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| WGOV > SEC Filings for WGOV > Form 10-Q on 3-Feb-2004 | All Recent SEC Filings |
3-Feb-2004
Quarterly Report
We prepared the following discussion and analysis to help you better understand factors that may affect our future results, our critical accounting policies and market risks, our results of operations and financial condition, and the effects of recent accounting pronouncements. This discussion should be read with the consolidated financial statements.
Factors That May Affect Future Results
This Form 10-Q contains forward-looking statements, including:
• Projections of sales, earnings, cash flows, or other financial items;
• Descriptions of our plans and objectives for future operations;
• Forecasts of future economic performance; and
• Descriptions of assumptions underlying the above items.
Forward-looking statements do not reflect historical facts. Rather, they are statements about future events and conditions and often include words such as "anticipate," "believe," "estimate," "expect," "intend," "plan," "project," "target," "can," "could," "may," "should," "will," "would" or similar expressions. Such statements reflect our expectations about the future only as of the date they are made. We are not obligated to, and we might not, update our forward-looking statements to reflect changes that occur after the date they are made. Furthermore, actual results could differ materially from projections or any other forward-looking statement regardless of when they are made.
Important factors that could individually, or together with one or more other factors, affect our business, results of operations and/or financial condition are discussed more fully in the Management Discussion and Analysis on page 16 of our 2003 annual report to shareholders, which was filed with our Form 10-K for the year ended September 30, 2003.
Critical Accounting Policies
We consider the accounting policies used in preparing our financial statements to be critical accounting policies when they are both important to the portrayal of our financial condition and results of operation, and require us to make difficult, subjective, or complex judgments. Critical accounting policies normally result from the need to make estimates about the effect of matters that are inherently uncertain. Management has discussed the development and selection of our critical accounting policies with the audit committee of the company's Board of Directors. In each of the areas that were identified as critical accounting policies, our judgments, estimates, and assumptions are impacted by conditions that change over time. As a result, in the future there could be changes in our assets and liabilities, increases or decreases in our expenses, and additional losses or gains that are material to our financial condition and results of operations. Our critical accounting policies are discussed more fully in the Management Discussion and Analysis on pages 17-18 of our 2003 annual report to shareholders, which was filed with our Form 10-K for the year ended September 30, 2003.
Market Risks
Our long-term debt and interest rate swap agreements are sensitive to changes in interest rates. Also, assets, liabilities, and commitments that are to be settled in cash and are denominated in foreign currencies for transaction purposes are sensitive to changes in currency exchange rates. These market risks are discussed more fully in the Management Discussion and Analysis on page 19 of our 2003 annual report to shareholders, which was filed with our Form 10-K for the year ended September 30, 2003.
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Results of Operations
Our results of operations are discussed and analyzed by segment. We have two operating segments — Industrial Controls and Aircraft Engine Systems. Industrial Controls provides energy control systems and components primarily to OEMs (original equipment manufacturers) of industrial engines, turbines, and other power equipment. Aircraft Engine Systems provides energy control systems and components primarily to OEMs of aircraft turbines.
We use segment earnings internally to assess the performance of each segment and to make decisions on the allocation of resources. Total segment earnings do not reflect all expenses of the company. Nonsegment expenses, including income taxes, are separately discussed and analyzed.
Three Months
Ended
December 31,
---------------------
2003 2002
-------- --------
(In thousands)
Industrial Controls
External net sales $ 96,819 $ 78,529
Segment earnings 4,591 1,670
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External net sales of Industrial Controls increased in this year's first quarter as compared to the first quarter last year. Businesses acquired in the third and fourth fiscal quarters last year accounted for $12.2 million of the year-over-year increase. Most of the remaining increase was attributable to the effect of changes in foreign currency exchange rates.
Industrial Controls' segment earnings increased in this year's first quarter as compared to the first quarter last year. This increase was the result of higher sales and improved segment earnings margins. Also, in last year's first quarter, we incurred approximately $0.6 million for workforce management activities.
The improvement in the segment earnings margin was driven by cost reduction efforts in fiscal year 2003, including reductions in our workforce. Over the course of the full fiscal year, Industrial Controls' reduced its workforce by 172 positions, of which $2.1 million remained accrued at the end of the year. In this year's first quarter, we incurred an additional $0.2 million of expense associated with stay bonuses and made payments totaling $0.4 million. At December 31, 2003, our remaining accrual was $2.0 million, including the effects of foreign currency rate fluctuations. We expect all terminations to be completed by the end of March 2004 and all associated payments to be completed by the end of September 2004.
Three Months
Ended
December 31,
---------------------
2003 2002
-------- --------
(In thousands)
Aircraft Engine Systems
External net sales $ 62,154 $ 66,296
Segment earnings 11,421 12,831
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External net sales of Aircraft Engine Systems decreased in this year's first quarter as compared to the first quarter last year, reflecting continued weakness in the commercial aviation industry. However, military business remained strong and commercial aftermarket sales remained fairly stable.
Aircraft Engine Systems' segment earnings decreased in this year's first quarter as compared to the first quarter last year. Last year's first quarter results included $2.3 million of costs related to the consolidation of Aircraft Engine Systems' servovalve operations. This year's first quarter earnings were affected by lower sales and a less favorable sales mix as compared to the first quarter a year ago, reflecting normal variability in sales.
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The resulting decrease in margin was partially offset by cost reductions associated with the servovalve operations consolidation.
Three Months
Ended
December 31,
-------------------
2003 2002
------- -------
(In thousands)
Nonsegment Expenses
Interest expense $ 1,244 $ 1,194
Interest income (573 ) (109 )
Nonsegment expenses 3,320 3,312
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Interest income increased in this year's first quarter as compared to the same quarter last year as a result of interest received in connection with an income tax refund.
Three Months
Ended
December 31,
-------------------------
2003 2002
----------- --------
(In thousands except
per share amounts)
Consolidated Earnings
Earnings before income taxes $ 12,021 $ 10,104
Income taxes 4,628 3,839
----------- --------
Net earnings $ 7,393 $ 6,265
----------- --------
Earnings before income taxes and net earnings increased in this year's first quarter as compared to the same quarter last year. Income taxes were provided at an effective rate on earnings before income taxes of 38.5% in this year's first quarter compared to 38.0% in the first quarter last year. Our effective rate for the full fiscal year 2003 was 38.1%.
Outlook: While we believe the weakness in the commercial aviation industry will continue through the end of 2004 and into 2005, many of our customers have expressed favorable sentiments about future demands in our industrial markets. Nevertheless, until actual orders begin to validate these indications, it is too early to be more specific than our previous guidance that earnings for fiscal 2004 will exceed those of 2003. Actual earnings will be influenced by the timing and slope of the recoveries in our power generation, commercial aviation, and other global markets.
Financial Condition
Our discussion and analysis of financial condition is presented by segment for assets. We also separately discuss and analyze other balance sheet measures and cash flows. Together, this discussion and analysis will help you assess our liquidity and capital resources, as well as understand changes in our financial condition.
At At
December 31, September 30,
2003 2003
-------------- ---------------
(In thousands)
Assets
Segment assets:
Industrial Controls $ 342,088 $ 336,654
Aircraft Engine Systems 209,483 217,685
Nonsegment assets 74,234 61,660
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Total assets $ 625,805 $ 615,999
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Industrial Controls' segment assets increased in the first quarter, primarily as a result of fluctuations in foreign currency exchange rates. Aside from the foreign currency translation effects, an increase in inventories, due to normal variability in production schedules, was largely offset by decreases in accounts receivable. The reduction in accounts receivable was attributed to lower sales near the end of the first quarter because of holiday-related work schedules.
Aircraft Engine Systems' segment assets decreased in the first quarter primarily as a result of lower accounts receivable, attributed to lower sales near the end of the first quarter because of the holiday-related work schedules.
Nonsegment assets increased in the first quarter primarily as a result of an increase in cash and cash equivalents attributable to normal operating activities.
At At
December 31, September 30,
2003 2003
-------------- ---------------
(In thousands)
Other Balance Sheet Measures
Working capital $ 165,629 $ 151,262
Long-term debt, less current portion 89,743 89,970
Other liabilities 58,989 57,215
Commitments and contingencies
Shareholders' equity 368,623 360,804
-------------- ---------------
Working capital increased in the first quarter, primarily as a result of an increase in cash and cash equivalents attributable to normal operating activities.
Required future principal payments of long-term debt and commitments under operating leases were as follows:
2005/ 2007/
In thousands for the year(s) ended September 30, 2004 2006 2008 Thereafter
------------------------------------------------ ------- -------- -------- ------------
Long-term debt $ — $ 15,197 $ 28,600 $ 42,858
Operating leases 3,194 4,171 2,769 4,189
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We currently have a revolving line of credit facility with a syndicate of U.S. banks totaling $100 million, with an option to increase the amount of the line to $175 million if we desire. The line of credit facility expires on March 14, 2006. In addition, we have other lines of credit facilities, which totaled $30.6 million at September 30, 2003, that are generally reviewed annually for renewal.
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, a maximum consolidated debt to EBITDA, and a minimum EBIT to consolidated interest expense ratio, as defined in the agreements. We were in compliance with all covenants at December 31, 2003.
Other liabilities increased in the first quarter primarily as a result of changes in net accrued retirement healthcare benefits and retirement pension benefits. Our expenses associated with these plans totaled $9.0 million and our contributions totaled $6.5 million in 2003.
We are currently involved in pending or threatened litigation regarding employment, environmental, and product liability matters, and arbitration proceedings regarding contractual matters arising from the normal course of business. We have accrued approximately $500 at December 31, 2003, in accrued expenses for these matters, which represent our estimate of the most likely amount of losses that we believe will be incurred. We also file income tax returns in various jurisdictions worldwide, which are subject to audit. Our income taxes
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receivable/ payable include our estimate of the most likely amount of expenses that we believe will result from income tax audit adjustments. In the event of a change in control of the company, we may be required to pay termination benefits to certain executive officers. It is our opinion, after consultation with legal counsel, that additional liabilities, if any, resulting from these matters are not expected to have a material adverse effect on our financial condition, although such matters could have a material effect on our quarterly or annual operating results and cash flows when resolved in a future period.
Shareholders' equity increased in the first quarter. Increases due to net earnings and favorable foreign currency translation adjustments were partially offset by cash dividend payments.
On November 9, 2002, our Board of Directors authorized the repurchase of up to $20 million of our common stock from time to time in open market and private transactions over the two years following the authorization. Through December 31, 2003, we purchased $9.5 million of our common stock.
Three Months Ended
December 31,
-----------------------
2003 2002
--------- ---------
(In thousands)
Cash Flows
Net cash provided by operating activities $ 25,446 $ 12,005
Net cash used in investing activities (4,034 ) (2,780 )
Net cash used in financing activities (4,107 ) (11,192 )
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Net cash flows provided by operations increased in this year's first quarter compared to the first quarter last year. Both operating cash receipts and disbursements increased over the prior year's first quarter due to higher sales volume. However, cash collected from customers increased at a greater rate than cash paid to employees and other suppliers, reflecting normal variations in collection and payment patterns, as well as increased earnings. Other factors contributing to the change include higher cash receipts of income tax refunds and interest income, which were partially offset by higher cash payments for interest expense and income taxes.
Net cash flows used for investing activities increased in this year's first quarter compared to the first quarter last year because of higher levels of capital expenditures. For the full fiscal year last year, capital expenditures were $18.8 million.
Net cash flows for financing activities decreased in this year's first quarter compared to the first quarter last year. This decrease is primarily related to the purchase of $6.7 million of treasury stock in last year's first quarter. These stock purchases were made in connection with a November 19, 2002, authorization by the Board of Directors to repurchase up to $20 million of our common stock from time to time in open market and private transactions over the two years following the authorization. Dividends were higher in this year's first quarter, reflecting dividend per share payment rates of $0.2400 in this year's first quarter and $0.2325 in last year's first quarter.
Outlook: 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. Payments of our $75 million of senior notes are not due until the 2006-2012 timeframe. Also, we have a $100 million line of credit facility that includes an option to increase the amount of the line up to $175 million that does not expire until March 14, 2006. Despite these factors, it is possible business acquisitions could be made in the future that would require amendments to existing debt agreements and the need to obtain additional financing.
Recent Accounting Pronouncements
In December 2003, the Financial Accounting Standards Board issued a revised Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The revised Statement requires additional disclosures to those in the original Statement No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The interim-period disclosure requirements of the revised Statement are effective
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beginning this quarter, and our disclosures may be found in the notes to the consolidated financial statements. The remaining disclosure requirements of the revised Statement are effective for our year ending September 30, 2004.
In January 2004, the Financial Accounting Standards Board issued FASB Staff Position 106-1, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003." The Act introduced a prescription drug benefit and federal subsidy to sponsors of retiree healthcare benefit plans. The Staff Position permits a plan sponsor to make a one-time election to defer recognition of the effects of the Act in accounting for its retiree healthcare benefit plans until authoritative guidance on accounting for subsidies provided by the Act is issued. The next measurement date for our retirement healthcare benefits plan is September 30, 2004.
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