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
<TABLE> 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) <CAPTION> 1998 1997 <S> <C> <C> <C> <C> 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. </TABLE>
<TABLE> 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) <CAPTION> 1998 1997 <S> <C> <C> <C> <C> 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. </TABLE>
<TABLE> WOODWARD GOVERNOR COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands of dollars) <CAPTION> JUNE SEPTEMBER 30, 1998 30, 1997 (Unaudited) <S> <C> <C> 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. </TABLE>
<TABLE> 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) <CAPTION> 1998 1997 <S> <C> <C> 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. </TABLE>
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: <TABLE> <CAPTION> Three Months Nine Months Ended Ended June 30, June 30, (in 000's except per share amounts) 1998 1997 1998 1997 <S> <C> <C> <C> <C> 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 </TABLE> 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: <TABLE> <CAPTION> WEIGHTED AVERAGE EXERCISE DATE OPTIONS PRICE <S> <C> <C> 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 </TABLE>
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