total current liabilities | | 111,778 | | 128,507 | | | 108,967 | | 128,507 | |
| Long-term debt, less current portion | | 60,188 | | 72,942 | | | 59,402 | | 72,942 | |
Other liabilities | | 70,448 | | 71,548 | | | 69,595 | | 71,548 | |
Commitments and contingencies | | |
| Shareholders’ equity represented by: | | |
Preferred stock, par value $0.003 per share, authorized 10,000 shares, no shares issued | | — | | — | | | — | | — | |
Common stock, par value $0.002917 per share, authorized 100,000 shares, issued 36,480 shares | | 106 | | 106 | | | 106 | | 106 | |
Additional paid-in capital | | 29,729 | | 25,854 | | | 30,536 | | 25,854 | |
Accumulated other comprehensive earnings | | 10,576 | | 10,904 | | | 12,589 | | 10,904 | |
Deferred compensation | | 5,456 | | 5,402 | | | 5,490 | | 5,402 | |
Retained earnings | | 442,576 | | 425,568 | | | 467,736 | | 425,568 | |
| | | 488,443 | | 467,834 | | | 516,457 | | 467,834 | |
Less: Treasury stock, at cost, 1,891 shares for March and 2,154 shares for September | | 28,381 | | 29,963 | | |
Treasury stock held for deferred compensation, at cost, 414 shares for March and September | | 5,456 | | 5,402 | | |
Less: Treasury stock, at cost, 2,288 shares for June and 2,154 shares for September | | | 41,685 | | 29,963 | |
Treasury stock held for deferred compensation, at cost, 415 shares for June and September | | | 5,490 | | 5,402 | |
| Total shareholders’ equity | | 454,606 | | 432,469 | | | 469,282 | | 432,469 | |
| Total liabilities and shareholders’ equity | | $ | 697,020 | | $ | 705,466 | | | $ | 707,246 | | $ | 705,466 | |
|
See accompanying Notes to Consolidated Financial Statements.
4
| | |
| | |
Consolidated Statements of Cash Flows | | WOODWARD |
|
| | | | | | | | | | | | | | | | |
| | (Unaudited) | | (Unaudited) |
| | Six months | | Nine months |
| | ended March 31, | | ended June 30, |
(In thousands) | | 2006 | | 2005 | | 2006 | | 2005 |
| Cash flows from operating activities: | | |
Net earnings | | $ | 23,893 | | $ | 24,974 | | | $ | 52,811 | | $ | 44,720 | |
| Adjustments to reconcile net earnings to net cash provided by operating activities: | | |
Depreciation and amortization | | 14,752 | | 16,722 | | | 22,340 | | 24,286 | |
Curtailment gain | | | — | | | (7,825 | ) |
Net gain on sale of property, plant, and equipment | | | (212 | ) | | | (257 | ) | | | (186 | ) | | | (595 | ) |
Stock compensation expense | | 1,573 | | — | | | 2,253 | | — | |
Excess tax benefits from stock compensation | | | (2,424 | ) | | — | | | | (2,547 | ) | | — | |
Deferred income taxes | | | (934 | ) | | 286 | | | | (13,364 | ) | | 3,322 | |
Reclassification of unrealized losses on derivatives to earnings | | 142 | | 158 | | | 214 | | 240 | |
Changes in operating assets and liabilities: | | |
Accounts receivable | | 3,880 | | 838 | | | | (1,860 | ) | | 3,894 | |
Inventories | | | (7,567 | ) | | | (13,317 | ) | | | (7,559 | ) | | | (16,718 | ) |
Accounts payable and accrued liabilities | | | (23,743 | ) | | | (5,717 | ) | | | (14,874 | ) | | | (5,717 | ) |
Income taxes payable | | 5,539 | | | (1,673 | ) | | 7,026 | | | (7,786 | ) |
Other – net | | 1,114 | | 6,264 | | |
Other — net | | | | (1,189 | ) | | 7,792 | |
| Total adjustments | | | (7,880 | ) | | 3,304 | | | | (9,746 | ) | | 893 | |
| Net cash provided by operating activities | | 16,013 | | 28,278 | | | 43,065 | | 45,613 | |
| Cash flows from investing activities: | | |
Payments for purchase of property, plant, and equipment | | | (12,982 | ) | | | (9,686 | ) | | | (19,661 | ) | | | (16,325 | ) |
Proceeds from sale of property, plant, and equipment | | 557 | | 853 | | | 695 | | 3,246 | |
| Net cash used in investing activities | | | (12,425 | ) | | | (8,833 | ) | | | (18,966 | ) | | | (13,079 | ) |
| Cash flows from financing activities: | | |
Cash dividends paid | | | (6,885 | ) | | | (5,567 | ) | | | (10,643 | ) | | | (8,419 | ) |
Proceeds from sales of treasury stock | | 3,124 | | 3,153 | | | 3,287 | | 5,633 | |
Purchases of treasury stock | | | (1,907 | ) | | — | | | | (15,370 | ) | | | (3,791 | ) |
Excess tax benefits from stock compensation | | 2,424 | | — | | | 2,547 | | — | |
Net borrowings (payments) from borrowings under revolving lines | | 4,106 | | | (1,160 | ) | | | (8,475 | ) | | 609 | |
Payments of long-term debt | | | (12,576 | ) | | — | | | | (13,535 | ) | | — | |
| Net cash used in financing activities | | | (11,714 | ) | | | (3,574 | ) | | | (42,189 | ) | | | (5,968 | ) |
| Effect of exchange rate changes on cash | | 182 | | 258 | | | 431 | | | (790 | ) |
| Net change in cash and cash equivalents | | | (7,944 | ) | | 16,129 | | | | (17,659 | ) | | 25,776 | |
Cash and cash equivalents, beginning of year | | 84,597 | | 48,895 | | | 84,597 | | 48,895 | |
| Cash and cash equivalents, end of period | | $ | 76,653 | | $ | 65,024 | | | $ | 66,938 | | $ | 74,671 | |
| | | |
Supplemental cash flow information: | | |
Interest paid | | $ | 2,896 | | $ | 2,766 | | | $ | 5,208 | | $ | 5,411 | |
Income taxes paid | | 8,277 | | 18,647 | | | 12,648 | | 22,122 | |
|
See accompanying Notes to Consolidated Financial Statements.
5
WOODWARD
Notes to consolidatedConsolidated Financial Statements (Continued)
(1) Overview:
The consolidated balance sheet as of March 31,June 30, 2006, the consolidated statements of earnings for the three and six-monthnine-month periods ended March 31,June 30, 2006 and 2005, and the consolidated statements of cash flows for the six-monthnine-month periods ended March 31,June 30, 2006 and 2005, were prepared by the company without audit. The September 30, 2005, consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Information in this Form 10-Q report is based in part on estimates and is subject to year-end adjustments and audit. In our opinion, we have made all adjustments necessary to present fairly the company’s financial position as of March 31,June 30, 2006, the results of its operations for the three and six-monthnine-month periods ended March 31,June 30, 2006 and 2005, and its cash flows for the six-monthnine-month periods ended March 31,June 30, 2006 and 2005. All such adjustments were of a normal and recurring nature. The statements were prepared following the accounting policies described in the company’s 2005 annual report on Form 10-K and should be read with the notes to consolidated financial statements in the annual report. The consolidated statements of earnings for the three and six-monthnine-month periods ended March 31,June 30, 2006, are not necessarily indicative of the results to be expected for other interim periods or for the full year.
A three-for-one stock split was approved by shareholders at the 2005 annual meeting of shareholders on January 25, 2006. The stock split became effective for shareholders at the close of business on February 1, 2006. The number of shares and per share amounts reported in these consolidated financial statements have been updated from amounts reported prior to February 1, 2006, to reflect the effects of the split. In addition, in accordance with stock option plan provisions, the terms of all outstanding stock option awards were proportionally adjusted.
(2) Stock-based compensation:
We have granted stock options to key management members and directors of the company. These options are generally granted with an exercise price equal to the market price of our stock at the date of grant, a four year graded vesting schedule, and a term of ten years. Vesting would be accelerated in the event of retirement, disability, or death of a participant, or change in control of the company.
6
WOODWARD
Notes to Consolidated Financial Statements (Continued)
Provisions governing our stock option grants are included in the 2006 Omnibus Incentive Plan and the 2002 Stock Option Plan. The 2006 Plan was approved by shareholders and became effective on January 25, 2006. No grants were issued in January 2006, and no further grants will be made under the 2002 Plan. The 2006 Plan made 3,705,000 shares available for grants made on or after January 25, 2006, to members and directors of the company, subject to annual award limits as specified in the Plan.
6
WOODWARD
Notes to consolidated Financial Statements (Continued)
We adopted the provisions of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment”, beginning October 1, 2005, using the modified prospective transition method. This statement requires 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 cost over the requisite service period. Under the modified prospective transition method, financial statements for periods prior to the date of adoption are not adjusted for the change in accounting.
Prior to October 1, 2005, we used 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 did not recognize compensation expense in association with options granted at or above the market price of our common stock at the date of grant.
As a result of adopting the new standard, earnings before income taxes for the three months ended March 31,June 30, 2006, decreased by $695,000,$680,000, and net earnings decreased by $431,000,$422,000, or $0.01 per basic share and $0.01 per diluted share. These results reflect stock compensation expense of $695,000$680,000 and tax benefits of $264,000$258,000 for the period. Earnings before income taxes for the sixnine months ended March 31,June 30, 2006, decreased by $1,573,000,$2,253,000, and net earnings decreased by $975,000,$1,397,000, or $0.03$0.04 per basic share and $0.03$0.04 per diluted share. These results reflect stock compensation expense of $1,573,000$2,253,000 and tax benefits of $598,000$856,000 for the period.
Adoption of the new standard also affected our consolidated statements of cash flows. The change is related to tax benefits associated with tax deductions that exceed the amount of compensation expense recognized in financial statements. For the sixnine months ended March 31,June 30, 2006, cash flow from operating activities was reduced by $2,424,000$2,547,000 and cash flow from financing activities was increased by $2,424,000$2,547,000 from amounts that would have been reported if we had not adopted the new accounting standard.
Concurrent with our adoption of the new statement, we began to use the non-substantive vesting period approach for attributing stock compensation to individual periods. The nominal vesting period approach was used in determining the stock compensation
7
WOODWARD
Notes to Consolidated Financial Statements (Continued)
expense for our pro forma net earnings disclosure for the three and sixnine months ended March 31,June 30, 2005, presented in a table that follows. The change in the attribution method will not affect the ultimate amount of stock compensation expense recognized, but it has accelerated the recognition of such expense for non-substantive vesting conditions, such as retirement eligibility provisions. Under both approaches, we elected to recognize stock compensation on a straight-line basis for options with graded vesting schedules. As a result of the change in attribution method, earnings before income taxes for the three months ended March 31,June 30, 2006, were increased by approximately $2,000,$4,000, and net
7
WOODWARD
Notes to consolidated Financial Statements (Continued)
earnings were increased by $1,000,$3,000, which had no effect on basic and diluted earnings per share. Earnings before income taxes for the sixnine months ended March 31,June 30, 2006 were reduced by approximately $268,000,$264,000, and net earnings were reduced by $166,000,$164,000, or $0.01 per basic share and $0.01no effect per diluted share.
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 last year:
| | | | | | | | | | | | | | | | |
| | Three months | | Six months | | Three months | | Nine months |
| | ended March | | ended March | |
(In thousands exceptper share amounts) | | 31, 2005 | | 31, 2005 | |
(In thousands except per | | | ended June | | ended June |
share amounts) | | | 30, 2005 | | 30, 2005 |
| Reported net earnings | | $ | 12,979 | | $ | 24,974 | | | $ | 19,746 | | $ | 44,720 | |
Stock-based compensation expense using the fair value method, net of income tax | | | (359 | ) | | | (703 | ) | | | (377 | ) | | | (1,080 | ) |
| Pro forma net earnings | | $ | 12,620 | | $ | 24,271 | | | $ | 19,369 | | $ | 43,640 | |
| Reported net earnings per share amounts: | | |
Basic | | $ | 0.38 | | $ | 0.73 | | | $ | 0.58 | | $ | 1.31 | |
Diluted | | 0.37 | | 0.71 | | | 0.56 | | 1.28 | |
| Pro forma net earnings per share amounts: | | |
Basic | | $ | 0.37 | | $ | 0.71 | | | $ | 0.57 | | $ | 1.28 | |
Diluted | | 0.36 | | 0.70 | | | 0.55 | | 1.25 | |
|
The fair value for options granted during the sixnine months ended March 31,June 30, 2006, and the year ended September 30, 2005, was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions by grant year:
8
| | | | | | | | |
| | Six months | | Year ended |
| | ended March | | September |
| | 31, 2006 | | 30, 2005 |
|
Expected term | | 7 years | | | 7 years |
Expected volatility: | | | | | | | | |
Range used | | | 37 | % | | | 37% – 38 | % |
Weighted-average | | | 37 | % | | | 37.7 | % |
Expected dividend yield: | | | | | | | | |
Range used | | | 1.73 | % | | | 1.65% – 1.73 | % |
Weighted-average | | | 1.73 | % | | | 1.70 | % |
Risk-free interest rate: | | | | | | | | |
Range used | | | 4.48% – 4.57 | % | | | 3.98% – 4.18 | % |
|
WOODWARD
Notes to Consolidated Financial Statements (Continued)
| | | | | | | | |
| | Nine months ended June | | | Year ended September | |
| | 30, 2006 | | | 30, 2005 | |
|
Expected term | | 7 years | | 7 years |
Expected volatility: | | | | | | | | |
Range used | | 37 | % | | | 37% – 38 | % | |
Weighted-average | | 37 | % | | | 37.7 | % | |
Expected dividend yield: | | | | | | | | |
Range used | | 1.73 | % | | | 1.65% – 1.73 | % | |
Weighted-average | | 1.73 | % | | | 1.70 | % | |
Risk-free interest rate: | | | | | | | | |
Range used | | 4.48% – 4.57 | % | | | 3.98% – 4.18 | % | |
|
Historical company information was the primary basis for the selection of the expected term, expected volatility, and expected dividend yield assumptions. The risk-free interest rate was selected based on yields from U.S. Treasury zero-coupon
8
WOODWARD
Notes to consolidated Financial Statements (Continued)
issues with a remaining term equal to the expected term of the options being valued.
Changes in outstanding stock options for the sixnine months ended March 31,June 30, 2006, were as follows:
| | | | | | | | | | | | | | | | |
| | Weighted | | Weighted- | |
| | Average | | Average | |
| | Exercise | | Exercise | |
| | Number | | Price | | Number | | Price | |
| Balance at September 30, 2005 | | 2,998,869 | | $ | 13.96 | | | 2,998,869 | | $ | 13.96 | |
Options granted | | 365,400 | | 27.01 | | | 365,400 | | 27.01 | |
Options exercised | | | (350,001 | ) | | 10.36 | | | | (364,576 | ) | | 10.38 | |
Options forfeited | | | | (2,250 | ) | | 15.62 | |
| Balance at March 31, 2006 | | 3,014,268 | | $ | 15.96 | | |
Balance at June 30, 2006 | | | 2,997,443 | | $ | 15.99 | |
|
At March 31,June 30, 2006, there was $6,055,000$5,375,000 of unrecognized compensation cost related to nonvested awards, which we expect to recognize over a weighted-average period of 1.51.4 years.
Information about stock options that are vested or are expected to vest and that are exercisable at March 31,June 30, 2006, follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Weighted- | | | | Weighted- | | | |
| | Weighted- | | Average | | Aggregate | | Weighted- | | Average | | Aggregate | |
| | Average | | Remaining | | Intrinsic | | Average | | Remaining | | Intrinsic | |
| | Exercise | | Life in | | Value | | Exercise | | Life in | | Value |
Options | | Number | | Price | | Years | | ($000’s) | | Price | | Years | | ($000’s) | |
| Vested or expected to vest | | 2,922,687 | | $ | 15.73 | | 5.6 | | $ | 51,217 | | | 2,905,862 | | $ | 15.75 | | 5.4 | | $ | 42,889 | |
Exercisable | | 2,062,367 | | 12.82 | | 4.2 | | 42,130 | | | 2,047,792 | | 12.84 | | 4.0 | | 36,192 | |
|
9
WOODWARD
Notes to Consolidated Financial Statements (Continued)
The weighted-average grant-date fair value of options granted was $10.44 for the sixnine months ended March 31,June 30, 2006, and $9.24 for the sixnine months ended March 31,June 30, 2005. Other information for the three and six-monthnine-month periods follows:
| | | | | | | | | | | | | | | | |
| | Three months ended | | Six months ended |
| | March 31, | | March 31, |
(In thousands) | | 2006 | | 2005 | | 2006 | | 2005 |
|
Total fair value of shares vested | | $ | 291 | | | $ | 5 | | | $ | 2,547 | | | $ | 1,960 | |
Total intrinsic value of options exercised | | | 3,317 | | | | 1,928 | | | | 6,730 | | | | 3,514 | |
Cash received from exercises of stock options | | | 2,369 | | | | 1,547 | | | | 3,112 | | | | 3,084 | |
Tax benefit realized from exercise of stock options | | | 1,260 | | | | 702 | | | | 2,522 | | | | 1,305 | |
|
9
WOODWARDNotes to consolidated Financial Statements (Continued) | | | | | | | | | | | | | | | | |
| | Three months ended | | | Nine months ended | |
| | June 30, | | | June 30, | |
(In thousands) | | 2006 | | | 2005 | | | 2006 | | | 2005 | |
|
Total fair value of shares vested | | $ | — | | | $ | — | | | $ | 2,547 | | | $ | 1,960 | |
Total intrinsic value of options exercised | | | 325 | | | | 3,723 | | | | 7,055 | | | | 7,237 | |
Cash received from exercises of stock options | | | 158 | | | | 2,401 | | | | 3,270 | | | | 5,485 | |
Tax benefit realized from exercise of stock options | | | 123 | | | | 1,354 | | | | 2,645 | | | | 2,659 | |
(3) Earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months | | Six months | | Three months | | Nine months | |
| | ended March 31, | | ended March 31, | |
(In thousands, except per shareamounts) | | 2006 | | 2005 | | 2006 | | 2005 | |
(In thousands, except per share | | | ended June 30, | | ended June 30, | |
amounts) | | | 2006 | | 2005 | | 2006 | | 2005 | |
| Net earnings(A) | | $ | 11,466 | | $ | 12,979 | | $ | 23,893 | | $ | 24,974 | | | $ | 28,918 | | $ | 19,746 | | $ | 52,811 | | $ | 44,720 | |
| Determination of shares: | | |
Weighted-average shares of common stock outstanding (B) | | 34,508 | | 34,170 | | 34,427 | | 34,077 | | | 34,410 | | 34,269 | | 34,421 | | 34,140 | |
Assumed exercise of stock options | | 861 | | 939 | | 842 | | 939 | | | 844 | | 921 | | 847 | | 918 | |
| Weighted-average shares of common stock outstanding assuming dilution (C) | | $ | 35,369 | | $ | 35,109 | | $ | 35,269 | | $ | 35,016 | | | 35,254 | | 35,190 | | 35,268 | | 35,058 | |
| Earnings before cumulative effect of accounting change: | | |
Net earnings: | | |
Basic per share amount (A/B) | | $ | 0.33 | | $ | 0.38 | | $ | 0.69 | | $ | 0.73 | | | $ | .84 | | $ | 0.58 | | $ | 1.53 | | $ | 1.31 | |
Diluted per share amount (A/C) | | 0.32 | | 0.37 | | 0.68 | | 0.71 | | | .82 | | 0.56 | | 1.50 | | 1.28 | |
|
The weighted-average shares of common stock outstanding included the following weighted-average shares held for deferred compensation obligations were as follows:obligations:
| | | | | | | | | | | | | | | | |
| | Three months | | Six months |
| | ended March 31, | | ended March 31, |
(In thousands, except pershare amounts) | | 2006 | | 2005 | | 2006 | | 2005 |
|
Weighted-average shares held for deferred compensation | | | 413,389 | | | | 362,937 | | | | 413,606 | | | | 292,980 | |
|
| | | | | | | | | | | | | | | | |
| | Three months | | | Nine months | |
| | ended June 30, | | | ended June 30, | |
| | 2006 | | | 2005 | | | 2006 | | | 2005 | |
|
Weighted-average shares held for deferred compensation | | | 413,949 | | | | 400,977 | | | | 413,720 | | | | 384,174 | |
|
The following stock options were outstanding during the three and sixnine months ended March 31,June 30, 2006 and 2005, but were not included
10
WOODWARD
Notes to Consolidated Financial Statements (Continued)
in the computation of diluted earnings per share because their inclusion would have been anti-dilutive:
| | | | | | | | | | | | | | | | |
| | Three months | | Six months |
| | ended March 31, | | ended March 31, |
(In thousands, exceptper share amounts) | | 2006 | | 2005 | | 2006 | | 2005 |
|
Options | | | 410,400 | | | | 375,654 | | | | 644,874 | | | | 375,771 | |
|
| | | | | | | | | | | | | | | | |
| | Three months | | | Nine months | |
| | ended June 30, | | | ended June 30, | |
| | 2006 | | | 2005 | | | 2006 | | | 2005 | |
|
Options | | | 410,400 | | | | — | | | | 339,264 | | | | 306,900 | |
|
(4) Inventories:New accounting standard
| | | | | | | | |
| | At March | | At September |
(In thousands) | | 31, 2006 | | 30, 2005 |
|
Raw materials | | $ | 5,906 | | | $ | 4,876 | |
Component parts | | | 96,591 | | | | 97,429 | |
Work in process | | | 32,080 | | | | 28,326 | |
Finished goods | | | 22,086 | | | | 18,705 | |
|
| | $ | 156,663 | | | $ | 149,336 | |
|
10
WOODWARD
NotesIn June 2006, the Financial Accounting Standards Board issued FASB interpretation No. 48, “Accounting for Uncertainty in Income Taxes.” The Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes,” and will be effective for our year ending September 30, 2008, although earlier application is encouraged. The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to consolidated Financial Statements (Continued)be taken in a tax return. The Interpretation also provides guidance on the derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. We are currently evaluating the effects this Interpretation will have on our financial statements.
(5) Property, plant,Taxes:
The effective tax rate for the nine months ended June 30, 2006, was 8.7% and equipment:the effective tax rate for the year ended September 30, 2005, was 29.2%. The change in the effective tax rate from last year’s full year rate to this year’s nine-month rate was attributable to the following (as a percent of earnings before income taxes):
| | | | | | | | |
| | At March | | At September |
(In thousands) | | 31, 2006 | | 30, 2005 |
|
Land | | $ | 9,626 | | | $ | 9,766 | |
Buildings and equipment | | | 155,202 | | | | 153,567 | |
Machinery and equipment | | | 244,806 | | | | 238,550 | |
Construction in progress | | | 2,145 | | | | 4,905 | |
|
| | | 411,779 | | | | 406,788 | |
Less accumulated depreciation | | | 296,265 | | | | 292,001 | |
|
Property, plant, and equipment — net | | $ | 115,514 | | | $ | 114,787 | |
|
| | | | | | |
• | | Adjustments of the beginning-of-the-year balance of a valuation allowance for deferred tax assets | | | (23.7 | %) |
• | | Change in estimates of taxes in the nine months ended June 30, 2006 for previous years | | | (2.5 | %) |
• | | Change in estimates of taxes in the year ended September 30, 2005 for previous years | | | 2.5 | % |
• | | Expiration of tax credit for increasing research activities (expired on December 31, 2005) | | | 1.3 | % |
• | | Changes in the extraterritorial income exclusion | | | 1.2 | % |
• | | Other changes, net | | | 0.7 | % |
| | | | | | | | | | | | | | | | |
| | Three months | | Six months |
| | ended March 31, | | ended March 31, |
(In thousands) | | 2006 | | 2005 | | 2006 | | 2005 |
|
Depreciation expense | | $ | 5,764 | | | $ | 6,651 | | | $ | 11,239 | | | $ | 13,166 | |
|
(6) Goodwill:
| | | | |
(In thousands) | | | | |
|
Industrial Controls: | | | | |
Balance at September 30, 2005 | | $ | 68,913 | |
Foreign currency exchange rate changes | | | (152 | ) |
Balance at March 31, 2006 | | $ | 68,761 | |
|
|
Aircraft Engine Systems: | | | | |
Balance at September 30, 2005 and March 31, 2006 | | $ | 62,122 | |
|
Consolidated: | | | | |
Balance at September 30, 2005 | | $ | 131,035 | |
Foreign currency exchange rate changes | | | (152 | ) |
|
Balance at March 31, 2006 | | $ | 130,883 | |
|
Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Both positive and negative evidence are considered in forming our judgment as to whether a valuation allowance is11
WOODWARD
Notes to consolidatedConsolidated Financial Statements (Continued)
appropriate, and more weight is given to evidence that can be objectively verified. Valuation allowances are reassessed whenever there are changes in circumstances that may cause a change in judgments. In the three months ended June 30, 2006, additional objective evidence became available regarding earnings in tax jurisdictions that had unexpired net operating loss carryforwards that affected our judgment about the valuation allowance. As a result, the valuation allowance for deferred tax assets, which had a balance of $17,769,000 at September 30, 2005, was reduced by $13,710,000 at June 30, 2006.
The changes in estimates of income taxes in the nine months ended June 30, 2006, were primarily related to the favorable resolution of certain tax matters during the three-month period ended June 30, 2006.
The changes in estimates of income taxes in the year ended September 30, 2005, were recognized in the three months ended June 30, 2005, and resulted from increases in the amount of certain credits claimed and changes in the amount of certain deductions taken as compared to prior estimates.
(6) Inventories:
| | | | | | | | |
| | At June | | At September |
(In thousands) | | 30, 2006 | | 30, 2005 |
|
Raw materials | | $ | 5,226 | | | $ | 4,876 | |
Component parts | | | 95,847 | | | | 97,429 | |
Work in process | | | 33,197 | | | | 28,326 | |
Finished goods | | | 23,353 | | | | 18,705 | |
|
| | $ | 157,623 | | | $ | 149,336 | |
|
12
WOODWARD
Notes to Consolidated Financial Statements (Continued)
(7) Property, plant, and equipment:
| | | | | | | | |
| | At June | | At September |
(In thousands) | | 30, 2006 | | 30, 2005 |
|
Land | | $ | 9,770 | | | $ | 9,766 | |
Buildings and equipment | | | 157,354 | | | | 153,567 | |
Machinery and equipment | | | 248,805 | | | | 238,550 | |
Construction in progress | | | 2,763 | | | | 4,905 | |
|
| | | 418,692 | | | | 406,788 | |
Less accumulated depreciation | | | 301,626 | | | | 292,001 | |
|
Property, plant, and equipment — net | | $ | 117,066 | | | $ | 114,787 | |
|
| | | | | | | | | | | | | | | | |
| | Three months | | Nine months |
| | ended June 30, | | ended June 30, |
(In thousands) | | 2006 | | 2005 | | 2006 | | 2005 |
|
Depreciation expense | | $ | 5,871 | | | $ | 5,794 | | | $ | 17,110 | | | $ | 18,960 | |
|
(8) Goodwill:
| | | | |
(In thousands) | | | | |
|
Industrial Controls: | | | | |
Balance at September 30, 2005 | | $ | 68,913 | |
Foreign currency exchange rate changes | | | 713 | |
|
Balance at June 30, 2006 | | $ | 69,626 | |
|
| | | | |
Aircraft Engine Systems: | | | | |
Balance at September 30, 2005 and June 30, 2006 | | $ | 62,122 | |
|
| | | | |
Consolidated: | | | | |
Balance at September 30, 2005 | | $ | 131,035 | |
Foreign currency exchange rate changes | | | 713 | |
|
Balance at June 30, 2006 | | $ | 131,748 | |
|
13
WOODWARD
Notes to Consolidated Financial Statements (Continued)
(9) Other intangibles — net:
| | | | | | | | | | | | | | | | |
| | At March | | At September | | At June | | At September |
(In thousands) | | 31, 2006 | | 30, 2005 | | 30, 2006 | | 30, 2005 |
| Industrial Controls: | | |
Customer relationships: | | |
Amount acquired | | $ | 37,387 | | $ | 37,387 | | | $ | 37,387 | | $ | 37,387 | |
Accumulated amortization | | | (10,114 | ) | | | (8,814 | ) | | | (10,764 | ) | | | (8,814 | ) |
| | |
| | 27,273 | | 28,573 | | | 26,623 | | 28,573 | |
| | |
Other: | | |
Amount acquired | | 31,175 | | 31,207 | | | 31,491 | | 31,207 | |
Accumulated amortization | | | (11,620 | ) | | | (10,194 | ) | | | (12,505 | ) | | | (10,194 | ) |
| | |
| | 19,555 | | 21,013 | | | 18,986 | | 21,013 | |
| | |
Total | | $ | 46,828 | | $ | 49,586 | | | $ | 45,609 | | $ | 49,586 | |
| | |
| | |
Aircraft Engine Systems: | | |
Customer relationships: | | |
Amount acquired | | $ | 28,547 | | $ | 28,547 | | | $ | 28,547 | | $ | 28,547 | |
Accumulated amortization | | | (7,454 | ) | | | (6,979 | ) | | | (7,692 | ) | | | (6,979 | ) |
| | |
| | 21,093 | | 21,568 | | | 20,855 | | 21,568 | |
| | |
Other: | | |
Amount acquired | | 11,785 | | 11,785 | | | 11,785 | | 11,785 | |
Accumulated amortization | | | (4,673 | ) | | | (4,375 | ) | | | (4,822 | ) | | | (4,375 | ) |
| | | 7,112 | | 7,410 | | | 6,963 | | 7,410 | |
| Total | | $ | 28,205 | | $ | 28,978 | | | $ | 27,818 | | $ | 28,978 | |
| | | |
Consolidated: | | |
Customer relationships: | | |
Amount acquired | | $ | 65,934 | | $ | 65,934 | | | $ | 65,934 | | $ | 65,934 | |
Accumulated amortization | | | (17,568 | ) | | | (15,793 | ) | | | (18,456 | ) | | | (15,793 | ) |
| | | 48,366 | | 50,141 | | | 47,478 | | 50,141 | |
| Other: | | |
Amount acquired | | 42,960 | | 42,992 | | | 43,276 | | 42,992 | |
Accumulated amortization | | | (16,293 | ) | | | (14,569 | ) | | | (17,327 | ) | | | (14,569 | ) |
| | | 26,667 | | 28,423 | | | 25,949 | | 28,423 | |
| | |
Total | | $ | 75,033 | | $ | 78,564 | | | $ | 73,427 | | $ | 78,564 | |
|
Amortization expense associated with current intangibles is expected to be approximately $7,000,000 for 2006, $6,600,000 for 2007, $5,800,000 for 2008, $5,500,000 for 2009, and $5,300,000 for 2010.
(8)(10) Accrued liabilities:
| | | | | | | | | | | | | | | | |
| | At March | | At September | | At June 30, | | At September 30, |
(In thousands) | | 31, 2006 | | 30, 2005 | | 2006 | | 2005 |
| Salaries and other member benefits | | $ | 13,634 | | $ | 40,629 | | | $ | 22,333 | | $ | 40,629 | |
Warranties | | 5,881 | | 5,692 | | | 5,450 | | 5,692 | |
Contingent legal matters | | | 8,500 | | — | |
Taxes, other than on income | | 4,784 | | 4,828 | | | 3,133 | | 4,828 | |
Other items – net | | 24,393 | | 17,498 | | |
Other items — net | | | 18,256 | | 17,498 | |
| | | $ | 48,692 | | $ | 68,647 | | | $ | 57,672 | | $ | 68,647 | |
|
1214
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Notes to consolidatedConsolidated Financial Statements (Continued)
Salaries and other member benefits include accrued termination benefits totaling $4,935,000 at September 30, 2005. These accrued termination benefits were in Industrial Controls. Changes in accrued termination benefits for the sixnine months ended March 31,June 30, 2006 were as follows:
| | | | | | | | |
(In thousands) | | |
| Balance at September 30, 2005 | | $ | 4,935 | | | $ | 4,935 | |
Expense: | | |
Cost of goods sold | | 69 | | | 69 | |
Selling, general, and administrative expenses | | 1 | | | 1 | |
Payments and other settlements | | | (4,916 | ) | | | (4,916 | ) |
Accrual adjustments | | — | | | — | |
Foreign currency exchange rate changes | | | (89 | ) | | | (89 | ) |
| | |
Balance at March 31, 2006 | | $ | — | | |
Balance at June 30, 2006 | | | $ | — | |
|
The amounts expensed during the six-monthnine-month period were for termination benefits earned by members over the period and are primarily related to the consolidation of one of the European manufacturing operations with existing operations. This action was taken to streamline the organization by eliminating redundant manufacturing operations and is complete. The total expense for this action was $15,763,000, which included $12,010,000 for termination benefits, $1,800,000 for contractual pension termination benefits, and other costs primarily associated with moving equipment and inventory to other locations totaling $1,953,000. We do not anticipate additional expenditures related to this action.
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 pattern exists. A reconciliation of accrued product warranties from September 30, 2005, to March 31,June 30, 2006, follows:
| | | | |
(In thousands) | | | | |
|
Balance at September 30, 2005 | | $ | 5,692 | |
Accruals related to warranties issued during the period | | | 3,437 | |
Adjustments to pre-existing warranty liabilities | | | (836 | ) |
Settlements of amounts accrued | | | (2,394 | ) |
Foreign currency exchange rate changes | | | (18 | ) |
|
Balance at March 31, 2006 | | $ | 5,881 | |
|
| | | | |
(In thousands) | | | | |
|
Balance at September 30, 2005 | | $ | 5,692 | |
Accruals related to warranties issued during the period | | | 4,217 | |
Adjustments to pre-existing warranty liabilities | | | (996 | ) |
Settlements of amounts accrued | | | (3,501 | ) |
Foreign currency exchange rate changes | | | 38 | |
|
Balance at June 30, 2006 | | $ | 5,450 | |
|
1315
WOODWARD
Notes to consolidatedConsolidated Financial Statements (Continued)
(9)(11) 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 | | Six months | | Three months | | Nine months |
| | ended March 31, | | ended March 31, | | ended June 30, | | ended June 30, |
(In thousands) | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 |
| Retirement pension benefits — United States: | | |
Retirement pension benefits – United States: | | Retirement pension benefits – United States: |
Components of net periodic benefit cost: | | |
Interest cost | | $ | 286 | | $ | 270 | | $ | 571 | | $ | 540 | | | $ | 285 | | $ | 270 | | $ | 856 | | $ | 810 | |
Expected return on plan assets | | | (325 | ) | | | (272 | ) | | | (590 | ) | | | (544 | ) | | | (294 | ) | | | (272 | ) | | | (884 | ) | | | (816 | ) |
Recognized losses | | 63 | | 37 | | 126 | | 74 | | | 63 | | 37 | | 189 | | 111 | |
| Net periodic benefit cost | | $ | 24 | | $ | 35 | | $ | 107 | | $ | 70 | | | $ | 54 | | $ | 35 | | $ | 161 | | $ | 105 | |
| Contributions by the company | | $ | — | | $ | — | | $ | — | | $ | — | | | $ | — | | $ | — | | $ | — | | $ | — | |
| | | |
Retirement pension benefits — other countries: | | |
Retirement pension benefits – other countries: | | Retirement pension benefits – other countries: |
Components of net periodic benefit cost: | | |
Service cost | | $ | 308 | | $ | 505 | | $ | 619 | | $ | 1,009 | | | $ | 281 | | $ | 471 | | $ | 900 | | $ | 1,480 | |
Interest cost | | 551 | | 536 | | 1,085 | | 1,075 | | | 538 | | 506 | | 1,623 | | 1,581 | |
Expected return on plan assets | | | (496 | ) | | | (528 | ) | | | (986 | ) | | | (1,058 | ) | | | (488 | ) | | | (498 | ) | | | (1,474 | ) | | | (1,556 | ) |
Amortization of unrecognized transition obligation | | 23 | | 26 | | 46 | | 51 | | | 22 | | 23 | | 68 | | 74 | |
Recognized losses | | 101 | | 141 | | 199 | | 282 | | | 98 | | 132 | | 297 | | 414 | |
Recognized prior service costs | | | (2 | ) | | | (2 | ) | | | (4 | ) | | | (4 | ) | | | (2 | ) | | | (2 | ) | | | (6 | ) | | | (6 | ) |
| | |
Net periodic benefit cost | | $ | 485 | | $ | 678 | | $ | 959 | | $ | 1,355 | | | $ | 449 | | $ | 632 | | $ | 1,408 | | $ | 1,987 | |
| | |
Contributions by the company | | $ | 190 | | $ | 351 | | $ | 597 | | $ | 705 | | | $ | 423 | | $ | 324 | | $ | 1,020 | | $ | 1,029 | |
| | |
1416
WOODWARD
Notes to consolidatedConsolidated Financial Statements (Continued)
(9)(11) Retirement benefits (continued):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three | | For the six | | For the three | | For the nine |
| | months ended | | months ended | | months ended | | months ended |
| | March 31, | | March 31, | | June 30, | | June 30, |
(In thousands) | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 |
| Retirement healthcare benefits: | | Retirement healthcare benefits: |
Components of net periodic benefit cost: | | |
Service cost | | $ | 96 | | $ | 663 | | $ | 191 | | $ | 1,326 | | | $ | 96 | | $ | 285 | | $ | 287 | | $ | 1,611 | |
Interest cost | | 676 | | 1,112 | | 1,378 | | 2,209 | | | 688 | | 845 | | 2,066 | | 3,054 | |
Recognized losses | | 299 | | 350 | | 598 | | 700 | | | 299 | | 407 | | 897 | | 1,107 | |
Recognized prior service costs | | | (630 | ) | | | (127 | ) | | | (1,260 | ) | | | (254 | ) | | | (630 | ) | | | (461 | ) | | | (1,890 | ) | | | (715 | ) |
Curtailment gain | | | — | | | (7,825 | ) | | — | | | (7,825 | ) |
| | |
Net periodic benefit cost | | $ | 441 | | $ | 1,998 | | $ | 907 | | $ | 3,981 | | | $ | 453 | | $ | (6,749 | ) | | $ | 1,360 | | $ | (2,768 | ) |
| | |
Contributions by the company | | $ | 824 | | $ | 498 | | $ | 1,268 | | $ | 921 | | | $ | 892 | | $ | 677 | | $ | 2,160 | | $ | 1,598 | |
| | |
We paid prescription drug benefits of $592,000$614,000 during the three months and $1,178,000$1,792,000 during the sixnine months ended March 31,June 30, 2006. We expect to pay additional prescription drug benefits of approximately $1,100,000 for$448,000 during the year ending September 30,fourth quarter of 2006. We are entitled to a federal subsidy under the Medicare Prescription Drug, Improvement and Modernization Act of 2003. We did not receive a federal subsidy for the sixnine months ended March 31,June 30, 2006, but we currently expect to receive $644,000$627,000 during the year ending September 30, 2006.
We expect contributions by the company for retirement pension benefits will be $0 in the United States and $2,072,000 in other countries in 2006. We also expect contributions by the company for retirement healthcare benefits will be $3,557,000 in 2006, less amounts received as federal subsidies.
The curtailment gain reflected in the table above is related to amendments of one of our retirement healthcare benefit plans, which reduced the number of individuals who will qualify for benefits in future periods. These amendments also reduced our net periodic benefit cost over amounts that would have been recognized prior to the amendments.
1517
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Notes to consolidatedConsolidated Financial Statements (Continued)
(10)(12) Accumulated other comprehensive earnings:
Accumulated other comprehensive earnings, which totaled $10,576,000$12,589,000 at March 31,June 30, 2006, consisted of the following items:
| | | | | |
| | | | | | At or for the |
| | At or for the | | nine months |
| | six months ended | | ended June 30, |
(In thousands) | | March 31, 2006 | | 2006 |
| Accumulated foreign currency translation adjustments: | | |
Balance at beginning of year | | $ | 14,575 | | | $ | 14,575 | |
Translation adjustments | | | (671 | ) | | 2,504 | |
Taxes associated with translation adjustments | | 255 | | | | (951 | ) |
| | |
Balance at end of period | | $ | 14,159 | | | $ | 16,128 | |
| | |
Accumulated unrealized derivative losses: | | |
Balance at beginning of year | | $ | (661 | ) | | $ | (661 | ) |
Reclassification to interest expense | | 142 | | | 214 | |
Taxes associated with interest reclassification | | | (54 | ) | | | (82 | ) |
| | |
Balance at end of period | | $ | (573 | ) | | $ | (529 | ) |
| | |
Accumulated minimum pension liability adjustments: | | |
Balance at beginning and end of year | | $ | (3,010 | ) | |
Balance at beginning and end of period | | | $ | (3,010 | ) |
| | |
(11)(13) Total comprehensive earnings:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months | | Six months | | Three months | | Nine months |
| | ended March 31, | | ended March 31, | | ended June 30, | | ended June 30, |
(In thousands) | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 |
| Net earnings | | $ | 11,466 | | $ | 12,979 | | $ | 23,893 | | $ | 24,974 | | | $ | 28,918 | | $ | 19,746 | | $ | 52,811 | | $ | 44,720 | |
Other comprehensive earnings: | | |
Foreign currency translation adjustments | | 422 | | | (1,206 | ) | | | (416 | ) | | 2,043 | | | 1,969 | | | (2,133 | ) | | 1,553 | | | (90 | ) |
Reclassification of unrealized losses on derivatives to earnings | | 44 | | 49 | | 88 | | 98 | | | 44 | | 51 | | 132 | | 149 | |
Minimum pension liability adjustment | | — | | — | | — | | 4 | | | — | | — | | — | | 4 | |
| | |
Total comprehensive earnings | | $ | 11,932 | | $ | 11,822 | | $ | 23,565 | | $ | 27,119 | | | $ | 30,931 | | $ | 17,664 | | $ | 54,496 | | $ | 44,783 | |
| | |
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WOODWARD
Notes to consolidatedConsolidated Financial Statements (Continued)
(12)(14) Commitments and 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, including accruals totaling $5,000,000$8,500,000 that were made in the threenine months ended March 31,June 30, 2006. 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 $10,000,000 in the aggregate.
Among the current legal proceedings referred to in the preceding paragraph, we are a defendant in a class action lawsuit filed in the U.S. District Court for Northern District of Illinois and received findings of the U.S. Equal Employment Opportunity Commission that allege discrimination on the basis of race, national origin, and gender in our Winnebago County, Illinois, facilities. We believe there are meritorious defenses to the charges and claims that were asserted and, based on management’s judgment, we are pursuing the actions necessary to resolve these matters in the best interest of our shareholders.
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 related amounts 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.
1719
WOODWARD
Notes to consolidatedConsolidated Financial Statements (Continued)
(13)(15) Segment information:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months | | Six months | | Three months | | Nine months |
| | ended March 31, | | ended March 31, | | ended June 30, | | ended June 30, |
(In thousands) | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 |
| Industrial Controls: | | |
External net sales | | $ | 132,030 | | $ | 136,031 | | $ | 256,489 | | $ | 258,386 | | | $ | 137,930 | | $ | 136,592 | | $ | 394,419 | | $ | 394,978 | |
Intersegment sales | | 484 | | 272 | | 848 | | 470 | | | 519 | | 317 | | 1,367 | | 787 | |
Segment earnings | | 13,107 | | 10,095 | | 24,652 | | 15,150 | | | 16,406 | | 9,469 | | 41,058 | | 24,619 | |
| | |
| | |
Aircraft Engine Systems: | | |
External net sales | | $ | 76,887 | | $ | 74,588 | | $ | 148,062 | | $ | 141,558 | | | $ | 79,123 | | $ | 73,660 | | $ | 227,185 | | $ | 215,218 | |
Intersegment sales | | 1,059 | | 1,360 | | 2,114 | | 1,812 | | | 1,619 | | 609 | | 3,733 | | 2,421 | |
Segment earnings | | 16,054 | | 15,922 | | 30,866 | | 34,234 | | | 14,753 | | 14,321 | | 45,619 | | 48,555 | |
| | |
The difference between the total of segment earnings and the statements of consolidated earnings follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months | | Six months | | Three months | | Nine months |
| | ended March 31, | | ended March 31, | | ended June 30, | | ended June 30, |
(In thousands) | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 |
| Total segment earnings | | $ | 29,161 | | $ | 26,017 | | $ | 55,518 | | $ | 49,384 | | | $ | 31,159 | | $ | 23,790 | | $ | 86,677 | | $ | 73,174 | |
Unallocated corporate expenses | | | (11,277 | ) | | | (4,604 | ) | | | (17,861 | ) | | | (8,197 | ) | | | (9,035 | ) | | | (5,144 | ) | | | (26,896 | ) | | | (13,341 | ) |
Curtailment gain | | | — | | 7,825 | | — | | 7,825 | |
Interest expense and income | | | (707 | ) | | | (1,123 | ) | | | (1,361 | ) | | | (1,857 | ) | | | (545 | ) | | | (983 | ) | | | (1,906 | ) | | | (2,840 | ) |
| Consolidated earnings before income taxes | | $ | 17,177 | | $ | 20,290 | | $ | 36,296 | | $ | 39,330 | | | $ | 21,579 | | $ | 25,488 | | $ | 57,875 | | $ | 64,818 | |
| | |
Segment assets were as follows:
| | | | | | | | | | | | | | | | |
| | At March | | At September | | At June | | At September |
(In thousands) | | 31, 2006 | | 30, 2005 | | 30, 2006 | | 30, 2005 |
| Industrial Controls | | $ | 363,435 | | $ | 370,220 | | | $ | 365,127 | | $ | 370,220 | |
Aircraft Engine Systems | | 214,874 | | 208,140 | | | 220,878 | | 208,140 | |
| | |
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| | 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 and turbines. To penetrate our target markets — power generation, process industries, transportation, and aerospace — our strategy focuses on maintaining and developing technologies that are used in the development of components and integrated systems for power equipment used by customers worldwide.
We have two operating segments — Industrial Controls and Aircraft Engine Systems. Industrial Controls is focused on the technologies, components, integrated systems, power equipment, and customers for industrial markets, which includes power generation, process industries, and transportation. Aircraft Engine Systems is focused on the technologies, components, integrated systems, power equipment, and customers for the aerospace market. We use segment information internally to assess the performance of each segment and to make decisions on the allocation of resources.
Industrial Controls’ earnings have improved significantly for the secondthird quarter and first sixnine months as compared to the same periods a year ago, due to a favorable sales mix and productivity improvements.ago. As a percent of sales, Industrial Controls’ segment earnings were 9.6%10.4% in the first sixnine months this year compared to 5.9%6.2% in the same period last year. Improving Industrial Controls’ profitability has been a priority for us for several quarters. Perhaps the most visible action has been the consolidation of operations in Europe, which was completed at the end of March 2006.
Aircraft Engine Systems’ earnings were slightly improved from last year’s secondthird quarter results. For the six-monthnine-month period, Aircraft Engine Systems’ earnings decreased $3.4$2.9 million; however, its first quarter results last year included a $3.8 million gain on the sale of product rights.
Nonsegment expenses for the second quarter and first six months included $5.0$8.5 million for accruals related to pending legal matters higher level of professional services, andin the first nine months this year, including $3.5 million that was recognized in the third quarter. Nonsegment expenses were also affected by a change in accounting for stock-based compensation. We adopted new accounting rules for stock-based compensation at the beginning of this year. If we had applied the provisions of the new accounting rules last year, our earnings before
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income taxes and net earnings would have decreased $0.6 million in last year’s secondthird fiscal quarter and $1.1$1.7 million in last year’s first sixnine months. These decreases are equivalent to net earnings reductions of $0.4 million, or $0.01 per diluted share, in last year’s secondthird fiscal quarter and $0.7$1.1 million, or $0.01$0.03 per diluted share, in last year’s first sixnine months.
Our income taxes in the third quarter benefits from a $13.7 million change in valuation allowances for deferred tax assets.
At March 31,June 30, 2006, our total assets were $697$708 million, including $77$67 million in cash and cash equivalents, and our total debt was $87$74 million. We are well positioned to fund expanded research and development and to explore other investment opportunities consistent with our focused strategies.
The financial statements that are filed as part of this Form 10-Q reflect the effects of the three-for-one stock split that became effective during our second fiscal quarter. Shareholders approved the split in January 2006.
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.
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. |
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 in the management’s discussion and analysis in our 2005 annual report on Form 10-K for the year ended September 30, 2005.
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discussion and analysis in our 2005 annual report on Form 10-K for the year ended September 30, 2005.
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 operations, 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’s discussion and analysis in our 2005 annual report on Form 10-K for the year ended September 30, 2005.
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’s discussion and analysis in our 2005 annual report on Form 10-K for the year ended September 30, 2005.
Results of Operations
Sales
| | | | | | | | | | | | | | | | |
| | Three months | | Six months |
| | ended March 31, | | ended March 31, |
|
(In thousands) | | 2006 | | 2005 | | 2006 | | 2005 |
|
External net sales: | | | | | | | | | | | | | | | | |
Industrial Controls | | $ | 132,030 | | | $ | 136,031 | | | $ | 256,489 | | | $ | 258,386 | |
Aircraft Engine Systems | | | 76,887 | | | | 74,588 | | | | 148,062 | | | | 141,558 | |
|
Consolidated net sales | | $ | 208,917 | | | $ | 210,619 | | | $ | 404,551 | | | $ | 399,944 | |
|
Aircraft Engine Systems’ external net salesincreased in both the three months and six months ended March 31, 2006. Boeing and Airbus, the leading OEMs of narrow- and wide-body aircraft, have both increased their production levels. We believe these increases were largely driven by orders from commercial airlines headquartered in Asia. We also believe higher revenue passenger miles are being experienced by
21
commercial airlines generally, which drives aircraft usage and has a positive effect on our aftermarket sales. | | | | | | | | | | | | | | | | |
| | Three months | | | Nine months | |
| | ended June 30, | | | ended June 30, | |
(In thousands) | | 2006 | | | 2005 | | | 2006 | | | 2005 | |
|
External net sales: | | | | | | | | | | | | | | | | |
Industrial Controls | | $ | 137,930 | | | $ | 136,592 | | | $ | 394,419 | | | $ | 394,978 | |
Aircraft Engine Systems | | | 79,123 | | | | 73,660 | | | | 227,185 | | | | 215,218 | |
|
Consolidated net sales | | $ | 217,053 | | | $ | 210,252 | | | $ | 621,604 | | | $ | 610,196 | |
|
Industrial Controls’ external net salesdecreased in both the three months and sixnine months ended March 31, 2006.June 30, 2006, were near the levels achieved in the same periods a year ago. While shipment volumes increased for many of our products, we experienced fewer shipments of combustion systems for large industrial turbines used in power generation, particularly in the second quarter. We believe these decreases were related to normal variability in demand, and that power generation improvement projects in Asia and Eastern Europe will continue to drive increases in the market for power generation products. We also experienced lower sales of alternative fuel systems that are sold to
23
Chinese OEMs, which we believe is related to the production and ordering patterns typical in the Chinese market. Customers in China have shown a tendency to batch their orders and engine production in such a manner that results in greater quarterly variability than is typical among customers in other markets. Aside from volume factors, changes in foreign currency translation rates also had the effect of reducing reported sales this year as compared to a year ago.
Aircraft Engine Systems’ external net salesincreased in both the three months and nine months ended June 30, 2006. Boeing and Airbus, the leading OEMs of narrow- and wide-body aircraft, have both increased their production levels. We believe these increases were largely driven by orders from commercial airlines headquartered in Asia. We also believe higher revenue passenger miles are being experienced by commercial airlines generally, which drives aircraft usage and has a positive effect on our aftermarket sales.
Costs and Expenses
| | | | | | | | | | | | | | | | | |
| | Three months | | Six months | | | | | | | | | | | | | | | | |
| | ended March 31, | | ended March 31, | | Three months | | Nine months | |
| | | ended June 30, | | ended June 30, | |
(In thousands) | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 | |
| Cost of goods sold | | $ | 152,027 | | $ | 157,520 | | $ | 293,966 | | $ | 300,793 | | | $ | 154,089 | | $ | 158,867 | | $ | 448,055 | | $ | 459,660 | |
Sales, general, and administrative expenses | | 25,257 | | 19,559 | | 46,314 | | 38,256 | | | 23,234 | | 19,427 | | 69,548 | | 57,683 | |
Research and development costs | | 13,069 | | 11,690 | | 24,979 | | 22,295 | | | 16,793 | | 12,811 | | 41,772 | | 35,106 | |
Curtailment gain | | | — | | | (7,825 | ) | | — | | | (7,825 | ) |
All other expense items | | 3,148 | | 3,432 | | 6,428 | | 6,678 | | | 3,184 | | 3,909 | | 9,612 | | 10,587 | |
Interest and other income | | | (1,761 | ) | | | (1,872 | ) | | | (3,432 | ) | | | (7,408 | ) | | | (1,826 | ) | | | (2,425 | ) | | | (5,258 | ) | | | (9,833 | ) |
| Consolidated costs and expenses | | $ | 191,740 | | $ | 190,329 | | $ | 368,255 | | $ | 360,614 | | | $ | 195,474 | | $ | 184,764 | | $ | 563,729 | | $ | 545,378 | |
|
Cost of goods soldas a percentage of sales decreased in both the three months and sixnine months ended March 31,June 30, 2006, as compared to the same periods last year. Cost of goods sold represented 72.8%71.0% of sales in the three-month period and 72.7%72.1% in the six-monthnine-month period, both improvements from the prior year in which cost of goods sold represented 74.8%75.6% in the three-month period and 75.2%75.3% in the six-month period. We attribute the improvement to normal variability in sales mix and productivity improvements. The productivity improvements includingincluded the favorable effects of the consolidation of European operations and other actions taken to improve Industrial Controls’ performance.
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Sales, general, and administrative expensesincreased in both the three months and sixnine months ended March 31,June 30, 2006, as compared to the same periods last year. The increase was primarily due to second quarter accruals totaling $5.0 million related to pending legal matters of a contingent nature, a higher level of professional services as compared to a year ago, and a change in accounting for stock-based compensation. The extent to which we use professional services varies on a quarterly basis, and expenses are recognized in the period services are provided. Contingencies and stock-based compensation are discussed more fully in separate sections of this management’s discussion and analysis.
Research and developmentincreased in both the three months and sixnine months ended March 31,June 30, 2006, as compared to the same periods last year, reflecting higher levels of development activity in both segments. Among other programs, Aircraft Engine Systems is developingcontinues to develop components and the integrated fuel system for the new GEnx turbofan engine for the Boeing 787, Airbus A350, and Boeing 747-8, and components for the GE Rolls-Royce F136 engine and T700-GE-701D engine for use in military applications. Industrial Controls is also developing products in conjunction with customers’ development programs, as well as developing products for the turbine auxiliary market. Turbine auxiliary applications offer multiple opportunities to leverage our existing hydraulic and electric actuation and valve technologies for off-engine applications.
Curtailment gainrelates to an amount recognized in 2005 for the immediate effects of amendments to one of our retirement healthcare benefit plans. The amendment eliminated retirement healthcare benefits for members that had not attained age 55 and 10 years of service by January 1, 2006. In addition to the immediate recognition of a curtailment gain, net periodic benefit costs were reduced from amounts that would have been recognized prior to the amendments.
Interest and other incomedecreased in the six-monthnine-month period ended March 31,June 30, 2006, as compared to the same period last year. Last years’ six-monthnine-month results included a first quarter pre-tax gain of $3.8 million from the sale of rights to our aircraft propeller synchronizer products to an unrelated third party.
Stock-Based Compensation
We adopted a new accounting standard for stock-based compensation beginning October 1, 2005 – Statement of Financial Accounting Standards No. 123R, “Share-Based Payment.” This standard requires us to measure employee compensation made in the form of stock-based instruments at the grant-date fair value of the stock-based award and to recognize the compensation over the requisite service period. Upon adoption, we used the modified prospective application
25
transition method, under which prior periods are not restated in the financial statements.
Prior to October 1, 2005, we used 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 did not recognize compensation expense in association with options
23
granted at or above the market price of our common stock at the date of grant.
The effect of adopting the new accounting standard on earnings for the three months ended March 31,June 30, 2006, was that earnings before income taxes were reduced by $0.7 million and net earnings were reduced by $0.4 million, or $0.01 per basic share and $0.01 per diluted share. The effect for the sixnine months ended March 31,June 30, 2006, was that earnings before income taxes were reduced by $1.6$2.3 million and net earnings were reduced by $1.0$1.4 million, or $0.03$0.04 per basic share and $0.03$0.04 per diluted share. Stock compensation is accounted for as a nonsegment expense. We expect stock compensation expense in the immediate future to be at levels similar to the amount recognized in the first sixnine months.
If we had applied the provisions of the new accounting standard last year, our earnings before income taxes for the three months ended March 31,June 30, 2005, would have been reduced by $0.6 million and our net earnings would have been reduced by $0.4 million, or $0.01 per basic share and $0.01 per diluted share. For the sixnine months ended March 31,June 30, 2005, our earnings before income taxes would have been reduced by $1.1$1.7 million and our net earnings would have been reduced by $0.7$1.1 million, or $0.02$0.03 per basic share and $0.02$0.03 per diluted share.
Adoption of the new accounting standards also affected our presentation of cash flows. The change is related to tax benefits associated with tax deductions that exceed the amount of compensation expense recognized in financial statements. For the sixnine months ended March 31,June 30, 2006, cash flow from operations was reduced by $2.4$2.5 million and cash flow from financing activities was increased by $2.4$2.5 million from amounts that would have been reported prior to the accounting change.
At March 31,June 30, 2006, the amount of stock compensation expense that has not yet been recognized totaled $6.1$5.4 million. This amount is related to stock options that have been granted but have not yet vested. We currently expect to recognize an additional $1.4$0.7 million of stock compensation for these options over the remainder of the year ending September 30, 2006.
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Workforce Management Actions
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months | | Six months | | Three months | | Nine months | |
| | ended March 31, | | ended March 31, | | ended June 30, | | ended June 30, | |
(In thousands) | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 | |
| Member termination benefits — Industrial Controls | | $ | — | | $ | 384 | | $ | 70 | | $ | 872 | | |
Member termination benefits— Industrial Controls | | | $ | — | | $ | 469 | | $ | 70 | | $ | 1,341 | |
Member termination benefits adjustments — Industrial Controls | | | — | | 943 | | — | | 943 | |
| | |
Member termination benefits adjustments — Industrial Controls | | — | | | (2,115 | ) | | — | | | (2,115 | ) | | — | | | (83 | ) | | — | | | (2,198 | ) |
| Total workforce management costs, net of adjustments | | $ | — | | $ | (1,731 | ) | | $ | 70 | | $ | (1,243 | ) | | $ | — | | $ | 1,329 | | $ | 70 | | $ | 86 | |
|
The amounts expensed during the sixnine months ended March 31,June 30, 2006, were for termination benefits earned by members over the period and are primarily related to the consolidation of one of the European manufacturing operations with existing operations in Industrial Controls. This action was taken to streamline the organization by eliminating redundant manufacturing operations and was complete by March 31, 2006. These actions are discussed more fully in the management’s discussion and analysis in our 2005 annual report on Form 10-K for the year ended September 30, 2005.
The 2005 costs, which are related to the same actions referenced in the preceding paragraph, were for termination benefits that were earned by members during the three and six-monthnine-month periods ended March 31,June 30, 2005, and for adjustments of amounts previously accrued for the actions. The accrual adjustments were made as a result of changes in estimates for termination benefits payable 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.
Since the inception of these workforce management actions through March 31,June 30, 2006, we expensed $15.8 million, which includes $12.0 million for member termination benefits under ongoing termination benefit plans, $1.8 million of contractual pension termination benefits, and $2.0 million for other costs primarily associated with moving equipment and inventory to other locations. With the exception of the $1.8 million for contractual pension termination benefits, all expenses were cash expenses that have been or will be paid from available cash balances in 2005 and 2006 without the need for additional borrowings.
27
Although it is difficult to precisely estimate the savings that are uniquely related to these actions, we believe that current expense levels are $9.0 million to $11.0 million lower than they would have been prior to the actions. The lower expenses are primarily related to reductions in
25
personnel costs, although savings in travel and other costs associated with the reduced headcount have also been realized. Of the total savings, approximately 90% affects cost of goods sold and 10% selling, general, and administrative expenses. The effect of these actions is considered as part of our outlook for the year, which is discussed more fully in a separate section of this management’s discussion and analysis.
Earnings
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months | | Six months | | Three months | | Nine months | |
| | ended March 31, | | ended March 31, | | ended June 30, | | ended June 30, | |
(In thousands) | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 | |
| Segment earnings: | | |
Industrial Controls | | $ | 13,107 | | $ | 10,095 | | $ | 24,652 | | $ | 15,150 | | | $ | 16,406 | | $ | 9,469 | | $ | 41,058 | | $ | 24,619 | |
Aircraft Engine Systems | | 16,054 | | 15,922 | | 30,866 | | 34,234 | | | 14,753 | | 14,321 | | 45,619 | | 48,555 | |
| Total segment earnings | | 29,161 | | 26,017 | | 55,518 | | 49,384 | | | 31,159 | | 23,790 | | 86,677 | | 73,174 | |
Nonsegment expenses | | | (11,277 | ) | | | (4,604 | ) | | | (17,861 | ) | | | (8,197 | ) | | | (9,035 | ) | | | (5,144 | ) | | | (26,896 | ) | | | (13,341 | ) |
Curtailment gain | | | — | | 7,825 | | — | | 7,825 | |
Interest expense and income | | | (707 | ) | | | (1,123 | ) | | | (1,361 | ) | | | (1,857 | ) | | | (545 | ) | | | (983 | ) | | | (1,906 | ) | | | (2,840 | ) |
| Consolidated earnings before income taxes | | 17,177 | | 20,290 | | 36,296 | | 39,330 | | | 21,579 | | 25,488 | | 57,875 | | 64,818 | |
Income taxes | | 5,711 | | 7,311 | | 12,403 | | 14,356 | | | | (7,339 | ) | | 5,742 | | 5,064 | | 20,098 | |
| Consolidated net earnings | | $ | 11,466 | | $ | 12,979 | | $ | 23,893 | | $ | 24,974 | | | $ | 28,918 | | $ | 19,746 | | $ | 52,811 | | $ | 44,720 | |
|
Industrial Controls’ segment earningsincreased in both the three months and sixnine months ended March 31,June 30, 2006, as compared to the same periods last year. In addition, Industrial Controls’ workforce management actions resulted in the net reductions of $1.7 million of expense in last year’s second quarter and $1.2 million of expense in last year’s first six months. Without these reductions last year, the year-over-year increase in earnings would have been higher. These reductions are discussed more fully in a separate section of this management’s discussion and analysis.
Changes in sales mix higher sales levels for the six-month period, and productivity improvements were the primary drivers for the increase in earnings this year over last year. Industrial Controls had a higher gross margin (external net sales less external cost of goods sold) as a percent of sales in both the three-month and six-monthnine-month periods this year. We attribute the change in Industrial Controls’ sales mix to normal variation in the timing of shipments and the productivity improvements to specific actions taken to improve Industrial Controls’ performance, including the favorable effects of the consolidation of European operations. In addition, Industrial Controls’ workforce management actions resulted in $1.3 million of expense in last year’s third quarter. Workforce management actions are
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discussed more fully in a separate section of this management’s discussion and analysis.
Aircraft Engine Systems’ segment earningsincreased slightly in the three months ended March 31,June 30, 2006, and decreased in the sixnine months ended March 31,June 30, 2006, as compared to the same periods last year. Last year’s six-monthnine-month earnings included a gain of $3.8 million from the sale of product rights, accounting for most of the year-over-year change. In addition, Aircraft Engine Systems has achieved higher gross margins this year in both the three and six-monthnine-month periods as a result of increased sales, which have been largely offset by higher research and development costs. The increase in Aircraft Engine Systems’ research and development costs was discussed more fully in a separate section of this management’s discussion and analysis.
Nonsegment expensesincreased in both the three months and sixnine months ended March 31,June 30, 2006, as compared to the same period a year ago. In the second quarter, weWe accrued $5.0$3.5 million related to pending legal matters of a contingent nature.nature in this year’s three-month period and $8.5 million in this year’s nine-month period. Contingencies are discussed more fully in separate sections of this management’s discussion and analysis. In addition, nonsegment expenses have increased because of a higher level of professional services this year as compared to a year ago and a change in accounting for stock-based compensation. The level of professional services varies on a quarterly basis, and expenses are recognized in the period services are provided. Stock-based compensation is discussed more fully in a separate section of this management’s discussion and analysis.
Curtailment gainwas discussed previously in this management’s discussion and analysis.
Income taxeswere provided at an effective rate on earnings before income taxes of 34.2%8.7% for the sixnine months ended March 31, 2006. The changeJune 30, 2006, which included the effect of changes in the rate from the first quarter, which was 35.0%, was made to reflect our current full year outlook on the mix of earnings byvaluation allowances for deferred tax jurisdiction.
assets. The tax rate for the year ended September 30, 2005, was 29.2%. The changechanges in valuation allowances reduced income tax expense by $13.7 million, representing 23.7% of pretax earnings. Exclusive of this item, the effective tax rate from last year’s full year ratefor the nine-month period was 32.4%.
We establish valuation allowances to this year’s six-month rate was attributablereflect the estimated amount of deferred tax assets that might not be realized. Both positive and negative evidence are considered in forming our judgment as to whether a valuation allowance is appropriate, and more weight is given to evidence that can be objectively verified. Valuation allowances are reassessed whenever there are changes in circumstances that may cause a change in our judgments. In our third quarter, additional objective evidence became available regarding earnings in tax jurisdictions that have unexpired net operating loss
29
carryforwards that affected our judgment about the following (as a percent of earnings beforevaluation allowance.
In addition, income taxes):
| | | | | | |
• | | Change in estimates of taxes in the year ended September 30, 2005 for previous years | | | 2.5 | % |
• | | Expiration of tax credit for increasing research activities (expired on December 31, 2005) | | | 1.3 | % |
• | | Phase-out of the extraterritorial income exclusion | | | 1.1 | % |
• | | Other changes, net | | | 0.1 | % |
Income taxes in fiscal yearthe third quarter of both 2006 and 2005 were affected byincluded the effects of changes in estimates of income taxes for previous years, which resulted fromyears. In 2006, the changes were primarily related to the favorable resolution of certain tax matters in the third quarter. These changes reduced the effective tax rate for the nine-month period by approximately 2.5% of pretax earnings.
In 2005, the changes in estimates were related to increases in the amountsamount of certain credits claimed and changes in the amount of certain deductions taken.
Amongtaken as compared to prior estimates. These changes reduced the other changes in our effective tax rate werefor the effectsyear ended September 30, 2005, by approximately 2.5% of pretax earnings.
Aside from changes in valuation allowances for deferred tax assets and changes in estimates related to previous years, the remaining difference in the effective tax rate for the nine-month period compared to the full year last year is primarily related to the expiration of the tax credit for increasing research activities (which expired on December 31, 2005) and changes in the relative mixamounts of earnings byextraterritorial income exclusion. Both of these factors increased our effective tax jurisdiction, which affects the comparison of foreign and
27
state income tax rates relative to the United States federal statutory rate.
Outlook:Our outlook for the year ending September 30, 2006, is consistent with what we previously reported, with sales growth of 3% to 6% and earnings per share of $1.67 to $1.75 per diluted share, before the effects of accruals totaling $5.0 million on a pretax basis for pending legal matters that were recognizedand changes in our second quarter.valuation allowances for deferred tax assets.
Our sales growth expectation is based on our belief that Aircraft Engine Systems’ sales will grow between 7% and 9%. We now believe Industrial Controls’ sales will be approximately the same as last year.
Our earnings expectation is a result of the expected companywide sales increase and improvements in Industrial Controls’ segment earnings. We anticipate that Industrial Controls’ segment earnings will increase to approximately 10% of sales on average for fiscal year 2006. Among other factors, the improvement in Industrial Controls’ earnings includes savings resulting from the consolidation of our European operations, which were discussed more fully in another section of this management’s discussion and analysis. Aircraft Engine Systems’ segment earnings are expected to remain near the levels achieved in the last two years in relation to its sales.
Our net earnings expectation for the year includes expense for stock compensation that resulted from the adoption of a
30
new accounting standard at the beginning of the year. Had we adopted the provisions of the new standard last year, our net earnings for the year ended September 30, 2005, would have decreased by $0.03 per diluted share. Stock compensation is discussed more fully in a separate section of this management’s discussion and analysis.
The accruals for pending legal matters and changes in valuation allowances for deferred tax assets are discussed more fully in separate sections of this management’s discussion and analysis.
Financial Condition
Assets
| | | | | | | | | | | | | | | | |
| | March 31, | | September 30, | | June 30, | | September 30, | |
(In thousands) | | 2006 | | 2005 | | 2006 | | 2005 | |
| Industrial Controls | | $ | 363,435 | | $ | 370,220 | | | $ | 365,127 | | $ | 370,220 | |
Aircraft Engine Systems | | 214,874 | | 208,140 | | | 220,878 | | 208,140 | |
Nonsegment assets | | 118,711 | | 127,106 | | | 121,241 | | 127,106 | |
| Consolidated total assets | | $ | 697,020 | | $ | 705,466 | | | $ | 707,246 | | $ | 705,466 | |
|
Industrial Controls’ segment assetsdecreased in the sixnine months ended March 31,June 30, 2006, due primarily to lower accounts receivabledepreciation and intangible balances. Accounts receivable were lower due to normal variations in the timingamortization of billingsproperty, plant, and collections that occurred near the end of March as opposed to the end of September. Intangibles were reduced as a result of normal amortization.equipment, and intangibles.
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Aircraft Engine Systems’ segment assetsincreased in the sixnine months ended March 31,June 30, 2006, primarily due to increases in inventories, which are being held in anticipationaccounts receivables and inventories. Both of higher levelsthese increases were due to an increased level of sales.sales that occurred near June 30, 2006, as compared to September 30, 2005.
Nonsegment assetsdecreased in the sixnine months ended March 31,June 30, 2006, primarily because of decreasesreflecting a decrease in cash and cash equivalents.equivalents and an increase in deferred tax assets. Changes in cash for the quarternine-month period and changes in valuation allowances for deferred tax assets are discussed more fully in a separate sectionsections of this management’s discussion and analysis.
Other Balance Sheet Measures
| | | | | | | | | | | | | | | | |
| | March 31, | | September 30, | | June 30, | | September 30, | |
(In thousands) | | 2006 | | 2005 | | 2006 | | 2005 | |
| Working capital | | $ | 253,621 | | $ | 241,066 | | | $ | 254,912 | | $ | 241,066 | |
Long-term debt, less current portion | | 60,188 | | 72,942 | | | 59,402 | | 72,942 | |
Other liabilities | | 70,448 | | 71,548 | | | 69,595 | | 71,548 | |
Shareholders’ equity | | 454,606 | | 432,469 | | | 469,282 | | 432,469 | |
|
Working capital(current assets less current liabilities) increased in the sixnine months ended March 31,June 30, 2006, primarily as a result of a decrease in accrued liabilities, the effect of which was partially offset by a reduction in cash and cash
31
equivalents. Accruals associated with variable compensation plans accumulate throughout the year and are paid in our first quarter. Similarly, accruals associated with certain defined benefit retirement plan contributions accumulate throughout the year and are paid in our second quarter.
Long-term debtdecreased in the sixnine months ended March 31,June 30, 2006, as a result of payments during the period. 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 choose. The line of credit facility expires on March 11, 2010. In addition, we have other line of credit facilities, which totaled $26.4 million at September 30, 2005, 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 March 31,June 30, 2006.
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Commitments and contingenciesat March 31,June 30, 2006, 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, including accruals totaling $5,000,000$8,500,000 that were made in the threenine months ended March 31,June 30, 2006. 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 $10 million in the aggregate.
Among the current legal proceedings referred to in the preceding paragraph, we are a defendant in a class action lawsuit filed in the U.S. District Court for Northern District of Illinois and received findings of the U.S. Equal Employment Opportunity Commission that allege discrimination on the basis of race, national origin, and gender in our Winnebago County, Illinois, facilities. We believe there are meritorious defenses to the charges and claims that were asserted and, based on management’s judgment, we are pursuing
32
the actions necessary to resolve these matters in the best interest of our shareholders.
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 expense 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 related amounts 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’ equityincreased in the sixnine months ended March 31,June 30, 2006. Increases due to net earnings, sales of treasury stock, stock compensation expense, and excess tax benefits from stock compensation during the sixnine months were partially offset by cash dividend payments and purchases of treasury stock.stock and cash dividend payments.
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. Through March 31,June 30, 2006, we purchased $8.3$21.9 million of our common stock under this authorization at an average price per share of $30.04. This authorization was terminated on July 25, 2006, concurrent with the approval of a new stock repurchase authorization. No purchases were made under this authorization from June 30, 2006, through the date of its termination.
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On July 25, 2006, the Board of Directors authorized the repurchase of up to $50 million of our outstanding shares of common stock on the open market and private transactions over a three-year period that will end on July 25, 2009.
A three-for-one stock split was approved by shareholders at the 2005 annual meeting of shareholders on January 25, 2006. This stock split became effective for shareholders at the close of business on February 1, 2006. The effects of the stock split are reflected in the financial statements filed as part of this Form 10-Q. In addition, in accordance with stock option plan provisions, the terms of all outstanding stock option awards were proportionally adjusted.
Contractual Obligations
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
(In thousands for the | | 2007/ | | 2009/ | | | | | | | | | |
year(s) ending September 30,) | | 2006 | | 2008 | | 2010 | | Thereafter | |
year(s) ending September | | | 2007/ | | 2009/ | | | |
30,) | | | 2006 | | 2008 | | 2010 | | Thereafter | |
| Long-term debt principal | | $ | 14,426 | | $ | 28,852 | | $ | 21,428 | | $ | 21,429 | | | $ | 14,426 | | $ | 28,852 | | $ | 21,428 | | $ | 21,429 | |
Operating leases | | 3,600 | | 5,000 | | 3,000 | | 2,000 | | | 3,600 | | 5,000 | | 3,000 | | 2,000 | |
Purchase obligations | | 76,357 | | 1,070 | | — | | — | | | 76,357 | | 1,070 | | — | | — | |
|
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The above table reflects contractual obligations at September 30, 2005, but excludes our retirement pension and retirement healthcare benefit obligations. Our contributions to retirement pension benefit plans totaled $1.8 million in 2005 and $3.1 million in 2004, and we currently expect our contributions for 2006 will total approximately $2.1 million. Pension contributions in future years will vary as a result of a number of factors, including actual plan asset returns and interest rates.
Our contributions to retirement healthcare benefit obligations totaled $2.4 million in 2005 and $2.6 million in 2004, and we currently estimate our contributions for 2006 will total approximately $3.6 million, less the amount of federal subsidies associated with our prescription drug benefits that we receive. Retirement healthcare contributions are made on a “pay-as-you-go” basis as payments are made to healthcare providers, and such contributions will vary as a result of changes in the future cost of healthcare benefits provided for covered retirees.
More information about our retirement benefit obligations is included in Notes to Consolidated Financial Statements in “Item 1 – Financial Statements.”
We enter into purchase obligations with suppliers in the normal course of business, on a short-term basis.
Cash Flows
| | | | | | | | | | | | | | | | |
| | Six months | | Nine months | |
| | ended March 31, | | ended June 30, | |
(In thousands) | | 2006 | | 2005 | | 2006 | | 2005 | |
| Net cash provided by operating activities | | $ | 16,013 | | $ | 28,278 | | | $ | 43,065 | | $ | 45,613 | |
Net cash used in investing activities | | | (12,425 | ) | | | (8,833 | ) | | | (18,966 | ) | | | (13,079 | ) |
Net cash used in financing activities | | | (11,714 | ) | | | (3,574 | ) | | | (42,189 | ) | | | (5,968 | ) |
|
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Net cash flows provided by operating activitiesdecreased by 43%6% in the sixnine months ended March 31,June 30, 2006, as compared to the same period a year ago. Both operating cash receipts and disbursements increased in the sixnine months this year compared to last year. However, cash paid to employees and suppliers increased at a greater rate than cash collected from customers, most significantly because variable compensation earned in 2005 and paid in 2006 was higher than variable compensation earned in 2004 and paid in 2005.
Net cash flows used in investing activitiesincreased by $3.6$5.9 million in the sixnine months ended March 31,June 30, 2006, as compared to the same period a year agoago. Capital expenditures were higher in the nine-month period this year as a result of investments to support higher capital expenditures.sales and new programs. In addition, proceeds from the sale of property, plant, and equipment were higher in the nine-month period last year
34
because of actions related to the consolidation of our European facilities.
Net cash flows used in financing activitiesincreased by $8.1$36.2 million in the sixnine months ended March 31,June 30, 2006, as compared to the same period a year ago. ChangesDebt principal payments were higher this year, in part due to payments associated with senior notes, which became payable for the first time in this year’s six-month period, more than offset net changesnine-month period. In addition, there was an increase in short-term borrowings.the purchase of treasury stock, which were primarily associated with a stock repurchase authorization.
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. Approximately $21.7 millionThis authorization was terminated on July 25, 2006, concurrent with the approval of shares may yet be purchaseda new stock repurchase authorization. No purchases were made under this authorization at March 31, 2006.from June 30, 2006, through the date of its termination.
On July 25, 2006, the Board of Directors authorized the repurchase of up to $50 million of our outstanding shares of common stock on the open market and private transactions over a three-year period that will end on July 25, 2009.
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 our senior notes, which totaled $64.3 million at March 31,June 30, 2006, are due over 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
A discussion of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” is included in the Notes to Consolidated Financial Statements in “Item 1 – Financial Statements.”
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 are sensitive to changes in currency exchange rates. These market risks are discussed more fully in the management’s discussion and analysis in our 2005 annual report on Form 10-K for the year ended September 30, 2005.
35
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
32
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 (Robert F. Weber, Jr., chief financial officer and treasurer), as appropriate to allow timely decisions regarding required disclosures.
Thomas A. Gendron, our president and chief executive officer, and Robert F. Weber, Jr., our 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.
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PART II – OTHER INFORMATION
Item 2. | | Unregistered Sales of Equity Securities and Use of Proceeds |
(In thousands) | | | | | | | | | | | | | | | | |
| | | | | | | | | | (c) Total | | | (d) | |
| | | | | | | | | | number of | | | Approximate | |
| | | | | | | | | | shares | | | dollar value | |
| | | | | | | | | | purchased | | | of shares | |
| | | | | | | | | | as part of | | | that may yet | |
| | (a) Total | | | | | | | publicly | | | be purchased | |
| | number of | | | (b) Average | | | announced | | | under the | |
| | shares | | | price paid | | | plans or | | | plans or | |
Period | | purchased | | | per share | | | programs | | | programs | |
|
April 1, 2006 through April 30, 2006 | | | 11,249 | | | $ | 33.70 | | | | 11,249 | | | $ | 21,225,295 | |
|
May 1, 2006 through May 31, 2006 | | | 400,446 | | | $ | 32.67 | | | | 400,446 | | | $ | 8,141,464 | |
|
June 1, 2006 through June 30, 2006 | | | 1,282 | | | | — | | | | — | | | $ | 8,141,464 | |
|
| | | | | | | | | | | | | | | | |
|
| | | | | | | | | | (c) Total | | (d) |
| | | | | | | | | | number of | | Approximate |
| | | | | | | | | | shares | | dollar value |
| | | | | | | | | | purchased | | of shares |
| | | | | | | | | | as part of | | that may yet |
| | (a) Total | | | | | | publicly | | be purchased |
| | number of | | (b) Average | | announced | | under the |
| | shares | | price paid | | plans or | | plans or |
Period | | purchased | | per share | | programs | | programs |
|
January 1, 2006 through January 31, 2006 | | | 2,409 | | | $ | 29.90 | | | | 2,409 | | | $ | 21,604,682 | |
|
February 1, 2006 through February 28, 2006 | | | — | | | | — | | | | — | | | $ | 21,604,682 | |
|
March 1, 2006 through March 31, 2006 | | | 1,245 | | | | — | | | | — | | | $ | 21,604,682 | |
|
33
The shares purchased in MarchJune were purchased on the open market and are 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 private transactions over a three-year period. There have been no terminations or expirations sinceThis authorization was terminated on July 25, 2006, concurrent with the approval date.of a new stock repurchase authorization. No purchases were made under this authorization from June 30, 2006, through the date of its termination.
On July 25, 2006, the Board of Directors authorized the repurchase of up to $50 million of our outstanding shares of common stock on the open market and private transactions over a three-year period that will end on July 25, 2009.
Sales of common stock issued from treasury to one of the company’s directors during the sixnine months ended March 31,June 30, 2006, consisted of the following:
37
| | | | | | | | | | | | | | | | |
| | Total number | | | | Total number | | |
| | of shares | | Consideration | | of shares | | Consideration |
Date | | purchased | | received | | purchased | | received |
| December 2, 2005 | | 297 | | $ | 8,019 | | | | 297 | | | $ | 8,019 | |
February 1, 2006 | | 132 | | 4,004 | | | | 132 | | | | 4,004 | |
May 1, 2006 | | | | 180 | | | | 5,990 | |
|
The securities were sold in reliance upon the exemption contained in Section 4(2) of the Securities Act of 1933.
Item 4.Item 6.Exhibits | | Submission of Matters to a Vote of Security Holders |
Four matters were submitted to a vote of shareholders at the January 25, 2006 Annual Meeting of Shareholders. The results of the voting were as follows:
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Broker |
| | For | | Against | | Abstain | | Non-votes |
|
1. Election of Directors: | | | | | | | | | | | | | | | | |
Paul Donovan | | | 10,151,856 | | | | 365,007 | | | | — | | | | — | |
Thomas A. Gendron | | | 10,102,330 | | | | 414,533 | | | | — | | | | — | |
John A. Halbrook | | | 10,137,615 | | | | 379,248 | | | | — | | | | — | |
|
2. Ratification of the Appointment of Independent Registered Public Accounting Firm | | | 10,390,534 | | | | 84,129 | | | | 42,200 | | | None | |
|
3. Approval of the Woodward Governor Company 2006 Omnibus Incentive Plan | | | 7,733,702 | | | | 1,600,478 | | | | 170,028 | | | | 1,012,655 | |
|
34
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Broker |
| | For | | Against | | Abstain | | Non-votes |
|
4. Amendment of Article Fourth of the Certificate of Incorporation to Increase the Number of Authorized Shares of Common Stock from 50,000,000 to 100,000,000 As Well As to Effect a Three-For-One Stock Split of the Common Stock | | | 10,005,194 | | | | 472,029 | | | | 39,640 | | | None |
|
(a) Exhibits Filed as Part of this Report:
| | | | | | | | |
| | | (3 | ) | | (i) | | Amendment of Article Fourth of the ArticlesRestated Certificate of Incorporation |
| | | | | | (ii) | | By-laws |
| | | (31 | ) | | (i) | | Rule 13a-14(a)/15d-14(a) certifications of Thomas A. Gendron. |
| | | | | | | | |
| | | | | | (ii) | | Rule 13a-14(a)/15d-14(a) certifications of Robert F. Weber, Jr. |
| | | | | | | | |
| | | (32 | ) | | (i) | | Section 1350 certifications. |
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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: April 28,July 31, 2006 | | /s/ THOMAS A. GENDRONThomas A. Gendron, President | | |
| | | | |
| | Thomas A. Gendron, Chairman and Chief Executive Officer | | |
| | | | |
Date: April 28,July 31, 2006 | | /s/ ROBERT F. WEBER, JR. | | |
| | | | |
| | Robert F. Weber, Jr., Chief
| | |
| | Financial Officer and Treasurer | | |
3639