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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 28, 2003
[ ]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, 42nd Floor, 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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 28, 2003
- ------------------------------------- ---------------------------------
Common shares, par value $1 per share 19,714,266
Page 2 of 27
EDO CORPORATION
INDEX
Page
Face Sheet 1
Index 2
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
June 28, 2003 and
December 31, 2002 3
Consolidated Statements of Earnings -
Three Months Ended
June 28, 2003 and
June 29, 2002 4
Consolidated Statements of Earnings -
Six Months Ended
June 28, 2003 and
June 29, 2002 5
Consolidated Statements of Cash Flows -
Six Months Ended
June 28, 2003 and
June 29, 2002 6
Notes to Consolidated Financial Statements 7-14
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 14-24
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 24
Item 4. Controls and Procedures 24
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 25
Signature Page 26
Exhibit Index 27
Page 3 of 27
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EDO Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
June 28, 2003 December 31, 2002
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 60,241 $ 132,320
Restricted cash 194 27,347
Marketable securities 215 193
Accounts receivable, net 117,512 100,594
Inventories 37,289 32,406
Assets held for sale 26,892 --
Deferred income tax asset, net 3,222 3,222
Prepayments and other 5,133 3,133
--------- ---------
Total current assets 250,698 299,215
Property, plant and equipment, net 32,763 64,472
Notes receivable 2,453 2,556
Goodwill 108,265 61,352
Other intangible assets, net 45,188 11,867
Deferred income tax asset, net 23,256 20,439
Other assets 20,973 21,673
--------- ---------
$ 483,596 $ 481,574
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 18,449 $ 19,108
Accrued liabilities 63,250 55,448
Contract advances and deposits 10,760 20,277
--------- ---------
Total current liabilities 92,459 94,833
Long-term debt 137,800 137,800
Post-retirement benefits obligations 79,301 78,643
Environmental obligation 2,015 2,025
Shareholders' equity:
Preferred shares, par value $1 per share,
authorized 500,000 shares -- --
Common shares, par value $1 per share, authorized
50,000,000 shares in 2003,issued 19,805,188 in
2003 and 19,790,477 in 2002 19,805 19,790
Additional paid-in capital 148,477 147,091
Retained earnings 58,045 56,325
Accumulated other comprehensive loss,
net of income tax benefit (34,097) (33,899)
Treasury shares at cost (90,922 shares in
2003 and 94,322 shares in 2002) (1,295) (1,321)
Unearned Employee Stock Ownership Plan shares (17,916) (18,541)
Deferred compensation under
Long-Term Incentive Plan (647) (579)
Management group receivables (351) (593)
--------- ---------
Total shareholders' equity 172,021 168,273
--------- ---------
$ 483,596 $ 481,574
========= =========
See accompanying Notes to Consolidated Financial Statements.
Page 4 of 27
EDO Corporation and Subsidiaries
Consolidated Statements of Earnings
(in thousands, except per share amounts)
For the three months ended
June 28, 2003 June 29, 2002
(unaudited)
Continuing Operations:
Net sales $ 111,736 $ 73,719
Costs and expenses
Cost of sales 79,190 56,139
Selling, general and administrative 21,493 8,619
Research and development 2,498 2,096
Impairment loss on assets held for sale 9,160 --
Acquisition-related costs 215 --
--------- --------
112,556 66,854
--------- --------
Operating (loss) earnings (820) 6,865
Non-operating income (expense)
Interest income 165 564
Interest expense (2,247) (2,079)
Other, net 95 (47)
--------- --------
(1,987) (1,562)
--------- --------
(Loss)earnings from continuing operations before
income taxes and discontinued operations (2,807) 5,303
Income tax benefit (expense) 1,181 (2,229)
--------- --------
(Loss)earnings from continuing operations before
discontinued operations $ (1,626) $ 3,074
Earnings from discontinued operations, net of tax 1,398 --
--------- --------
Net (loss) earnings $ (228) $ 3,074
========= ========
(Loss) earnings per common share:
Basic:
Continuing operations $ (0.09) $ 0.18
Discontinued operations 0.08 --
--------- --------
$ (0.01) $ 0.18
========= ========
Diluted:
Continuing operations $ (0.09) $ 0.18
Discontinued operations 0.08 --
--------- --------
$ (0.01) $ 0.18
========= ========
Weighted-average common shares outstanding:
Basic 17,276 17,057
========= ========
Diluted 17,276 17,386
========= ========
See accompanying Notes to Consolidated Financial Statements.
Page 5 of 27
EDO Corporation and Subsidiaries
Consolidated Statements of Earnings
(in thousands, except per share amounts)
For the six months ended
June 28, 2003 June 29, 2002
(unaudited)
Continuing Operations:
Net sales $ 206,113 $ 140,628
Costs and expenses
Cost of sales 149,020 106,846
Selling, general and administrative 36,700 18,341
Research and development 4,488 3,861
Impairment loss on assets held for sale 9,160 --
Acquisition-related costs 420 --
--------- ---------
199,788 129,048
--------- ---------
Operating earnings 6,325 11,580
Non-operating income (expense)
Interest income 400 772
Interest expense (4,474) (2,125)
Other, net 128 6
--------- ---------
(3,946) (1,347)
--------- ---------
Earnings from continuing operations before
income taxes, discontinued operations
and cumulative effect of a change in
accounting principle 2,379 10,233
Income tax expense (1,023) (4,349)
--------- ---------
Earnings from continuing operations before
discontinued operations and cumulative
effect of a change in accounting principle $ 1,356 $ 5,884
Earnings from discontinued operations, net of tax 1,398 --
Cumulative effect of a change in accounting
principle, net of tax -- (3,363)
--------- ---------
Net earnings $ 2,754 $ 2,521
========= =========
Earnings (loss) per common share:
Basic:
Continuing operations $ 0.08 $ 0.35
Discontinued operations 0.08 --
Cumulative effect of a change in
accounting principle -- (0.20)
--------- ---------
$ 0.16 $ 0.15
========= =========
Diluted:
Continuing operations $ 0.08 $ 0.34
Discontinued operations 0.08 --
Cumulative effect of a change in
accounting principle -- (0.19)
--------- ---------
$ 0.16 $ 0.15
========= =========
Weighted-average common shares outstanding:
Basic 17,253 17,015
========= =========
Diluted 17,493 17,343
========= =========
See accompanying Notes to Consolidated Financial Statements.
Page 6 of 27
EDO Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
For the six months ended
June 28, 2003 June 29, 2002
(unaudited)
Operating activities:
Net earnings from continuing operations $ 1,356 $ 2,521
Adjustments to net earnings from continuing
operations to arrive at cash provided (used)
by operations:
Depreciation 5,998 4,750
Amortization 2,105 120
Bad debt expense 154 --
Deferred tax benefit (3,756) --
Loss on sale of plant and equipment 76 6
Impairment loss on assets held for sale 9,160 --
Deferred compensation expense 121 85
Non-cash Employee Stock Ownership Plan(ESOP)expense 1,510 2,315
Non-cash stock option compensation expense 292 --
Dividends on unallocated ESOP shares 148 159
Common shares issued for directors' fees 51 96
Income tax benefit from stock options 45 413
Cumulative effect of a change in accounting principle -- 3,363
Changes in operating assets and liabilities,
excluding effects of acquisitions:
Accounts receivable 12,206 (5,914)
Inventories (1,150) 252
Prepayments and other assets 630 (3,412)
Accounts payable, accrued liabilities and other (12,553) (5,463)
Contract advances and deposits (9,517) (7,308)
--------- ---------
Cash provided (used) by operations 6,876 (8,017)
Net cash provided by discontinued operations 47 --
Investing activities:
Cash paid for acquisitions, net of cash acquired (88,792) --
Deposit for the acquisition of Condor Systems, Inc. -- (7,000)
Release of restricted cash 27,153 --
Payments received on notes receivable 101 174
Purchase of plant and equipment (4,573) (2,247)
Proceeds from the sale of plant and equipment -- 1
Purchase of marketable securities (22) (2)
--------- ---------
Cash used by investing activities (66,133) (9,074)
Financing activities:
Repayment of acquired debt (11,998) --
Proceeds from exercise of stock options 69 397
Proceeds from management group receivables 242 252
Issuance of convertible subordinated notes -- 137,800
Payment of common share cash dividends (1,182) (1,179)
--------- ---------
Cash (used) provided by financing activities (12,869) 137,270
Net change in cash and cash equivalents (72,079) 120,179
Cash and cash equivalents at beginning of year 132,320 57,841
--------- ---------
Cash and cash equivalents at end of period $ 60,241 $ 178,020
========= =========
Supplemental disclosures:
Cash paid for: Interest $ 3,617 $ --
Income taxes $ 6,424 $ 7,830
See accompanying Notes to Consolidated Financial Statements.
Page 7 of 27
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 accounting principles generally accepted in the
United States. They should be read in conjunction with the consolidated
financial statements and notes thereto of EDO Corporation and Subsidiaries (the
"Company") for the year ended December 31, 2002 filed by the Company on Form
10-K with the Securities and Exchange Commission on March 14, 2003.
The accompanying consolidated financial statements include all adjustments
(consisting of normal recurring adjustments) 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.
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share.
Three months ended Six months ended
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
(in thousands)
Numerator:
Net (loss)earnings for basic
and diluted calculations $ (228) $ 3,074 $ 2,754 $ 2,521
======== ======= ======= =======
Denominator:
Denominator for basic calculation 17,276 17,057 17,253 17,015
Effect of dilutive securities:
Stock options -- 329 240 328
-------- ------- ------- -------
Denominator for diluted calculation 17,276 17,386 17,493 17,343
======== ======= ======= =======
In the three and six months ended June 28, 2003 and June 29, 2002, respectively,
the effect of the convertible subordinated notes was anti-dilutive.
Stock-Based Compensation
The company accounts for its stock-based compensation plans in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations. Under APB No. 25, because the
exercise price of the Company's stock options is set equal to the market price
of the underlying stock on the date of grant, no compensation expense is
recognized.
Had the Company determined compensation cost for its stock options under
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," based on the fair values at the grant dates, the
Company's basic and diluted earnings (loss) per common share would have been
reduced to the pro forma amounts indicated below:
Page 8 of 27
Three months ended Six months ended
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
(in thousands, except per share amounts)
Net (loss) earnings:
As reported $ (228) $ 3,074 $ 2,754 $ 2,521
Stock option compensation expense based on fair
value method, net of tax (415) (283) (848) (413)
--------- --------- --------- ---------
Pro forma $ (643) $ 2,791 $ 1,906 $ 2,108
========= ========= ========= =========
Basic (loss) earnings per common share:
As reported $ (0.01) $ 0.18 $ 0.16 $ 0.15
Pro forma $ (0.04) $ 0.16 $ 0.11 $ 0.12
Diluted (loss) earnings per common share:
As reported $ (0.01) $ 0.18 $ 0.16 $ 0.15
Pro forma $ (0.04) $ 0.16 $ 0.11 $ 0.12
Acquisitions
On June 16, 2003, the Company acquired for cash all of the stock of Emblem Group
Ltd. ("Emblem"), a privately-held company based in Brighton, England. Emblem is
a supplier of aerospace and defense products and services, primarily through its
MBM Technology unit in England and Artisan Technologies Inc. subsidiary in the
United States. Emblem has a core competency in aircraft weapons-carriage and
interfacing systems that will reinforce EDO's position as a global leader in
aircraft armament-release systems. Emblem is expected to broaden the Company's
customer base in Europe. The preliminary purchase price was L15.25 million
($22.3 million) which includes a L2.0 million ($3.3 million) payment of debt. In
addition, there were transaction costs of approximately $1.8 million. Emblem
became part of the Company's Defense segment.
On March 10, 2003, the Company acquired for cash all of the stock of Darlington,
Inc. ("Darlington"), a privately-held defense communications company based in
Alexandria, Virginia. Darlington designs, manufactures and supports military
communications equipment and information networking systems. The acquisition is
expected to enhance the Company's existing positions on long-range platforms and
programs across the U.S. military services and in particular the U.S. Marine
Corps. The preliminary purchase price was $28.5 million, excluding transaction
costs of approximately $0.3 million. In addition, the Company acquired and
immediately paid off debt of $4.9 million. Darlington became part of the
Company's Defense segment.
On February 5, 2003, a wholly-owned subsidiary of the Company acquired for cash
all of the stock of Advanced Engineering and Research Associates, Inc.("AERA"),
a privately-held company located in Alexandria, Virginia. AERA provides
professional and information technology services primarily to the Department of
Defense and other government agencies. The acquisition is expected to strengthen
and expand the range of such services that the Company offers. The preliminary
purchase price was $38.0 million, excluding transaction costs of $0.4 million.
Page 9 of 27
In addition, the Company acquired and immediately paid of debt of $3.8 million.
AERA became part of the Company's Defense segment.
On July 26, 2002, a wholly-owned subsidiary of the Company acquired
substantially all of the assets and assumed certain liabilities of Condor
Systems, Inc., a privately-held defense electronics company and its domestic
subsidiary (together, "Condor") for $61.9 million in cash, in addition to
transaction costs of $4.1 million. The acquisition expands the Company's
electronic warfare business in the areas of reconnaissance and surveillance
systems. The assets became part of the Company's Defense and Communications and
Space Products segments.
These acquisitions were accounted for as purchases and, accordingly, their
operating results are included in the Company's consolidated financial
statements since their respective acquisition dates.
Unaudited pro forma results of operations, assuming the acquisitions of Emblem,
Darlington, AERA and Condor had been completed at the beginning of each period
are summarized below. The results reflect adjustments to net sales, cost of
sales, amortization expense, compensation expense, purchased in-process research
and development costs, interest income and expense and income tax expense.
Six months ended
June 28, 2003 June 29, 2002
(in thousands, except per share amounts)
Net sales $ 266,844 $ 239,513
Earnings available for common shares, before discontinued
operations and cumulative effect of a change in
accounting principle $ 5,376 $ 1,805
Diluted earnings per common share $ 0.31 $ 0.10
The pro forma results of operations are not necessarily indicative of the actual
results of operations that would have occurred had these acquisitions been
completed at the beginning of the periods, or of the results which may occur in
the future.
The following table summarizes the preliminary allocation of the purchase price
to the assets acquired and liabilities assumed at the date of acquisition.
Emblem Darlington AERA Condor
At June 16, At March 10, At February 5, At July 26,
2003 2003 2003 2002
Current assets $ 9,649 $ 12,579 $ 13,260 $ 30,628
Plant and equipment 3,228 1,567 1,048 5,543
Customer contracts and relationships -- 14,900 17,100 --
Purchased in-process research and
development -- -- -- 150
Purchased technologies -- -- -- 11,648
Purchased backlog -- -- -- 916
Non-compete agreements -- 30 2,420 --
Tradename -- 400 500 --
Goodwill 20,219 15,573 11,697 40,175
Other assets 85 446 142 76
Liabilities (9,179) (16,445) (7,317) (23,150)
-------- -------- -------- --------
Net assets acquired $ 24,002 $ 29,050 $ 38,850 $ 65,986
======== ======== ======== ========
Page 10 of 27
Business Combinations and Goodwill and Other Intangibles
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS Nos.
141, "Business Combinations," and 142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 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. SFAS No. 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 definite lives will
continue to be amortized over their estimated useful lives. SFAS No. 142 was
adopted by the Company effective January 1, 2002.
Impairment indicators include, among other conditions, cash flow deficits, an
historic or anticipated decline in revenue or operating profit, adverse legal or
regulatory developments, accumulation of costs significantly in excess of
amounts originally expected to acquire the asset and a material decrease in the
fair value of some or all of the assets.
The Company performed the required impairment tests of goodwill and indefinite
lived intangible assets as of January 1, 2002, using the two-step process
prescribed in SFAS No. 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 charge, net of a tax benefit of $0.8 million,
occurred in the Engineered Materials segment and is comprised of $2.3 million
and $1.9 million of pre-tax impaired goodwill and trademark, respectively.
The changes in the carrying amount of goodwill by segment for the six months
ended June 28, 2003 are as follows:
Communications
and Space Engineered
Defense Products Materials Total
(in thousands)
Balance as of January 1, 2003 $ 57,660 $ 3,692 $ -- $ 61,352
Adjustment of Condor purchase price accounting (576) -- -- (576)
Acquisition of AERA 11,697 -- -- 11,697
Acquisition of Darlington 15,573 -- -- 15,573
Acquisition of Emblem 20,219 -- -- 20,219
--------- ---------- ----------- ---------
Balance as of June 28, 2003 $ 104,573 $ 3,692 $ -- $ 108,265
========= ========== =========== =========
Summarized below are intangible assets subject to amortization:
Estimated
June 28, December 31, Useful Lives
2003 2002 (years)
(in thousands)
Customer contracts and relationships $ 32,000 $ -- 15
Purchased technologies 11,648 11,648 8
Non-compete agreements 2,650 200 1-5
Tradename 900 -- 5
Purchased backlog 916 916 2
-------- -------
48,114 12,764
Less accumulated amortization (2,926) (897)
-------- --------
$ 45,188 $ 11,867
======== ========
Page 11 of 27
The amortization expense for the three months ended June 28, 2003 and June 29,
2002 amounted to $1.1 million and $0.1 million, respectively. The amortization
expense for the six months ended June 28, 2003 and June 29, 2002 amounted to
$2.0 million and $0.1 million, respectively.
Total amortization expense for the years 2003, 2004, 2005, 2006, 2007 and
thereafter related to intangible assets are estimated to be $4.5 million, $4.5
million, $4.3 million, $4.3 million, $4.3 million and $25.4 million,
respectively. Due to the timing of the Emblem acquisition, the total excess of
the purchase price over net tangible assets acquired was preliminarily allocated
entirely to goodwill as of June 28, 2003. Upon completion of a valuation of
Emblem, to be performed by an independent third party, the Company will
re-allocate the purchase price as appropriate.
Since the total carrying amount of a trademark was written off in 2002 as part
of the cumulative effect of a change in accounting principle, there are no
intangible assets, other than goodwill, not subject to amortization as of June
28, 2003.
Assets Held For Sale
On June 24, 2003, the Board of Directors of the Company approved the decision to
sell the Company's 726,000 square foot facility in Deer Park, NY. As of June 28,
2003, the facility is reflected on the accompanying consolidated balance sheet
as assets held for sale at its fair value less costs to sell, including
commissions and transfer taxes. Consequently, the Company recorded a pre-tax
impairment loss of $9.2 million, as the net book value of the assets exceeded
the fair value less the costs to sell.
In July 2003, the Company entered into an agreement with a buyer for a sales
price of $29.0 million, of which $1.0 million was received upon signing, $21.0
million will be received at closing and $7.0 million will be received when the
Company vacates the facility. The $7.0 million will be in the form of a note
receivable. As part of the agreement, the Company will lease the facility for a
period not to exceed two years. The triple net lease agreement does not have any
renewal or buyout options.
Inventories
Inventories are summarized by major classification as follows:
June 28, 2003 December 31, 2002
(in thousands)
Raw materials and supplies $ 8,535 $ 7,804
Work-in-process 26,188 22,561
Finished goods 2,566 2,041
-------- --------
$ 37,289 $ 32,406
======== ========
Credit Facility
At June 28, 2003, the Company has a $200.0 million credit facility with a
consortium of banks, led by Citibank, N.A. as the administrative agent, Fleet
National Bank as the syndication agent and Wachovia Bank, N.A. as the
documentation agent. The facility expires in November 2005. In connection with
the amended facility, $1.2 million of deferred finance costs is included in
other assets on the accompanying consolidated balance sheet and is being
amortized using the straight-line method over the term of the agreement.
Page 12 of 27
The credit facility provides the Company with sub-limits of borrowing up to
$125.0 million for acquisition-related financing and up to $125.0 million in
stand-by letters of credit financing. The potential cash borrowing under the
facility is reduced by the amount of outstanding letters of credit. There were
no direct borrowings outstanding under the credit facility at June 28, 2003.
Letters of credit outstanding at June 28, 2003 pertaining to the credit facility
were $62.9 million, resulting in $62.1 million available at June 28, 2003 for
stand-by letters of credit. Any future borrowings under the facility would be
priced initially at LIBOR plus a predetermined amount, ranging from 1.25% to
1.75%, dependent on the Company's consolidated leverage ratio at the time of the
borrowing. At June 28, 2003, LIBOR was approximately 1.0% and the applicable
adjustment to LIBOR was 1.50%. The facility requires a commitment fee of 0.25%
on the average daily unused portion of the facility.
In connection with the credit facility, the Company is required to maintain both
financial and non-financial covenants and ratios. As of June 28, 2003, the
Company was in compliance with its covenants. The credit facility is secured by
our accounts receivable, inventory and machinery and equipment.
5.25% Convertible Subordinated Notes due 2007
In April 2002, the Company completed the offering of its 5.25% Convertible
Subordinated Notes due 2007 (the "Notes") and received proceeds of $133.7
million, net of $4.1 million of commissions paid. Interest payments on the Notes
are due April 15 and October 15 of each year.
The Notes are convertible, unless previously redeemed or repurchased by the
Company, 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. As of June 28, 2003, there had been no
conversions.
Comprehensive Income
As of June 28, 2003, accumulated other comprehensive loss included in the
accompanying consolidated balance sheet primarily represents additional minimum
liabilities on benefit plans. Comprehensive (loss) income for the three and six
month periods ended June 28, 2003 was ($0.4) million and $2.6 million,
respectively, compared to comprehensive income for the three and six month
periods ended June 29, 2002 of $3.1 million and $2.5 million, respectively.
Business Segments
EDO Corporation is a leading supplier of sophisticated, highly engineered
products and systems for defense, aerospace and industrial applications. The
Company's advanced electronic, electromechanical systems, information systems
and engineered materials are mission-critical, standard equipment on a wide
range of military platforms. The Company has three reporting segments: Defense,
Communications and Space Products and Engineered Materials.
The Defense segment provides integrated, front-line, warfighting systems and
components including electronic warfare, radar countermeasures systems,
reconnaissance and surveillance systems, aircraft weapons suspension and release
systems, airborne mine countermeasures systems, integrated combat and sonar
systems, command, control and communications systems and professional,
operational, technical and information technology services for military forces
and governments worldwide. The Communications and Space Products segment
supplies antenna products and ultra-miniature electronics and systems for the
remote sensing and electronic warfare industries. The Engineered Materials
segment supplies commercial and military piezo-electric ceramic
Page 13 of 27
products and advanced fiber composite structural products for the aircraft,
communication, navigation, chemical, petrochemical, paper and oil industries.
Three months ended Six months ended
June 28, June 29, June 28, June 29,
2003 2002 2003 2002
(in thousands)
Net sales:
Defense $ 86,925 $ 54,129 $ 156,943 $ 103,359
Communications and Space Products 13,323 10,199 27,703 19,116
Engineered Materials 11,488 9,391 21,467 18,153
--------- --------- --------- ---------
$ 111,736 $ 73,719 $ 206,113 $ 140,628
========= ========= ========= =========
Operating earnings (loss):
Defense $ 7,364 $ 6,474 $ 12,739 $ 12,466
Communications and Space Products 827 (209) 2,051 (2,033)
Engineered Materials 149 600 695 1,147
Impairment loss on assets
held for sale (9,160) -- (9,160) --
--------- --------- --------- ---------
(820) 6,865 6,325 11,580
Net interest expense (2,082) (1,515) (4,074) (1,353)
Other, net 95 (47) 128 6
--------- --------- --------- ---------
(Loss) earnings before income
taxes, discontinued operations
and cumulative effect of a
change in accounting principle $ (2,807) $ 5,303 $ 2,379 $ 10,233
========= ========= ========= =========
Included in the Defense segment's results for the three and six months ended
June 28, 2003 is $0.2 million and $0.4 million, respectively, of
acquisition-related costs attributable to the Condor acquisition.
New Accounting Standards
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The effect of the adoption of this statement
on January 1, 2003 was not material to the Company's operating results or
financial position.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. The disclosure provisions of SFAS No. 148
were effective for years ending after December 15, 2002. Presently, the Company
does not plan to voluntarily change its method of accounting for stock-based
compensation.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The effect of the adoption
of this statement was not material to the Company's operating results or
financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This SFAS is
generally effective for financial instruments entered into or modified after May
31, 2003 and otherwise effective at the beginning of the first
Page 14 of 27
interim period beginning after June 15, 2003. The Company has not yet determined
the effect, if any, of the adoption of this statement.
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 28, 2003.
Three Months Ended June 28, 2003 compared with Three Months Ended June 29, 2002
Net sales for the three months ended June 28, 2003 increased $38.0 million or
51.6% to $111.7 million from $73.7 million for the three months ended June 29,
2002. This increase comprised sales growth of $32.8 million in the Defense
segment, $3.1 million in the Communications and Space Products segment and $2.1
million in the Engineered Materials segment.
In the Defense segment, $17.0 million of the increase was due to sales of
reconnaissance and surveillance systems attributable to the assets acquired from
Condor Systems, Inc. ("Condor"). Such sales were not included in sales for the
first half of 2002 as the Condor assets were acquired on July 26, 2002. Also,
$23.6 million of the increase was attributable to sales of recently acquired
Emblem Group Ltd ("Emblem"), Darlington, Inc. ("Darlington") and Advanced
Engineering and Research Associates, Inc. ("AERA"). Aircraft weapons and
suspension release systems sales increased due in part to the F-22 AMRAAM
Vertical Eject Launcher program, the BRU-57 Multiple-Carriage Smart Bomb Rack
program, development efforts on the Small Diameter Bomb and the Joint Strike
Fighter suspension and weapons release units programs. Sales of undersea sonar
systems and radar signal simulator units for aircraft also increased in the
second quarter of 2003 compared to the second quarter of 2002. These increases
in the Defense segment were partially offset by the decreases in sales of
electronic warfare equipment as well as integrated combat systems. The decrease
in sales of electronic warfare equipment was due to higher sales in the first
half of 2002 on the Universal Exciter Upgrade ("UEU") program. The UEU
production program is expected to be completed in the third quarter of 2003. The
decrease in sales of integrated combat systems was due primarily to delays in
receipt of orders from foreign customers, resulting in lower sales of combat and
command, control and communications systems.
In the Communications and Space Products segment, the increase in sales was
attributable primarily to sales contributed by the assets acquired from Condor.
In addition, there were increases in sales of antenna products. The increases in
this segment were partially offset by a decrease in sales of space products.
In the Engineered Materials segment, there were increases in sales of advanced
fiber composite structural products, including work on recently received orders
associated with the Sikorsky Comanche program, and electro-ceramic products.
For the three months ended June 28, 2003, we incurred an operating loss of $0.8
million. This compares to operating earnings of $6.9 million for the three
months ended June 29, 2002. Included in the operating loss for the three months
ended June 28, 2003 is a $9.2 million impairment loss related to our Deer Park
facility (see "Assets Held For Sale" in the Notes to the Consolidated Financial
Page 15 of 27
Statements) and $1.1 million of intangible asset amortization expense associated
with the Condor, AERA and Darlington acquisitions. This compares to total
amortization expense of approximately $0.1 million for the three months ended
June 29, 2002. Also included in operating earnings for the three months ended
June 28, 2003 is non-cash pension expense of $1.0 million and non-cash Employee
Stock Ownership Plan ("ESOP") compensation expense of $0.7 million. Included in
operating earnings for the three months ended June 29, 2002 is non-cash pension
expense of $1.0 million and non-cash ESOP compensation expense of $1.2 million.
The lower non-cash ESOP compensation expense for the three months ended June 28,
2003 is attributable to our lower average stock price compared to the second
quarter of 2002. Pension and ESOP compensation expense are allocated between
cost of sales and selling, general and administrative expense.
The Defense segment's operating earnings for the three months ended June 28,
2003 were $7.4 million or 8.5% of this segment's net sales compared to operating
earnings for the three months ended June 29, 2002 of $6.5 million or 12.0% of
this segment's net sales. The second quarter of 2002 was favorably impacted by
the high margin sales on the UEU production program, which is expected to be
completed in the third quarter of 2003. In the three months ended June 28, 2003,
operating earnings were negatively impacted by amortization expense pertaining
to intangible assets, as well as the effect of lower margin sales of
reconnaissance and surveillance systems acquired from Condor. The decrease in
the Defense segment's operating earnings is also due in part to a shift in the
margins of aircraft weapons suspension and release systems from higher-margin
production efforts last year to lower-margin, non-recurring development efforts
on recently awarded long-term programs. These decreases were partially offset by
efficiencies achieved on higher production volume associated with our radar
signal simulator.
The Communications and Space Products segment's operating earnings for the three
months ended June 28, 2003 were $0.8 million or 6.2% of this segment's net sales
compared to an operating loss for the three months ended June 29, 2002 of $0.2
million. Operating earnings in the current period were favorably impacted by the
contribution of sales from Condor, as well as increased margin on antenna
product sales.
The Engineered Materials segment's operating earnings for the three months ended
June 28, 2003 were $0.1 million or 1.3% of this segment's net sales compared to
operating earnings for the three months ended June 29, 2002 of $0.6 million or
6.4% of this segment's net sales. During the three months ended June 28, 2003,
we incurred a charge of $0.7 million to write down to net realizable value
inventory and receivables related to the microwave product line in our
electro-ceramics business. In addition, the decrease in this segment's operating
earnings as a percentage of net sales was due to a decrease in contribution from
fiber composite waste and water tanks resulting from the commercial aviation
industry's decreased demand for such tanks, a shift in sales to lower margin
non-recurring engineering efforts, and production associated with the Sikorsky
Comanche program moving to future quarters.
Selling, general and administrative expenses increased $12.9 million or 149.4%
to $21.5 million or 19.2% of net sales for the three months ended June 28, 2003
from $8.6 million or 11.7% of net sales for the three months ended June 29,
2002. This increase is primarily attributable to the acquisitions of Condor,
AERA, Darlington and Emblem, which accounted for in excess of $11.0 million of
the net increase and included $1.1 million of amortization expense associated
with the intangible assets established as part of purchase accounting. In the
second quarter of 2002, amortization expense was $0.1 million.
Page 16 of 27
Company-sponsored research and development expenditures of $2.5 million or 2.2%
of net sales in the three months ended June 28, 2003 are lower on a percentage
of net sales basis than the $2.1 million or 2.8% of net sales in the three
months ended June 29, 2002. This is due to timing of such expenditures in
addition to the absence of such expenditures in our services business, which
includes recently acquired AERA.
Interest expense, net of interest income, for the three months ended June 28,
2003 was $2.1 million compared to $1.5 million for the three months ended June
29, 2002. Interest expense for each period reflects interest associated with our
$137.8 million principal amount 5.25% Convertible Subordinated Notes due 2007
(the "Notes"), issued in April 2002, amortization of deferred debt issuance
costs associated with the offering of the Notes, and amortization of deferred
financing costs associated with our credit facility, which was amended in the
fourth quarter of 2002. In the three months ended June 29, 2002, interest
expense reflected lower amortization of deferred financing costs, as the costs
to amend the credit facility and, therefore, the increased amortization expense,
did not occur until later quarters.
For the three months ended June 28, 2003, the net loss from continuing
operations was $1.6 million or $0.09 per common share on 17.3 million basic
common shares compared to net earnings from continuing operations of $3.1
million or $0.18 per diluted common share on 17.4 million diluted common shares
for the three months ended June 29, 2002. In the three months ended June 28,
2003, we received notification of final settlement of bankruptcy matters
pertaining to our former energy business. Upon the discontinuance of such
business in 1996, a liability was established pending final settlement of the
bankruptcy. This liability was reversed as of June 28, 2003. Consequently, $1.4
million, net of income tax expense of $0.9 million, was reported as earnings
from discontinued operations in the accompanying statement of earnings. The net
loss, including discontinued operations, was $0.2 million or $0.01 per common
share for the three months ended June 28, 2003.
Six Months Ended June 28, 2003 compared with Six Months Ended June 29, 2002
Net sales for the six months ended June 28, 2003 increased $65.5 million or
46.6% to $206.1 million from $140.6 million for the six months ended June 29,
2002. This increase comprised sales growth of $53.6 million in the Defense
segment, $8.6 million in the Communications and Space Products segment and $3.3
million in the Engineered Materials segment.
In the Defense segment, $34.5 million of the increase was due to sales of
reconnaissance and surveillance systems attributable to the assets acquired from
Condor. Such sales were not included in sales for the first half of 2002 as the
Condor assets were acquired on July 26, 2002. Also, $32.2 million of the
increase was attributable to sales of recently acquired Emblem, Darlington and
AERA. Aircraft weapons and suspension release systems sales increased due in
part to the F-22 AMRAAM Vertical Eject Launcher program, the BRU-57
Multiple-Carriage Smart Bomb Rack program, development efforts on the Small
Diameter Bomb and the Joint Strike Fighter suspension and weapons release units
programs. Sales relating to our radar signal simulator program also increased in
the six months ended June 28, 2003 compared to the six months ended June 29,
2002 due to increased production efforts. These increases in the Defense segment
were partially offset by the decreases in sales of electronic warfare equipment,
integrated combat systems, as well as professional services. The decrease in
sales of electronic warfare equipment was due to higher sales in the first half
of 2002 on the UEU program. The UEU production program is expected to be
completed in the third quarter of 2003. The decrease in sales of integrated
combat systems and professional services was due primarily to delays in receipt
of orders.
Page 17 of 27
In the Communications and Space Products segment, the increase in sales was
attributable primarily to sales contributed by the assets acquired from Condor.
In addition, there were increases in sales of antenna products. The increases in
this segment were partially offset by decreases in sales of space products.
In the Engineered Materials segment, there were increases in sales of advanced
fiber composite structural products, including work on recently received orders
associated with the Sikorsky Comanche program, and electro-ceramic products.
Operating earnings for the six months ended June 28, 2003 decreased $5.3 million
or 45.4% to $6.3 million or 3.1% of net sales compared to $11.6 million or 8.2%
of net sales for the six months ended June 29, 2002. In the six months ended
June 29, 2002, operating earnings of the Communications and Space Products
segment were negatively impacted by a $1.5 million charge recorded to provide
for manufacturing inefficiencies resulting from a primary customer's decrease in
forecasted purchases of our Ku-Ku band down converters. Included in operating
earnings for the six months ended June 28, 2003 is a $9.2 million impairment
loss related to the Deer Park facility and $2.0 million of intangible asset
amortization expense associated with the Condor, AERA and Darlington
acquisitions. This compares to total amortization expense of approximately $0.1
million for the six months ended June 29, 2002. Also included in operating
earnings for the six months ended June 28, 2003 is non-cash pension expense of
$2.0 million and non-cash ESOP compensation expense of $1.5 million. Included in
operating earnings for the six months ended June 29, 2002 is non-cash pension
expense of $2.0 million and non-cash ESOP compensation expense of $2.3 million.
The lower non-cash ESOP compensation expense for the six months ended June 28,
2003 is attributable to our lower average stock price compared to the first half
of 2002. Pension and ESOP compensation expense are allocated between cost of
sales and selling, general and administrative expense.
The Defense segment's operating earnings for the six months ended June 28, 2003
were $12.7 million or 8.1% of this segment's net sales compared to operating
earnings for the six months ended June 29, 2002 of $12.5 million or 12.1% of
this segment's net sales. The first half of 2002 was favorably impacted by the
high margin sales on the UEU production program, which is expected to be
completed in the third quarter of 2003. In the six months ended June 28, 2003,
operating earnings were negatively impacted by the aforementioned amortization
expense pertaining to intangible assets, as well as the effect of lower margin
sales of reconnaissance and surveillance systems acquired from Condor. The
decrease in the Defense segment's operating earnings is also due in part to a
shift in the margins of aircraft weapons suspension and release systems from
higher-margin production efforts last year to lower-margin, non-recurring
development efforts on recently awarded long-term programs. These decreases were
partially offset by higher margins on sales of our radar signal simulator.
The Communications and Space Products segment's operating earnings for the six
months ended June 28, 2003 were $2.1 million or 7.4% of this segment's net
sales. For the six months ended June 29, 2002, this segment had an operating
loss of $2.0 million, due primarily to the $1.5 million Ku-Ku band down
converter related charge discussed above. Operating earnings for the six months
ended June 28, 2003 were also favorably impacted by the contribution of sales
from Condor.
The Engineered Materials segment's operating earnings for the six months ended
June 28, 2003 were $0.7 million or 3.2% of this segment's net sales compared to
operating earnings for the six months ended June 29, 2002 of $1.1 million or
6.3% of this segment's net sales. During the six months ended June 28, 2003, we
incurred a charge of $0.7 million to write down to net realizable value
Page 18 of 27
inventory and receivables related to the microwave product line in our
electro-ceramics business. In addition, the decrease in this segment's operating
earnings as a percentage of net sales was due to a decrease in contribution from
fiber composite waste and water tanks resulting from the commercial aviation
industry's decreased demand for such tanks, a shift in sales to lower margin
non-recurring engineering efforts, and production associated with the Sikorsky
Comanche program moving to future quarters.
Selling, general and administrative expenses increased $18.4 million or 100.0%
to $36.7 million or 17.8% of net sales for the six months ended June 28, 2003
from $18.3 million or 13.0% of net sales for the six months ended June 29, 2002.
This increase is primarily attributable to the acquisitions of Condor, AERA,
Darlington, and Emblem, which accounted for in excess of $16.0 million of the
net increase and included $2.0 million of amortization expense associated with
the intangible assets established as part of purchase accounting. In the first
half of 2002, amortization expense was $0.1 million.
Company-sponsored research and development expenditures of $4.5 million or 2.2%
of net sales in the six months ended June 28, 2003 are lower on a percentage of
net sales basis than the $3.9 million or 2.7% of net sales in the six months
ended June 29, 2002. This is due to timing of such expenditures in addition to
the absence of such expenditures in our services business, which includes
recently acquired AERA.
Interest expense, net of interest income, for the six months ended June 28, 2003
was $4.1 million compared to $1.4 million for the six months ended June 29,
2002. Interest expense for each period reflects interest expense associated with
our Notes, issued in April 2002, amortization of deferred debt issuance costs
associated with the offering of the Notes and amortization of deferred financing
costs associated with our credit facility, which was amended in the fourth
quarter of 2002. In the six months ended June 29, 2002, interest expense
reflected lower amortization of deferred financing costs, as the costs to amend
the credit facility and, therefore, the increased amortization expense, did not
occur until later quarters.
Income tax expense for the six months ended June 28, 2003 reflects our estimated
effective rate of 43.0% for the year ending December 31, 2003. This compares to
an effective rate of 42.5% for the six months ended June 29, 2002, reflecting
our estimated effective rate for the year ended December 31, 2002. This increase
in the effective rate is primarily attributable to the non-deductible portion of
non-cash ESOP compensation expense as a percentage of projected book income.
For the six months ended June 28, 2003, net earnings from continuing operations
were $1.4 million or $0.08 per diluted common share on 17.5 million diluted
common shares compared to net earnings from continuing operations of $5.9
million or $0.34 per diluted common share on 17.3 million diluted common shares
for the six months ended June 29, 2002. In the six months ended June 28, 2003,
we received notification of final settlement of bankruptcy matters pertaining to
our former energy business. Upon the discontinuance of such business in 1996, a
liability was established pending final settlement of the bankruptcy. This
liability was reversed as of June 28, 2003. Consequently, $1.4 million, net of
income tax expense of $0.9 million, was reported as earnings from discontinued
operations in the accompanying statement of earnings. Net earnings including
discontinued operations, were $2.8 million or $0.16 per diluted share for the
six months ended June 28, 2003.
Considering a retroactive effect of a change in accounting principle, net
earnings for the six months ended June 29, 2002 were $2.5 million or $0.15 per
diluted common share. This reflects a $3.4 million charge which was
Page 19 of 27
recorded as of January 1, 2002, and is shown net of a tax benefit of $0.8
million on the statement of earnings. This charge pertains to the impairment of
goodwill and a trademark resulting from impairment tests performed in 2002, as
required under Statement of Financial Accounting Standard ("SFAS") No. 142. The
impairment occurred in the Engineered Materials segment and is comprised of $2.3
million of goodwill and $1.9 million related to a trademark.
Liquidity and Capital Resources
Balance Sheet
Our cash, cash equivalents and marketable securities decreased $72.1 million or
54.4% to $60.5 million at June 28, 2003 from $132.5 million at December 31,
2002. The decrease was primarily due to cash outflows of $88.8 million to
finance the acquisitions of Emblem, Darlington and AERA, net of cash acquired.
Partially offsetting the cash used by investing activities for acquisitions was
the release of $27.2 million of restricted cash. Cash provided by operations for
the six months ended June 28, 2003 was $6.9 million compared to $8.0 million of
cash used by operations for the six months ended June 29, 2002. Cash flows from
operations for the six months ended June 28, 2003 were favorably impacted by the
collection of receivables. During the six months ended June 28, 2003, we also
made payments of approximately $12.0 million in full settlement of the debt we
assumed upon the acquisition of AERA, Darlington and Emblem. Such payments were
made in order to remain in compliance with our credit facility.
Restricted cash of $0.2 million at June 28, 2003 represents remaining collateral
backing 105% of outstanding letters of credit assumed in connection with the
acquisition of Condor. In July 2003, all remaining restricted cash was released.
Accounts receivable increased $16.9 million or 16.8% to $117.5 million at June
28, 2003 from $100.6 million at December 31, 2002 due primarily to the
acquisitions of Emblem, Darlington and AERA. Excluding the effects of the
Emblem, Darlington and AERA acquisitions, accounts receivable decreased $12.2
million or 12.1% from December 31, 2002.
Inventories increased $4.9 million or 15.1% to $37.3 million at June 28, 2003
from $32.4 million at December 31, 2002. The increase was due primarily to the
acquisition of Emblem. Excluding the acquisitions made in 2003, inventories
increased $1.2 million or 3.5% from December 31, 2002.
The notes receivable of $2.5 million at June 28, 2003 (of which $0.4 million is
included in current assets at June 28, 2003) are comprised of a note related to
the sale of property in Deer Park in June 2000, which had a balance of $1.1
million at June 28, 2003, and $1.8 million in notes related to the sale of our
former College Point facility in January 1996. In July 2003, we collected the
entire remaining balance of the Deer Park facility note. The College Point
facility 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 7.0% per
annum. The latter notes receivable are secured by a mortgage on the facility.
Contract advances decreased $9.5 million or 46.9% to $10.8 million at June 28,
2003 from $20.3 million at December 31, 2002 due to the liquidation of
previously received advances by cost input on foreign contracts.
Capital expenditures, excluding the effects of the acquisitions of Emblem,
Darlington and AERA, for the six months ended June 28, 2003 were $4.6 million
compared to $2.2 million for the six months ended June 29, 2002. Increases were
in accordance with planned expenditures and attributable to leasehold
improvements at the Company's headquarters as well as purchases of machinery and
equipment. We are currently reviewing our capital expenditures
Page 20 of 27
plan for 2003 and the strategic alternatives for our facilities in light of
recent acquisitions.
Financing Activities
Credit Facility
At June 28, 2003, we have a $200.0 million credit facility with a consortium of
banks, led by Citibank, N.A. as the administrative agent, Fleet National Bank as
the syndication agent and Wachovia Bank, N.A. as the documentation agent. The
facility expires in November 2005 and amended the $69.0 million credit facility
in place at December 31, 2001.
The credit facility provides us with sub-limits of borrowing up to $125.0
million for acquisition-related financing and up to $125.0 million in stand-by
letters of credit financing. The potential cash borrowing under the facility is
reduced by the amount of outstanding letters of credit. There were no direct
borrowings outstanding under the credit facility at June 28, 2003. Letters of
credit outstanding at June 28, 2003 pertaining to the credit facility were $62.9
million, resulting in $62.1 million available at June 28, 2003 for stand-by
letters of credit. In connection with the credit facility, we are required to
maintain both financial and non-financial covenants and ratios. As of June 28,
2003, we were in compliance with our covenants. The credit facility is secured
by our accounts receivable, inventory and machinery and equipment.
5.25% Convertible Subordinated Notes due 2007
In April 2002, we completed the offering of the Notes and received proceeds of
$133.7 million, net of $4.1 million of commissions paid. Interest payments on
the Notes are due April 15 and October 15 of each year. Accrued interest
payable, included in accrued liabilities on our consolidated balance sheet, was
$1.5 million at June 28, 2003 and December 31, 2002, respectively. 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.
As of June 28, 2003, there had been no conversions.
Employee Stock Ownership Trust ("ESOT") Loan
We sponsor an ESOP which provides retirement benefits to substantially all
employees. An indirect loan which is collateralized by unallocated EDO common
shares is funded by quarterly cash contributions from us. As quarterly cash
payments are made, the unallocated EDO common shares are committed-to-be-
released and allocated to participants.
We believe that, for the foreseeable future, we have adequate liquidity and
sufficient capital to fund our currently anticipated requirements for working
capital, capital expenditures including acquisitions, research and development
expenditures, interest payments and servicing of the ESOP indirect loan. 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
facility; issuance of our common stock or other equity securities; and/or
convertible or other debt offerings.
Commitments and Contingencies
In order to aggregate all commitments and contractual obligations as of June 28,
2003, we have included the following table. Our commitments under
Page 21 of 27
letters of credit and advance payment and performance bonds relate primarily to
advances received on 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 amounts for letters of
credit and performance bonds represent the amount of commitment expiration per
period.
Payments Due In (in millions):
2007 and
Total 2003 2004 2005 2006 Beyond
------ ------ ------ ------ ------ --------
5.25% Convertible Subordinated
Notes due 2007 $137.8 -- -- -- -- $137.8
Operating leases 51.4 7.2 8.3 6.6 4.9 24.4
Letters of credit 79.2 15.2 7.6 55.9 0.2 0.3
Advance payment and performance
bonds 2.0 0.3 -- -- -- 1.7
------ ------ ------ ------ ------ ------
Total $270.4 22.7 15.9 62.5 5.1 $164.2
====== ====== ====== ====== ====== ======
Additionally, we are subject to certain legal actions that arise out of the
normal course of business. Although we believe that the ultimate outcome of
these actions will not have a material adverse effect on our consolidated
financial position, results of operations or liquidity, legal costs incurred in
connection with these matters could materially impact our results of operations,
particularly within a quarterly period.
Backlog
The funded backlog of unfilled orders at June 28, 2003 increased $72.4 million
or 19.3% to $447.4 from $375.0 million at December 31, 2002. Excluding the
effects of the Emblem, Darlington and AERA acquisitions, backlog increased $3.4
million or 1.0%. Our backlog consists primarily of current orders under
long-lived, mission-critical programs of key defense platforms.
Critical Accounting Policies
We make estimates and assumptions in the preparation of our consolidated
financial statements in conformity with accounting principles generally accepted
in the United States. Actual results could differ significantly from those
estimates under different assumptions and conditions. We believe that the
following discussion addresses our critical accounting policies, which are those
that are most important to the portrayal of our consolidated financial condition
and results of operations and which require our most difficult and subjective
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. The following is a brief discussion of
the critical accounting policies employed by us:
Revenue Recognition
Sales under long-term, fixed-price contracts, including pro-rata profits, are
generally recorded based on the relationship of costs incurred to date to total
projected final costs or, alternatively, as deliveries and other milestones are
achieved or services are provided. These projections are revised throughout the
lives of the contracts. Adjustments to profits resulting from such revisions
Page 22 of 27
are made cumulative to the date of change and may affect current period
earnings.
Our gross profit is affected by a variety of factors, including the mix of
products, systems and services sold, production efficiencies, price competition
and general economic conditions. Estimated losses on long-term contracts are
recorded when identified. Sales under cost reimbursement contracts are recorded
as costs are incurred. Sales on other than long-term contract orders
(principally commercial products) are recorded as shipments are made.
Inventories
Inventories under long-term contracts and programs reflect all accumulated
production costs, including factory overhead, initial tooling and other related
costs (including general and administrative expenses relating to certain of our
defense contracts), less the portion of such costs charged to cost of sales.
Inventory costs in excess of amounts recoverable under contracts and which
relate to a specific technology or application and which may not have
alternative uses are charged to cost of sales when such circumstances are
identified. All other inventories are stated at the lower of cost (principally
first-in, first-out method) or market. From time to time, we manufacture certain
products prior to receiving firm contracts in anticipation of future demand.
Such costs are inventoried and are incurred to help maintain stable and
efficient production schedules.
Several factors may influence the sale and use of our inventories, including our
decision to exit a product line, technological change, new product development
and/or revised estimates of future product demand. If inventory is determined to
be overvalued due to one or more of the above factors, we would be required to
recognize such loss in value at the time of such determination. Under the
contractual arrangements by which progress payments are received, the United
States Government has a title to or a security interest in the inventories
identified with related contracts.
Property, Plant and Equipment and Other Long-Lived Assets
Property, plant and equipment is recorded at cost and is depreciated on a
straight-line basis over the estimated useful lives of such assets. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
their respective lease periods. In those cases where we determine that the
useful life of property, plant and equipment should be shortened, we depreciate
the net book value in excess of the salvage value over its revised remaining
useful life thereby increasing depreciation expense. Factors such as
technological advances, changes to our business model, changes in our capital
strategy, changes in the planned use of equipment, fixtures, software or changes
in the planned use of facilities could result in shortened useful lives.
Long-lived assets, other than goodwill, are reviewed by us for impairment
whenever events or changes in circumstances indicate that the carrying amount of
any such asset may not be recoverable. The estimate of cash flow is based upon,
among other things, certain assumptions about expected future operating
performance. Our estimates of undiscounted cash flow may differ from actual cash
flow due to, among other things, technological changes, economic conditions,
changes to our business model or changes in our operating performance. If the
sum of the undiscounted cash flows, excluding interest, is less than the
carrying value, we would recognize an impairment loss, measured as the amount by
which the carrying value exceeds the fair value of the asset.
Page 23 of 27
In accordance with SFAS No. 142, goodwill must be tested at least annually for
impairment at the reporting unit level. If an indication of impairment exists,
we are required to determine if such goodwill's implied fair value is less than
its carrying value in order to determine the amount, if any, of the impairment
loss required to be recorded. Impairment indicators include, among other
conditions, cash flow deficits, an historic or anticipated decline in revenue or
operating profit, adverse legal or regulatory developments, accumulation of
costs significantly in excess of amounts originally expected to acquire the
asset and a material decrease in the fair value of some or all of the assets.
Pension and Post-Retirement Benefit Obligations
We sponsor defined benefit pension and other retirement plans in various forms
covering all eligible employees. Several statistical and other factors which
attempt to anticipate future events are used in calculating the expense and
liability related to the plans. These factors include assumptions about the
discount rate, expected return on plan assets and rate of future compensation
increases as determined by us, within certain guidelines and in conjunction with
our actuarial consultants. In addition, our actuarial consultants also use
subjective factors such as withdrawal and mortality rates to estimate the
expense and liability related to these plans. The actuarial assumptions used by
us may differ significantly, either favorably or unfavorably, from actual
results due to changing market, economic or regulatory conditions, higher or
lower withdrawal rates or longer or shorter life spans of participants.
New Accounting Standards
See the notes accompanying the unaudited consolidated financial statements as of
and for the three and six months ended June 28, 2003.
"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 within 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 Exchange 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 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, upgrades and spares support are
subject to: establishment and continuance of various consortiums for satellite
constellation programs; delay in launch dates due to equipment,
Page 24 of 27
weather or other factors beyond our control; 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 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 our overall structure.
Expectations of future income tax rates can be affected by a variety of factors,
including statutory changes in Federal and state tax rates, changes in the
non-deductible portion of our non-cash ESOP compensation expense, changes in
Federal and state regulations, and non-deductible expenses related to
acquisitions.
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."
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, EDO
carried out an evaluation of the effectiveness of the design and operation of
its disclosure controls and procedures under the supervision and with the
participation of its management, including its Review and Disclosure Committee,
its Chief Executive Officer and its Chief Financial Officer. The Chief Executive
Officer and Chief Financial Officer concluded that EDO's disclosure controls and
procedures are effective to ensure that material information is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission rules and forms.
Changes in internal controls
There were no changes in EDO's internal controls over financial reporting
during EDO's last fiscal quarter that have materially affected, or are likely to
materially affect internal controls over financial reporting.
Page 25 of 27
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 April 22, 2003, the
following action was taken:
(a) Messrs. Robert E. Allen, Robert Alvine, Dennis C. Blair,
Michael J. Hegarty, and James Roth were elected as directors,
each receiving at least 16,539,042 votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits to this Report are listed in the Exhibit Index
appearing herein.
(b) Reports on Form 8-K
On April 18, 2003, we filed a Current Report on Form 8-K/A to
file certain audited financial statements and unaudited pro
forma financial information relating to the acquisition by EDO
Professional Services Inc., a wholly-owned subsidiary of the
Company, of all of the outstanding capital stock of Advanced
Engineering and Research Associates, Inc., a Virginia
corporation.
On May 6, 2003, we filed a Current Report on Form 8-K to
announce the release of our financial results for the quarter
ended March 29, 2003 and to file such press release as an
exhibit thereto.
On June 25, 2003, we filed a Current Report on Form 8-K to
report the acquisition by EDO of 100% of the outstanding
capital stock of Emblem Group Limited, pursuant to a Stock
Purchase Agreement dated as of June 16, 2003.
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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: /s/ Frederic B. Bassett
-----------------------------------------
Frederic B. Bassett - Vice President- Finance
(Principal Financial Officer)
Date: August 6, 2003
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Exhibit Index
Exhibit Description
- ------- -----------
31.1 Certification of Principal Executive Officer Pursuant to 15 U.S.C.
Section 10A, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer Pursuant to 15 U.S.C.
Section 10A, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 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
32.2 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