UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
September 30, 2008
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
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For the transition period
from
to
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Commission file number
0-8408
WOODWARD GOVERNOR
COMPANY
(Exact name of registrant as
specified in its charter)
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Delaware
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36-1984010
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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1000 East Drake Road,
Fort Collins, Colorado
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80525
(Zip Code)
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(Address of principal executive
offices)
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Registrants
telephone number, including area code:
(970)
482-5811
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class:
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Name of Each Exchange on Which Registered:
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Common stock, par value $.001455
per share
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NASDAQ Global Select Market
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
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No
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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
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
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Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2
of the
Exchange Act. (Check one):
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Large
accelerated
filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting
company
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes
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No
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Aggregate market value of registrants common stock held by
non-affiliates of the registrant, based upon the closing price
of a share of the registrants common stock on
March 31, 2008 as reported on The NASDAQ Global Select
Market on that date: $1,550,848,000. For purposes of this
calculation, shares of common stock held by (i) persons
holding more than 5% of the outstanding shares of stock,
(ii) officers and directors of the registrant, and
(iii) the Woodward Governor Company Profit Sharing Trust,
Woodward Governor Company Deferred Shares Trust, or the Woodward
Governor Company Charitable Trust, as of March 31, 2008,
are excluded in that such persons may be deemed to be
affiliates. This determination is not necessarily conclusive of
affiliate status.
Number of shares of the registrants common stock
outstanding as of November 17, 2008: 67,789,021.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of our proxy statement for the 2008 Annual Meeting of
Stockholders to be held January 22, 2009, are incorporated
by reference into Parts II and III of this
Form 10-K,
to the extent indicated.
PART I
Forward
Looking Statement
This Annual Report on
Form 10-K,
including Managements Discussion and Analysis of
Financial Condition and Results of Operations, contains
forward-looking statements regarding future events and our
future results within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements other than
statements of historical fact are statements that are deemed
forward-looking statements. These statements are based on
current expectations, estimates, forecasts, and projections
about the industries in which we operate and the beliefs and
assumptions of management. Words such as anticipate,
believe, estimate, seek,
goal, expect, forecasts,
intend, continue, outlook,
plan, project, target,
can, could, may,
should, will, would,
variations of such words, and similar expressions are intended
to identify such forward-looking statements. In addition, any
statements that refer to projections of our future financial
performance, our anticipated growth and trends in our
businesses, and other characteristics of future events or
circumstances are forward-looking statements. Forward-looking
statements may include, among others, statements relating to:
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Future sales, earnings, cash flow, uses of cash, and other
measures of financial performance;
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Description of our plans and expectations for future
operations;
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The effect of economic downturns or growth in particular
regions;
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The effect of changes in the level of activity in particular
industries or markets;
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The availability and cost of materials, components, services,
and supplies;
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The scope, nature, or impact of acquisition activity and
integration into our businesses;
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The development, production, and support of advanced
technologies and new products and services;
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New business opportunities;
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Restructuring costs and savings;
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The outcome of contingencies;
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Future repurchases of common stock;
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Future levels of indebtedness and capital spending; and
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Pension plan assumptions and future contributions.
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Readers are cautioned that these forward-looking statements
are only predictions and are subject to risks, uncertainties,
and assumptions that are difficult to predict, including:
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A decline in business with our significant customers;
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Our ability to forecast future sales and earnings;
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The recent instability of the credit markets and other
adverse economic and industry conditions;
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Fines or sanctions resulting from the outcome of the
investigation by the U.S. Department of Justice (the
DOJ) regarding certain pricing practices of MPC
Products Corporation, one of our wholly-owned subsidiaries prior
to 2006;
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Our ability to successfully manage competitive factors,
including prices, promotional incentives, industry
consolidation, and commodity and other input cost increases;
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Our ability to reduce our expenses in proportion to any sales
shortfalls;
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The ability of our suppliers to provide us with materials of
sufficient quality or quantity required to meet our production
needs at favorable prices or at all;
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The success of or expenses associated with our product
development activities;
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Our ability to integrate acquisitions and costs related
thereto;
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Our ability to operate our business and pursue business
strategies in the light of certain restrictive covenants in our
outstanding debt documents;
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Future impairment charges resulting from changes in the
estimates of fair value of reporting units or of long-lived
assets;
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Changes in domestic or international tax statutes and future
subsidiary results;
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Environmental liabilities related to manufacturing
activities;
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Our continued access to a stable workforce and favorable
labor relations with our employees;
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Our ability to successfully manage regulatory, tax and legal
matters (including product liability, patent and intellectual
property matters);and
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Risks from operating internationally, including the impact on
reported earnings from fluctuations in foreign currency exchange
rates.
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These factors are representative of the risks, uncertainties,
and assumptions that could cause actual outcomes and results to
differ materially from what is expressed or forecast in our
forward-looking statements. Other factors are discussed under
Risk Factors in our SEC filings are incorporated by
reference.
Therefore, actual results could differ materially and
adversely from those expressed in any forward-looking
statements. For additional information regarding factors that
may affect our actual financial condition and results of
operations, see the information under the caption
Item 1A. Risk Factors beginning on page 8
of this Annual Report on
Form 10-K
for the year ended September 30, 2008. We undertake no
obligation to revise or update any forward-looking statements
for any reason.
Item 1.
Business
General
Woodward Governor Company (Woodward, the
Company, we, our, or
us) designs, manufactures, and services energy
control systems and components for commercial and military
aircraft, turbines, reciprocating engines, and electrical power
system equipment. Our innovative fluid energy, combustion
control, electrical energy, and motion control systems help
customers offer cleaner, more reliable, and more cost-effective
equipment. Leading original equipment manufacturers use our
products and services in aerospace, power and process
industries, and transportation.
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.
Woodward is headquartered in Fort Collins, Colorado, and
serves global markets from locations worldwide. The mailing
address for our headquarters is 1000 East Drake Road,
Fort Collins, Colorado 80525. Our telephone at that
location is
(970) 482-5811,
and our website is
www.woodward.com
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Products
and Services
Woodward strives to be the undisputed leader in the aerospace,
power and process industries, and transportation markets that we
serve. We help meet global needs for reliable, efficient,
low-emission, and high-performance energy for diverse
applications in challenging environments.
We remain focused on Energy Control and Optimization Solutions
for aerospace, power and process industries, and transportation
markets that we serve. We design systems that manage the energy
of fluid movement,
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motion, and electricity. We also convert wind energy into
reliable and safe electrical power through inverter systems.
We believe all of our business segments have a significant
competitive position within their markets for components and
integrated systems. We compete with several other manufacturers,
including the in-house operations of certain original equipment
manufacturers (OEMs). We believe our prices,
technology, quality, and customer service are highly competitive.
Principal
Lines of Business
Woodward operates in the following four business segments:
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Turbine Systems
is focused on developing and
manufacturing systems and components that provide energy control
and optimization solutions for the aircraft and industrial gas
turbine markets.
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Engine Systems
is focused on developing and manufacturing
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.
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Electrical Power Systems
is focused on developing and
manufacturing 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.
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Airframe Systems
was added October 1, 2008 upon
Woodwards acquisition of all of the outstanding shares of
stock of Techni-Core, Inc. (Techni-Core) and all of
the outstanding shares of stock of MPC Products Corporation
(MPC Products and, together with Techni-Core,
MPC). MPC is the leader in the manufacture of
high-performance electromechanical motion control systems
primarily for aerospace applications. Their core competencies in
sensing, motors, actuation systems, and electronics will also be
applied to Woodwards aircraft turbine market, industrial
turbine market, as well as other industrial markets.
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Information about our operations in 2008 and outlook for the
future, including certain segment information, is included in
Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Additional segment information and certain geographical
information are included in Note 20 to the Consolidated
Financial Statements in Item 8 Financial
Statements and Supplementary Data. Additional information
about Airframe Systems and the acquisition is included in
Note 22 to the Consolidated Financial Statements in
Item 8 Financial Statements and
Supplementary Data. Other information about our business
follows.
Turbine
Systems
We provide integrated control systems and control components
such as electronics, actuators, valves, fuel systems, and
combustion systems through the Turbine Systems segment to OEMs
that manufacture gas turbines for use in aerospace and
industrial power markets. We also sell components as spares or
replacements and provide repair and overhaul services to these
and other customers.
We primarily sell Turbine Systems products and services
directly to manufacturers, although we also generate some
aftermarket sales through distributors, dealers, and independent
service facilities.
In fiscal 2008, customers exceeding 10% of net external sales in
the Turbine Systems segment were General Electric Company
(approximately 35%), United Technologies (approximately 16%),
and the U.S. government (approximately 10%).
Engine
Systems
We provide integrated control systems and control components,
such as electronics, actuators, valves, pumps, injectors, and
ignition systems through the Engine Systems segment primarily to
OEMs that manufacture diesel engines, gas engines, steam
turbines, and distributors for use in power generation, marine,
transportation, and
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process applications. We also sell components as spares or
replacements and provide repair and overhaul services to OEM
customers and equipment operators.
We primarily sell Engine Systems products and services
directly to our OEM customers. We also sell through our global
channel partners (distributors, dealers, and independent service
facilities) to support our OEMs customers and end users.
In fiscal 2008, Caterpillar exceeded 10% of net external sales
in the Engine Systems segment, accounting for approximately 26%
of Engine Systems net external sales.
Electrical
Power Systems
We provide integrated control systems and electronic control and
protection modules through the Electrical Power Systems segment
primarily to OEMs that manufacture electrical power generation,
distribution, conversion (predominantly wind power), and grid
related quality equipment using digital controls and inverter
technologies. Sales are made primarily to OEMs that manufacture
generator sets, wind turbines, and switchgear equipment. We sell
components as spares or replacements, and provide other related
services to these OEM and other customers. We also provide
repair and overhaul services to OEM customers and equipment
operators as part of the wind power side of our business.
We generally sell Electrical Power Systems products and
services directly to our OEM customers, although we also
generate sales to end users through distributors. Our customers
demand technological solutions to meet their needs for security,
quality, reliability, and availability of electrical power
networks.
In fiscal 2008, customers exceeding 10% of net external sales in
the Electrical Power Systems segment were REpower Systems AG
(approximately 24%), Caterpillar (approximately 12%), and
Ecotècnia (approximately 10%).
Airframe
Systems
On October 1, 2008, we added a fourth business segment,
Airframe Systems, upon the acquisition of MPC. Airframe Systems
provides high-performance electromechanical motion control
systems, including sensors, primarily for aerospace
applications. The primary product lines include high performance
electric motors and sensors, analog and digital control
electronics, rotary and linear actuation systems, and flight
deck and
fly-by-wire
systems for commercial and military aerospace programs. Sales
are made primarily OEMs and to tier-one prime contractors.
Additional information about Airframe Systems and the
acquisition is included in Note 22 to the Consolidated
Financial Statements in Item 8 Financial
Statements and Supplementary Data.
Customers
Our customers include Caterpillar, Ecotècnia, General
Electric, REpower Systems AG, Rolls Royce, the
U.S. government, and United Technologies.
Two customers individually accounted for more than 10% of
consolidated net sales in each of the years ended
September 30, 2008, 2007, and 2006. Sales to General
Electric were made by all of our segments and totaled
approximately 17% in fiscal 2008, approximately 20% in fiscal
2007, and approximately 22% in fiscal 2006. Sales to Caterpillar
were made by all of our segments and net sales totaled
approximately 10% in fiscal 2008, approximately 10% in fiscal
2007, and approximately 11% in fiscal 2006.
5
Backlog
Our backlog as of October 31, 2008 and 2007 by segment was
as follows (in thousands):
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% Expected to
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be Filled by
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October 31,
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September 30,
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October 31,
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2008
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2009
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2007
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Turbine Systems
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$
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165,413
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82
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%
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$
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150,000
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Engine Systems
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107,953
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92
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103,895
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Electrical Power Systems
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100,856
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55
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104,063
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Airframe Systems
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1,789
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52
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N/A
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$
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376,011
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77
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%
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$
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357,958
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Turbine Systems backlog at October 31, 2007 is
estimated. In previous years, our disclosure of Turbine
Systems reported backlog included forecasts of certain
sales associated with customer agreements in addition to firm
sales orders. Our current estimate of the backlog is based on
typically assumed relationships between the timing of firm
orders and subsequent sales. Backlog orders are not necessarily
an indicator of future sales levels because of variations in
lead times and customer production demand pull systems.
Seasonality
We do not believe sales are subject to significant seasonal
variation.
Government
Contracts and Regulation
Our businesses are heavily regulated in many of our fields of
endeavor. We deal with numerous U.S. government agencies
and entities, including all of the branches of the
U.S. military, the National Aeronautics and Space
Administration (NASA), and the Departments of
Defense, Homeland Security, and Transportation. Similar
government authorities exist with respect to our international
efforts.
The U.S. government, and other governments, may terminate
any of our government contracts (and, in general, subcontracts)
at their convenience, as well as for default based on specified
performance measurements. If any of our government contracts
were to be terminated for convenience, we generally would be
entitled to receive payment for work completed and allowable
termination or cancellation costs. If any of our government
contracts were to be terminated for default, the
U.S. government generally would pay only for the work
accepted, and could require us to pay the difference between the
original contract price and the cost to re-procure the contract
items, net of the work accepted from the original contract. The
U.S. government could also hold us liable for damages
resulting from the default.
We must comply with, and are affected by, laws and regulations
relating to the formation, administration, and performance of
U.S. government contracts. These laws and regulations,
among other things:
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require certification and disclosure of all cost or pricing data
in connection with certain contract negotiations;
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impose specific and unique cost accounting practices that may
differ from accounting principles generally accepted in the
U.S. (U.S. GAAP) and therefore require
reconciliation;
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impose acquisition regulations that define allowable and
unallowable costs and otherwise govern our right to
reimbursement under certain cost-based U.S. government
contracts; and
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restrict the use and dissemination of information classified for
national security purposes and the export of certain products
and technical data.
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Research
and Development
We conduct research and development activities under
customer-funded contracts and with our own independent research
and development funds. Our research and development costs
include basic research, applied
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research, development, systems and other concept formulation
studies, and bid and proposal efforts related to government
products and services. Costs related to customer-funded
contracts are generally allocated among all contracts and
programs in progress based on the contractual arrangements.
Company-sponsored product development costs not otherwise
allocable are charged to expenses when incurred. Under certain
arrangements in which a customer shares in product development
costs, our portion of the unreimbursed costs is generally
expensed as incurred. Across all our segments, total research
and development costs, including costs related to bid and
proposal efforts, totaled $73.4 million in fiscal 2008,
$65.3 million in fiscal 2007, and $60.0 million in
fiscal 2006. See Research and development costs in
Note 1 to the Consolidated Financial Statements in
Item 8 Financial Statements and
Supplementary Data.
Manufacturing
For our segments, our products consist of mechanical,
electronic, and electromagnetic components. Mechanical
components are machined primarily from aluminum, iron, and
steel. Generally there are numerous sources for the raw
materials and components used in our products, and they are
believed to be sufficiently available to meet expected
requirements. We carry certain finished goods and component
parts inventory to meet rapid delivery requirements of
customers, primarily for aftermarket needs.
Employees
As of October 31, 2008, we employed 5,823 full-time
employees of which 1,626 were located outside of the
U.S. We consider the relationships with our employees to be
positive.
Approximately 1,285 joined Woodward in connection with the
acquisition of MPC and 75 employees in connection with the
acquisition of MotoTron Corporation (MotoTron) in
October 2008. Additional information about our acquisitions is
included in Note 22 to the Consolidated Financial
Statements in Item 8 Financial Statements
and Supplementary Data.
In the U.S., as of October 31, 2008, all of our employees
are at-will employees, except certain MPC employees who are not
executive officers of Woodward and either had pre-existing
employment agreements with MPC prior to the MPC acquisition or
were members of the MPC Employees Representative Union. Our
at-will employees are not subject to any type of employment
contract or agreement. Our Chief Executive Officer and President
and our Chief Financial Officer and Treasurer each have a Change
in Control Transition Agreement.
Outside of the U.S., we enter into employment contracts and
agreements in those countries in which such relationships are
mandatory or customary. The provisions of these agreements
correspond in each case with the required or customary terms in
the subject jurisdiction.
Patents,
Intellectual Property, and Licensing
Products for our segments make use of several patents and
trademarks of various durations that we believe are collectively
important. However, we do not consider any one patent or
trademark material to our business.
Executive
Officers of the Registrant
Set forth below is certain information with respect to the
current executive officers. There are no family relationships
between any of the executive officers listed below.
Thomas A. Gendron
, Age 47. Chairman of
the Board since January 2008; Chief Executive Officer,
President, and Director since July 2005; Chief Operating Officer
and President from September 2002 through June 2005;
Vice President and General Manager of Industrial Controls
June 2001 through September 2002; Vice President of Industrial
Controls April 2000 through May 2001; Director of Global
Marketing and Industrial Controls Business Development
February 1999 through March 2000.
Robert F. Weber, Jr.
, Age 54. Chief
Financial Officer and Treasurer since August 2005. Prior to
August 2005, Mr. Weber was employed at Motorola, Inc. for
17 years, where he held various positions, including
Corporate
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Vice President and General Manager EMEA Auto.
Prior to this role, Mr. Weber served in a variety of
financial positions at both a corporate and operating unit level
with Motorola.
Martin V. Glass
, Age 51. Group Vice
President, Turbine Systems since September 2007; Vice President
of the Aircraft Engine Systems Customer Business Segment
December 2002 through August 2007; Director of Sales, Marketing,
and Engineering February 2000 through December 2002.
Dennis Benning
, Age 67. Group Vice
President, Airframe Systems since October 2008; Group
Vice President, Engine Systems September 2007 through
September 2008; Vice President, Center of Excellence Industrial
Controls December 2002 through August 2007; General Manager,
Center of Excellence Industrial Controls July 2002 through
November 2002; Director of Operations, Aircraft Engine Systems
January 2002 through June 2002.
Gerhard Lauffer
, Age 47. Group Vice
President, Electrical Power Systems since September 2007;
Vice President and General Manager Electronic Controls
March 2002 through August 2007; Managing Director
Leonhard-Reglerbau GmbH 1991 through March 2002 when it was
acquired by Woodward.
Chad Preiss
, Age 43. Group Vice
President, Engine Systems since October 2008; Vice President,
Sales, Service, and Marketing, Engine Systems December 2007
through September 2008; and Vice President, Industrial Controls
September 2004 through December 2007. Prior to this role,
Mr. Preiss served in a variety of engineering and
marketing/sales management roles, including Director of Business
Development, since joining Woodward in 1988.
A. Christopher Fawzy
, Age 39. Vice
President, General Counsel and Corporate Secretary since June
2007. Prior to joining Woodward, Mr. Fawzy was employed by
Mentor Corporation, a global medical device company. He joined
Mentor in 2001 and served as Corporate Counsel, then General
Counsel in 2003, and was appointed Vice President, General
Counsel and Secretary in 2004.
Information
available on Woodwards Website
Through a link on the Investor Information section of our
Website, we make available the following filings as soon as
reasonably practicable after they are electronically filed or
furnished to the Securities and Exchange Commission
(SEC): our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
Proxy Statements, and any amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934. Stockholders may obtain,
without charge, a single copy of Woodwards 2008 Annual
Report on
Form 10-K
upon written request to the Corporate Secretary, Woodward
Governor Company, 1000 East Drake Road, Fort Collins,
Colorado 80525.
8
Investment in our securities involves risk. An investor or
potential investor should consider the risks summarized in this
section when making investment decisions regarding our
securities.
Important factors that could individually, or together with one
or more other factors, affect our business, results of
operations, financial condition,
and/or
cash
flows include, but are not limited to, the following:
Company
Risks
A
decline in business with our significant customers could
decrease our consolidated net sales and have a material adverse
effect on our business, financial condition, results of
operations, and cash flows.
We have fewer customers than many other companies with similar
sales volumes. For the year ended September 30, 2008,
approximately 43% of our consolidated net sales were made to our
five largest customers. Sales to our five largest customers
represented approximately 47% of our consolidated net sales for
the year ended September 30, 2007. Two of those customers
individually accounted for more than 10% of consolidated net
sales in each of the years ended September 30, 2008, 2007,
and 2006. Turbine Systems, Engine Systems, and Electrical Power
Systems made sales to General Electric Company, and those sales
totaled approximately 17% in fiscal 2008, approximately 20% in
fiscal 2007, and approximately 22% in fiscal 2006 of our
consolidated net sales. Turbine Systems, Engine Systems, and
Electrical Power Systems also made sales to Caterpillar Inc. and
those sales totaled approximately 10% in fiscal 2008,
approximately 10% in fiscal 2007, and approximately 11% in
fiscal 2006 of our consolidated net sales. If any of our
significant customers were to change suppliers, in-source
production, experience difficulties in the markets in which they
participate, or otherwise reduce purchases from us, our
consolidated net sales could decrease significantly, which could
have a material adverse effect on our business, financial
condition, results of operations, and cash flows.
Our
future sales and earnings could vary materially from our
projections.
Our sales forecast is based on managements best estimate
of various factors and information deemed relevant, including,
among others, customer and third-party forecasts of sales
volumes and purchase requirements in our markets. Each of these
factors is subjective and could be overstated. In addition,
general business and economic conditions and industry-specific
business and economic conditions, including a continuation of
the current economic slowdown or further deterioration of
economic conditions in the U.S. and internationally, could
result in sales that are lower than forecast. Accordingly, our
ability to forecast the timing and amount of specific sales is
limited, and our future sales and earnings could vary materially
from our projections. The difficulty in forecasting demand
increases the challenge in anticipating our inventory
requirements, which may cause us to over-produce finished goods
and could result in inventory write-offs, or could cause us to
under-produce finished goods. Any such over-production or
under-production could have a material adverse effect on our
business, financial condition, results of operations, and cash
flows.
The
recent instability of the financial markets and adverse economic
conditions could have a material adverse effect on the ability
of our customers to perform their obligations to us and on
demand for our products and services.
Recently, there has been widespread concern over the instability
of the financial markets and their influence on the global
economy. As a result of the credit market crisis and other
economic challenges currently affecting the global economy, our
current or potential future customers may experience serious
cash flow problems and as a result, may modify, delay, or cancel
plans to purchase our products. Additionally, if customers are
not successful in generating sufficient revenue or are precluded
from securing financing, they may not be able to pay, or may
delay payment of, accounts receivable that are owed to us. Any
inability of current
and/or
potential customers to pay us for our products may adversely
affect our earnings and cash flows.
In addition, demand for our products and services is
significantly affected by the general economic environment.
During periods of slowing economic activity, such as the recent
tightening of the credit markets, a global slowdown in spending
on infrastructure development may occur in the markets in which
we operate, and customers
9
may reduce their purchases of our products and services. As a
result, any significant economic downturn, including the current
economic downturn and the adverse conditions in the credit
markets, could have a material adverse effect on customer demand.
There can be no assurance that the current economic slowdown or
further deterioration of economic conditions in the U.S. as
well as internationally will not have a material adverse effect
our business, financial condition, results of operations, and
cash flows.
If
funding is not available to us when needed, or is available only
on unfavorable terms, we may be unable to implement our business
plans, complete acquisitions, or otherwise take advantage of
business opportunities or respond to competitive
pressures.
Global financial markets and economic conditions have been, and
continue to be, disrupted and volatile. The debt and equity
capital markets have been distressed. These issues, along with
significant write-offs in the financial services sector, the
repricing of credit risk, and the current weak economic
conditions have made, and will likely continue to make, it
difficult to obtain funding. In addition, as a result of
concerns about the stability of financial markets generally and
the solvency of counterparties specifically, the cost of
obtaining money from the credit markets has generally increased
as many lenders and institutional investors have increased
interest rates, enacted tighter lending standards, refused to
refinance existing debt at maturity either at all or on terms
similar to our current debt and reduced and, in some cases,
ceased to provide funding to borrowers. Due to these factors, we
cannot be certain that funding will be available if needed and
to the extent required, on acceptable terms. If funding is not
available when needed, or is available only on unfavorable
terms, we may be unable to implement our business plans,
complete acquisitions, or otherwise take advantage of business
opportunities or respond to competitive pressures, any of which
could have a material adverse effect on our business, financial
condition, results of operations, and cash flows.
Many
of our expenses may not be able to be reduced in proportion to a
sales shortfall.
Some of our expenses are relatively fixed in relation to changes
in sales volumes and are difficult to adjust in the short term.
Some of these expenses are related to past capital expenditures
or business acquisitions in the form of depreciation and
amortization expense. Others are related to expenditures driven
by levels of business activity other than the level of sales,
including manufacturing overhead. As a result, we might be
unable to reduce expenses in a timely manner to compensate for a
reduction in sales, which could have a material adverse effect
on our business, financial condition, results of operations, and
cash flows.
Suppliers
may be unable to provide us with materials of sufficient quality
or quantity required to meet our production needs at favorable
prices or at all.
We are dependent upon suppliers for parts and raw materials used
in the manufacture of components that we sell to our customers.
We may experience an increase in costs for parts or materials
that we source from our suppliers, or we may experience a
shortage of materials for various reasons, such as the loss of a
significant supplier, high overall demand creating shortages in
parts and supplies we use, or financial distress, work
stoppages, natural disasters, or production difficulties that
may affect one or more of our suppliers. Our customers rely on
us to provide on-time delivery and have certain rights if our
delivery standards are not maintained. A significant increase in
our supply costs, or a protracted interruption of supplies for
any reason, could result in the delay of one or more of our
customer contracts or could damage our reputation and
relationships with customers. Any of these events could have a
material adverse effect on our business, financial condition,
results of operations, and cash flows.
Subcontractors
may fail to perform contractual obligations.
We frequently subcontract portions of work due under contracts
with our customers and are dependent on the continued
availability and satisfactory performance by these
subcontractors. Nonperformance or underperformance by
subcontractors may materially impact our ability to perform
obligations to our customers. A subcontractors failure to
perform could result in a customer terminating our contract for
default, expose us to liability, and substantially impair our
ability to compete for future contracts and orders, and we may
not be able to enforce fully
10
all of our rights under these agreements, including any rights
to indemnification. Any of these events could have a material
adverse effect on our business, financial condition, results of
operations, and cash flows.
Our
product development activities may not be successful or may be
more costly than currently anticipated.
Our business involves a significant level of product development
activities, generally in connection with our customers own
development activities. Industry standards, customer
expectations, or other products may emerge that could render one
or more of our products or services less desirable or obsolete.
Maintaining our market position will require continued
investment in research and development. During an economic
downturn, including the current one, we may need to maintain our
investment in research and development, which may limit our
ability to reduce these expenses in proportion to a sales
shortfall. If these activities are not as successful as
currently anticipated, or if they are more costly than currently
anticipated, future sales
and/or
earnings could be lower than expected, which could have a
material adverse effect on our business, financial condition,
results of operations, and cash flows.
Activities
necessary to integrate acquisitions may result in costs in
excess of current expectations or be less successful than
anticipated.
We completed two business acquisitions in October 2008, and we
may acquire other businesses in the future. The success of these
transactions will depend, among other things, on our ability to
integrate assets and personnel acquired in these transactions
and to apply our internal controls processes to these acquired
businesses. The integration of these acquisitions may require
significant attention from our management, and the diversion of
managements attention and resources could have a material
adverse effect on our ability to manage our business.
Furthermore, we may not realize the degree or timing of benefits
we anticipate when we first enter into a transaction. If actual
integration costs are higher than amounts assumed or we are
unable to integrate the assets and personnel acquired in an
acquisition as anticipated, or if we are unable to fully benefit
from anticipated synergies, our business, financial condition,
results of operations, and cash flows could be materially
adversely affected.
Certain
restrictive covenants limit our ability to operate our business
and to pursue our business strategies, and if we fail to comply
with these covenants, it could result in an acceleration of
payments for our outstanding indebtedness.
Our existing term loan credit agreement, revolving credit
agreement, and note purchase agreements governing our
outstanding senior notes contain covenants that limit or
restrict our ability to finance future operations or capital
needs, to respond to changing business and economic conditions,
or to engage in other transactions or business activities that
may impact our growth or otherwise be important to us. These
agreements limit or restrict, among other things, our ability
and the ability of our subsidiaries to:
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incur additional indebtedness;
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pay dividends or make distributions on our capital stock or
certain other restricted payments or investments;
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purchase or redeem stock;
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issue stock of our subsidiaries;
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make investments and extend credit;
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engage in transactions with affiliates;
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transfer and sell assets;
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effect a consolidation or merger or sell, transfer, lease, or
otherwise dispose of all or substantially all of our
assets; and
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create liens on our assets to secure debt.
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11
The agreements also impose financial covenants on us and our
subsidiaries that require us to maintain certain leverage ratios
and minimum levels of consolidated net worth. In addition,
certain of these agreements require us to repay outstanding
borrowings with portions of the proceeds we receive from certain
sales of property or assets and specified future debt offerings.
Our ability to comply with these provisions may be affected by
events beyond our control.
Any breach of these covenants could cause a default under these
agreements and other debt, which could restrict our ability to
borrow under the revolving credit agreement. If there were an
event of default under certain provisions of our debt
instruments that was not cured or waived, the holders of the
defaulted debt would be able to cause all amounts outstanding
with respect to the debt instrument to be due and payable
immediately. Our assets and cash flow may not be sufficient to
fully repay borrowings under our outstanding debt instruments if
accelerated upon an event of default. If we are unable to repay,
refinance, or restructure our indebtedness as required, or amend
the covenants contained in these agreements, the lenders or
noteholders may be entitled to institute foreclosure proceedings
against our assets. Any of these events could have a material
adverse effect on our business, financial condition, results of
operations, and cash flows.
Changes
in the estimates of fair value of reporting units or of
long-lived assets may result in future impairment charges, which
could have a material adverse effect on our business, financial
condition, results of operations, and cash flows.
Over time, the fair values of long-lived assets change. We test
goodwill for impairment at least annually, and more often if
circumstances require. Future goodwill impairment charges may
occur if estimates of fair values decrease, which would reduce
future earnings. We also test property, plant, and equipment and
other intangibles for impairment whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. Future asset impairment charges may occur if asset
utilization declines, if customer demand decreases, or for a
number of other reasons, which would reduce future earnings. Any
such impairment charges could have a material adverse effect on
our business, financial condition, results of operations, and
cash flows.
Future
subsidiary results or changes in domestic or international tax
statutes may change the amount of valuation allowances provided
for deferred income tax assets.
We establish valuation allowances to reflect the estimated
amount of deferred tax assets that might not be realized. The
underlying analysis is performed for individual tax
jurisdictions, generally at a subsidiary level. Future
subsidiary results, actual or forecasted, as well as changes to
the relevant tax statutes, could change the outcome of our
analysis and change the amount of valuation allowances provided
for deferred income tax assets, which could have a material
adverse effect on our financial condition, results of
operations, and cash flows.
Manufacturing
activities may result in future environmental
liabilities.
We use hazardous materials
and/or
regulated materials in our manufacturing operations. We also own
and may acquire facilities that were formerly owned and operated
by others that used such materials. The risk that a significant
release of regulated materials has occurred in the past or will
occur in the future cannot be completely eliminated or
prevented. As a result, we are subject to a substantial number
of costly regulations. In particular, we are required to comply
with increasingly stringent requirements of federal, state, and
local environmental, occupational health and safety laws and
regulations in the U.S., the European Union, and other
territories, including those governing emissions to air,
discharges to water, noise and odor emissions, the generation,
handling, storage, transportation, treatment and disposal of
waste materials, and the cleanup of contaminated properties and
human health and safety. Compliance with these laws and
regulations results in ongoing costs. We cannot be certain that
we have been, or will at all times be, in complete compliance
with all environmental requirements, or that we will not incur
additional material costs or liabilities in connection with
these requirements. As a result, we may incur material costs or
liabilities or be required to need to undertake future
environmental remediation activities that could have a material
adverse effect on our business, financial condition, results of
operations, and cash flows.
12
Our
performance depends on continued access to a stable workforce
and on favorable labor relations with our
employees.
Competition for technical personnel in the industry in which we
compete is intense. Our future success depends in part on our
continued ability to hire, train, assimilate, and retain
qualified personnel. There is no assurance that we will continue
to be successful in recruiting qualified employees in the
future. In addition, labor unrest at a customer facility can
cause a reduction in demand or a deferral of orders. Any
significant increases in labor costs, deterioration of employee
relations, slowdowns or work stoppages at any of our locations,
whether due to employee turnover, changes in availability of
qualified technical personnel, or otherwise, could have a
material adverse effect on our business, our relationships with
customers, and our financial condition, results of operations,
and cash flows.
Our
intellectual property rights may not be sufficient to protect
all our products or technologies.
Our success depends in part on our ability to obtain patents or
rights to patents, protect trade secrets, operate without
infringing upon the proprietary rights of others, and prevent
others from infringing on our patents, trademarks, and other
intellectual property rights. We will be able to protect our
intellectual property from unauthorized use by third parties
only to the extent that it is covered by valid and enforceable
patents, trademarks, or licenses. Patent protection generally
involves complex legal and factual questions and, therefore,
enforceability of patent rights cannot be predicted with
certainty; thus, any patents that we own or license from others
may not provide us with adequate protection against competitors.
Moreover, the laws of certain foreign countries do not recognize
intellectual property rights or protect them to the same extent
as do the laws of the U.S. If we infringe on the
proprietary rights of others or if we are unable to sufficiently
protect our proprietary rights, our business, financial
condition, results of operations, and cash flows could be
materially adversely affected.
If
third parties claim we are infringing their intellectual
property rights, we could face significant litigation,
indemnification, or licensing expenses or be prevented from
marketing our products.
Our commercial success depends significantly on our ability to
operate without infringing the patents and other proprietary
rights of others. However, regardless of our intent, our current
or future technologies may infringe upon the patents or violate
other proprietary rights of third parties. In the event of such
infringement or violation, we may face expensive litigation or
indemnification obligations and may be prevented from selling
existing products and pursuing product development or
commercialization, which could have an adverse affect on our
business, financial condition, results of operations, and cash
flows.
Product
liability claims, product recalls or other liabilities
associated with the products and services we provide may force
us to pay substantial damage awards and other expenses that
could exceed our accruals and insurance coverage.
The manufacture and sale of our products and the services we
provide expose us to risk of product liability and other tort
claims. Both currently and in the past, we have had a number of
product liability claims relating to our products, and we will
likely be subject to additional product liability claims in the
future for both past and current products, some of which may
have a material adverse effect on our business, financial
condition, and results of operations. We also provide certain
services to our customers and are subject to claims with respect
to the services provided. In providing such services, we may
rely on subcontractors to perform all or a portion of the
contracted services. It is possible that we could be liable to
our customers for work performed by a subcontractor. While we
believe that we have appropriate insurance coverage available to
us related to any such claims, our insurance may not cover all
liabilities or be available in the future at a cost acceptable
to us. If a product liability or other claim or series of
claims, including class action claims, is brought against us for
liabilities that are not covered by insurance or for which
third-party indemnification is not available, such claim could
have a material adverse effect on our business, financial
condition, results of operations, and cash flows.
13
Fines
or sanctions resulting from the investigation by the DOJ
regarding MPC pricing policies could have a material adverse
effect on Woodward.
MPC, one of our newly acquired subsidiaries, is subject to an
investigation by the DOJ regarding certain of its pricing
practices prior to 2006 related to government contracts. MPC and
the U.S. Attorney for the Northern District of Illinois
have reached a settlement in principle and are in the process of
finalizing and obtaining approvals within the DOJ. Final
disposition will be subject to acceptance and approval by the
U.S. District Court. It is anticipated that any settlement
of the matter would involve the payment of monetary fines and
other amounts by MPC. MPC is also in the process of working with
the U.S. Department of Defense to resolve any
administrative matters that may arise out of the investigation.
There can be no assurance as to the resolution of these matters.
The purchase price for MPC reflects the amount agreed to in
principle by MPC with the U.S. Attorney. Any resulting
fines or other sanctions beyond this amount could have a
material adverse effect on our business, financial condition,
results of operations, and cash flows.
Amounts
accrued for contingencies may be inadequate to cover the amount
of loss when the matters are ultimately resolved.
In addition to intellectual property and product liability
matters, we are currently involved or may become involved in
pending or threatened litigation or other legal proceedings
regarding employment or other contractual matters arising in the
ordinary course of business. We accrue for known 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 may be additional losses that have not been accrued,
which could have a material adverse effect on our business,
financial condition, results of operations, and cash flows.
Changes
in the legal environment in which we operate may affect future
sales and expenses.
We operate in a number of countries and are affected by a
variety of laws and regulations, including foreign investment,
employment, import, export, business acquisitions, environmental
and taxation matters, land use rights, property, and other
matters. Our ability to operate in these countries may be
materially adversely affected by unexpected changes in such laws
and regulations.
Operations
and suppliers may be subject to physical and other risks that
could disrupt production.
Our operations include principal facilities in China, Germany,
Scotland, and Poland as well as the U.S. In addition, we
operate sales and service facilities in Brazil, India, Japan,
the Netherlands, and the United Kingdom. We also have suppliers
for materials and parts inside and outside the U.S. Our
operations and sources of supply could be disrupted by a natural
disaster, war, political unrest, terrorist activity, public
health concerns, or other unforeseen events, which could cause
significant delays in the shipment of products and the provision
of services and could cause the loss of sales and customers.
Accordingly, disruption of our operations or the operations of a
significant supplier could have a material adverse effect on our
business, financial condition, results of operations, and cash
flows.
We
have significant investments in foreign entities and have
significant sales and purchases in foreign denominated
currencies creating exposure to foreign currency exchange rate
fluctuations.
We have significant investments outside the U.S. Further,
we have sales and purchases of raw materials and finished goods
in foreign denominated currencies. Accordingly, we have exposure
to fluctuations in foreign currency exchange rates relative to
the U.S. dollar. Foreign currency exchange rate risk is
reduced through several means, including the maintenance of
local production facilities in the markets served, invoicing of
customers in the same currency as the source of the products,
prompt settlement of inter-company balances utilizing a global
netting system, and limited use of foreign currency denominated
debt. Despite these measures, foreign currency rate fluctuations
could have a material adverse effect on our international
operations or on our business, financial condition, results of
operations, and cash flows.
14
Changes
in assumptions may increase the amount of retirement pension and
healthcare benefit obligations and related
expense.
Accounting for retirement pension and healthcare benefit
obligations and related expense requires the use of assumptions,
including a weighted-average discount rate, an expected
long-term rate of return on assets, and a net healthcare cost
trend rate, among others. Benefit obligations and benefit costs
are sensitive to changes in these assumptions. As a result,
assumption changes could result in increases in our obligation
amounts and expenses. Significant increases in the amount of
retirement pension and healthcare benefit obligations and
related expense could have a material adverse affect on our
business, financial condition, results of operations, and cash
flows.
Industry
Risks
Competitors
may develop breakthrough technologies that are adopted by our
customers.
Many of the components and systems we sell are used in harsh
environments with stringent emissions standards. The
technological expertise we have developed and maintained could
become less valuable if a competitor were to develop a
breakthrough technology that would allow them to match or exceed
the performance of existing technologies at a lower cost. If we
are unable to develop competitive technologies, future sales or
earnings could be lower than expected, which could have a
material adverse effect on our business, financial condition,
results of operations, and cash flows.
Industry
consolidation trends could reduce our sales opportunities,
decrease sales prices, and drive down demand for our
product.
There has been consolidation and there may be further
consolidation in the aerospace, power, and process industries.
The consolidation in these industries has resulted in customers
with vertically integrated operations, including increased
in-sourcing capabilities, which may result in economies of scale
for those companies. If our customers continue to seek to
control more aspects of vertically integrated projects, cost
pressures resulting in further integration or industry
consolidation could reduce our sales opportunities, decrease
sales prices, and drive down demand for our products, which
could have a material adverse effect on our business, financial
condition, results of operations, and cash flows.
Changes
in competitor strategies may reduce the demand for our
products.
Companies compete on the basis of providing products that meet
the needs of customers, as well as on the basis of price,
quality, and customer service. Changes in competitive
conditions, including the availability of new products and
services, the introduction of new channels of distribution, and
changes in OEM and aftermarket pricing, could adversely affect
future sales, which could have a material adverse effect on our
business, financial condition, results of operations, and cash
flows.
Unforeseen
events may occur that significantly reduce commercial airline
travel.
Our Turbine Systems segment accounted for 46% of our external
sales in 2008, with the majority of sales tied to commercial
aviation. Certain events, such as the terrorist actions of 2001,
have had a notable negative effect on passenger flight miles in
the past and the airlines revenues. Currently, increases
in fuel costs, high labor costs, and heightened competition from
low cost carriers have adversely affected the financial
condition of some commercial airlines. In addition, the current
economic downturn has led to a general reduction in air travel,
and any further deterioration of economic conditions in the
U.S. and internationally could lead to additional
reductions in air travel. Market demand for our components and
systems could be materially adversely affected by such
reductions in commercial airline travel and commercial
airlines financial difficulties, which could have a
material adverse affect on our business, financial condition,
results of operations, and cash flows.
Increasing
emission standards that drive certain product sales may be eased
or delayed.
We sell components and systems that have been designed to meet
demanding emission standards, including standards that have not
yet been implemented but are intended to be soon. If these
emission standards are eased, our future sales could be lower as
potential customers select alternative products or delay
adoption of our products, which would have a material adverse
affect on our business, financial condition, results of
operations, and cash flows.
15
Natural
gas prices may increase significantly and disproportionately to
other sources of fuels used for power generation.
Commercial producers of electricity use many of our components
and systems, most predominately in their power plants that use
natural gas as their fuel source. Commercial producers of
electricity are often in a position to manage the use of
different power plant facilities and make decisions based on
operating costs. Compared to other sources of fuels used for
power generation, natural gas prices have increased slower than
fuel oil, but about the same as coal. This increase in natural
gas prices and any future increases could decrease the use of
our components and systems, which could have a material adverse
affect on our business, financial condition, results of
operations, and cash flows.
The
U.S. government may reduce defense funding or the mix of
programs to which such funding is allocated.
A portion of our sales of components and systems is to the
U.S. government, primarily in the aerospace market. The
level of U.S. defense spending is subject to periodic
congressional appropriation actions, which is subject to change
at any time. The mix of programs to which such funding is
allocated is also uncertain, and we can provide no assurance
that an increase in defense spending will be allocated to
programs that would benefit our business. If the amount of
spending was to decrease, or there was a shift from certain
aerospace programs to other programs, our sales could decrease,
which could have a material adverse effect on our business,
financial condition, results of operations, and cash flows.
Changes
in foreign currency exchange rates or in interest rates may
reduce the demand for our products.
A significant portion of our business is conducted in currencies
other than the U.S. dollar which exposes us to movements in
foreign currency exchange rates. These exposures may change over
time as our business and business practices evolve, and they
could have a material adverse effect on our financial results
and cash flows. An increase in the value of the U.S. dollar
could increase the real cost to our customers of our products in
those markets outside the U.S. where we sell in dollars,
and a weakened dollar could increase the cost of local operating
expenses and procurement of raw materials to the extent that we
must purchase components in foreign currencies. Continued
instability in the worldwide financial markets could impact our
ability to effectively manage our foreign currency exchange rate
fluctuation risk, which could negatively impact our business,
financial condition, results of operations, and cash flows.
Investment
Risks
The
historic market price of our common stock may not be indicative
of future market prices.
The market price of our common stock changes over time. Stock
markets in general have experienced significant price and volume
volatility over the past year. The trading price of our common
stock ranged from a low of $24.50 per share to a high of $48.62
per share in fiscal 2008. The market price and volume of trading
of our common stock may continue to be subject to significant
fluctuations due not only to general stock market conditions,
but also to factors such as general conditions in the aerospace
industry or a change in sentiment in the market regarding our
operations or business prospects. As a result, the market price
of our common stock may fluctuate or decline significantly in
the future.
The
typical trading volume of our common stock may affect an
investors ability to sell significant stock holdings in
the future without negatively affecting stock
price.
We currently have approximately 68 million shares of common
stock outstanding. While the level of trading activity will vary
by day, the typical trading level represents only a small
percentage of total shares of stock outstanding. As a result, a
seller who a significant number of shares of stock in a short
period of time could negatively affect our share price.
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Item 1B.
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Unresolved
Staff Comments
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None.
16
Our principal plants are as follows:
United
States
Fort Collins, Colorado Turbine Systems, Engine
Systems, and Electrical Power Systems manufacturing,
engineering, and corporate headquarters
Loveland, Colorado Turbine Systems and Engine
Systems manufacturing and partially leased to a third party
Rockford, Illinois Turbine Systems manufacturing and
engineering
Rockton, Illinois Turbine Systems manufacturing and
repair and overhaul
Zeeland, Michigan Turbine Systems manufacturing and
engineering
Greenville, South Carolina (leased) Turbine Systems
manufacturing and engineering
Other
Countries
Suzhou, Peoples Republic of China (leased)
Engine Systems manufacturing
Aken, Germany (leased) Engine Systems manufacturing
and engineering
Kempen, Germany Electrical Power Systems
manufacturing and engineering
Stuttgart, Germany (leased) Electrical Power Systems
manufacturing and engineering
Prestwick, Scotland, United Kingdom (leased) Turbine
Systems repair and overhaul
Tianjin, Peoples Republic of China (leased)
Engine Systems manufacturing
Krakow, Poland (leased) Electrical Power Systems
manufacturing and engineering
In connection with the MPC acquisition, Woodward assumed leases
on approximately 450,000 square feet of manufacturing and
office space in Skokie and Niles, Illinois. In connection with
the acquisition of MotoTron, Woodward assumed office leases in
Ann Arbor, Michigan and Columbus, Indiana and established a
lease for an office facility in Oshkosh, Wisconsin. Additional
information about these acquisitions is included in Note 22
to the Consolidated Financial Statements in
Item 8 Financial Statements and
Supplementary Data.
In addition to the principal plants listed above, we own or
lease other facilities in Brazil, India, Japan, the Netherlands,
and the United Kingdom which are used primarily for sales and
service activities.
Our principal plants are suitable and adequate for the
manufacturing and other activities performed at those plants,
and we believe our utilization levels are generally high.
However, with continuing advancements in manufacturing
technology and operational improvements, we believe we can
continue to increase production without significant capital
expenditures for expansion, retooling, or acquisition of
additional plants.
We anticipate growth in capacity in the following locations
during fiscal 2009: Loveland, Colorado, Tianjin, China, and
Krakow, Poland.
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Item 3.
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Legal
Proceedings
|
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 where management 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, we
currently believe the possible additional loss in the event of
an unfavorable resolution of each matter is less than $10,000 in
the aggregate.
Specifically, MPC, one of our newly acquired subsidiaries, is
subject to an investigation by the DOJ regarding certain of its
pricing practices related to government contracts prior to 2006.
MPC and the U.S. Attorney for the Northern District of
Illinois have reached a settlement in principle and are in the
process of finalizing and obtaining approvals within the DOJ.
Final disposition will be subject to acceptance and approval by
the U.S. District Court. It is anticipated that any
settlement of the matter would involve the payment of monetary
fines and other amounts by MPC. MPC is also in the process of
working with the U.S. Department of Defense to resolve any
administrative matters that may arise out of the investigation.
There can be no assurance as to the resolution of these matters.
The purchase price for MPC reflects the amount agreed to in
principle by MPC with the U.S. Attorney. Any resulting
fines or other sanctions beyond this amount could have a
material negative impact on Woodward.
We currently do not have any administrative or judicial
proceedings arising under any Federal, State, or local
provisions regulating the discharge of materials into the
environment or primarily for the purpose of protecting the
environment.
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.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
There were no matters submitted to a vote of security holders
during the fourth quarter of fiscal 2008.
18
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock is listed on The NASDAQ Global Select Market
and at November 17, 2008, there were approximately 1,380
holders of record. Cash dividends were declared quarterly during
2008 and 2007. The amount of cash dividends per share and the
high and low sales price per share for our common stock for each
fiscal quarter in 2008 and 2007 are included in the Note 21
to the Consolidated Financial Statements in
Item 8 Financial Statements and
Supplementary Data.
(a) Recent
Sales of Unregistered Securities
Sales of common stock issued from treasury stock to one of the
companys directors during the fourth quarter of 2008
consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Shares
|
|
|
Consideration
|
|
|
|
Purchased
|
|
|
Received
|
|
|
July 1, 2008 through July 31, 2008
|
|
|
209
|
|
|
$
|
9
|
|
August 1, 2008 through August 31, 2008
|
|
|
|
|
|
|
|
|
September 1, 2008 through September 30, 2008
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
|
|
|
(or Approximate
|
|
|
|
|
|
|
|
|
|
Total Number
|
|
|
Dollar Value)
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
of Shares that
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
|
May Yet
|
|
|
|
|
|
|
|
|
|
Part of
|
|
|
Be Purchased
|
|
|
|
Total Number
|
|
|
Average Price
|
|
|
Publicly Announced
|
|
|
Under the
|
|
|
|
of Shares
|
|
|
Paid Per
|
|
|
Plans or
|
|
|
Plans or
|
|
Period
|
|
Purchased
|
|
|
Share
|
|
|
Programs
|
|
|
Programs(1)
|
|
|
|
(Dollars in thousands)
|
|
|
July 1, 2008 through July 31, 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
168,075
|
|
August 1, 2008 through August 31, 2008(2)
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
168,075
|
|
September 1, 2008 through September 30, 2008(3)(4)
|
|
|
554
|
|
|
$
|
43.30
|
|
|
|
|
|
|
$
|
168,075
|
|
|
|
|
(1)
|
|
During September 2007, the Board of Directors authorized a stock
repurchase program of up to $200 million of our outstanding
shares of common stock on the open market or privately
negotiated transactions over a three-year period that will end
in October 2010. During the first half of fiscal year 2008,
$31,925 was spent from this allocated pool for repurchase of
stock.
|
|
(2)
|
|
Does not include 21,265 shares acquired as part of the
exercise of stock options in August 2008.
|
|
(3)
|
|
Does not include 2,677 shares acquired as part of the
exercise of stock options in September 2008.
|
|
(4)
|
|
We purchased 554 shares on the open market related to the
reinvestment of dividends for shares of treasury stock held for
deferred compensation in September 2008.
|
The information required by this item relating to securities
authorized for issuance under equity plans is included under the
caption Executive Compensation Equity
Compensation Plan Information in our Proxy Statement for
the 2008 Annual Meeting of Stockholders to be held
January 22, 2009 and is incorporated herein by reference.
19
|
|
Item 6.
|
Selected
Financial Data
|
The following selected financial data should be read in
conjunction with the Consolidated Financial Statements and
related notes which appear in Item 8
Financial Statements and Supplementary Data of this Annual
Report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands except per share amounts)
|
|
|
Net sales
|
|
$
|
1,258,204
|
|
|
|
1,042,337
|
|
|
|
854,515
|
|
|
|
827,726
|
|
|
|
709,805
|
|
Net Earnings(1)(2)(4)
|
|
$
|
121,880
|
|
|
|
98,157
|
|
|
|
69,900
|
|
|
|
55,971
|
|
|
|
31,382
|
|
Earnings per share(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.80
|
|
|
|
1.43
|
|
|
|
1.02
|
|
|
|
0.82
|
|
|
|
0.46
|
|
Diluted
|
|
$
|
1.75
|
|
|
|
1.39
|
|
|
|
0.99
|
|
|
|
0.80
|
|
|
|
0.45
|
|
Cash dividends per share
|
|
$
|
0.235
|
|
|
|
0.215
|
|
|
|
0.200
|
|
|
|
0.175
|
|
|
|
0.160
|
|
Income taxes
|
|
$
|
60,030
|
|
|
|
33,831
|
|
|
|
14,597
|
|
|
|
23,137
|
|
|
|
17,910
|
|
Interest expense
|
|
$
|
3,834
|
|
|
|
4,527
|
|
|
|
5,089
|
|
|
|
5,814
|
|
|
|
5,332
|
|
Interest income
|
|
$
|
2,120
|
|
|
|
3,604
|
|
|
|
2,750
|
|
|
|
2,159
|
|
|
|
1,095
|
|
Depreciation expense
|
|
$
|
28,620
|
|
|
|
25,428
|
|
|
|
22,064
|
|
|
|
24,451
|
|
|
|
25,856
|
|
Amortization expense
|
|
$
|
6,830
|
|
|
|
7,496
|
|
|
|
6,953
|
|
|
|
7,087
|
|
|
|
6,905
|
|
Capital expenditures
|
|
$
|
41,099
|
|
|
|
31,984
|
|
|
|
31,713
|
|
|
|
26,615
|
|
|
|
18,698
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares outstanding
|
|
|
67,564
|
|
|
|
68,489
|
|
|
|
68,702
|
|
|
|
68,400
|
|
|
|
67,716
|
|
Diluted shares outstanding
|
|
|
69,560
|
|
|
|
70,487
|
|
|
|
70,382
|
|
|
|
70,254
|
|
|
|
69,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Working capital
|
|
$
|
369,211
|
|
|
|
275,611
|
|
|
|
260,243
|
|
|
|
241,066
|
|
|
|
197,524
|
|
Total assets
|
|
$
|
927,017
|
|
|
|
829,767
|
|
|
|
735,497
|
|
|
|
705,466
|
|
|
|
654,294
|
|
Long-term debt, less current portion
|
|
$
|
33,337
|
|
|
|
45,150
|
|
|
|
58,379
|
|
|
|
72,942
|
|
|
|
88,452
|
|
Total debt
|
|
$
|
48,928
|
|
|
|
66,586
|
|
|
|
73,515
|
|
|
|
95,787
|
|
|
|
95,241
|
|
Total liabilities
|
|
$
|
297,389
|
|
|
|
285,336
|
|
|
|
256,808
|
|
|
|
272,997
|
|
|
|
268,433
|
|
Stockholders equity
|
|
$
|
629,628
|
|
|
|
544,431
|
|
|
|
478,689
|
|
|
|
432,469
|
|
|
|
385,861
|
|
Full-time worker members
|
|
|
4,476
|
|
|
|
4,248
|
|
|
|
3,731
|
|
|
|
3,513
|
|
|
|
3,287
|
|
Registered stockholder members
|
|
|
1,358
|
|
|
|
1,229
|
|
|
|
1,442
|
|
|
|
1,448
|
|
|
|
1,529
|
|
Notes:
|
|
|
1.
|
|
Net earnings for fiscal 2007 included two tax adjustments, a
favorable resolution of issues with tax authorities resulting in
a reduction of net tax expense of $13.3 million and a
reduction in deferred tax assets resulting in a tax expense of
$3.0 million due to a decrease in the German statutory
income tax rate. These adjustments increased net earnings by
$10.3 million, or $0.15 per basic share and $0.15 per
diluted share.
|
|
2.
|
|
Net earnings for fiscal 2006 included a deferred tax asset
valuation allowance change that increased net earnings by
$13.7 million, or $0.20 per basic share and $0.19 per
diluted share.
|
|
3.
|
|
Per share amounts have been updated from amounts reported prior
to February 1, 2008 to reflect the effect of a two-for-one
stock split and prior to February 1, 2006 to reflect the
effect of a three-for-one stock split.
|
|
4.
|
|
Accounting for stock-based compensation changed to the fair
value method from the intrinsic value method beginning in the
first quarter of fiscal 2006, concurrent with the adoption on
October 1, 2005 of Statement of Financial Accounting
Standards 123R, Share-Based Payments. The following
presents a reconciliation of reported net earnings and per share
information to pro forma net earnings and per share information
that would
|
20
|
|
|
|
|
have been reported if the fair value method had been used to
account for stock-based employee compensation in fiscal 2004 and
fiscal 2005:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands except per share amounts)
|
|
|
Reported net earnings
|
|
$
|
55,971
|
|
|
$
|
31,382
|
|
Stock based compensation expense using fair value method, net of
tax
|
|
|
1,502
|
|
|
|
1,400
|
|
|
|
|
|
|
|
|
|
|
Pro forma net earnings
|
|
$
|
54,469
|
|
|
$
|
29,982
|
|
|
|
|
|
|
|
|
|
|
Reported net earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.82
|
|
|
$
|
0.46
|
|
Diluted
|
|
$
|
0.80
|
|
|
$
|
0.45
|
|
Pro forma net earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.80
|
|
|
$
|
0.44
|
|
Diluted
|
|
$
|
0.78
|
|
|
$
|
0.43
|
|
21
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
OVERVIEW
Woodward designs, manufactures, and services energy control
systems and components for commercial and military aircraft,
turbines, reciprocating engines, and electrical power system
equipment. Our innovative fluid energy, combustion control,
electrical energy, and motion control systems help customers
offer cleaner, more reliable, and more cost-effective equipment.
Leading original equipment manufacturers use our products and
services in aerospace, power and process industries, and
transportation.
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 business 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
to improve the security, quality, reliability, and availability
of electrical power networks for industrial markets, which
include power generation, power distribution, transportation,
and process industries.
On October 1, 2008, we acquired MPC in a transaction valued
at approximately $383 million. MPC is a privately-held
company headquartered in Skokie, Illinois. MPCs products
include high performance motors and sensors, analog and digital
control electronics, rotary and linear actuation systems, and
flight deck and
fly-by-wire
systems. MPCs products are used in both commercial and
military aerospace programs. MPCs customer list includes
airframers such as Boeing and Airbus, as well as tier-one
suppliers, such as Raytheon and Honeywell. MPC will form our
fourth business segment, Airframe Systems. This segment allows
us to focus on the airframe applications of both MPCs and
Woodwards technologies and products. We are also
evaluating opportunities to leverage MPCs competencies
into our traditional market niches. Additional information about
Airframe Systems and the acquisition is included in Note 22
to the Consolidated Financial Statements in
Item 8 Financial Statements and
Supplementary Data.
We use segment information internally to assess the performance
of each segment and to make decisions on the allocation of
resources.
Our sales have increased at an annual rate of 15% from fiscal
2004 to fiscal 2008. Our earnings have increased at an annual
rate of 40% from fiscal 2004 to fiscal 2008. In 2008, we
achieved record sales of $1.26 billion and our net earnings
were $121.9 million. Our markets showed continued strength
through fiscal 2008 and we were well positioned to capture the
opportunities presented in each of our segments.
We took advantage of two continuing trends in our
markets the increasing global need for both energy
efficiency and emissions reductions, where our products meet
customer expectations by providing superior performance. At
September 30, 2008, our total assets were approximately
$927.0 million, including $109.9 million in cash, and
our total debt was approximately $48.9 million. As
discussed in Note 22 to the Consolidated Financial
Statements in Item 8 Financial Statements
and Supplementary Data, an aggregate $400.0 million
of additional debt was issued on October 1, 2008 and
October 30, 2008, a substantial portion of which was used
to finance the MPC acquisition. We are well positioned to fund
expanded research and development and to explore other
investment opportunities consistent with our focused strategies.
In the sections that follow, we are providing information to
help you better understand our critical accounting estimates and
market risks, our results of operations and financial condition,
and the effects of recent accounting pronouncements.
22
CRITICAL
ACCOUNTING ESTIMATES
The preparation of financial statements and related disclosures
in conformity with accounting principles generally accepted in
the U.S. (U.S.GAAP) requires us to make
judgments, assumptions, and estimates that affect the amounts
reported in the Consolidated Financial Statements and
accompanying notes. Note 1 to the Consolidated Financial
Statements describes the significant accounting policies and
methods used in the preparation of the Consolidated Financial
Statements. The accounting positions described below are
significantly affected by critical accounting estimates. Such
accounting positions require significant judgments, assumptions,
and estimates to be used in the preparation of the Consolidated
Financial Statements, and actual results could differ materially
from the amounts reported based on variability in factors
affecting these estimates.
Our management has discussed the development and selection of
these critical accounting estimates with the audit committee of
our board of directors, and the audit committee has reviewed our
disclosures to it in this Managements Discussion and
Analysis.
Inventory
Inventories are valued at the lower of cost or market, with cost
being determined on a
first-in,
first-out basis. Customer-specific information and contractual
terms are considered when evaluating lower of cost or market
considerations. The carrying value of inventory as of
September 30, 2008 was $208.3 million. If economic
conditions or other factors significantly reduce future customer
demand for our products from forecast levels, then future
adjustments to the carrying value of inventory may become
necessary. We attempt to maintain inventory quantities to levels
considered necessary to fill expected orders in a reasonable
time frame, which we believe mitigates our exposure to future
inventory carrying cost adjustments.
Post-retirement
benefits
The Company provides various benefits to certain employees
through defined benefit plans and retirement healthcare benefit
plans. For financial reporting purposes, net periodic benefits
expense and related obligations are calculated using a number of
significant actuarial assumptions, including anticipated
discount rates, rates of compensation increases, long-term
return on defined benefit plan investments, and anticipated
healthcare cost increases. Changes in net periodic expense may
occur in the future due to changes in these assumptions.
Estimates of the value of post-retirement benefit obligations,
and related net periodic benefits expense, are dependent on
actuarial assumptions including future interest rates,
compensation rates, healthcare cost trends, and returns on
defined benefit plan investments. Variances from our year end
estimates for these variables could materially affect our
recognized post-retirement benefit obligation liabilities. On a
near-term basis, such changes are unlikely to have a material
impact on reported earnings, since such adjustments are recorded
to other comprehensive income and recognized into expense over a
number of years. Significant changes in estimates could,
however, materially affect the carrying amounts of projected
benefit obligation liabilities, which could affect loan covenant
compliance and future borrowing capacity. As of
September 30, 2008, the projected benefit obligation of all
of our post-retirement benefit plans was $101.1 million. In
light of recent global economic instability, management
considers the likelihood that such assumptions may change
significantly in future periods to be greater than in recent
years.
Reviews
for impairment of goodwill
At September 30, 2008, we had $139.6 million of
goodwill, or 15% of total assets. We test goodwill for
impairment at least annually, during the second quarter, and
whenever events occur or circumstances change that indicate
there may be an impairment. These events or circumstances could
include a significant adverse change in the business climate,
poor indicators of operating performance, or a sale or
disposition of a significant reporting unit.
We test goodwill for impairment at the reporting unit level. Our
reporting units are our operating segments. Testing goodwill for
impairment requires us to determine the amount of goodwill
associated with reporting units, estimate fair values of those
reporting units, and determine their carrying values. These
processes are subjective and
23
require significant estimates. These estimates include judgments
about future cash flows that are dependent on internal
forecasts, long-term growth rates, allocations of commonly
shared assets, and estimates of weighted-average cost of capital
used to discount future cash flows. Changes in these estimates
and assumptions could materially affect the results of our
reviews for impairment of goodwill.
Our impairment analysis is partially dependent upon future cash
flow projections for our operating segments, discounted at
appropriate interest rates. If future sales are significantly
impacted by changes in the overall economy, negatively affecting
future cash flows, or if interest rates change significantly
from current levels, then the impairment assessment could be
effected, which could materially impact our results of
operations and financial position. Management believes that
changes in future cash flows
and/or
interest rates of significant magnitude to result in a future
impairment charge against goodwill recorded as of
September 30, 2008 are unlikely.
Income
taxes
We are subject to income taxes in the U.S. and numerous
foreign jurisdictions. Significant judgment is required in
evaluating our tax positions and determining our provision for
income taxes.
During the ordinary course of business, there are many
transactions and calculations for which the ultimate tax
determination is uncertain. We establish reserves for
tax-related uncertainties based on estimates of whether, and the
extent to which, additional taxes will be due. The reserves are
established when we believe that certain positions are likely to
be challenged and may not be fully sustained on review by tax
authorities. We adjust these reserves in light of changing facts
and circumstances, such as the closing of a tax audit or
refinement of an estimate. Although we believe our reserves are
reasonable, no assurance can be given that the final outcome of
these matters will not be different from that which is reflected
in our historical income tax provisions and accruals. To the
extent that the final tax outcome of these matters is different
than the amounts recorded, such differences will impact the
provision for income taxes. The provision for income taxes
includes the impact of reserve provisions and changes to
reserves that are considered appropriate. As of
September 30, 2008, unrecognized net tax benefits for which
recognition has been deferred following the guidance of
FIN 48 was $22.6 million.
Significant judgment is also required in determining any
valuation allowance recorded against deferred tax assets. In
assessing the need for a valuation allowance, we consider all
available evidence including past operating results, estimates
of future taxable income, and the feasibility of tax planning
strategies. In the event that we change our determination as to
the amount of deferred tax assets that can be realized, we will
adjust our valuation allowance with a corresponding impact to
the provision for income taxes in the period in which such
determination is made. As of September 30, 2008, our
valuation allowance was $0.1 million.
Our effective tax rates differ from the statutory rate primarily
due to the tax impact of foreign operations, adjustments of
valuation allowances, research tax credits, state taxes, and tax
audit settlements.
Our provision for income taxes is subject to volatility and
could be affected by the following: earnings that are different
than anticipated in countries which have lower or higher tax
rates; changes in the valuation of our deferred tax assets and
liabilities; transfer pricing adjustments; tax effects of
stock-based compensation; costs or benefits related to
intercompany restructurings; or changes in tax laws,
regulations, and accounting principles, including accounting for
uncertain tax positions, or interpretations thereof. In
addition, we are subject to examination of our income tax
returns by the Internal Revenue Service and other tax
authorities. We regularly assess the likelihood of adverse
outcomes resulting from these examinations to determine the
adequacy of our provision for income taxes.
There can be no assurance that the outcomes from these
examinations will not have an effect on our operating results
and financial condition.
24
RESULTS
OF OPERATIONS
Sales
The following table presents the breakdown of consolidated net
external sales by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Segment net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turbine Systems
|
|
$
|
595,774
|
|
|
|
47
|
%
|
|
$
|
523,842
|
|
|
|
50
|
%
|
|
$
|
458,923
|
|
|
|
54
|
%
|
Engine Systems
|
|
|
499,318
|
|
|
|
40
|
|
|
|
455,200
|
|
|
|
44
|
|
|
|
430,448
|
|
|
|
50
|
|
Electrical Power Systems
|
|
|
289,294
|
|
|
|
23
|
|
|
|
181,366
|
|
|
|
17
|
|
|
|
76,186
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net sales
|
|
|
1,384,386
|
|
|
|
110
|
|
|
|
1,160,408
|
|
|
|
111
|
|
|
|
965,557
|
|
|
|
113
|
|
Less intersegment net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turbine Systems
|
|
|
(18,470
|
)
|
|
|
(2
|
)
|
|
|
(21,285
|
)
|
|
|
(2
|
)
|
|
|
(20,197
|
)
|
|
|
(2
|
)
|
Engine Systems
|
|
|
(41,141
|
)
|
|
|
(3
|
)
|
|
|
(41,124
|
)
|
|
|
(4
|
)
|
|
|
(39,829
|
)
|
|
|
(5
|
)
|
Electrical Power Systems
|
|
|
(66,571
|
)
|
|
|
(5
|
)
|
|
|
(55,662
|
)
|
|
|
(5
|
)
|
|
|
(51,016
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net external sales
|
|
$
|
1,258,204
|
|
|
|
100
|
%
|
|
$
|
1,042,337
|
|
|
|
100
|
%
|
|
$
|
854,515
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment sales primarily reflect contract-manufacturing
activity across business segments. Turbine Systems and Engine
Systems sell electronic controls manufactured by Electrical
Power Systems as part of their system offerings. These
intersegment activities have been increasing as a result of our
Turbine and Engine Systems segments growing their
respective external sales.
2008
Compared to 2007
Consolidated net external sales increased 21% from fiscal 2007
to fiscal 2008. The increase was attributable to the following
(in thousands):
|
|
|
|
|
Consolidated net external sales for year
ended September 30, 2007
|
|
$
|
1,042,337
|
|
Turbine Systems volume changes
|
|
|
58,688
|
|
Engine Systems volume changes
|
|
|
19,743
|
|
Electrical Power Systems volume changes
|
|
|
76,856
|
|
Price changes
|
|
|
13,613
|
|
Foreign currency translation
|
|
|
46,967
|
|
|
|
|
|
|
Consolidated net external sales for year ended
September 30, 2008
|
|
$
|
1,258,204
|
|
|
|
|
|
|
Turbine Systems sales volume
changes:
Turbine Systems sales
performance reflected generally strong demand for our OEM
offerings in the industrial and aerospace turbine markets,
including our recently introduced control systems for business
jets and power generation OEM and the government for military
applications. This mix of aerospace growth was consistent with
our expectations and reflects the high volume of orders for new
aircraft with engines containing increased Woodward content.
Engine Systems sales volume
changes:
The primary drivers of the growth in
sales volume for Engine Systems are increased production in the
marine and alternative fuel markets as well as growth in demand
in the power and process markets. Engine Systems sales
were boosted by demand for our control systems for large,
natural gas-powered on-highway vehicles, and our offerings in
the marine market.
Electrical Power Systems sales volume
changes:
Demand in both the power generation
and distribution and wind inverter turbine markets continues to
drive growth in sales of Electrical Power Systems. The growth in
wind turbine inverter demand has been strong. The increase in
Electrical Power Systems intercompany sales is the result
of higher external sales in Turbines Systems and Engine Systems
of products that incorporate electronic controls manufactured by
Electrical Power Systems.
25
Price changes:
Selling price increases
were across most products in Turbine Systems and Engine Systems
impacting spares and components used in the aerospace
aftermarket. These selling price changes were in response
prevailing market conditions as prices fluctuated for
commodities used to produce mechanical, electrical, or
electromagnetic components.
Foreign currency translation:
Our
worldwide sales activities are primarily denominated in
U.S. dollar (USD), European Monetary Unit Euro
(the Euro), and Great Britain pound
(GBP). As these currencies fluctuate against each
other and other currencies, we are exposed to gains or losses on
sales transactions. During fiscal 2008, approximately 22% of the
increase in net external sales was due to changes in the foreign
currency exchange rates.
2007
Compared to 2006
Consolidated net external sales increased 22% from fiscal 2006
to fiscal 2007. The increase was attributable to the following
(in thousands):
|
|
|
|
|
Consolidated net external sales for year ended
September 30, 2006
|
|
$
|
854,515
|
|
Turbine Systems volume changes
|
|
|
54,687
|
|
Engine Systems volume changes
|
|
|
9,018
|
|
Electrical Power Systems volume changes
|
|
|
5,082
|
|
Schaltanlagen-Elektronik-Geräte
GmbH & Co. KG (SEG) related revenue
|
|
|
92,776
|
|
Price changes
|
|
|
11,327
|
|
Foreign currency translation
|
|
|
14,932
|
|
|
|
|
|
|
Consolidated net external sales for year ended
September 30, 2007
|
|
$
|
1,042,337
|
|
|
|
|
|
|
Turbine Systems sales volume
changes:
Turbine Systems improvement
reflects the favorable trends in all segments of aerospace
business. We saw strong growth in the business and regional
aviation markets with order backlogs and deliveries
significantly higher than 2006 levels. Overall fleet growth and
increased utilization resulted in strong demand for repair and
related aftermarket service. Our significant development efforts
on the GEnx fuel system for the Boeing Dreamliner, the GP7200
fuel system components for the A380 and the PW600 control system
for the Mustang and the Eclipse were making the transition from
research to production. We saw a trend toward higher revenue
passenger miles incurred by commercial airlines and cargo
growth, which drove aircraft usage and had a positive effect on
our aftermarket sales. We estimate approximately 40% of Turbine
Systems sales were aftermarket for fiscal 2007 and fiscal
2006.
Engine Systems sales volume
changes:
Demand for power generation, such as
large gas and diesel engines, grew with the significant increase
in global demand for electricity, particularly in distributed
power applications. Growing infrastructure needs in India, China
and the rest of Asia played a key role in this growth. Within
the transportation market, the marine segment was robust.
Electrical Power Systems sales volume
changes:
As part of our channel development,
we gained new customers in the power generation and distribution
market. Electrical Power Systems sales growth of 60% for
the year consisted of 55% organic growth and 5% inorganic.
Price changes:
Price changes were made
primarily in response to material cost increases in Turbine
Systems and Engine Systems. The material cost increases were
related to price fluctuations of commodities from which
mechanical, electronic, or electromagnetic components are
produced.
SEG related revenue:
On
October 31, 2006, we acquired 100% of the stock of SEG. The
acquisition provided us with technologies and products that
complemented our power generation system solutions. The results
of SEGs operations were included in fiscal 2007 net
sales from the beginning of November 2006.
26
Costs
and Expenses
The following table presents costs and expenses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
Net
|
|
|
|
|
|
Net
|
|
Year Ended September 30,
|
|
2008
|
|
|
Sales
|
|
|
2007
|
|
|
Sales
|
|
|
2006
|
|
|
Sales
|
|
|
Net Sales
|
|
$
|
1,258,204
|
|
|
|
100.0
|
%
|
|
$
|
1,042,337
|
|
|
|
100.0
|
%
|
|
$
|
854,515
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
882,996
|
|
|
|
70.2
|
%
|
|
$
|
728,820
|
|
|
|
69.9
|
%
|
|
$
|
612,263
|
|
|
|
71.6
|
%
|
Selling, general, and administrative expenses
|
|
|
115,399
|
|
|
|
9.2
|
|
|
|
111,297
|
|
|
|
10.7
|
|
|
|
92,013
|
|
|
|
10.8
|
|
Research and development costs
|
|
|
73,414
|
|
|
|
5.8
|
|
|
|
65,294
|
|
|
|
6.3
|
|
|
|
59,861
|
|
|
|
7.0
|
|
Amortization of intangible assets
|
|
|
6,830
|
|
|
|
0.5
|
|
|
|
7,496
|
|
|
|
0.7
|
|
|
|
6,953
|
|
|
|
0.8
|
|
Interest and other income
|
|
|
(6,805
|
)
|
|
|
(0.5
|
)
|
|
|
(7,790
|
)
|
|
|
(0.8
|
)
|
|
|
(6,995
|
)
|
|
|
(0.8
|
)
|
Interest and other expenses
|
|
|
4,460
|
|
|
|
0.3
|
|
|
|
5,232
|
|
|
|
0.5
|
|
|
|
5,923
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated costs and expenses
|
|
$
|
1,076,294
|
|
|
|
85.5
|
%
|
|
$
|
910,349
|
|
|
|
87.3
|
%
|
|
$
|
770,018
|
|
|
|
90.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
Compared to 2007
Cost of goods sold
increased 21% attributable to
the following (in thousands):
|
|
|
|
|
Cost of goods sold for the year ended
September 30, 2007
|
|
$
|
728,820
|
|
Increase in sales volume
|
|
|
96,314
|
|
Foreign currency translation
|
|
|
32,393
|
|
Changes in product mix
|
|
|
13,628
|
|
Increased non-volume related freight and
product expediting costs
|
|
|
4,809
|
|
Other
|
|
|
7,032
|
|
|
|
|
|
|
Cost of goods sold for the year ended
September 30, 2008
|
|
$
|
882,996
|
|
|
|
|
|
|
Gross margins were approximately flat at 29.8% for the year
ended September 30, 2008 compared to 30.1% for the year
ended September 30, 2007. The small decrease in gross
margins reflects a change in product mix and increased operating
costs associated with productivity enhancements and supply chain
constraints.
Our foreign locations purchase goods primarily in Euro and GBP.
The change in the foreign currency exchange rates to USD
resulted in increased costs during fiscal 2008 as compared to
fiscal 2007.
Selling, general, and administrative expenses
increased 4%, attributable to the following (in
thousands):
|
|
|
|
|
SG&A for the year ended
September 30, 2007
|
|
$
|
111,297
|
|
Accruals for legal and arbitration matters
|
|
|
(4,429
|
)
|
Variable compensation
|
|
|
2,070
|
|
Stock-based compensation expense
|
|
|
628
|
|
Foreign currency translation
|
|
|
4,205
|
|
Other
|
|
|
1,628
|
|
|
|
|
|
|
SG&A for the year ended
September 30, 2008
|
|
$
|
115,399
|
|
|
|
|
|
|
We accrue for individual legal matters that we believe are
likely to result in a loss when ultimately resolved using
estimates of the most likely amount of loss.
27
Selling, general, and administrative expenses increased
primarily from increases in foreign currency translation rates,
increased variable compensation, and costs incurred to open new
locations, partially offset by a reduction in costs related to
legal and arbitration matters. Selling, general, and
administrative expenses decreased as a percent of sales
year-to-year from 10.7% in fiscal 2007 to 9.2% in fiscal 2008.
Research and development costs
increased 12%,
attributable to the following (in thousands):
|
|
|
|
|
Research and development for the year ended
September 30, 2007
|
|
$
|
65,294
|
|
Turbine Systems development activities
|
|
|
2,401
|
|
Engine Systems development activities
|
|
|
2,828
|
|
Electrical Power Systems development activities
|
|
|
2,891
|
|
|
|
|
|
|
Research and development for the year ended
September 30, 2008
|
|
$
|
73,414
|
|
|
|
|
|
|
Research and development costs increased in the year ended
September 30, 2008, as compared to the year ended
September 30, 2007, reflecting higher levels of development
activity. Research and development costs decreased as a percent
of sales year-to-year from 6.3% in fiscal 2007 to 5.8% in fiscal
2008.
In the Turbine Systems segment, we continue to work closely with
our customers early in their technology development and
preliminary design stages. We help our customers by investing in
research and technology development programs that improve fuel
efficiency, reduce emissions, and lower total cost of ownership,
benefiting both operators and the general public. The result of
recent investments can be seen in our integrated fuel system
selected by GE Aviation for their GEnx turbofan engine, powering
the Boeing 787 Dreamliner and Boeing
747-8
airliner, and the fuel and combustion components we supply for
the Pratt & Whitney F135 and GE Rolls-Royce F136
engines powering the Lockheed-Martin Joint Strike Fighter. We
are also developing components for the
T700-GE-701D
engine that will be used for the upgrades to the Sikorsky Black
Hawk and Boeing Apache helicopters, components for the
Pratt & Whitney 600 family, the Pratt &
Whitney geared turbofan for both the Mitsubishi Regional Jet and
the Bombardier CSeries, and the CF34-10 and SAM146 turbo engine
programs to be used for global regional jets in the Chinese and
Russian markets, among others. Within the industrial markets,
Woodward fuel systems, controls, and combustion systems are used
on the worlds most advanced industrial gas turbine power
plants, oil and gas production facilities, and military marine
applications. Most recently, we have expanded our collaboration
with key customers by signing joint technology demonstration or
production contracts with GE Aviation and Pratt &
Whitney for their next generation of commercial aircraft engines
and with GE Energy and Pratt & Whitney Power Systems
for their next generation of industrial gas turbine applications.
Engine Systems continues to develop components and integrated
systems that allow our customers to meet developed
countries future emissions regulations, ever increasing
fuel efficiency demands, and support the growing infrastructure
needs in India, China, and the rest of Asia. Development
projects include components for our market leading Compressed
Natural Gas (CNG) systems for buses and trucks, next generation
injectors and pumps for diesel fuel systems used in shipping,
construction equipment, and power generation markets, a new line
of steam turbine control products, and control systems for the
new and growing diesel particulate filter market.
Electrical Power Systems is developing a new grid connected
inverter platform that enables large scale wind turbine power
integration and also supports local grid codes for High/Low
Voltage Ride Through, as well as electrical protection and
metering devices that provide safe and more reliable electrical
power distribution to commercial and industrial users and
utilities in a networked environment. In addition, we continue
to develop products for Distributed Energy Resource integration
based on our latest power generation controls platform.
28
2007
Compared to 2006
Cost of goods sold
increased 19%, attributable to
the following (in thousands):
|
|
|
|
|
Cost of goods sold for the year ended
September 30, 2006
|
|
$
|
612,263
|
|
Increase in sales volume
|
|
|
31,219
|
|
Effects of consolidation of European
operations and other
|
|
|
(2,327
|
)
|
Foreign currency translation
|
|
|
12,692
|
|
SEG related production costs
|
|
|
65,963
|
|
Other
|
|
|
9,010
|
|
|
|
|
|
|
Cost of goods sold for the year ended
September 30, 2007
|
|
$
|
728,820
|
|
|
|
|
|
|
Costs of goods sold benefited from the effects of Engine
Systems European consolidation, which we completed in
March 2006.
Variable compensation paid to members in direct and indirect
manufacturing functions was higher in 2007 than in 2006. Each
year, a portion of our members compensation will vary
depending on performance-based factors.
Selling, general, and administrative expenses
increased 21%, attributable to the following (in
thousands):
|
|
|
|
|
SG&A for the year ended
September 30, 2006
|
|
$
|
92,013
|
|
Accruals for legal and arbitration matters
|
|
|
(5,557
|
)
|
SEG related SG&A expenses
|
|
|
11,307
|
|
Variable compensation
|
|
|
5,430
|
|
SEG integration costs
|
|
|
3,000
|
|
Stock-based compensation expense
|
|
|
774
|
|
Other
|
|
|
4,330
|
|
|
|
|
|
|
SG&A for the year ended
September 30, 2007
|
|
$
|
111,297
|
|
|
|
|
|
|
We accrue for individual legal matters that we believe are
likely to result in a loss when ultimately resolved using
estimates of the most likely amount of loss.
Variable compensation paid to members was higher in 2007 than in
2006. Each year, a portion of our members compensation
will vary depending on performance-based factors.
We incurred expenses related to completing the acquisition of
SEG including dedicated staffing, travel, and telephone costs.
Research and development costs
increased 9%,
attributable to the following (in thousands):
|
|
|
|
|
Research and development for the year ended
September 30, 2006
|
|
$
|
59,861
|
|
Turbine Systems development activities
|
|
|
(170
|
)
|
Engine Systems development activities
|
|
|
1,544
|
|
Electrical Power Systems development activities
|
|
|
(841
|
)
|
SEG development projects
|
|
|
4,900
|
|
|
|
|
|
|
Research and development for the year ended
September 30, 2007
|
|
$
|
65,294
|
|
|
|
|
|
|
During fiscal year 2007, we made considerable progress on a new
diesel pump in Engine Systems, which will power next generation
engines being released into the market in the near future. This
pump will sustain higher pressures, temperatures, and speeds
than previous models. The SEG acquisition, which is included in
the Electrical Power Systems segment, added development
activities related to power protection and wind inverter
technologies.
29
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Turbine Systems
|
|
$
|
116,196
|
|
|
$
|
87,353
|
|
|
$
|
67,584
|
|
Engine Systems
|
|
|
56,471
|
|
|
|
56,984
|
|
|
|
40,829
|
|
Electrical Power Systems
|
|
|
42,303
|
|
|
|
20,294
|
|
|
|
4,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment earnings
|
|
|
214,970
|
|
|
|
164,631
|
|
|
|
112,888
|
|
Nonsegment expense
|
|
|
(31,346
|
)
|
|
|
(31,720
|
)
|
|
|
(26,052
|
)
|
Interest expense and income, net
|
|
|
(1,714
|
)
|
|
|
(923
|
)
|
|
|
(2,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated earnings before income taxes
|
|
|
181,910
|
|
|
|
131,988
|
|
|
|
84,497
|
|
Income tax expense
|
|
|
(60,030
|
)
|
|
|
(33,831
|
)
|
|
|
(14,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net earnings
|
|
$
|
121,880
|
|
|
$
|
98,157
|
|
|
$
|
69,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
Compared to 2007
Turbine Systems segment earnings
increased 33%,
attributable to the following (in thousands):
|
|
|
|
|
Earnings for the year ended September 30,
2007
|
|
$
|
87,353
|
|
Volume changes
|
|
|
18,661
|
|
Selling price changes
|
|
|
8,726
|
|
Sales mix
|
|
|
(5,993
|
)
|
Foreign exchange rate changes
|
|
|
731
|
|
Other, net
|
|
|
6,718
|
|
|
|
|
|
|
Earnings for the year ended September 30,
2008
|
|
$
|
116,196
|
|
|
|
|
|
|
The earnings increase in Turbine Systems was principally the
result of leverage on modest increases in sales volume over last
year, and reflects a stronger mix of OEM aerospace products
compared to recent quarters. Sales volume increased due to
higher demand for OEM, military, commercial aftermarket, and
industrial turbine products. Selling price increases primarily
affected spares and components used in the aerospace
aftermarket. Turbine Systems also experienced an unfavorable
product mix compared to the prior year which negatively impacted
earnings, due to greater growth of OEM sales relative to
aftermarket sales. Recent program wins and stronger market
conditions for our OEM customers have resulted in faster growth
to OEMs as compared to our aftermarket customers. Our
aftermarket pricing catalog is in GBP while much of our costs
are in USD. Earnings increased 1% as a result of changes in GBP
during fiscal 2008.
Engine Systems segment earnings
decreased 1%,
attributable to the following (in thousands):
|
|
|
|
|
Earnings for the year ended September 30,
2007
|
|
$
|
56,984
|
|
Volume changes
|
|
|
9,240
|
|
Selling price changes
|
|
|
3,391
|
|
Sales mix
|
|
|
(5,525
|
)
|
Foreign exchange rate changes
|
|
|
562
|
|
Increased non-volume related freight and
product expediting costs
|
|
|
(4,809
|
)
|
Other, net
|
|
|
(3,372
|
)
|
|
|
|
|
|
Earnings for the year ended September 30,
2008
|
|
$
|
56,471
|
|
|
|
|
|
|
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 sales mix compared to the prior year.
Engine Systems sells, manufactures and purchases product in
several foreign currencies including USD, Euro, CNY, Yen, and
GBP. The percentage of sales in a particular foreign currency
may
30
be significantly different from the percentage of costs incurred
in that currency. As a result of Engine Systems
significant international footprint, changes in foreign currency
can have a large impact on its earnings. During fiscal 2008, the
changes in foreign currency rates resulted in a 1% net increase
in earnings.
The increased freight costs were the result of increased
expediting costs associated with supply chain constraints,
product line moves, and fuel surcharges related to increased
global fuel costs. Global fuel costs have declined significantly
since September 30, 2008. Future volatility in fuel costs
may impact future earnings results.
Electrical Power Systems segment earnings
increased 108%, attributable to the following (in
thousands):
|
|
|
|
|
Earnings for the year ended September 30, 2007
|
|
$
|
20,294
|
|
Volume changes
|
|
|
19,118
|
|
Selling price changes
|
|
|
1,496
|
|
Sales mix
|
|
|
(2,110
|
)
|
Foreign exchange rate changes
|
|
|
5,883
|
|
Other, net
|
|
|
(2,378
|
)
|
|
|
|
|
|
Earnings for the year ended September 30,
2008
|
|
$
|
42,303
|
|
|
|
|
|
|
The improvement in earnings reflects the integration of our
acquisition in October 2006 of SEG. Sales volume is higher due
to inverter products sold into wind power applications. A change
in sales mix and changes in the external market put pressure on
margins. Foreign currency translation earnings increased
primarily as a result of the change in the Euro against the USD
during fiscal 2008. A significant portion of Electrical Power
Systems sales and many costs are transacted in Euro which
is then translated into USD for financial statement purposes.
Also, a significant portion of Electrical Power Systems
product costs are incurred in USD which contributed to increased
margins on sales denominated in Euros. During fiscal 2008, the
favorable changes in the euro resulted in a 29% net increase in
earnings.
Nonsegment expenses
decreased 1% in 2008 as
compared to 2007, attributable to the following (in thousands):
|
|
|
|
|
Nonsegment expenses for the year ended September 30, 2007
|
|
$
|
31,720
|
|
Accruals for a legal matters and arbitration
|
|
|
(4,376
|
)
|
Stock-based compensation expense
|
|
|
739
|
|
Other
|
|
|
3,263
|
|
|
|
|
|
|
Nonsegment expenses for the year ended
September 30, 2008
|
|
$
|
31,346
|
|
|
|
|
|
|
Among the other factors affecting nonsegment expenses are normal
variations in legal and other professional services. We accrue
for individual legal matters that we believe are likely to
result in a loss when ultimately resolved using estimates of the
most likely amount of loss. For more information about
contingencies, see Note 18 to the Consolidated Financial
Statements in Item 8, Financial Statements and
Supplementary Financial Data.
31
Income taxes
were provided at an effective rate on
earnings before income taxes of 33.0% in fiscal 2008 compared to
25.6% in fiscal 2007. The change in the effective tax rate was
attributable to the following (as a percent of earnings before
income taxes):
|
|
|
|
|
Effective tax rate for the year ended
September 30, 2007
|
|
|
25.6
|
%
|
Adjustments of the beginning-of-year balance
of valuation allowances for deferred tax assets
|
|
|
(1.5
|
)
|
Change in estimates of taxes for previous
periods and audit settlements in 2008 as compared to 2007
|
|
|
9.0
|
|
Research credit in 2008 as compared to 2007
|
|
|
2.1
|
|
German tax law changes
|
|
|
(2.3
|
)
|
Other changes, net
|
|
|
0.1
|
|
|
|
|
|
|
Effective tax rate for the year ended
September 30, 2008
|
|
|
33.0
|
%
|
|
|
|
|
|
The fiscal 2008 change in the beginning-of-year valuation
allowances reduced income tax expense by $2.7 million. We
establish valuation allowances to reflect the estimated amount
of deferred tax assets that might not be realized. Both positive
and negative evidence are considered in forming our judgment as
to whether a valuation allowance is appropriate, and more weight
is given to evidence that can be objectively verified. Valuation
allowances are reassessed whenever there are changes in
circumstances that may cause a change in our judgments. In
fiscal 2008, additional objective evidence became available
regarding earnings in tax jurisdictions that have unexpired net
operating loss carryforwards that affected our judgment about
the valuation allowance. Income taxes for both fiscal 2008 and
fiscal 2007 were affected by changes in estimates of income
taxes for previous years. In both years, the changes were
primarily related to settlements and resolutions of income tax
matters. These changes reduced the effective tax rate for fiscal
2008 by approximately 1.2% and for fiscal 2007 approximately
10.2% of pretax earnings.
The effective tax rate comparison between fiscal 2008 and fiscal
2007 was also affected by the retroactive extension of the tax
credit for increasing research activities available in fiscal
2007 but not in fiscal 2008. This credit expired on
December 31, 2007. Another retroactive extension was
approved in October 2008 that will benefit our effective tax
rate in fiscal 2009. Among the other changes in our effective
tax rate were the effects of changes in the relative mix of
earnings by tax jurisdiction.
2007
Compared to 2006
Turbine Systems segment earnings
increased 29%,
attributable to the following (in thousands):
|
|
|
|
|
Earnings for the year ended September 30,
2006
|
|
$
|
67,584
|
|
Volume changes
|
|
|
15,843
|
|
Selling price changes
|
|
|
6,775
|
|
Variable compensation
|
|
|
(6,421
|
)
|
Other, net
|
|
|
3,572
|
|
|
|
|
|
|
Earnings for the year ended September 30,
2007
|
|
$
|
87,353
|
|
|
|
|
|
|
Sales volume changes are discussed above as part of the
discussion of the changes in net external sales.
Selling price increases primarily affected industrial OEM
products and spares and components used in the aerospace
aftermarket.
Variable compensation paid to Turbine Systems members was
higher in 2007 than in 2006, driven by performance-based factors.
32
Engine Systems segment earnings
increased 40%,
attributable to the following (in thousands):
|
|
|
|
|
Earnings for the year ended September 30,
2006
|
|
$
|
40,829
|
|
Volume changes
|
|
|
10,591
|
|
Selling price changes
|
|
|
4,552
|
|
Margin changes
|
|
|
5,687
|
|
Reduced costs related to 2006 restructuring
|
|
|
2,327
|
|
Reduction in other selling, general and
administrative expenses, including exchange rate gains/(loss)
|
|
|
1,200
|
|
Variable compensation
|
|
|
(4,596
|
)
|
Other
|
|
|
(3,606
|
)
|
|
|
|
|
|
Earnings for the year ended September 30,
2007
|
|
$
|
56,984
|
|
|
|
|
|
|
After flat sales in fiscal 2006, many of Engine Systems
domestic and international markets began experiencing growth in
fiscal 2007. Sales volumes increased and were matched with a
modest price increase. Improvements in gross margins were the
result of productivity gains and a favorable product shipment
mix. Quality improvements reduced warranty and scrap expenses.
Other selling, general, and administrative expenses decreased
due to reduced currency losses associated with Engine
Systems
non-U.S. locations.
The stronger sales environment, improved margins, and increased
profitability resulted in higher performance-based variable
compensation expenses in fiscal 2007.
Electrical Power Systems segment earnings
increased 353%, attributable to the following (in
thousands):
|
|
|
|
|
Earnings for the year ended September 30,
2006
|
|
$
|
4,475
|
|
Sales volume
|
|
|
4,769
|
|
Improvements in material costs
|
|
|
2,853
|
|
Acquisition of SEG
|
|
|
13,041
|
|
Variable compensation
|
|
|
(998
|
)
|
Research and development costs, excluding SEG
|
|
|
841
|
|
Increase in selling, general and
administrative expenses
|
|
|
(1,245
|
)
|
Other
|
|
|
(3,442
|
)
|
|
|
|
|
|
Earnings for the year ended September 30,
2007
|
|
$
|
20,294
|
|
|
|
|
|
|
On October 31, 2006, we acquired 100% of the stock of SEG.
SEG had sales of approximately $60.0 million in calendar
year 2005. This business adds dimension and range to our core
technologies and product portfolio for the power generation
market, including protection and comprehensive control systems
for power distribution applications, and power inverters for
wind turbines areas we have targeted for growth.
Nonsegment expenses
increased 22%, attributable to
the following (in thousands):
|
|
|
|
|
Nonsegment expenses for the year ended
September 30, 2006
|
|
$
|
26,052
|
|
Accruals for a legal matter
|
|
|
(3,171
|
)
|
Stock-based compensation expense
|
|
|
911
|
|
Variable compensation
|
|
|
3,332
|
|
Other
|
|
|
4,596
|
|
|
|
|
|
|
Nonsegment expenses for the year ended
September 30, 2007
|
|
$
|
31,720
|
|
|
|
|
|
|
We accrue for individual legal matters that we believe are
likely to result in a loss when ultimately resolved using
estimates of the most likely amount of loss.
Among the other factors affecting nonsegment expenses are normal
variations in legal and other professional services.
33
Income taxes
were provided at an effective rate on
earnings before income taxes of 25.6% in fiscal 2007 compared to
17.3% in 2006. The change in the effective tax rate was
attributable to the following (as a percent of earnings before
income taxes):
|
|
|
|
|
Effective tax rate for the year ended
September 30, 2006
|
|
|
17.3
|
%
|
Adjustments of the beginning-of-year balance
of valuation allowances for deferred tax assets
|
|
|
16.2
|
|
Change in estimates of taxes for previous
periods and audit settlements in 2007 as compared to 2006
|
|
|
(8.9
|
)
|
Research credit in 2007 as compared to 2006
|
|
|
(1.5
|
)
|
Change in German income tax rate
|
|
|
2.3
|
|
Other changes, net
|
|
|
0.2
|
|
|
|
|
|
|
Effective tax rate for the year ended
September 30, 2007
|
|
|
25.6
|
%
|
|
|
|
|
|
The fiscal 2006 change in the beginning-of-year valuation
allowances reduced income tax expense by $13.7 million.
Exclusive of this item, the effective tax rate for fiscal 2006
was 33.5%. We establish valuation allowances to reflect the
estimated amount of deferred tax assets that might not be
realized. Both positive and negative evidence are considered in
forming our judgment as to whether a valuation allowance is
appropriate, and more weight is given to evidence that can be
objectively verified. Valuation allowances are reassessed
whenever there are changes in circumstances that may cause a
change in our judgments. In fiscal 2006 and fiscal 2007,
additional objective evidence became available regarding
earnings in tax jurisdictions that have unexpired net operating
loss carryforwards that affected our judgment about the
valuation allowance.
Income taxes for both fiscal 2007 and fiscal 2006 were affected
by changes in estimates of income taxes for previous years. In
2007, the changes were primarily related to the settlement of
income tax audits. These changes reduced the effective tax rate
for fiscal 2007 by approximately 10.2% of pretax earnings. In
fiscal 2006, the changes were primarily related to the favorable
resolution of certain tax matters. These changes reduced the
effective tax rate for fiscal 2006 by approximately 1.3% of
pretax earnings.
The effective tax rate comparison between fiscal 2007 and fiscal
2006 was also affected by the extension of the tax credit for
increasing research activities. This credit expired on
December 31, 2005 but was retroactively reinstated in
December 2006, and we recognized a benefit to our effective tax
rate for fiscal 2007 reflecting the extension.
Among the other changes in our effective tax rate were the
effects of changes in the amounts of extraterritorial income
exclusion and the effects of changes in the relative mix of
earnings by tax jurisdiction.
Outlook
The economy over the last several months has been significantly
impacted by financial institution credit crises ultimately
impacting the broader credit markets and the financing available
to many companies, both in the U.S. and abroad. More
significantly to Woodward, at the moment, the rapid weakening of
the Euro and the GBP coupled with our continuing growth in
Europe is having a pronounced impact on our outlook for 2009.
Preparation for the impacts of market fluctuations has been a
strategic objective for a number of years and Woodward is well
positioned to maintain liquidity and relative profitability in
the event of potential sales declines. We have been investing
more broadly both regionally and across our markets to reduce
specific risk with respect to any one economy or market. Our
focus on energy control and optimization across a wide range of
applications and resources mitigates fluctuations in any one
area. Further, our products are key components of critical
infrastructure projects where government funding may supplement
private financing. We are focusing on our core competencies to
better serve our customers, driving improvements in the cash
conversion cycle, reducing operating costs in many areas, and
have locked in favorable long-term financing.
At this time, our order volumes indicate a modest increase in
sales volumes in 2009. However, the significant effects of
rapidly weakened European currencies may offset this increase
and we now anticipate organic sales to be flat to slightly up.
34
FINANCIAL
CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
Assets
|
|
|
|
|
|
|
|
|
(In Thousands) at September 30,
|
|
2008
|
|
|
2007
|
|
|
Turbine Systems
|
|
$
|
371,275
|
|
|
$
|
330,969
|
|
Engine Systems
|
|
|
242,350
|
|
|
|
250,908
|
|
Electrical Power Systems
|
|
|
133,928
|
|
|
|
109,674
|
|
Nonsegment assets
|
|
|
179,464
|
|
|
|
138,216
|
|
|
|
|
|
|
|
|
|
|
Consolidated total assets
|
|
$
|
927,017
|
|
|
$
|
829,767
|
|
|
|
|
|
|
|
|
|
|
Turbine Systems segment assets
increased primarily
due to increases in accounts receivable and inventory in
response to increases in sales volume. In addition, property,
plant, and equipment increased due to equipment purchases and
the modernization of the segments largest manufacturing
facility. We plan to begin construction of a state-of-the-art
test facility for aircraft engine fuel and control systems in
Rockford, Illinois, on which we expect to invest approximately
$25.0 million within the next two years.
Engine Systems segment assets
decreased primarily
due to decreases in accounts receivable, property, plant and
equipment, and intangible assets. Accounts receivable decreased
as a result of an improvement in the management of accounts
receivable. The decreases in property, plant, and equipment and
intangible assets were due to normal depreciation and
amortization, as well as transfer of certain assets to other
segments or nonsegment use. These decreases were offset by an
increase in inventory in response to increases in sales volume.
Electrical Power Systems segment assets
increased
primarily as a result of increases in accounts receivable and
inventory in response to increases in sales volume and purchases
of property, plant, and equipment.
Nonsegment assets
increased primarily because of
an increase in cash and cash equivalents related to increases in
sales volume offset by the repurchase of common stock. Changes
in cash are discussed more fully in a separate section of this
Managements Discussion and Analysis.
Other
Balance Sheet Measures
|
|
|
|
|
|
|
|
|
(In Thousands) at September 30,
|
|
2008
|
|
|
2007
|
|
|
Working capital
|
|
$
|
369,211
|
|
|
$
|
275,611
|
|
Long-term debt, less current portion
|
|
|
33,337
|
|
|
|
45,150
|
|
Other liabilities
|
|
|
67,695
|
|
|
|
57,404
|
|
Stockholders equity
|
|
|
629,628
|
|
|
|
544,431
|
|
Working capital
(current assets less current
liabilities) increased at September 30, 2008 from
September 30, 2007 primarily as a result of an increase in
sales volume which led to an increase in inventories and
accounts receivable, and a decrease in short-term borrowings,
partially offset by an increase in accounts payable and accrued
liabilities.
As discussed in Note 22 to the Consolidated Financial
Statements in Item 8 Financial Statements
and Supplementary Data, on October 1, 2008, we
completed the acquisition of MPC in a transaction valued at
approximately $383.0 million.
On October 6, 2008, we completed the acquisition of the
outstanding capital stock of MotoTron and the intellectual
property assets owned by its parent company, Brunswick
Corporation, that are used in connection with the MotoTron
business for approximately $17.0 million.
The October 2008 acquisitions of MPC and MotoTron, including the
repayment of certain obligations associated with these
acquisitions, were primarily financed with a total of
$400.0 million of debt issued on October 1, 2008 and
October 30, 2008, as discussed below.
Long-term debt, less current portion
decreased as
a result of payments made during the period. As of
September 30, 2008, we had a revolving line of credit
facility with a syndicate of U.S. banks totaling
$225.0 million,
35
with an option to increase the amount of the line to
$350.0 million. In addition, we have other line of credit
facilities, which are generally reviewed annually for renewal,
which totaled $19.9 million at both September 30, 2008
and 2007.
Also, we have additional short-term borrowing capabilities tied
to net amounts on deposit at certain foreign financial
institutions under which $4.0 million had been advanced as
of September 30, 2008 and $5.5 million had been
advanced as of September 30, 2007. The total amount of
borrowings under all facilities was $4.0 million at
September 30, 2008 and $5.5 million at
September 30, 2007. The weighted-average interest rate for
outstanding borrowings under these line of credit facilities,
which were at rates significantly lower than those typical in
the U.S., was 3.0% September 30, 2008 and 3.8% at
September 30, 2007.
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 ratio, and
a maximum consolidated debt to earnings before income taxes,
depreciation, and amortization (EBITDA) ratio, as
defined in the agreements. We were in compliance with all
covenants at September 30, 2008.
Term
Loan Credit Agreement
As discussed in Note 22 to the Consolidated Financial
Statements in Item 8 Financial Statements
and Supplementary Data, On October 1, 2008, we
entered into a Term Loan Credit Agreement (the Term Loan
Credit Agreement). The Term Loan Credit Agreement provides
for a $150.0 million unsecured term loan facility, and may
be expanded by up to $50.0 million of additional
indebtedness from time to time, subject to the our compliance
with certain conditions and the lenders participation. The
Term Loan Credit Agreement generally bears interest at LIBOR
plus 1.00% to 2.25%, requires quarterly principal payments of
$1,875 beginning in March, 2009, and matures in October 2013.
The Term Loan Credit Agreement contains customary terms and
conditions, including, among others, covenants that place limits
on our ability to incur liens on assets, incur additional debt
(including a leverage or coverage based maintenance test),
transfer or sell our assets, merge or consolidate with other
persons, make capital expenditures, make certain investments,
make certain restricted payments and enter into material
transactions with affiliates. The Term Loan Credit Agreement
contains financial covenants requiring that (a) our ratio
of consolidated net debt to EBITDA not exceed 3.5 to 1.0 and
(b) we have a minimum consolidated net worth of
$400.0 million plus 50% of net income for any fiscal year
and 50% of the net proceeds of certain issuances of capital
stock, in each case on a rolling four quarter basis. The Term
Loan Credit Agreement also contains events of default customary
for such financings, the occurrence of which would permit the
lenders to accelerate the amounts due.
Our obligations under the Term Loan Credit Agreement are
guaranteed by Woodward FST, Inc., our wholly owned subsidiary
(Woodward FST).
A portion of the proceeds from the Term Loan Credit Agreement
was used to finance the MPC acquisition.
Note
Purchase Agreement
On October 1, 2008, we entered into a Note Purchase
Agreement (the Note Purchase Agreement) relating to
the sale by Woodward of an aggregate principal amount of
$250.0 million comprised of (a) $100.0 million
aggregate principal amount of Series B Senior Notes due
October 1, 2013 (the Series B Notes),
(b) $50.0 million aggregate principal amount of
Series C Senior Notes due October 1, 2015 (the
Series C Notes) and
(c) $100.0 million aggregate principal amount of
Series D Senior Notes due October 1, 2018 (the
Series D Notes and, together with the
Series B Notes and Series C Notes, the
Notes) in a series of private placement
transactions. On October 1, 2008, $200.0 million
aggregate principal amount of Notes were sold, comprised of
$80.0 million aggregate principal amount of the
Series B Notes, $40.0 million aggregate principal
amount of the Series C Notes and $80.0 million
aggregate principal amount of the Series D Notes. In
connection with the Note Purchase Agreement entered into on
October 1, 2008, we issued an additional $50.0 million
aggregate principal amount of Notes with
36
similar maturities and interest rates on October 30, 2008.
The Notes issued in the private placement have not been
registered under the Securities Act of 1933 and may not be
offered or sold in the U.S. absent registration or an
applicable exemption from registration requirements.
The Series B Notes have a maturity date of October 1,
2013 and generally bear interest at a rate of 5.63% per annum.
The Series C Notes have a maturity date of October 1,
2015 and generally bear interest at a rate of 5.92% per annum.
The Series D Notes have a maturity date of October 1,
2018 and generally bear interest at a rate of 6.39% per annum.
Under certain circumstances, the interest rate on each series of
Notes is subject to increase if our leverage ratio of
consolidated net debt to consolidated EBITDA increases beyond
3.5 to 1.0. Interest on the Notes is payable semi-annually on
April 1 and October 1 of each year until all principal is paid.
Interest payments commence on April 1, 2009.
Our obligations under the Note Purchase Agreement and the Notes
rank equal in right of payment with all of our other unsecured
unsubordinated debt, including our outstanding debt under the
Term Loan Credit Agreement.
The Note Purchase Agreement contains restrictive covenants
customary for such financings, including, among other things,
covenants that place limits on our ability to incur liens on
assets, incur additional debt (including a leverage or coverage
based maintenance test), transfer or sell our assets, merge or
consolidate with other persons, and enter into material
transactions with affiliates. The Note Purchase Agreement also
contains events of default customary for such financings, the
occurrence of which would permit the Purchasers of the Notes to
accelerate the amounts due.
The Note Purchase Agreement contains financial covenants
requiring that our (a) ratio of consolidated net debt to
consolidated EBITDA not exceed 4.0 to 1.0 during any material
acquisition period, or 3.5 to 1.0 at any other time on a rolling
four quarter basis, and (b) consolidated net worth at any
time equal or exceed $425.0 million plus 50% of
consolidated net earnings for each fiscal year beginning with
the fiscal year ending September 30, 2008. Additionally,
under the Note Purchase Agreement, we may not permit the
aggregate amount of priority debt to at any time exceed 20% of
our consolidated net worth at the end of the then most recently
ended fiscal quarter.
We are permitted at any time, at our option, to prepay
all any part of the then outstanding
principal amount of any series of the Notes at 100% of the
principal amount of the series of Notes to be prepaid (but, in
the case of partial prepayment, not less than
$1.0 million), together with interest accrued on such
amount to be prepaid to the date of payment, plus any applicable
make-whole amount. The make-whole amount is computed by
discounting the remaining scheduled payments of interest and
principal of the Notes being prepaid at a discount rate equal to
the sum of 50 basis points and the yield to maturity of
U.S. treasury securities having a maturity equal to the
remaining average life of the Notes being prepaid.
A portion of the proceeds from the issuance of the Notes was
used to finance the MPC acquisition.
Commitments and contingencies
at
September 30, 2008, include various matters arising from
the normal course of business. See previous discussion in
Item 3. Legal Proceedings and Note 18 to
the Consolidated Financial Statements in Item 8
Financial Statements and Supplementary Data.
Stockholders equity
at September 30,
2008, increased 16% over the prior fiscal year. Increases due to
net earnings, sales of treasury stock, and income tax benefits
from the exercise of stock options by employees during fiscal
2008 were partially offset by cash dividend payments and
purchases of treasury stock.
In July 2006, the Board of Directors authorized the repurchase
of up to $50.0 million of our outstanding shares of common
stock on the open market or in privately negotiated transactions
over a three-year period (the 2006 Authorization).
During fiscal year 2007, we purchased $38.6 million of our
common stock under the 2006 Authorization. Pursuant to the 2006
Authorization, in August 2007, we entered into an agreement with
J.P. Morgan Chase Bank whereby we purchased approximately
989,000 common stock shares in exchange for $31.1 million
at an average price of $31.47 per common share. This arrangement
with J.P. Morgan Chase Bank completed the stock repurchase
program previously authorized in July 2006.
During September 2007, the Board of Directors authorized a new
stock repurchase of up to $200.0 million of our outstanding
shares of common stock on the open market or in privately
negotiated transactions over a three-year period that will end
in October 2010 (the 2007 Authorization).
37
During fiscal 2008, we purchased a total of $31.9 million
of our common stock under the 2007 Authorization at an average
price of $29.94 per share. A two-for-one stock split was
approved by stockholders at the 2007 annual meeting of
stockholders on January 23, 2008. This stock split became
effective for stockholders at the close of business on
February 1, 2008. The effects of the stock split are
reflected in the financial statements filed as part of this
Form 10-K.
In addition, in accordance with stock option plan provisions,
the terms of all outstanding stock option awards were
proportionately adjusted.
Cash
Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net cash provided by operating activities
|
|
$
|
125,354
|
|
|
$
|
117,718
|
|
|
$
|
80,536
|
|
Net cash used in investing activities
|
|
|
(35,909
|
)
|
|
|
(67,048
|
)
|
|
|
(31,015
|
)
|
Net cash used in financing activities
|
|
|
(48,904
|
)
|
|
|
(66,496
|
)
|
|
|
(51,433
|
)
|
Effect of exchange rate on changes
|
|
|
(2,343
|
)
|
|
|
3,743
|
|
|
|
1,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
38,198
|
|
|
|
(12,083
|
)
|
|
|
(879
|
)
|
Cash and cash equivalents at beginning of the year
|
|
|
71,635
|
|
|
|
83,718
|
|
|
|
84,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year
|
|
$
|
109,833
|
|
|
$
|
71,635
|
|
|
$
|
83,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
Compared to 2007
Net cash flows provided by operating activities
increased by $7.6 million compared to fiscal 2007,
primarily due to an increase in net earnings and collections of
income tax refunds, partially offset by an increase in working
capital to support our growing business.
Net cash flows used in investing activities
decreased by $31.1 million compared to fiscal 2007,
primarily as a result of a business acquisition during fiscal
2007.
Capital expenditures increased by $9.1 million in fiscal
2008 compared to fiscal 2007. We are currently planning to begin
construction of a state-of-the-art test facility for aircraft
engine fuel and control systems in Rockford, Illinois. We expect
to invest approximately $25.0 million for this test
facility within the next two years, approximately
$9.0 million to modernize and upgrade other Rockford
facilities, and the balance for various other projects including
systems test capability expansions in Colorado and a new
facility in Poland. We continue to support our advanced test
facilities and core manufacturing process improvements.
Increases in capital expenditures are expected to be funded
through cash flows from operations and available revolving lines
of credit.
Net cash flows used in financing activities
decreased by $17.6 million from fiscal 2007,
primarily as a result of reduced repurchases of treasury stock
in fiscal 2008 and increases in excess tax benefits from stock
compensation compared to fiscal 2007.
Overall, cash and cash equivalents increased by
$38.2 million during fiscal 2008 to $109.8 million at
year end. We believe cash on hand and available short-term
borrowings at year end should continue to provide us with
significant liquidity to fund on-going operations. The debt to
total capitalization ratio was 7.2% as of September 30,
2008, compared to 10.9% as of September 30, 2007. Share
purchases of treasury stock totaled to $39.8 million in
fiscal 2008 and $51.0 million in fiscal 2007. The balance
remaining at September 30, 2008 on the September 2007
authorization is $168.1 million.
2007
Compared to 2006
Net cash flows provided by operating activities
increased by $37.2 million during fiscal 2007 as
compared to fiscal 2006 primarily due to an increase in net
earnings and deferred income taxes, partially offset by an
increase in working capital.
38
Net cash flows used in investing activities
increased by $36.0 million during fiscal 2007 as
compared to fiscal 2006 primarily as a result of a business
acquisition.
Net cash flows used in financing activities
increased by $15.1 million during fiscal 2007 as
compared to fiscal 2006 primarily as a result of an increase in
the purchase of treasury stock and payments on our borrowing
under the revolving lines of credit, partially offset by
increased sales of treasury stock. In August 2007, the Company
entered into an accelerated stock repurchase agreement. See
Note 1 to the Consolidated Financial Statements in
Item 8 Financial Statements and
Supplementary Data for further discussion.
Off-Balance
Sheet Arrangements and Contractual Obligations
Contractual
Obligations
A summary of our consolidated contractual obligations and
commitments as of September 30, 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending September 30,
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
|
(In thousands)
|
|
|
Long-term debt principal
|
|
$
|
11,377
|
|
|
$
|
11,197
|
|
|
$
|
11,064
|
|
|
$
|
10,878
|
|
|
$
|
|
|
|
$
|
|
|
Interest on debt obligations
|
|
|
2,473
|
|
|
|
1,755
|
|
|
|
1,047
|
|
|
|
347
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
4,400
|
|
|
|
3,800
|
|
|
|
3,100
|
|
|
|
2,900
|
|
|
|
2,500
|
|
|
|
3,100
|
|
Rebates
|
|
|
3,000
|
|
|
|
3,000
|
|
|
|
1,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations
|
|
|
132,997
|
|
|
|
2,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
154,777
|
|
|
$
|
21,974
|
|
|
$
|
16,411
|
|
|
$
|
14,125
|
|
|
$
|
2,500
|
|
|
$
|
25,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations include amounts committed under legally
enforceable contracts or purchase orders for goods and services
with defined terms as to price, quantity, delivery, and
termination liability.
Interest obligations on floating rate debt instruments are
calculated for future periods using interest rates in effect at
the end of fiscal 2008. See Note 11 to the Consolidated
Financial Statements in Item 8 Financial
Statements and Supplementary Data for further details on
our long-term debt.
Rebates reflect contractually required payments to customers,
which may be subsequently recovered, and exclude payments of
future rebate obligations to customers that will likely be paid
in connection with future sales activity.
The other obligations amount represents our best reasonable
estimate for uncertain tax positions at this time and may change
in future periods, as the timing of the payments and whether
such payments will actually be required cannot be reasonable
estimated.
The above table does not reflect the following items:
|
|
|
|
|
Contributions to our retirement pension benefit plans which we
estimate will total approximately $2.4 million in 2009.
Pension contributions in future years will vary as a result of a
number of factors, including actual plan asset returns and
interest rates.
|
|
|
|
Contributions to our healthcare benefit plans which we estimate
will total $2.8 million in 2009, less the amount of federal
subsidies associated with our prescription drug benefits that we
receive estimated to be $0.5 million. Retirement healthcare
contributions are made on a pay-as-you-go basis as
payments are made to healthcare providers, and such
contributions will vary as a result of changes in the future
cost of healthcare benefits provided for covered retirees.
|
Guarantees and letters of credit totaling approximately
$8.2 million were outstanding as of September 30,
2008, some of which were secured by cash and cash equivalents at
financial institutions or by Woodward line of credit facilities.
39
As discussed in Note 22 to the Consolidated Financial
Statements in Item 8 Financial Statements
and Supplementary Data, an aggregate $400.0 million
of additional debt was issued on October 1, 2008 and
October 30, 2008, a substantial portion of which was used
to finance the MPC acquisition. Scheduled future principal
payments on the $400.0 million of debt issued in October
2008, and associated interest expense, estimated based on rates
in effect at October 31, 2008, are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
Year Ending September 30,
|
|
Principal
|
|
|
Interest
|
|
|
2009
|
|
$
|
5,625
|
|
|
$
|
23,078
|
|
2010
|
|
|
7,500
|
|
|
|
22,949
|
|
2011
|
|
|
7,500
|
|
|
|
22,527
|
|
2012
|
|
|
7,500
|
|
|
|
22,125
|
|
2013
|
|
|
7,500
|
|
|
|
21,682
|
|
Thereafter
|
|
|
364,375
|
|
|
|
37,888
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
400,000
|
|
|
|
150,249
|
|
|
|
|
|
|
|
|
|
|
Recently
Adopted and Issued But Not Yet Effective Accounting
Standards
|
|
A.
|
Accounting
changes and recently adopted accounting standards:
|
Income
taxes
FIN 48: In July 2006, the Financial Accounting
Standards Board (FASB) issued Financial
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes-an interpretation of FASB Statement
No. 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 stockholders equity of $7,702. For
additional information, see Note 4, Income
Taxes to the Consolidated Financial Statements in
Item 8 Financial Statements and
Supplementary Data.
|
|
B.
|
Issued
but not yet effective accounting standards:
|
SFAS 157: In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements
(SFAS 157), which defines fair value,
establishes a framework for measuring fair value, and requires
additional disclosures about a Companys financial assets
and liabilities that are measured at fair value. SFAS 157
does not change existing guidance on whether or not an
instrument is carried at fair value. SFAS 157 is effective
for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. In February 2008, the FASB issued FASB Staff Position
(FSP)
No. FAS 157-1,
Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13
(FSP
FAS 157-1)
which excludes SFAS No. 13, Accounting for
Leases and certain other accounting pronouncements that
address fair value measurements, from the scope of
SFAS 157. In February 2008, the FASB issued FSP
No. FAS 157-2,
Effective Date of FASB Statement No. 157
(FSP
FAS 157-2)
which provides a one-year delayed application of SFAS 157
for nonfinancial assets and liabilities, except for items that
are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). We are
required to adopt SFAS 157 as amended by FSP
FAS 157-1
and FSP
FAS 157-2
on October 1, 2008, the beginning of fiscal 2009. The
adoption is not expected to have a material impact on our
consolidated financial statements.
In October 2008, the FASB issued FSP
No. FAS 157-3,
Determining the Fair Value of a Financial Asset in a
Market That Is Not Active (FSP
FAS 157-3),
which clarifies the application of SFAS 157 when the market
for a
40
financial asset is inactive. Specifically, FSP
FAS 157-3
clarifies how (1) managements internal assumptions
should be considered in measuring fair value when observable
data are not present, (2) observable market information
from an inactive market should be taken into account, and
(3) the use of broker quotes or pricing services should be
considered in assessing the relevance of observable and
unobservable data to measure fair value. The guidance in FSP
FAS 157-3
is effective immediately and will apply to us upon adoption of
SFAS 157.
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 us in the first quarter of fiscal
2009. We do not plan to apply SFAS 159.
EITF 07-3: In
June 2007, the Emerging Issues Task Force (EITF)
issued
EITF 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities
(EITF 07-3).
EITF 07-3
addresses 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 07-3
is effective for interim or annual reporting periods in fiscal
years beginning after December 15, 2007 (fiscal 2009 for
us). We do not expect the adoption of
EITF 07-03
to have a material impact on our consolidated financial
statements.
EITF 07-1: In
November 2007, the EITF issued
EITF 07-1,
Accounting for Collaborative Arrangements
(EITF 07-1).
EITF 07-1,
which will be applied retrospectively, requires expanded
disclosures for contractual arrangements with third parties that
involve joint operating activities and may require
reclassifications to previously issued financial statements.
EITF 07-1
is effective for interim or annual reporting periods beginning
after December 15, 2008 (fiscal 2010 for us). We are
currently evaluating the impact
EITF 07-1
may have on our consolidated financial statements.
SFAS 141(R): In December 2007, the FASB issued
SFAS No. 141 (Revised) Business
Combinations (SFAS 141(R)).
SFAS 141(R) is intended to improve, simplify, and converge
internationally the accounting for business combinations. Under
SFAS 141(R), an acquiring entity in a business combination
must recognize the assets acquired, liabilities assumed, and any
noncontrolling interest in the acquired entity at the
acquisition date fair values, with limited exceptions. In
addition, SFAS 141(R) requires the acquirer to disclose all
information that investors and other users need to evaluate and
understand the nature and financial impact of the business
combination. SFAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period on or after
December 15, 2008. Earlier adoption is prohibited.
Accordingly, we will record and disclose business combinations
under the revised standard beginning October 1, 2009.
SFAS 160: In December 2007, the FASB issued
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements an Amendment of
Accounting Research Bulletin (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
(i) noncontrolling interests to be reported as a component
of equity, (ii) changes in a parents ownership
interest while the parent retains its controlling interest be
accounted for as equity transactions, and (iii) 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.
SFAS 160 is effective for fiscal years beginning
41
after December 15, 2008. As a result, SFAS 160 is
effective for us in the first quarter of fiscal 2010. We are
currently evaluating the impact SFAS 160 may have on our
consolidated financial statements.
SFAS 161: In March 2008, the FASB issued
SFAS No. 161, Disclosures About Derivative
Instruments and Hedging Activities
(SFAS 161). SFAS 161 is intended to
improve financial reporting about derivative instruments and
hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entitys
financial position, financial performance, and cash flows. The
new standard is effective for financial statements issued for
fiscal years and interim periods beginning after
November 15, 2008 (fiscal 2010 for us). We are currently
assessing the impact that SFAS 161 may have on our
consolidated financial statements.
FSP
FAS 142-3: In
April 2008, the FASB issued FSP
No. FAS 142-3,
Determination of the Useful Life of Intangible
Assets (FSP
FAS 142-3),
which improves the consistency of the useful life of a
recognized intangible asset among various pronouncements. FSP
FAS 142-3
is effective for fiscal years beginning after December 15,
2008 (fiscal 2010 for us). We are currently assessing the impact
that FSP
FAS 142-3
may have on consolidated financial statements.
SFAS 162: In May 2008, the FASB issued
SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles
(SFAS 162). The new standard is intended to
improve financial reporting by identifying a consistent
framework, or hierarchy, for selecting accounting principles to
be used in preparing financial statements that are presented in
conformity with U.S. GAAP for nongovernmental entities. The
new standard is effective 60 days following the Security
and Exchange Commissions approval of the Public Company
Accounting Oversight Board amendments to AU Section 411,
The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles. We are currently assessing
the impact that SFAS 162 may have on our consolidated
financial statements.
FSP
EITF 03-6-1: In
June 2008, the FASB issued FASB Staff Position
No. EITF 03-6-1,
Determining Whether Instruments Granted in Stock-Based
Payment Transactions are Participating Securities
(FSP
EITF 03-6-1).
The FSP addresses whether instruments granted in stock-based
payment transactions are participating securities prior to
vesting and, therefore, need to be included in the earnings
allocation in computing earnings per share under the two-class
method described in paragraphs 60 and 61 of
SFAS No. 128, Earnings Per Share. The new
FSP is effective for financial statements issued for fiscal
years beginning after December 15, 2008 and interim periods
within those years (fiscal 2010 for us). Early application is
not permitted. Our unvested options are not eligible to receive
dividends; therefore, FSP
EITF 03-06-1
will not have any impact on our consolidated financial
statements.
FSP
FAS 133-1: In
September 2008, the FASB issued FSP
No. FAS 133-1
Disclosures about Credit Derivatives and Certain
Guarantees: An Amendment of FASB Statement No. 133
(FSP
FAS 133-1)
and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161. This FSP
amends SFAS No. 133 to require disclosures by sellers
of credit derivatives, including credit derivatives embedded in
a hybrid instrument. This FSP also amends FIN No. 45
to require an additional disclosure about the current status of
the payment/performance risk of a guarantee. Further, this FSP
clarifies the FASBs intent about the effective date of
SFAS No. 161. This FSP is effective for fiscal years
ending after November 15, 2008. We expect to adopt this FSP
for periods ending on and after December 31, 2008. We are
currently assessing the impact that FSP
FAS 133-1
may have on our consolidated financial statements.
Recent
Market Events
Current market conditions and economic events have significantly
impacted the financial condition, liquidity and outlook for a
wide range of companies, including many companies outside the
financial services sectors. We have considered the potential
impact of such conditions and events as it relates to currently
reported financial results of operations and liquidity,
including consideration of the possible impact of other than
temporary impairment, auction rate securities, and counterparty
credit risk and hedge accounting. We do not believe that current
market conditions and economic events have significantly
impacted our results of operations or current liquidity, nor do
we believe that, based on our current investment policies and
contractual relationships, we are subject to greater risk from
such factors than applies to other companies of similar size and
market breadth.
42
Financing
Arrangements
Payments on our senior notes outstanding as of
September 30, 2008, totaling $44.5 million, are due
from fiscal 2009 through fiscal 2012. Payments on our senior
notes issued on October 1 and October 30, 2008 are due in
fiscal 2009 through fiscal 2019. Also, we have a
$225.0 million line of credit facility that includes an
option to increase the amount of the line up to
$350.0 million, subject to our compliance with certain
conditions and the participation of the lenders that does not
expire until October 2012.
As described in Note 22 to the Consolidated Financial
Statements in Item 8 Financial Statements
and Supplementary Data, we entered into a Term Loan Credit
Agreement on October 1, 2008 that provides for a
$150.0 million unsecured term loan facility, and may be
expanded by up to $50.0 million of additional indebtedness,
subject to our compliance with certain conditions and the
participation of the lenders. On October 1, 2008, we also
entered into a Note Purchase Agreement relating to our sale of
an aggregate principal amount of $250.0 million comprised
of (a) $100.0 million aggregate principal amount of
Series B Notes due October 1, 2013,
(b) $50.0 million aggregate principal amount of
Series C Notes due October 1, 2015 and
(c) $100.0 million aggregate principal amount of
Series D Notes due October 1, 2018. On October 1,
2008, $200.0 million aggregate principal amount of Notes
were sold, comprised of $80.0 million aggregate principal
amount of the Series B Notes, $40.0 million aggregate
principal amount of the Series C Notes, and
$80.0 million aggregate principal amount of the
Series D Notes. On October 30, 2008, we issued an
additional $50.0 million aggregate principal amount of
Notes with similar maturities and interest rates.
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.
Outlook
The economy over the last several months has been buffeted with
financial institution credit crises ultimately impacting the
broader credit markets and the financing available to many
companies, both in the U.S. and abroad. Preparation for the
impacts of market fluctuations has been a strategic objective
for a number of years and Woodward is better positioned at this
time to maintain liquidity and relative profitability in the
face of potential sales declines than in the past. Future cash
flows from operations and available revolving lines of credit
are expected to be adequate to meet our cash requirements over
the next twelve months.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Market
Risk and Risk Management
In the normal course of business, we have exposures to interest
rate risk from our long-term debt, foreign exchange rate risk
related to our foreign operations, and foreign currency
transactions. We are also exposed to various market risks that
arise from transactions entered into in the normal course of
business related to items such as the cost of raw materials and
changes in inflation. Certain contractual relationships with
customers and vendors mitigate risks from changes in raw
material costs and currency exchange rate changes that arise
from normal purchasing and normal sales activities.
Interest
Rate Exposure
Derivative instruments utilized by us are viewed as risk
management tools, involve little complexity, and are not used
for trading or speculative purposes. To manage interest rate
risk related to the $400 million of long-term debt issued
in October 2008, we used a treasury lock which locked in
interest rates on future debt. The treasury lock agreement was
designated as a cash flow hedge against interest rate risk on a
portion of the debt issued in October 2008.
A portion of our long-term debt is sensitive to changes in
interest rates. We monitor trends in interest rates as a basis
for determining whether to enter into fixed rate or variable
rate debt agreements, the duration of such agreements, and
whether to use hedging strategies. Our primary objective is to
minimize our long-term costs of borrowing. At September 30,
2008, our long-term debt consisted of variable and fixed rate
agreements. As
43
measured at September 30, 2008, a hypothetical 1% immediate
increase in interest rates would reduce the fair value of our
long-term debt by approximately $0.8 million.
The actuarial assumptions used to calculate the funding status
of our post-retirement benefit plans and future returns on
associated plan assets are sensitive to changes in interest
rates. The following information illustrates the sensitivity of
the net periodic benefit cost and the projected benefit
obligation to a change in the discount rate and in the return on
benefit plan assets. Amounts relating to foreign plans are
translated at the spot rate on September 30, 2008. The
sensitivities reflect the impact of changing one assumption at a
time and are specific to base conditions at September 30,
2008. It should be noted that economic factors and conditions
often affect multiple assumptions simultaneously and the effects
of changes in assumptions are not necessarily linear.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease) in
|
|
|
|
|
|
|
|
|
|
2008 Projected
|
|
|
Accumulated Post
|
|
|
|
|
|
|
2009 Net Periodic
|
|
|
Service and
|
|
|
Retirement Benefit
|
|
Assumption
|
|
Change
|
|
|
Benefit Cost
|
|
|
Interest Costs
|
|
|
Obligation
|
|
|
|
|
|
|
(In thousands)
|
|
|
Retirement Pension Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in discount rate
|
|
|
1
|
% increase
|
|
$
|
(107
|
)
|
|
$
|
(122
|
)
|
|
$
|
(3,680
|
)
|
|
|
|
1
|
% decrease
|
|
|
114
|
|
|
|
330
|
|
|
|
4,693
|
|
Retirement Healthcare Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in discount rate
|
|
|
1
|
% increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
(3,162
|
)
|
|
|
|
1
|
% decrease
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
3,705
|
|
Change in healthcare cost trend rate
|
|
|
1
|
% increase
|
|
|
3,939
|
|
|
|
275
|
|
|
|
N/A
|
|
|
|
|
1
|
% decrease
|
|
|
(3,411
|
)
|
|
|
(240
|
)
|
|
|
N/A
|
|
Foreign
Currency Exposure
We are impacted by changes in foreign currency rates through
sales and purchasing transactions when we sell product in
functional currencies different from the currency in which
product and manufacturing costs were incurred. The functional
currencies of our worldwide facilities primarily include the
USD, the Euro, and the GBP. Our purchasing and sales activities
are primarily denominated in the USD, the Euro, and the GBP. We
may be impacted by changes in the relative buying power of our
customers, which may impact sales volumes either positively or
negatively. As these currencies fluctuate against each other,
and other currencies, we are exposed to foreign currency risk on
sales, purchasing transactions, and labor.
Our reported financial results of operations, including the
reported value of our assets and liabilities, are also impacted
by changes in foreign currency rates. The assets and liabilities
of substantially all of our subsidiaries outside the
U.S. are translated at period end rates of exchange for
each reporting period. Earnings and cash flow statements are
translated at weighted-average rates of exchange. Although these
translation changes have no immediate cash impact, the
translation changes may impact future borrowing capacity, debt
covenants, and overall value of our net assets.
Currency exchange rates vary daily and often one currency
strengthens against the USD while another currency weakens.
Because of the complex interrelationship of the worldwide supply
chains and distribution channels, it is difficult to quantify
the impact of a particular change in exchange rates.
We estimate that a 10% increase (or decrease) in the purchasing
power of the USD against all other currencies for one year would
increase (or decrease) net sales by less than 5%. The impact on
pretax earnings would be minimal.
44
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Woodward Governor Company
Fort Collins, Colorado
We have audited the accompanying consolidated balance sheet of
Woodward Governor Company and subsidiaries (the
Company) as of September 30, 2008 and the
related consolidated statements of earnings, stockholders
equity, and cash flows for the year then ended. Our audit also
included the financial statement schedule listed in the Index at
Item 15. These financial statements are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our
audit. The consolidated financial statements of the Company for
the years ended September 30, 2007 and 2006 were audited by
other auditors whose report, dated November 29, 2007,
expressed an unqualified opinion on those statements and
included an explanatory paragraph concerning a change in
accounting for share-based payments effective October 1,
2005 and a change in the manner the Company presented
obligations associated with defined benefit pension and other
postretirement plans effective September 30, 2007.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such 2008 consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Woodward Governor Company and subsidiaries
as of September 30, 2008, and the results of their
operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth
therein.
As discussed in Note 2 to the consolidated financial
statements, the Company changed its method of accounting for
uncertain tax positions on October 1, 2007 in accordance
with the Financial Accounting Standards Boards
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes.
We have also audited the adjustments to the 2007 and 2006
consolidated financial statements to retrospectively apply the
two-for-one
stock split as discussed in Note 1 to the consolidated
financial statements. Our procedures included (1) comparing
the amounts shown in the earnings per share disclosures for 2007
and 2006 to the Companys underlying accounting analysis,
(2) comparing the previously reported shares outstanding
and statement of earnings amounts per the Companys
accounting analysis to the previously issued consolidated
financial statements, and (3) recalculating the additional
shares to give effect to the stock split and testing the
mathematical accuracy of the underlying analysis. In our
opinion, such retrospective adjustments are appropriate and have
been properly applied. However, we were not engaged to audit,
review, or apply any procedures to the 2007 and 2006
consolidated financial statements of the Company other than with
respect to the retrospective adjustments and, accordingly, we do
not express an opinion or any other form of assurance on the
2007 and 2006 consolidated financial statements taken as a whole.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
September 30, 2008, based on the criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated November 19, 2008 expressed
an unqualified opinion on the Companys internal control
over financial reporting.
Deloitte & Touche LLP
Denver, Colorado
November 19, 2008
45
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Woodward Governor Company
In our opinion, the consolidated balance sheet as of
September 30, 2007 and the related consolidated statements
of earnings, stockholders equity and cash flows for each
of two years in the period ended September 30, 2007, before
the effects of the adjustments to retrospectively reflect the
two-for-one
stock split described in Note 1B, present fairly, in all
material respects, the financial position of Woodward Governor
Company and its subsidiaries at September 30, 2007, and the
results of their operations and their cash flows for each of the
two years in the period ended September 30, 2007, in
conformity with accounting principles generally accepted in the
United States of America (the 2007 financial statements
before the effects of the adjustments discussed in Note 1B
are not presented herein). In addition, in our opinion, the
financial statement schedule for the each of the two years in
the period ended September 30, 2007 presents fairly, in all
material respects, the information set forth therein when read
in conjunction with the related consolidated financial
statements before the effects of the adjustments described
above. These financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits, before the effects of the
adjustments described above, of these statements in accordance
with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
We were not engaged to audit, review, or apply any procedures to
the adjustments to retrospectively reflect the
two-for-one
stock split described in Note 1B and accordingly, we do not
express an opinion or any other form of assurance about whether
such adjustments are appropriate and have properly applied.
Those adjustments were audited by other auditors.
PricewaterhouseCoopers LLP
Chicago, Illinois
November 29, 2007
46
|
|
Consolidated
Statements of Earnings
|
WOODWARD
GOVERNOR COMPANY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
1,258,204
|
|
|
$
|
1,042,337
|
|
|
$
|
854,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
882,996
|
|
|
|
728,820
|
|
|
|
612,263
|
|
Selling, general, and administrative expenses
|
|
|
115,399
|
|
|
|
111,297
|
|
|
|
92,013
|
|
Research and developments costs
|
|
|
73,414
|
|
|
|
65,294
|
|
|
|
59,861
|
|
Amortization of intangible assets
|
|
|
6,830
|
|
|
|
7,496
|
|
|
|
6,953
|
|
Interest expense
|
|
|
3,834
|
|
|
|
4,527
|
|
|
|
5,089
|
|
Interest income
|
|
|
(2,120
|
)
|
|
|
(3,604
|
)
|
|
|
(2,750
|
)
|
Other income
|
|
|
(4,685
|
)
|
|
|
(4,186
|
)
|
|
|
(4,245
|
)
|
Other expense
|
|
|
626
|
|
|
|
705
|
|
|
|
834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
1,076,294
|
|
|
|
910,349
|
|
|
|
770,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes
|
|
|
181,910
|
|
|
|
131,988
|
|
|
|
84,497
|
|
Income taxes
|
|
|
(60,030
|
)
|
|
|
(33,831
|
)
|
|
|
(14,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
121,880
|
|
|
$
|
98,157
|
|
|
$
|
69,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.80
|
|
|
$
|
1.43
|
|
|
$
|
1.02
|
|
Diluted
|
|
$
|
1.75
|
|
|
$
|
1.39
|
|
|
$
|
0.99
|
|
Weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
67,564
|
|
|
|
68,489
|
|
|
|
68,702
|
|
Diluted
|
|
|
69,560
|
|
|
|
70,487
|
|
|
|
70,382
|
|
See accompanying Notes to Consolidated Financial
Statements.
47
|
|
Consolidated
Balance Sheets
|
WOODWARD
GOVERNOR COMPANY
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
109,833
|
|
|
$
|
71,635
|
|
Accounts receivable, less allowance for losses of $1,648 and
$1,886, respectively
|
|
|
178,128
|
|
|
|
152,826
|
|
Inventories
|
|
|
208,317
|
|
|
|
172,500
|
|
Income taxes receivable
|
|
|
|
|
|
|
9,461
|
|
Deferred income tax assets
|
|
|
25,128
|
|
|
|
23,754
|
|
Other current assets
|
|
|
16,649
|
|
|
|
8,429
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
538,055
|
|
|
|
438,605
|
|
Property, plant and equipment, net
|
|
|
168,651
|
|
|
|
158,998
|
|
Goodwill
|
|
|
139,577
|
|
|
|
141,215
|
|
Other intangibles, net
|
|
|
66,106
|
|
|
|
73,018
|
|
Deferred income tax assets
|
|
|
6,208
|
|
|
|
11,250
|
|
Other assets
|
|
|
8,420
|
|
|
|
6,681
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
927,017
|
|
|
$
|
829,767
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
4,031
|
|
|
$
|
5,496
|
|
Current portion of long-term debt
|
|
|
11,560
|
|
|
|
15,940
|
|
Accounts payable
|
|
|
65,427
|
|
|
|
57,668
|
|
Income taxes payable
|
|
|
2,235
|
|
|
|
|
|
Accrued liabilities
|
|
|
85,591
|
|
|
|
83,890
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
168,844
|
|
|
|
162,994
|
|
Long-term debt, less current portion
|
|
|
33,337
|
|
|
|
45,150
|
|
Deferred income tax liabilities
|
|
|
27,513
|
|
|
|
19,788
|
|
Other liabilities
|
|
|
67,695
|
|
|
|
57,404
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
297,389
|
|
|
|
285,336
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 4, 14, 17, and 18)
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.003 per share, 10,000 shares
authorized, no shares issued
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001455 per share, 150,000 and
100,000 shares authorized, 72,960 shares issued and
outstanding
|
|
|
106
|
|
|
|
106
|
|
Additional paid-in capital
|
|
|
68,520
|
|
|
|
48,641
|
|
Accumulated other comprehensive income
|
|
|
20,319
|
|
|
|
23,010
|
|
Deferred compensation
|
|
|
5,283
|
|
|
|
4,752
|
|
Retained earnings
|
|
|
663,442
|
|
|
|
565,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
757,670
|
|
|
|
641,645
|
|
Less: Treasury stock at cost, 5,261 shares and
5,231 shares, respectively
|
|
|
(122,759
|
)
|
|
|
(92,462
|
)
|
Treasury stock held for deferred compensation, at cost,
404 shares and 430 shares, respectively
|
|
|
(5,283
|
)
|
|
|
(4,752
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
629,628
|
|
|
|
544,431
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
927,017
|
|
|
$
|
829,767
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial
Statements.
48
|
|
Consolidated
Statements of Cash Flow
|
WOODWARD
GOVERNOR COMPANY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
121,880
|
|
|
$
|
98,157
|
|
|
$
|
69,900
|
|
Adjustments to reconcile net earnings to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
35,450
|
|
|
|
32,924
|
|
|
|
29,017
|
|
Post retirement settlement gain
|
|
|
|
|
|
|
(871
|
)
|
|
|
|
|
Contractual pension termination benefit
|
|
|
|
|
|
|
715
|
|
|
|
340
|
|
Net loss (gain) on sale of property, plant and equipment
|
|
|
1,229
|
|
|
|
(199
|
)
|
|
|
84
|
|
Stock-based compensation
|
|
|
4,588
|
|
|
|
3,849
|
|
|
|
2,942
|
|
Excess tax benefits from stock-based compensation
|
|
|
(15,355
|
)
|
|
|
(9,787
|
)
|
|
|
(3,305
|
)
|
Deferred income taxes
|
|
|
10,960
|
|
|
|
12,473
|
|
|
|
(13,481
|
)
|
Reclassification of unrealized gains and losses on derivatives
to earnings
|
|
|
204
|
|
|
|
247
|
|
|
|
286
|
|
Changes in operating assets and liabilities, net of business
acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(26,470
|
)
|
|
|
(20,765
|
)
|
|
|
(8,730
|
)
|
Inventories
|
|
|
(36,661
|
)
|
|
|
(8,592
|
)
|
|
|
1,140
|
|
Accounts payable and accrued liabilities
|
|
|
6,078
|
|
|
|
16,962
|
|
|
|
(2,514
|
)
|
Current income taxes
|
|
|
27,089
|
|
|
|
2,952
|
|
|
|
9,785
|
|
Other
|
|
|
(3,638
|
)
|
|
|
(10,347
|
)
|
|
|
(4,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
125,354
|
|
|
|
117,718
|
|
|
|
80,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for purchase of property, plant and equipment
|
|
|
(37,516
|
)
|
|
|
(31,984
|
)
|
|
|
(31,713
|
)
|
Proceeds from sale of property, plant and equipment
|
|
|
1,607
|
|
|
|
225
|
|
|
|
698
|
|
Business acquisition, net of cash acquired
|
|
|
|
|
|
|
(35,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(35,909
|
)
|
|
|
(67,048
|
)
|
|
|
(31,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid
|
|
|
(15,872
|
)
|
|
|
(14,747
|
)
|
|
|
(13,742
|
)
|
Proceeds from sales of treasury stock as a result of exercise of
stock options
|
|
|
9,440
|
|
|
|
7,856
|
|
|
|
4,163
|
|
Purchases of treasury stock
|
|
|
(39,801
|
)
|
|
|
(50,952
|
)
|
|
|
(22,306
|
)
|
Excess tax benefits from stock compensation
|
|
|
15,355
|
|
|
|
9,788
|
|
|
|
3,305
|
|
Net payments from borrowings under revolving lines of credit
|
|
|
(1,465
|
)
|
|
|
(2,760
|
)
|
|
|
(8,025
|
)
|
Payments of long-term debt
|
|
|
(16,257
|
)
|
|
|
(15,681
|
)
|
|
|
(14,510
|
)
|
Proceeds from cash flow hedge
|
|
|
108
|
|
|
|
|
|
|
|
|
|
Debt financing costs
|
|
|
(412
|
)
|
|
|
|
|
|
|
|
|
Other payments
|
|
|
|
|
|
|
|
|
|
|
(318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(48,904
|
)
|
|
|
(66,496
|
)
|
|
|
(51,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(2,343
|
)
|
|
|
3,743
|
|
|
|
1,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
38,198
|
|
|
|
(12,083
|
)
|
|
|
(879
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
71,635
|
|
|
|
83,718
|
|
|
|
84,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
109,833
|
|
|
$
|
71,635
|
|
|
$
|
83,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense paid
|
|
$
|
4,216
|
|
|
$
|
4,870
|
|
|
$
|
5,334
|
|
Income taxes paid
|
|
|
33,735
|
|
|
|
21,169
|
|
|
|
19,131
|
|
Income tax refunds received
|
|
|
13,579
|
|
|
|
|
|
|
|
|
|
Non-cash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt assumed in business acquisition
|
|
|
|
|
|
|
10,319
|
|
|
|
|
|
Purchases of property, plant and equipment on account
|
|
|
3,583
|
|
|
|
|
|
|
|
|
|
Sales of assets on account
|
|
|
433
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial
Statements.
49
|
|
Consolidated
Statements of Stockholders Equity
|
WOODWARD
GOVERNOR COMPANY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning and ending balance
|
|
$
|
106
|
|
|
$
|
106
|
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
48,641
|
|
|
$
|
31,960
|
|
|
$
|
25,854
|
|
(Gain) loss on sales of treasury stock
|
|
|
(628
|
)
|
|
|
1,957
|
|
|
|
(141
|
)
|
Tax benefits applicable to exercise of stock options
|
|
|
15,355
|
|
|
|
9,787
|
|
|
|
3,305
|
|
Stock-based compensation
|
|
|
4,588
|
|
|
|
3,849
|
|
|
|
2,942
|
|
Deferred compensation transfer
|
|
|
564
|
|
|
|
1,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
68,520
|
|
|
$
|
48,641
|
|
|
$
|
31,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
23,010
|
|
|
$
|
12,619
|
|
|
$
|
10,904
|
|
Foreign currency translation adjustments, net
|
|
|
(4,071
|
)
|
|
|
10,514
|
|
|
|
2,525
|
|
Reclassification of unrealized losses on derivatives to
earnings, net
|
|
|
127
|
|
|
|
153
|
|
|
|
177
|
|
Proceeds from cash flow hedge, net
|
|
|
67
|
|
|
|
|
|
|
|
|
|
Impact of implementing SFAS 158, net
|
|
|
|
|
|
|
(980
|
)
|
|
|
|
|
Minimum post-retirement benefits liability adjustments, net
|
|
|
1,186
|
|
|
|
704
|
|
|
|
(987
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
20,319
|
|
|
$
|
23,010
|
|
|
$
|
12,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
4,752
|
|
|
$
|
5,524
|
|
|
$
|
5,402
|
|
Deferred compensation invested in the companys common stock
|
|
|
841
|
|
|
|
2,006
|
|
|
|
165
|
|
Deferred compensation settled with the companys common
stock
|
|
|
(310
|
)
|
|
|
(2,778
|
)
|
|
|
(43
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
5,283
|
|
|
$
|
4,752
|
|
|
$
|
5,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
565,136
|
|
|
$
|
481,726
|
|
|
$
|
425,568
|
|
Net earnings
|
|
|
121,880
|
|
|
|
98,157
|
|
|
|
69,900
|
|
Impact of implementing FIN 48
|
|
|
(7,702
|
)
|
|
|
|
|
|
|
|
|
Cash dividends $0.235, $0.215 and $0.20 per common
share, respectively
|
|
|
(15,872
|
)
|
|
|
(14,747
|
)
|
|
|
(13,742
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
663,442
|
|
|
$
|
565,136
|
|
|
$
|
481,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
92,462
|
|
|
$
|
47,722
|
|
|
$
|
29,963
|
|
Purchases of treasury stock
|
|
|
39,801
|
|
|
|
50,952
|
|
|
|
22,820
|
|
Sales of treasury stock
|
|
|
(9,323
|
)
|
|
|
(5,900
|
)
|
|
|
(5,061
|
)
|
Deferred compensation transfer
|
|
|
(181
|
)
|
|
|
(312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
122,759
|
|
|
$
|
92,462
|
|
|
$
|
47,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock held for deferred compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
4,752
|
|
|
$
|
5,524
|
|
|
$
|
5,402
|
|
Deferred compensation transfer
|
|
|
745
|
|
|
|
1,875
|
|
|
|
|
|
Stock distributions
|
|
|
(310
|
)
|
|
|
(2,778
|
)
|
|
|
(43
|
)
|
Automatic dividend reinvestment
|
|
|
96
|
|
|
|
131
|
|
|
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
5,283
|
|
|
$
|
4,752
|
|
|
$
|
5,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial
Statements.
50
|
|
Consolidated
Statements of Stockholders
Equity (Continued)
|
WOODWARD
GOVERNOR COMPANY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Total stockholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
544,431
|
|
|
$
|
478,689
|
|
|
$
|
432,469
|
|
Effect of changes among components of stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
19,879
|
|
|
|
16,681
|
|
|
|
6,106
|
|
Accumulated other comprehensive earnings
|
|
|
(2,691
|
)
|
|
|
10,391
|
|
|
|
1,715
|
|
Deferred compensation
|
|
|
531
|
|
|
|
772
|
|
|
|
122
|
|
Retained earnings
|
|
|
98,306
|
|
|
|
83,410
|
|
|
|
56,158
|
|
Treasury stock
|
|
|
(30,297
|
)
|
|
|
(44,740
|
)
|
|
|
(17,759
|
)
|
Treasury stock held for deferred compensation
|
|
|
(531
|
)
|
|
|
(772
|
)
|
|
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total effect of changes among components of stockholders
equity
|
|
|
85,197
|
|
|
|
65,742
|
|
|
|
46,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
629,628
|
|
|
$
|
544,431
|
|
|
$
|
478,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
121,880
|
|
|
$
|
98,157
|
|
|
$
|
69,900
|
|
Other comprehensive earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments, net
|
|
|
(4,071
|
)
|
|
|
10,514
|
|
|
|
2,525
|
|
Reclassification of unrealized losses on derivatives to
earnings, net
|
|
|
127
|
|
|
|
153
|
|
|
|
177
|
|
Gain on cash flow hedge, net
|
|
|
67
|
|
|
|
|
|
|
|
|
|
Post-retirement benefit adjustments, net
|
|
|
1,186
|
|
|
|
704
|
|
|
|
(987
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive earnings
|
|
|
(2,691
|
)
|
|
|
11,371
|
|
|
|
1,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive earnings
|
|
$
|
119,189
|
|
|
$
|
109,528
|
|
|
$
|
71,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning and ending balance
|
|
|
72,960
|
|
|
|
72,960
|
|
|
|
72,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
5,231
|
|
|
|
4,852
|
|
|
|
4,308
|
|
Purchases of treasury stock
|
|
|
1,384
|
|
|
|
1,680
|
|
|
|
1,440
|
|
Sales of treasury stock
|
|
|
(1,330
|
)
|
|
|
(1,233
|
)
|
|
|
(896
|
)
|
Deferred compensation transfer
|
|
|
(24
|
)
|
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
5,261
|
|
|
|
5,231
|
|
|
|
4,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock held for deferred compensation, number of
shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
430
|
|
|
|
830
|
|
|
|
828
|
|
Deferred compensation transfer
|
|
|
24
|
|
|
|
68
|
|
|
|
|
|
Stock distributions
|
|
|
(53
|
)
|
|
|
(474
|
)
|
|
|
(8
|
)
|
Automatic dividend reinvestment
|
|
|
3
|
|
|
|
6
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
404
|
|
|
|
430
|
|
|
|
830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial
Statements.
51
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial Statements
(amounts
in thousands, except per share)
|
|
Note 1.
|
Operations
and summary of significant accounting policies
|
Woodward Governor Company (Woodward or the
Company) is an independent designer, manufacturer,
and service provider of energy control and optimization
solutions for commercial and military aircraft, turbines,
reciprocating engines, and electrical power system equipment.
Woodwards innovative fluid energy, combustion control,
electrical energy, and motion control systems help customers
offer cleaner, more reliable, and more cost-effective equipment.
Leading original equipment manufacturers use Woodwards
products and services in aerospace, power and process
industries, and transportation.
Woodward was established in 1870 and incorporated in 1902.
Woodward serves global markets and is headquartered in
Fort Collins, Colorado. Woodwards principal plants
are located in the U.S., China, Germany, and Poland. The Company
operates other facilities in Brazil, India, Japan, the
Netherlands, and the United Kingdom, which are used primarily
for sales and service activities.
During fiscal years 2008, 2007, and 2006, Woodward operated in
the following three business segments:
|
|
|
|
|
Turbine Systems
is focused on developing and
manufacturing systems and components that provide energy control
and optimization solutions for the aircraft and industrial gas
turbine markets.
|
|
|
|
Engine Systems
is focused on developing and manufacturing
systems and components that provide energy control and
optimization solutions for the industrial engine and steam
turbine markets, which includes power generation,
transportation, and process industries.
|
|
|
|
Electrical Power Systems
is focused on developing and
manufacturing 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 includes power generation, power
distribution, transportation, and process industries.
|
|
|
B.
|
Summary
of significant accounting policies
|
Principles of consolidation:
The Consolidated
Financial Statements are prepared in accordance with accounting
principles generally accepted in the
U.S. (U.S. GAAP) and include the accounts
of Woodward and its majority-owned subsidiaries. Transactions
within and between these companies are eliminated. Results of
joint ventures in which Woodward does not have a controlling
financial interest are included in the financial statements
using the equity method of accounting.
Stock-split:
A
two-for-one
stock split was approved by stockholders at the 2007 annual
meeting of stockholders on January 23, 2008. The stock
split became effective for stockholders at the close of business
on February 1, 2008. The number of shares and per share
amounts reported in the Consolidated Financial Statements has
been updated from amounts reported prior to February 1,
2008, to reflect the effects of the split. In addition, in
accordance with stock option plan provisions, the terms of all
outstanding stock option awards were proportionally adjusted.
Use of estimates:
The preparation of financial
statements prepared in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses recognized during the reporting period. Actual results
could differ materially from Woodwards estimates.
Reclassifications:
Certain reclassifications
have been made to prior year balances in order to conform to the
current years presentation.
52
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
Foreign currency:
The assets and liabilities
of substantially all subsidiaries outside the U.S. are
translated at year-end rates of exchange, and earnings and cash
flow statements are translated at weighted-average rates of
exchange. Translation adjustments are accumulated with other
comprehensive earnings as a separate component of
stockholders equity and are presented net of tax effects
in the Consolidated Statements of Stockholders Equity. The
effects of changes in exchange rates on loans between
consolidated subsidiaries that are not expected to be repaid in
the foreseeable future are also accumulated with other
comprehensive earnings.
The Company is exposed to market risks related to fluctuations
in foreign exchange rates because some sales transactions, and
the assets and liabilities of its domestic and foreign
subsidiaries, are denominated in foreign currencies. Selling,
general, and administrative expenses include net foreign
currency transaction losses of $1,454 in 2008, $249 in 2007 and
$903 in 2006.
Revenue recognition:
The provisions of Staff
Accounting Bulletin No. 104 and all other related
interpretations have been applied. Sales are generally
recognized when delivery of product has occurred or services
have been rendered and there is persuasive evidence of a sales
arrangement, selling prices are fixed or determinable, and
collectability from the customer is reasonably assured. Revenue
from sales arrangements with multiple deliverables are
recognized when there is pervasive evidence of a sales
arrangement for each individual deliverable.
Product delivery is generally considered to have occurred when
the customer has taken title and assumed the risks and rewards
of ownership of the products. In countries whose laws provide
for retention of some form of title by sellers enabling recovery
of goods in the event of customer default on payment, product
delivery is considered to have occurred when the customer has
assumed the risks and rewards of ownership of the products. Most
of the sales are made directly to customers that use Woodward
products, although products are also sold to distributors,
dealers, and independent service facilities. Sales terms for
distributors, dealers, and independent service facilities are
substantially similar to Woodwards sales terms for direct
customers.
Customer Rebates:
Woodward sometimes agrees to
make rebate payments to customers related to anticipated sales
activity. Payments made to customers are accounted for as a
reduction of revenue unless they are made in exchange for
identifiable goods or services with fair values that can be
reasonably estimated. These reductions in revenues are
recognized immediately to the extent that the payments cannot be
attributed to anticipated future sales, and are recognized in
future periods to the extent that the payments relate to future
sales, based on the specific facts and circumstances underlying
each payment. Payments that are probable and can be reasonably
estimated are accrued at expected rates based on anticipated
sale activity.
Stock-based compensation:
The provisions of
Statement of Financial Accounting Standards (SFAS)
No. 123R, Share-Based Payment
(SFAS 123R) requiring that compensation cost
relating to stock-based payment awards made to employees and
directors be recognized in the financial statements have been
applied. Non-qualified stock option awards are issued under
Woodwards stock-based compensation plans. The cost for
such awards is measured at the grant date based on the fair
value of the award. Historical company information is the
primary basis for selection of the expected term, expected
volatility, and expected dividend yield assumptions used to
estimate the fair value of the options on the date of grant.
The portion of the award that is ultimately expected to vest is
recognized as expense over the requisite service periods, which
is generally the vesting period of the awards.
SFAS 123R requires forfeitures to be estimated at the time
of the grant in order to estimate the portion of the award that
will ultimately vest. The estimate is based on Woodwards
historical rates of forfeitures and is updated periodically.
Research and development costs:
Expenditures
related to new product development activities are expensed when
incurred and are separately reported in the Consolidated
Statements of Earnings.
53
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
Income taxes:
Deferred income taxes are
provided for the temporary differences between the financial
reporting basis and the tax basis of Woodwards assets and
liabilities. Woodward provides for taxes that may be payable if
undistributed earnings of overseas subsidiaries were to be
remitted to the U.S., except for those earnings that it
considers to be permanently reinvested.
Cash equivalents:
Highly liquid investments
purchased with an original maturity of three months or less are
considered to be cash equivalents.
Cash and cash equivalents are maintained with several financial
institutions. Generally, these deposits may be redeemed upon
demand and are maintained with financial institutions with
reputable credit and therefore bear minimal credit risk.
Woodward holds cash and cash equivalents at financial
institutions in excess of amounts covered by federal depository
insurance.
Accounts receivable:
Virtually all
Woodwards sales are made on credit and result in accounts
receivable, which are recorded at the amount invoiced. In the
normal course of business, not all accounts receivable are
collected and, therefore, an allowance for losses of accounts
receivable is provided equal to the amount that Woodward
believes ultimately will not be collected. Customer-specific
information is considered related to delinquent accounts, past
loss experience, and current economic conditions in establishing
the amount of its allowance. Accounts receivable losses are
deducted from the allowance and the related accounts receivable
balances are written off when the receivables are deemed
uncollectible. Recoveries of accounts receivable previously
written off are recognized when received.
Inventories:
Inventories are valued at the
lower of cost or market, with cost being determined on a
first-in,
first-out basis. Component parts include items that can be sold
separately as finished goods or included in the manufacture of
other products.
Property, plant, and equipment:
Property,
plant, and equipment are recorded at cost and are depreciated
over the estimated useful lives of the assets, ranging from five
to 40 years for buildings and improvements and three to
fifteen years for machinery and equipment. Assets are
depreciated using the straight-line method. Assets are tested
for recoverability whenever events or circumstances indicate the
carrying value may not be recoverable.
Purchase Accounting:
The provisions of
SFAS No. 141, Business Combinations and
related interpretations have been applied. Business combinations
are accounted for using the purchase method of accounting. Under
the purchase method, assets and liabilities are recorded at
their fair values as of the acquisition date, including
intangible assets. Acquisition costs in excess of amounts
assigned to assets acquired and liabilities assumed are recorded
as goodwill.
Goodwill:
Woodward tests goodwill on the
reporting unit level on an annual basis and more often if an
event occurs or circumstances change that would more likely than
not reduce the fair value of a reporting unit below its carrying
amount. The impairment test consist of comparing the fair value
of the reporting unit, determined using discounted cash flows,
with its carrying amount including goodwill, and, if the
carrying amount of the reporting unit exceeds its fair value,
comparing the implied value of goodwill with its carrying
amount. If the carrying amount of goodwill exceeds the implied
fair value of goodwill, an impairment loss would be recognized
to reduce the carrying amount to its implied fair value. There
was no impairment charge recorded in fiscal 2008, fiscal 2007,
or fiscal 2006.
Other intangibles:
Other intangibles are
recognized apart from goodwill whenever an acquired intangible
asset arises from contractual or other legal rights, or whenever
it is capable of being separated or divided from the acquired
entity and sold, transferred, licensed, rented, or exchanged,
either individually or in combination with a related contract,
asset, or liability. All of Woodwards intangibles have an
estimated useful life and are being amortized. Impairment losses
are recognized if the carrying amount of an intangible exceeds
its fair value.
54
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
Estimated lives over which intangible assets are amortized, on a
straight line basis, at September 30, 2008 were as follows:
|
|
|
|
|
Customer relationships
|
|
|
10 - 30 years
|
|
Intellectual property
|
|
|
15 years
|
|
Process technology
|
|
|
8 - 30 years
|
|
Patents
|
|
|
10 - 14 years
|
|
Other intangibles
|
|
|
15 years
|
|
Deferred compensation:
Deferred compensation
obligations will be settled either by delivery of a fixed number
of shares of Woodwards common stock (in accordance with
certain eligible members irrevocable elections) or in
cash. Woodward has contributed shares of its common stock into a
trust established for the future settlement of deferred
compensation obligations that are payable in shares of
Woodwards common stock. Common stock held by the trust is
reflected in the Consolidated Balance Sheet as treasury stock
held for deferred compensation and the related deferred
compensation obligation is reflected as a separate component of
equity in amounts equal to the fair value of the common stock at
the dates of contribution. These accounts are not adjusted for
subsequent changes in fair value of the common stock. Deferred
compensation obligations that will be settled in cash are
accounted for on an accrual basis in accordance with the terms
of the underlying contract and are reflected in the Consolidated
Balance Sheet as an accrued liability.
Investments:
Woodward holds marketable equity
securities related to its deferred compensation program. In
accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities and
based on Woodwards intentions regarding these instruments,
marketable equity securities are classified as trading
securities. The trading securities are reported at fair value,
with realized gains and losses recognized in earnings. The
trading securities are included in Other current
assets. The associated obligation to provide benefits is
included in Other liabilities.
Derivatives:
The Company is exposed to various
market risks that arise from transactions entered into in the
normal course of business. The Company utilizes derivative
instruments such as treasury lock agreements to lock in fixed
rates on future debt issuances that qualify as cash flow or fair
value hedges to mitigate the risk of variability in cash flows
related to future interest payments attributable to changes in
the designated benchmark rate. The Company complies with
SFAS Nos. 133, 137, 138 and 149 (collectively
SFAS 133) pertaining to the accounting for
these derivatives and hedging activities which require all such
interest rate hedge instruments to be recorded on the balance
sheet at fair value. Cash flows related to the instrument
designated as a qualifying hedge are reflected in the
accompanying Consolidated Statements of Cash Flows in the same
categories as the cash flows from the items being hedged.
Accordingly, cash flows relating to the settlement of interest
rate derivatives hedging the forecasted issuance of debt have
been reflected upon settlement as a component of financing cash
flows. The resulting gain or loss from such settlement is
deferred to other comprehensive income and reclassified to
interest expense over the term of the underlying debt. This
reclassification of the deferred gains and losses impacts the
interest expense recognized on the underlying debt that was
hedged and is therefore reflected as a component of operating
cash flows in periods subsequent to settlement. The periodic
settlement of interest rate derivatives hedging outstanding
variable rate debt is recorded as an adjustment to interest
expense and is therefore reflected as a component of operating
cash flows.
Post-retirement benefits:
The Company provides
various benefits to certain employees through defined benefit
plans and retirement healthcare benefit plans. For financial
reporting purposes, net periodic benefits expense and related
obligations are calculated using a number of significant
actuarial assumptions. Changes in net periodic expense may occur
in the future due to changes in these assumptions.
55
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
The weighted average actuarial assumptions used in measuring the
net periodic benefit cost and plan obligations of retirement
pension benefits were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
|
United States
|
|
|
Other Countries
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted-average assumptions used to determine benefit
obligation at September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.5
|
%
|
|
|
6.1
|
%
|
|
|
5.6
|
%
|
|
|
4.7
|
%
|
|
|
4.8
|
%
|
|
|
4.4
|
%
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
4.5
|
|
|
|
3.7
|
|
|
|
3.8
|
|
|
|
3.4
|
|
Weighted-average assumptions used to determine net periodic
benefit cost for years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.1
|
|
|
|
5.6
|
|
|
|
5.3
|
|
|
|
5.7
|
|
|
|
4.4
|
|
|
|
4.1
|
|
Rate of compensation increase
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
4.5
|
|
|
|
3.7
|
|
|
|
3.8
|
|
|
|
3.2
|
|
Long-term rate of return on plan assets
|
|
|
7.5
|
|
|
|
8.0
|
|
|
|
8.0
|
|
|
|
5.6
|
|
|
|
5.8
|
|
|
|
5.6
|
|
The discount rate assumption is intended to reflect the rate at
which the retirement benefits could be effectively settled based
upon the assumed timing of the benefit payments. In the U.S.,
Woodward used a bond portfolio matching analysis based on
recently traded, non-callable bonds rated AA- or better by
Standard & Poors, which have at least
$25.0 million outstanding. In the United Kingdom, Woodward
used the AA corporate bond index (applicable for bonds over
15 years) and government bond yields (for bonds over
15 years) to determine a blended rate to use as the
benchmark. In Japan, Woodward used AA-rated corporate bond
yields (for bonds of 12.5 years) as the benchmark.
Woodwards assumed rates do not differ significantly from
any of these benchmarks.
The investment objectives for the pension plan assets are
designed to generate returns that will enable the pension plans
to meet their future obligations. The precise amount for which
these obligations will be settled depends on future events,
including the life expectancy of the plan participants. These
obligations are estimated using actuarial assumptions, based on
the current economic environment. The strategy balances the
requirements to generate returns, using the higher-returning
assets such as equity securities with the need to control risk
in the pension plan with less volatile assets, such as
fixed-income securities. Risks include, among others, the
likelihood of the pension plans becoming underfunded, thereby
increasing their dependence on contributions from Woodward. The
assets are managed by professional investment firms and
performance is evaluated against specific benchmarks. In the
U.S., assets are primarily invested in broadly diversified
passive vehicles.
The weighted average actuarial assumptions used in measuring the
net periodic benefit cost and plan obligations of retirement
healthcare benefits follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Weighted-average discount rate assumptions used to determine
benefit obligation at September 30
|
|
|
6.5
|
%
|
|
|
6.1
|
%
|
|
|
5.6
|
%
|
Weighted-average discount rate assumptions used to determine net
periodic benefit cost for years ended September 30
|
|
|
6.1
|
%
|
|
|
5.6
|
%
|
|
|
5.3
|
%
|
The discount rate assumption is intended to reflect the rate at
which the retirement benefits could be effectively settled based
upon the assumed timing of the benefit payments. In the U.S.,
Woodward used a bond portfolio matching analysis based on
recently traded, non-callable bonds rated AA- or better by
Standard & Poors, which have at least
$25.0 million outstanding. In the United Kingdom, Woodward
used the AA corporate bond index (applicable for bonds over
15 years) and government bond yields (for bonds over
15 years) to determine a blended rate to use as the
benchmark. Woodwards assumed rates do not differ
significantly from any of these benchmarks.
56
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
For retirement healthcare benefits, Woodward assumed net
healthcare cost trend rates of 8.0% in 2009, decreasing
gradually to 5.0% in 2011, and remaining at 5.0% thereafter. A
1.0% increase in assumed healthcare cost trend rates would have
increased the total of the service and interest cost components
by approximately $275 and increased the benefit obligation at
the end of the year by approximately $3,939 in 2008. Likewise, a
1.0% decrease in the assumed rates would have decreased the
total of service and interest cost components by $240 and
decreased the benefit obligation by approximately $3,411 in 2008.
Stockholders equity:
In July 2006, the
Board of Directors authorized the repurchase of up to $50,000 of
Woodwards outstanding shares of common stock on the open
market or in privately negotiated transactions over a three-year
period (the 2006 Authorization). During fiscal 2007,
Woodward purchased $38,649 of its common stock under the 2006
Authorization. The 2006 Authorization is closed.
In September 2007, the Board of Directors authorized a new stock
repurchase of up to $200,000 of Woodwards outstanding
shares of common stock on the open market or in privately
negotiated transactions over a three-year period that will end
in October 2010 (the 2007 Authorization). During
fiscal 2008, Woodward purchased a total of $31,925 of its common
stock under the 2007 Authorization.
Advertising Costs:
Woodward expenses all
advertising costs as incurred and they are classified within
selling, general, and administrative expenses. Advertising costs
were not material for all years presented.
Shipping and Handling Costs:
Product freight
costs are included in cost of goods sold.
|
|
Note 2.
|
Recently
adopted and issued but not yet effective accounting
standards
|
|
|
A.
|
Accounting
changes and recently adopted accounting standards:
|
Income
taxes
FIN 48: In July 2006, the Financial Accounting
Standards Board (FASB) issued Financial
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes-an interpretation of FASB Statement
No. 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 stockholders equity of $7,702. For
additional information, see Note 4, Income
Taxes.
|
|
B.
|
Issued
but not yet effective accounting standards:
|
SFAS 157: In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements
(SFAS 157), which defines fair value,
establishes a framework for measuring fair value, and requires
additional disclosures about a Companys financial assets
and liabilities that are measured at fair value. SFAS 157
does not change existing guidance on whether or not an
instrument is carried at fair value. SFAS 157 is effective
for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. In February 2008, the FASB issued FASB Staff Position
(FSP)
No. FAS 157-1,
Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13
(FSP
FAS 157-1)
which excludes SFAS No. 13, Accounting for
Leases and certain other accounting pronouncements that
address fair value measurements, from the scope of
SFAS 157. In February 2008, the FASB issued FSP
No. FAS 157-2,
Effective
57
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
Date of FASB Statement No. 157 (FSP
FAS 157-2)
which provides a one-year delayed application of SFAS 157
for nonfinancial assets and liabilities, except for items that
are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). Woodward is
required to adopt SFAS 157 as amended by FSP
FAS 157-1
and FSP
FAS 157-2
on October 1, 2008, the beginning of fiscal 2009. The
adoption is not expected to have a material impact on the
consolidated financial statements.
In October 2008, the FASB issued FSP
No. FAS 157-3,
Determining the Fair Value of a Financial Asset in a
Market That Is Not Active (FSP
FAS 157-3),
which clarifies the application of SFAS 157 when the market
for a financial asset is inactive. Specifically, FSP
FAS 157-3
clarifies how (1) managements internal assumptions
should be considered in measuring fair value when observable
data are not present, (2) observable market information
from an inactive market should be taken into account, and
(3) the use of broker quotes or pricing services should be
considered in assessing the relevance of observable and
unobservable data to measure fair value. The guidance in FSP
FAS 157-3
is effective immediately and will apply to the Company upon
adoption of SFAS 157.
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 that 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 does not plan to apply SFAS 159.
EITF 07-3: In
June 2007, the Emerging Issues Task Force (EITF)
issued
EITF 07-3,
Accounting for Nonrefundable Advance Payments for Goods or
Services to Be Used in Future Research and Development
Activities
(EITF 07-3).
EITF 07-3
addresses 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 07-3
is effective for interim or annual reporting periods in fiscal
years beginning after December 15, 2007 (fiscal 2009 for
Woodward). Woodward does not expect the adoption of
EITF 07-03
to have a material impact on its consolidated financial
statements.
EITF 07-1: In
November 2007, the EITF issued
EITF 07-1,
Accounting for Collaborative Arrangements
(EITF 07-1).
EITF 07-1,
which will be applied retrospectively, requires expanded
disclosures for contractual arrangements with third parties that
involve joint operating activities and may require
reclassifications to previously issued financial statements.
EITF 07-1
is effective for interim or annual reporting periods beginning
after December 15, 2008 (fiscal 2010 for Woodward).
Woodward is currently evaluating the impact
EITF 07-1
may have on consolidated financial statements.
SFAS 141(R): In December 2007, the FASB issued
SFAS No. 141 (Revised) Business
Combinations (SFAS 141(R)).
SFAS 141(R) is intended to improve, simplify, and converge
internationally the accounting for business combinations. Under
SFAS 141(R), an acquiring entity in a business combination
must recognize the assets acquired, liabilities assumed, and any
noncontrolling interest in the acquired entity at the
acquisition date fair values, with limited exceptions. In
addition, SFAS 141(R) requires the acquirer to disclose all
information that investors and other users need to evaluate and
understand the nature and financial impact of the business
combination. SFAS 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period on or after
December 15, 2008. Earlier adoption is
58
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
prohibited. Accordingly, Woodward will record and disclose
business combinations under the revised standard beginning
October 1, 2009.
SFAS 160: In December 2007, the FASB issued
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements an Amendment of
Accounting Research Bulletin (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
(i) noncontrolling interests to be reported as a component
of equity, (ii) changes in a parents ownership
interest while the parent retains its controlling interest be
accounted for as equity transactions, and (iii) 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.
SFAS 160 is effective for fiscal years beginning after
December 15, 2008. As a result, SFAS 160 is effective
for Woodward in the first quarter of fiscal 2010. Woodward is
currently evaluating the impact SFAS 160 may have on its
consolidated financial statements.
SFAS 161: In March 2008, the FASB issued
SFAS No. 161, Disclosures About Derivative
Instruments and Hedging Activities
(SFAS 161). SFAS 161 is intended to
improve financial reporting about derivative instruments and
hedging activities by requiring enhanced disclosures to enable
investors to better understand their effects on an entitys
financial position, financial performance, and cash flows. The
new standard is effective for financial statements issued for
fiscal years and interim periods beginning after
November 15, 2008 (fiscal 2010 for Woodward). Woodward is
currently assessing the impact that SFAS 161 may have on
its consolidated financial statements.
FSP
FAS 142-3: In
April 2008, the FASB issued FSP
No. FAS 142-3,
Determination of the Useful Life of Intangible
Assets (FSP
FAS 142-3),
which improves the consistency of the useful life of a
recognized intangible asset among various pronouncements. FSP
FAS 142-3
is effective for fiscal years beginning after December 15,
2008 (fiscal 2010 for Woodward). Woodward is currently assessing
the impact that FSP
FAS 142-3
may have on its consolidated financial statements.
SFAS 162: In May 2008, the FASB issued
SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles
(SFAS 162). The new standard is intended to
improve financial reporting by identifying a consistent
framework, or hierarchy, for selecting accounting principles to
be used in preparing financial statements that are presented in
conformity with U.S. GAAP for nongovernmental entities. The
new standard is effective 60 days following the Security
and Exchange Commissions approval of the Public Company
Accounting Oversight Board amendments to AU Section 411,
The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles. Woodward is currently
assessing the impact that SFAS 162 may have on its
consolidated financial statements.
FSP
EITF 03-6-1: In
June 2008, the FASB issued FASB Staff Position
No. EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions are Participating Securities
(FSP
EITF 03-6-1).
The FSP addresses whether instruments granted in stock-based
payment transactions are participating securities prior to
vesting and, therefore, need to be included in the earnings
allocation in computing earnings per share under the two-class
method described in paragraphs 60 and 61 of
SFAS No. 128, Earnings Per Share. The new
FSP is effective for financial statements issued for fiscal
years beginning after December 15, 2008 and interim periods
within those years (fiscal 2010 for Woodward). Early application
is not permitted. Woodwards unvested options are not
eligible to receive dividends; therefore, FSP
EITF 03-06-1
will not have any impact on its consolidated financial
statements.
FSP
SFAS 133-1: In
September 2008, the FASB issued FSP
No. FAS 133-1
Disclosures about Credit Derivatives and Certain
Guarantees: An Amendment of FASB Statement No. 133
(FSP
FAS 133-1)
and FASB Interpretation No. 45; and Clarification of the
Effective Date of FASB Statement No. 161. This FSP
amends
59
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
SFAS No. 133 to require disclosures by sellers of
credit derivatives, including credit derivatives embedded in a
hybrid instrument. This FSP also amends FIN No. 45 to
require an additional disclosure about the current status of the
payment/performance risk of a guarantee. Further, this FSP
clarifies the FASBs intent about the effective date of
SFAS No. 161. This FSP is effective for fiscal years
ending after November 15, 2008. Woodward expects to adopt
this FSP for periods ending on and after December 31, 2008.
Woodward is currently assessing the impact that FSP
No. FAS 133-1
may have on its consolidated financial statements.
|
|
Note 3.
|
Business
acquisitions
|
On October 31, 2006, Woodward acquired 100 percent of
the stock of Schaltanlagen-Elektronik-Geräte
GmbH & Co. KG (SEG), and a related
receivable from SEG that was held by one of the sellers, for
$35,289, including $10,319 of assumed debt obligations. The
transaction was financed with available cash. The acquisition
provides Woodward with technologies and products that complement
its power generation system solutions. Headquartered in Kempen,
Germany, SEG designs and manufactures a wide range of protection
and comprehensive control systems for power generation and
distribution applications, power inverters for wind turbines,
and complete electrical systems for gas and diesel engine based
power stations.
As part of the acquisition, Woodward implemented a plan to exit
from a project-based segment of the business. Costs related to
exiting this line of business have been accrued as business
termination costs, including involuntary employee termination
benefits and relocation costs. Due to changes in the market,
Woodward no longer expects to exit from the project-based
segment of the business. Woodward estimates that the
implementation of the remaining restructuring to this business
will be completed in fiscal year 2009.
|
|
|
|
|
Accrued termination costs, October 1, 2006
|
|
$
|
1,753
|
|
Payments
|
|
|
(448
|
)
|
Foreign currency translation
|
|
|
218
|
|
|
|
|
|
|
Accrued termination costs, September 30, 2007
|
|
|
1,523
|
|
Payments
|
|
|
(128
|
)
|
Changes in estimates
|
|
|
(599
|
)
|
Foreign currency translation
|
|
|
5
|
|
|
|
|
|
|
Accrued termination costs, September 30, 2008
|
|
$
|
801
|
|
|
|
|
|
|
The results of SEGs operations are included in
Woodwards Consolidated Statements of Earnings from the
beginning of November 2006. If the acquisition had been
completed on October 1, 2006, Woodwards net sales and
net earnings for the fiscal year ended September 30, 2007
would not have been materially different from amounts reported
in the Consolidated Statements of Earnings.
Income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
26,689
|
|
|
$
|
6,204
|
|
|
$
|
21,117
|
|
State
|
|
|
4,080
|
|
|
|
3,416
|
|
|
|
3,223
|
|
Foreign
|
|
|
17,583
|
|
|
|
10,465
|
|
|
|
3,994
|
|
Deferred
|
|
|
11,678
|
|
|
|
13,746
|
|
|
|
(13,737
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60,030
|
|
|
$
|
33,831
|
|
|
$
|
14,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
Earnings before income taxes by geographical area consisted of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
United States
|
|
$
|
96,934
|
|
|
$
|
93,818
|
|
|
$
|
70,037
|
|
Germany
|
|
|
46,239
|
|
|
|
22,012
|
|
|
|
5,991
|
|
Other countries
|
|
|
38,737
|
|
|
|
16,158
|
|
|
|
8,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
181,910
|
|
|
$
|
131,988
|
|
|
$
|
84,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes presented in the Consolidated Balance
Sheets are related to the following:
|
|
|
|
|
|
|
|
|
At September 30,
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Retirement healthcare and early retirement benefits
|
|
$
|
14,528
|
|
|
$
|
16,913
|
|
Foreign net operating loss carryforwards
|
|
|
4,579
|
|
|
|
11,007
|
|
Inventory
|
|
|
14,828
|
|
|
|
14,491
|
|
Other
|
|
|
20,637
|
|
|
|
23,744
|
|
Valuation allowance
|
|
|
(129
|
)
|
|
|
(2,596
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net of valuation allowance
|
|
|
54,443
|
|
|
|
63,559
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangibles net
|
|
|
(33,354
|
)
|
|
|
(29,761
|
)
|
Other
|
|
|
(17,266
|
)
|
|
|
(18,582
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(50,620
|
)
|
|
|
(48,343
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
3,823
|
|
|
$
|
15,216
|
|
|
|
|
|
|
|
|
|
|
The foreign net operating loss carryforwards as of
September 30, 2008 may be carried forward indefinitely.
At September 30, 2008, Woodward has not provided for taxes
on undistributed foreign earnings of $32,642 that it considers
permanently reinvested. These earnings could become subject to
income taxes if they are remitted as dividends, are loaned to
Woodward, or if it sells its stock in the subsidiaries. However,
the Company believes that foreign tax credits would largely
offset any income tax that might otherwise be due.
The changes in the valuation allowance were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Beginning balance
|
|
$
|
(2,596
|
)
|
|
$
|
(2,566
|
)
|
|
$
|
(17,769
|
)
|
Change in valuation allowance that existed at the beginning of
the year
|
|
|
2,689
|
|
|
|
(116
|
)
|
|
|
13,710
|
|
Current activity related to deferred items
|
|
|
(222
|
)
|
|
|
(302
|
)
|
|
|
|
|
Foreign net operating loss carryforward
|
|
|
|
|
|
|
388
|
|
|
|
1,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
(129
|
)
|
|
$
|
(2,596
|
)
|
|
$
|
(2,566
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets are reduced by a valuation allowance if,
based on the weight of available evidence, it is more likely
than not that some portion or all of the deferred tax assets
will not be realized. Both positive and negative evidence are
considered in forming Woodwards judgment as to whether a
valuation allowance is appropriate, and more weight is given to
evidence that can be objectively verified. Valuation allowances
are reassessed whenever there are changes in circumstances that
may cause a change in judgment. In fiscal 2008, 2007,
61
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
and 2006, additional objective evidence became available
regarding earnings in tax jurisdictions that had unexpired net
operating loss carryforwards that affected Woodwards
judgment about the valuation allowance that existed at the
beginning of the year.
Foreign net operating loss carryforward amounts in the preceding
table included the translation effects of changes in foreign
currency exchange rates.
The reasons for the differences between Woodwards
effective income tax rate and the U.S. statutory federal
income tax rate were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of pretax Earnings
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Adjustments of the beginning-of-year balance of valuation
allowances for deferred tax assets
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
(16.2
|
)
|
State income taxes, net of federal tax benefit
|
|
|
1.5
|
|
|
|
2.0
|
|
|
|
2.4
|
|
Foreign loss effect
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
Foreign tax rate differences
|
|
|
|
|
|
|
0.1
|
|
|
|
1.1
|
|
Foreign sales benefits
|
|
|
|
|
|
|
(0.4
|
)
|
|
|
(2.3
|
)
|
German tax law changes
|
|
|
|
|
|
|
2.3
|
|
|
|
|
|
ESOP dividends on allocated stock shares
|
|
|
(0.4
|
)
|
|
|
(0.5
|
)
|
|
|
(0.7
|
)
|
Research credit
|
|
|
(0.3
|
)
|
|
|
(2.4
|
)
|
|
|
(0.9
|
)
|
Retroactive extension of research credit
|
|
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
Change in estimate of taxes for previous periods and audit
settlements
|
|
|
(1.2
|
)
|
|
|
(10.2
|
)
|
|
|
(1.3
|
)
|
Other items, net
|
|
|
(0.1
|
)
|
|
|
0.6
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective rate
|
|
|
33.0
|
%
|
|
|
25.6
|
%
|
|
|
17.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in estimate of taxes for previous periods are
primarily related to the favorable resolution of certain tax
matters for 2008 and 2007, and to increases in the amount of
certain credits claimed and changes in the amount of certain
deductions taken as compared to prior estimates for 2006.
In June 2006, the 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 stockholders equity of $7,702.
62
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
A reconciliation of the beginning and ending amounts of gross
unrecognized tax benefits is as follows:
|
|
|
|
|
Balance at October 1, 2007
|
|
$
|
20,509
|
|
Tax positions related to the current year
|
|
|
5,819
|
|
Tax positions related to prior years
|
|
|
(74
|
)
|
Lapse of applicable statute of limitations
|
|
|
(3,678
|
)
|
|
|
|
|
|
Balance at September 30, 2008
|
|
$
|
22,576
|
|
|
|
|
|
|
At September 30, 2008, the amount of unrecognized tax
benefits that would impact Woodwards effective tax rate,
if recognized, was $17,086. At this time, Woodward estimates
that it is reasonably possible that the liability for
unrecognized tax benefits will decrease by up to $8,308 in the
next twelve months through completion of reviews by various
worldwide tax authorities.
Woodward recognizes interest and penalties related to
unrecognized tax benefits in tax expense. Woodward had accrued
interest and penalties of $5,956 and $4,396 as of
September 30, 2008, and October 1, 2007, respectively.
Woodwards tax returns are audited by U.S., 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 significant foreign jurisdictions include 2002
and forward. Woodward is subject to U.S. and state income
tax examinations for fiscal years 2003 and forward.
63
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
|
|
Note 5.
|
Earnings
per share
|
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 reflect the
potential dilution that could occur if options were exercised.
The average shares outstanding decreased during fiscal 2008 as a
result of shares repurchased under Woodwards ongoing stock
repurchase program. (See Note 1. Operations and
summary of significant accounting policies.) Woodward
repurchases common stock at times management deems appropriate,
given current market valuations. The following is a
reconciliation of net earnings to net earnings per
share basic and net earnings per share
diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
121,880
|
|
|
$
|
98,157
|
|
|
$
|
69,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
67,564
|
|
|
|
68,489
|
|
|
|
68,702
|
|
Assumed exercise of stock options
|
|
|
1,996
|
|
|
|
1,998
|
|
|
|
1,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
69,560
|
|
|
|
70,487
|
|
|
|
70,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.80
|
|
|
$
|
1.43
|
|
|
$
|
1.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.75
|
|
|
$
|
1.39
|
|
|
$
|
0.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average shares of common stock outstanding for
basic earnings per share included the weighted-average treasury
stock shares held for deferred compensation obligations of 417,
558, and 828 for fiscal 2008, 2007, and 2006, respectively.
The following outstanding stock options were not included in the
computation of diluted earnings per share because their
inclusion would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Options
|
|
|
398
|
|
|
|
636
|
|
|
|
716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average option price
|
|
$
|
32.68
|
|
|
$
|
18.54
|
|
|
$
|
13.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
2008
|
|
|
2007
|
|
|
Raw materials
|
|
$
|
16,221
|
|
|
$
|
10,808
|
|
Component parts
|
|
|
118,248
|
|
|
|
92,737
|
|
Work in progress
|
|
|
41,047
|
|
|
|
36,220
|
|
Finished goods
|
|
|
32,801
|
|
|
|
32,735
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
208,317
|
|
|
$
|
172,500
|
|
|
|
|
|
|
|
|
|
|
64
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
|
|
Note 7.
|
Property,
plant, and equipment
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
2008
|
|
|
2007
|
|
|
Land
|
|
$
|
13,343
|
|
|
$
|
12,469
|
|
Buildings and equipment
|
|
|
188,359
|
|
|
|
182,765
|
|
Machinery and equipment
|
|
|
286,074
|
|
|
|
277,100
|
|
Construction in progress
|
|
|
16,524
|
|
|
|
15,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
504,300
|
|
|
|
488,083
|
|
Less accumulated depreciation
|
|
|
(335,649
|
)
|
|
|
(329,085
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
$
|
168,651
|
|
|
$
|
158,998
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense totaled $28,620 in fiscal 2008, $25,428 in
fiscal 2007, and $22,064 in fiscal 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Additions/
|
|
|
Translation
|
|
|
September 30,
|
|
|
|
2007
|
|
|
Adjustments
|
|
|
Gains/(Losses)
|
|
|
2008
|
|
|
Turbine Systems
|
|
$
|
86,565
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
86,565
|
|
Engine Systems
|
|
|
37,736
|
|
|
|
(675
|
)
|
|
|
(1,430
|
)
|
|
|
35,631
|
|
Electrical Power Systems
|
|
|
16,914
|
|
|
|
675
|
|
|
|
(208
|
)
|
|
|
17,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
141,215
|
|
|
$
|
|
|
|
$
|
(1,638
|
)
|
|
$
|
139,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
Additions/
|
|
|
Translation
|
|
|
September 30,
|
|
|
|
2006
|
|
|
Adjustments
|
|
|
Gains/(Losses)
|
|
|
2007
|
|
|
Turbine Systems
|
|
$
|
86,565
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
86,565
|
|
Engine Systems
|
|
|
36,703
|
|
|
|
|
|
|
|
1,033
|
|
|
|
37,736
|
|
Electrical Power Systems
|
|
|
8,816
|
|
|
|
6,296
|
|
|
|
1,802
|
|
|
|
16,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
132,084
|
|
|
$
|
6,296
|
|
|
$
|
2,835
|
|
|
$
|
141,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
|
|
Note 9.
|
Other
intangibles net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Amount
|
|
|
Value
|
|
|
Amortization
|
|
|
Amount
|
|
|
Customer relationships:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turbine Systems
|
|
$
|
44,327
|
|
|
$
|
(15,268
|
)
|
|
$
|
29,059
|
|
|
$
|
44,327
|
|
|
$
|
(13,791
|
)
|
|
$
|
30,536
|
|
Engine Systems
|
|
|
20,607
|
|
|
|
(9,877
|
)
|
|
|
10,730
|
|
|
|
20,607
|
|
|
|
(8,003
|
)
|
|
|
12,604
|
|
Electrical Power Systems
|
|
|
2,190
|
|
|
|
(386
|
)
|
|
|
1,804
|
|
|
|
2,609
|
|
|
|
(424
|
)
|
|
|
2,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
67,124
|
|
|
$
|
(25,531
|
)
|
|
$
|
41,593
|
|
|
$
|
67,543
|
|
|
$
|
(22,218
|
)
|
|
$
|
45,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual property:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turbine Systems
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Engine Systems
|
|
|
12,705
|
|
|
|
(5,408
|
)
|
|
|
7,297
|
|
|
|
16,163
|
|
|
|
(6,175
|
)
|
|
|
9,988
|
|
Electrical Power Systems
|
|
|
2,790
|
|
|
|
(1,220
|
)
|
|
|
1,570
|
|
|
|
4,564
|
|
|
|
(4,374
|
)
|
|
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,495
|
|
|
$
|
(6,628
|
)
|
|
$
|
8,867
|
|
|
$
|
20,727
|
|
|
$
|
(10,549
|
)
|
|
$
|
10,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Process technology:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turbine Systems
|
|
$
|
11,941
|
|
|
$
|
(4,113
|
)
|
|
$
|
7,828
|
|
|
$
|
11,941
|
|
|
$
|
(3,715
|
)
|
|
$
|
8,226
|
|
Engine Systems
|
|
|
5,350
|
|
|
|
(2,853
|
)
|
|
|
2,497
|
|
|
|
5,350
|
|
|
|
(2,318
|
)
|
|
|
3,032
|
|
Electrical Power Systems
|
|
|
1,338
|
|
|
|
(1,129
|
)
|
|
|
209
|
|
|
|
1,351
|
|
|
|
(971
|
)
|
|
|
380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,629
|
|
|
$
|
(8,095
|
)
|
|
$
|
10,534
|
|
|
$
|
18,642
|
|
|
$
|
(7,004
|
)
|
|
$
|
11,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turbine Systems
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,056
|
|
|
$
|
(2,852
|
)
|
|
$
|
204
|
|
Engine Systems
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical Power Systems
|
|
|
4,442
|
|
|
|
(693
|
)
|
|
|
3,749
|
|
|
|
4,486
|
|
|
|
(335
|
)
|
|
|
4,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,442
|
|
|
$
|
(693
|
)
|
|
$
|
3,749
|
|
|
$
|
7,542
|
|
|
$
|
(3,187
|
)
|
|
$
|
4,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turbine Systems
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Engine Systems
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
315
|
|
|
|
(275
|
)
|
|
|
40
|
|
Electrical Power Systems
|
|
|
1,563
|
|
|
|
(200
|
)
|
|
|
1,363
|
|
|
|
1,578
|
|
|
|
(96
|
)
|
|
|
1,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,563
|
|
|
$
|
(200
|
)
|
|
$
|
1,363
|
|
|
$
|
1,893
|
|
|
$
|
(371
|
)
|
|
$
|
1,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
107,253
|
|
|
$
|
(41,147
|
)
|
|
$
|
66,106
|
|
|
$
|
116,347
|
|
|
$
|
(43,329
|
)
|
|
$
|
73,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense totaled $6,830 in fiscal 2008, $7,496 in
fiscal 2007, and $6,953 in fiscal 2006.
66
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
Amortization expense associated with current intangibles is
expected to be:
|
|
|
|
|
Year Ending September 30:
|
|
|
|
|
2009
|
|
$
|
6,184
|
|
2010
|
|
|
6,059
|
|
2011
|
|
|
6,017
|
|
2012
|
|
|
6,017
|
|
2013
|
|
|
5,839
|
|
Thereafter
|
|
|
35,990
|
|
|
|
|
|
|
|
|
$
|
66,106
|
|
|
|
|
|
|
|
|
Note 10.
|
Short-term
borrowings
|
Short-term borrowings reflect interest bearing advances subject
to a cash pooling agreement on certain foreign bank accounts and
are collateralized by the associated bank account balances.
Total borrowing capacity varies daily in relation to net amounts
on deposit in the associated bank accounts. The weighted-average
interest rate for outstanding borrowings was 3.0% and 3.8%, at
September 30, 2008 and 2007, respectively. The rates were
lower than is typical in the U.S. because of borrowing rates
available in foreign countries.
|
|
Note 11.
|
Long-term
debt and line of credit facilities
|
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
At September 30,
|
|
2008
|
|
|
2007
|
|
|
Senior notes 6.39%, due October 2011; unsecured
|
|
$
|
42,857
|
|
|
$
|
53,572
|
|
Term note 5.19%, due July 2008; unsecured
|
|
|
|
|
|
|
4,375
|
|
Term note 4.25% 6.95%, due May 2009 to
September 2012, secured by land and buildings
|
|
|
1,659
|
|
|
|
2,526
|
|
Fair value hedge adjustment for unrecognized discontinued hedge
gains
|
|
|
381
|
|
|
|
617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,897
|
|
|
|
61,090
|
|
Less: current portion
|
|
|
(11,560
|
)
|
|
|
(15,940
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
$
|
33,337
|
|
|
$
|
45,150
|
|
|
|
|
|
|
|
|
|
|
The senior notes are held by multiple institutions. The term
notes are held by banks in Germany.
The current portion of long-term debt at September 30, 2008
includes $183 related to the fair value hedge adjustment for
unrecognized discontinued hedge gains.
Required future principal payments of the senior notes and the
term notes are as follows:
|
|
|
|
|
Year Ending September 30,
|
|
|
|
|
2009
|
|
$
|
11,377
|
|
2010
|
|
|
11,197
|
|
2011
|
|
|
11,064
|
|
2012
|
|
|
10,878
|
|
Prior to the issuance of SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) Woodward entered
into certain interest rate swaps that were designated as fair
value hedges of its long-term debt. The discontinuance of these
interest rate swaps resulted in gains that are recognized as a
reduction
67
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
of interest expense over the term of the associated debt using
the effective interest method. The unrecognized portion of the
gain is presented as an adjustment to long-term debt based on
the accounting guidance in effect at the time the interest rate
swaps were discontinued. If SFAS 133 had been issued and
adopted when these interest rate swaps were entered into, the
unrecognized potion of the gain would be presented in
accumulated other comprehensive income rather than as an
adjustment to long-term debt.
In September 2008, the Company entered into treasury lock
agreements with a notional amount totaling $100,000 that
qualified as cash flow hedges under SFAS 133. The objective
of this derivative instrument was to hedge the risk of
variability in cash flows related to future interest payments of
a portion of the anticipated future debt issuances attributable
to changes in the designated benchmark interest rate. The hedges
were closed-out prior to September 30, 2008 resulting in a
gain of approximately $108 and the gain is recorded in
accumulated other comprehensive income as of September 30,
2008. The gain on the close-out of the treasury lock agreements
will be recognized as a reduction of interest expense over the
scheduled term of the hedged debt (seven years) issued on
October 1, 2008 using the effective interest method.
Provisions of the debt agreements, including the $225,000
revolving line of credit facility described below, include
covenants customary to such agreements that require Woodward 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. The most
restrictive covenants require the maintenance of a minimum
consolidated net worth, a maximum ratio of consolidated debt to
consolidated operating cash flow, and a maximum ratio of
consolidated debt to earnings before interest, taxes,
depreciation, and amortization (EBITDA), as defined
in the agreements. Woodward is in compliance with all covenants.
As of September 30, 2008, Woodward had a $225,000 revolving
line of credit facility that involved unsecured financing
arrangements with a syndicate of U.S. banks. The agreement
provided for an option to increase the amount of the line to
$350,000 and has an expiration date of October 2012. Interest
rates on borrowings under the agreement vary with LIBOR, the
federal funds rate, or the prime rate.
Woodward also had various foreign lines of credit. The lines are
generally reviewed annually for renewal and are subject to the
usual terms and conditions applied by the banks. Several of the
lines assess commitment fees.
Borrowing capacity under lines of credit consisted of the
following:
|
|
|
|
|
|
|
|
|
At September 30,
|
|
2008
|
|
|
2007
|
|
|
U.S. revolving line of credit facility
|
|
$
|
225,000
|
|
|
$
|
100,000
|
|
Various foreign lines of credit
|
|
|
19,903
|
|
|
|
19,867
|
|
|
|
|
|
|
|
|
|
|
Total borrowing capacity under revolving lines of credit
|
|
|
244,903
|
|
|
|
119,867
|
|
Less: borrowings outstanding
|
|
|
(
|
)
|
|
|
(
|
)
|
|
|
|
|
|
|
|
|
|
Available line of credit borrowing capacity
|
|
$
|
244,903
|
|
|
$
|
119,867
|
|
|
|
|
|
|
|
|
|
|
68
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
|
|
Note 12.
|
Accrued
liabilities
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
2008
|
|
|
2007
|
|
|
Salaries and other member benefits
|
|
$
|
51,773
|
|
|
$
|
47,578
|
|
Warranties
|
|
|
7,232
|
|
|
|
5,675
|
|
Taxes, other than income
|
|
|
6,908
|
|
|
|
6,682
|
|
Accrued retirement benefits
|
|
|
5,865
|
|
|
|
6,132
|
|
Other
|
|
|
13,813
|
|
|
|
17,823
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
85,591
|
|
|
$
|
83,890
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
At September 30,
|
|
2008
|
|
|
2007
|
|
|
Warranties, beginning of period
|
|
$
|
5,675
|
|
|
$
|
5,832
|
|
Increases to accruals
|
|
|
7,477
|
|
|
|
4,911
|
|
Settlements of amounts accrued
|
|
|
(5,800
|
)
|
|
|
(5,715
|
)
|
Foreign currency exchange rate changes
|
|
|
(120
|
)
|
|
|
647
|
|
|
|
|
|
|
|
|
|
|
Warranties, end of period
|
|
$
|
7,232
|
|
|
$
|
5,675
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13.
|
Other
liabilities
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
2008
|
|
|
2007
|
|
|
Net accrued retirement benefits, less amounts recognized with
accrued liabilities
|
|
$
|
42,103
|
|
|
$
|
46,145
|
|
Other
|
|
|
25,592
|
|
|
|
11,259
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
67,695
|
|
|
$
|
57,404
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 14.
|
Retirement
benefits
|
Woodward provides various benefits to eligible members of the
Company, including contributions to various defined contribution
plans, pension benefits associated with defined benefit plans,
and retirement healthcare benefits. Eligibility requirements and
benefit levels vary depending on employee location.
Woodward provides health-care and life insurance benefits to
certain retired employees and their covered dependents and
beneficiaries. Generally, employees who have attained
age 55 and have rendered 10 or more years of service are
eligible for these postretirement benefits. Certain retirees are
required to contribute to plans in order to maintain coverage.
On September 30, 2007, Woodward adopted
SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans
(SFAS 158), which requires the recognition of
the funded status of defined pension and postretirement plans in
the statement of financial position. The funded status is
measured as the difference between the fair market value of the
plan assets and the benefit obligation. For a defined benefit
pension plan, the benefit obligation is the projected benefit
obligation; for any other defined benefit postretirement plan,
such as a retiree health care plan, the benefit obligation is
the accumulated postretirement benefit obligation. Any
over-funded status should be recognized as an asset and any
underfunded status should be recognized as a liability.
69
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
As part of the initial recognition of the funded status, any
transitional asset/(liability), prior service cost/(credit) or
actuarial gain/(loss) that has not yet been recognized as a
component of net periodic cost should be recognized in the
Accumulated Other Comprehensive Income section of the
Consolidated Statements of Stockholders Equity, net of
tax. Accumulated Other Comprehensive Income will be adjusted as
these amounts are subsequently recognized as a component of net
periodic benefit costs in future periods.
The recognition of the funded status requirement and certain
disclosure provisions of SFAS 158 were effective for
Woodward as of the end of fiscal 2007. Retrospective application
of SFAS 158 was not permitted. The initial incremental
recognition of the funded status under SFAS 158 that is
reflected upon adoption in the Accumulated Other Comprehensive
Income section of Consolidated Statements of Stockholders
Equity was an after tax decrease to equity of $980.
The impact of adopting the provisions of SFAS 158 on the
components of the Consolidated Balance Sheet as of
September 30, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment
|
|
|
|
|
|
|
Before Application
|
|
|
Increases/
|
|
|
After Application
|
|
|
|
of SFAS 158
|
|
|
(Decreases)
|
|
|
of SFAS 158
|
|
|
Retirement Pension Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
$
|
1,980
|
|
|
$
|
816
|
|
|
$
|
2,796
|
|
Total assets
|
|
|
1,980
|
|
|
|
816
|
|
|
|
2,796
|
|
Pension obligation
|
|
|
(4,674
|
)
|
|
|
(2,916
|
)
|
|
|
(7,590
|
)
|
Accumulated other comprehensive income, net of taxes
|
|
|
3,293
|
|
|
|
2,100
|
|
|
|
5,393
|
|
Total stockholders equity
|
|
|
3,293
|
|
|
|
2,100
|
|
|
|
5,393
|
|
Total liabilities and equity
|
|
|
(1,381
|
)
|
|
|
(816
|
)
|
|
|
(2,197
|
)
|
Retirement Healthcare Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
|
|
|
|
|
(687
|
)
|
|
|
(687
|
)
|
Pension obligation
|
|
|
(46,494
|
)
|
|
|
1,807
|
|
|
|
(44,687
|
)
|
Accumulated other comprehensive income, net of taxes
|
|
|
|
|
|
|
(1,120
|
)
|
|
|
(1,120
|
)
|
Total stockholders equity
|
|
|
|
|
|
|
(1,120
|
)
|
|
|
(1,120
|
)
|
|
|
A.
|
Defined
Contribution Plans
|
Substantially all U.S. employees are eligible to
participate in the U.S. defined contribution plan. Certain
foreign employees also are eligible to participate in foreign
plans.
The amount of expense associated with defined contribution plans
totaled $14,877 in fiscal 2008, $13,487 in fiscal 2007, and
$13,684 in fiscal 2006. The amount of contributions associated
with the multiemployer plan totaled $613 in fiscal 2008, $572 in
fiscal 2007, and $635 in fiscal 2006.
|
|
B.
|
Pension
benefits associated with defined benefit plans
|
Woodward has defined benefit plans which provide pension
benefits for certain retired employees in the U.S., the United
Kingdom, and Japan. Approximately 575 current employees may
receive future benefits under the plans. The defined benefit
plans in the U.S. were frozen in January 2007 and no
additional employees may participate in the U.S. plans and
no additional service costs will be incurred. A September 30
measurement date is utilized to value plan assets and
obligations for all of Woodwards defined benefit pension
plans.
70
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
Woodwards investment policies and strategies for plan
assets focus on maintaining diversified investment portfolios
that provide for growth while minimizing risk to principal. The
target allocation ranges for plan assets in the U.S. and in the
United Kingdom, which represented about 81% of total foreign
plan assets at September 30, 2008, are 50% for equity
securities and 50% for debt securities. The remaining foreign
plan assets are in Japan, and Woodwards investment manager
uses asset allocations that are customary in that country. The
expected long-term rates of return on plan assets were based on
Woodwards current asset allocations and the historical
long-term performance for each asset class, as adjusted for
existing market conditions.
Salary increase assumptions are based upon historical experience
and anticipated future management actions. In determining the
long-term rate of return on plan assets, Woodward assumes that
the historical long-term compound growth rates of equity and
fixed-income securities will predict the future returns of
similar investments in the plan portfolio. Investment management
and other fees paid out of the plan assets are factored into the
determination of asset return assumptions.
Net periodic benefit costs consists of the following components
reflected as expense in Woodwards Consolidated Statements
of Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
Other Countries
|
|
Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
945
|
|
|
$
|
1,294
|
|
|
$
|
1,360
|
|
Interest cost
|
|
|
1,122
|
|
|
|
1,034
|
|
|
|
1,142
|
|
|
|
2,814
|
|
|
|
2,554
|
|
|
|
2,200
|
|
Expected return on plan assets
|
|
|
(1,362
|
)
|
|
|
(1,317
|
)
|
|
|
(1,180
|
)
|
|
|
(3,005
|
)
|
|
|
(2,424
|
)
|
|
|
(1,998
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized transition obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99
|
|
|
|
89
|
|
|
|
91
|
|
Unrecognized losses
|
|
|
118
|
|
|
|
244
|
|
|
|
251
|
|
|
|
181
|
|
|
|
360
|
|
|
|
402
|
|
Recognized prior service cost (benefit)
|
|
|
(260
|
)
|
|
|
(259
|
)
|
|
|
1
|
|
|
|
(10
|
)
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Contractual termination benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
715
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost (benefit)
|
|
$
|
(382
|
)
|
|
$
|
(298
|
)
|
|
$
|
214
|
|
|
$
|
1,024
|
|
|
$
|
2,580
|
|
|
$
|
2,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
An amendment was made to one of Woodwards retirement
pension benefit plans in 2006 that modified the amount of
pension benefits payable to participants retiring after
January 1, 2007.
Contractual pension termination benefits were associated with
workforce reductions of members covered by one of
Woodwards retirement pension benefit plans. The workforce
reductions were related to the consolidation of manufacturing
operations that were initially accrued for in 2004. The expense
was recognized in the Engine Systems segment.
The amounts expected to be amortized from Accumulated Other
Comprehensive Income and reported as a component of net periodic
benefit cost during fiscal 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
Other Countries
|
|
|
Net transition obligation
|
|
$
|
|
|
|
$
|
(74
|
)
|
Prior service cost (benefit)
|
|
|
(260
|
)
|
|
|
7
|
|
Net actuarial losses (gains)
|
|
|
118
|
|
|
|
(124
|
)
|
71
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
The following table provides a reconciliation of the changes in
the projected benefit obligation and fair value of assets for
the retirement pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Year
|
|
United States
|
|
|
Other Countries
|
|
Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Changes in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
18,676
|
|
|
$
|
18,716
|
|
|
$
|
59,628
|
|
|
$
|
57,072
|
|
Service cost
|
|
|
|
|
|
|
|
|
|
|
945
|
|
|
|
1,294
|
|
Interest cost
|
|
|
1,122
|
|
|
|
1,034
|
|
|
|
2,814
|
|
|
|
2,554
|
|
Contribution by participants
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
122
|
|
Net actuarial gains
|
|
|
(1,299
|
)
|
|
|
(547
|
)
|
|
|
(8,989
|
)
|
|
|
(2,775
|
)
|
Foreign currency exchange rate changes
|
|
|
|
|
|
|
|
|
|
|
(3,798
|
)
|
|
|
3,958
|
|
Benefits paid
|
|
|
(543
|
)
|
|
|
(527
|
)
|
|
|
(3,384
|
)
|
|
|
(3,312
|
)
|
Curtailment gain
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
Contractual termination cost (benefits)
|
|
|
|
|
|
|
|
|
|
|
(1,630
|
)
|
|
|
715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
$
|
17,956
|
|
|
$
|
18,676
|
|
|
$
|
45,642
|
|
|
$
|
59,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
18,438
|
|
|
$
|
16,709
|
|
|
$
|
52,276
|
|
|
$
|
40,812
|
|
Actual return on plan assets
|
|
|
(2,549
|
)
|
|
|
2,256
|
|
|
|
(4,284
|
)
|
|
|
2,504
|
|
Foreign currency exchange rate changes
|
|
|
|
|
|
|
|
|
|
|
(3,794
|
)
|
|
|
3,431
|
|
Contributions by the company
|
|
|
|
|
|
|
|
|
|
|
2,582
|
|
|
|
8,719
|
|
Contributions by plan participants
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
122
|
|
Settlements
|
|
|
|
|
|
|
|
|
|
|
(1,631
|
)
|
|
|
|
|
Benefits paid
|
|
|
(543
|
)
|
|
|
(527
|
)
|
|
|
(3,384
|
)
|
|
|
(3,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
15,346
|
|
|
$
|
18,438
|
|
|
$
|
41,834
|
|
|
$
|
52,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of accrued obligation and total amounts
recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(2,610
|
)
|
|
$
|
(238
|
)
|
|
$
|
(3,808
|
)
|
|
$
|
(7,352
|
)
|
Unrecognized prior service cost (benefit)
|
|
|
(2,890
|
)
|
|
|
(3,149
|
)
|
|
|
37
|
|
|
|
(56
|
)
|
Unrecognized net losses (gains)
|
|
|
5,842
|
|
|
|
3,348
|
|
|
|
19
|
|
|
|
8,046
|
|
Unrecognized transition obligation
|
|
|
|
|
|
|
|
|
|
|
(145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts recognized
|
|
$
|
342
|
|
|
$
|
(39
|
)
|
|
$
|
(3,897
|
)
|
|
$
|
638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit liability
|
|
$
|
(2,610
|
)
|
|
$
|
(238
|
)
|
|
$
|
(3,808
|
)
|
|
$
|
(7,352
|
)
|
Deferred taxes
|
|
|
1,122
|
|
|
|
76
|
|
|
|
986
|
|
|
|
2,720
|
|
Accumulated other comprehensive income (loss)
|
|
|
1,830
|
|
|
|
123
|
|
|
|
(1,075
|
)
|
|
|
5,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts recognized
|
|
$
|
342
|
|
|
$
|
(39
|
)
|
|
$
|
(3,897
|
)
|
|
$
|
638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The underfunded status of the plans declined from $7,590 in
fiscal 2007 to $6,418 in fiscal 2008, primarily due to actuarial
gains resulting, in part, from the increase in the discount rate
and contributions made during the year.
Woodward makes periodic cash contributions to its defined
pension plans.
72
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
The accumulated benefit obligation is the present value of
pension benefits (whether vested or unvested) attributed to
employee service rendered before the measurement date and based
on employee service and compensation prior to that date. The
accumulated benefit obligation differs from the projected
benefit obligation in that it includes no assumption about
future compensation levels. The projected benefit obligation,
accumulated benefit obligation and fair value of plan assets for
pension plans with accumulated benefit obligations in excess of
plan assets were as follow, at or for the year ended September
30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
Other Countries
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Projected benefit obligation
|
|
$
|
(17,956
|
)
|
|
$
|
(18,676
|
)
|
|
$
|
(45,642
|
)
|
|
$
|
(59,628
|
)
|
Accumulated benefit obligation
|
|
|
(17,956
|
)
|
|
|
(18,676
|
)
|
|
|
(43,497
|
)
|
|
|
(56,097
|
)
|
Fair value of plan assets
|
|
|
15,346
|
|
|
|
18,438
|
|
|
|
41,834
|
|
|
|
52,276
|
|
The allocation of pension plan assets as of the respective
measurement dates is as follows at September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
Other Countries
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Equity securities
|
|
|
52
|
%
|
|
|
60
|
%
|
|
|
42
|
%
|
|
|
44
|
%
|
Debt securities
|
|
|
48
|
%
|
|
|
40
|
%
|
|
|
58
|
%
|
|
|
38
|
%
|
Insurance contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
%
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension assets at September 30, 2008 and 2007 do not
include any direct investment in Woodwards equity
securities.
Substantially all pension benefit payments are made from assets
of the pension plans. Using foreign exchange rates as of
September 30, 2008 and expected future service, it is
anticipated that the future benefit payments will be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Year Ending September 30,
|
|
United States
|
|
|
Countries
|
|
|
2009
|
|
$
|
604
|
|
|
$
|
2,823
|
|
2010
|
|
|
656
|
|
|
|
2,922
|
|
2011
|
|
|
737
|
|
|
|
3,155
|
|
2012
|
|
|
829
|
|
|
|
3,032
|
|
2013
|
|
|
922
|
|
|
|
3,228
|
|
2014 - 2018
|
|
|
6,240
|
|
|
|
17,043
|
|
Woodward expects its contributions for retirement pension
benefits will be $0 in the United States and $2,426 in other
countries in 2009.
|
|
C.
|
Retirement
healthcare benefit plans
|
Woodward has retirement healthcare benefit plans in the
U.S. and the United Kingdom that provides healthcare
benefits for approximately 1,100 retired employees and may
provide future benefits to approximately 140 active employees,
upon retirement. Benefits include the option to elect company
provided healthcare insurance benefits to age 65 and a
Medicare supplemental plan after age 65. The retirement
healthcare benefit plans were
73
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
frozen in January 2007 and no additional employees may
participate in the plans. A September 30 measurement date is
utilized to value plan assets and obligations for all of
Woodwards retirement healthcare benefit plans.
Net periodic benefit costs consists of the following components
reflected as expense in Woodwards Consolidated Statements
of Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
242
|
|
|
$
|
297
|
|
|
$
|
381
|
|
Interest cost
|
|
|
2,452
|
|
|
|
2,474
|
|
|
|
2,753
|
|
Recognized losses
|
|
|
192
|
|
|
|
259
|
|
|
|
1,198
|
|
Recognized prior service cost
|
|
|
(2,520
|
)
|
|
|
(2,520
|
)
|
|
|
(2,520
|
)
|
Cost of buyout events
|
|
|
|
|
|
|
(871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic cost (benefit)
|
|
$
|
366
|
|
|
$
|
(361
|
)
|
|
$
|
1,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2007, Woodward provided an option for certain
retirees to receive a cash settlement in lieu of future
payments. The expense related to retirees who accepted the offer
is included in the cost of buyout events.
As part of our retirement healthcare benefits, Woodward provides
a prescription drug benefit that is at least actuarially
equivalent to Medicare Part D. As a result, Woodward is
entitled to a federal subsidy that was introduced by the
Medicare Prescription Drug, Improvement, and Modernization Act
of 2003. Subsidies received are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Prescription drug benefits paid
|
|
$
|
3,180
|
|
|
$
|
2,318
|
|
|
$
|
2,336
|
|
Federal subsidy received
|
|
|
166
|
|
|
|
924
|
|
|
|
|
|
74
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
The following table provides a reconciliation of the changes in
the projected benefit obligation and fair value of assets for
the retirement healthcare benefits for the years ended September
30:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Changes in projected benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
44,687
|
|
|
$
|
51,557
|
|
Service cost
|
|
|
242
|
|
|
|
297
|
|
Interest cost
|
|
|
2,453
|
|
|
|
2,475
|
|
Contribution by participants
|
|
|
2,407
|
|
|
|
2,663
|
|
Net actuarial gain
|
|
|
(3,493
|
)
|
|
|
(5,896
|
)
|
Foreign currency exchange rate changes
|
|
|
(88
|
)
|
|
|
188
|
|
Benefits paid
|
|
|
(6,342
|
)
|
|
|
(5,237
|
)
|
Settlement gain
|
|
|
|
|
|
|
(2,284
|
)
|
Plan amendments
|
|
|
(2,531
|
)
|
|
|
|
|
Part D Medicare reimbursement
|
|
|
166
|
|
|
|
924
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
37,501
|
|
|
$
|
44,687
|
|
|
|
|
|
|
|
|
|
|
Changes in fair value of plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
|
|
|
$
|
|
|
Special termination benefit cost
|
|
|
|
|
|
|
(737
|
)
|
Contributions by the company
|
|
|
3,935
|
|
|
|
3,310
|
|
Contributions by plan participants
|
|
|
2,407
|
|
|
|
2,663
|
|
Benefits paid
|
|
|
(6,342
|
)
|
|
|
(5,236
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of accrued obligation and total amounts
recognized:
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(37,501
|
)
|
|
$
|
(44,687
|
)
|
Unrecognized prior service cost
|
|
|
(5,426
|
)
|
|
|
(5,418
|
)
|
Unrecognized net (gain) loss
|
|
|
(90
|
)
|
|
|
3,611
|
|
|
|
|
|
|
|
|
|
|
Net amounts recognized
|
|
$
|
(43,017
|
)
|
|
$
|
(46,494
|
)
|
|
|
|
|
|
|
|
|
|
Accrued benefit liability
|
|
$
|
(37,501
|
)
|
|
$
|
(44,687
|
)
|
Deferred taxes
|
|
|
(2,100
|
)
|
|
|
(687
|
)
|
Accumulated other comprehensive income
|
|
|
(3,416
|
)
|
|
|
(1,120
|
)
|
|
|
|
|
|
|
|
|
|
Net amounts recognized
|
|
$
|
(43,017
|
)
|
|
$
|
(46,494
|
)
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation is the present value of
healthcare benefits (whether vested or unvested) attributed to
employee service rendered before the measurement date and based
on employee service and compensation prior to that date. The
accumulated benefit obligation differs from the projected
benefit obligation in that it includes no assumption about
future compensation levels. The projected benefit obligation and
accumulated benefit obligation were as follows:
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2008
|
|
2007
|
|
Projected benefit obligation/Accumulated postretirement benefit
obligation
|
|
$
|
(37,501
|
)
|
|
$
|
(44,687
|
)
|
75
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
For retirement healthcare benefits, Woodward assumed net
healthcare cost trend rates of 8.0% in 2009, decreasing
gradually to 5.0% in 2011, and remaining at 5.0% thereafter. A
1.0% increase in assumed healthcare cost trend rates would have
increased the total of the service and interest cost components
by approximately $275 and increased the benefit obligation at
the end of the year by approximately $3,939 in 2008. Likewise, a
1.0% decrease in the assumed rates would have decreased the
total of service and interest cost components by $240 and
decreased the benefit obligation by approximately $3,411 in 2008.
Using foreign exchange rates as of September 30, 2008 and
expected future service, it is anticipated that the future
benefit payments will be as follows:
|
|
|
|
|
Year Ending September 30,
|
|
|
|
|
2009
|
|
$
|
2,756
|
|
2010
|
|
|
2,924
|
|
2011
|
|
|
3,012
|
|
2012
|
|
|
3,079
|
|
2013
|
|
|
3,137
|
|
2014 - 2018
|
|
|
16,216
|
|
Woodward expects its contributions for retirement healthcare
benefits will be approximately $2,783 in fiscal 2009, less
amounts received as federal subsidies expected to be $473.
Stock options are granted to key management members and
directors of the Company. These options are granted with an
exercise price equal to the market price of Woodwards
stock at the date of grant, and generally with a four-year
graded vesting schedule and a term of 10 years. Vesting
would be accelerated in the event of retirement, disability, or
death of a participant, or change in control of the Company, as
defined. Woodward recognizes stock compensation on a
straight-line basis over the requisite service period of the
entire award for options with graded vesting schedules. Stock
for exercised stock options is issued from treasury stock shares.
Provisions governing the stock option grants are included in the
2006 Omnibus Incentive Plan (the 2006 Plan) and the
2002 Stock Option Plan (the 2002 Plan). The 2006
Plan was approved by stockholders and became effective on
January 25, 2006. No further grants will be made under the
2002 Plan. The 2006 Plan made 7,410 stock 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, of which 6,222 were available for future
grants as of September 30, 2008.
The fair value of options granted during the fiscal years ended
September 30, 2008, 2007, and 2006 was estimated on the
date of grant using the Black-Scholes-Merton option-pricing
model with the following assumptions by grant year:
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
Expected term
|
|
7 years
|
|
7 years
|
|
7 years
|
Expected volatility
|
|
37.0%
|
|
37.0%
|
|
37.0%
|
Expected dividend yield
|
|
1.7%
|
|
1.7%
|
|
1.7%
|
Risk-free interest rate range used
|
|
3.73%
|
|
4.4% - 5.0%
|
|
4.5% - 4.6%
|
The risk-free interest rate was selected based on yields from
U.S. Treasury zero-coupon issues with a remaining term
equal to the expected term of the options being valued.
76
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
Changes in outstanding stock options were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Balance at September 30, 2005
|
|
|
5,998
|
|
|
$
|
6.98
|
|
Options granted
|
|
|
734
|
|
|
|
13.52
|
|
Options exercised
|
|
|
(920
|
)
|
|
|
5.16
|
|
Options forfeited
|
|
|
(4
|
)
|
|
|
7.81
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006
|
|
|
5,808
|
|
|
|
8.09
|
|
Options granted
|
|
|
774
|
|
|
|
18.78
|
|
Options exercised
|
|
|
(1,208
|
)
|
|
|
6.40
|
|
Options forfeited
|
|
|
(98
|
)
|
|
|
13.74
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2007
|
|
|
5,276
|
|
|
|
9.94
|
|
Options granted
|
|
|
446
|
|
|
|
32.74
|
|
Options exercised
|
|
|
(1,329
|
)
|
|
|
6.52
|
|
Options forfeited
|
|
|
(6
|
)
|
|
|
18.49
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
|
4,387
|
|
|
|
13.29
|
|
|
|
|
|
|
|
|
|
|
Changes in nonvested stock options during 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Balance at September 30, 2007
|
|
|
1,747
|
|
|
|
14.90
|
|
Options granted
|
|
|
446
|
|
|
|
32.74
|
|
Options vested
|
|
|
(748
|
)
|
|
|
13.45
|
|
Options forfeited
|
|
|
(6
|
)
|
|
|
18.49
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008
|
|
|
1,439
|
|
|
|
21.17
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008, there was $6,440 of unrecognized
compensation cost related to nonvested awards, which Woodward
expects to recognize over a weighted-average period of
1.2 years. Information about stock options that have
vested, or are expected to vest, and are exercisable at
September 30, 2008, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted-
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
Life
|
|
Aggregate
|
|
|
|
|
Exercise
|
|
in
|
|
Intrinsic
|
|
|
Number
|
|
Price
|
|
Years
|
|
Value
|
|
Options vested or expected to vest
|
|
|
3,694
|
|
|
$
|
12.04
|
|
|
|
5.0
|
|
|
$
|
85,807
|
|
Options exercisable
|
|
|
2,948
|
|
|
|
9.44
|
|
|
|
4.2
|
|
|
|
76,150
|
|
Stock-based expense recognized under SFAS 123(R) was as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2008
|
|
2007
|
|
2006
|
|
Employee stock-based compensation expense
|
|
$
|
4,588
|
|
|
$
|
3,849
|
|
|
$
|
2,942
|
|
The weighted-average grant date fair value of options granted
was $13.09 for 2008, $7.36 for 2007, and $5.22 for 2006.
77
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
Other information follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Total fair value of stock options vested
|
|
$
|
3,841
|
|
|
$
|
3,114
|
|
|
$
|
2,668
|
|
Total intrinsic value of options exercised
|
|
|
40,316
|
|
|
|
19,247
|
|
|
|
9,056
|
|
Cash received from exercises of stock options
|
|
|
5,216
|
|
|
|
5,875
|
|
|
|
4,139
|
|
Tax benefit realized from exercise of stock options
|
|
|
15,355
|
|
|
|
9,787
|
|
|
|
3,406
|
|
|
|
Note 16.
|
Accumulated
other comprehensive earnings
|
Accumulated other comprehensive earnings consisted of the
following items:
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
Accumulated foreign currency translation adjustments:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
27,614
|
|
|
$
|
17,100
|
|
Translation adjustments, net of reclassification to earnings
|
|
|
(6,135
|
)
|
|
|
16,874
|
|
Taxes associated with translation adjustments
|
|
|
2,064
|
|
|
|
(6,360
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
23,543
|
|
|
|
27,614
|
|
|
|
|
|
|
|
|
|
|
Accumulated unrealized derivative losses:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
(331
|
)
|
|
|
(484
|
)
|
Proceeds from cash flow hedge, net of taxes
|
|
|
67
|
|
|
|
|
|
Reclassification to interest expense
|
|
|
205
|
|
|
|
247
|
|
Taxes associated with interest reclassification
|
|
|
(78
|
)
|
|
|
(94
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
(137
|
)
|
|
|
(331
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated minimum post-retirement benefit liability
adjustments:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
(4,273
|
)
|
|
|
(3,997
|
)
|
Minimum benefit liability adjustment
|
|
|
3,125
|
|
|
|
3,789
|
|
Taxes associated with benefit adjustments
|
|
|
(1,939
|
)
|
|
|
(3,085
|
)
|
Implementation of SFAS 158, net of taxes
|
|
|
|
|
|
|
(980
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
(3,087
|
)
|
|
|
(4,273
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income
|
|
$
|
20,319
|
|
|
$
|
23,010
|
|
|
|
|
|
|
|
|
|
|
78
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
|
|
Note 17.
|
Commitments
and guarantees
|
Woodward has entered into operating leases for certain
facilities and equipment with terms in excess of one year under
agreements that expire at various dates. Some leases require the
payment of property taxes, insurance, and maintenance costs in
addition to rental payments. Future minimum rental payments
required under these leases are as follows:
|
|
|
|
|
Year Ending September 30,
|
|
|
|
|
2009
|
|
$
|
4,400
|
|
2010
|
|
|
3,800
|
|
2011
|
|
|
3,100
|
|
2012
|
|
|
2,900
|
|
2013
|
|
|
2,500
|
|
Thereafter
|
|
|
3,100
|
|
Rent expense for all operating leases totaled $6,503 in fiscal
2008, $5,524 in fiscal 2007, and $4,610 in fiscal 2006.
Woodward enters into unconditional purchase obligation
arrangements (i.e., issuance of purchase orders, obligations to
transfer funds in the future for fixed or minimum quantities of
goods or services at fixed or minimum prices, such as
take-or-pay contracts) in the normal course of
business to ensure that adequate levels of sourced product are
available to Woodward. Future minimum unconditional purchase
obligations are as follows:
|
|
|
|
|
Year Ending September 30,
|
|
|
|
2009
|
|
$
|
132,977
|
|
2010
|
|
|
2,222
|
|
Guarantees and letters of credit totaling approximately $8,200
were outstanding as of September 30, 2008, some of which
were secured by cash and cash equivalents at financial
institutions or by Woodward line of credit facilities.
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. The Company 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
management 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, management currently believes
the possible additional loss in the event of an unfavorable
resolution of each matter is less than $10.0 million in the
aggregate.
MPC Products Corporation (MPC), which was acquired
by Woodward on October 1, 2008, as described in
Note 22, Subsequent Events, is subject to an
investigation by the U.S. Department of Justice (the
DOJ) regarding certain of its pricing practices
prior to 2006 related to government contracts. MPC and the
U.S. Attorney for the Northern District of Illinois have
reached a settlement in principle and are in the process of
finalizing and obtaining approvals within the DOJ. Final
disposition will be subject to acceptance and approval by the
U.S. District Court. It is anticipated that any settlement
of the matter would involve the payment of monetary fines and
other amounts by MPC. MPC is also in the process of working with
the U.S. Department of Defense to resolve any
administrative matters that may arise out of the investigation.
There can be no assurance as to the resolution of these matters.
The purchase price for MPC reflects the amount agreed to in
principle by MPC with the U.S. Attorney. Any resulting
fines or other sanctions beyond this amount could have a
material negative impact on Woodward.
79
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
Woodward currently does not have any administrative or judicial
proceedings arising under any Federal, State, or local
provisions regulating the discharge of materials into the
environment or primarily for the purpose of protecting the
environment.
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.
|
|
Note 19.
|
Financial
instruments
|
The estimated fair values of Woodwards financial
instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Cash and cash equivalents
|
|
$
|
109,833
|
|
|
$
|
109,833
|
|
|
$
|
71,635
|
|
|
$
|
71,635
|
|
Investments in deferred compensation program
|
|
|
3,931
|
|
|
|
3,931
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
(4,031
|
)
|
|
|
(4,031
|
)
|
|
|
(5,496
|
)
|
|
|
(5,496
|
)
|
Long-term debt, including current portion
|
|
|
(44,836
|
)
|
|
|
(44,516
|
)
|
|
|
(60,473
|
)
|
|
|
(60,473
|
)
|
Obligations for deferred compensation program
|
|
|
(3,931
|
)
|
|
|
(3,931
|
)
|
|
|
|
|
|
|
|
|
The fair values of cash and cash equivalents and short-term
borrowings at variable interest rates are assumed to be equal to
their carrying amounts. Cash and cash equivalents have
short-term maturities and short-term borrowings have short-term
maturities and market interest rates.
Investments and obligations related to the deferred compensation
program used to provide deferred compensation benefits to
certain employees are assumed to be equal to their carrying
amounts since both the asset and the liability are marked to
market value each reporting period.
The fair value of long-term debt at fixed interest rates was
estimated based on a model that discounted future principal and
interest payments at interest rates available to the Company at
the end of the year for similar debt of the same maturity. The
weighted-average interest rates used to estimate the fair value
of long-term debt at fixed interest rates were 6.0% at
September 30, 2008, and 6.3% at September 30, 2007.
|
|
Note 20.
|
Segment
information:
|
During fiscal years 2008, 2007 and 2006, Woodward operated in
the following three business segments:
|
|
|
|
|
Turbine Systems
is focused on developing and
manufacturing systems and components that provide energy control
and optimization solutions for the aircraft and industrial gas
turbine markets.
|
|
|
|
Engine Systems
is focused on developing and manufacturing
systems and components that provide energy control and
optimization solutions for industrial markets, which includes
power generation, transportation, and process industries.
|
|
|
|
Electrical Power Systems
is focused on developing and
manufacturing 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 includes power generation, power
distribution, transportation, and process industries.
|
80
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
On October 1, 2008, Woodward completed the acquisition of
MPC and Techni-Core, Inc. (Techni-Core) which formed
the basis for its fourth business segment Airframe
Systems. Additional information about Airframe Systems and the
acquisition is included in Note 22, Subsequent
Events.
|
|
|
|
|
Airframe Systems
is focused is focused on developing and
manufacturing high-performance electromechanical motion control
systems, including sensors, primarily for aerospace applications.
|
The accounting policies of the segments are the same as those
described in Note 1, Operations and summary of
significant accounting policies. Intersegment sales and
transfers are made at established intersegment selling prices
generally intended to approximate selling prices to unrelated
parties. The determination of segment earnings does not reflect
allocations of certain corporate expenses, which are designated
as nonsegment expenses, and is before interest expense, interest
income, and income taxes.
Segment assets consist of accounts receivable, inventories,
property, plant, and equipment net, goodwill, and
other intangibles net.
Summarized financial information for Woodwards segments
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Segment net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Turbine Systems
|
|
|
|
|
|
|
|
|
|
|
|
|
External net sales
|
|
$
|
577,304
|
|
|
$
|
502,557
|
|
|
$
|
438,726
|
|
Intersegment sales
|
|
|
18,470
|
|
|
|
21,285
|
|
|
|
20,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net sales
|
|
|
595,774
|
|
|
|
523,842
|
|
|
|
458,923
|
|
Engine Systems
|
|
|
|
|
|
|
|
|
|
|
|
|
External net sales
|
|
|
458,177
|
|
|
|
414,076
|
|
|
|
390,619
|
|
Intersegment sales
|
|
|
41,141
|
|
|
|
41,124
|
|
|
|
39,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net sales
|
|
|
499,318
|
|
|
|
455,200
|
|
|
|
430,448
|
|
Electrical Power Systems
|
|
|
|
|
|
|
|
|
|
|
|
|
External net sales
|
|
|
222,723
|
|
|
|
125,704
|
|
|
|
25,170
|
|
Intersegment sales
|
|
|
66,571
|
|
|
|
55,662
|
|
|
|
51,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net sales
|
|
|
289,294
|
|
|
|
181,366
|
|
|
|
76,186
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
External net sales
|
|
|
1,258,204
|
|
|
|
1,042,337
|
|
|
|
854,515
|
|
Intersegment sales
|
|
|
126,182
|
|
|
|
118,071
|
|
|
|
111,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment net sales
|
|
$
|
1,384,386
|
|
|
$
|
1,160,408
|
|
|
$
|
965,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Turbine Systems
|
|
$
|
116,196
|
|
|
$
|
87,353
|
|
|
$
|
67,584
|
|
Engine Systems
|
|
|
56,471
|
|
|
|
56,984
|
|
|
|
40,829
|
|
Electrical Power Systems
|
|
|
42,303
|
|
|
|
20,294
|
|
|
|
4,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment earnings
|
|
|
214,970
|
|
|
|
164,631
|
|
|
|
112,888
|
|
Nonsegment expenses
|
|
|
(31,346
|
)
|
|
|
(31,720
|
)
|
|
|
(26,052
|
)
|
Interest expense and income, net
|
|
|
(1,714
|
)
|
|
|
(923
|
)
|
|
|
(2,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated earnings before income taxes
|
|
$
|
181,910
|
|
|
$
|
131,988
|
|
|
$
|
84,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
At or for the Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Segment assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Turbine Systems
|
|
$
|
371,275
|
|
|
$
|
330,969
|
|
|
$
|
317,688
|
|
Engine Systems
|
|
|
242,350
|
|
|
|
250,908
|
|
|
|
231,485
|
|
Electrical Power Systems
|
|
|
133,928
|
|
|
|
109,674
|
|
|
|
40,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment assets
|
|
|
747,553
|
|
|
|
691,551
|
|
|
|
589,845
|
|
Unallocated corporate property, plant and equipment, net
|
|
|
13,226
|
|
|
|
6,651
|
|
|
|
4,577
|
|
Other unallocated assets
|
|
|
166,238
|
|
|
|
131,565
|
|
|
|
141,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total assets
|
|
$
|
927,017
|
|
|
$
|
829,767
|
|
|
$
|
735,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Turbine Systems
|
|
$
|
14,586
|
|
|
$
|
12,133
|
|
|
$
|
14,764
|
|
Engine Systems
|
|
|
13,034
|
|
|
|
14,271
|
|
|
|
12,148
|
|
Electrical Power Systems
|
|
|
6,002
|
|
|
|
5,572
|
|
|
|
1,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment depreciation and amortization
|
|
|
33,622
|
|
|
|
31,976
|
|
|
|
28,367
|
|
Unallocated corporate amounts
|
|
|
1,828
|
|
|
|
948
|
|
|
|
650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated depreciation and amortization
|
|
$
|
35,450
|
|
|
$
|
32,924
|
|
|
$
|
29,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Turbine Systems
|
|
$
|
17,710
|
|
|
$
|
12,490
|
|
|
$
|
14,540
|
|
Engine Systems
|
|
|
14,817
|
|
|
|
13,164
|
|
|
|
14,098
|
|
Electrical Power Systems
|
|
|
4,531
|
|
|
|
5,124
|
|
|
|
2,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment capital expenditures
|
|
|
37,058
|
|
|
|
30,778
|
|
|
|
30,736
|
|
Unallocated corporate amounts
|
|
|
4,041
|
|
|
|
1,206
|
|
|
|
977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated capital expenditures
|
|
$
|
41,099
|
|
|
$
|
31,984
|
|
|
$
|
31,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two customers individually accounted for more than 10% of
consolidated net sales in each of the fiscal years 2006 through
2008. Sales to the first customer were made by all of
Woodwards segments and totaled approximately 17%, 20%, and
22% of sales during the years ended September 30, 2008,
2007, and 2006, respectively. Sales to the second customer were
made by all of Woodwards segments and totaled
approximately 10%, 10%, and 11% of sales during the years ended
September 30, 2008, 2007, and 2006, respectively.
One customer accounted for more than 10% of accounts receivable
as of September 30, 2008 and 2007. Accounts receivable from
this customer totaled approximately 20% and 21% of accounts
receivable at September 30, 2008 and 2007, respectively.
82
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
External net sales by geographical area, as determined by the
location of the customer invoiced, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30,
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
External net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
528,318
|
|
|
$
|
494,237
|
|
|
$
|
449,617
|
|
Europe
|
|
|
433,101
|
|
|
|
340,292
|
|
|
|
226,039
|
|
Asia
|
|
|
198,086
|
|
|
|
133,738
|
|
|
|
123,639
|
|
Other countries
|
|
|
98,699
|
|
|
|
74,070
|
|
|
|
55,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated external net sales
|
|
$
|
1,258,204
|
|
|
$
|
1,042,337
|
|
|
$
|
854,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment net by geographical
area, as determined by the physical location of the assets, were
as follows:
|
|
|
|
|
|
|
|
|
At September 30,
|
|
2008
|
|
|
2007
|
|
|
United States
|
|
$
|
108,897
|
|
|
$
|
100,336
|
|
Germany
|
|
|
37,427
|
|
|
|
36,544
|
|
Other countries
|
|
|
22,327
|
|
|
|
22,118
|
|
|
|
|
|
|
|
|
|
|
Consolidated total property, plant, and equipment, net
|
|
$
|
168,651
|
|
|
$
|
158,998
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 21.
|
Supplementary
financial data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Fiscal Quarters
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Net sales
|
|
$
|
272,063
|
|
|
$
|
305,753
|
|
|
$
|
329,847
|
|
|
$
|
350,541
|
|
Gross profit(1)
|
|
|
81,233
|
|
|
|
95,376
|
|
|
|
97,892
|
|
|
|
100,707
|
|
Earnings before income taxes
|
|
|
38,488
|
|
|
|
43,648
|
|
|
|
49,096
|
|
|
|
50,678
|
|
Net earnings
|
|
|
25,325
|
|
|
|
29,714
|
|
|
|
32,414
|
|
|
|
34,427
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.37
|
|
|
|
0.44
|
|
|
|
0.48
|
|
|
|
0.51
|
|
Diluted
|
|
|
0.36
|
|
|
|
0.43
|
|
|
|
0.47
|
|
|
|
0.50
|
|
Cash dividends per share
|
|
|
0.055
|
|
|
|
0.060
|
|
|
|
0.060
|
|
|
|
0.060
|
|
Common stock price per share(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
36.22
|
|
|
|
34.52
|
|
|
|
42.77
|
|
|
|
48.62
|
|
Low
|
|
|
29.69
|
|
|
|
24.50
|
|
|
|
26.27
|
|
|
|
33.00
|
|
Close
|
|
|
33.98
|
|
|
|
26.72
|
|
|
|
35.66
|
|
|
|
35.27
|
|
83
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Fiscal Quarters
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Net sales
|
|
$
|
226,248
|
|
|
$
|
256,298
|
|
|
$
|
269,026
|
|
|
$
|
290,765
|
|
Gross profit(1)
|
|
|
68,504
|
|
|
|
80,126
|
|
|
|
82,971
|
|
|
|
81,916
|
|
Earnings before income taxes
|
|
|
26,652
|
|
|
|
31,410
|
|
|
|
37,140
|
|
|
|
36,786
|
|
Net earnings(3)
|
|
|
17,887
|
|
|
|
20,262
|
|
|
|
23,974
|
|
|
|
36,034
|
|
Net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.26
|
|
|
|
0.30
|
|
|
|
0.35
|
|
|
|
0.53
|
|
Diluted
|
|
|
0.26
|
|
|
|
0.29
|
|
|
|
0.34
|
|
|
|
0.51
|
|
Cash dividends per share
|
|
|
0.050
|
|
|
|
0.055
|
|
|
|
0.055
|
|
|
|
0.055
|
|
Common stock price per share(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
20.47
|
|
|
|
22.55
|
|
|
|
29.50
|
|
|
|
33.14
|
|
Low
|
|
|
16.33
|
|
|
|
19.18
|
|
|
|
20.33
|
|
|
|
26.81
|
|
Close
|
|
|
19.86
|
|
|
|
20.59
|
|
|
|
26.84
|
|
|
|
31.20
|
|
Notes:
|
|
|
1.
|
|
Gross profit represents net sales less cost of goods sold.
|
|
2.
|
|
Per share amounts have been updated from amounts reported
prior to February 1, 2008, to reflect the effects of a
two-for-one stock split.
|
|
3.
|
|
Net earnings included net tax adjustments of $10,293 in the
fourth quarter of fiscal 2007. These adjustments included a
benefit of $13,286 from the favorable resolution of issues with
tax authorities and a charge of $2,993 for the adjustment of
deferred taxes as a result of a statutory tax rate change in
Germany.
|
|
|
Note 22.
|
Subsequent
Events
|
Term Loan Credit Agreement
On October 1,
2008, the Woodward entered into a Term Loan Credit Agreement
(the Term Loan Credit Agreement), by and among the
Company, the institutions from time to time parties thereto, as
lenders, and JPMorgan Chase Bank, National Association, as
administrative agent. The Term Loan Credit Agreement provides
for a $150.0 million unsecured term loan facility, and may
be expanded by up to $50.0 million of additional
indebtedness from time to time, subject to the Companys
compliance with certain conditions and the lenders
participation. The Term Loan Credit Agreement generally bears
interest at LIBOR plus 1.00% to 2.25%, requires quarterly
principal payments of $1,875 beginning in March 2009, and
matures in October 2013.
The Term Loan Credit Agreement contains customary terms and
conditions, including, among others, covenants that place limits
on the Companys ability to incur liens on assets, incur
additional debt (including a leverage or coverage based
maintenance test), transfer or sell the Companys assets,
merge or consolidate with other persons, make capital
expenditures, make certain investments, make certain restricted
payments, and enter into material transactions with affiliates.
The Term Loan Credit Agreement contains financial covenants
requiring that (a) the Companys ratio of consolidated
net debt to EBITDA not exceed 3.5 to 1.0 and (b) the
Company have a minimum consolidated net worth of $400,000 plus
50% of net income for any fiscal year and 50% of the net
proceeds of certain issuances of capital stock, in each case on
a rolling four quarter basis. The Term Loan Credit Agreement
also contains events of default customary for such financings,
the occurrence of which would permit the lenders to accelerate
the amounts due.
84
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
The Companys obligations under the Term Loan Credit
Agreement are guaranteed by Woodward FST, Inc., a wholly owned
subsidiary of the Company.
Note Purchase Agreement
Also on
October 1, 2008, Woodward entered into a Note Purchase
Agreement (the Note Purchase Agreement) relating to
the sale by Woodward of an aggregate principal amount of
$250.0 million comprised of (a) $100.0 million
aggregate principal amount of Series B Senior Notes due
October 1, 2013 (the Series B Notes),
(b) $50.0 million aggregate principal amount of
Series C Senior Notes due October 1, 2015 (the
Series C Notes) and
(c) $100.0 million aggregate principal amount of
Series D Senior Notes due October 1, 2018 (the
Series D Notes and, together with the
Series B Notes and Series C Notes, the
Notes) in a series of private placement
transactions. On October 1, 2008, $200.0 million
aggregate principal amount of Notes were sold, comprised of
$80.0 million aggregate principal amount of the
Series B Notes, $40.0 million aggregate principal
amount of the Series C Notes and $80.0 million
aggregate principal amount of the Series D Notes.
In connection with the Note Purchase Agreement, on
October 30, 2008, Woodward sold an additional
$50.0 million aggregate principal amount of Notes comprised
of (a) $20.0 million aggregate principal amount of
Series B Notes, (b) $10.0 million aggregate
principal amount of Series C Notes, and
(c) $20.0 million aggregate principal amount of
Series D Notes in another series of private placement
transactions.
The Notes issued in the private placements have not been
registered under the Securities Act of 1933 and may not be
offered or sold in the U.S. absent registration or an
applicable exemption from registration requirements.
The Series B Notes have a maturity date of October 1,
2013 and generally bear interest at a rate of 5.63% per annum.
The Series C Notes have a maturity date of October 1,
2015 and generally bear interest at a rate of 5.92% per annum.
The Series D Notes have a maturity date of October 1,
2018 and generally bear interest at a rate of 6.39% per annum.
Under certain circumstances, the interest rate on each series of
Notes is subject to increase if Woodwards leverage ratio
of consolidated net debt to consolidated EBITDA increases beyond
3.5 to 1.0. Interest on the Notes is payable semi-annually on
April 1 and October 1 of each year until all principal is paid.
Interest payments commence on April 1, 2009.
The obligations under the Note Purchase Agreement and the Notes
rank equal in right of payment with all of Woodwards other
unsecured unsubordinated debt, including its outstanding debt
under the Term Loan Credit Agreement.
The Note Purchase Agreement contains restrictive covenants
customary for such financings, including, among other things,
covenants that place limits on Woodwards ability to incur
liens on assets, incur additional debt (including a leverage or
coverage based maintenance test), transfer or sell its assets,
merge or consolidate with other persons, and enter into material
transactions with affiliates. The Note Purchase Agreement also
contains events of default customary for such financings, the
occurrence of which would permit the Purchasers of the Notes to
accelerate the amounts due.
The Note Purchase Agreement contains financial covenants
requiring that Woodwards (a) ratio of consolidated
net debt to consolidated EBITDA not exceed 4.0 to 1.0 during any
material acquisition period, or 3.5 to 1.0 at any other time on
a rolling four quarter basis, and (b) consolidated net
worth at any time equal or exceed $425.0 million plus 50%
of consolidated net earnings for each fiscal year beginning with
the fiscal year ending September 30, 2008. Additionally,
under the Note Purchase Agreement, Woodward may not permit the
aggregate amount of priority debt to at any time exceed 20% of
its consolidated net worth at the end of the then most recently
ended fiscal quarter.
Woodward is permitted at any time, at its option, to prepay all,
or from time to time to prepay any part of, the then outstanding
principal amount of any series of the Notes at 100% of the
principal amount of the series of Notes to be prepaid (but, in
the case of partial prepayment, not less than
$1.0 million), together with interest accrued on such
amount to be prepaid to the date of payment, plus any applicable
make-whole amount. The make-whole
85
WOODWARD
GOVERNOR COMPANY
Notes to
Consolidated Financial
Statements (Continued)
(amounts
in thousands, except per share)
amount is computed by discounting the remaining scheduled
payments of interest and principal of the Notes being prepaid at
a discount rate equal to the sum of 50 basis points and the
yield to maturity of U.S. treasury securities having a
maturity equal to the remaining average life of the Notes being
prepaid.
A portion of the proceeds from the issuances in connection with
Term Loan Purchase Agreement and the Note Purchase Agreement was
used to finance the MPC acquisition.
Required future principal payments of senior and term notes
outstanding at the end of 2008 and the $400,000 senior notes
issued in October 2008 are as follows:
|
|
|
|
|
Year Ending September 30,
|
|
|
|
|
2009
|
|
$
|
17,002
|
|
2010
|
|
|
18,697
|
|
2011
|
|
|
18,564
|
|
2012
|
|
|
18,378
|
|
2013
|
|
|
7,500
|
|
Thereafter
|
|
|
364,375
|
|
On October 1, 2008, Woodward acquired all of the
outstanding stock of Techni-Core and all of the outstanding
stock of MPC not held by Techni-Core for approximately
$383.0 million. The Company paid cash at closing of
approximately $334.7 million, a portion of which was used
by the Company to repay the outstanding debt of MPC in an
aggregate amount equal to approximately $18.6 million. MPC
is an industry leader in the manufacture of high-performance
electromechanical motion control systems primarily for aerospace
applications. The main product lines include high performance
electric motors and sensors, analog and digital control
electronics, rotary and linear actuation systems, and flight
deck and
fly-by-wire
systems for commercial and military aerospace programs. MPC will
form the basis of a fourth Woodward business segment, Airframe
Systems beginning in fiscal 2009. The cost of the acquisition
may increase or decrease based on the outcome of a purchase
price adjustment procedure customary to purchase agreements and
the final determination of the direct acquisition costs.
Woodward is in the process of finalizing valuations of property,
plant, and equipment, other intangibles, and estimates of
liabilities associated with the acquisition.
On October 6, 2008, Woodward acquired all of the
outstanding capital stock of MotoTron Corporation
(MotoTron) and the intellectual property assets
owned by its parent company, Brunswick Corporation, that are
used in connection with the MotoTron business for approximately
$17.0 million in cash, subject to certain adjustments.
MotoTron specializes in software tools and processes used to
rapidly develop control systems for marine, power generation,
industrial and other engine equipment applications. MotoTron is
expected to be integrated into the Engine Systems business
segment. The cost of this acquisition has not been finalized.
The cost of the acquisition may increase or decrease based on
the outcome of a purchase price adjustment procedure customary
to purchase agreements and the final determination of the direct
acquisition costs. Woodward is in the process of finalizing
valuations of property, plant, and equipment, other intangibles,
and estimates of liabilities associated with the acquisition.
86
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
On December 6, 2007, the Audit Committee of the Board of
Directors (the Audit Committee) recommended and
approved the dismissal of PricewaterhouseCoopers LLP
(PwC) as the Companys independent registered
public accounting firm. On that same day, the Audit Committee
appointed Deloitte & Touche, LLP
(Deloitte) as the Companys independent
registered public accounting firm. Details of the events were
filed under Item 4.01 of
Form 8-K
on December 11, 2007. There have been no disagreements or
any reportable events requiring disclosure under
Item 304(b) of
Regulation S-K.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We have established disclosure controls and procedures, as
defined in
Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the Exchange
Act), which are designed to ensure that information
required to be disclosed in reports filed or submitted under the
Exchange Act is recorded, processed, summarized, and reported,
within the time periods specified in the Securities and Exchange
Commissions 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 Exchange Act is
accumulated and communicated to management, including our
principal executive officer (Thomas A. Gendron, chief executive
officer and president) 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, our chief executive officer and president and
Robert F. Weber, Jr., our chief financial officer and
treasurer, evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by
this
Form 10-K.
Based on, and as of the date of, their evaluation, they
concluded that our disclosure controls and procedures were
effective.
Managements
Annual Report on Internal Control Over Financial
Reporting
We are responsible for establishing and maintaining adequate
internal control over financial reporting for the company. We
have evaluated the effectiveness of internal control over
financial reporting using the criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and, based on that evaluation, have concluded
that the companys internal control over financial
reporting was effective as of September 30, 2008, the end
of the companys most recent fiscal year.
Deloitte & Touche, LLP, an independent registered
public accounting firm, conducted an integrated audit of
Woodwards internal control over financial reporting as of
September 30, 2008, as stated in their report included in
Item 9a Controls and Procedures.
Internal control over financial reporting is a process designed
by, or under the supervision of, our principal executive and
principal financial officers, or persons performing similar
functions, and effected by our board of directors, management,
and other personnel, to provide reasonable assurance regarding
the reliability of our financial reporting and the preparation
of our financial statements for external purposes in accordance
with
87
generally accepted accounting principles. Internal control over
financial reporting includes those policies and procedures that:
|
|
|
|
|
Pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
|
|
|
|
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the Company are being made
only in accordance with authorization of management and
directors of the company; and
|
|
|
|
Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Companys assets that could have a material effect on the
financial statements.
|
Changes
in Internal Control Over Financial Reporting
There has been no change in our internal control over financial
reporting during the fourth fiscal quarter covered by this
Form 10-K
that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
88
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Woodward Governor Company
Fort Collins, Colorado
We have audited the internal control over financial reporting of
Woodward Governor Company and subsidiaries (the
Company) as of September 30, 2008, based on
criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Managements Annual Report on
Internal Control Over Financial Reporting. Our responsibility is
to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of September 30, 2008, based on the criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended September 30, 2008 of
the Company and our report dated November 19, 2008
expressed an unqualified opinion on those financial statements
and financial statement schedule and included an explanatory
paragraph regarding the Companys adoption of the Financial
Accounting Standards Boards Interpretation No. 48,
Accounting for Uncertainty in Income Taxes.
Deloitte & Touche, LLP
Denver, Colorado
November 19, 2008
89
|
|
Item 9B.
|
Other
Information
|
There is no information required to be disclosed in a report on
Form 8-K
during the fourth quarter of 2008 that was not reported on
Form 8-K.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this item relating to our directors
and nominees, regarding compliance with Section 16(a) of
the Securities Act of 1934, and regarding our Audit Committee is
included under the captions Board of Directors,
Board Meetings and Committees Audit
Committee (including information with respect to audit
committee financial experts), Stock Ownership of
Management, and Section 16(a) Beneficial
Ownership Reporting Compliance in our Proxy Statement
related to the 2008 Annual Meeting of Stockholders to be held
January 22, 2009 and is incorporated herein by reference.
The information required by this item relating to our executive
officers is included under the caption Executive Officers
of the Registrant in Item 1 of this report.
We have adopted a code of ethics that applies to our principal
executive officer and our principal financial and accounting
officer. This code of ethics is posted on our Website. The
Internet address for our Website is www.woodward.com, and the
code of ethics may be found from our main Web page by clicking
first on Investor Information and then on
Corporate Governance, and finally on Woodward
Codes of Business Conduct and Ethics.
We intend to satisfy any disclosure requirement under
Item 5.05 of
Form 8-K
regarding an amendment to, or waiver from, a provision of this
code of ethics by posting such information to our Website, at
the address and location specified above.
|
|
Item 11.
|
Executive
Compensation
|
Information regarding executive compensation is under the
captions Board Meetings and Committees
Director Compensation, Compensation Committee Report
on Compensation Discussion and Analysis,
Compensation Committee Interlocks and Insider
Participation, and Executive Compensation in
our Proxy Statement for the 2008 Annual Meeting of Stockholders
to be held January 22, 2009, and is incorporated herein by
reference, except the section captioned Compensation
Committee Report on Compensation Discussion and Analysis
is hereby furnished and not filed with
this annual report on
Form 10-K.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Information regarding security ownership of certain beneficial
owners and management and related stockholder matters is under
the tables captioned Stock Ownership of Management,
Persons Owning More than Five Percent of Woodward
Stock, and Executive Compensation Equity
Compensation Plan Information (as of September 30,
2008), in our Proxy Statement for the 2008 Annual Meeting
of Stockholders to be held January 22, 2009, and is
incorporated herein by reference.
90
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information set forth under Board Meetings and
Committees Related Person Transactions Policies and
Procedures, Board of Directors and Audit
Committee Report to Stockholders in our Proxy Statement
for the 2008 Annual Meeting of the Stockholders to be held
January 22, 2009 is incorporated herein by reference except
the section captioned Audit Committee Report is
hereby furnished and not filed with this
annual report on
Form 10-K.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
Information regarding principal accounting fees and services is
under the captions Audit Committee Report to
Stockholders Audit Committees Policy on
Pre-Approval of Services Provided by Independent Registered
Public Accounting Firm and Fees Paid to Deloitte and
Touche, LLP and PricewaterhouseCoopers LLP in our Proxy
Statement for the 2008 Annual Meeting of Stockholders to be held
January 22, 2009, and is incorporated herein by reference.
91
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) (1)
Consolidated Financial
Statements:
|
|
|
|
|
|
|
Page Number
|
|
|
in Form 10-K
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
45
|
|
Consolidated Statements of Earnings for the years ended
September 30, 2008, 2007, and 2006
|
|
|
47
|
|
Consolidated Balance Sheets at September 30, 2008 and 2007
|
|
|
48
|
|
Consolidated Statements of Cash Flows for the years ended
September 30, 2008, 2007, and 2006
|
|
|
49
|
|
Consolidated Statements of Stockholders Equity for the
years ended September 30, 2008, 2007, and 2006
|
|
|
50
|
|
Notes to Consolidated Financial Statements
|
|
|
52
|
|
(a) (2)
Consolidated Financial Statement
Schedules
|
|
|
|
|
Valuation and Qualifying Accounts
|
|
|
96
|
|
Financial statements and schedules other than those listed above
are omitted for the reason that they are not applicable, are not
required, or the information is included in the financial
statements or the footnotes.
(a) (3)
Exhibits Filed as Part
of This Report:
|
|
|
|
|
|
2
|
.1
|
|
Stock Purchase Agreement, dated August 19, 2008, by and
among Woodward Governor Company, MPC Products Corporation,
Techni-Core, Inc., The Successor Trustees of the Joseph M.
Roberti Revocable Trust dated December 29, 1992, Maribeth
Gentry, as Successor Trustee of the Vincent V. Roberti Revocable
Trust dated April 4, 1991 and the individuals and entities
named in Schedule I thereto filed as an Exhibit 10.1
to Current Report on
Form 8-K,
dated August 21, 2008 and incorporated herein by reference.
|
|
2
|
.2
|
|
Amendment No. 1, dated October 1, 2008, to the Stock Purchase
Agreement, dated August 19, 2008, by and among Woodward Governor
Company, MPC Products Corporation, Techni-Core, Inc., The
Successor Trustees of the Joseph M. Roberti Revocable Trust
dated December 29, 1992, Maribeth Gentry, as Successor Trustee
of the Vincent V. Roberti Revocable Trust dated April 4, 1991
and the individuals and entities named in Schedule I thereto,
filed as Exhibit 10.6 to Current Report on Form 8-K filed
October 7, 2008 and incorporated herein by reference.
|
|
3
|
(i)(a)
|
|
Restated Certificate of Incorporation, as amended
October 3, 2007, filed as an exhibit
|
|
3
|
(i)(b)
|
|
Restated Certificate of Incorporation, as amended
January 23, 2008, filed as an exhibit
|
|
3
|
(ii)
|
|
Amended and Restated Bylaws, filed as an Exhibit 3.1 to
Current Report on
Form 8-K,
dated January 29, 2008 and incorporated herein by reference
|
|
4
|
.1
|
|
Note Purchase Agreement dated October 15, 2001, filed as
Exhibit 4 to
Form 10-Q
for the three months ended December 31, 2001 and
incorporated herein by reference
|
|
10
|
.1
|
|
Long-Term Management Incentive Compensation Plan, filed as
Exhibit 10(c) to
Form 10-K
for the year ended September 30, 2000 and incorporated
herein by reference
|
|
10
|
.2
|
|
Annual Management Incentive Compensation Plan, filed as
Exhibit 10(d) to
Form 10-K
for the year ended September 30, 2000 and incorporated
herein by reference
|
|
10
|
.3
|
|
2002 Stock Option Plan, effective January 1, 2002 filed as
Exhibit 10 (iii) to
Form 10-Q
for the three months ended March 31, 2002 and incorporated
herein by reference
|
|
10
|
.4
|
|
Executive Benefit Plan (non-qualified deferred compensation
plan), filed as Exhibit 10(e) to
Form 10-K
for the year ended September 30, 2002 and incorporated
herein by reference
|
|
10
|
.5
|
|
Form of Outside Director Stock Purchase Agreement with James L.
Rulseh, filed as Exhibit 10(j) to
Form 10-K
for the year ended September 30, 2002 and incorporated
herein by reference
|
92
|
|
|
|
|
|
10
|
.6
|
|
Form of Transitional Compensation Agreement with Thomas A.
Gendron filed as Exhibit 10 to
Form 10-Q
for the three months ended December 31, 2002 and
incorporated herein by reference
|
|
10
|
.7
|
|
Summary of Non-Employee Director Meeting Fees and Compensation,
filed as an exhibit
|
|
10
|
.8
|
|
Material Definitive Agreement with Thomas A. Gendron, filed on
Form 8-K
filed August 1, 2005 and incorporated herein by reference
|
|
10
|
.9
|
|
Material Definitive Agreement with Robert F. Weber, Jr., filed
on
Form 8-K
filed August 24, 2005 and incorporated herein by reference
|
|
10
|
.10
|
|
2006 Omnibus Incentive Plan, effective January 25, 2006,
filed as Exhibit 4.1 to Registration Statement on
Form S-8
effective April 28, 2006 and incorporated herein by
reference
|
|
10
|
.11
|
|
Form of Transitional Compensation Agreement with Robert F.
Weber, Jr., dated August 22, 2005, filed as
exhibit 10.11 to
Form 10-K
for the year ended September 30, 2005 and incorporated
herein by reference
|
|
10
|
.12
|
|
Material Definitive Agreement with A. Christopher Fawzy, filed
as Exhibit 10.12 to
Form 10-Q
for the nine months ended June 30, 2007 and incorporated
herein by reference
|
|
10
|
.13
|
|
Amended Executive Benefit Plan, filed as Exhibit 10.13 to
Form 10-K
for the year ended September 30, 2007 and incorporated
herein by reference
|
|
10
|
.14
|
|
Form of Non-Qualified Stock Option Agreement filed as
Exhibit 99.2 to Current Report on
Form 8-K,
dated November 16, 2007 and incorporated herein by reference
|
|
10
|
.15
|
|
Second Amended and Restated Credit Agreement, filed as
Exhibit 99.1 to Current Report on
Form 8-K,
dated October 25, 2007 and incorporated herein by reference
|
|
10
|
.16
|
|
Summary of Executive Officer Compensation, filed as an exhibit
|
|
10
|
.17
|
|
Dennis Benning Post Retirement Relocation Agreement, filed as
Exhibit 10.17 to
Form 10-K
for the year ended September 30, 2007 and incorporated
herein by reference
|
|
10
|
.18
|
|
Dennis Benning Promotion Letter dated October 1, 2008,
filed as an exhibit
|
|
10
|
.19
|
|
Chad Preiss Promotion Letter dated October 1, 2008, filed
as an exhibit
|
|
10
|
.20
|
|
Term Loan Credit Agreement, dated October 1, 2008, by and among
Woodward Governor Company, the institutions from time to time
parties thereto as lenders and JPMorgan Chase Bank, National
Association, as administrative agent, filed as Exhibit 10.1 to
Current Report on Form 8-K filed October 7, 2008 and
incorporated herein by reference.
|
|
10
|
.21
|
|
Note Purchase Agreement, dated October 1, 2008, by and among
Woodward Governor Company and the purchasers named therein,
filed as Exhibit 10.2 to Current Report on Form 8-K filed
October 7, 2008 and incorporated herein by reference.
|
|
10
|
.22
|
|
Amendment No. 1, dated October 1, 2008, to the Note Purchase
Agreement, dated as of October 15, 2001 by and among Woodward
Governor Company and the purchasers named therein, filed as
Exhibit 10.3 to Current Report on Form 8-K filed October 7, 2008
and incorporated herein by reference.
|
|
10
|
.23
|
|
Amendment No. 2 and Consent, dated October 1, 2008, to the
Second Amended and Restated Credit Agreement, dated as of
October 25, 2007, by and among Woodward Governor Company,
certain foreign subsidiary borrowers of Woodward Governor
Company from time to time parties thereto, the institutions from
time to time parties thereto, as lenders, JPMorgan Chase Bank,
National Association, as administrative agent, Wachovia Bank
N.A. and Wells Fargo Bank N.A., as syndication agents, and
Deutsche Bank Securities Inc., as documentation agent, filed as
Exhibit 10.4 to Current Report on Form 8-K filed October 7, 2008
and incorporated herein by reference.
|
|
11
|
|
|
Statement on computation of earnings per share, included in
Note 5 of Notes to Consolidated Financial Statements
|
|
14
|
|
|
Code of Ethics filed as Exhibit 14 to
Form 10-K
for the year ended September 30, 2003 and incorporated
herein by reference
|
|
21
|
|
|
Subsidiaries, filed as an exhibit
|
|
23
|
(i)
|
|
Consent of current Independent Registered Public Accounting
Firm, filed as an exhibit
|
93
|
|
|
|
|
|
23
|
(ii)
|
|
Consent of prior Independent Registered Public Accounting Firm,
filed as an exhibit
|
|
31
|
(i)
|
|
Rule 13a-14(a)/15d-14(a)
certification of Thomas A. Gendron, filed as an exhibit
|
|
31
|
(ii)
|
|
Rule 13a-14(a)/15d-14(a)
certification of Robert F. Weber, Jr., filed as an exhibit
|
|
32
|
(i)
|
|
Section 1350 certifications, filed as an exhibit
|
94
SIGNATURES
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.
Woodward Governor
Company
Thomas A. Gendron
Chairman of the Board,
Chief Executive Officer, and President
(Principal Executive Officer)
Date: November 19, 2008
Robert F. Weber, Jr.
Chief Financial Officer, Treasurer
(Principal Financial and Accounting Officer)
Date: November 19, 2008
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/
John
D. Cohn
John
D. Cohn
|
|
Director
|
|
November 19, 2008
|
|
|
|
|
|
/s/
Paul
Donovan
Paul
Donovan
|
|
Director
|
|
November 19, 2008
|
|
|
|
|
|
/s/
Thomas
A. Gendron
Thomas
A. Gendron
|
|
Chairman of the Board
and Director
|
|
November 19, 2008
|
|
|
|
|
|
/s/
John
A. Halbrook
John
A. Halbrook
|
|
Director
|
|
November 19, 2008
|
|
|
|
|
|
/s/
Michael
H. Joyce
Michael
H. Joyce
|
|
Director
|
|
November 19, 2008
|
|
|
|
|
|
/s/
Mary
L. Petrovich
Mary
L. Petrovich
|
|
Director
|
|
November 19, 2008
|
|
|
|
|
|
/s/
Larry
E. Rittenberg
Larry
E. Rittenberg
|
|
Director
|
|
November 19, 2008
|
95
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/
James
R. Rulseh
James
R. Rulseh
|
|
Director
|
|
November 19, 2008
|
|
|
|
|
|
/s/
Dr. Ronald
Sega
Dr. Ronald
Sega
|
|
Director
|
|
November 19, 2008
|
|
|
|
|
|
/s/
Michael
T. Yonker
Michael
T. Yonker
|
|
Director
|
|
November 19, 2008
|
96
WOODWARD
GOVERNOR COMPANY AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING
ACCOUNTS
For the Years Ended September 30, 2008, 2007, and 2006
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column C
|
|
|
|
|
|
Column E
|
|
|
|
Column B
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged to
|
|
|
|
|
|
|
|
Column A
|
|
Beginning of
|
|
|
Costs and
|
|
|
Other
|
|
|
Column D
|
|
|
Balance at
|
|
Description
|
|
Year
|
|
|
Expenses
|
|
|
Accounts(a)
|
|
|
Deductions(b)
|
|
|
End of Year
|
|
|
Allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
1,886
|
|
|
$
|
415
|
|
|
$
|
71
|
|
|
$
|
(724
|
)
|
|
$
|
1,648
|
|
2007
|
|
|
2,213
|
|
|
|
167
|
|
|
|
(331
|
)
|
|
|
(163
|
)
|
|
|
1,886
|
|
2006
|
|
|
1,965
|
|
|
|
249
|
|
|
|
363
|
|
|
|
(364
|
)
|
|
|
2,213
|
|
Notes:
|
|
|
(a)
|
|
Includes recoveries of accounts previously written off.
|
|
|
|
(b)
|
|
Represents accounts written off and foreign currency translation
adjustments. Currency translation adjustments resulted in a
decrease in the reserve of $48 in fiscal 2008 and increases in
the reserve of $187 in fiscal 2007 and $43 in fiscal 2006.
|
97
EXHIBIT
INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1
|
|
Stock Purchase Agreement, dated August 19, 2008, by and
among Woodward Governor Company, MPC Products Corporation,
Techni-Core, Inc., The Successor Trustees of the Joseph M.
Roberti Revocable Trust dated December 29, 1992, Maribeth
Gentry, as Successor Trustee of the Vincent V. Roberti Revocable
Trust dated April 4, 1991 and the individuals and entities
named in Schedule I thereto filed as an Exhibit 10.1
to Current Report on
Form 8-K,
dated August 21, 2008 and incorporated herein by reference.
|
|
2
|
.2
|
|
Amendment No. 1, dated October 1, 2008, to the Stock
Purchase Agreement, dated August 19, 2008, by and among
Woodward Governor Company, MPC Products Corporation,
Techni-Core, Inc., The Successor Trustees of the Joseph M.
Roberti Revocable Trust dated December 29, 1992, Maribeth
Gentry, as Successor Trustee of the Vincent V. Roberti Revocable
Trust dated April 4, 1991 and the individuals and entities
named in Schedule I thereto, filed as Exhibit 10.6 to
Current Report on
Form 8-K
filed October 7, 2008 and incorporated herein by reference.
|
|
3
|
(i)(a)
|
|
Restated Certificate of Incorporation, as amended
October 3, 2007, filed as an exhibit
|
|
3
|
(i)(b)
|
|
Restated Certificate of Incorporation, as amended
January 23, 2008, filed as an exhibit
|
|
3
|
(ii)
|
|
Amended and Restated Bylaws, filed as an Exhibit 3.1 to
Current Report on
Form 8-K,
dated January 29, 2008 and incorporated herein by reference
|
|
4
|
.1
|
|
Note Purchase Agreement dated October 15, 2001, filed as
Exhibit 4 to
Form 10-Q
for the three months ended December 31, 2001 and
incorporated herein by reference
|
|
10
|
.1
|
|
Long-Term Management Incentive Compensation Plan, filed as
Exhibit 10(c) to
Form 10-K
for the year ended September 30, 2000 and incorporated
herein by reference
|
|
10
|
.2
|
|
Annual Management Incentive Compensation Plan, filed as
Exhibit 10(d) to
Form 10-K
for the year ended September 30, 2000 and incorporated
herein by reference
|
|
10
|
.3
|
|
2002 Stock Option Plan, effective January 1, 2002 filed as
Exhibit 10 (iii) to
Form 10-Q
for the three months ended March 31, 2002 and incorporated
herein by reference
|
|
10
|
.4
|
|
Executive Benefit Plan (non-qualified deferred compensation
plan), filed as Exhibit 10(e) to
Form 10-K
for the year ended September 30, 2002 and incorporated
herein by reference
|
|
10
|
.5
|
|
Form of Outside Director Stock Purchase Agreement with James L.
Rulseh, filed as Exhibit 10(j) to
Form 10-K
for the year ended September 30, 2002 and incorporated
herein by reference
|
|
10
|
.6
|
|
Form of Transitional Compensation Agreement with Thomas A.
Gendron filed as Exhibit 10 to
Form 10-Q
for the three months ended December 31, 2002 and
incorporated herein by reference
|
|
10
|
.7
|
|
Summary of Non-Employee Director Meeting Fees and Compensation,
filed as an exhibit
|
|
10
|
.8
|
|
Material Definitive Agreement with Thomas A. Gendron, filed on
Form 8-K
filed August 1, 2005 and incorporated herein by reference
|
|
10
|
.9
|
|
Material Definitive Agreement with Robert F. Weber, Jr., filed
on
Form 8-K
filed August 24, 2005 and incorporated herein by reference
|
|
10
|
.10
|
|
2006 Omnibus Incentive Plan, effective January 25, 2006,
filed as Exhibit 4.1 to Registration Statement on
Form S-8
effective April 28, 2006 and incorporated herein by
reference
|
|
10
|
.11
|
|
Form of Transitional Compensation Agreement with Robert F.
Weber, Jr., dated August 22, 2005, filed as
exhibit 10.11 to
Form 10-K
for the year ended September 30, 2005 and incorporated
herein by reference
|
|
10
|
.12
|
|
Material Definitive Agreement with A. Christopher Fawzy, filed
as Exhibit 10.12 to
Form 10-Q
for the nine months ended June 30, 2007 and incorporated
herein by reference
|
|
10
|
.13
|
|
Amended Executive Benefit Plan, filed as Exhibit 10.13 to
Form 10-K
for the year ended September 30, 2007 and incorporated
herein by reference
|
|
10
|
.14
|
|
Form of Non-Qualified Stock Option Agreement filed as
Exhibit 99.2 to Current Report on
Form 8-K,
dated November 16, 2007 and incorporated herein by reference
|
|
10
|
.15
|
|
Second Amended and Restated Credit Agreement, filed as
Exhibit 99.1 to Current Report on
Form 8-K,
dated October 25, 2007 and incorporated herein by reference
|
|
10
|
.16
|
|
Summary of Executive Officer Compensation, filed as an exhibit
|
|
10
|
.17
|
|
Dennis Benning Post Retirement Relocation Agreement, filed as
Exhibit 10.17 to
Form 10-K
for the year ended September 30, 2007 and incorporated
herein by reference
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.18
|
|
Dennis Benning Confirmation Letter dated October 1, 2008,
filed as an exhibit
|
|
10
|
.19
|
|
Chad Preiss Confirmation Letter dated October 1, 2008,
filed as an exhibit
|
|
10
|
.20
|
|
Term Loan Credit Agreement, dated October 1, 2008, by and
among Woodward Governor Company, the institutions from time to
time parties thereto as lenders and JPMorgan Chase Bank,
National Association, as administrative agent, filed as
Exhibit 10.1 to Current Report on
Form 8-K
filed October 7, 2008 and incorporated herein by reference
|
|
10
|
.21
|
|
Note Purchase Agreement, dated October 1, 2008, by and
among Woodward Governor Company and the purchasers named
therein, filed as Exhibit 10.2 to Current Report on
Form 8-K
filed October 7, 2008 and incorporated herein by reference
|
|
10
|
.22
|
|
Amendment No. 1, dated October 1, 2008, to the Note
Purchase Agreement, dated as of October 15, 2001 by and
among Woodward Governor Company and the purchasers named
therein, filed as Exhibit 10.3 to Current Report on
Form 8-K
filed October 7, 2008 and incorporated herein by reference
|
|
10
|
.23
|
|
Amendment No. 2 and Consent, dated October 1, 2008, to
the Second Amended and Restated Credit Agreement, dated as of
October 25, 2007, by and among Woodward Governor Company,
certain foreign subsidiary borrowers of Woodward Governor
Company from time to time parties thereto, the institutions from
time to time parties thereto, as lenders, JPMorgan Chase Bank,
National Association, as administrative agent, Wachovia Bank
N.A. and Wells Fargo Bank N.A., as syndication agents, and
Deutsche Bank Securities Inc., as documentation agent, filed as
Exhibit 10.4 to Current Report on
Form 8-K
filed October 7, 2008 and incorporated herein by reference
|
|
11
|
|
|
Statement on computation of earnings per share, included in
Note 5 of Notes to Consolidated Financial Statements
|
|
14
|
|
|
Code of Ethics filed as Exhibit 14 to
Form 10-K
for the year ended September 30, 2003 and incorporated
herein by reference
|
|
21
|
|
|
Subsidiaries, filed as an exhibit
|
|
23
|
(i)
|
|
Consent of current Independent Registered Public Accounting
Firm, filed as an exhibit
|
|
23
|
(ii)
|
|
Consent of prior Independent Registered Public Accounting Firm,
filed as an exhibit
|
|
31
|
(i)
|
|
Rule 13a-14(a)/15d-14(a)
certification of Thomas A. Gendron, filed as an exhibit
|
|
31
|
(ii)
|
|
Rule 13a-14(a)/15d-14(a)
certification of Robert F. Weber, Jr., filed as an exhibit
|
|
32
|
(i)
|
|
Section 1350 certifications, filed as an exhibit
|
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