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, 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 July 31, 1997, 11,446,966 shares of common stock with a par value of 1.5625 cents per share were outstanding.
WOODWARD GOVERNOR COMPANY FORM 10-Q For the Quarter Ended June 30, 1997 INDEX Description Part I. Financial Information Item 1. Financial Statements Statements of Consolidated Earnings for the three months ended June 30, 1997 and 1996 Statements of Consolidated Earnings for the nine months ended June 30, 1997 and 1996 Consolidated Balance Sheets as of June 30, 1997 and September 30, 1996 Statements of Consolidated Cash Flows for the nine months ended June 30, 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
<TABLE> WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED EARNINGS for the three months ended June 30, 1997 and 1996 (in thousands except per share amounts) (Unaudited) <CAPTION> 1997 1996 <S> <C> <C> <C> <C> Net billings for products and services $115,761 $106,034 Costs and expenses: Cost of goods sold 87,247 79,312 Sales, service and administrative expenses 17,967 16,534 Other: Interest expense $701 $760 Interest income (204) (107) Miscellaneous expense, net 918 1,415 1,259 1,912 Total costs and expenses 106,629 97,758 Earnings before income taxes and equity in loss of unconsolidated affiliate 9,132 8,276 Income taxes 3,562 3,311 Earnings before equity in loss of unconsolidated affiliate 5,570 4,965 Equity in loss of unconsolidated affiliate, net of tax (732) - Net earnings $4,838 $4,965 Net earnings per share $0.42 $0.43 Average shares outstanding 11,447 11,580 Cash dividends per share $0.2325 $0.2325 See accompanying notes to consolidated financial statements. </TABLE>
<TABLE> WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED EARNINGS for the nine months ended June 30, 1997 and 1996 (in thousands except per share amounts) (Unaudited) <CAPTION> 1997 1996 <S> <C> <C> <C> <C> Net billings for products and services $321,336 $300,961 Costs and expenses: Cost of goods sold 238,212 224,412 Sales, service and administrative expenses 53,234 47,978 Other: Interest expense $1,913 $2,568 Interest income (594) (448) Miscellaneous expense, net 3,058 4,377 3,633 5,753 Total costs and expenses 295,823 278,143 Earnings before income taxes and equity in loss of unconsolidated affiliate 25,513 22,818 Income taxes 9,950 9,128 Earnings before equity in loss of unconsolidated affiliate 15,563 13,690 Equity in loss of unconsolidated affiliate, net of tax (2,157) - Net earnings $13,406 $13,690 Net earnings per share $1.17 $1.18 Average shares outstanding 11,493 11,556 Cash dividends per share $0.6975 $0.6975 See accompanying notes to consolidated financial statements. </TABLE>
<TABLE> WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars) <CAPTION> JUNE SEPTEMBER 30, 1997 30, 1996 (Unaudited) <S> <C> <C> Assets Current assets: Cash and cash equivalents $14,280 $13,070 Accounts receivable, less allowance for losses of $2,543 for June and $2,755 for September 79,251 80,902 Inventories 87,945 92,135 Deferred income taxes 19,991 19,991 Total current assets 201,467 206,098 Property, plant and equipment, at cost: Land 5,876 6,218 Buildings and improvements 120,022 120,283 Machinery and equipment 195,715 182,680 Construction in progress 448 6,971 322,061 316,152 Less allowance for depreciation 213,397 201,939 Property, plant and equipment - net 108,664 114,213 Intangibles and other assets 10,815 9,919 Deferred income taxes 18,525 18,568 Total assets $339,471 $348,798 Liabilities and shareholders' equity Current liabilities: Short-term borrowings $12,000 $15,310 Current portion of long-term debt 4,862 4,862 Accounts payable and accrued expenses 55,147 61,597 Taxes on income 5,153 3,226 Total current liabilities 77,162 84,995 Long-term debt, less current portion 22,651 22,696 Other liabilities 33,112 33,112 Commitments and contingencies - - Shareholders' equity represented by: Preferred stock - - Common stock 190 190 Additional paid-in capital 13,194 13,165 Unearned stock plan compensation (14,637) (14,665) Currency translation adjustment 9,981 13,620 Retained earnings 213,069 207,392 221,797 219,702 Less treasury stock, at cost 15,251 11,707 206,546 207,995 Total liabilities and shareholders'equity $339,471 $348,798 See accompanying notes to consolidated financial statements. </TABLE>
<TABLE> WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED CASH FLOWS for the nine months ended June 30, 1997 and 1996 (in thousands of dollars) (Unaudited) <CAPTION> 1997 1996 <S> <C> <C> Cash flows from operating activities: Net earnings $13,406 $13,690 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Depreciation and amortization 17,763 18,157 Deferred income taxes, noncurrent 43 76 Stock plan compensation expense 28 126 Changes in assets and liabilities: Accounts receivable (94) 3,746 Inventories 2,821 (4,399) Current liabilities, other than short-term borrowings and current portion of long-term debt (3,095) 5,056 Equity in loss of unconsolidated affiliate 3,536 - Other, net (269) (4,020) Total adjustments 20,733 18,742 Net cash provided by operating activities 34,139 32,432 Cash flows from investing activities: Payments for purchase of property, plant and equipment (13,401) (16,023) Investment in unconsolidated affiliate (5,300) - Other 363 1,007 Net cash (used) in investing activities (18,338) (15,016) Cash flows from financing activities: Cash dividends paid (8,019) (8,073) Proceeds from sales of treasury stock 184 436 Purchases of treasury stock (3,761) (1,731) Payments of long-term debt (45) (209) Short-term borrowings (payments) (2,563) (13,439) Tax benefit applicable to stock plan dividend 273 276 Net cash (used) in financing activities (13,931) (22,740) Effect of exchange rate changes on cash (660) (1,172) Net change in cash and cash equivalents 1,210 (6,496) Cash and cash equivalents, beginning of year 13,070 12,451 Cash and cash equivalents, end of period $14,280 $5,955 Supplemental cash flow information: Interest paid $1,626 $2,587 Income taxes paid $5,872 $11,562 See accompanying notes to consolidated financial statements. </TABLE>
WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The consolidated balance sheet as of June 30, 1997, and the statements of consolidated earnings and cash flows for the three and nine month periods ended June 30, 1997 and 1996, have been prepared by Woodward Governor Company (the company) without audit. The September 30, 1996 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, 1997, and the results of its operations for the three and nine month periods ended June 30, 1997 and 1996, 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 1996 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, 1997 are not necessarily indicative of the results to be expected for other interim periods or for the full year. Stock Split Fiscal year 1996 net earnings per share, average shares outstanding and cash dividends per share have been restated to reflect the four-for-one stock split on February 7, 1997, to holders of record as of January 23, 1997.
PART I - ITEM 2 WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The company is pleased to report solid financial performance in the third fiscal quarter and the nine months ended June 30, 1997. Increased sales and improved cost management were the principal contributors to the results for both periods. Third Quarter Results Net billings for products and services in the quarter ended June 30, 1997 rose 9%, to $115,761,000 from $106,034,000 a year ago. Aircraft Controls' shipments of $51,920,000 were up 6%; excluding Bauer Aerospace, which was divested in July 1996, the increase would have been almost 9%. The increase reflects the current upswing in the aircraft production cycle, as well as additional market penetration by new products that expand beyond the core fuel controls business. Industrial Controls' shipments rose 12%, to $63,841,000, benefiting from strength in custom-engineered systems, turbine retrofits in the U.S., a strong market for engine controls in Europe, and last year's acquisition of Deltec Fuel Systems. Total costs and expenses for the quarter were $106,629,000, an increase of $8,871,000, or 9%, over the prior year quarter. As a percentage of net billings, however, total costs and expenses were approximately the same as last year, reflecting the company's continued focus on productivity and efficiency. Sales, service and administrative expenses increased $1,433,000 over the prior year quarter primarily due to expanding international sales operations including Deltec, an increased emphasis on training, and costs associated with the recent consolidation of the Industrial Controls business units in Colorado. Earnings for the quarter, before the effect of the GENXONtm Power Systems joint venture, rose 12% to $5,570,000, or $.49 per share, from $4,965,000, or $.43 per share, a year ago. Including the company's share of GENXON's loss ($732,000 after taxes, or $.07 per share), net earnings were $4,838,000, or $.42 per share. Nine Months Results For the first nine months of fiscal 1997, net billings for products and services were $321,336,000, up 7% from $300,961,000 in the corresponding period last year. Aircraft Controls' billings increased 4% for the year to date (7% excluding Bauer), to $138,721,000; Industrial Controls achieved a 9% gain, to $182,615,000. Total costs and expenses for the first nine months of fiscal 1997, as a percentage of billings, were slightly lower when compared to the same prior year period, primarily due to the Company's ongoing emphasis on cost management. Before the effect of GENXON, earnings were $15,563,000, or $1.35 per share, 14% ahead of last year's $13,690,000, or $1.18 per share. Including the company's portion of GENXON's loss for the nine months ($2,157,000 after taxes, or $.18 per share), net earnings were $13,406,000, or $1.17 per share.
GENXON Update GENXON, a joint venture with Catalytica, Inc., which is developing XONONtm Combustion Systems for installed, out-of-warranty gas turbines, had several positive achievements during the quarter. In June, GENXON signed a Memorandum of Understanding with General Electric Company for the worldwide commercialization of the ultra-low emission systems in GE-designed heavy duty gas turbines. Also during the quarter, GENXON announced the successful operation of XONON in a gas turbine under field operating conditions at full load. These encouraging developments, coupled with recent indications of continued political support for strict air quality regulations in the United States and abroad, helped to focus attention on GENXON's advanced emission control technology. Development expenses have been accelerated to support these expanding market opportunities. Balance Sheet The balance sheet remained strong as of June 30, 1997, with total shareholders' equity of $206,546,000 and long-term debt of $22,651,000, which was less than 10% of total capital. Cash balances increased $1,210,000 to $14,280,000 at June 30, 1997 when compared to September 30, 1996. Higher cash balances during the current fiscal year have been utilized to reduce short-term borrowings, which declined $3,310,000 since September 30, 1996 and totaled $12,000,000 at June 30, 1997. Total inventories were $87,945,000 at June 30, 1997 as compared to $92,135,000 at September 30, 1996, a decline of $4,190,000, which reflects the company's on-going emphasis of inventory management. Property, plant and equipment - net decreased to $108,664,000 at June 30, 1997 from $114,213,000 at September 30, 1996, due to capital expenditures being less than depreciation. Intangibles and other assets increased from $9,919,000 at September 30, 1996 to $10,815,000 at June 30, 1997 due to the impact of the investment in the GENXON joint venture. Accounts payable and accrued expenses decreased to $55,147,000 at June 30, 1997 from $61,597,000 at September 30, 1996, due in part to reductions in accounts payable and other accruals. The currency translation adjustment, a component of total shareholders' equity, decreased from $13,620,000 at September 30, 1996 to $9,981,000 at June 30, 1997 due to fluctuations in exchange rates. The company's effective tax rate for the nine months ended June 30, 1997 and 1996 was 39.0% and 40.0%, respectively. The effective tax rate for the fiscal year ended September 30, 1996 was 37.0%. Other On June 25, 1997, the Board of Directors declared a quarterly dividend of twenty-three and one-quarter cents ($.2325) per share. The dividend is payable on September 2, 1997 to shareholders of record at the close of business on August 15, 1997.
To continue to build presence in the company's competitive markets, efforts are centered on working closely with customers to understand their needs and respond quickly and effectively. Internally, as part of a commitment to maintaining a leading position in technology, product quality, and customer service, the company continues programs designed to ensure that all members have the motivation, knowledge, and authority to continually raise the level of their performance and, collectively, that of the company. An energized and engaged membership is the key strategic asset moving the company toward its long-term objectives for growth and profitability. This quarterly report may contain forward looking statements reflecting the company's current expectations. These statements involve risk and uncertainty. Actual future results may differ materially from expectations. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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.
PART II - OTHER INFORMATION Item 6(b) No Form 8-K was filed for the quarter ended June 30, 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 August 14, 1997 /s/ John A. Halbrook John A. Halbrook, President and Chief Executive Officer August 14, 1997 /s/ Stephen P. Carter Stephen P. Carter, Vice President, Chief Financial Officer and Treasurer