SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
{ X } QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 1997 Commission File #0-8408
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
WOODWARD GOVERNOR COMPANY
(Exact name of registrant as specified in its charter)
Delaware 36-1984010
(State or other jurisdiction of I.R.S. Employer identification No.)
incorporation or organization)
5001 North Second Street, Rockford, Illinois 61125-7001
(Address of principal executive offices)
Registrant's telephone number - (815) 877-7441
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
As of January 31,1998, 11,298,422 shares of common stock with a par value of
.00875 cents per share were outstanding
WOODWARD GOVERNOR COMPANY
FORM 10-Q
For the Quarter Ended December 31, 1997
INDEX
Description
Part I. Financial Information
Item 1. Financial Statements
Statements of Consolidated Earnings for the
three months ended December 31, 1997 and 1996
Consolidated Balance Sheets as of
December 31, 1997 and September 30, 1997
Statements of Consolidated Cash Flows for the three
months ended December 31, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information
Signatures
STATEMENTS OF CONSOLIDATED EARNINGS
for the three months ended December 31, 1997 and 1996
(in thousands except per share amounts)
(Unaudited)
1997 1996
Net billings for products and services $98,140 $99,029
Costs and expenses:
Cost of goods sold 73,059 71,257
Sales, service and administrative
expenses 18,719 16,643
Other:
Interest expense $341 $569
Interest income (199) (96)
Other expense, net 746 888 1,160 1,633
Total costs and expenses 92,666 89,533
Earnings before income taxes and
equity in loss of unconsolidated affiliate 5,474 9,496
Income taxes 2,135 3,703
Earnings before equity in loss of
unconsolidated affiliate 3,339 5,793
Equity in loss of unconsolidated affiliate,
net of tax (881) (655)
Net earnings $2,458 $5,138
Basic and diluted earnings per share $ 0.21 $ 0.44
Average number of shares outstanding 11,448 11,548
Cash dividends per share $0.2325 $0.2325
See accompanying notes to consolidated financial statements.
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
DECEMBER SEPTEMBER
31, 1997 30, 1997
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $12,176 $14,999
Accounts receivable, less allowance
for losses of $2,944 for December
and $2,757 for September 70,894 91,806
Inventories 86,321 83,249
Deferred income taxes 19,651 19,651
Total current assets 189,042 209,705
Property, plant and equipment, at cost:
Land 5,614 5,842
Buildings and improvements 119,260 119,997
Machinery and equipment 191,200 188,758
Construction in progress 1,474 2,270
317,548 316,867
Less allowance for depreciation 208,525 205,919
Property, plant and equipment - net 109,023 110,948
Intangibles and other assets 9,806 8,933
Deferred income taxes 18,492 18,524
Total assets $326,363 $348,110
Liabilities and shareholders' equity
Current liabilities:
Short-term borrowings $8,378 $7,908
Current portion of long-term debt 4,979 4,979
Accounts payable and accrued expenses 45,488 64,824
Taxes on income 5,219 7,167
Total current liabilities 64,064 84,878
Long-term debt, less current portion 17,698 17,717
Other liabilities 34,901 34,901
Commitments and contingencies - -
Shareholders' equity represented by:
Preferred stock - -
Common stock 106 106
Additional paid-in capital 13,293 13,283
Unearned ESOP compensation (12,152) (12,128)
Currency translation adjustment 8,573 9,391
Retained earnings 215,100 215,211
224,920 225,863
Less treasury stock, at cost 15,220 15,249
209,700 210,614
Total liabilities and shareholders' equity $326,363 $348,110
See accompanying notes to consolidated financial statements.
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
for the three months ended December 31, 1997 and 1996
(in thousands of dollars)
(Unaudited)
1997 1996
Cash flows from operating activities:
Net earnings $2,458 $5,138
Adjustments to reconcile net earnings to
net cash provided (used) by operating activities:
Depreciation and amortization 6,404 6,033
Equity in loss of unconsolidated affiliate 1,445 1,074
Changes in assets and liabilities:
Accounts receivable 20,741 9,949
Inventories (2,586) (4,155)
Current liabilities, other than short-term
borrowings and current portion of
long-term debt (20,349) (8,745)
Other, net (1,308) (1,193)
Total adjustments 4,347 2,963
Net cash provided by operating activitie 6,805 8,101
Cash flows from investing activities:
Payments for purchase of property, plant
and equipment (4,677) (4,890)
Investment in unconsolidated affiliate (1,300) (2,500)
Other 67 (137)
Net cash used in investing activities (5,910) (7,527)
Cash flows from financing activities:
Cash dividends paid (2,662) (2,685)
Proceeds from sales of treasury stock 24 -
Purchases of treasury stock - (136)
Payments of long-term debt (19) (18)
Short-term borrowings net proceeds (payments) 531 (1,204)
Tax benefit applicable to ESOP dividend 93 91
Net cash used in financing activities (2,033) (3,952)
Effect of exchange rate changes on cash (1,685) (582)
Net change in cash and cash equivalents (2,823) (3,960)
Cash and cash equivalents, beginning of year 14,999 13,070
Cash and cash equivalents, end of period 12,176 9,110
Supplemental cash flow information:
Interest expense paid $235 $388
Income taxes paid $3,629 $834
See accompanying notes to consolidated financial statements.
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) The consolidated balance sheet as of December 31, 1997, and the
statements of consolidated earnings and cash flows for the three month
periods ended December 31, 1997 and 1996, have been prepared by
Woodward Governor Company (the Company), without audit. The September
30, 1997 consolidated balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. Information furnished in this 10-Q
report is based in part on approximations and is subject to year-end
adjustment and audit. The figures do reflect all adjustments necessary,
in the opinion of management, to present fairly the Company's financial
position as of December 31, 1997, and the results of its operations for
the three months ended December 31, 1997 and 1996, and cash flows for
the three months then ended. All such adjustments are of a normal and
recurring nature. The statements have been prepared in accordance with
accounting policies set forth in the Company's 1997 Annual Report on
Form 10-K and should be read in conjunction with the Notes to
Consolidated Financial Statements therein. The statement of
consolidated earnings for the three month period ended December 31,
1997 is not necessarily indicative of the results to be expected for
other interim periods or for the full year.
(2) The following is a reconciliation of the numerators and
denominators for the computation of basic and diluted earnings per
share:
Three Months Ended December 31,
(in 000's except per share amounts) 1997 1996
Net earnings (numerator) $ 2,458 $ 5,138
Basic Earnings per Share:
Weighted average number of common
shares (denominator) 11,448 11,548
Basic per share amount $ .21 $ .44
Diluted Earnings per Share:
Weighted average number of common
shares 11,448 11,548
Effect of dilutive securities:
Stock options 52 28
Diluted weighted average number of
common shares (denominator) 11,500 11,576
Diluted per share amount $ .21 $ .44
Options to purchase 20,000 shares of common stock at $34.875 per share
and 1,000 shares of common stock at $33.75 per share were outstanding
during the quarter ended December 31, 1997 but were not included in the
computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common shares
during the quarter.
PART I - ITEM 2
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's financial performance for the first quarter of fiscal
1998 was below the strong results reported for the same period a year
ago. Lower than anticipated shipments, coupled with costs that do not
vary with shipment levels, were the principal reasons for the less
than favorable results. The Company's quarterly results are not
necessarily indicative of underlying trends or of results to be
expected for future quarters or the full fiscal year. Management
believes that bookings, production and shipment patterns are best
viewed over longer time periods rather than in a single quarter.
Results of Operations
Net billings for products and services in the quarter ended December
31, 1997 were $98,140,000, slightly below the $99,029,000 reported a
year ago. Aircraft Controls' shipments of $42,104,000 rose 5 percent
from a year ago. Shipments by the Industrial Controls group fell 5
percent to $56,036,000, as shipments were particularly strong in last
year's first quarter. Temporary production delays, short-term
customer demand fluctuations, and the impact of a strong U.S. dollar
were the primary reasons for the lower than expected shipment levels.
Total costs and expenses were $92,666,000, an increase of $3,133,000,
or 3 percent from a year ago. Costs of goods sold totaled $73,059,000
in the first quarter of fiscal 1998, an increase of $1,802,000 or 2.5
percent from the prior year quarter. As a percent of shipments, cost
of goods sold was 74 percent versus 72 percent a year earlier. These
higher product costs were mainly due to increased product development
efforts, on-going process improvement programs and higher labor costs.
Sales, service and administrative expenses increased $2,076,000 or 12
percent over the prior year quarter primarily due to higher labor
costs, new business development efforts and start-up costs related to
the Aircraft Controls' Prestwick, Scotland service facility.
Earnings before the effect of the GENXON(tm) Power Systems, LLC joint
venture were $3,339,000 compared with $5,793,000 a year earlier.
Including Woodward's share of GENXON's losses in both periods, net
earnings were $2,458,000, or $0.21 per share, in the current year
quarter compared with $5,138,000, or $0.44 per share, a year ago.
With direct sales from Asia accounting for only 10 percent of total
net shipments, the Asian economic weakness, so far, has had only a
limited effect on Woodward. In Japan, where the Company has its
largest Asian presence, shipments in the first quarter were well ahead
of the prior year quarter. While these shipment levels are
encouraging, it is still too early to understand the full impact the
Asian crisis may have on Woodward's business as a whole. In addition
to direct sales, the Company also indirectly sells many products to
Asian customers through U.S. and European equipment manufacturers.
Management will continue to monitor these relationships and the Asian
marketplace.
The Company's effective tax rate for the three months ended December
31, 1997 and 1996 was the same at 39 percent. The effective tax rate
for the fiscal year ended September 30, 1997 was 38.6 percent.
Quarterly financial variability notwithstanding, management is
encouraged by the marketplace demands for many of the Company's
products. Aircraft Controls' strategy is to move beyond its core fuel
metering product line to components and systems that make up the
broader engine fuel delivery system. Industrial Controls is focusing
resources on engine and turbine control markets in which there has
been the greatest success, and de-emphasizing markets that do not meet
its financial objectives. Management continues to view GENXON as an
investment which, over time, should provide a competitive advantage
for Woodward in supplying controls to the turbine retrofit market.
Financial Condition
The financial condition of the Company remained strong as of December
31, 1997, with total shareholders' equity of $209,700,000 and long-
term debt of $17,698,000, which was less than 8 percent of total
capital.
Cash balances decreased $2,823,000 to $12,176,000 at December 31, 1997
when compared to September 30, 1997. Accounts receivable totaled
$70,894,000 at December 31, 1997 as compared to $91,806,000 at
September 30, 1997. This balance reduction was caused by higher
shipment levels in September, resulting in a greater level of
receivables as of the last fiscal year-end. Total inventories were
$86,321,000 at December 31, 1997 as compared to $83,249,000 at
September 30, 1997, an increase of $3,072,000 due partially to
customer demand fluctuations and temporary production delays.
Property, plant and equipment - net has decreased $1,925,000 since
September 30, 1997 due to capital expenditures being less than
depreciation. Accounts payable and accrued expenses decreased to
$45,488,000 at December 31, 1997 from $64,824,000 as of September 30,
1997, due mainly to higher business levels in September and the
payment of annual member benefit balances.
On January 14, 1998 the Board of Directors declared a quarterly
dividend of twenty-three and one quarter cents ($.2325) per share.
The dividend is payable on March 2, 1998 to shareholders of record at
the close of business on February 2, 1998.
Year 2000 Project
The Company has formed a Year 2000 Task Force with representatives from
each business unit and location. This task force is charged with the
responsibility of determining and coordinating the action necessary to
provide uninterrupted, normal operation of business-critical systems
before, during, and after Year 2000. The Company is also encouraging
similar compliance from customers, suppliers, and partners, as
appropriate, and will work with them to help achieve this goal.
Management believes that total costs associated with Year 2000 issues
will not have a material effect on the consolidated earnings of the
Company.
New Accounting Pronouncements
On October 1, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share". This new
standard simplifies the calculations of earnings per share and requires
presentation of both basic and diluted earnings per share on the
Statements of Consolidated Earnings. Diluted earnings per share
reflects the impact of outstanding stock options, if exercised. The
Company's basic and diluted earnings per share were the same for the
first fiscal quarters of both 1998 and 1997.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", both of which
become effective in fiscal year 1999. The Company has not yet
determined the impact these new statements will have on the
consolidated financial statements and related disclosures.
Forward-looking Statements
This quarterly report may contain forward-looking statements
reflecting management's current expectations concerning shipment
levels, business performance, joint venture outlook and growth
prospects. These statements involve risks and uncertainties including
changes in product demand, competition, effectiveness of process
improvement programs, impact of currency exchange rate changes, and
other factors discussed in the Company's 1997 Annual Report on Form
10-K filed with the Securities and Exchange Commission. Actual future
results and trends may differ materially from these expectations.
PART II - OTHER INFORMATION
Item 4
At the January 14, 1998 annual meeting of the shareholders, two items
were submitted to a vote.
(1) The re-election of three directors whose terms had expired. The
results of the voting were as follows:
Number of Number of Shares Number of
Director Shares For Against/Withheld Abstentions
Vern H. Cassens 10,607,549 288,380 None
Carl J. Dargene 10,658,763 237,166 None
Thomas W. Heenan 10,639,411 256,518 None
(2) Amendment to the Woodward Governor Company 1996 Long-Term Incentive
Compensation Plan to provide a competitive level of stock options for
the Company's senior managers and increase the level of participation
in the stock option plan, including broadening the base of stock option
participants in current business units as well as for additional
management of future new businesses and ventures. The results of the
voting on this item were as follows:
For Against Abstain
7,533,644 2,026,314 576,383
In addition, broker non-votes totaled 770,148.
Item 6
(a) Exhibits
3. Change in the By-laws
27. Financial data schedule
(b) No Form 8-K was filed for the quarter ended December 31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
WOODWARD GOVERNOR COMPANY
February 10, 1998 /s/ John A. Halbrook
John A. Halbrook, Chairman and
Chief Executive Officer
February 10, 1998 /s/ Stephen P. Carter
Stephen P. Carter, Vice
President, Chief Financial
Officer and Treasurer