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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[x]Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 29, 2002
[ ]Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number 1-3985
EDO CORPORATION
(Exact name of registrant as specified in its charter)
New York No. 11-0707740
(State or other jurisdiction (I.R.S. Employee
of incorporation or organization) Identification No.)
60 East 42nd Street, Suite 5010, New York, NY 10165
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 716-2000
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
requirement for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Outstanding at June 29, 2002
- ------------------------------------- ---------------------------------
Common shares, par value $1 per share 19,681,150
Page 2
EDO CORPORATION
INDEX
Page No.
Face Sheet 1
Index 2
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - 3
June 29, 2002 and
December 31, 2001
Consolidated Statements of Earnings - 4
Three Months Ended
June 29, 2002 and
June 30, 2001
Consolidated Statement of Earnings 5
Six Months Ended
June 29, 2002 and
June 30, 2001
Consolidated Statements of Cash Flows - 6
Six Months Ended
June 29, 2002 and
June 30, 2001
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis 12-17
of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosure 17
About Market Risk
Part II Other Information
Item 4. Submission of Matters to a Vote of 17
Security Holders
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
Exhibit Index 20
Page 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EDO Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
June 29, 2002 Dec. 31, 2001
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 178,020 $ 57,841
Marketable securities 192 190
Accounts receivable, less allowances 89,321 83,407
Inventories 22,685 22,937
Deferred income tax asset, net 3,018 3,018
Prepayments and other 2,710 2,346
--------- ---------
Total current assets 295,946 169,739
Property, plant and equipment, net 59,745 62,255
Notes receivable 2,809 2,910
Cost in excess of fair value of net
assets acquired 20,601 22,874
Deferred income tax asset, net 3,343 2,553
Other assets 33,272 25,299
--------- ---------
$ 415,716 $ 285,630
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 41,688 $ 47,397
Contract advances and deposits 9,394 16,702
Current portion of note payable 463 463
--------- ---------
Total current liabilities 51,545 64,562
Long-term debt 137,800 --
Postretirement benefits obligations 45,057 44,675
Environmental obligation 1,888 1,895
Shareholders' equity:
Common shares, par value $1 per share, authorized
50,000,000 shares, issued 19,790,477 in 2002
and 2001 19,790 19,790
Additional paid-in capital 145,763 143,747
Retained earnings 49,245 47,744
Accumulated other comprehensive loss,
net of income tax benefit (13,385) (13,385)
--------- ---------
201,413 197,896
Less: Treasury shares at cost
(109,327 shares in 2002 and
182,459 shares in 2001) (1,531) (2,461)
Unearned ESOP shares (19,167) (19,792)
Deferred compensation under
Long-Term Incentive Plan (696) (300)
Management group receivable (593) (845)
--------- ---------
Total shareholders' equity 179,426 174,498
--------- ---------
$ 415,716 $ 285,630
========= =========
See accompanying Notes to Consolidated Financial Statements.
Page 4
EDO Corporation and Subsidiaries
Consolidated Statements of Earnings
(in thousands, except per share amounts)
For the three months ended
June 29, 2002 June 30, 2001
(unaudited)
Net sales $ 73,719 $ 66,776
Costs and expenses
Cost of sales 56,139 49,858
Selling, general and administrative 8,619 8,477
Research and development 2,096 2,190
Merger-related costs -- 772
-------- --------
66,854 61,297
-------- --------
Operating earnings 6,865 5,479
Non-operating income (expense)
Interest income 564 268
Interest expense (2,079) (734)
Other, net (47) 62
-------- --------
(1,562) (404)
-------- --------
Earnings before income taxes 5,303 5,075
Income tax expense (2,229) (1,980)
-------- --------
Net earnings available for common shares 3,074 3,095
======== ========
Earnings per common share:
Basic $ 0.18 $ 0.25
======== ========
Diluted $ 0.18 $ 0.24
======== ========
Pro forma amounts assuming retroactive
effect of change in accounting principle:
Net earnings -- $ 3,229
Basic net earnings per common share -- $ 0.26
Diluted net earnings per common share -- $ 0.25
Weighted average common shares outstanding:
Basic 17,057 12,370
======== ========
Diluted 17,386 13,824
======== ========
See accompanying Notes to Consolidated Financial Statements.
Page 5
EDO Corporation and Subsidiaries
Consolidated Statements of Earnings
(in thousands, except per share amounts)
For the six months ended
June 29, 2002 June 30, 2001
(unaudited)
Net sales $ 140,628 $ 126,927
Costs and expenses
Cost of sales 106,846 94,768
Selling, general and administrative 18,341 16,285
Research and development 3,861 3,982
Merger-related costs -- 1,318
--------- ---------
129,048 116,353
--------- ---------
Operating earnings 11,580 10,574
Non-operating income (expense)
Interest income 772 587
Interest expense (2,125) (1,627)
Other, net 6 199
--------- ---------
(1,347) (841)
--------- ---------
Earnings before income taxes and
cumulative effect of change in
accounting principle 10,233 9,733
Income tax expense (4,349) (3,795)
--------- ---------
Net earnings before cumulative effect
of change in accounting principle 5,884 5,938
Cumulative effect of change in accounting
principle, net of tax (3,363) --
Dividends on preferred shares -- (194)
--------- ---------
Net earnings available for common shares $ 2,521 $ 5,744
========= =========
Earnings (loss) per common share:
Basic:
Net earnings before cumulative effect
of change in accounting principle $ 0.35 $ 0.48
Cumulative effect of change in
accounting principle, net of tax (0.20) --
--------- ---------
Net earnings $ 0.15 $ 0.48
========= =========
Diluted:
Net earnings before cumulative effect
of change in accounting principle $ 0.34 $ 0.46
Cumulative effect of change in
accounting principle, net of tax (0.19) --
--------- ---------
Net earnings $ 0.15 $ 0.46
========= =========
Pro forma amounts assuming retroactive effect
of change in accounting principle:
Net earnings -- $ 6,055
Basic net earnings per common share -- $ 0.51
Diluted net earnings per common share -- $ 0.49
Weighted average common shares outstanding:
Basic 17,015 11,905
========= =========
Diluted 17,343 12,433
========= =========
See accompanying Notes to Consolidated Financial Statements.
Page 6
EDO Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
For the six months ended
June 29, 2002 June 30, 2001
(unaudited)
Operating activities:
Net earnings $ 2,521 $ 5,938
Adjustments to earnings from operations
to arrive at cash (used) provided
by operations:
Depreciation 4,750 4,876
Amortization 120 556
Bad debt expense -- 18
Gain on repurchase of debentures -- (171)
Loss (gain) on sale of property, plant and
equipment 6 (56)
Gain on sale of marketable securities -- (81)
Deferred compensation expense 85 121
ESOP compensation expense 2,315 1,115
Non-cash compensation expense -- 278
Dividends on unallocated ESOP shares 159 --
Common shares issued for directors' fees 96 87
Income tax benefit from stock options 413 799
Real estate tax assessment adjustment -- 7,846
Cumulative effect of change in
accounting principle 3,363 --
Changes in:
Accounts receivable (5,914) (6,114)
Inventories 252 (1,704)
Prepayments and other assets (3,412) (1,892)
Accounts payable and accrued liabilities (5,463) (421)
Contract advances and deposits (7,308) (11,035)
--------- ---------
Cash (used) provided by operations (8,017) 160
Investing activities:
Deposit for acquisition of Condor Systems, Inc (7,000) --
Payments received on notes receivable 174 173
Purchase of plant and equipment (2,247) (6,797)
Proceeds from sale of plant and equipment 1 226
Purchase of marketable securities (2) (56)
Sale or redemption of marketable securities -- 14,454
--------- ---------
Cash (used) provided by investing activities (9,074) 8,000
Financing activities:
Proceeds from exercise of stock options 397 1,584
Proceeds from management group receivables 252 376
Issuance of convertible subordinated notes 137,800 --
Repayments of long-term debt -- (1,900)
Repurchase of debentures -- (3,184)
Purchase of treasury shares -- (1,021)
Payment of common share cash dividends (1,179) (887)
Payment of preferred share cash dividends -- (194)
--------- ---------
Cash provided (used) by financing activities 137,270 (5,226)
Net increase in cash and cash equivalents 120,179 2,934
Cash and cash equivalents at beginning of year 57,841 2,208
--------- ---------
Cash and cash equivalents at end of period $ 178,020 $ 5,142
========= =========
Supplemental disclosures:
Cash paid for: Interest $ -- $ 1,431
Income taxes $ 7,830 $ 4,770
See accompanying Notes to Consolidated Financial Statements.
Page 7
Notes to Consolidated Financial Statements
Unaudited Consolidated Financial Statements
The accompanying unaudited, consolidated financial statements have been
prepared in accordance with instructions to Form 10-Q and, therefore, do not
include all information and footnotes normally included in consolidated
financial statements prepared in conformity with generally accepted accounting
principles. They should be read in conjunction with the consolidated financial
statements of EDO Corporation and Subsidiaries (the "Company") for the year
ended December 31, 2001 filed by the Company on Form 10-K with the Securities
and Exchange Commission on March 18, 2002.
The accompanying consolidated financial statements are unaudited and include
all adjustments (consisting of normal recurring adjustments and accruals) that
management considers necessary for a fair presentation of its consolidated
financial position and results of operations for the interim periods presented.
The results of operations for the interim periods are not necessarily indicative
of the results that may be expected for the entire year.
Acquisitions
In October 2001, the Company acquired all of the outstanding stock of Dynamic
Systems, Inc., a privately held company based in Alexandria, Virginia, for
$13.7 million in cash, including transaction costs, resulting in goodwill of
$12.2 million. Dynamic Systems, Inc., became part of our Defense segment and
provides professional and information technology services primarily to the U.S.
Department of Defense and other government agencies. The acquisition is expected
to strengthen and expand the range of services the Company offers to both
existing and new customers. The acquisition has been accounted for as a purchase
and is included in the Company's results of operations from its acquisition
date. The results of operations for the periods presented are not materially
affected by the timing of this acquisition.
On July 26, 2002, the Company acquired substantially all of the assets of Condor
Systems, Inc., a privately-held defense electronics company and its domestic
subsidiary (together, "Condor")for $61.9 million in cash and the assumption of
certain current liabilities incurred in the ordinary course of business. For the
most recent twelve-month period Condor had revenue of approximately $78 million.
Condor had been operating under protection of Chapter 11 of the U.S. Bankruptcy
Code. The acquisition is expected to expand the Company's electronic warfare
business in the areas of intelligence, reconnaissance and surveillance systems.
The acquisition will be accounted for as a purchase, and, accordingly, will be
included in the Company's results of operations as of the acquisition date. The
transaction will result in goodwill and other intangible assets of approximately
$35 million.
Business Combinations and Goodwill and Other Intangibles
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets." Statement 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. Statement 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets arising from business
combinations completed after June 30, 2001. Statement 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives and
requires that these assets be reviewed for impairment at least annually.
Intangible assets with finite lives will continue to be amortized over their
estimated useful lives. Statement 142 was adopted by the Company effective
January 1, 2002; however
Page 8
the provisions that provide for the non-amortization of goodwill were effective
July 1, 2001 for acquisitions completed after the issuance of Statement 141.
Accordingly, the goodwill acquired in connection with the purchase of Dynamic
Systems, Inc., in October 2001 was not amortized.
The Company performed the required impairment tests of goodwill and indefinite
lived intangible assets as of January 1, 2002 in the second quarter of 2002
using the two-step process prescribed in Statement 142. The first step was a
review for potential impairment, while the second step measured the amount of
the impairment. The impairment charge resulting from these transitional
impairment tests was reflected as a cumulative effect of a change in accounting
principle as of January 1, 2002. The $3.4 million, net of tax, charge occurred
in the Engineered Materials segment and is comprised of $2.2 million of impaired
goodwill related to the acquisition of Specialty Plastics, $1.9 million of
impaired value of a trademark related to Specialty Plastics, $0.1 million of
goodwill related to the acquisition of Zenix, offset by a tax benefit of
$0.8 million.
The changes in the carrying amount of goodwill for the six months ended June 29,
2002 are as follows:
(dollars in thousands)
Defense Engineered Materials
Segment Segment Total
Balance as of January 1, 2002 $ 20,601 $ 2,273 $ 22,874
Impairment loss -- (2,273) (2,273)
-------- -------- --------
Balance as of June 29, 2002 $ 20,601 -- $ 20,601
======== ======== ========
The goodwill impairment loss is comprised of $95,000 related to the acquisition
of Zenix in December 1998 and $2,178,000 related to the acquisition of Specialty
Plastics also in December 1998. In the case of Zenix, the trend in sales and
earnings performance has been lower than expected resulting in the impairment of
the entire goodwill carrying value. In the case of Specialty Plastics, the fair
value of this reporting unit was estimated using a discounted cash flow
analysis, also resulting in an impairment loss of the entire goodwill carrying
value, and a trademark of $1,880,000 was also written off and included in the
cumulative effect of the change in accounting principle.
Summarized below are intangible assets subject to amortization:
(dollars in thousands)
June 29, December 31,
2002 2001
Capitalized non-compete agreements related
to the acquisition of Dynamic Systems, Inc.:
Gross carrying amount $ 200 $ 200
Accumulated amortization (50) --
----- -----
Net $ 150 $ 200
===== =====
The non-compete agreements are being amortized on a straight-line basis over a
two-year period. The amortization expense for the six months ended June 29, 2002
amounted to $50,000.
Page 9
Since the total trademark carrying amount of $1.9 million was written off in the
three months ended June 29, 2002 as part of the cumulative effect of a change in
accounting principle, there are no intangible assets not subject to amortization
as of June 29, 2002.
Net earnings for the three-and six-months ended June 30, 2001 included
amortization expense of approximately $0.2 million and $0.4 million,
respectively. Excluding these amounts would have resulted in net earnings per
common share and diluted net earnings per common share of $0.26 and $0.25,
respectively, for the three months ended June 30, 2001 and $0.51 and $0.49,
respectively for the six months ended June 30, 2001.
Impairment or Disposal of Long-Lived Assets
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (FAS 144), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations" for a
disposal of a segment of a business. The Company adopted FAS 144 as of January
1, 2002. The effect of the adoption of this Statement was not material to the
Company's operating results or financial position.
Inventories
Inventories are summarized by major classification as follows:
June 29, 2002 Dec. 31, 2001
(in thousands)
Raw materials and supplies $ 4,402 $ 6,539
Work-in-process 17,621 14,680
Finished goods 662 1,718
------- -------
$22,685 $22,937
======= =======
Page 10
Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share.
Three months ended Six months ended
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
(in thousands) (in thousands)
Numerator:
Earnings available for common shares
for basic calculation $ 3,074 $ 3,095 $ 2,521 $ 5,744
Effect of dilutive securities:
Convertible preferred shares -- -- -- 9
Convertible subordinated debentures -- 274 -- --
------- ------- ------- -------
Numerator for diluted
calculation $ 3,074 $ 3,369 $ 2,521 $ 5,753
======= ======= ======= =======
Denominator:
Denominator for basic calculation 17,057 12,370 17,015 11,905
Effect of dilutive securities:
Stock options 329 287 328 219
Convertible preferred shares -- -- -- 309
Convertible subordinated debentures -- 1,167 -- --
------- ------- ------- -------
Denominator for diluted
calculation 17,386 13,824 17,343 12,433
======= ======= ======= =======
Convertible Subordinated Notes
In April 2002, the Company completed its offering of $137.8 million of 5.25%
Convertible Subordinated Notes due 2007 and received $133.7 million, net of
commissions paid. Interest payments on these notes are due April 15 and
October 15 of each year, commencing on October 15, 2002. The notes are
convertible, unless previously redeemed or repurchased by us, at the option of
the holder at any time prior to maturity, into the Company's common shares at an
initial conversion price of $31.26 per share, subject to adjustment in certain
events.
Comprehensive Income
As of June 29, 2002, accumulated other comprehensive loss included in the
accompanying consolidated balance sheet represents additional minimum
liabilities on benefit plans. Comprehensive income for the three-and six-month
periods ended June 29, 2002 was $3,074,000 and $2,521,000. Comprehensive income
for the three-and six-month periods ended June 30, 2001 was $3,044,000 and
$6,030,000.
Page 11
Business Segments
EDO Corporation is a supplier of highly engineered products for governments and
industry worldwide. The Company's advanced electronic, electromechanical and
information systems and engineered materials are products, the vast majority of
which are critical to the mission success of its customers. The Company has
three reporting segments: Defense, Communications and Space Products, and
Engineered Materials.
The Defense segment provides integrated systems and components including
electronic warfare systems, subsystems and test equipment, aircraft stores
suspension and release systems, airborne mine countermeasures systems,
integrated combat systems, undersea warfare sonar systems, operational,
technical and information technology services for military forces and
governments worldwide. The Communications and Space Products segment supplies
antenna products, interference cancellation products and space sensor
communications products for the remote sensing, communication, and navigation
industries. The Engineered Materials segment supplies electro-ceramic products
and advanced fiber composite structural products for the communication,
navigation, chemical, petrochemical, paper and oil industries, and for the
commercial infrastructure and military markets.
Three months ended Six months ended
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
Net sales:
Defense $ 54,129 $ 46,593 $ 103,359 $ 89,186
Communications and Space Products 10,199 11,039 19,116 19,643
Engineered Materials 9,391 9,144 18,153 18,098
--------- --------- --------- ---------
$ 73,719 $ 66,776 $ 140,628 $ 126,927
========= ========= ========= =========
Operating earnings (loss):
Defense $ 6,474 $ 4,330 $ 12,466 $ 9,454
Communications and Space Products (209) 355 (2,033) (538)
Engineered Materials 600 794 1,147 1,658
--------- --------- --------- ---------
6,865 5,479 11,580 10,574
Net interest expense (1,515) (466) (1,353) (1,040)
Other, net (47) 62 6 199
--------- --------- --------- ---------
Earnings before income taxes $ 5,303 $ 5,075 $ 10,233 $ 9,733
========= ========= ========= =========
In 2001, merger-related costs attributable to the EDO-AIL Merger are included in
the segments as follows:
Three months ended Six months ended
June 30, 2001 June 30, 2001
Defense $ 565 $ 937
Communications and Space Products 98 184
Engineered Materials 109 197
------ ------
Total $ 772 $1,318
====== ======
Page 12
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
The following information should be read in conjunction with the Consolidated
Financial Statements as of June 29, 2002.
Three Months Ended June 29, 2002 compared with the Three Months Ended June 30,
2001
Net sales for the three months ended June 29, 2002 increased to $73.7 million
from $66.8 million for the three months ended June 30, 2001. This increase
comprised sales growth of $7.5 million in the Defense segment and $0.2 million
in the Engineered Materials segment, partially offset by a decrease of
$0.8 million in the Communications and Space Products segment. In the Defense
segment there were increases in sales of aircraft stores suspension and release
equipment, electronic warfare systems, sonar systems, and technology services.
The increase in technology services was attributable in part to the acquisition
of Dynamic Systems, Inc., in October 2001. These increases were partially offset
by decreases in sales of airborne mine countermeasures systems. In the
Communications and Space Products segment, increases in sales of antenna
products were offset by lower sales of space sensor communication products and
interference cancellation products. In the Engineered Materials segment, there
were increases in sales of electro-ceramic products and advanced fiber composite
structural products.
Operating earnings for the three months ended June 29, 2002 increased to
$6.9 million or 9.3% of net sales from $6.3 million (before considering one-time
EDO-AIL merger-related costs of $0.8 million) or 9.4% of net sales for the three
months ended June 30, 2001. The increase in operating earnings is attributable
to the aforementioned increases in sales, partially offset by the recording of
pension expense of $1.0 million in the three months ended June 29, 2002 compared
to pension income of $0.7 million in the three months ended June 30, 2001. In
addition, compensation expense related to the Company's Employee Stock Ownership
Plan ("ESOP") increased to $1.2 million in the three months ended June 29, 2002
compared to $0.2 million in the three months ended June 30, 2001. Pension and
ESOP compensation expense/income are allocated between cost of sales and
selling, general and administrative expense.
For the three months ended June 29, 2002, net earnings available for common
shares were $3.1 million or $0.18 per diluted common share on 17.4 million
diluted shares compared to $3.1 million or $0.24 per diluted common share on
13.8 million diluted shares for the three months ended June 30, 2001. Net
earnings were impacted by interest expense incurred on the newly-issued
subordinated notes, as discussed below.
Selling, general and administrative expenses for the three months ended June 29,
2002 increased to $8.6 million or 11.7% of net sales from $8.5 million or 12.7%
of net sales for the three months ended June 30, 2001. This increase is
partially attributable to the aforementioned change in pension expense versus
pension income and the increase in ESOP compensation expense, partially offset
by reduced expenses at the Company's Deer Park facility.
Interest expense for the three months ended June 29, 2002 increased to
$2.1 million from $0.7 million for the three months ended June 30, 2001 due to
the issuance of $137.8 million of 5.25% Convertible Subordinated Notes on April
2, 2002. Interest payments are due April 15 and October 15 of each year,
commencing on October 15, 2002. Interest expense also includes amortization of
debt issuance costs related to the Convertible Subordinated Notes.
Page 13
Income tax expense for the three months ended June 29, 2002 reflects our
estimated effective rate of 43% for the year ending December 31, 2002. This
compares to an income tax expense at an effective rate of 39% for the three
months ended June 30, 2001. This increase in the effective rate is primarily
attributable to the non-deductible portion of the non-cash ESOP compensation
expense, which is based on the market value of common shares
committed-to-be-released.
Company-sponsored research and development expenditures of $2.1 million in the
three months ended June 29, 2002 decreased slightly from $2.2 million in the
three months ended June 30, 2001.
Six Months Ended June 29, 2002 compared with the Six Months Ended June 30, 2001
Net sales for the six months ended June 29, 2002 increased to $140.6 million
from $126.9 million for the six months ended June 30, 2001. This increase
comprised sales growth of $14.2 million in the Defense segment, partially offset
by a decrease of $0.5 million in the Communications and Space Products segment.
In the Defense segment there were increases in sales of electronic warfare
systems, sonar systems, and technology services. The latter increase was
attributable in part to the acquisition of Dynamic Systems, Inc. in October
2001. In the Communications and Space Products segment, lower sales of space
sensor communication products and interference cancellation products were
partially offset by increases in sales of antenna products.
Operating earnings for the six months ended June 29, 2002 decreased to
$11.6 million or 8.2% of net sales from $11.9 million (before considering one-
time EDO-AIL merger-related costs of $1.3 million) or 9.4% of net sales for the
six months ended June 30, 2001. The decrease in operating earnings is
attributable to losses in the Communications and Space Products segment. The
losses primarily relate to a $1.5 million charge taken in the three months ended
March 30, 2002 to provide for manufacturing inefficiencies resulting from
lowered production levels of Ku-Band down converters. The lowered production
levels are due to one of our primary customers lowering its forecast of the
quantity of Ku-Band down converters it was to purchase from us in 2002. In
addition, the Company recorded pension expense of $2.0 million and ESOP
compensation expense of $2.3 million in the six months ended June 29, 2002
compared to pension income of $1.3 million and ESOP compensation expense of $1.1
million in the six months ended June 30, 2001. Pension and ESOP compensation
expense/income are allocated between cost of sales and selling, general and
administrative expense.
For the six months ended June 29, 2002, net earnings available for common shares
before the cumulative effect of a change in accounting principle were
$5.9 million or $0.34 per diluted common share on 17.3 million diluted shares
compared to $5.7 million or $0.46 per diluted common share on 12.4 million
diluted shares for the six months ended June 30, 2001. Net earnings were
impacted by interest expense incurred on the newly-issued subordinated notes, as
discussed below.
Selling, general and administrative expenses for the six months ended June 29,
2002 increased to $18.3 million or 13.0% of net sales from $16.3 million or
12.8% of net sales for the six months ended June 30, 2001. This increase is
principally attributable to the aforementioned change in pension expense versus
pension income and the increase in ESOP compensation expense.
Interest expense for the six months ended June 29, 2002 increased to
$2.1 million from $1.6 million for the six months ended June 30, 2001. Interest
expense for the six months ended June 29, 2002 reflects accruals for interest on
the 5.25% Convertible Subordinated Notes issued in April 2002 and the
amortization of the related debt issuance costs. Interest expense for the six
months ended June 30, 2001 consists primarily of interest on the 7% Convertible
Subordinated Debentures, which were converted into common shares in the fourth
quarter of 2001.
Page 14
Income tax expense for the six months ended June 29, 2002 reflects our estimated
effective rate of 43% for the year ending December 31, 2002. This compares to an
income tax expense at an effective rate of 39% for the six months ended June 30,
2001. This increase in the effective rate is primarily attributable to the
non-deductible portion of the non-cash ESOP compensation expense, which is based
on the market value of common shares committed-to-be-released.
Company-sponsored research and development expenditures of $3.9 million in the
six months ended June 29, 2002 are about the same level as expenditures in the
six months ended June 30, 2001.
In the six months ended June 29, 2002 a $3.4 million cumulative effect of a
change in accounting principle charge was recorded and is shown net of a tax
benefit of $0.8 million on the income statement. This charge pertains to the
impairment of goodwill and a trademark resulting from impairment tests performed
in the second quarter of 2002, as required under Statement of Financial
Accounting Standard No. 142. The impairment occurred in the Engineered Materials
segment and is comprised of the following: $2.2 million of goodwill related to
the acquisition of Specialty Plastics, $1.9 million related to the trademark at
Specialty Plastics, and $0.1 million of goodwill related to the acquisition of
Zenix.
Liquidity and Capital Resources
Our cash, cash equivalents and marketable securities increased to $178.2 million
at June 29, 2002 from $58.0 million at December 31, 2001. This increase was due
to the issuance of $137.8 million of convertible subordinated notes, less
commissions, resulting in $133.7 of net proceeds, offset by $8.0 million of cash
used by operations(attributable to payments of income taxes accrued at December
31, 2001, $4.1 million of commissions paid on the subordinated notes offering
which were capitalized in other assets, and lower accounts payable due to
timing), $7.0 million paid as a deposit for the acquisition of Condor Systems,
Inc., $2.2 million for purchases of capital equipment, and $1.2 million for
payment of common dividends.
Accounts receivable increased to $89.3 million at June 29, 2002 from
$83.4 million at December 31, 2001.
Inventories decreased to $22.7 million at June 29, 2002 from $22.9 million at
December 31, 2001.
The notes receivable of $3.1 million at June 29, 2002 (of which $0.3 million is
in current assets) are comprised of a note related to the sale of property at
Deer Park in June 2000, which had a balance at June 29, 2002 of $1.1 million,
and $2.0 million in notes related to the sale of the Company's former College
Point facility in January 1996. The Deer Park facility note is due in monthly
installments through July 2015 and bears interest at a rate of 7.5% per annum.
The College Point notes are due in annual amounts through September 2004 with a
final payment of $1.3 million due on December 31, 2004 and bear interest at 7%
per annum. The latter notes receivable are secured by a mortgage on the
facility.
Contract advances decreased to $9.4 million at June 29, 2002 from $16.7 million
at December 31, 2001 reflecting the use of these advances for costs incurred on
foreign contracts. In prior years, we were awarded several large foreign
contracts and received the associated advances. This year, as we continue to
perform the work and recognize revenues under those contracts, the related
advances are reduced.
We have a $69.0 million long-term credit facility with a consortium of banks
co-led by Mellon Bank and Citibank. The credit facility includes $19.0 million
in five-year term debt, which was paid in full in the fourth quarter of 2001,
and $50.0 million in revolving debt. At June 29, 2002 there were no borrowings
under the revolving credit facility of $50.0 million, but there were outstanding
letters of credit of $21.7 million, leaving available borrowing capacity of
$28.3 million. At June 29, 2002, the Company was in compliance with its debt
covenants.
Page 15
In April 2002, we completed our offering of $137.8 million of 5.25% Convertible
Subordinated Notes due 2007. We received $133.7 million, net of commissions
paid. Interest payments on these notes are due April 15 and October 15 of each
year, commencing on October 15, 2002. The notes are convertible, unless
previously redeemed or repurchased by us, at the option of the holder at any
time prior to maturity, into our common shares at an initial conversion price of
$31.26 per share, subject to adjustment in certain events.
Capital expenditures for the six months ended June 29, 2002 decreased to
$2.2 million from $6.8 million for the six months ended June 30, 2001.
We conduct a significant amount of our business with the United States
Government. Although there are currently no indications of a significant change
in the status of government funding of certain programs, should this occur, our
results of operations, financial position and liquidity could be materially
affected. Such a change could have a significant impact on our profitability and
our stock price. This could affect our ability to acquire additional funds from
our revolving credit facility due to covenant restrictions or from other
sources.
We believe that we have adequate liquidity and sufficient capital to fund our
currently anticipated requirements for working capital, capital expenditures,
research and development expenditures and principal and interest payments. We
continue to focus on positioning ourselves to be a significant player in the
consolidation of first-tier defense suppliers and, to that end, have actively
sought candidates for strategic acquisitions. Future acquisitions may be funded
from any of the following sources: cash on hand; borrowings under our credit
agreement; issuance of our common stock or other equity securities; and/or
convertible or other debt offerings.
We have commitments under a note payable and facility and equipment operating
leases that will be funded from operating sources. We also have commitments
under letters of credit ($21.7 million at June 29, 2002) and advance payment and
performance bonds ($15.9 million at June 29, 2002) related primarily to foreign
contracts. As a result of the acquisition of Condor in July 2002, we assumed
$28.3 million of letters of credit associated with foreign contracts. We do not
expect to have to make payments under these letters of credit or bonds since
these obligations are removed as we perform under the related contracts. The
backlog of unfilled orders at June 29, 2002 increased to $305.9 million from
$294.8 million at December 31, 2001.
Critical Accounting Policies
Revenue Recognition
We record revenues and profits on substantially all of our contracts using
percentage of completion methods of accounting. As a result, revisions made to
our estimates of total costs to complete our contracts are recorded in the
period in which the conditions that dictate such revisions become known and can
be estimated. We believe that our profits are fairly stated. Revisions to
estimates do occur and at times are material to our results of operations and
financial position.
Inventory
We manufacture certain products prior to receiving firm contracts in
anticipation of future demand. These products often relate to a specific
technology or application and may not have alternative uses. We believe that
sufficient markets exist and that these products will ultimately be sold.
Page 16
New Accounting Standards
Business Combinations and Goodwill and Other Intangibles
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets." Statement 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. Statement 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets arising from business
combinations completed after June 30, 2001. Statement 142 prohibits the
amortization of goodwill and intangible assets with indefinite useful lives and
requires that these assets be reviewed for impairment at least annually.
Intangible assets with finite lives will continue to be amortized over their
estimated useful lives. Statement 142 was adopted by the Company effective
January 1, 2002; however the provisions that provide for the non-amortization of
goodwill were effective July 1, 2001 for acquisitions completed after the
issuance of Statement 141. Accordingly, the goodwill acquired in connection with
the purchase of Dynamic Systems, Inc., in October 2001 was not amortized.
The Company performed the required impairment tests of goodwill and indefinite
lived intangible assets as of January 1, 2002 in the second quarter of 2002
using the two-step process prescribed in Statement 142. The first step was a
review for potential impairment, while the second step measured the amount of
the impairment. The impairment charge resulting from these transitional
impairment tests was reflected as a cumulative effect of a change in accounting
principle as of January 1, 2002. The $3.4 million net of tax charge is comprised
of $2.2 million of impaired goodwill related to the acquisition of Specialty
Plastics, $1.9 million of impaired value of a trademark, $0.1 million of
goodwill related to the acquisition of Zenix, net of a tax benefit of
$0.8 million. On an annual basis, Specialty Plastics, a commercial business, has
sales of about $6 million.
Impairment or Disposal of Long-Lived Assets
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (FAS 144), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations" for a
disposal of a segment of a business. The Company adopted FAS 144 as of January
1, 2002. The effect of the adoption of this Statement was not material to the
Company's operating results or financial position.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
The statements in this quarterly report and in oral statements that may be made
by representatives of the Company relating to plans, strategies, economic
performance and trends and other statements that are not descriptions of
historical facts may be forward-looking statements with the meaning of the
Private Securities Litigation Reform Act of 1995, Section 27(a) of the
Securities Act of 1933 and Section 21(e) of the Securities Exchanges Act of
1934. Forward-looking statements are inherently subject to risks and
uncertainties, and actual results could differ materially from those currently
anticipated due to a number of factors, which include but are not limited to the
following for each of the types of information noted below.
U.S. and international military program sales, follow-on procurement, contract
continuance, and future program awards, upgrades and spares support are subject
to U.S. and international military budget constraints and determinations; U.S.
congressional and international legislative body discretion; U.S. and
international
Page 17
government administration policies and priorities; changing world military
threats, strategies and missions; competition from foreign manufacturers of
platforms and equipment; NATO country determinations regarding participation in
common programs; changes in U.S. and international government procurement
timing, strategies and practices; and the general state of world military
readiness and deployment.
Commercial satellite programs and equipment sales, follow-on procurement,
contract continuance and future program awards are subject to: establishment and
continuance of various consortiums for satellite constellation programs; delay
in launch dates due to equipment, weather or other factors beyond the control of
the Company; and development of sufficient customer base to support a particular
satellite constellation program.
Commercial product sales are subject to: success of product development programs
currently underway or planned; competitiveness of current and future product
production costs and prices and market and consumer base development of new
product programs.
Achievement of margins on sales, earnings and cash flow can be affected by;
unanticipated technical problems; government termination of contracts for
convenience; decline in expected levels of sales; underestimation of anticipated
costs on specific programs; the ability to effect acquisitions; and risks
inherent in integrating recent acquisitions into the Company's overall
structure. Expectations of future Federal income tax rates can be affected by a
variety of factors, including amounts of profits relating to foreign sales.
The Company has no obligation to update any forward-looking statements.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The information called for by this item is provided under Item 2 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
At the Company's Annual Meeting of Shareholders held on May 7, 2002, the
following actions were taken:
(a) Messrs. Robert M. Hanisee, Ronald L. Leach, and George A. Strutz,
Jr. were elected as directors, each receiving at least 13,259,944
votes.
(b) The EDO Corporation 2002 Long-Term Incentive Plan was approved:
there were 11,425,760 votes cast in favor, 1,780,387 votes cast
against, and 178,123 abstentions.
(c) The EDO Corporation 2002 Non-Employee Director Stock Option Plan
was approved: there were 12,228,474 votes cast in favor, 970,122 votes
cast against, and 185,674 abstentions.
(d) The amendment to the certificate of incorporation to increase the
number of authorized common shares from 25,000,000 to 50,000,000 was
approved: there were 12,436,165 votes cast in favor, 905,810 votes cast
against, and 42,296 abstentions.
(e) The appointment of Ernst & Young LLP as independent auditors for
the Company for the year 2002 was ratified: there were 12,922,742 votes
cast in favor, 433,620 votes cast against, and 27,910 abstentions.
Page 18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits to this Report are listed in the Exhibit Index
appearing on page 20 hereof.
(b) Reports on Form 8-K
On May 28, 2002, the Corporation filed a Current Report on Form
8-K, dated May 28, 2002, to announce its agreement to purchase the assets of
Condor Systems, Inc.
On June 26, 2002, the Corporation filed a Current Report on Form
8-K, dated June 25, 2002, announcing that the U.S. Bankruptcy Court had approved
the sale of the assets of Condor Systems, Inc. to a wholly-owned subsidiary of
the Corporation.
Page 19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
EDO Corporation
-----------------------------------------
(Registrant)
by: D.L. Reed
-----------------------------------------
D.L. Reed - Vice President- Finance
(Principal Financial Officer)
Date: August 9, 2002
Page 20
Exhibit Index
Exhibit Description
- ------- -----------
99.1 Certification of Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002