UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Form 10-Q

 

 

 

Commission file number 0-8408

 

 

WOODWARD GOVERNOR COMPANY
(Exact name of registrant as specified in its charter)

 

 

 

 

1000 East Drake Road, Fort Collins, Colorado 80525

(Address of principal executive offices)

 

 

(970) 482-5811
(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

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

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

 

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

 

As of April 24, 2007, 34,296,594 shares of common stock with a par value of $.002917 cents per share were outstanding.

 

TABLE OF CONTENTS

 

WOODWARD GOVERNOR COMPANY

Consolidated Statements of Earnings

 

 

See accompanying Notes to Consolidated Financial Statements.

WOODWARD GOVERNOR COMPANY

 

Consolidated Statements of Earnings

 

 

See accompanying Notes to Consolidated Financial Statements.

WOODWARD GOVERNOR COMPANY

 

Consolidated Balance Sheets

 

 

See accompanying Notes to Consolidated Financial Statements.

WOODWARD GOVERNOR COMPANY

 

Consolidated Statements of Cash Flows

 

 

See accompanying Notes to Consolidated Financial Statements.

WOODWARD GOVERNOR COMPANY

 

Notes to Consolidated Financial Statements

 

(1)  Overview:

 

The consolidated balance sheet as of March 31, 2007, the consolidated statements of earnings for the three and six-month periods ended March 31, 2007 and 2006, and the consolidated statements of cash flows for the six-month periods ended March 31, 2007 and 2006, were prepared by the Company without audit. The September 30, 2006, consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Information in this 10-Q report is based in part on estimates and is subject to year-end adjustments and audit. In our opinion, we have made all adjustments necessary to present fairly the Company’s financial position as of March 31, 2007, the results of its operations for the three and six-month periods ended March 31, 2007 and 2006, and its cash flows for the six-month periods ended March 31, 2007 and 2006. All such adjustments were of a normal and recurring nature. The statements were prepared following the accounting policies described in the Company’s 2006 annual report on Form 10-K and should be read with the notes to the consolidated financial statements in the annual report. The consolidated statements of earnings for the three and six-month periods ended March 31, 2007 are not necessarily indicative of the results to be expected for other interim periods or for the full year.

 

(2)  Earnings per share:

 

 

The following stock options were outstanding during the three and six months ended March 31, 2007 and 2006, but were not included in the computation of diluted earnings per share because their inclusion would have been anti-dilutive:

 

 

(3)  Business acquisition:

 

On October 31, 2006, we acquired 100 percent of the stock of SEG Schaltanlagen-Elektronik-Geräte GmbH & Co. KG (SEG) and a related receivable from SEG that was held by one of the sellers. The acquisition provides us with technologies and products that complement our power generation system solutions. Headquartered in Kempen, Germany, SEG is focused on the design and manufacture of a wide range of protection and comprehensive control

 

WOODWARD GOVERNOR COMPANY

 

Notes to Consolidated Financial Statements — (Continued)

systems for power generation and distribution applications, power inverters for wind turbines, and complete electrical systems for gas and diesel engine based power stations.

 

The cost for the acquisition of SEG totaled $44,912,000, consisting of $34,594,000 of cash, and $10,318,000 of assumed debt obligations. Of this amount, $12,474,000 was recognized as intangibles. However, the cost of the acquisition and the related allocation of the acquisition cost are subject to change. The cost of the acquisition may increase or decrease based on the final determination of the direct acquisition costs. Also, we are in the process of finalizing valuations of property, plant, and equipment, other intangibles, and estimates of liabilities associated with the acquisition. We currently expect to finalize the cost of the acquisition and the related allocation of the acquisition cost before the end of the fiscal year.

 

The results of SEG’s operations are included in our consolidated statements of earnings from the beginning of November 2006. If we had completed the acquisition on October 1, 2005, our net sales and net earnings for the three and six months ended March 31, 2007 and 2006 would not have been materially different from amounts reported in the statements of consolidated earnings.

 

(4)  Income taxes:

 

Income taxes for the six months ended March 31, 2007 includes an expense reduction of $1,177,000 related to the retroactive extension of the U.S. research and experimentation tax credit. This expense reduction relates to the estimated amount of the credit applicable to the period January 1, 2006 through September 30, 2006.

 

(5)  Inventories:

 

 

(6)  Property, plant, and equipment:

 

 

WOODWARD GOVERNOR COMPANY

 

Notes to Consolidated Financial Statements — (Continued)

 

(7)  Goodwill:

 

 

WOODWARD GOVERNOR COMPANY

 

Notes to Consolidated Financial Statements — (Continued)

(8)  Other intangibles — net:

 

 

Amortization expense associated with intangibles is expected to be approximately $7,800,000 for 2007, $7,100,000 for 2008, $6,700,000 for 2009, $6,200,000 for 2010, and $6,500,000 for 2011.

 

WOODWARD GOVERNOR COMPANY

 

Notes to Consolidated Financial Statements — (Continued)

 

(9)  Accrued liabilities:

 

 

Provisions of our sales agreements include product warranties customary to such agreements. We establish accruals for specifically identified warranty issues that are probable to result in future costs. We also accrue for warranty costs on a non-specific basis whenever past experience indicates a normal and predictable pattern exists. A reconciliation of accrued product warranties from September 30, 2006, to March 31, 2007, follows:

 

 

 

 

WOODWARD GOVERNOR COMPANY

 

Notes to Consolidated Financial Statements — (Continued)

 

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

 

 

 

WOODWARD GOVERNOR COMPANY

 

Notes to Consolidated Financial Statements — (Continued)

 

Both the contractual termination benefits cost and the settlement gains reflected in the tables above were recognized in the Industrial Controls segment. The contractual termination benefits reflect an increase in our pension obligations for certain participants as a result of workforce management actions. The settlement gains reflect settlements with certain participants that relieved us of obligations for future retirement healthcare payments.

 

We are entitled to a federal subsidy under the Medicare Prescription Drug, Improvement and Modernization Act of 2003. We received a subsidy of $130,000 for the three months and $563,000 for the six months ended March 31, 2007. We currently expect to receive an additional $260,000 during the year ending September 30, 2007. We paid prescription drug benefits of $506,000 during the three months and $1,184,000 during the six months ended March 31, 2007. We expect to pay additional prescription drug benefits of approximately $1,570,000 for the year ending September 30, 2007.

 

WOODWARD GOVERNOR COMPANY

 

Notes to Consolidated Financial Statements — (Continued)

 

Accumulated other comprehensive earnings, which totaled $16,857,000 at March 31, 2007, consisted of the following items:

 

 

 

 

 

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 accrue for individual matters that we believe are likely to result in a loss when ultimately resolved using estimates of the most likely amount of loss, including $9,500,000 accrued for a specific matter. The majority of this $9,500,000 was accrued during fiscal 2006. There are also individual matters that we believe the likelihood of a loss when ultimately resolved is less than likely but more than remote, which were not accrued. While it is possible that there could be additional losses that have not been

 

WOODWARD GOVERNOR COMPANY

 

Notes to Consolidated Financial Statements — (Continued)

accrued, we currently believe the possible additional loss in the event of an unfavorable resolution of each matter is less than $10,000,000 in the aggregate.

 

Among the legal proceedings referred to in the preceding paragraph, we were a defendant in a class action lawsuit filed in the U.S. District Court for Northern District of Illinois regarding alleged discrimination on the basis of race, national origin, and gender in our Winnebago County, Illinois, facilities. On April 17, 2007, a U.S. District Court Judge granted final approval of a Consent Decree that included a $5,000,000 settlement of the class action and EEOC matters. Accruals for the amount of the settlement and related legal expenses were included in our consolidated balance sheet at March 31, 2007. Also, cash balances that were restricted for settlements and legal expenses have been reported as other current assets at March 31, 2007.

 

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

 

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

 

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

 

 

 

The difference between total segment earnings and the consolidated earnings before income tax follows:

 

 

WOODWARD GOVERNOR COMPANY

 

Notes to Consolidated Financial Statements — (Continued)

Segment assets were as follows:

 

 

 

On April 30, 2007, the Company was notified of an adverse arbitration ruling on a matter that was initiated by the Company and outstanding since 2002. As a result of the ruling, the Company has incurred a loss of approximately $4 million, which included expenses related to the arbitration finding. After variable compensation impacts and appropriate tax effects, the after-tax impact is a reduction in previously reported net earnings of approximately $1.8 million or $0.05 per diluted share. These items have been included in the financial statements as of March 31, 2007 and for the three and six months ended March 31, 2007.

 

We prepared the following discussion and analysis to help you better understand our financial condition, changes in our financial condition, and results of operations. This discussion should be read with the consolidated financial statements.

 

Overview

 

Woodward designs, manufactures, and services energy control systems and components for aircraft and industrial engines and turbines and electronic control systems for both power generation and distribution. Leading OEMs throughout the world use our products and services in the aerospace, power generation, transportation and process industry markets.

 

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

 

We have two operating segments — Industrial Controls and Aircraft Engine Systems. Industrial Controls is focused on systems and components that provide energy control and optimization solutions for industrial markets, which includes power generation, transportation, and process industries. Aircraft Engine Systems is focused on systems and components that provide energy control and optimization solutions for the aerospace market. We use segment information internally to assess the performance of each segment and to make decisions on the allocation of resources.

 

Industrial Controls’ segment earnings for the second quarter increased to 13.1% of sales from 9.9% of sales a year ago. Industrial Controls’ segment earnings for the first half increased to 13.0% of sales from 9.6% of sales a year ago. The earnings improvement reflected the effects of the higher sales volume, leverage of fixed costs and expenses over the higher sales, and reductions in certain expenses due to actions taken over the last two years, including the consolidation of various manufacturing facilities.

 

Aircraft Engine Systems’ second quarter earnings increased to 24.1% of sales from 20.9% from the second quarter a year ago. Aircraft Engine Systems’ first half earnings increased to 23.2% of sales from 20.8% from the second quarter a year ago. This improvement is attributable to broad based strength in the industry as a whole, and in particular an increase in aftermarket sales.

 

Our first half results this year also included the effect of the retroactive extension of the U.S. research and experimentation tax credit, which improved net earnings by $1.2 million, or $0.03 per diluted share.

 

At March 31, 2007, our total assets were $787 million, including $38 million in cash and cash equivalents, and our total debt was $69 million. 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 policies and market risks, our results of operations and financial condition, and the effects of recent accounting pronouncements. However, you should be aware that this discussion contains statements intended to be considered forward-looking statements and therefore entitled to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. Information about forward-looking statements, including important factors that could affect our business, results of operations and/or financial condition, are referred to in “Part II — Item 1A — Risk Factors.”

 

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 operations, and require us to make difficult, subjective, or complex judgments. Critical accounting policies normally result from the need to make estimates about the effect of matters that are inherently uncertain. Management has discussed the

development and selection of our critical accounting policies with the audit committee of 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’s discussion and analysis section in our annual report on Form 10-K for the year ended September 30, 2006.

 

Market Risks

 

Our long-term debt is sensitive to changes in interest rates. Also, assets, liabilities, and commitments that are to be settled in cash and are denominated in foreign currencies for transaction purposes are sensitive to changes in currency exchange rates. These market risks are discussed more fully in the management’s discussion and analysis section in our annual report on Form 10-K for the year ended September 30, 2006.

 

Results of Operations

 

Sales

 

 

Industrial Controls’ external net sales increased in the three and six months ended March 31, 2007, over the same periods a year ago. This year’s sales include the external net sales of a business acquisition. The remaining increase primarily reflects higher sales in the power generation and marine markets.

 

Aircraft Engine Systems’ external net sales increased in the three and six months ended March 31, 2007, over the same periods a year ago. The increase was related to higher production levels of aircraft engines by our customers to support the requirements of Boeing, Airbus, and other airframe manufacturers. In addition, aircraft usage has increased which has positively affected our aftermarket sales.

 

Costs and Expenses

 

 

Cost of goods sold increased in both the three months and six months ended March 31, 2007, as compared to the same periods last year, primarily due to an increase in sales volume and a slight increase in variable compensation, offset by fixed cost leverage.

 

Gross margins (as measured by external net sales less external cost of goods sold) increased to 31% for the three and six months ended March 31, 2007 from 27% for the three and six months ended March 31, 2006.

Sales, general, and administrative expenses increased in both the three months and six months ended March 31, 2007, as compared to the same periods last year. The increase is primarily due to inclusion of the operating results of a business acquisition and higher professional fees and costs associated with business development activities.

 

Research and development costs increased in both the three months and six months ended March 31, 2007, as compared to the same periods last year, reflecting higher levels of development activity and the operating results our business acquisition.

 

In Industrial Controls, we are working closely with our customers early in their own development and design stages, helping them by developing components and integrated systems that allow them to meet emissions requirements, increase fuel efficiency, and lower their costs. We also continue to develop products for the turbine auxiliary and diesel particulate filter after-treatment burner system markets. These markets offer multiple opportunities to leverage our energy control and optimization solutions.

 

Aircraft Engine Systems is developing new aircraft gas turbine programs for both commercial and military aircraft. Most significantly we are developing components and an integrated fuel system for the new GEnx turbofan engine for the Boeing 787, Airbus A350, and Boeing 747-8, and components for the GE Rolls-Royce F136 and Pratt & Whitney F135 engines that are the two propulsion choices to power Lockheed’s Joint Strike Fighter aircraft, and components for the T700-GE-701D engine that will be used to upgrade the Sikorsky Black Hawk and Boeing Apache helicopters, among others.

 

Earnings

 

 

Industrial Controls’ segment earnings increased in both the three months and six months ended March 31, 2007, as compared to the same periods last year due to the following:

 

 

The earnings improvement reflected the effects of the higher sales volume, leverage of fixed costs and expenses over the higher sales, margin improvement initiatives and reductions in certain expenses due to actions taken over the last two years, including the continued consolidation of various manufacturing facilities.

 

Industrial Controls’ segment earnings also included the results of our business acquisition, discussed below. The operating expenses of the acquired business reflected above are for selling, general, and administrative expenses and research and development costs.

 

On October 31, 2006, we acquired 100 percent of the stock of SEG Schaltanlagen-Elektronik-Geräte GmbH & Co. KG (SEG) and a related receivable from SEG that was held by one of the sellers. The acquisition provides us with technologies and products that complement our power generation system solutions. Headquartered in Kempen, Germany, SEG is focused on the design and manufacture of 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.

 

The cost for the acquisition of SEG totaled $45 million, consisting of $35 million of cash and $10 million of assumed debt obligations. Of this amount, $12 million was recognized as intangibles. However, the cost of the acquisition and the related allocation of the acquisition cost are subject to change. The cost of the acquisition may increase or decrease based on the final determination of the direct acquisition costs. Also, we are in the process of finalizing valuations of property, plant, and equipment, other intangibles, and estimates of liabilities associated with the acquisition. We currently expect to finalize the cost of the acquisition and the related allocation of the acquisition cost before the end of the fiscal year.

 

Aircraft Engine Systems’ segment earnings increased in the three and six months ended March 31, 2007 as compared to the same periods last year. This improvement is attributable to broad based strength in the industry as a whole, in particular an increase in aftermarket sales.

 

Nonsegment expenses decreased in the three months ended March 31, 2007, as compared to the same period a year ago as a result of lower professional fees. Expense for the six months ended March 31, 2007 approximated those for the same period in 2006.

 

Income taxes were provided at an effective rate on earnings before income taxes of 35.5% and 34.3% for the three and six months ended March 31, 2007, respectively, compared to 33.2% and 34.2% for the three and six months ended March 31, 2006, respectively.

 

During the six months ended March 31, 2007, the U.S. research and experimentation tax credit was extended and made retroactive to January 1, 2006. As a result, we reflected the effect of the extension in our first quarter this year, which reduced our income tax expense by $1.2 million. This relates to the amount of the credit attributable to the period January 1, 2006 through September 30, 2006.

 

Among other changes in our effective tax rate are the effects of changes in the relative mix of earnings by tax jurisdiction, which affect the comparison of foreign and state income tax rates relative to the United States federal statutory rate.

 

Financial Condition

 

Assets

 

 

Industrial Controls’ segment assets increased in the six months ended March 31, 2007, primarily as a result of the business acquisition.

 

Aircraft Engine Systems’ segment assets increased in the six months ended March 31, 2007, primarily due to increases in accounts receivable due to higher revenues.

 

Nonsegment assets decreased in the six months ended March 31, 2007, primarily because of decreases in cash and cash equivalents. Changes in cash are discussed more fully in a separate section of this management’s discussion and analysis.

 

Other Balance Sheet Measures

 

 

Working capital (current assets less current liabilities) for the six months ended March 31, 2007 approximated working capital at September 30, 2006.

 

Long-term debt, less current portion decreased in the six months ended March 31, 2007, as a result of payments made during the period. We currently have a revolving line of credit facility with a syndicate of U.S. banks totaling $100 million, with an option to increase the amount of the line to $175 million if we choose. The line of credit facility expires on March 11, 2010. In addition, we have other line of credit facilities, which totaled $17.7 million at September 30, 2006, that are generally reviewed annually for renewal. The total amount of borrowings under all facilities was $5.8 million and $0.5 million at March 31, 2007 and September 30, 2006, respectively.

 

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

 

Commitments and contingencies at March 31, 2007, include various matters arising from the normal course of business. We are currently involved in pending or threatened litigation or other legal proceedings regarding employment, product liability, and contractual matters arising from the normal course of business. We accrue for individual matters that we believe are likely to result in a loss when ultimately resolved using estimates of the most likely amount of loss, including $9,500,000 accrued for a specific matter. The majority of this $9,500,000 was accrued during fiscal 2006. There are also individual matters that we believe the likelihood of a loss when ultimately resolved is less than likely but more than remote, which were not accrued. While it is possible that there could be additional losses that have not been accrued, we currently believe the possible additional loss in the event of an unfavorable resolution of each matter is less than $10,000,000 in the aggregate.

 

Among the legal proceedings referred to in the preceding paragraph, we were a defendant in a class action lawsuit filed in the U.S. District Court for Northern District of Illinois regarding alleged discrimination on the basis of race, national origin, and gender in our Winnebago County, Illinois, facilities. On April 17, 2007, a U.S. District Court Judge granted final approval of a Consent Decree that included a $5,000,000 settlement of the class action and EEOC matters. Accruals for the amount of the settlement and related legal expenses were included in our consolidated balance sheet at March 31, 2007. Also, cash balances that were restricted for settlements and legal expenses have been reported as other current assets at March 31, 2007.

 

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

 

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

 

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

 

Shareholders’ equity increased in the six months ended March 31, 2007. Increases due to net earnings, sales of treasury stock, stock compensation expense, and excess tax benefits from stock compensation during the six months were partially offset by cash dividend payments and purchases of treasury stock.

 

On July 25, 2006, the Board of Directors authorized the repurchase of up to $50 million of our outstanding shares of common stock on the open market and private transactions over a three-year period that will end on July 25, 2009. Through March 31, 2007 we purchased $6.9 million of our common stock under this authorization.

 

Subsequent Event

 

On April 30, 2007, the Company was notified of an adverse arbitration ruling on a matter that was initiated by the Company and outstanding since 2002. As a result of the ruling, the Company has incurred a loss of approximately $4 million, which included expenses related to the arbitration finding. After variable compensation impacts and appropriate tax effects, the after-tax impact is a reduction in previously reported net earnings of approximately $1.8 million or $0.05 per diluted share. These items have been included in the financial statements as of March 31, 2007 and for the three and six months ended March 31, 2007.

 

Contractual Obligations

 

We have various contractual obligations, including obligations related to long-term debt, operating leases, purchases, retirement pensions, and retirement healthcare. These contractual obligations are summarized and discussed more fully in the management’s discussion and analysis in our 2006 annual report on Form 10-K for the year ended September 30, 2006.

 

Cash Flows

 

 

Net cash flows provided by operating activities increased by $4.3 million in the six months ended March 31, 2007, as compared to the same period a year ago primarily due to an increase in Net Earnings, partially offset by a cash settlement of the class action and EEOC Matter referred to earlier.

 

Net cash flows used in investing activities increased by $35.1 million in the six months ended March 31, 2007, compared to the same period a year ago primarily as a result of a business acquisition.

 

Net cash flows used in financing activities increased by $8.6 million in the six months ended March 31, 2007, as compared to the same period a year ago primarily as a result of increased purchases of treasury stock and payments on our borrowing under the revolving lines of credit.

 

Payments of our senior notes, which totaled $53.6 million at March 31, 2007, are due over the 2008 — 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 11, 2010. 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 February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value, with the objective of improving financial reporting by mitigating volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The provisions of FAS 159 are effective for the Company’s fiscal year beginning October 1, 2008. The Company is currently evaluating the impact that the adoption of this statement will have on the Company’s consolidated financial position, results of operations and disclosures.

In September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measurements” (“FAS 157”). FAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurement. The provisions of FAS 157 are effective for the Company’s fiscal year beginning October 1, 2008. The Company is currently evaluating the impact that the adoption of this statement will have on the Company’s consolidated financial position, results of operations and disclosures.

 

Our long-term debt is sensitive to changes in interest rates. Also, assets, liabilities and commitments that are to be settled in cash and are denominated in foreign currencies are sensitive to changes in currency exchange rates. These market risks are discussed more fully in the management’s discussion and analysis in our 2006 annual report on Form 10-K for the year ended September 30, 2006.

 

We have established disclosure controls and procedures, which are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Act is accumulated and communicated to management, including our principal executive officer (Thomas A. Gendron, president and chief executive officer) and principal financial officer (Robert F. Weber, Jr., chief financial officer and treasurer), as appropriate to allow timely decisions regarding required disclosures.

 

Thomas A. Gendron, our president and chief executive officer, 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-Q. Based on their evaluation, they concluded that our disclosure controls and procedures were effective in achieving the objectives for which they were designed as described in the preceding paragraph.

 

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

 

 

 

Investment in our securities involves risk. An investor or potential investor should consider the risks summarized in “Item 1A. — Risk Factors” in our annual report on Form 10-K for the year ended September 30, 2006, when making investment decisions regarding our securities.

 

Also, an investor should be aware that this quarterly report contains statements intended to be considered forward-looking statements and therefore entitled to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including:

 

 

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,” “forecast,” “intend,” “outlook,” “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 statements 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 include, but are not limited to, the factors that are listed and discussed in “Item 1A. — Risk Factors” in our annual report on Form 10-K for the year ended September 30, 2006.