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Page 1 of 27
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: September 27, 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 latest practicable date.
Class Outstanding at November 3, 2003
- ------------------------------------- ---------------------------------
Common shares, par value $1 per share 19,739,245
Page 2 of 27
EDO CORPORATION
INDEX
Page
Face Sheet 1
Index 2
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
September 27, 2003 and
December 31, 2002 3
Consolidated Statements of Earnings -
Three Months Ended
September 27, 2003 and
September 28, 2002 4
Consolidated Statements of Earnings -
Nine Months Ended
September 27, 2003 and
September 28, 2002 5
Consolidated Statements of Cash Flows -
Nine Months Ended
September 27, 2003 and
September 28, 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 25
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)
September 27, 2003 December 31, 2002
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 59,998 $ 132,320
Restricted cash - 27,347
Marketable securities 216 193
Accounts receivable, net 117,919 100,594
Inventories 35,265 32,406
Assets held for sale 26,892 -
Deferred income tax asset, net 3,222 3,222
Prepayments and other 6,240 3,133
--------- ---------
Total current assets 249,752 299,215
Property, plant and equipment, net 32,059 64,472
Notes receivable 1,375 2,556
Goodwill 93,903 61,352
Other intangible assets, net 57,196 11,867
Deferred income tax asset, net 23,256 20,439
Other assets 25,528 21,673
--------- ---------
$ 483,069 $ 481,574
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 14,776 $ 19,108
Accrued liabilities 63,662 55,448
Contract advances and deposits 7,236 20,277
--------- ---------
Total current liabilities 85,674 94,833
Long-term debt 137,800 137,800
Post-retirement benefits obligations 79,478 78,643
Environmental obligation 1,941 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 19,828,727 in
2003 and 19,790,477 in 2002 19,829 19,790
Additional paid-in capital 149,255 147,091
Retained earnings 63,084 56,325
Accumulated other comprehensive loss,
net of income tax benefit (34,178) (33,899)
Treasury shares at cost (89,482 shares in
2003 and 94,322 shares in 2002) (1,274) (1,321)
Unearned Employee Stock Ownership Plan shares (17,603) (18,541)
Deferred compensation under
Long-Term Incentive Plan (586) (579)
Management group receivables (351) (593)
--------- ---------
Total shareholders' equity 178,176 168,273
--------- ---------
$ 483,069 $ 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
September 27, 2003 September 28, 2002
(unaudited)
Net sales $ 118,783 $ 85,104
Costs and expenses
Cost of sales 84,818 62,541
Selling, general and administrative 20,388 12,766
Research and development 1,450 2,080
Write-off of purchased in-process
research and development - 150
Acquisition-related costs 249 204
--------- ---------
106,905 77,741
--------- ---------
Operating earnings 11,878 7,363
Non-operating income (expense)
Interest income 273 512
Interest expense (2,295) (2,046)
Other, net (103) 34
--------- ---------
(2,125) (1,500)
--------- ---------
Earnings before income taxes 9,753 5,863
Income tax expense (4,194) (2,492)
--------- ---------
Net earnings $ 5,559 $ 3,371
========= =========
Earnings per common share:
Basic $ 0.32 $ 0.20
========= =========
Diluted $ 0.30 $ 0.19
========= =========
Weighted-average common shares outstanding:
Basic 17,336 17,120
========= =========
Diluted 21,999 17,401
========= =========
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 nine months ended
September 27, 2003 September 28, 2002
(unaudited)
Continuing Operations:
Net sales $ 324,896 $ 225,732
Costs and expenses
Cost of sales 233,838 169,387
Selling, general and administrative 57,088 31,107
Research and development 5,938 5,941
Write-off of purchased in-process
research and development - 150
Impairment loss on assets held for sale 9,160 -
Acquisition-related costs 669 204
--------- ---------
306,693 206,789
--------- ---------
Operating earnings 18,203 18,943
Non-operating income (expense)
Interest income 673 1,284
Interest expense (6,769) (4,171)
Other, net 25 40
--------- ---------
(6,071) (2,847)
--------- ---------
Earnings from continuing operations before
income taxes, discontinued operations
and cumulative effect of a change in
accounting principle 12,132 16,096
Income tax expense (5,217) (6,841)
--------- ---------
Earnings from continuing operations before
discontinued operations and cumulative
effect of a change in accounting principle 6,915 9,255
Earnings from discontinued operations, net of tax 1,398 -
Cumulative effect of a change in accounting
principle, net of tax - (3,363)
--------- ---------
Net earnings $ 8,313 $ 5,892
========= =========
Earnings (loss) per common share:
Basic:
Continuing operations $ 0.40 $ 0.54
Discontinued operations 0.08 -
Cumulative effect of a change in
accounting principle - (0.19)
--------- ---------
$ 0.48 $ 0.35
========= =========
Diluted:
Continuing operations $ 0.39 $ 0.53
Discontinued operations 0.08 -
Cumulative effect of a change in
accounting principle - (0.19)
--------- ---------
$ 0.47 $ 0.34
========= =========
Weighted-average common shares outstanding:
Basic 17,281 17,050
========= =========
Diluted 17,526 17,362
========= =========
See accompanying Notes to Consolidated Financial Statements.
Page 6 of 27
EDO Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
For the nine months ended
September 27, 2003 September 28, 2002
(unaudited)
Operating activities:
Net earnings from continuing operations $ 6,915 $ 5,892
Adjustments to net earnings from continuing
operations to arrive at cash provided
by operations:
Depreciation 9,017 7,478
Amortization 3,529 549
Bad debt expense 170 -
Write-off of purchased in-process
research and development - 150
Deferred tax benefit (3,756) -
Loss on sale of plant and equipment 92 13
Impairment loss on assets held for sale 9,160 -
Deferred compensation expense 182 143
Non-cash Employee Stock Ownership Plan expense 2,356 3,230
Non-cash stock option compensation expense 292 -
Dividends on unallocated ESOP shares 221 236
Common shares issued for directors' fees 79 119
Income tax benefit from stock options 147 426
Cumulative effect of a change in accounting principle - 3,363
Changes in operating assets and liabilities,
excluding effects of acquisitions:
Accounts receivable 13,579 75
Inventories 874 (4,258)
Prepayments and other assets (126) (3,108)
Contribution to defined benefit pension plan (5,000) -
Accounts payable, accrued liabilities and other (17,804) 1,803
Contract advances and deposits (13,041) 2,099
--------- ---------
Cash provided by continuing operations 6,886 18,210
Net cash provided by discontinued operations 47 -
Investing activities:
Cash paid for acquisitions, net of cash acquired (87,647) (58,543)
Restricted cash 27,347 (28,238)
Payments received on notes receivable 1,310 262
Purchase of plant and equipment (6,938) (4,094)
Proceeds from the sale of plant and equipment - 6
Purchase of marketable securities (23) (3)
--------- ---------
Cash used by investing activities (65,951) (90,610)
Financing activities:
Repayment of acquired debt (11,998) -
Proceeds from exercise of stock options 226 411
Proceeds from management group receivables 242 252
Issuance of convertible subordinated notes - 137,800
Payment of common share cash dividends (1,774) (1,770)
--------- ---------
Cash (used) provided by financing activities (13,304) 136,693
Net change in cash and cash equivalents (72,322) 64,293
Cash and cash equivalents at beginning of year 132,320 57,841
--------- ---------
Cash and cash equivalents at end of period $ 59,998 $ 122,134
========= =========
Supplemental disclosures:
Cash paid for: Interest $ 3,617 $ -
Income taxes $ 10,621 $ 11,949
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 Nine months ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2003 2002 2003 2002
(in thousands)
Numerator:
Net earnings for basic
and diluted calculations $ 5,559 $ 3,371 $ 8,313 $ 5,892
Effect of dilutive securities:
5.25% Convertible Subordinated
Notes due 2007 1,031 - - -
------- ------- ------- -------
$ 6,590 $ 3,371 $ 8,313 $ 5,892
======= ======= ======= =======
Denominator:
Denominator for basic calculation 17,336 17,120 17,281 17,050
Effect of dilutive securities:
5.25% Convertible Subordinated
Notes due 2007 4,408 - - -
Stock options 255 281 245 312
------- ------- ------- -------
Denominator for diluted calculation 21,999 17,401 17,526 17,362
======= ======= ======= =======
Page 8 of 27
The following table summarizes, for each period presented, the number of shares
excluded from the computation of diluted earnings per share, as their effect
upon potential issuance was antidilutive:
Three months ended Nine months ended
Sept. 27, 2003 Sept. 28, 2002 Sept. 27, 2003 Sept. 28, 2002
(in thousands)
5.25% Convertible
Subordinated Notes due
2007 - 4,408 4,408 2,928
Stock Options 361 305 471 104
--- ----- ----- -----
361 4,713 4,879 3,032
=== ===== ===== =====
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.
The following table illustrates the effect on net earnings and earnings per
share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," whereby compensation expense would be recognized as
incurred for stock-based employee compensation.
Three months ended Nine months ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2003 2002 2003 2002
(in thousands, except per share amounts)
Net earnings:
As reported $ 5,559 $ 3,371 $ 8,313 $ 5,892
Stock option compensation
expense based on fair value
method, net of tax (384) (346) (1,208) (747)
--------- --------- --------- ---------
Pro forma $ 5,175 $ 3,025 $ 7,105 $ 5,145
========= ========= ========= =========
Basic earnings per common share:
As reported $ 0.32 $ 0.20 $ 0.48 $ 0.35
Pro forma $ 0.30 $ 0.18 $ 0.41 $ 0.30
Diluted earnings per common share:
As reported $ 0.30 $ 0.19 $ 0.47 $ 0.34
Pro forma $ 0.28 $ 0.17 $ 0.41 $ 0.30
Page 9 of 27
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 (pound)13.26 million
($22.3 million), excluding transaction costs of approximately $1.9 million. In
addition, the Company acquired and immediately paid off debt of (pound)1.99
million ($3.3 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 purchase price was $25.6 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 purchase
price was $38.1 million, excluding transaction costs of $0.3 million. In
addition, the Company acquired and immediately paid off 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 $62.5 million in cash, in addition to
transaction costs of $5.0 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. The
interest rate used in determining pro forma adjustments to interest income or
expense was based on the average yield of the Company's invested cash and cash
equivalents and approximated 1.0% for each of the respective periods presented
below.
Page 10 of 27
Nine months ended
September 27, 2003 September 28, 2002
(in thousands, except per share amounts)
Net sales $ 353,313 $ 370,040
Earnings available for common shares,
before discontinued operations and
cumulative effect of a change in
accounting principle $ 8,473 $ 3,961
Diluted earnings per common share $ 0.48 $ 0.23
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 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 $ 11,942 $ 13,262 $ 31,775
Plant and equipment 3,228 1,534 1,048 5,543
Customer contracts and
relationships 7,200 14,400 17,100 -
Purchased in-process
research and development - - - 150
Purchased technologies 5,120 - - 11,648
Purchased backlog - - - 916
Non-compete agreements 336 30 2,420 -
Tradename 960 400 500 -
Trademark 320 - - -
Goodwill 6,433 13,463 11,672 41,734
Other assets 85 446 174 76
Liabilities (9,179) (16,326) (7,815) (24,351)
-------- -------- -------- --------
Total purchase price $ 24,152 $ 25,889 $ 38,361 $ 67,491
======== ======== ======== ========
Adjustments resulting from the settlement of purchase prices on Condor, AERA and
Darlington have been made. In addition, there were adjustments due to the
settlement of certain pre-acquisition Condor liabilities. Adjustments related to
the settlement of the Emblem purchase price are expected to be determined in the
fourth quarter of 2003.
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.
Page 11 of 27
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, which is net of a tax benefit of $0.8
million, occurred in the Engineered Materials segment and was 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 nine months
ended September 27, 2003 are as follows:
Communications and
Space Engineered
Defense Products Materials Total
(in thousands)
Balance at January 1, 2003 $ 57,660 $ 3,692 $ - $ 61,352
Adjustment of Condor purchase
price accounting 3,014 (2,031) - 983
Acquisition of AERA 11,672 - - 11,672
Acquisition of Darlington 13,463 - - 13,463
Acquisition of Emblem 6,433 - - 6,433
---------------------------------------------------------------------
Balance at September 27, 2003 $ 92,242 $ 1,661 $ - $ 93,903
=====================================================================
Summarized below are intangible assets subject to amortization:
Estimated
September 27, December 31, Useful Lives
2003 2002 (years)
(in thousands)
Customer contracts and relationships $ 38,700 $ - 10-20
Purchased technologies 16,768 11,648 8-20
Non-compete agreements 2,986 200 1-5
Tradename/trademark 2,180 - 5-35
Purchased backlog 916 916 2
---------------------------------
61,550 12,764
Less accumulated amortization (4,354) (897)
---------------------------------
$ 57,196 $ 11,867
=================================
The amortization expense for the three months ended September 27, 2003 and
September 28, 2002 amounted to $1.4 million and $0.4 million, respectively. The
amortization expense for the nine months ended September 27, 2003 and September
28, 2002 amounted to $3.5 million and $0.5 million, respectively.
Total amortization expense for the years 2003, 2004, 2005, 2006, 2007 and
thereafter related to intangible assets are estimated to be $4.8 million, $5.4
million, $5.1 million, $5.1 million, $5.1 million and $35.1 million,
respectively.
Page 12 of 27
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
September 27, 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
September 27, 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. The Company recorded a pre-tax
impairment loss of $9.2 million in the second quarter of 2003, as the net book
value of the assets exceeded the fair value less the costs to sell. The fair
value was based on a $29.0 million sales price per the sales agreement entered
into in July 2003. This impairment charge represented the entire loss the
Company expects to incur.
Of the $29.0 million sales price, $22.0 million is in cash and $7.0 million is
in the form of a purchase money mortgage and note. The Company closed on the
sale in October 2003 and received the cash less closing payments. The note
receivable is due when the Company vacates the facility. As part of the
agreement, the Company will lease the facility for a period not to exceed two
years. The lease agreement does not have any renewal or buyout options.
Inventories
Inventories are summarized by major classification as follows:
September 27, 2003 December 31, 2002
(in thousands)
Raw materials and supplies $ 8,847 $ 7,804
Work-in-process 40,606 27,024
Finished goods 2,149 2,041
Less: Unliquidated progress payments (16,337) (4,463)
-------- --------
$ 35,265 $ 32,406
======== ========
Credit Facility
At September 27, 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, $1.0 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.
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 September 27,
2003. Letters of credit outstanding at September 27, 2003 pertaining to the
credit facility were $54.3 million, resulting in $70.7 million available at
September 27, 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 September 27, 2003, LIBOR was
approximately 1.2% and the applicable adjustment to LIBOR was 1.25%. The
Page 13 of 27
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. Also, the Company cannot
declare or pay any dividend on its outstanding common stock in an amount that
exceeds fifty percent of its consolidated net income for the immediately
preceding quarter. As of September 27, 2003, the Company was in compliance with
its covenants. The credit facility is secured by the Company's 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 September 27, 2003, there had been no conversions.
Comprehensive Income
As of September 27, 2003, accumulated other comprehensive loss included in the
accompanying consolidated balance sheet primarily represents additional minimum
liabilities on benefit plans. Comprehensive income from continuing operations
for the three and nine month periods ended September 27, 2003 was $5.5 million
and $6.8 million, respectively, compared to comprehensive income, before
cumulative effect of a change in accounting principle, for the three and nine
month periods ended September 28, 2002 of $3.4 million and $9.3 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 and 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 products and
advanced fiber composite structural products for the aircraft, communication,
navigation, chemical, petrochemical, paper and oil industries.
Page 14 of 27
Three months ended Nine months ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
2003 2002 2003 2002
(in thousands)
Net sales:
Defense $ 94,108 $ 62,760 $ 251,051 $ 166,119
Communications and Space Products 13,308 12,444 41,011 31,560
Engineered Materials 11,367 9,900 32,834 28,053
--------- -------- --------- ---------
$ 118,783 $ 85,104 $ 324,896 $ 225,732
========= ======== ========= =========
Operating earnings (loss):
Defense $ 10,781 $ 6,009 $ 23,520 $ 18,475
Communications and Space Products 295 366 2,346 (1,667)
Engineered Materials 802 988 1,497 2,135
Impairment loss on assets
held for sale - - (9,160) -
--------- -------- --------- ---------
11,878 7,363 18,203 18,943
Net interest expense (2,022) (1,534) (6,096) (2,887)
Other, net (103) 34 25 40
--------- -------- --------- ---------
Earnings before income
taxes, discontinued operations
and cumulative effect of a
change in accounting principle $ 9,753 $ 5,863 $ 12,132 $ 16,096
========= ======== ========= =========
New Accounting Standards
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires that a liability be
recognized for costs associated with an exit or disposal activity only when the
liability is incurred. SFAS No. 146 also establishes fair value as the objective
for initial measurement of liabilities related to exit or disposal activities.
SFAS No. 146 is effective for exit or disposal activities initiated after
December 31, 2002. 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.
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 September 27, 2003.
Page 15 of 27
Three Months Ended September 27, 2003 compared with Three Months Ended September
28, 2002
Net sales for the three months ended September 27, 2003 increased $33.7 million
or 39.6% to $118.8 million from $85.1 million for the three months ended
September 28, 2002. This increase comprised sales growth of $31.3 million in the
Defense segment, $0.9 million in the Communications and Space Products segment
and $1.5 million in the Engineered Materials segment.
In the Defense segment, $12.8 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 included in sales for two
months of the quarter ended September 28, 2002, as the Condor assets were
acquired on July 26, 2002. Also, $27.9 million of the increase was attributable
to sales of Emblem Group Ltd. ("Emblem"), Darlington, Inc. ("Darlington") and
Advanced Engineering and Research Associates, Inc. ("AERA"), all of which were
acquired in 2003. Aircraft weapons suspension and 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 and development efforts on the
Joint Strike Fighter weapons suspension and release units programs. Sales of
undersea sonar systems and aircraft radar signal simulator units also increased
in the third quarter of 2003 compared to the third quarter of 2002. These
increases were partially offset by the decreases in electronic warfare equipment
as well as integrated combat systems and mine countermeasures systems. The
decrease in sales of electronic warfare equipment was due to the completion of
the Universal Exciter Upgrade ("UEU") production program in the third quarter of
2003. The decrease in 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. The net decrease in sales of mine
countermeasure systems was due to lower sales from our MK-105 program, partially
offset by an increase in sales relating to our development work associated with
Organic Airborne/Surface Influence Sweep ("OASIS") systems. The last MK-105
system for the U.S. Navy was delivered in the third quarter of 2003.
In the Communications and Space Products segment, the increase in sales was
attributable primarily to sales of antenna and space products.
In the Engineered Materials segment, there were increases in sales of composite
structural products, including work associated with the Sikorsky Comanche
program, and electro-ceramic products.
Operating earnings for the three months ended September 27, 2003, increased $4.5
million or 61.3% to $11.9 million. This compares to operating earnings for the
three months ended September 28, 2002 of $7.4 million. Included in the operating
earnings for the three months ended September 27, 2003 is $1.4 million of
intangible asset amortization expense related to our recent acquisitions. This
compares to total amortization expense of approximately $0.4 million for the
three months ended September 28, 2002.
The Defense segment's operating earnings for the three months ended September
27, 2003 increased $4.8 million or 79.4% to $10.8 million or 11.5% of this
segment's net sales compared to operating earnings for the three months ended
September 28, 2002 of $6.0 million or 9.6% of this segment's net sales. The
increase in operating earnings is due to increased margin sales of
reconnaissance and surveillance systems acquired from Condor, efficiencies
achieved on higher production volume associated with our radar signal simulator
program and higher-margin sales of aircraft weapons suspension and release
systems. In addition, the completion of production activities on certain
long-term programs, which included the UEU, resulted in earnings at relatively
high margin. These increases were offset in part by a shift in the margins of
mine countermeasure systems from higher-margin production efforts on the MK-105
Page 16 of 27
program last year to lower-margin, non-recurring development efforts this year
associated with OASIS. Additionally, the third quarter of 2003 was negatively
impacted by the aforementioned increase in amortization expense, whereas the
third quarter of 2002 was favorably impacted by the higher volume of sales on
UEU production program on Lots 4 and 5.
The Communications and Space Products segment's operating earnings for the three
months ended September 27, 2003 were $0.3 million or 2.2% of this segment's net
sales compared to operating earnings for the three months ended September 28,
2002 of $0.4 million or 2.9% of net sales for this segment. Operating earnings
in the current period included a $1.1 million pre-tax charge to write down
satellite-related inventory to net realizable value. This reduction was caused
by competitive price pressure from our major customer as well as some
obsolescence, determined as part of our normal, ongoing review of
recoverability. This charge was substantially offset by the contribution from
sales from other products in this segment.
The Engineered Materials segment's operating earnings for the three months ended
September 27, 2003 were $0.8 million or 7.1% of this segment's net sales
compared to operating earnings for the three months ended September 28, 2002 of
$1.0 million or 10.0% of this segment's net sales. The decrease in this
segment's operating earnings was due to a decrease in contribution from
composite structural products, resulting from a shift in sales to lower-margin
non-recurring engineering efforts on the Sikorsky Comanche program.
Selling, general and administrative expenses increased $7.6 million or 59.7% to
$20.4 million or 17.2% of net sales for the three months ended September 27,
2003 from $12.8 million or 15.0% of net sales for the three months ended
September 28, 2002. This increase is primarily attributable to the acquisitions
of Condor, AERA, Darlington and Emblem, which accounted for approximately $8.4
million of the net increase and included $1.4 million of amortization expense
associated with the intangible assets established as part of purchase
accounting. In the third quarter of 2002, amortization expense was $0.4 million.
Company-sponsored research and development expenditures of $1.5 million, or 1.2%
of net sales, in the three months ended September 27, 2003 are lower on a
percentage of net sales basis than the $2.1 million or 2.4% of net sales in the
three months ended September 28, 2002. This is due to timing of such
expenditures in addition to the absence of such expenditures in our services
business, which includes AERA.
Interest expense, net of interest income, for the three months ended September
27, 2003 was $2.0 million compared to $1.5 million for the three months ended
September 28, 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
September 28, 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 the fourth quarter of 2002.
Income tax expense for the three months ended September 27, 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 three months ended September 28,
2002, reflecting our estimated effective rate for the year ended December 31,
2002.
For the three months ended September 27, 2003, net earnings were $5.6 million or
$0.32 per common share on 22.0 million diluted common shares compared to net
earnings of $3.4 million or $0.19 per diluted common share on 17.4 million
diluted common shares for the three months ended September 28, 2002. The 5.25%
Page 17 of 27
Convertible Subordinated Notes due 2007 were dilutive for the three months ended
September 27, 2003.
Nine Months Ended September 27, 2003 compared with Nine Months Ended September
28, 2002
Net sales for the nine months ended September 27, 2003 increased $99.2 million
or 43.9% to $324.9 million from $225.7 million for the nine months ended
September 28, 2002. This increase comprised sales growth of $84.9 million in the
Defense segment, $9.5 million in the Communications and Space Products segment
and $4.8 million in the Engineered Materials segment.
In the Defense segment, $47.2 million of the increase was due to sales of
reconnaissance and surveillance systems attributable to the assets acquired from
Condor. Such sales were included in sales for the nine months ended September
28, 2002, however, only for approximately two months as the Condor assets were
acquired on July 26, 2002. Also, $60.1 million of the increase was attributable
to sales of Emblem, Darlington and AERA, all acquired in 2003. Aircraft weapons
suspension and 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, and development efforts on the Small Diameter Bomb and the Joint Strike
Fighter weapons suspension and release units programs. Sales relating to our
aircraft radar signal simulator program and undersea sonar systems also
increased in the nine months ended September 27, 2003 compared to the nine
months ended September 28, 2002 due to increased production efforts. These
increases were partially offset by the decreases in sales of electronic warfare
equipment, integrated combat systems and mine countermeasure systems. The
decrease in sales of electronic warfare equipment was due to higher sales in
2002 on the UEU production program which was completed in the third quarter of
2003. The decrease in sales of integrated combat systems was due primarily to
delays in receipt of international orders. The net decrease in sales of mine
countermeasure systems was due to lower sales from our MK-105 program, partially
offset by an increase in sales relating to our development work associated with
OASIS.
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 composite
structural products, including work associated with the Sikorsky Comanche
program as well as production and installation of our composite pipe on offshore
oil rig projects resulting from increased activity in the Gulf of Mexico. In
addition, there were sales increases of our electro-ceramic products, namely
domestic sonar transducers.
Operating earnings for the nine months ended September 27, 2003 decreased $0.7
million or 3.9% to $18.2 million or 5.6% of net sales compared to $18.9 million
or 8.4% of net sales for the nine months ended September 28, 2002. Included in
operating earnings for the nine months ended September 27, 2003 is a $9.2
million impairment loss related to the Deer Park facility and $3.4 million of
intangible asset amortization expense associated with the Condor, AERA,
Darlington and Emblem acquisitions. This compares to total amortization expense
of approximately $0.5 million for the nine months ended September 28, 2002.
Also included in operating earnings for the nine months ended September 27,
2003 is pension expense of $3.0 million and ESOP compensation expense of $2.4
million. Included in operating earnings for the nine months ended September 28,
2002 is pension expense of $3.0 million and ESOP compensation expense of $3.2
million. The lower ESOP compensation expense for the nine months ended September
27, 2003 is attributable to our lower average stock price in the first nine
months of 2003 compared to the first nine months of 2002. Pension and ESOP
compensation expense are allocated between cost of sales and selling, general
and administrative expense.
Page 18 of 27
The Defense segment's operating earnings for the nine months ended September 27,
2003 increased $5.0 million or 27.3% to $23.5 million or 9.4% of this segment's
net sales compared to operating earnings for the nine months ended September 28,
2002 of $18.5 million or 11.1% of this segment's net sales. The increase in
operating earnings is due primarily to higher-margin sales of reconnaissance and
surveillance systems acquired from Condor and efficiencies achieved on higher
production volume associated with our radar signal simulator. These increases
were offset in part by a shift in the margins of mine countermeasure systems
from higher-margin production on the MK-105 program last year to lower-margin,
non-recurring development efforts this year associated with OASIS. Additionally,
operating earnings in the nine months ended September 27, 2003 were negatively
impacted by amortization expense pertaining to intangible assets associated with
acquisitions. Operating earnings in the nine months ended September 28, 2002
were favorably impacted by the high-margin sales on the UEU production program
on Lots 4 and 5.
The Communications and Space Products segment's operating earnings for the nine
months ended September 27, 2003 increased $4.0 million or 140.7% to $2.3 million
or 5.7% of this segment's net sales. In the nine months ended September 27,
2003, operating earnings in this segment were negatively impacted by a $1.1
million pre-tax charge to write down satellite-related inventory to net
realizable value. This reduction was caused by competitive price pressure from
our major customer as well as some obsolescence. This charge was more than
offset by the contribution from the higher sales of communications systems
acquired from Condor. For the nine months ended September 28, 2002, this segment
had an operating loss of $1.7 million, due primarily to a $1.5 million charge
recorded to provide for manufacturing inefficiencies resulting from a primary
customer's decrease in forecasted purchases of our satellite down converters.
The Engineered Materials segment's operating earnings for the nine months ended
September 27, 2003 were $1.5 million or 4.6% of this segment's net sales
compared to operating earnings for the nine months ended September 28, 2002 of
$2.1 million or 7.6% of this segment's net sales. During the nine months ended
September 27, 2003, we incurred a pre-tax charge of $0.7 million to write down
inventory and receivables related to the microwave product line that services
the telecommunications industry. As sales from such product line were not
materializing to expected levels set forth in the business plan for this line,
we conducted an analysis of market potential. Such analysis was completed in the
second quarter of 2003 and indicated that approximately $0.1 million of unbilled
receivables were unrecoverable and that the net realizable value of the related
inventory was $0.6 million lower than its book value. In addition, the decrease
in this segment's operating earnings as a percentage of net sales was due to a
decrease in contribution from composite structural products resulting from a
shift in sales to lower-margin, non-recurring engineering efforts associated
with the Sikorsky Comanche program.
Selling, general and administrative expenses increased $26.0 million or 83.5% to
$57.1 million or 17.6% of net sales for the nine months ended September 27, 2003
from $31.1 million or 13.8% of net sales for the nine months ended September 28,
2002. This increase is primarily attributable to the acquisitions of Condor,
AERA, Darlington, and Emblem, which accounted for approximately $25.0 million
of the net increase and included $3.4 million of amortization expense associated
with the intangible assets established as part of purchase accounting. In the
first nine months of 2002, amortization expense was $0.5 million.
Company-sponsored research and development expenditures of $5.9 million or 1.8%
of net sales in the nine months ended September 27, 2003 are lower on a
percentage of net sales basis than the $5.9 million or 2.6% of net sales in the
nine months ended September 28, 2002. This is due to the absence of such
expenditures in our services business, which includes AERA. However, there has
been an increase in the level of our customer-funded research and development.
Page 19 of 27
Interest expense, net of interest income, for the nine months ended September
27, 2003 was $6.1 million compared to $2.9 million for the nine months ended
September 28, 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 nine months ended September 28, 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 the fourth quarter of 2002.
Income tax expense for the nine months ended September 27, 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 nine months ended September 28,
2002, reflecting our estimated effective rate for the year ended December 31,
2002.
For the nine months ended September 27, 2003, net earnings from continuing
operations were $6.9 million or $0.39 per diluted common share on 17.5 million
diluted common shares compared to net earnings before a cumulative effect of a
change in accounting principle of $9.3 million or $0.53 per diluted common share
on 17.4 million diluted common shares for the nine months ended September 28,
2002.
In the nine months ended September 27, 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 in the nine
months ended September 27, 2003, and 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 $8.3 million or $0.47 per diluted share for the
nine months ended September 27, 2003.
Considering the retroactive effect of a change in accounting principle, net
earnings for the nine months ended September 28, 2002 were $5.9 million or $0.34
per diluted common share. This reflects a $3.4 million charge which was 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, restricted cash and marketable securities decreased
$99.6 million or 62.3% to $60.2 million at September 27, 2003 from $159.9
million at December 31, 2002. The decrease was primarily due to cash outflows of
$87.6 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 $27.3 million of restricted cash. Cash provided
by operations for the nine months ended September 27, 2003 was $6.9 million
compared to $18.2 million for the nine months ended September 28, 2002. Cash
flows from operations for the nine months ended September 27, 2003 were
favorably impacted by the collection of receivables and were offset by cash
outflows associated with a $5.0 million contribution to our defined benefit
pension plan made in the third quarter of 2003, the reduction of accounts
payable and the liquidation of contract advances. During the nine months ended
Page 20 of 27
September 27, 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.
Accounts receivable increased $17.3 million or 17.2% to $117.9 million at
September 27, 2003 from $100.6 million at December 31, 2002 due primarily to the
acquisitions of Emblem, Darlington and AERA. Excluding the effects of the
acquisitions, accounts receivable decreased $13.6 million or 13.5% from December
31, 2002.
Inventories increased $2.9 million or 8.8% to $35.3 million at September 27,
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
decreased $0.9 million or 2.7% from December 31, 2002.
The notes receivable of $1.7 million at September 27, 2003 (of which $0.3
million is included in current assets at September 27, 2003) represent notes
related to the sale of our former College Point facility in January 1996. These
notes bear interest at 7.0% per annum and are due in annual amounts through
September 2004, with a final payment of $1.3 million due on December 31, 2004.
The notes are secured by a mortgage on the College Point facility. In July 2003,
our note receivable related to the sale of property in Deer Park in June 2000
was collected in full with accrued interest.
Contract advances decreased $13.0 million or 64.3% to $7.2 million at September
27, 2003 from $20.3 million at December 31, 2002 due to the liquidation of
previously received advances by cost input on foreign contracts and the
resulting revenue recognition.
Capital expenditures, excluding the effects of the acquisitions of Emblem,
Darlington and AERA, for the nine months ended September 27, 2003 were $6.9
million compared to $4.1 million for the nine months ended September 28, 2002.
Increases were in accordance with planned expenditures and partially
attributable to leasehold improvements at the Company's headquarters as well as
purchases of machinery and equipment.
Financing Activities
Credit Facility
At September 27, 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.
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 September 27, 2003. Letters
of credit outstanding at September 27, 2003 pertaining to the credit facility
were $54.3 million, resulting in $70.7 million available at September 27, 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.
Also, we cannot declare or pay any dividend on our outstanding common stock in
an amount that exceeds fifty percent of our consolidated net income for the
immediately preceding quarter. As of September 27, 2003, we were in compliance
with our covenants. The credit facility is secured by our accounts receivable,
inventory and machinery and equipment.
Page 21 of 27
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
$3.3 million at September 27, 2003 and $1.5 million at 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 September 27, 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
A summary of our commitments and contractual obligations as of September 27,
2003, is included in the following table. Our commitments under 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 53.8 2.6 9.2 7.4 5.8 28.8
Letters of credit 55.7 17.0 10.3 27.9 0.2 0.3
Advance payment and performance
bonds 2.0 0.3 - - - 1.7
------- ------- ------- ------- ------- -------
Total $ 249.3 19.9 19.5 35.3 6.0 168.6
======= ======= ======= ======= ======= =======
Page 22 of 27
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.
Backlog
The funded backlog of unfilled orders at September 27, 2003 increased $74.6
million or 19.9% to $449.6 from $375.0 million at December 31, 2002. Excluding
the effects of the Emblem, Darlington and AERA acquisitions, backlog increased
$7.3 million or 1.9%. 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 are
made cumulative to the date of change and may affect current period earnings.
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.
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.
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. All
other inventories are stated at the lower of cost (principally first-in,
first-out method)or market. 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. 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
Page 23 of 27
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, which is used
to determine recoverability, is based upon, among other things, certain
assumptions about future operating performance. The Company's estimates of
undiscounted cash flow may differ from actual cash flow due to factors including
technological advances, changes to the Company's business model, or changes in
the Company's capital strategy or planned use of long-lived assets. 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.
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/or 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.
Page 24 of 27
New Accounting Standards
See the notes accompanying the unaudited consolidated financial statements as of
and for the three and nine months ended September 27, 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, 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."
Page 25 of 27
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, we
carried out an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures under the supervision and with the
participation of our management, including our Review and Disclosure Committee,
our Chief Executive Officer and Chief Financial Officer. The Chief Executive
Officer and Chief Financial Officer concluded that our 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 our internal controls over financial reporting during
our last fiscal quarter that have materially affected, or are likely to
materially affect, internal controls over financial reporting.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
None
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 August 6, 2003, we filed a Current Report on Form 8-K to
announce the release of our financial results for the quarter
ended June 28, 2003, and to file such press release as an
exhibit thereto.
Page 26 of 27
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: November 10, 2003
Page 27 of 27
Exhibit Index
Exhibit Description
- ------- -----------
3(a)(1) Certificate of Incorporation of the Company and amendments
thereto dated June 14, 1984, July 18, 1988 and July 22, 1988
(incorporated herein by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1994, Exhibit 3(i))
3(a)(2) Amendment to the Certificate of Incorporation of the
Company dated July 29, 1998 (incorporated herein by
reference to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, Exhibit 3(i))
3(a)(3) Amendment to the Certificate of Incorporation of the
Company dated May 17, 2002 (incorporated herein by reference
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2002, Exhibit 3(a)(3))
3(b) By-Laws of the Company effective October 1, 2002
(incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended September
28, 2002, Exhibit 3(ii))
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
- ------------
* Filed herewith