UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
/ / 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 identification No.)
incorporation or organization)
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. Yes _X_ No ___
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ___ No ___
As of April 30, 2001, 11,316,377 shares of common stock with a par value of
$.00875 cents per share were outstanding.
TABLE OF CONTENTS
Page
Part I Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 15
Item 4. Submission of Matters to a Vote of
Security Holders 16
Part II. Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Part I
ITEM 1. FINANCIAL STATEMENTS
Statements of Consolidated Earnings
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
THREE MONTHS
ENDED MARCH 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2001 2000
Net Sales $170,176 $149,085
- --------------------------------------------------------------------------------
Costs and expenses:
Cost of goods sold 128,585 116,340
Sales, general, and administrative
expenses 17,007 20,148
Amortization of intangible assets 1,722 1,508
Interest expense 2,336 3,076
Interest income (289) (165)
Other expense - net (26) (629)
- --------------------------------------------------------------------------------
Total costs and expenses 149,335 140,278
- --------------------------------------------------------------------------------
Earnings before income taxes 20,841 8,807
Income taxes 8,169 3,435
- --------------------------------------------------------------------------------
Net earnings $ 12,672 $5,372
================================================================================
Basic earnings per share $ 1.12 $ 0.48
================================================================================
Diluted earnings per share $ 1.10 $ 0.48
================================================================================
Weighted-average number of basic shares
outstanding 11,316 11,241
================================================================================
Weighted-average number of diluted shares
outstanding 11,524 11,260
================================================================================
Cash dividends per share $ 0.2325 $ 0.2325
================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
1
Statements of Consolidated Earnings
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SIX MONTHS
ENDED MARCH 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2001 2000
- --------------------------------------------------------------------------------
Net Sales $320,906 $282,677
Costs and expenses:
Cost of goods sold 241,986 215,993
Sales, general, and administrative
expenses 32,293 38,669
Amortization of intangible assets 3,367 3,175
Interest expense 4,515 5,885
Interest income (568) (339)
Other expense - net 530 475
- --------------------------------------------------------------------------------
Total costs and expenses 282,123 263,858
- --------------------------------------------------------------------------------
Earnings before income taxes 38,783 18,819
Income taxes 15,203 7,440
- --------------------------------------------------------------------------------
Net earnings $ 23,580 $ 11,379
================================================================================
Basic earnings per share $ 2.08 $ 1.01
================================================================================
Diluted earnings per share $ 2.05 $ 1.01
================================================================================
Weighted-average number of basic shares
outstanding 11,316 11,258
================================================================================
Weighted-average number of diluted shares
outstanding 11,498 11,285
================================================================================
Cash dividends per share $ 0.4650 $ 0.4650
================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
Consolidated Balance Sheets
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
===================================================================================
At March At September
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 31, 2001 30, 2000
- -----------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $9,206 $9,315
Accounts receivable, less
allowance for losses of
$3,542 for March and
$4,452 for September 107,329 105,153
Inventories 113,438 102,990
Deferred income taxes 16,903 16,835
- -----------------------------------------------------------------------------------
Total current assets 246,876 234,293
- -----------------------------------------------------------------------------------
Property, plant, and equipment, at
cost:
Land 5,814 6,032
Buildings and improvements 128,311 127,825
Machinery and equipment 235,656 233,188
Construction in progress 1,903 3,364
- -----------------------------------------------------------------------------------
371,684 370,409
Accumulated depreciation 252,831 247,951
- -----------------------------------------------------------------------------------
Property, plant, and equipment - net 118,853 122,458
Intangibles - net 151,142 150,118
Other assets 9,874 8,450
Deferred income taxes 18,211 18,404
- -----------------------------------------------------------------------------------
TOTAL ASSETS $544,956 $533,723
===================================================================================
BALANCE SHEETS CONTINUED ON NEXT PAGE.
3
Consolidated Balance Sheets - Continued
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
===================================================================================
At March At September
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 31, 2001 30, 2000
- -----------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Short-term borrowings $ 11,370 $ 21,284
Current portion of long-term debt 37,500 22,500
Accounts payable and accrued
expenses 68,830 81,342
Income taxes payable 7,843 8,331
- -----------------------------------------------------------------------------------
Total current liabilities 125,543 133,457
- -----------------------------------------------------------------------------------
Long-term debt, less current portion 74,500 74,500
Other liabilities 51,302 50,142
Commitments and contingencies - -
- -----------------------------------------------------------------------------------
Shareholders' equity represented by:
Preferred stock, par value $.003
per share, authorized 10,000
shares, no shares issued - -
Common stock, par value $.00875 per
share, authorized 50,000 shares,
issued 12,160 shares 106 106
Additional paid-in capital 13,352 13,295
Unearned ESOP compensation (5,552) (5,308)
Accumulated other comprehensive
earnings 2,648 3,045
Retained earnings 302,897 284,431
- -----------------------------------------------------------------------------------
313,451 295,569
Less treasury stock, at cost 19,840 19,945
- -----------------------------------------------------------------------------------
Total shareholders' equity 293,611 275,624
- -----------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $544,956 $533,723
===================================================================================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
Statements of Consolidated Cash Flows
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SIX MONTHS
ENDED MARCH 31,
- --------------------------------------------------------------------------------
(IN THOUSANDS OF DOLLARS) 2001 2000
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $23,580 $11,379
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 16,628 14,899
Net (gain)/loss on sale of property, plant, and
equipment 575 (183)
Deferred income taxes 125 1,537
ESOP compensation expense (244) (179)
Equity in loss of unconsolidated affiliate - 122
Changes in operating assets and liabilities,
net of business acquisitions and sale:
Accounts receivable (1,863) 21,256
Inventories (9,903) (5,361)
Current liabilities, other than short-
term borrowings and current portion
of long-term debt (10,465) (16,048)
Other - net (347) (710)
- --------------------------------------------------------------------------------
Total adjustments (5,494) 15,333
- --------------------------------------------------------------------------------
Net cash provided by operating activities 18,086 26,712
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of property, plant, and
equipment (10,535) (14,270)
Proceeds from sale of property, plant, and
equipment 291 1,048
Payments associated with sale of business (2,821) -
Business acquisitions, net of cash acquired (4,556) -
- --------------------------------------------------------------------------------
Net cash used in investing activities (17,621) (13,222)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (5,262) (5,233)
Proceeds from sales of treasury stock 162 803
Purchases of treasury stock - (1,762)
Net proceeds from borrowings under revolving
lines 14,767 5,786
Payments of long-term debt (10,000) (9,500)
Tax benefit applicable to ESOP dividend and
stock options 148 206
- --------------------------------------------------------------------------------
Net cash used in financing activities ( 185) (9,700)
- --------------------------------------------------------------------------------
Effect of exchange rate changes on cash (389) (695)
- --------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS ( 109) 3,095
Cash and cash equivalents, beginning of year 9,315 10,449
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 9,206 $13,544
================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest expense paid $ 4,640 $ 6,510
Income taxes paid $15,186 $ 9,844
NONCASH INVESTING:
Liabilities assumed in business acquisition (sale) - net
$ (81) $ -
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
Notes to Consolidated Financial Statements
(1) The consolidated balance sheet as of March 31, 2001, the statements of
consolidated earnings for the three and six-month periods ended March 31,
2001 and 2000, and the statements of consolidated cash flows for the
six-month periods ended March 31, 2001 and 2000, were prepared by the
company without audit. The September 30, 2000, consolidated balance sheet
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
Information in this 10-Q report is based in part on estimates and is
subject to year-end adjustments and audit. In our opinion, the figures
reflect all adjustments necessary to present fairly the company's financial
position as of March 31, 2001, the results of its operations for the three
and six-month periods ended March 31, 2001 and 2000, and its cash flows for
the six-month periods ended March 31, 2001 and 2000. All such adjustments
were of a normal and recurring nature. The statements were prepared
following the accounting policies described in the company's 2000 annual
report on Form 10-K and should be read with the Notes to Consolidated
Financial Statements on pages 26-33 of the 2000 annual report to
shareholders. The statements of consolidated earnings for the three and
six-month periods ended March 31, 2001, are not necessarily indicative of
the results to be expected for other interim periods or for the full year.
(2) In the statements of consolidated earnings, amounts reported under the
caption other expense-net include our equity in loss of an unconsolidated
affiliate. Prior to the first quarter of the year ending September 30,
2001, we reported our equity in loss of this unconsolidated affiliate as a
separate line in the statement. Amounts reported for the three months and
six months ended March 31, 2000, have been reclassified to be consistent
with the current presentation.
(3) On November 3, 2000, we acquired the stock of Hoeflich Controls, Inc.,
a manufacturer of ignition systems, and related assets for $5,050,000. The
acquisition was accounted for using the purchase method of accounting and
results of operations of the acquired company were included in our
consolidated results from the acquisition date. The excess of the purchase
price over the estimated fair value of tangible and identified intangible
net assets acquired is being amortized over 15 years. Under terms of the
purchase agreement, we could be required to make an additional payment of
up to $1,200,000 in fiscal year 2004, contingent upon attaining certain
investment and sales volumes, as defined by the agreement. We currently
expect any additional payment to be accounted for as additional purchase
price to be allocated among intangible assets acquired. Pro forma
information of our consolidated results of operations as if the acquisition
had been completed at the beginning of fiscal year 2000 have not been
included as the resulting pro forma data would not be materially different
from the results reported.
6
(4) Earnings per share:
--------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
--------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS) 2001 2000 2001 2000
--------------------------------------------------------------------------------
Net earnings (A) $12,672 $ 5,372 $23,580 $11,379
--------------------------------------------------------------------------------
Determination of shares:
Weighted-average shares of
common stock outstanding (B) 11,316 11,241 11,316 11,258
Assumed exercise of stock
options 208 19 182 27
--------------------------------------------------------------------------------
Weighted-average shares of
common stock outstanding
assuming dilution (C) 11,524 11,260 11,498 11,285
================================================================================
Basic earnings per share (A/B) $1.12 $0.48 $2.08 $ 1.01
Diluted earnings per share (A/C) $1.10 $0.48 $2.05 $ 1.01
================================================================================
All outstanding stock options during the three months and six months ended
March 31, 2001, were included in the above computation. The following stock
options were outstanding during the three months and six months ended March
31, 2000, but were not included in the computation of diluted earnings per
share because the options' exercise prices were greater than the average
market price of the common shares during the respective periods: 509,498
options at a weighted-average exercise price of $27.63 for the three-month
period; and 362,898 options at a weighted-average exercise price of $29.30
for the six-month period.
(5) Inventories:
--------------------------------------------------------------------------------
AT MARCH AT SEPTEMBER
(IN THOUSANDS OF DOLLARS) 31, 2001 30, 2000
--------------------------------------------------------------------------------
Raw materials $3,315 $3,056
Component parts 60,783 58,559
Work in process 31,699 27,315
Finished goods 17,641 14,453
--------------------------------------------------------------------------------
113,438 103,383
Less progress payments - (393)
--------------------------------------------------------------------------------
$113,438 $102,990
================================================================================
(6) Included in accounts payable and accrued expenses are accounts payable
of $21,340,000 at March 31, 2001, and $25,065,000 at September 30, 2000.
(7) The assets and liabilities of substantially all subsidiaries outside
the United States are translated to the United States dollar at period-end
rates of exchange, and earnings and cash flow statements are translated at
weighted-average rates of exchange. Translation adjustments are accumulated
with other comprehensive earnings (losses) as a separate component of
shareholders' equity. We have no other components of other comprehensive
earnings. The company's total comprehensive earnings were as follows:
7
--------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
(IN THOUSANDS) 2001 2000 2001 2000
--------------------------------------------------------------------------------
Net earnings $12,672 $5,372 $23,580 $11,379
Other comprehensive gains
(losses) 968 (2,369) (397) (3,494)
--------------------------------------------------------------------------------
Total comprehensive
earnings $13,640 $3,003 $23,183 $7,885
================================================================================
(8) Segment information:
--------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
(IN THOUSANDS) 2001 2000 2001 2000
--------------------------------------------------------------------------------
Industrial Controls:
External net sales $95,180 $83,717 $178,225 $161,015
Intersegment sales 372 291 549 398
Segment earnings 13,381 12,100 25,838 24,282
--------------------------------------------------------------------------------
Aircraft Engine Systems:
External net sales $74,996 $65,368 $142,681 $121,662
Intersegment sales 1,080 336 1,614 601
Segment earnings 14,165 4,014 26,657 8,457
================================================================================
Portions of Industrial Controls were previously reported as Aircraft Engine
Systems or Other Segments. Amounts for 2000 in the information above have
been restated to be consistent with the current composition of our
segments.
The reconciliation between the total of segment earnings and the statements
of consolidated earnings follows:
--------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
(IN THOUSANDS) 2001 2000 2001 2000
--------------------------------------------------------------------------------
Total segment earnings $27,546 $16,114 $52,495 $32,739
Interest expense and
interest income (2,047) (2,911) (3,947) (5,546)
Unallocated corporate
expenses (4,658) (4,396) (9,765) (8,374)
Consolidated earnings
before income taxes $20,841 $8,807 $38,783 $18,819
================================================================================
Segment assets were as follows:
--------------------------------------------------------------------------------
AT MARCH AT SEPTEMBER
(IN THOUSANDS) 31, 2001 30, 2000
--------------------------------------------------------------------------------
Industrial Controls $234,198 $214,935
Aircraft Engine Systems 252,278 260,712
================================================================================
8
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 results of operations and financial condition. This
discussion should be read with the consolidated financial statements,
including the notes, and the cautionary statement on page 35 of our
2000 annual report to shareholders, which was filed with our Form 10-K
for the year ended September 30, 2000.
Statements in this discussion and analysis concerning the company's
future sales, earnings, business performance, and prospects reflect
current expectations and are forward-looking statements that involve
risks and uncertainties. Actual results could differ materially from
projections or any other forward-looking statement and we have no
obligation to update our forward-looking statements. Factors that
could affect performance and could cause results to differ materially
from projections and forward-looking statements are described in the
cautionary statement referred to above.
Results of Operations
Our results of operations are discussed and analyzed by segment. We
have two segments--Industrial Controls and Aircraft Engine Systems.
Industrial Controls provides energy control systems and components
primarily to OEMs (original equipment manufacturers) of industrial
engines and turbines. Aircraft Engine Systems provides energy control
systems and components primarily to OEMs of aircraft engines. Portions
of Industrial Controls, related to the manufacture and sale of fuel
injection nozzles for industrial markets, control systems and related
services for industrial users in retrofit situations, and products for
small industrial engine markets, were previously reported as Aircraft
Engine Systems or Other Segments. Prior-year amounts in the financial
information that follows have been restated to be consistent with the
current composition of our segments.
The segment earnings reported in this discussion and analysis do not
reflect allocations of corporate expenses, and are before interest and
income taxes. These other items are separately discussed and analyzed.
Industrial Controls
======================================================================
Three months ended Six months ended
March 31, March 31,
----------------------------------------------------------------------
IN THOUSANDS 2001 2000 2001 2000
----------------------------------------------------------------------
External net sales $95,180 $83,717 $178,225 $161,015
Segment earnings 13,381 12,100 25,838 24,282
======================================================================
External net sales for Industrial Controls increased in both the three
months and six months ended March 31, 2001 as compared to the
corresponding periods last year. Included
9
in last year's amounts were sales from a portion of Industrial
Controls that was divested on May 31, 2000. Although the actual amount
of sales associated with this portion of our business has not been
determined, we believe it had annual sales of approximately $50
million. We continue to manufacture and sell components used in the
business to the buyer, accounting for approximately $2.4 million of
sales in the three-month period and $4.4 million of sales in the
six-month period this year. If adjusted for the effects of the
divestiture, our sales increase in both the three-month and six-month
periods was much higher than reflected above. This increase was
broadly based both geographically and across Woodward's energy control
technologies, led by gas turbine fuel systems and controls, as well as
other systems and components used in power generation. While the power
generation market is particularly active, demand in each of Industrial
Controls' principal target markets is healthy and growing. Other key
global markets for Industrial Controls include transportation,
particularly marine propulsion, and process industries, notably oil
and gas exploration. These markets are quite receptive to our systems
and controls that can reduce operating costs and lower emissions.
Segment earnings for Industrial Controls also increased in both the
three months and six months ended March 31, 2001, as compared to the
corresponding periods last year. The increases in earnings would have
been higher if the divested operations, which last year generated
earnings in proportion to sales similar to the rest of Industrial
Controls, had been excluded from last year's comparison amounts. The
earnings increase occurred despite major increases in new product
development activity this year over the same periods last year, much
of which represents adaptations of existing product platforms for
specific OEM customers that will begin shipping later this year or in
2002. Also, in the second fiscal quarter, we incurred expenses related
to the relocation of operations from our Oak Ridge, Tennessee facility
to facilities in Colorado. This relocation was initiated to more
closely align the small industrial engine operations, which were
previously performed in Oak Ridge, with the remainder of Industrial
Controls, and is expected to benefit earnings in future periods.
We expect Industrial Controls' sales for the last half of the year
will be about 15 percent higher than sales were in the first half of
the year, with some improvement in gross margins (net sales less cost
of sales).
Aircraft Engine Systems
======================================================================
Three months ended Six months ended
March 31, March 31,
----------------------------------------------------------------------
IN THOUSANDS 2001 2000 2001 2000
----------------------------------------------------------------------
External net sales $74,996 $65,368 $142,681 $121,662
Segment earnings 14,165 4,014 26,657 8,457
======================================================================
10
External net sales for Aircraft Engine Systems increased in both the
three months and six months ended March 31, 2001, as compared to the
corresponding periods last year. This increase reflected strength in
sales of both regional and narrow-body commercial jet engine fuel
delivery systems, as well as higher volumes of military spare parts
and commercial aftermarket activities.
Segment earnings for Aircraft Engine Systems also increased
significantly in both the three months and six months ended March 31,
2001, as compared to the corresponding periods last year. Included in
both the three-month and six-month periods last year was a charge
related to an early retirement program, which was partially offset by
a reduction in certain accruals related to a prior business
acquisition. Together, these items reduced last year's segment
earnings by $2.5 million. The remainder of the improvement in earnings
reflected the impact of higher sales and cost reduction actions
initiated in the second quarter of fiscal 2000. In particular, our
cost of goods sold was relatively high in the first half of fiscal
2000. Following last year's workforce management program, which
aligned staffing levels with expected demand, and other cost reduction
actions, our cost of goods sold as a percent of sales decreased to
levels comparable to those in fiscal year 1999.
We expect Aircraft Engine Systems' sales for the full year will be
about 5 percent higher than sales last year (which totaled $266.4
million), with gross margins similar to those generated in the first
half of this year.
Nonsegment Expenses
======================================================================
Three months Six months
ended ended
March 31, March 31,
----------------------------------------------------------------------
IN THOUSANDS 2001 2000 2001 2000
----------------------------------------------------------------------
Interest expense $2,336 $3,076 $4,515 $5,885
Interest income (289) (165) (568) (339)
Corporate
expenses 4,658 4,396 9,765 8,374
======================================================================
Interest expense decreased in both the three months and six months
ended March 31, 2001, as compared to the corresponding periods last
year because we had lower levels of average outstanding debt this
year.
Corporate expenses not allocated to segments were higher in the
three-month and six-month periods this year as compared to the same
periods last year primarily because we capitalized certain ongoing
member costs that were associated with a project involving our
business system software as internal software development costs last
year and we provided more for variable compensation plans this year as
a result of improved companywide performance. Other corporate
expenses, on a net basis, decreased from last year.
11
Net Earnings
======================================================================
Three months Six months
ended ended
March 31, March 31,
----------------------------------------------------------------------
IN THOUSANDS EXCEPT
PER SHARE AMOUNTS 2001 2000 2001 2000
----------------------------------------------------------------------
Earnings before
income taxes $20,841 $8,807 $38,783 $18,819
Income taxes 8,169 3,435 15,203 7,440
----------------------------------------------------------------------
Net earnings $12,672 $5,372 $23,580 $11,379
======================================================================
Basic earnings
per share $1.12 $ .48 $2.08 $1.01
Diluted earnings
per share 1.10 .48 2.05 1.01
======================================================================
Income taxes were provided at an effective rate of 39.2% of earnings
in the six-month period ended March 31, 2001, compared to 39.5% for
the same period last year, reduced because nondeductible expenses were
less significant relative to pretax earnings this year than a year
ago. Last year, our effective tax rate was 40.0% in the first quarter
and was reduced to 39.5% for the first six months of the year.
Net earnings increased in both the three months and six months ended
March 31, 2001, as compared to the corresponding periods last year.
Without the early retirement charge and the reduction in
acquisition-related accruals in last year's second quarter, net
earnings would have been $6.9 million ($0.61 per basic and diluted
share) for the three months ended March 31, 2000, and $12.9 million
($1.14 per basic and diluted share) for the six months ended March 31,
2000.
We believe that we are on track to achieve about 10 percent growth in
net sales, without considering the impact of any new acquisitions, and
25 percent growth in net earnings, not including any one-time gains or
expenses, for the year ended September 30, 2001, over the year ended
September 30, 2000. However, ongoing investments in product
development will tend to pressure third and fourth quarter results
compared to relatively strong quarters in 2000. Long-term, we believe
that our competitive strength in both Industrial Controls and Aircraft
Engine Systems, combined with long, favorable cycles in a number of
our target markets, particularly for power generation equipment, will
enable us to deliver 15% annual growth on average in earnings per
share, before one-time gains or expenses, over the next three or four
years.
12
Financial Condition
Our discussion and analysis of financial condition is presented by
segment for total segment assets, which consists of accounts
receivable, inventories, property, plant, and equipment--net, and
intangibles--net. We also discuss and analyze other balance sheet and
cash flow items. Together, this discussion and analysis will help you
assess our liquidity and capital resources, as well as understand
changes in our financial condition.
Assets
------------------------------------------------------------------------
At March At September
IN THOUSANDS 31, 2001 30, 2000
------------------------------------------------------------------------
Total segment assets:
Industrial Controls $234,198 $214,935
Aircraft Engine Systems 252,278 260,712
Unallocated corporate
property, plant, and
equipment - net 4,286 5,072
Other unallocated assets 54,194 53,004
------------------------------------------------------------------------
Total assets $544,956 $533,723
========================================================================
Industrial Controls' total segment assets at March 31, 2001, increased
over the amount at September 30, 2000, because of higher sales
activity, which impacted both accounts receivable and inventories, and
the first quarter 2001 acquisition of Hoeflich Controls, Inc. and
related assets.
Aircraft Engine Systems' total segment assets at March 31, 2001,
decreased from the amount at September 30, 2000, primarily because of
differences in sales volumes in the periods immediately preceding the
balance sheet dates and the impact such changes have on accounts
receivable balances.
Other Balance Sheet Measures
------------------------------------------------------------------------
At March At September
IN THOUSANDS 31, 2001 30, 2000
------------------------------------------------------------------------
Total assets $544,956 $533,723
Working capital 121,333 100,836
Long-term debt, less
current portion 74,500 74,500
Other liabilities 51,302 50,142
Commitments and
contingencies - -
Shareholders' equity $293,611 $275,624
========================================================================
13
Our balance sheet remained strong at March 31, 2001. The increase in
working capital (current assets less current liabilities) over the
September 30, 2000, amount was most significantly due to reductions in
accounts payable and accrued expenses that included the impact of
making annual payments associated with variable compensation plans and
defined contribution benefit plans, and increases in inventory caused
by anticipated sales growth. The increase in shareholders' equity over
the September 30, 2000, amount was primarily due to the excess of net
earnings over dividends.
We are currently involved in matters of litigation arising from the
normal course of business, including certain environmental and product
liability matters. Further discussion of these matters is in Note P in
the notes to consolidated financial statements in our 2000 annual
report to shareholders, which was filed with our Form 10-K for the
year ended September 30, 2000.
Cash Flows
---------------------------------------------------------------------
SIX MONTHS
ENDED MARCH 31,
---------------------------------------------------------------------
IN THOUSANDS 2001 2000
---------------------------------------------------------------------
Net cash provided by operating
activities $18,086 $26,712
Net cash used in investing activities (17,621) (13,222)
Net cash used in financing activities (185) (9,700)
=====================================================================
Net cash flows provided by operations decreased in the six months
ended March 31, 2001 as compared to the same period last year.
Although we generated more earnings in the current year, the timing of
sales billings and collections was such that our accounts receivable
did not decrease in the six-month period this year as much as last
year. Other factors impacting operating cash flows were less
significant. In both years, cash flows were impacted by annual
payments associated with variable compensation plans and defined
contribution benefit plans.
Net cash flows used in investing activities increased in the six
months ended March 31, 2001 as compared to the same period last year
primarily because of the acquisition of Hoeflich Controls, Inc. and
related assets in the first quarter of fiscal year 2001. Capital
expenditures in the six-month period this year were $3.7 million lower
than they were in the same period last year. Of this amount, $1.0
million related to internal software development costs that we
capitalized last year. The project that those expenditures related to
was completed last year. Currently, there are no ongoing or planned
software development projects similar in size or scope to that
project. The remaining difference is related to both normal quarterly
variations in capital expenditure rates and an expectation for lower
capital expenditures for the full fiscal year 2001 as compared to
fiscal year 2000, to be more in line with depreciation expense. We
also made payments totaling $2.8 million associated with amounts
previously accrued for the May 31, 2000, sale of the turbine control
retrofit business.
14
Net cash flows used in financing activities decreased in the six
months ended March 31, 2001, as compared to the same period last year.
In the six-month period this year, we borrowed, on a net basis, $4.8
million. Last year, we reduced debt, on a net basis, $3.7 million. In
both periods, borrowings were used to maintain cash at a relatively
stable level. Increases or decreases in debt, therefore, were related
primarily to cash flows generated from operating and investing
activities, as discussed above, less the payment of dividends (which
were at similar amounts in both years).
Future cash flows from operations and available revolving lines of
credit are expected to be adequate to meet our cash requirements
during the next twelve months. However, 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
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements." This bulletin provides interpretations and practices
followed by the Division of Corporation Finance and the Office of the
Chief Accountant in administering the disclosure requirements of the
Federal securities laws regarding revenue recognition. It is effective
for us no later than July 1, 2001. We have completed a review of our
current revenue recognition practices and have not discovered any
revenue recognition practices that would need to change in order to
comply with this bulletin. As a result, compliance with this bulletin
is not expected to have any impact on our consolidated 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 Discussion and Analysis on page 21 of our 2000
annual report to shareholders, which was filed with our Form 10-K for
the year ended September 30, 2000.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the January 24, 2001 Annual Meeting of Shareholders, the election of
four Class II directors was submitted to a vote. The results of the voting were
as follows:
------------------------------------------------------------------
Number of Number of Shares
Director Shares For Against/Withheld
------------------------------------------------------------------
Vern H. Cassens 9,606,279 585,056
Thomas W. Heenan 9,945,413 245,922
Michael H. Joyce 9,991,811 199,524
Lou L. Pai 9,476,356 714,966
==================================================================
PART II
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits Filed as Part of this Report.
(3) (ii) By-laws, as amended
(b) Reports Filed on Form 8-K During the Second Quarter of the Fiscal
Year Ending September 30, 2001. None.
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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
MAY 1, 2001 /s/John A. Halbrook
- ------------------------------ John A. Halbrook, President
and Chief Executive Officer
MAY 1, 2001 /s/Stephen P. Carter
- ------------------------------ Stephen P. Carter, Vice
President, Chief Financial
Officer and Treasurer
17