Woodward - 10-Q quarterly report FY

 

 

 

 

 

 

 

 

 

 

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 þ     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of “accelerated filer and large accelerated filer” inRule 12b-2of the Exchange Act. (Check one):

Large accelerated filer þ     Accelerated filer o      Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2of the Act).  Yes o     No þ

As of January 14, 2008, 34,076,647 shares of the common stock with a par value of $0.00291 per share were outstanding.

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

Woodward Governor Company’s (“Woodward”) Condensed Consolidated Financial Statements for the three months ended December 31, 2007 and 2006, included herein, have not been audited by an independent registered public accounting firm. These Condensed Consolidated Financial Statements reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly Woodward’s financial position as of December 31, 2007, and the results of operations and cash flows for the periods presented herein. The Condensed Consolidated Balance Sheet as of September 30, 2007 was derived from Woodward’s annual report onForm 10-Kfor the fiscal year ended September 30, 2007. The results of operations for the three months ended December 31, 2007 is not necessarily indicative of the operating results to be expected for other interim periods or for the full year.

The Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in Woodward’s Annual Report onForm 10-Kfor the fiscal year ended September 30, 2007 and other financial information filed with SEC.

The preparation of the Condensed Consolidated Financial Statements requires management to make use of estimates and assumptions that affect the reported amount of assets and liabilities, revenues and expenses and certain financial statement disclosures. Significant estimates in these Condensed Consolidated Financial Statements include allowances for losses, net realizable value of inventories and related purchase commitments, the cost of sales incentives, useful lives of property and identifiable intangible assets, the evaluation of impairments of property, identifiable intangible assets and goodwill, income tax and valuation reserves, the valuation of assets and liabilities acquired in business combinations, assumptions used in the determination of the funded status and annual expense of pension and postretirement employee benefit plans and the valuation of stock compensation instruments granted to employees, including estimates of the related volatility and expected lives for the instruments. Ultimately realized values could differ from these estimates.

 

Woodward operates through three business segments:

 

SFAS 157: In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal

 

 

years beginning after November 15, 2007, and interim periods within those fiscal years. As a result, SFAS 157 is effective for Woodward in the first quarter of fiscal 2009. Woodward is currently assessing the impact that SFAS 157 may have on its results of operations and financial position.

SFAS 159: In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 is expected to expand the use of fair value accounting but does not affect existing standards which require certain assets or liabilities to be carried at fair value. The objective of SFAS 159 is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Under SFAS 159, a company may choose, at specified election dates, to measure eligible items at fair value and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. As a result, SFAS 159 is effective for Woodward in the first quarter of fiscal 2009. Woodward is currently assessing the impact that SFAS 159 may have on its results of operations and financial position.

EITF 07-3:In June 2007, the Emerging Issues Task Force (“EITF”) issuedEITF 07-3,“Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities”(“EITF 07-3”).EITF 07-3addresses the diversity that exists with respect to the accounting for the non-refundable portion of a payment made by a research and development entity for future research and development activities. The EITF concluded that an entity must defer and capitalize non-refundable advance payments made for research and development activities and expense these amounts as the related goods are delivered or the related services are performed.EITF 07-3is effective for interim or annual reporting periods in fiscal years beginning after December 15, 2007 (fiscal 2009 for Woodward). Woodward is currently evaluating the impact adoptingEITF 07-03may have on its results of operations and financial position.

SFAS 141(R): In December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) is effective for fiscal years beginning after December 13, 2008. As a result, SFAS 141(R) is effective for Woodward in the first quarter of fiscal 2010. SFAS 141(R) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141(R) also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Woodward is currently assessing the impact that SFAS 141(R) may have on its results of operations and financial position.

SFAS 160: In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an Amendment of ARB 51”, (“SFAS 160”). This statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest (minority interest) in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 establishes accounting and reporting standards that require noncontrolling interests to be reported as a component of equity, changes in a parent’s ownership interest while the parent retains its controlling interest be accounted for as equity transactions, and any retained noncontrolling equity investment upon the deconsolidation of a subsidiary be initially measured at fair value. SFAS 160 is to be applied prospectively to business combinations consummated on or after the beginning of the first annual reporting period on or after December 15, 2008 (fiscal 2010 for Woodward). Woodward is currently evaluating the impact SFAS 160 may have on its results of operations and financial position.

 

Net earnings per share — basic is computed by dividing net earnings available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Net earnings per share — diluted reflects the potential dilution that could occur if options were exercised.

The average shares outstanding decreased in the first quarter of fiscal 2008 as a result of shares repurchased under Woodward’s ongoing share repurchase program. Woodward repurchases common stock at times management deems appropriate, given current market valuations. During the first quarter of fiscal 2008, Woodward completed its accelerated stock repurchase agreement through J.P. Morgan Chase Bank. Woodward purchased a total of 494 common shares in exchange for $31,114 through this program at an average price of $62.95 per common share.

The following is a reconciliation of net earnings to net earnings per share — basic and net earnings per share — diluted for the first quarters of fiscal 2008 and fiscal 2007:

Outstanding stock options totaling 120 and 190 shares for the three months ended December 31, 2007 and 2006, respectively, were not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive.

 

Effective Annual Tax Rate for Interim Reporting — GAAP requires that the interim period tax provision be determined as follows:

The estimated annual effective rate is applied to the year-to-date “ordinary” income at the end of each quarter to compute the year-to-date tax applicable to ordinary income. The tax expense or benefit related to ordinary income in each quarter is the difference between the most recent year-to-date and the prior quarter year-to-date computations.

 

The determination of the annual effective tax rate is based upon a number of significant estimates and judgments, including the estimated annual pretax income of Woodward in each tax jurisdiction in which it operates and the development of tax planning strategies during the year. In addition, as a global commercial enterprise, Woodward’s tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews, as well as other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.

The following table sets out the tax expense and the effective tax rate for Woodward’s continuing operations:

Income taxes for the three months ended December 31, 2006, included an expense reduction of $1,177 related to the retroactive extension of the U.S. research and experimentation tax credit. This expense reduction related to the estimated amount of the credit applicable to the period January 1, 2006 through September 30, 2006.

In June 2006, FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109” (“FIN 48”), which provides guidance on the financial statement recognition, measurement, reporting and disclosure of uncertain tax positions taken or expected to be taken in a tax return. FIN 48 addresses the determination of whether tax benefits, either permanent or temporary, should be recorded in the financial statements. For those tax benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

Woodward adopted the provisions of FIN 48 on October 1, 2007, as required. The change in measurement criteria caused Woodward to recognize a decrease in the retained earnings component of shareholders’ equity of $7,702.

As of October 1, 2007, the total amount of the gross liability for worldwide unrecognized tax benefits recorded on adoption of FIN 48 and reported in other liabilities in the Condensed Consolidated Balance Sheet was $20,509. Of this amount, $16,316 would impact Woodward’s effective tax rate, if recognized. At this time, Woodward estimates that it is reasonably possible that the liability for unrecognized tax benefits will decrease by up to $9,702 in the next twelve months through completion of reviews by various worldwide tax authorities. The change in Woodward’s tax liability for unrecognized tax benefits in the first quarter of fiscal 2008 was not significant.

Woodward recognizes interest and penalties related to unrecognized tax benefits in tax expense. As of the date of adoption of FIN 48, Woodward has accrued interest and penalties of $4,396.

Woodward’s tax returns are audited by Federal, state, and foreign tax authorities and these audits are at various stages of completion at any given time. Fiscal years remaining open to examination in foreign jurisdictions include 2002 and forward. Woodward is subject to Federal and state income tax examinations for fiscal years 2001 and forward.

 

 

Depreciation expense totaled $7,402 and $6,523 for the three months ended December 31, 2007 and 2006, respectively.

 

 

 

 

Amortization expense totaled $1,895 and $1,726 for the three months ended December 31, 2007 and 2006, respectively.

Amortization expense associated with current intangibles is expected to be:

 

On October 25, 2007, Woodward entered into a Second Amended and Restated Credit Agreement with J.P. Morgan Chase Bank, National Association, Wachovia Bank, N.A., Wells Fargo Bank, N.A. and Deutsche Bank Securities. This agreement increases the initial commitment from $100,000 to $225,000 and also increases the option to expand the commitment from $75,000 to $125,000, for a total of $350,000. The agreement generally bears interest at LIBOR plus 41 basis points to 80 basis points and expires in October 2012. At December 31, 2007 and September 30, 2007, there were no borrowings against the line.

 

Provisions of the sales agreements include product warranties customary to such agreements. Accruals are established for specifically identified warranty issues that are probable to result in future costs. Warranty costs are

 

accrued on a non-specific basis whenever past experience indicates a normal and predictable pattern exists. Changes in accrued product warranties were as follows:

 

 

The components of the net periodic pension cost related to continuing operations are as follows:

 

The components of the net periodic retirement healthcare benefits related to continuing operations are as follows:

Woodward expects its contributions for retirement pension benefits will be $0 in the United States and $2,913 in other countries in 2008. Woodward also expects its contributions for retirement healthcare benefits will be $3,276 in 2008, less amounts received as federal subsidies. The exact amount of cash contributions made to these plans in any year is dependent upon a number of factors including minimum funding requirements in the jurisdictions in which Woodward operates and arrangements made with trustees of certain foreign plans. As a result, the actual funding in fiscal 2008 may differ from the current estimate.

Woodward is entitled to a federal subsidy under the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Woodward received no subsidy for the three months ended December 31, 2007 ($433 for the three months ended December 31, 2006). Woodward currently expects to receive an additional $542 during the year ending September 30, 2008. Woodward paid prescription drug benefits of $813 and $678 during the three months ended December 31, 2007 and 2006, respectively. Woodward expects to pay additional prescription drug benefits of approximately $1,800 for the year ending September 30, 2008.

 

Accumulated other comprehensive earnings, which totaled $26,179 at December 31, 2007, consisted of the following items:

 

 

Woodward is currently involved in pending or threatened litigation or other legal proceedings regarding employment, product liability, and contractual matters arising from the normal course of business. Woodward has accrued for individual matters that it believes are likely to result in a loss when ultimately resolved using estimates of the most likely amount of loss. There are also individual matters that it believes the likelihood of a loss when ultimately resolved is less than likely but more than remote, which were not accrued. While it is possible that there could be additional losses that have not been accrued, Woodward currently believes the possible additional loss in the event of an unfavorable resolution of each matter is less than $10,000 in the aggregate.

Woodward does not recognize contingencies that might result in a gain until such contingencies are resolved and the related amounts are realized.

In the event of a change in control of the company, Woodward may be required to pay termination benefits to certain executive officers.

 

 

The differences between the total of segment amounts and the Condensed Consolidated Financial Statements were as follows:

 

The summary of consolidated total assets is as follows:

 

We design, manufacture, and service energy control systems and components for aircraft and industrial engines and turbines and electrical power equipment. Leading original equipment manufacturers (“OEMs”) throughout the world use our products and services in the aerospace, power and process industries, and transportation markets.

Our strategic focus is Energy Control and Optimization Solutions. The control of energy — fluid energy, combustion, electrical energy, and motion — is a growing requirement in the markets we serve. Our customers look to us to optimize the efficiency, emissions, and operations of power equipment. Our core technologies leverage well across our markets and customer applications, enabling us to develop and integrate cost-effective and state-of-the-art fuel, combustion, fluid, actuation, and electronic systems. We focus primarily on OEMs and equipment packagers, partnering with them to bring superior component and system solutions to their demanding applications.

We have three operating segments — Turbine Systems, Engine Systems, and Electrical Power Systems. Turbine Systems is focused on systems and components that provide energy control and optimization solutions for the aircraft and industrial gas turbine markets. Engine Systems is focused on systems and components that provide energy control and optimization solutions for the industrial engine and steam turbine markets, which include power generation, transportation, and process industries. Electrical Power Systems is focused on systems and components that provide power sensing and energy control systems that improve the security, quality, reliability, and availability of electrical power networks for industrial markets, which include power generation, power distribution, transportation, and process industries. We use segment information internally to assess the performance of each segment and to make decisions on the allocation of resources.

Net sales for the quarter was $272,063, an increase of 20.2%, from $226,248 for the first quarter of the prior year with organic growth of 16.6%. Net earnings for the quarter were $25,325, or $0.72 per diluted share, compared to $17,887, or $0.51 per diluted share, in the previous year’s first quarter.

Turbine Systems’ net sales for the first quarter were $130,793, an increase of 11.8% from $117,005 for last year’s first quarter. Turbine Systems’ segment earnings for the first quarter increased to 20.8% of segment sales from 16.5% of segment sales from the first quarter a year ago. This improvement is primarily attributable to continuous improvement efforts related to operating margins and the positive impact of higher sales on a consistent fixed cost base, a favorable product mix, and cost-control activities.

Engine Systems’ net sales for the first quarter were $114,038, an increase of 10.8% from $102,921 for last year’s first quarter. Engine Systems’ first quarter earnings decreased to 10.6% of segment sales from 12.2% of segment sales from the first quarter a year ago. This change reflects an unfavorable product mix compared to the prior year, increased expediting costs associated with supply chain constraints, and growth related investments.

Electrical Power Systems’ net sales for the first quarter were $57,474, an increase of 77.9% from $32,302 for last year’s first quarter. Electrical Power Systems’ first quarter earnings increased to 12.5% of segment sales from 11.1% of segment sales from the first quarter a year ago. This improvement reflects the integration of our acquisition of Schaltanlagen-Elektronik-Geräte GmbH & Co. KG (“SEG”) and continuous improvement efforts related to operating margins and the positive impact of higher sales on our fixed cost base.

Our first quarter results this year also included the effect of the implementation of Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”), which decreased the retained earnings component of shareholders’ equity by $7,702.

At December 31, 2007, our total assets were $821,823, including $61,142 in cash and cash equivalents, and our total debt was $54,820. Together with our line of credit, we are well positioned to fund expanded research and development projects and to explore other investment opportunities consistent with our focused strategies.

The following table presents the breakdown of consolidated net external sales by segment:

Turbine Systems’ net external sales increased 11.8% in the three months ended December 31, 2007, compared to the same period a year ago reflecting the continued strength of the aerospace business. This has driven higher demand for both OEM and military and commercial aftermarket products.

Engine Systems’ net external sales increased 10.8% in the three months ended December 31, 2007, compared to the same period a year ago. Increased production in the marine and alternative fuel segments as well as growth in the continuous power application market have been the primary drivers of this growth.

Electrical Power Systems’ net external salesincreased 77.9% in the three months ended December 31, 2007, compared to the same period a year ago. Demand for power generation, primarily wind turbine, is driving increased demand for our products.

 

The following table presents costs and expenses:

Cost of goods sold increased in the three months ended December 31, 2007, as compared to the same period last year, primarily due to an increase in sales volume.

Gross margins (as measured by net sales less cost of goods sold) decreased to 29.9% for the three months ended December 31, 2007 from 30.3% for the three months ended December 31, 2006. The decrease in gross margins reflects a change in product mix and costs associated with supply chain constraints.

Selling, general, and administrative expenses decreased both in dollar terms and as a percentage of sales in the three months ended December 31, 2007, as compared to the same period last year primarily due to a reduction in business development costs.

Research and development costs increased in the three months ended December 31, 2007, as compared to the same period last year, reflecting higher levels of development activity and the full integration of our business acquisition. Research and development costs decreased as a percent of sales period-to-period.

In Turbine Systems, we are working closely with our customers early in their own development and design stages, helping them by developing components and integrated systems that allow them to meet emissions requirements, increase fuel efficiency, and lower their costs. Most significantly, we are developing components and an integrated fuel system for the new GEnx turbofan engine for the Boeing 787, Airbus A350, and Boeing747-8, and components for the GE Rolls-Royce F136 and Pratt & Whitney F135 engines that are the two propulsion choices to power Lockheed Martin’s Joint Strike Fighter aircraft, and components for the T700-GE-701D engine that will be used to upgrade the Sikorsky Black Hawk and Boeing Apache helicopters, among others.

Engine Systems continues to develop components and integrated systems that allow our customers to meet emissions requirements, increase fuel efficiency, and lower their costs. Development projects include compressed natural gas and liquid propane gas for urban vehicles and trucks. In addition, we are developing a leading edge diesel particulate filter and after-treatment burner systems for off highway and urban diesel truck markets.

Electrical Power Systems is developing new power inverter controls that enable the energy from wind to be tied to the power grid as well as electrical devices that sense and correct problems in the power grid to protect homes and businesses.

 

Turbine Systems’ segment earnings increased 41% in the three months ended December 31, 2007 as compared to the same period last year due to the following:

Sales volume increased due to higher demand for both military and commercial aftermarket products. Selling price increases primarily affected spares and components used in the aerospace aftermarket. Turbine Systems also experienced a favorable product mix compared to the prior year which increased earnings. Forecasted variable compensation accrued and expensed for Turbine Systems’ members was higher in 2008 than in 2007, driven by performance-based factors.

Engine Systems’ segment earnings decreased 4% in the three months ended December 31, 2007 as compared to the same period last year due to the following:

Sales volume increases were primarily in the power generation and marine markets. Selling price increases were across most products to offset increased material costs. Engine Systems also experienced an unfavorable product mix compared to the prior year, increased expediting costs associated with supply chain constraints, and growth related investments. Forecasted variable compensation accrued and expensed for Engine Systems’ members was higher in 2008 than in 2007, driven by performance-based factors.

Electrical Power Systems’ segment earnings increased 100% in the three months ended December 31, 2007 as compared to the same period last year due to the following:

Sales volume is higher due to inverter products sold into wind power applications. A change in mix and changes in the external market put pressure on margins. Forecasted variable compensation accrued and expensed for Electrical Power Systems’ members was higher in 2008 than in 2007, driven by performance-based factors.

Income taxes were provided at an effective rate on earnings before income taxes of 34.2% for the three-month period ended December 31, 2007 compared to 32.9% for the three month period ended December 31, 2006. The change in the effective tax rate was attributable to the following (as a percent of earnings before income taxes):

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109” (“FIN 48”), which provides guidance on the financial statement recognition, measurement, reporting and disclosure of uncertain tax positions taken or expected to be taken in a tax return. FIN 48 addresses the determination of whether tax benefits, either permanent or temporary, should be recorded in the Condensed Consolidated Financial Statements. For those tax benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by the taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

We adopted the provisions of FIN 48 on October 1, 2007, as required. The change in measurement criteria caused us to recognize a decrease in the retained earnings component of shareholders’ equity of $7,702.

As of October 1, 2007, the total amount of the gross liability for worldwide unrecognized tax benefits recorded on adoption of FIN 48 and reported in other liabilities in the Condensed Consolidated Balance Sheet was $20,509. Of this amount, $16,316 would impact our effective tax rate, if recognized. At this time, we estimate that it is reasonably possible that the liability for unrecognized tax benefits will decrease by up to $9,702 in the next twelve months through completion of reviews by various worldwide tax authorities. The change in our tax liability for unrecognized tax benefits in the first quarter of fiscal 2008 was not significant.

We recognize interest and penalties related to unrecognized tax benefits in tax expense. As of the date of adoption of FIN 48, we have accrued interest and penalties of $4,396.

Our tax returns are audited by Federal, state, and foreign tax authorities and these audits are at various stages of completion at any given time. Fiscal years remaining open to examination in foreign jurisdictions include 2002 and forward. We are subject to Federal and state income tax examinations for fiscal years 2001 and forward.

 

Turbine Systems’ segment assets increased primarily due to increases in inventory in response to increases in sales volume offset by collections of accounts receivable.

Engine Systems’ segment assets decreased primarily due to increases in inventory as a result of an increase in sales volume offset by collection of accounts receivable and a transfer of assets to nonsegment assets.

Electrical Power Systems’ segment assets increased primarily as a result of increases in accounts receivable and inventory in response to increases in sales volume.

Nonsegment assets decreased primarily because of a decrease in cash and cash equivalents related payments of accrued bonuses and the payment of long-term debt. Changes in cash are discussed more fully in a separate section of this Management’s Discussion and Analysis.

 

Working capital (current assets less current liabilities) increased at December 31, 2007 from September 30, 2007 primarily as a result of an increase in inventory due to increases in sales volume, and reductions in accounts payable and accrued liabilities, partially offset by an increase in collections of accounts receivable.

Long-term debt, less current portion decreased in the three months ended December 31, 2007, as a result of payments made during the period. We currently have a revolving line of credit facility with a syndicate of U.S. banks of up to $225,000, with an option to increase the amount of the line to $350,000 if we choose. The line of credit facility expires in October 2012. In addition, we have other line of credit facilities, which totaled $25,363 at September 30, 2007, that are generally reviewed annually for renewal. The total amount of borrowings under all facilities was $5,499 and $5,496 at December 31, 2007 and September 30, 2007, respectively.

Provisions of debt agreements include covenants customary to such agreements that require us to maintain specified minimum or maximum financial measures and place limitations on various investing and financing activities. The agreements also permit the lenders to accelerate repayment requirements in the event of a material adverse event. Our most restrictive covenants require us to maintain a minimum consolidated net worth, a maximum consolidated debt to consolidated operating cash flow, and a maximum consolidated debt to Earnings Before Income Taxes, Depreciation and Amortization, as defined in the agreements. We were in compliance with all covenants at December 31, 2007.

Commitments and contingencies at December 31, 2007, include various matters arising from the normal course of business. We are currently involved in pending or threatened litigation or other legal proceedings regarding employment, product liability, and contractual matters arising from the normal course of business. We have accrued for individual matters that we believe are likely to result in a loss when ultimately resolved using estimates of the most likely amount of loss. There are also individual matters that we believe the likelihood of a loss when ultimately resolved is less than likely but more than remote, which were not accrued. While it is possible that there could be additional losses that have not been accrued, we currently believes the possible additional loss in the event of an unfavorable resolution of each matter is less than $10,000 in the aggregate.

We do not recognize contingencies that might result in a gain until such contingencies are resolved and the related amounts are realized.

In the event of a change in control of the company, we may be required to pay termination benefits to certain executive officers.

Shareholders’ equity increased in the three months ended December 31, 2007. Increases due to net earnings and sales of treasury stock during the three months were partially offset by cash dividend payments and purchases of treasury stock.

During the first quarter of fiscal 2008, we completed our accelerated stock repurchase agreement through J.P. Morgan Chase Bank. We purchased a total of 494 common shares in exchange for $31,114 through this program at an average price of $62.95 per common share.

 

We have various contractual obligations, including obligations related to long-term debt, operating leases, purchases, retirement pensions, and retirement healthcare. These contractual obligations are summarized and discussed more fully in the Management’s Discussion and Analysis in our 2007 annual report onForm 10-Kfor the year ended September 30, 2007.

 

Net cash flows provided by operating activities decreased by $7,381 in the three months ended December 31, 2007, as compared to the same period a year ago primarily due to an increase in earnings and working capital.

Net cash flows used in investing activities decreased by $33,577 in the three months ended December 31, 2007, compared to the same period a year ago primarily as a result of a business acquisition in the October 2006. Capital expenditures were $6,572 for the quarter as compared to $5,423 for the same quarter last year.

Net cash flows used in financing activities decreased by $4,096 in the three months ended December 31, 2007, as compared to the same period a year ago primarily as a result of increases in the sales of treasury stock as a result of exercise of stock options offset by increased purchases of treasury stock and increases in excess tax benefits from share-based compensation.

 

Payments on our senior notes, totaling $48,764, are due over the 2009 — 2013 timeframe. Also, we have a $225,000 line of credit facility that includes an option to increase the amount of the line up to $350,000 that does not expire until October 2012. Despite these factors, it is possible that business acquisitions could be made in the future that would require amendments to existing debt agreements and the need to obtain additional financing.

 

We consider the accounting policies used in preparing our Condensed Consolidated Financial Statements to be critical accounting policies when they are both important to the portrayal of our financial condition and results of operations, and require us to make difficult, subjective, or complex judgments. Critical accounting policies normally result from the need to make estimates about the effect of matters that are inherently uncertain. Management has discussed the development and selection of our critical accounting policies with the Audit Committee of our Board of Directors. In each of the areas that were identified as critical accounting policies, our judgments, estimates, and assumptions are impacted by conditions that change over time. As a result, in the future there could be changes in our assets and liabilities, increases or decreases in our expenses, and additional losses or gains that are material to our financial condition and results of operations. Our critical accounting policies are discussed more fully in the Management’s Discussion and Analysis section in our annual report onForm 10-Kfor the year ended September 30, 2007.

 

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 for transaction purposes are sensitive to changes in currency exchange rates. These market risks are discussed more fully in the Management’s Discussion and Analysis section in our annual report onForm 10-Kfor the year ended September 30, 2007.

 

See accounting standards discussed in Note 3 to the unaudited Condensed Consolidated Financial Statements.

 

Interest expense on 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’s Discussion and Analysis in our Annual Report onForm 10-Kfor the year ended September 30, 2007.

 

We have established disclosure controls and procedures, which are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Act is accumulated and communicated to management, including our Principal Executive Officer

(Thomas A. Gendron, President and Chief Executive Officer) and Principal Financial Officer (Robert F. Weber, Jr., Chief Financial Officer and Treasurer), as appropriate to allow timely decisions regarding required disclosures.

Thomas A. Gendron and Robert F. Weber, Jr. evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by thisForm 10-Q.Based on their evaluation, they concluded that our disclosure controls and procedures were effective in achieving the objectives for which they were designed as described in the preceding paragraph.

Furthermore, there have been no changes in our internal control over financial reporting during the fiscal quarter covered by thisForm 10-Qthat have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Information regarding legal proceedings is contained in Note 16 to the unaudited Condensed Consolidated Financial Statements contained in this Report and is incorporated herein by reference.

Investment in our securities involves risk. An investor or potential investor should consider the risks summarized in “Item 1A. — Risk Factors” in our annual report onForm 10-Kfor the year ended September 30, 2007, when making investment decisions regarding our securities.

(a) Recent Sales of Unregistered Securities

Sales of common stock issued from treasury to one of the company’s directors during the first quarter of 2008 consisted of the following:

The securities were sold in reliance upon the exemption contained in Section 4(2) of the Securities Act of 1933.

(b) Issuer Purchases of Equity Securities

 

 

There were no matters submitted to a vote of the security holders.

 

(a) Exhibits Filed as Part of this Report are listed in the Exhibit Index.

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

 

 

Date: January 22, 2008

 

 

Date: January 22, 2008