Woodward - 10-Q quarterly report FY

 

(Exact name of registrant as specified in its charter)

5001 North Second Street, Rockford, Illinois 61125-7001
(Address of principal executive offices)

(815) 877-7441
(Registrant’s telephone number, including area code)

     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 definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

     As of April 21, 2006, 34,588,677 shares of common stock with a par value of $.002917 cents per share were outstanding.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

See accompanying Notes to Consolidated Financial Statements.

WOODWARD
Notes to consolidated Financial Statements (Continued)

The consolidated balance sheet as of March 31, 2006, the consolidated statements of earnings for the three and six-month periods ended March 31, 2006 and 2005, and the consolidated statements of cash flows for the six-month periods ended March 31, 2006 and 2005, were prepared by the company without audit. The September 30, 2005, consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Information in this 10-Q report is based in part on estimates and is subject to year-end adjustments and audit. In our opinion, we have made all adjustments necessary to present fairly the company’s financial position as of March 31, 2006, the results of its operations for the three and six-month periods ended March 31, 2006 and 2005, and its cash flows for the six-month periods ended March 31, 2006 and 2005. All such adjustments were of a normal and recurring nature. The statements were prepared following the accounting policies described in the company’s 2005 annual report on Form 10-K and should be read with the notes to consolidated financial statements in the annual report. The consolidated statements of earnings for the three and six-month periods ended March 31, 2006, are not necessarily indicative of the results to be expected for other interim periods or for the full year.

A three-for-one stock split was approved by shareholders at the 2005 annual meeting of shareholders on January 25, 2006. The stock split became effective for shareholders at the close of business on February 1, 2006. The number of shares and per share amounts reported in these consolidated financial statements have been updated from amounts reported prior to February 1, 2006, to reflect the effects of the split.

We have granted stock options to key management members and directors of the company. These options are generally granted with an exercise price equal to the market price of our stock at the date of grant, a four year graded vesting schedule, and a term of ten years. Vesting would be accelerated in the event of retirement, disability, or death of a participant, or change in control of the company.

Provisions governing our stock option grants are included in the 2006 Omnibus Incentive Plan and the 2002 Stock Option Plan. The 2006 Plan was approved by shareholders and became effective on January 25, 2006. No grants were issued in January 2006, and no further grants will be made under the 2002 Plan. The 2006 Plan made 3,705,000 shares available for grants made on or after January 25, 2006, to members and directors of the company, subject to annual award limits as specified in the Plan.

WOODWARD
Notes to consolidated Financial Statements (Continued)

We adopted the provisions of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment”, beginning October 1, 2005, using the modified prospective transition method. This statement requires us to measure the cost of employee services in exchange for an award of equity instruments based on the grant-date fair value of the award and to recognize cost over the requisite service period. Under the modified prospective transition method, financial statements for periods prior to the date of adoption are not adjusted for the change in accounting.

Prior to October 1, 2005, we used the intrinsic value method to account for stock-based employee compensation under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and therefore we did not recognize compensation expense in association with options granted at or above the market price of our common stock at the date of grant.

As a result of adopting the new standard, earnings before income taxes for the three months ended March 31, 2006, decreased by $695,000, and net earnings decreased by $431,000, or $0.01 per basic share and $0.01 per diluted share. These results reflect stock compensation expense of $695,000 and tax benefits of $264,000 for the period. Earnings before income taxes for the six months ended March 31, 2006, decreased by $1,573,000, and net earnings decreased by $975,000, or $0.03 per basic share and $0.03 per diluted share. These results reflect stock compensation expense of $1,573,000 and tax benefits of $598,000 for the period.

Adoption of the new standard also affected our consolidated statements of cash flows. The change is related to tax benefits associated with tax deductions that exceed the amount of compensation expense recognized in financial statements. For the six months ended March 31, 2006, cash flow from operating activities was reduced by $2,424,000 and cash flow from financing activities was increased by $2,424,000 from amounts that would have been reported if we had not adopted the new accounting standard.

Concurrent with our adoption of the new statement, we began to use the non-substantive vesting period approach for attributing stock compensation to individual periods. The nominal vesting period approach was used in determining the stock compensation expense for our pro forma net earnings disclosure for the three and six months ended March 31, 2005, presented in a table that follows. The change in the attribution method will not affect the ultimate amount of stock compensation expense recognized, but it has accelerated the recognition of such expense for non-substantive vesting conditions, such as retirement eligibility provisions. Under both approaches, we elected to recognize stock compensation on a straight-line basis for options with graded vesting schedules. As a result of the change in attribution method, earnings before income taxes for the three months ended March 31, 2006, were increased by approximately $2,000, and net

WOODWARD
Notes to consolidated Financial Statements (Continued)

earnings were increased by $1,000, which had no effect on basic and diluted earnings per share. Earnings before income taxes for the six months ended March 31, 2006 were reduced by approximately $268,000, and net earnings were reduced by $166,000, or $0.01 per basic share and $0.01 per diluted share.

The following table presents a reconciliation of reported net earnings and per share information to pro forma net earnings and per share information that would have been reported if the fair value method had been used to account for stock-based employee compensation last year:

The fair value for options granted during the six months ended March 31, 2006, and the year ended September 30, 2005, was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions by grant year:

Historical company information was the primary basis for the selection of the expected term, expected volatility, and expected dividend yield assumptions. The risk-free interest rate was selected based on yields from U.S. Treasury zero-coupon

WOODWARD
Notes to consolidated Financial Statements (Continued)

issues with a remaining term equal to the expected term of the options being valued. Changes in outstanding stock options for the six months ended March 31, 2006, were as follows:

At March 31, 2006, there was $6,055,000 of unrecognized compensation cost related to nonvested awards, which we expect to recognize over a weighted-average period of 1.5 years. Information about stock options that are vested or are expected to vest and that are exercisable at March 31, 2006, follows:

The weighted-average grant-date fair value of options granted was $10.44 for the six months ended March 31, 2006, and $9.24 for the six months ended March 31, 2005. Other information for the three and six-month periods follows:

WOODWARD
Notes to consolidated Financial Statements (Continued)

The weighted-average shares of common stock outstanding included the weighted-average             shares held for deferred compensation obligations were as follows:

The following stock options were outstanding during the three and six months ended March 31, 2006 and 2005, but were not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive:

WOODWARD
Notes to consolidated Financial Statements (Continued)

WOODWARD
Notes to consolidated Financial Statements (Continued)

Amortization expense associated with current intangibles is expected to be approximately $7,000,000 for 2006, $6,600,000 for 2007, $5,800,000 for 2008, $5,500,000 for 2009, and $5,300,000 for 2010.

WOODWARD
Notes to consolidated Financial Statements (Continued)

Salaries and other member benefits include accrued termination benefits totaling $4,935,000 at September 30, 2005. These accrued termination benefits were in Industrial Controls. Changes in accrued termination benefits for the six months ended March 31, 2006 were as follows:

The amounts expensed during the six-month period were for termination benefits earned by members over the period and are primarily related to the consolidation of one of the European manufacturing operations with existing operations. This action was taken to streamline the organization by eliminating redundant manufacturing operations and is complete. The total expense for this action was $15,763,000, which included $12,010,000 for termination benefits, $1,800,000 for contractual pension termination benefits, and other costs primarily associated with moving equipment and inventory to other locations totaling $1,953,000. We do not anticipate additional expenditures related to this action.

Provisions of our sales agreements include product warranties customary to such agreements. We establish accruals for specifically identified warranty issues that are probable to result in future costs. We also accrue for warranty costs on a non-specific basis whenever past experience indicates a normal and predictable pattern exists. A reconciliation of accrued product warranties from September 30, 2005, to March 31, 2006, follows:

WOODWARD
Notes to consolidated Financial Statements (Continued)

We provide various benefits to eligible members of our company, including pension benefits associated with defined benefit plans and retirement healthcare benefits. Components of net periodic benefit cost and company contributions for these plans were as follows:

WOODWARD
Notes to consolidated Financial Statements (Continued)

We paid prescription drug benefits of $592,000 during the three months and $1,178,000 during the six months ended March 31, 2006. We expect to pay additional prescription drug benefits of approximately $1,100,000 for the year ending September 30, 2006. We are entitled to a federal subsidy under the Medicare Prescription Drug, Improvement and Modernization Act of 2003. We did not receive a federal subsidy for the six months ended March 31, 2006, but we currently expect to receive $644,000 during the year ending September 30, 2006.

We expect contributions by the company for retirement pension benefits will be $0 in the United States and $2,072,000 in other countries in 2006. We also expect contributions by the company for retirement healthcare benefits will be $3,557,000 in 2006, less amounts received as federal subsidies.

WOODWARD
Notes to consolidated Financial Statements (Continued)

Accumulated other comprehensive earnings, which totaled $10,576,000 at March 31, 2006, consisted of the following items:

WOODWARD
Notes to consolidated Financial Statements (Continued)

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 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, including accruals totaling $5,000,000 that were made in the three months ended March 31, 2006. 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 believe the possible additional loss in the event of an unfavorable resolution of each matter is less than $10,000,000 in the aggregate.

Among the current legal proceedings referred to in the preceding paragraph, we are a defendant in a class action lawsuit filed in the U.S. District Court for Northern District of Illinois and received findings of the U.S. Equal Employment Opportunity Commission that allege discrimination on the basis of race, national origin, and gender in our Winnebago County, Illinois, facilities. We believe there are meritorious defenses to the charges and claims that were asserted and, based on management’s judgment, we are pursuing the actions necessary to resolve these matters in the best interest of our shareholders.

We also file income tax returns in various jurisdictions worldwide, which are subject to audit. We have accrued for our estimate of the most likely amount of expenses that we believe will result from income tax audit adjustments.

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.

WOODWARD
Notes to consolidated Financial Statements (Continued)

The difference between the total of segment earnings and the statements of consolidated earnings follows:

Segment assets were as follows:

PART II – OTHER INFORMATION

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.