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 June 30, 1998 Commission File #0-8408
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
WOODWARD GOVERNOR COMPANY
(Exact name of registrant as specified in its charter)
Delaware 36-1984010
(State or other jurisdiction of (I.R.S. Employer identification No.)
incorporation or organization)
5001 North Second Street, Rockford, Illinois 61125-7001
(Address of principal executive offices)
Registrant's telephone number - (815) 877-7441
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
As of July 31, 1998, 11,305,466 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 June 30, 1998
INDEX
Description
Part I. Financial Information
Item 1. Financial Statements
Statements of Consolidated Earnings for the
three months ended June 30, 1998 and 1997
Statements of Consolidated Earnings for the nine
months ended June 30, 1998 and 1997
Consolidated Balance Sheets as of June 30, 1998
and September 30, 1997
Statements of Consolidated Cash Flows for the nine
months ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information
Signatures
WOODWARD GOVERNOR MPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS
for the three months ended June 30, 1998 and 1997
(in thousands except per share amounts)
(Unaudited)
1998 1997
Net billings for products and services $119,399 $115,761
Costs and expenses:
Cost of goods sold 87,186 87,247
Sales, service and administrative
expenses 19,655 17,967
Other:
Interest expense $1,018 $701
Interest income (117) (204)
Other expense, net 2,422 3,323 918 1,415
Total costs and expenses 110,164 106,629
Earnings before income taxes and
equity in loss of unconsolidated
affiliate 9,235 9,132
Income taxes 3,714 3,562
Earnings before equity in loss of
unconsolidated affiliate 5,521 5,570
Equity in loss of unconsolidated affiliate,
net of tax 630 732
Net earnings $4,891 $4,838
Basic and diluted earnings per share $ 0.43 $ 0.42
Average number of basic shares
outstanding 11,299 11,447
Average number of diluted
shares outstanding 11,337 11,487
Cash dividends per share $0.2325 $0.2325
See accompanying notes to consolidated financial statements.
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS
for the nine months ended June 30, 1998 and 1997
(in thousands except per share amounts)
(Unaudited)
1998 1997
Net billings for products and services $330,699 $321,336
Costs and expenses:
Cost of goods sold 241,808 238,212
Sales, service and administrative
expenses 57,786 53,234
Other:
Interest expense $1,803 $1,913
Interest income (541) (594)
Other expense, net 4,437 5,699 3,058 4,377
Total costs and expenses 305,293 295,823
Earnings before income taxes and
equity in loss of unconsolidated
affiliate 25,406 25,513
Income taxes 10,163 9,950
Earnings before equity in loss of
unconsolidated affiliate 15,243 15,563
Equity in loss of unconsolidated
affiliate, net of tax 2,479 2,157
Net earnings $12,764 $13,406
Basic earnings per share $ 1.12 $ 1.17
Diluted earnings per share $ 1.12 $ 1.16
Average number of basic shares
outstanding 11,355 11,493
Average number of diluted
shares outstanding 11,399 11,530
Cash dividends per share $0.6975 $0.6975
See accompanying notes to consolidated financial statements.
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
JUNE SEPTEMBER
30, 1998 30, 1997
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $7,421 $14,999
Accounts receivable, less allowance
for losses of $3,602 for June
and $2,757 for September 95,941 91,806
Inventories 108,844 83,249
Deferred income taxes 19,878 19,651
Total current assets 232,084 209,705
Property, plant and equipment, at cost:
Land 5,657 5,842
Buildings and improvements 122,485 119,997
Machinery and equipment 210,087 188,758
Construction in progress 4,348 2,270
342,577 316,867
Less allowance for depreciation 215,330 205,919
Property, plant and equipment - net 127,247 110,948
Intangibles and other assets 168,576 8,933
Deferred income taxes 19,555 18,524
Total assets $547,462 $348,110
Liabilities and shareholders' equity
Current liabilities:
Short-term borrowings $ 83,272 $ 7,908
Current portion of long-term debt 4,979 4,979
Accounts payable and accrued
expenses 88,844 64,824
Taxes on income 6,173 7,167
Total current liabilities 183,268 84,878
Long-term debt, less current portion 117,659 17,717
Other liabilities 37,801 34,901
Commitments and contingencies - -
Shareholders' equity represented by:
Preferred stock - -
Common stock 106 106
Additional paid-in capital 13,302 13,283
Unearned ESOP compensation (12,200) (12,128)
Currency translation adjustment 7,237 9,391
Retained earnings 220,340 215,211
228,785 225,863
Less treasury stock, at cost 20,051 15,249
208,734 210,614
Total liabilities and shareholders'
equity $547,462 $348,110
See accompanying notes to consolidated financial statements.
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
for the nine months ended June 30, 1998 and 1997
(in thousands of dollars)
(Unaudited)
1998 1997
Cash flows from operating activities:
Net earnings $ 12,764 $13,406
Adjustments to reconcile net earnings to
net cash provided (used) by operating
activities,
Depreciation and amortization 19,775 17,763
Equity in loss of unconsolidated affiliate 4,132 3,536
Changes in assets and liabilities,
net of effect of business acquisitions:
Accounts receivable 6,006 (94)
Inventories (9,938) 2,821
Current liabilities, other than
short-term borrowings and current
portion of long-term debt (6,955) (3,095)
Other, net (2,886) (198)
Total adjustments 10,134 20,733
Net cash provided by operating activities 22,898 34,139
Cash flows from investing activities:
Payments for purchase of property, plant
and equipment (14,627) (13,401)
Investment in unconsolidated affiliate (4,375) (5,300)
Business acquisitions, net of cash (169,451) -
Other 650 363
Net cash used in investing activities (187,803) (18,338)
Cash flows from financing activities:
Cash dividends paid (7,915) (8,019)
Proceeds from sales of treasury stock 38 184
Purchases of treasury stock (4,866) (3,761)
Proceeds from long-term debt 100,000 -
Payments of long-term debt (5,197) (45)
Net proceeds from short-term borrowings 75,616 (2,563)
Tax benefit applicable to ESOP dividend 279 273
Net cash used in financing activities 157,955 (13,931)
Effect of exchange rate changes on cash (628) (660)
Net change in cash and cash equivalents (7,578) 1,210
Cash and cash equivalents,
beginning of year 14,999 13,070
Cash and cash equivalents, end of period $ 7,421 $ 14,280
Supplemental cash flow information:
Cash paid during the year for:
Interest expense $ 1,240 $ 1,626
Income taxes $ 6,596 $ 5,872
Noncash investing and financing activities:
Liabilities assumed in business
acquisitions $25,446 $ -
See accompanying notes to consolidated financial statements.
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Financial Statements
The consolidated balance sheet as of June 30, 1998, and the statements
of consolidated earnings and cash flows for the three and nine month
periods ended June 30, 1998 and 1997, have been prepared by 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
June 30, 1998, and the results of its operations for the three and nine
month periods ended June 30, 1998 and 1997, and cash flows for the nine
month periods 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 statements of
consolidated earnings for the three and nine month periods ended June
30, 1998 are not necessarily indicative of the results to be expected
for other interim periods or for the full year.
Note 2 - Business Acquisitions
During the quarter ended June 30, 1998, the Company acquired two
businesses. The acquisitions have been accounted for under the purchase
method, and accordingly, the operating results have been included in
the consolidated results since the dates of acquisition.
In May 1998, the Company purchased the net assets of Baker Electrical
Products, Inc. of Memphis, Michigan, a manufacturer of electromagnetic
coils for anti-lock braking systems, for approximately $7,000,000. The
excess of the purchase price over the estimated fair value of the
assets acquired approximated $5,000,000 and is being amortized over 15
years.
In June 1998, the Company acquired the stock of Fuel Systems Textron,
Inc. (renamed Woodward FST, Inc.), a subsidiary of Textron, Inc.
(Textron), for $160,000,000, and incurred acquisition costs of
approximately $2,500,000. FST is a leading designer, developer, and
manufacturer of fuel injection nozzles, spray manifolds, and fuel
metering and distribution valves for gas turbine engines in the
aircraft (commercial and military) and industrial markets, and also
provides commercial repair and overhaul services. Total revenues of
FST for the year ended December 31, 1997 were approximately
$82,000,000.
In accordance with the FST acquisition agreement, the Company has the
option to elect Internal Revenue Service Code 338(h)(10) to treat the
transaction as an asset purchase for tax purposes. The Company must
notify Textron of this election by September 1, 1998 and will be
required to make an additional payment to Textron, not to exceed
$13,500,000, as compensation for the additional tax liability Textron
would recognize under this election. The Company expects to elect
Section 338(h)(10) treatment, as the estimated future tax benefits
outweigh the maximum required payment to Textron.
In connection with the acquisition of FST, the Company recorded
intangible assets for goodwill, customer relationships, process
technology, assembled workhorse and patents. These intangibles are
being amortized over a weighted average of 30 years. The amount of the
intangible assets recorded at the acquisition date is expected to be
approximately $150,000,000.
The amounts recorded relating to the acquisitions are currently subject
to adjustment subsequent to June 30, 1998 as the Company has not yet
completed the final allocation of the purchase price. Pro forma
financial information related to the FST acquisition will be included
in a subsequent Form 8-K filing.
The transactions were financed by a $100,000,000 term loan ("Term
Loan") and a revolving line of credit facility ("Revolver") up to a
maximum amount of $150,000,000. Borrowings under the Revolver are at
rates that vary with the LIBOR rate, money market rate or the prime
rate and carries a facility fee of 0.25%. The outstanding principal
amount of the Revolver is due 5 years from inception of the credit
facility. The Term Loan rate varies with the LIBOR rate. Required
principal payments of the Term Loan are: $3,750,000 in 1999,
$16,250,000 in 2000, $20,000,000 in 2001, $20,000,000 in 2002 and
$40,000,000 in 2003. The provisions of the Term Loan agreement require
the Company to maintain a minimum fixed charge coverage ratio and a
maximum funded debt to total capitalization ratio, as defined in the
agreement.
Note 3 - Earnings per Share
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 calculation of diluted earnings per share did not differ from
basic earnings per share for the quarter ended June 30, 1997 and 1998
nor in the year-to-date period ended June 30, 1998. Diluted earnings
per share for the year-to-date period ended June 30, 1997 differed by
$.01 from basic earnings per share.
Note 4 - Basic and Diluted Earnings per Share
The following is a reconciliation of the numerators and denominators
for the computation of basic and diluted earnings per share:
Three Months Nine Months
Ended Ended
June 30, June 30,
(in 000's except per share amounts)
1998 1997 1998 1997
Basic Earnings per Share:
Net earnings $ 4,891 $4,838 $12,764 $ 13,406
Shares:
Weighted average common shares 11,299 11,447 11,355 11,493
Basic Earnings per Share $ 0.43 $ 0.42 $ 1.12 $ 1.17
Diluted Earnings per Share:
Net earnings $4,891 $4,838 $12,764 $ 13,406
Shares:
Weighted average shares
from above 11,299 11,447 11,355 11,493
Add: Additional dilutive effect
of outstanding stock options 38 40 44 37
Weighted average shares, as adjusted
for dilution 11,337 11,487 11,399 11,530
Diluted Earnings per Share $ 0.43 $ 0.42 $ 1.12 $ 1.16
The following options were not included in the computation of diluted
earnings per share as the options' exercise prices were greater than
the average market price of the common shares during the respective
quarter and year-to-date periods:
WEIGHTED
AVERAGE
EXERCISE
DATE OPTIONS PRICE
6/25/97 1,000 $33.75
10/1/97 20,000 34.88
11/17/97 138,340 32.25
1/14/98 55,701 32.00
PART I - ITEM 2
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the third quarter of fiscal 1998, the Company achieved
significant progress towards the implementation of its strategic growth
plan, completing two acquisitions and launching a new operating group.
Financial results were comparable to last year despite the effects of
the Asian economic slowdown, the strong dollar, and increased caution
among a number of customers.
The strategic highlight of the quarter was the acquisition of the Fuel
Systems subsidiary of Textron Inc., which was renamed Woodward FST,
Inc. The addition of FST, a leading manufacturer of fuel injection
nozzles, spray manifolds, and fuel metering and distribution valves,
significantly augments the company's aircraft engine fuel delivery
system capabilities, and positions them for an expanded role in
customers' engine programs. FST, which also serves the industrial
engine market, generated revenues of $82 million in 1997 and is
expected to have minimal impact on fiscal 1998 earnings. To reflect the
broadened strategic thrust to better serve the total engine fuel
delivery market, the Aircraft Controls group has been renamed Aircraft
Engine Systems.
Earlier in the quarter, the Company launched the Automotive Products
group, which is focused on control systems for industrial engines and
turbines with less than 300 horsepower and smaller than those served by
our Industrial Controls group. The Company believes there is a
significant opportunity to serve this industrial market using
automotive derivative technology. In May, the Automotive Products group
acquired privately held Baker Electrical Products, Inc., of Memphis,
Michigan. Baker makes electromagnetic coils for anti-lock braking
systems, and, more generally, provides Woodward with low-cost, high-
quality production capabilities for solenoids used in industrial
applications. Long-term plans call for pursuing additional
acquisitions, joint ventures, and license agreements to supplement our
own technology and production capabilities to serve this market.
Results of Operations
For the quarter ended June 30, 1998, net billings for products and
services rose 3 percent to $119,399,000, from $115,761,000 a year ago.
Shipments by the Aircraft Engine Systems group increased 5 percent to
$54,694,000, primarily as a result of the addition of FST in June.
Industrial Controls' shipments were $62,357,000, off 2 percent from a
year ago, despite strong growth for some of the group's products--
notably, engineered systems. Automotive Products' shipments were
$2,348,000 for the quarter.
On the cost side, the improved gross margins reflect ongoing efforts to
increase efficiency as well as a favorable revenue mix, including a
healthy proportion of aftermarket products and services. Increased
sales, service and administrative expenses were attributable in part to
investments in new business development efforts, including the
Automotive Products group. The increase in other expense-net reflects
the amortization of intangibles from acquisitions as well as the effect
of foreign currency fluctuations. Net earnings for the quarter were
$4,891,000, or $0.43 per diluted share, compared with $4,838,000, or
$0.42 per diluted share, a year ago. Woodward's equity in the loss of
its unconsolidated GENXON(tm) Power Systems, LLC affiliate reduced
earnings per share for both periods by $0.06.
For the first nine months of fiscal 1998, net billings for products and
services were $330,699,000, up 3 percent from $321,336,000 in the
corresponding period a year ago. Shipments by Aircraft Engine Systems
rose 5 percent to $145,912,000; Industrial Controls' shipments of
$182,439,000 were virtually identical to the previous year's level. Net
earnings were $12,764,000, or $1.12 per diluted share, compared with
$13,406,000, or $1.17 per diluted share, in part because Woodward's
portion of GENXON's loss, $0.22 per share, was $0.03 greater than a
year earlier.
Financial Condition
As a result of recent acquisitions the following asset balances
increased; inventories by $25,595,000, accounts receivable by
$4,135,000, property, plant and equipment-net by $21,400,000 and
intangibles and other assets by $159,642,000 due principally to
intangibles recorded in the transactions. Additionally, the following
liability balances increased; short-term borrowings by $75,364,000,
accounts payable and accrued liabilities by $24,020,000, long-term debt
by $99,942,000 and other liabilities by $2,900,000.
Exclusive of the recent acquisitions, accounts receivable decreased
$5,761,000 from the September 30, 1998 level of $91,806,000 to
$86,045,000 as a result of higher shipment levels at the end of the
fiscal year. Inventories increased to $92,840,000 at June 30, 1998
from $83,249,000 at September 30, 1998 partly due to the additional
inventory needed to meet anticipated product demand over the next
several months. Property, plant and equipment - net decreased from
$110,948,000 at September 30, 1997 to $105,847,000 due to capital
expenditures being less than depreciation expense. Accounts payable
and accrued expenses decreased $8,713,000 to $56,111,000 from the
September 30, 1998 level of $64,824,000 due in part to reductions in
trade payables and member benefit accruals.
The company's effective tax rate for the nine months ended June 30,
1998 and 1997 was 40.0% and 39.0%, respectively. The effective tax
rate for the fiscal year ended September 30, 1997 was 38.6%.
On June 25, 1998, the Board of Directors declared a quarterly dividend
of twenty-three and one-quarter cents ($.2325) per share. The dividend
is payable on September 1, 1998 to shareholders of record at the close
of business on August 14, 1998.
Year 2000 Project
The Company has completed an enterprise-wide assessment of its
operations to identify and prioritize systems that will be affected by
the year 2000. In addition to assessing its core information system
hardware and software, the Company has evaluated its manufactured
products, manufacturing equipment and facilities. An implementation
plan to resolve identified year 2000 issues has been developed and it
is anticipated that all corrective efforts and testing will be
completed by March 1999, allowing adequate time for testing. Costs of
corrective efforts, principally system reprogramming and upgrades, are
not anticipated to be material and are estimated to be less than
$1,500,000.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") 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.
In February 1998, FASB issued SFAS No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits". The Company does not
not expect the adoption of this pronouncement to have a material effect
on the results of operations or financial condition.
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Currently the Company does not
expect the adoption of this pronouncement to have a material effect on
results of operations or financial condition.
Forward-looking Statements
This quarterly report contains 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 6(b)
a) Exhibits
4. $250,000,000 credit agreement dated June 15, 1998 between
the Company and Wachovia Bank N.A.
27. Financial data schedule
b) Two form 8-K's were filed for the quarter ended June 30, 1998; one
on June 1, 1998 and another on June 30, 1998 to report the
acquisition of Fuel Systems Textron, Inc. (FST) a subsidiary of
Textron, Inc.
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
August 14, 1998 /s/ John A. Halbrook
John A. Halbrook, President
and Chief Executive Officer
August 14, 1998 /s/ Stephen P. Carter
Stephen P. Carter, Vice
President, Chief Financial
Officer and Treasurer