Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 27, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER 1-3985
-----------------------------
EDO CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 11-0707740
(State of Incorporation) (IRS Employer Identification No.)
60 EAST 42ND STREET, 42ND FLOOR, 10165
NEW YORK, NEW YORK (Zip Code)
(Address of principal executive offices)
(212) 716-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The number of shares of EDO common stock outstanding as of April 19,
2004 was 19,933,791 shares, with a par value $1 per share.
================================================================================
EDO CORPORATION
TABLE OF CONTENTS
PART I Financial Information
ITEM 1 Financial Statements.......................................................................... 3
Consolidated Balance Sheets -
March 27, 2004 and December 31, 2003......................................................... 3
Consolidated Statements of Earnings -
Three Months Ended March 27, 2004 and March 29, 2003......................................... 4
Consolidated Statements of Cash Flows -
Three Months Ended March 27, 2004 and March 29, 2003......................................... 5
Notes to Consolidated Financial Statements.................................................... 6
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................... 14
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk.................................... 20
ITEM 4 Controls and Procedures....................................................................... 20
PART II Other Information
ITEM 6 Exhibits and Reports on Form 8-K.............................................................. 20
Signature Page.................................................................................................. 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 27, DECEMBER 31,
2004 2003
-------------- --------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 65,823 $ 86,632
Accounts receivable, net ...................................................... 142,034 134,303
Inventories ................................................................... 43,462 34,733
Deferred income tax asset, net ................................................ 3,594 3,594
Prepayments and other ......................................................... 7,721 5,954
--------- ---------
Total current assets ....................................................... 262,634 265,216
--------- ---------
Property, plant and equipment, net .............................................. 30,755 31,355
Notes receivable ................................................................ 6,604 6,538
Goodwill ........................................................................ 92,550 92,527
Other intangible assets, net .................................................... 54,465 55,898
Deferred income tax asset, net .................................................. 21,655 21,774
Other assets .................................................................... 20,286 21,388
--------- ---------
$ 488,949 $ 494,696
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................................. $ 15,587 $ 22,801
Accrued liabilities ........................................................... 57,489 61,942
Contract advances and deposits ................................................ 8,256 8,195
--------- ---------
Total current liabilities .................................................. 81,332 92,938
--------- ---------
Long-term debt .................................................................. 137,800 137,800
Post-retirement benefits obligations ............................................ 72,225 71,898
Environmental obligation ........................................................ 1,768 1,728
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, 20,014,170 issued in 2004 and 19,832,108 issued in 2003 . 20,014 19,832
Additional paid-in capital .................................................... 154,453 150,097
Retained earnings ............................................................. 72,389 69,059
Accumulated other comprehensive loss, net of income tax
benefit .................................................................... (29,247) (29,281)
Treasury shares at cost (91,979 shares in 2004 and 88,128 shares in 2003 ) .... (1,371) (1,255)
Unearned Employee Stock Ownership Plan shares ................................. (16,978) (17,290)
Deferred compensation under Long-Term Incentive Plan .......................... (3,202) (479)
Management group receivables .................................................. (234) (351)
--------- ---------
Total shareholders' equity ................................................. 195,824 190,332
--------- ---------
$ 488,949 $ 494,696
========= =========
See accompanying Notes to Consolidated Financial Statements.
3
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED
MARCH 27, MARCH 29,
2004 2003
--------------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
NET SALES ...................................... $ 110,877 $ 94,377
--------- --------
COSTS AND EXPENSES
Cost of sales ................................. 80,658 69,830
Selling, general and administrative ........... 20,087 15,207
Research and development ...................... 1,465 1,990
Acquisition-related costs ..................... -- 205
--------- --------
102,210 87,232
--------- --------
OPERATING EARNINGS ............................. 8,667 7,145
NON-OPERATING INCOME (EXPENSE)
Interest income ............................... 242 235
Interest expense .............................. (2,223) (2,227)
Other, net .................................... 22 33
--------- --------
(1,959) (1,959)
--------- --------
Earnings before income taxes ..................... 6,708 5,186
Income tax expense ............................... (2,851) (2,204)
--------- --------
NET EARNINGS AVAILABLE FOR COMMON SHARES ......... $ 3,857 $ 2,982
========= ========
NET EARNINGS PER COMMON SHARE:
Basic ......................................... $ 0.22 $ 0.17
========= ========
Diluted ....................................... $ 0.22 $ 0.17
========= ========
Weighted-average common shares outstanding:
Basic .......................................... 17,549 17,230
========= ========
Diluted ........................................ 17,834 17,472
========= ========
See accompanying Notes to Consolidated Financial Statements.
4
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 27, MARCH 29,
2004 2003
-------------- -------------
(UNAUDITED)
(IN THOUSANDS)
OPERATING ACTIVITIES:
Earnings from operations ...................................... $ 3,857 $ 2,982
Adjustments to earnings to arrive at cash provided by
operations:
Depreciation ............................................... 2,585 2,895
Amortization ............................................... 1,441 940
Bad debt expense ........................................... -- 180
Deferred tax provision ..................................... 119 --
Loss on disposal of property, plant and equipment .......... 6 33
Deferred compensation expense .............................. 201 57
Non-cash Employee Stock Ownership Plan compensation
expense .................................................. 1,051 766
Dividends on unallocated Employee Stock Ownership Plan
shares ................................................... 70 75
Common shares issued for directors' fees ................... 31 23
Income tax benefit from stock options and Long-Term
Incentive Plan ........................................... 353 33
Changes in operating assets and liabilities, excluding
effects of acquisitions:
Accounts receivable ...................................... (7,731) 2,115
Inventories .............................................. (8,729) (2,399)
Prepayments and other assets ............................. (814) (304)
Accounts payable, accrued liabilities and other .......... (11,425) (8,829)
Contract advances and deposits ........................... 61 (4,359)
-------- ---------
Cash used by operations ......................................... (18,924) (5,792)
-------- ---------
INVESTING ACTIVITIES:
Purchase of plant and equipment ............................... (1,991) (2,112)
Payments received on notes receivable ......................... 75 88
Release of restricted cash .................................... -- 16,181
Purchase of marketable securities ............................. -- (1)
Cash paid for acquisitions, net of cash acquired .............. -- (65,182)
-------- ---------
Cash used by investing activities ............................... (1,916) (51,026)
-------- ---------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options ....................... 511 47
Proceeds from management group receivables .................... 117 125
Repayments of acquired debt ................................... -- (8,660)
Payment of common share cash dividends ........................ (597) (591)
-------- ---------
Cash provided (used) by financing activities .................... 31 (9,079)
-------- ---------
Net decrease in cash and cash equivalents ....................... (20,809) (65,897)
Cash and cash equivalents at beginning of year .................. 86,632 132,320
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 65,823 $ 66,423
======== =========
Supplemental disclosures:
Cash paid for:
Interest ................................................... $ -- $ --
======== =========
Income taxes ............................................... $ 4 ,583 $ 3,633
======== =========
See accompanying Notes to Consolidated Financial Statements.
5
EDO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) 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, 2003 filed by the
Company on Form 10-K with the Securities and Exchange Commission.
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.
(2) 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 market value
recognition provisions of SFAS No. 123 "Accounting for Stock-Based Compensation"
whereby compensation expense would be recognized as incurred for stock-based
employee compensation. For purposes of pro forma disclosures, the estimated fair
value of the options is amortized to expense over the options' vesting period.
FOR THE THREE MONTHS ENDED
MARCH 27, MARCH 29,
2004 2003
------------- ---------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Earnings:
As reported ................................................... $ 3,857 $ 2,982
Stock option compensation expense based on fair value
method, net of tax ......................................... (425) (439)
--------- ---------
Pro forma ..................................................... $ 3,432 $ 2,543
========= =========
Basic earnings per common share:
As reported ................................................... $ 0.22 $ 0.17
Pro forma ..................................................... $ 0.20 0.15
Diluted earnings per common share:
As reported ................................................... $ 0.22 $ 0.17
Pro forma ..................................................... $ 0.19 0.15
========= =========
(3) 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, now known as EDO (UK) Ltd., is a supplier of aerospace and
defense products and services, primarily through its MBM Technology unit in
England, now known as EDO (UK) Ltd., and Artisan Technologies, Inc. subsidiary
in the United States, now known as EDO Artisan. 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 purchase price
was (pound)16.3 million ($27.3 million), excluding transaction costs of
approximately $1.9 million. Emblem became part of the Company's Defense segment.
The excess of the purchase price over the net assets acquired recorded as
goodwill and other intangibles related to Emblem's units located in England is
deductible for U.S. income tax purposes over 15 years. The excess of the
purchase price over the net assets acquired related to Artisan Technologies,
Inc. is not deductible for income tax purposes.
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
6
of $4.9 million. Darlington became part of the Company's Defense segment. The
excess of the purchase price over the net assets acquired recorded as goodwill
and other intangible assets is deductible for income tax purposes over 15 years.
On February 5, 2003, a wholly-owned subsidiary of the Company acquired
for cash all of the stock of Advanced Engineering & Research Associates,
Inc.("AERA"), a privately-held company located in Alexandria, Virginia. AERA,
which was merged with another EDO subsidiary and renamed EDO Professional
Services Inc., 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. The
excess of the purchase price over the net assets acquired recorded as goodwill
and other intangible assets is deductible for income tax purposes over 15 years.
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, and AERA 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 the period presented below.
FOR THE THREE MONTHS ENDED
MARCH 29,
2003
----
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Net Sales .............................. $115,942
========
Earnings available for common shares ... $ 5,148
========
Diluted earnings per common share ...... $ 0.28
========
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 period, 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
AT JUNE 16, AT MARCH 10, AT FEBRUARY 5,
2003 2003 2003
Current assets $ 9,314 $ 11,943 $ 13,022
Plant and equipment 3,537 1,534 1,048
Customer contracts and
relationships 7,698 14,400 17,100
Purchased technologies 5,355 - -
Non-compete agreements 318 30 2,420
Tradename 669 400 500
Goodwill 9,608 13,462 11,649
Other assets - 446 414
Liabilities (7,257) (16,326) (7,791)
-------- -------- --------
Total purchase price $ 29,242 $ 25,889 $ 38,362
======== ======== ========
Adjustments resulting from the settlement of purchase prices on AERA
and Darlington have been made. Adjustments related to the settlement of the
Emblem purchase price are expected to be determined in the first half of 2004.
(4) BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS
Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations," 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, "Goodwill and Other Intangible Assets," 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 are amortized over their estimated useful
lives.
7
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, the Company is required to determine if such goodwill's
implied fair value is less than the 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 profits, 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.
The changes in the carrying amount of goodwill by segment for the three
months ended March 27, 2004 are as follows:
COMMUNI-
CATIONS
AND SPACE
DEFENSE PRODUCTS TOTAL
------- -------- -------
(IN THOUSANDS)
Balance as of January 1, 2004 ..... $90,866 $ 1,661 $92,527
Adjustment of certain AERA
liabilities ..................... 23 -- 23
------- ------- -------
Balance as of March 27, 2004 ...... $90,889 $ 1,661 $92,550
======= ======= =======
Summarized below are intangible assets subject to amortization.
MARCH 27, DECEMBER 31,
2004 2003 LIFE
-------- -------- ----
(IN THOUSANDS)
Capitalized non-compete agreements related to the
acquisitions of DSI/AERA/Darlington/Emblem ............................. $ 3,118 $ 3,118 1-5 years
Purchased technologies related to the acquisitions of Condor/Emblem ...... 17,003 17,003 8-20 years
Customer contracts and relationships related to the acquisitions
of AERA/Darlington/Emblem ............................................... 39,198 39,198 10-20 years
Tradename related to the acquisitions of
AERA/Darlington/Emblem ................................................... 1,569 1,569 5-10 years
Other intangible assets related to the acquisition of Condor ............. 916 916 2 years
-------- --------
61,804 61,804
Less accumulated amortization ............................................ (7,339) (5,906)
-------- --------
$ 54,465 $ 55,898
======== ========
The amortization expense for the three months ended March 27, 2004 and
March 29, 2003 amounted to $1.4 million and $0.9 million, respectively. Total
amortization expense for 2004, 2005, 2006, 2007, 2008 and thereafter related to
these intangible assets is estimated to be $5.5 million, $5.2 million, $5.2
million, $5.2 million, $4.6 million and $30.2 million, respectively.
All intangible assets other than goodwill are subject to amortization.
(5) INVENTORIES
Inventories are summarized by major classification as follows:
MARCH 27, DECEMBER 31,
2004 2003
-------- --------
(IN THOUSANDS)
Raw material and supplies ............................ $ 8,773 $ 8,624
Work-in-process ...................................... 44,488 38,052
Finished goods ....................................... 1,774 1,870
Less: Unliquidated progress payments .... (11,573) (13,813)
-------- --------
$ 43,462 $ 34,733
======== ========
8
(6) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
FOR THE THREE MONTHS ENDED
MARCH 27, MARCH 29,
2004 2003
------- -------
(IN THOUSANDS)
Numerator:
Net Earnings for basic and diluted
calculation ............................................... $ 3,857 $ 2,982
======= =======
Denominator:
Denominator for basic calculation ............................ 17,549 17,230
Effect of dilutive securities:
Stock options ............................................. 285 242
Convertible preferred shares .............................. -- --
Convertible notes ......................................... -- --
------- -------
Denominator for diluted calculation .......................... 17,834 17,472
======= =======
The assumed conversion of the Notes was anti-dilutive for 2004 and 2003.
The following table summarizes, for each year presented, the number of
shares excluded from the computation of diluted earnings per share, as their
effect upon potential issuance was anti-dilutive.
FOR THREE MONTHS ENDED
MARCH 27, MARCH 29,
2004 2003
----- -----
(IN THOUSANDS)
5.25 % Convertible Subordinated Notes ........................... 4,408 4,408
Unexercised stock options ....................................... 288 530
----- -----
4,696 4,938
===== =====
(7) DEFINED BENEFIT PLAN
The Company maintains a qualified noncontributory defined benefit pension plan
covering less than half of its employees. In November 2002, the plan was amended
whereby benefits accrued under the plan were frozen as of December 31, 2002. The
Company's funding policy is to make annual contributions to the extent such
contributions are actuarially determined and tax deductible.
For the three months ended March 27, 2004 and March 29, 2003, the Company
recorded pension expense of $0.6 million and $1.0 million, respectively.
Summarized below are the components of the expense for each period presented.
For the Three Months Ended
March 27, March 29,
2004 2003
--------- --------
(In thousands)
Service cost.................................... $ -- $ --
Interest cost................................... 3,037 3,182
Expected return on plan assets.................. (3,176) (3,062)
Amortization of unrecognized net loss........... 689 880
-------- --------
$ 550 $ 1,000
======== ========
(8) EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
The Company sponsors an employee stock ownership plan which provides
retirement benefits to substantially all employees. The cost basis of the
unearned/unallocated shares was initially recorded as a reduction to
shareholders' equity. Compensation expense is recorded based on the market value
of the Company's common shares as they are committed-to-be-released quarterly,
as payments are made under the related indirect loan. The difference between the
market value and the cost basis of the shares was recorded as additional paid-in
capital. Dividends on unallocated shares are recorded as compensation expense.
(9) COMPREHENSIVE INCOME
As of March 27, 2004, 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 months ended March 27, 2004 was $3.9 million compared
to comprehensive income for the three months ended March 29, 2003 of $3.0
million.
(10) BUSINESS SEGMENTS
The Company determines its operating segments based upon an analysis of
its products and services, production processes, types of customers, economic
characteristics and the related regulatory environment, which is consistent with
how management operates the Company. The Company's operations are conducted in
three segments: Defense, Communications and Space Products, and Engineered
Materials.
9
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, communications, computers and intelligence (C4I)
products and systems, undersea-warfare 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 integrated
composite structures for the aircraft and oil industries.
FOR THE THREE MONTHS ENDED
MARCH 27, MARCH 29,
2004 2003
--------- ---------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Net Sales:
Defense................................... $ 88,040 $ 70,018
Communications and Space Products......... 11,552 14,380
Engineered Materials...................... 11,285 9,979
--------- --------
$ 110,877 $ 94,377
--------- --------
Operating earnings (loss):
Defense................................... $ 9,030 $ 5,375
Communications and Space Products......... (1,091) 1,224
Engineered Materials...................... 728 546
--------- --------
8,667 7,145
Net interest expense...................... (1,981) (1,992)
Other, net................................ 22 33
--------- --------
Earnings before income taxes.............. $ 6,708 $ 5,186
--------- --------
(11) GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
EDO CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 27, 2004
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- ---------- -------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 60,225 $ 1,524 $ 4,074 $ -- $ 65,823
Accounts receivable, net 32,602 104,390 5,456 (414) 142,034
Inventories 4,796 35,460 3,206 -- 43,462
Deferred income tax asset, net 3,594 -- -- -- 3,594
Prepayments and other 5,558 1,721 442 -- 7,721
--------- --------- --------- --------- ---------
Total current assets 106,775 143,095 13,178 (414) 262,634
Investment in subsidiaries 260,790 -- -- (260,790) --
Property, plant and equipment, net 6,911 20,210 3,634 -- 30,755
Notes receivable 6,604 -- -- -- 6,604
Goodwill -- 82,942 9,608 -- 92,550
Other intangible assets, net -- 41,092 13,373 -- 54,465
Deferred income tax asset, net 21,655 -- -- -- 21,655
Other assets 19,135 1,151 -- -- 20,286
--------- --------- --------- --------- ---------
$ 421,870 $ 288,490 $ 39,793 $(261,204) $ 488,949
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 23,407 $ 44,448 $ 5,820 $ (599) 73,076
Contract advances and deposits 2,020 6,236 -- -- 8,256
--------- --------- --------- --------- ---------
Total current liabilities 25,427 50,684 5,820 (599) 81,332
Long-term debt 137,800 -- -- -- 137,800
Deferred income tax liabilities, net (84) -- 84 -- --
Post retirement benefits obligations 61,166 11,059 -- -- 72,225
Environmental obligation 1,768 -- -- -- 1,768
Intercompany accounts -- 120,852 26,848 (147,700) --
Shareholders' equity:
Preferred shares -- -- -- -- --
Common shares 20,014 99 -- (99) 20,014
Additional paid-in capital 154,453 25,221 6,486 (31,707) 154,453
Retained earnings 72,389 84,872 508 (85,380) 72,389
Accumulated other comprehensive loss,
net of income tax benefit (29,512) (11) 47 229 (29,247)
Treasury shares (1,371) (4,052) -- 4,052 (1,371)
Unearned ESOP shares (16,978) -- -- -- (16,978)
Management group receivables -- (234) -- -- (234)
Deferred compensation under Long-Term
Incentive Plan (3,202) -- -- -- (3,202)
--------- --------- --------- --------- ---------
Total shareholders' equity 195,793 105,895 7,041 (112,905) 195,824
--------- --------- --------- --------- ---------
$ 421,870 $ 288,490 $ 39,793 $(261,204) $ 488,949
========= ========= ========= ========= =========
10
EDO CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF
EARNINGS
MARCH 27, 2004
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- ---------- -------------- ------------ ------------
Continuing Operations:
Net Sales $ 20,965 $86,057 $ 7,346 $ (3,491) $ 110,877
Costs and expenses:
Cost of sales 17,090 63,120 3,939 (3,491) 80,658
Selling, general and administrative 2,091 14,602 3,394 -- 20,087
Research and development 539 926 -- -- 1,465
-------- ------- ------- --------- ---------
19,720 78,648 7,333 (3,491) 102,210
-------- ------- ------- --------- ---------
Operating Earnings 1,245 7,409 13 -- 8,667
Non-operating income (expense)
Interest income 166 34 42 -- 242
Interest expense (2,223) -- -- -- (2,223)
Other, net (59) 81 -- -- 22
-------- ------- ------- --------- ---------
(2,116) 115 42 -- (1,959)
(Loss) earnings from continuing
operations before income taxes (871) 7,524 55 -- 6,708
Income tax (benefit) expense (775) 3,531 95 -- 2,851
-------- ------- ------- --------- ---------
(Loss) earnings from continuing operations (96) 3,993 (40) -- 3,857
Equity in undistributed earnings of
subsidiaries 3,953 -- -- (3,953) --
-------- ------- ------- --------- ---------
Net earnings $ 3,857 $ 3,993 $ (40) $ (3,953) $ 3,857
======== ======= ======= ========= =========
EDO CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
MARCH 27, 2004
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- ---------- -------------- ------------ ------------
OPERATING ACTIVITIES:
Earnings from continuing operations $ 3,857 $ 3,993 $ (40) $(3,953) $ 3,857
Adjustments to earnings to arrive at cash
provided (used) by continuing operations:
Depreciation 464 1,924 197 -- 2,585
Amortization -- 1,192 249 -- 1,441
Deferred tax benefit 119 -- -- -- 119
Loss (gain) on sale of property, plant
and equipment -- 6 -- -- 6
Deferred compensation expense 201 -- -- -- 201
Non-cash Employee Stock Ownership Plan
compensation expense 1,051 -- -- -- 1,051
Dividends on unallocated Employee Stock
Ownership Plan shares 70 -- -- -- 70
Common shares issued for directors' fees 31 -- -- 31
Income tax benefit from stock options 353 -- -- -- 353
Changes in operating assets and liabilities,
excluding effects of acquisitions:
Equity in earnings of subsidiaries (3,953) -- -- 3,953 --
Intercompany 5,115 (5,352) 237 -- --
Accounts receivable (3,515) (2,744) (1,472) -- (7,731)
Inventories 524 (9,336) 83 -- (8,729)
Prepayments and other assets (2,374) 1,672 (112) -- (814)
Accounts payable, accrued liabilities
and other (10,623) (4,635) (120) -- (11,425)
Contract advances and deposits (768) 829 -- -- 61
-------- -------- ------- ------- --------
Cash provided (used) by continuing operations (9,448) (8,498) (978) -- (18,924)
INVESTING ACTIVITIES:
Purchase of plant and equipment (409) (1,466) (116) -- (1,991)
Payments received on notes receivable 75 -- -- -- 75
Purchase of marketable securities -- -- -- -- --
Restricted cash -- -- -- -- --
Cash paid for acquisitions, net of cash
acquired -- -- -- -- --
-------- -------- ------- ------- --------
Cash used by investing activities (334) (1,466) (116) -- (1,916)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 511 -- -- -- 511
Proceeds from management group receivables -- 117 -- -- 117
Repayments of acquired debt -- -- -- -- --
Payment of common share cash dividends (597) -- -- -- (597)
-------- -------- ------- ------- --------
Cash (used) provided by financing activities (86) 117 -- -- 31
-------- -------- ------- ------- --------
Net decrease in cash and cash equivalents (9,868) (9,847) (1,094) -- (20,809)
Cash and cash equivalents at beginning
of year 70,093 11,371 5,168 -- 86,632
-------- -------- ------- ------- --------
Cash and cash equivalents at end of year $ 60,225 $ 1,524 $ 4,074 $ -- $ 65,823
======== ======== ======= ======= ========
11
EDO CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2003
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- ---------- -------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 69,877 $ 11,371 $ 5,168 $ -- $ 86,416
Marketable securities 216 -- -- -- 216
Accounts receivable, net 29,087 101,233 3,984 (1) 134,303
Inventories 5,320 26,124 3,289 -- 34,733
Deferred income tax asset, net 3,594 -- -- -- 3,594
Prepayments and other 2,610 3,014 330 -- 5,954
--------- --------- --------- --------- ---------
Total current assets 110,704 141,742 12,771 (1) 265,216
Investment in subsidiaries 261,950 -- -- (261,950) --
Property, plant and equipment, net 6,966 20,674 3,715 -- 31,355
Notes receivable 6,538 -- -- -- 6,538
Goodwill -- 82,919 9,608 -- 92,527
Other intangible assets, net -- 42,276 13,622 -- 55,898
Deferred income tax asset, net 21,774 -- -- -- 21,774
Other assets 19,850 1,538 -- -- 21,388
--------- --------- --------- --------- ---------
$ 427,782 $ 289,149 $ 39,716 $(261,951) $ 494,696
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 34,061 $ 44,679 $ 6,004 $ (1) $ 84,743
Contract advances and deposits 2,788 5,407 -- -- 8,195
--------- --------- --------- --------- ---------
Total current liabilities 36,849 50,086 6,004 (1) 92,938
Long-term debt 137,800 -- -- -- 137,800
Deferred income tax liabilities, net (82) -- 82 -- --
Post retirement benefits obligations 61,035 10,863 -- -- 71,898
Environmental obligation 1,728 -- -- -- 1,728
Intercompany accounts -- 126,326 26,611 (152,937) --
Shareholders' equity:
Preferred shares -- -- -- -- --
Common shares 19,832 99 -- (99) 19,832
Additional paid-in capital 150,097 25,221 6,486 (31,707) 150,097
Retained earnings 69,059 80,878 548 (81,426) 69,059
Accumulated other comprehensive loss,
net of income tax benefit (29,512) 79 (15) 167 (29,281)
Treasury shares (1,255) (4,052) 4,052 (1,255)
Unearned ESOP shares (17,290) -- -- -- (17,290)
Management group receivables -- (351) -- -- (351)
Deferred compensation under Long-Term
Incentive Plan (479) -- -- -- (479)
--------- --------- --------- --------- ---------
Total shareholders' equity 190,452 101,874 7,019 (109,013) 190,332
--------- --------- --------- --------- ---------
$ 427,782 $ 289,149 $ 39,716 $(261,951) $ 494,696
========= ========= ========= ========= =========
EDO CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 29, 2003
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- ---------- -------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 59,810 $ 6,613 $ -- $ -- $ 66,423
Restricted cash 11,166 -- -- -- 11,166
Marketable securities 194 -- -- -- 194
Accounts receivable, net 28,454 95,253 -- (1,727) 121,980
Inventories 1,231 33,574 -- -- 34,805
Deferred income tax asset, net (10,202) 13,424 -- -- 3,222
Prepayments and other 3,512 1,641 -- -- 5,153
--------- --------- --------- --------- ---------
Total current assets 94,165 150,505 -- (1,727) 242,943
Investment in subsidiaries 253,386 -- -- (253,386) --
Property, plant and equipment, net 6,232 60,039 -- -- 66,271
Notes receivable 1,450 1,017 -- -- 2,467
Goodwill -- 83,534 -- -- 83,534
Other intangible assets, net -- 48,203 -- -- 48,203
Deferred income tax asset, net 20,439 -- -- -- 20,439
Other assets 19,447 1,766 -- -- 21,213
--------- --------- --------- --------- ---------
$ 395,119 $ 345,064 $ -- $(255,113) $ 485,070
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 17,321 $ 63,493 $ -- $ (2,164) 78,650
Contract advances and deposits 9,332 6,586 -- -- 15,918
--------- --------- --------- --------- ---------
Total current liabilities 26,653 70,079 $ -- (2,164) 94,568
Long-term debt 137,800 -- -- -- 137,800
Deferred income tax liabilities, net (12,227) 12,227 -- -- --
Post retirement benefits obligations 68,784 10,264 -- -- 79,048
Environmental obligation 2,041 -- -- -- 2,041
Intercompany accounts -- 160,465 -- (160,465) --
Shareholders' equity:
Preferred shares -- -- -- -- --
Common shares 19,802 99 -- (99) 19,802
Additional paid-in capital 147,739 18,565 -- (18,565) 147,739
Retained earnings 58,790 77,872 -- (77,872) 58,790
Accumulated other comprehensive loss,
net of income tax benefit (33,985) 13 -- -- (33,972)
Treasury shares (1,284) (4,052) -- 4,052 (1,284)
Unearned ESOP shares (18,229) -- -- -- (18,229)
Management group receivables -- (468) -- -- (468)
Deferred compensation under Long-Term
Incentive Plan (765) -- -- -- (765)
--------- --------- --------- --------- ---------
Total shareholders' equity 172,068 92,029 -- (92,484) 171,613
--------- --------- --------- --------- ---------
$ 395,119 $ 345,064 $ -- $(255,113) $ 485,070
========= ========= ========= ========== =========
12
EDO CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF
EARNINGS
MARCH 29, 2003
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- ---------- -------------- ------------ ------------
Continuing Operations:
Net Sales $ 20,427 $79,056 $ -- $ (5,106) $ 94,377
Costs and expenses:
Cost of sales 17,239 57,697 -- (5,106) 69,830
Selling, general and administrative 1,397 13,810 -- -- 15,207
Research and development 723 1,267 -- -- 1,990
Acquisition-related costs 63 142 205
-------- ------- ------- -------- --------
19,422 72,916 -- (5,106) 87,232
-------- ------- ------- -------- --------
Operating Earnings 1,005 6,140 -- -- 7,145
Non-operating income (expense)
Interest income 212 23 -- -- 235
Interest expense (2,227) -- -- -- (2,227)
Other, net (50) 83 -- -- 33
-------- ------- ------- -------- --------
(2,065) 106 -- -- (1,959)
(Loss) earnings from continuing
operations before income taxes (1,060) 6,246 -- -- 5,186
Income tax (benefit) expense (284) 2,488 -- -- 2,204
-------- ------- ------- -------- --------
(Loss) earnings from continuing
operations (776) 3,758 -- -- 2,982
Equity in undistributed earnings of
subsidiaries 3,758 -- -- (3,758) --
-------- ------- ------- -------- --------
Net earnings $ 2,982 $ 3,758 $ -- $ (3,758) $ 2,982
======== ======= ======= ======== ========
EDO CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
MARCH 29, 2003
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- ---------- -------------- ------------ ------------
OPERATING ACTIVITIES:
Earnings from continuing operations $ 2,982 $ 3,758 $ -- $(3,758) $ 2,982
Adjustments to earnings to arrive at cash
provided (used) by continuing operations:
Depreciation 390 2,505 -- -- 2,895
Amortization -- 940 -- -- 940
Bad debt expense -- 180 -- -- 180
Loss (gain) on sale of property, plant
and equipment -- 33 -- -- 33
Deferred compensation expense 57 -- -- -- 57
Non-cash Employee Stock Ownership Plan
compensation expense 766 -- -- -- 766
Dividends on unallocated Employee Stock
Ownership Plan shares 75 -- -- -- 75
Common shares issued for directors' fees 23 -- -- -- 23
Income tax benefit from stock options 33 -- -- -- 33
Changes in operating assets and liabilities,
excluding effects of acquisitions:
Equity in earnings of subsidiaries (3,758) -- -- 3,758 --
Intercompany 9,597 (9,597) -- -- --
Accounts receivable (3,867) 5,982 -- -- 2,115
Inventories (138) (2,261) -- -- (2,399)
Prepayments and other assets (1,195) 891 -- -- (304)
Accounts payable, accrued liabilities
and other 698 (9,527) -- -- (8,829)
Contract advances and deposits (1,753) (2,606) -- -- (4,359)
--------- -------- ---------- ------- ---------
Cash provided (used) by continuing operations 3,910 (9,702) -- -- (5,792)
INVESTING ACTIVITIES:
Purchase of plant and equipment (1,127) (985) -- -- (2,112)
Payments received on notes receivable 75 13 -- -- 88
Purchase of marketable securities (1) -- -- -- (1)
Restricted cash 16,181 -- -- -- 16,181
Cash paid for acquisitions, net of cash
acquired (65,182) -- -- -- (65,182)
--------- -------- ---------- ------- ---------
Cash used by investing activities (50,054) (972) -- -- (51,026)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 47 -- -- -- 47
Proceeds from management group receivables -- 125 -- -- 125
Repayments of acquired debt (8,660) -- -- -- (8,660)
Payment of common share cash dividends (591) -- -- -- (591)
--------- -------- ---------- ------- ---------
Cash (used) provided by financing activities (9,204) 125 -- -- (9,079)
--------- -------- ---------- ------- ---------
Net decrease in cash and cash equivalents (55,348) (10,549) -- -- (65,897)
Cash and cash equivalents at beginning of year 115,160 17,160 -- -- 132,320
--------- -------- ---------- ------- ---------
Cash and cash equivalents at end of period $ 59,812 $ 6,611 $ -- $ -- $ 66,423
======== ======= ======= ======== ========
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
EDO Corporation was incorporated in New York in 1925 by Earl Dodge
Osborn, from whose initials "EDO" is derived.
EDO Corporation (the "Company") provides military and commercial
products and professional services, with core competencies in a wide range of
critical defense areas, including:
- Defense Electronics
- Aircraft Armament
- Undersea Warfare
- Professional Services
- C4I - Command, Control, Communications, Computers, and
Intelligence
- Integrated Composite Structures
We are a leading supplier of sophisticated, highly engineered products
and systems for defense, aerospace and industrial applications. We believe our
advanced electronic, electromechanical systems, information systems and
engineered materials are mission-critical on a wide range of military programs.
We have three reporting segments: Defense, Communications and Space Products,
and Engineered Materials. Our Defense segment provides integrated front-line
warfighting systems and components including electronic-warfare systems,
reconnaissance and surveillance systems, aircraft weapons suspension and release
systems, integrated combat systems, command, control, communications, computers,
and intelligence (C4I) products and systems, undersea-warfare systems and
professional and engineering services for military forces and friendly
governments worldwide. Our Communications and Space Products segment supplies
antenna products and ultra-miniature electronics and systems for the remote
sensing and electronic warfare industries. Our Engineered Materials segment
supplies commercial and military piezo-electric ceramic products and integrated
composite structures for the aircraft and oil industries. A disciplined
acquisition program is diversifying the base of major platforms and customers.
The Company's Annual Report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and all amendments to those reports, and the
Proxy Statement for its Annual Meeting of Stockholders are made available, free
of charge, on its Web site www.edocorp.com, as soon as reasonably practicable
after such reports have been filed with or furnished to the Securities and
Exchange Commission.
DISCUSSION OF 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 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.
14
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 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.
Our estimates of undiscounted cash flow may differ from actual cash
flow due to such factors including technological advances, changes to our
business model, or changes in our 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 the unit 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 profits, 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 and expected return on plan assets 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.
In 2003 we used the building block approach to the estimation of the
long-term rate of return on assets. Under this approach, we reviewed the
publicly available common source data for the range of returns on basic types of
equity and fixed income instruments and the differential to those rates provided
by active investment management. In consultation with our actuarial and active
asset management consultants and taking into account the funds' actual
performance and expected asset allocation going forward, we selected an overall
return rate within the resulting range.
The expected long-term rate of return on plan assets to be used for
2004 expense is 8.25%. This rate of return was determined by application of a
statistical forecast modeling algorithm which, using the pension investment mix
and pension demographic data, simulates the long term performance of the plan
over a series of 2000 trials of variable economic conditions, rounded to the
nearest quarter-percent. The resulting rate is a 50 basis-point reduction in the
forecast from that used in 2003. The discount rate also reflects a similar 50
basis-point reduction from that used in 2003. The discount rate is selected
based on review of selected widely available index information for high quality
corporate bonds such as Factiva, adjusted for term.
15
RESULTS OF OPERATIONS
The following information should be read in conjunction with the
Consolidated Financial Statements as of March 27, 2004.
THREE MONTHS ENDED MARCH 27, 2004 COMPARED WITH THREE MONTHS ENDED MARCH 29,
2003
Net sales by segment were as follows:
THREE MONTHS ENDED INCREASE/(DECREASE)
MARCH 27, MARCH 29, FROM
SEGMENT 2004 2003 PRIOR PERIOD
------- ------------ --------- ------------
(DOLLARS IN THOUSANDS)
Defense ................................ $ 88,040 $70,018 25.7%
Communications and Space Products ...... 11,552 14,380 (19.7)%
Engineered Materials ................... 11,285 9,979 13.1%
-------- ------- ----
Total .................................. $110,877 $94,377 17.5%
======== ======= ----
In the Defense segment, approximately $16.9 million of the net increase
was attributable to sales of Emblem Group Ltd. ("Emblem"), Darlington, Inc.
("Darlington"), and Advanced Engineering & Research Associates, Inc. ("AERA")
since their acquisition dates of June 16, March 10, and February 5, 2003,
respectively. In addition, there were increases in sales of aircraft weapons
suspension and release systems due to the F/A-22 AMRAAM Vertical Eject Launcher
program, the BRU-57 Multiple Carriage Smart Bomb Rack program, and development
efforts on the Joint Strike Fighter ("JSF") weapons suspension and release units
programs. These increases were offset by decreases in sales of electronic
warfare equipment. The decrease in sales of electronic warfare equipment was due
to the completion of the Universal Exciter Upgrade ("UEU") production program in
2003.
In the Communications and Space Products segment, the decrease in sales
was attributable to the completion of large production deliveries in the first
quarter of 2003 of interference cancellation systems and the basic shortstop
electronic protection systems ("SEPS"). In 2004, we received a $6.8 million
incremental award as part of a $45.3 million contract for additional "Warlock"
SEPS units for the U.S. Army. This program will be a significant contributor to
sales and margin later this year.
In the Engineered Materials segment, there were increases in sales of
electro-ceramic products attributable to transducers and sonar arrays. There
were also increases in sales of integrated composite structures including work
associated with the Sikorsky Comanche program as well as production and
installation of our composite pipe on offshore oil rig projects. We recently
received stop work orders from Sikorsky due to the termination of the Comanche
program by the U.S. Department of Defense. The impact on the year is currently
being assessed but is expected to be minimal.
Operating earnings for the three months ended March 27, 2004 were $8.7
million or 7.8% of net sales. This compares to operating earnings for the three
months ended March 29, 2003 of $7.1 million or 7.6% of net sales. Included in
the results for the three months ended March 27, 2004 is $1.4 million of
intangible asset amortization expense associated with the acquisitions made in
2002 and 2003, compared to amortization expense of approximately $0.9 million
for the three months ended March 29, 2003. Also included in operating earnings
for the three months ended March 27, 2004 is pension expense of $0.6 million and
ESOP compensation expense of $1.1 million. Included in operating earnings for
the three months ended March 29, 2003 is pension expense of $1.0 million and
ESOP compensation expense of $0.8 million. The lower pension expense in 2004
compared to 2003 is attributable to the contribution made to the pension plan in
2003. The higher ESOP compensation expense for the first three months of 2004 is
attributable to our higher average stock price compared to the first three
months of 2003. 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
March 27, 2004 were $9.0 million or 10.3% of this segment's net sales compared
to $5.4 million or 7.7% of this segment's net sales for the three months ended
March 29, 2003. The increase in operating earnings in the first three months of
2004 was attributable to sales of reconnaissance and surveillance systems and
international sales of our radar signal simulator. In addition, there was a
positive impact to operating earnings of $0.8 million resulting from the
resolution of a contractual issue related to funding for which a reserve had
been previously established. Since the matter was resolved, the reserve was
released. These increases were partially offset by the increase in amortization
expense pertaining to intangible assets associated with the acquisitions made in
2003.
The Communications and Space Products segment experienced an operating
loss for the three months ended March 27, 2004 of $1.1 million or 9.4% of this
segment's net sales compared to operating earnings of $1.2 million or 8.5% of
this segment's net sales for the three months ended March 29, 2003. The loss
related primarily to adjustments to estimates to complete on development and
start-up production phases on certain interference cancellation programs
resulting from issues discovered in the first quarter during testing
16
phases as well as some direct cost increases. All anticipated losses have been
recognized, and the programs are expected to complete performance within the
current estimates. This segment's operating results do not yet reflect the
increased activity with respect to the aforementioned "Warlock" SEPS program
which will be a significant contributor to operating earnings as the year
progresses.
The Engineered Materials segment's operating earnings for the three
months ended March 27, 2004 were $0.7 million or 6.5% of this segment's net
sales compared to operating earnings of $0.5 million or 5.5% of this segment's
net sales for the three months ended March 29, 2003. The increase is
attributable to higher margins on electro-ceramic products and the mix of sales
of integrated composite structural products.
Selling, general and administrative expenses for the three months ended
March 27, 2004 increased to $20.1 million or 18.1% of net sales from $15.2
million or 16.1% of net sales for the same period ended March 29, 2003. This
increase was attributable to three acquisitions made in 2003, including the
increased amortization of intangible assets.
Research and development expense for the three months ended March 27,
2004 decreased to $1.5 million or 1.3% of net sales from $2.0 million or 2.1% of
net sales for the three months ended March 29, 2003. As a percent of sales, the
decrease is attributable to the absence of such expenditures in the
services-type businesses. In addition, there were some delayed expenditures in
the first three months of 2004 which are expected to begin in the second
quarter.
Interest expense, net of interest income, for the three months ended
March 27, 2004 remained unchanged at $2.0 million compared to the three months
ended March 29, 2003. Interest expense is associated primarily with our $137.8
million principal amount of 5.25% Convertible Subordinated Notes ("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.
Income tax expense reflects an effective rate of 42.5% for the three
months ended March 27, 2004 and for the three months ended March 29, 2003.
For the three months ended March 27, 2004, net earnings were $3.9
million or $0.22 per diluted common share on 17.8 million diluted shares
compared to net earnings of $3.0 million or $0.17 per diluted common share on
17.5 million diluted shares for the three months ended March 29, 2003.
LIQUIDITY AND CAPITAL RESOURCES
BALANCE SHEET
Our cash and cash equivalents decreased 24.0% to $65.8 million at March
27, 2004 from $86.6 million at December 31, 2003. This decrease was due
primarily to the cash used by operations of $18.9 million resulting from a
temporary growth in receivables and inventories, discussed below, and a
reduction in accounts payable and accrued liabilities due to timing. Also, $2.0
million was used for the purchase of capital equipment and $0.6 million for the
payment of common share dividends.
Accounts receivable increased 5.8% to $142.0 million at March 27, 2004
from $134.3 million at December 31, 2003 due in part to timing of collections of
billed receivables. At March 27, 2004 approximately 78% of billed receivables
are in the under-60 days aging category. There have been significant collections
in billed receivables subsequent to the end of the quarter. There was also
growth in the unbilled receivables resulting from work progressing on large
programs such as JSF and F/A-22.
Inventories increased 25.1% to $43.5 million at March 27, 2004 from
$34.7 million at December 31, 2003 due primarily to the efforts expended on
work-in-progress on major programs, particularly the SEPS program.
The note receivable of $6.6 million at March 27, 2004 and $6.5 million
at December 31, 2003 represents the note receivable from the sale of our
facility in Deer Park in 2003. Included in other current assets is $1.5 million
in notes related to the sale of our former College Point facility in January
1996. 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.
In the three months ended March 27, 2004, capital expenditures were
$2.0 million. This compares to $2.1 million for the three months ended March 29,
2003.
17
FINANCING ACTIVITIES
Credit Facility
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
standby letters of credit financing. The potential cash borrowing under the
facility is reduced by the amount of outstanding letters of credit. Borrowings
under the facility will be priced initially at LIBOR plus a predetermined
amount, ranging from 1.25% to 1.75%, depending on our consolidated leverage
ratio at the time of the borrowing. At March 27, 2004, LIBOR was approximately
1.11% and the applicable adjustment to LIBOR was 1.25%. The facility requires us
to pay each lender in the consortium a commitment fee on the average daily
unused portion of their respective commitment at a rate equal to 0.25%.
There were no direct borrowings outstanding under the credit facility
at March 27, 2004 and December 31, 2003. Letters of credit outstanding at March
27, 2004 pertaining to the credit facility were $42.7 million, resulting in
$82.3 million available at March 27, 2004 for standby letters of credit, if
needed.
In connection with the credit facility, we are required to maintain
both financial and non-financial covenants and ratios, including but not limited
to minimum tangible net worth plus subordinated debt, leverage ratio, fixed
charge coverage ratio, earnings before interest and taxes to interest expense
ratio, total unsubordinated debt to tangible net worth, net income and
dividends. 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 March 27,
2004, 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("Notes")
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, commencing
on October 15, 2002. Accrued interest payable, included in accrued liabilities
on our consolidated balance sheet, was $3.3 million at March 27, 2004 and $1.5
million at December 31, 2003.
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 March 27, 2004, there had been no conversions.
Shelf Registration
On December 23, 2003, we filed a shelf registration statement to
potentially offer for sale common shares, preferred shares, debt securities and
warrants. We may sell any combination of the foregoing securities in one or more
offerings up to an aggregate initial offering price of $500,000,000.
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 funding of our pension and
post-retirement benefit obligations. 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
March 27, 2004, we have included the following table. We are obligated under
building and equipment leases expiring between 2004 and 2012. The aggregate
future minimum lease commitments under those obligations with noncancellable
terms in excess of one year are shown below. Our commitments under letters of
credit and advance payment and performance bonds relate primarily to advances
received on foreign contracts should we fail to perform in accordance with the
contract terms. We do not expect to have to make payments under these letters of
credits 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.
18
Payments Due In (in millions):
----------------------------------------------------------------------------
2009 and
Total 2004 2005 2006 2007 2008 Beyond
--------- ------- ------- ------ ------ ------ ------
5.25% Convertible Subordinated Notes due
2007 ...................................... $ 137.8 $ -- $ -- $ -- $137.8 $ -- $ --
Operating leases ............................ 68.7 10.2 11.0 7.8 6.8 6.3 26.6
Letters of credit ........................... 43.1 13.3 29.5 -- -- 0.3 --
Advance payment and performance bonds ....... 1.9 0.2 -- -- -- -- 1.7
-------- ------- ------- ------ ------ ------ -----
Total ....................................... $ 251.5 $ 23.7 $ 40.5 $ 7.8 $144.6 $ 6.6 $28.3
======== ======= ======= ====== ====== ====== =====
Additionally, we are subject to certain legal actions that arise out of
the normal course of business. It is our belief that the ultimate outcome of
these actions will not have a material adverse effect on our consolidated
financial position, results of operations or liquidity.
CONCENTRATION OF SALES
We conduct a significant amount of our business with the United States
Government. Although there are currently no indications of a significant change
in the status of government funding of certain programs, should this occur, our
results of operations, financial position and liquidity could be materially
affected. Such a change could have a significant impact on our profitability and
our stock price. This could also affect our ability to acquire funds from our
credit facility due to covenant restrictions or from other sources.
BACKLOG
The funded backlog of unfilled orders at March 27, 2004 increased to
$513.5 million from $462.3 million at December 31, 2003. Our backlog consists
primarily of current orders under long-lived, mission-critical programs of key
defense platforms.
"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, the
general state of world military readiness and deployment; and the ability to
obtain export licenses.
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,
nondeductibility of goodwill amortization and IPR&D acquired in a stock purchase
business combination and the nondeductibility of our noncash ESOP compensation
expense.
The Company has no obligation to update any forward-looking statements.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
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.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10(a)* Amendment, dated March 25, 2004, to the Credit Agreement, dated as of
November 8, 2002, by and among the Company and AIL Systems Inc., with
Citibank N.A., Fleet National Bank, Wachovia Bank, N.A., et al.
(incorporated herein by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002, Exhibit
10(a)(1))
10(b)* EDO Corporation Non Qualified Deferred Compensation Plan I, effective
as of January 1, 2004.
10(c)* EDO Corporation Non Qualified Deferred Compensation Plan II,
effective as of January 1, 2004.
31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32* Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Filed herewith.
(b) REPORTS ON FORM 8-K
The following report on Form 8-K was filed during the three months
ended March 27, 2004:
DATE OF REPORT ITEMS REPORTED
- ----------------- -------------------------------------------------------------
February 19, 2004 Earnings Release, dated February 19, 2004, announcing
financial results for the quarter and year ended December 31,
2003.
20
SIGNATURES
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, its principal financial officer, thereunto duly authorized.
EDO CORPORATION (Registrant)
By: /s/ FREDERIC B. BASSETT
--------------------------------
Dated: May 3, 2004 Frederic B. Bassett
Vice President Finance, Treasurer
and Chief Financial Officer
21