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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 JUNE 26, 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 July 26, 2004 was
19,951,853 shares, with a par value $1 per share.
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EDO CORPORATION
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements..................................................................... 3
Consolidated Balance Sheets -
June 26, 2004 and December 31, 2003...................................................... 3
Consolidated Statements of Earnings -
Three months ended June 26, 2004 and June 28, 2003....................................... 4
Consolidated Statements of Earnings -
Six months ended June 26, 2004 and June 28, 2003......................................... 5
Consolidated Statements of Cash Flows -
Six months ended June 26, 2004 and June 28, 2003......................................... 6
Notes to Consolidated Financial Statements............................................... 7
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................... 16
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk............................... 24
ITEM 4 Controls and Procedures.................................................................. 24
PART II OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders...................................... 24
ITEM 6 Exhibits and Reports on Form 8-K......................................................... 25
SIGNATURES ............................................................................................... 26
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 26, DECEMBER 31,
2004 2003
------------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................................................................... $ 80,741 $ 86,632
Accounts receivable, net.................................................................... 136,107 134,303
Inventories................................................................................. 49,403 34,733
Deferred income tax asset, net.............................................................. 3,594 3,594
Prepayments and other....................................................................... 6,145 5,954
------------- -------------
Total current assets..................................................................... 275,990 265,216
------------- -------------
Property, plant and equipment, net............................................................ 30,073 31,355
Notes receivable.............................................................................. 6,670 6,538
Goodwill...................................................................................... 92,249 92,527
Other intangible assets, net.................................................................. 53,027 55,898
Deferred income tax asset, net................................................................ 21,610 21,774
Other assets.................................................................................. 19,182 21,388
------------- -------------
$ 498,801 $ 494,696
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................................ $ 16,456 $ 22,801
Accrued liabilities......................................................................... 57,304 61,942
Contract advances and deposits.............................................................. 12,232 8,195
------------- -------------
Total current liabilities................................................................ 85,992 92,938
------------- -------------
Long-term debt................................................................................ 137,800 137,800
Post-retirement benefits obligations.......................................................... 72,413 71,898
Environmental obligation...................................................................... 1,697 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, 20,029,970 issued in 2004 and 19,832,108 issued in 2003............... 20,030 19,832
Additional paid-in capital.................................................................. 155,356 150,097
Retained earnings........................................................................... 76,036 69,059
Accumulated other comprehensive loss, net of income tax
benefit.................................................................................. (29,215) (29,281)
Treasury shares at cost 93,013 shares in 2004 and 88,128 shares in 2003).................... (1,408) (1,255)
Unearned Employee Stock Ownership Plan shares............................................... (16,665) (17,290)
Deferred compensation under Long-Term Incentive Plan........................................ (3,001) (479)
Management group receivables................................................................ (234) (351)
------------- -------------
Total shareholders' equity............................................................... 200,899 190,332
------------- -------------
$ 498,801 $ 494,696
============= =============
See accompanying Notes to Consolidated Financial Statements.
3
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED
JUNE 26, JUNE 28,
2004 2003
------------- ---------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
NET SALES................................................................................... $ 126,290 $ 111,736
------------- ---------------
COSTS AND EXPENSES
Cost of sales.............................................................................. 95,264 79,190
Selling, general and administrative........................................................ 18,824 21,493
Research and development................................................................... 2,851 2,498
Impairment loss on assets held for sale.................................................... -- 9,160
Acquisition-related costs.................................................................. -- 215
------------- ---------------
116,939 112,556
------------- ---------------
OPERATING EARNINGS.......................................................................... 9,351 (820)
NON-OPERATING INCOME (EXPENSE)
Interest income............................................................................ 202 165
Interest expense........................................................................... (2,244) (2,247)
Other, net................................................................................. (47) 95
------------- ---------------
(2,089) (1,987)
------------- ---------------
Earnings before income taxes.................................................................. 7,262 (2,807)
Income tax (expense) benefit.................................................................. (3,086) 1,181
------------- ---------------
Earnings (loss) from continuing operations before discontinued operations..................... 4,176 (1,626)
Earnings from discontinued operations, net of tax............................................. -- 1,398
------------- ---------------
NET EARNINGS AVAILABLE FOR COMMON SHARES...................................................... $ 4,176 $ (228)
============= ===============
NET EARNINGS PER COMMON SHARE:
Basic:
Continuing operations...................................................................... $ 0.24 $ (0.09)
Discontinued operations.................................................................... -- $ 0.08
------------- ---------------
$ 0.24 $ (0.01)
============= ===============
Diluted:
Continuing operations...................................................................... $ 0.23 $ (0.09)
Discontinued operations.................................................................... -- 0.08
------------- ---------------
$ 0.23 $ (0.01)
============= ===============
Weighted-average common shares outstanding:
Basic....................................................................................... 17,670 17,276
============= ===============
Diluted..................................................................................... 17,927 17,276
============= ===============
See accompanying Notes to Consolidated Financial Statements.
4
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE SIX MONTHS ENDED
JUNE 26, JUNE 28,
2004 2003
----------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
NET SALES ......................................................... $ 237,167 $ 206,113
----------- -------------
COSTS AND EXPENSES
Cost of sales .................................................... 175,922 149,020
Selling, general and administrative .............................. 38,911 36,700
Research and development ......................................... 4,316 4,488
Impairment loss on assets held for sale .......................... -- 9,160
Acquisition-related costs ........................................ -- 420
----------- -------------
219,149 199,788
----------- -------------
OPERATING EARNINGS ................................................ 18,018 6,325
NON-OPERATING INCOME (EXPENSE)
Interest income .................................................. 444 400
Interest expense ................................................. (4,467) (4,474)
Other, net ....................................................... (25) 128
----------- -------------
(4,048) (3,946)
----------- -------------
Earnings before income taxes ........................................ 13,970 2,379
Income tax expense .................................................. (5,937) (1,023)
----------- -------------
Earnings from continuing operations before discontinued operations... 8,033 1,356
Earnings from discontinued operations, net of tax ................... -- 1,398
----------- -------------
NET EARNINGS AVAILABLE FOR COMMON SHARES ............................ $ 8,033 $ 2,754
=========== =============
NET EARNINGS PER COMMON SHARE:
Basic:
Continuing operations ............................................ $ 0.46 $ 0.08
Discontinued operations .......................................... -- $ 0.08
----------- -------------
$ 0.46 $ 0.16
=========== =============
Diluted:
Continuing operations ............................................ $ 0.45 $ 0.08
Discontinued operations .......................................... -- 0.08
----------- -------------
$ 0.45 $ 0.16
=========== =============
Weighted-average common shares outstanding:
Basic ............................................................. 17,610 17,253
=========== =============
Diluted ........................................................... 17,880 17,493
=========== =============
See accompanying Notes to Consolidated Financial Statements
5
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 26, JUNE 28,
2004 2003
---------- --------
(UNAUDITED)
(IN THOUSANDS)
OPERATING ACTIVITIES:
Earnings from operations ............................................. $ 8,033 $ 1,356
Adjustments to earnings to arrive at cash provided by operations:
Depreciation ...................................................... 5,455 5,998
Amortization ...................................................... 2,885 2,105
Bad debt expense .................................................. 190 154
Deferred tax provision (benefit) .................................. 164 (3,756)
Loss on disposal of property, plant and equipment ................. 26 76
Impairment loss on assets held for sale ........................... -- 9,160
Deferred compensation expense ..................................... 402 121
Non-cash Employee Stock Ownership Plan compensation expense ....... 2,028 1,510
Non-cash stock option compensation expense ........................ -- 292
Dividends on unallocated Employee Stock Ownership Plan shares ..... 139 148
Common shares issued for directors' fees .......................... 67 51
Income tax benefit from stock options and Long-Term
Incentive Plan .................................................. 449 45
Changes in operating assets and liabilities, excluding
effects of acquisitions:
Accounts receivable ............................................. (1,994) 12,206
Inventories ..................................................... (14,670) (1,150)
Prepayments and other assets .................................... 1,719 630
Accounts payable, accrued liabilities and other ................. (10,651) (12,553)
Contract advances and deposits .................................. 4,037 (9,517)
---------- ----------
Cash (used) provided by operations ..................................... (1,721) 6,876
---------- ----------
Net Cash provided by discontinued operations ........................... -- 47
INVESTING ACTIVITIES:
Purchase of plant and equipment ...................................... (4,199) (4,573)
Payments received on notes receivable ................................ 150 101
Release of restricted cash ........................................... -- 27,153
Purchase of marketable securities .................................... -- (22)
Cash paid for acquisitions, net of cash acquired ..................... -- (88,792)
Cash received from Emblem escrow settlement .......................... 301 --
---------- ----------
Cash used by investing activities ...................................... (3,748) (66,133)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options .............................. 656 69
Proceeds from management group receivables ........................... 117 242
Repayments of acquired debt .......................................... -- (11,998)
Payment of common share cash dividends ............................... (1,195) (1,182)
---------- ----------
Cash used by financing activities ...................................... (422) (12,869)
---------- ----------
Net decrease in cash and cash equivalents .............................. (5,891) (72,079)
Cash and cash equivalents at beginning of year ......................... 86,632 132,320
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................. $ 80,741 $ 60,241
========== ==========
Supplemental disclosures:
Cash paid for:
Interest .......................................................... $ 3,617 $ 3,617
========== ==========
Income taxes ...................................................... $ 7,332 $ 6,424
========== ==========
See accompanying Notes to Consolidated Financial Statements.
6
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 FOR THE SIX MONTHS ENDED
JUNE 26, JUNE 28, JUNE 26, JUNE 28,
2004 2003 2004 2003
---------- ----------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Earnings:
As reported .............................................. $ 4,176 $ (228) $ 8,033 $ 2,754
Stock option compensation expense based on fair value
method, net of tax .................................... (375) (415) (795) (848)
---------- ----------- ---------- ---------
Pro forma ................................................ 3,801 $ (643) $ 7,238 $ 1,906
========== =========== ========== =========
Basic earnings per common share:
As reported .............................................. $ 0.24 $ (0.01) $ 0.46 $ 0.16
Pro forma ................................................ 0.22 (0.04) 0.41 0.11
Diluted earnings per common share:
As reported .............................................. $ 0.23 $ (0.01) $ 0.45 $ 0.16
Pro forma ................................................ 0.21 (0.04) 0.40 0.11
========== =========== ========== =========
(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 Ltd. unit in
England, now known as EDO MBM Technology 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)16.1 million ($27.0 million), excluding
transaction costs of approximately $1.9 million. In the second quarter of 2004
we received $0.3 million from an escrow account resulting in a decrease in
purchase price and therefore goodwill. 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 has enhanced 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
7
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 expanded 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 SIX MONTHS ENDED
JUNE 28,
2003
----
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net Sales $ 266,844
==========
Earnings available for common shares...................... $ 5,376
==========
Diluted earnings per common share......................... $ 0.31
==========
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 9,307 13,462 11,649
Other assets - 446 414
Liabilities (7,257) (16,326) (7,791)
--------- ---------- ----------
Total purchase price $ 28,941 $ 25,889 $ 38,362
========= ========== ==========
Allocations of the purchase prices for AERA, Darlington and Emblem have
been finalized. There are outstanding amounts held in escrow which, when
settled, may result in further adjustments to goodwill.
(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.
8
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 six
months ended June 26, 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
Emblem purchase price adjustment ......... (301) -- (301)
--------- --------- ---------
Balance as of June 26, 2004 .............. $ 90,588 $ 1,661 $ 92,249
========= ========= =========
Summarized below are intangible assets subject to amortization.
JUNE 26, 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..................................... (8,777) (5,906)
---------- ----------
$ 53,027 $ 55,898
========== ==========
The amortization expense for the three months ended June 26, 2004 and June
28, 2003 amounted to $1.4 million and $1.1 million, respectively. The
amortization expense for the six months ended June 26, 2004 and June 28, 2003
amounted to $2.9 million and $2.0 million, respectively. Total remaining
amortization expense for 2004, 2005, 2006, 2007, 2008 and thereafter related to
these intangible assets is estimated to be $2.6 million, $5.3 million, $5.3
million, $5.1 million, $4.5 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:
JUNE 26, DECEMBER 31,
2004 2003
---------- ------------
(IN THOUSANDS)
Raw material and supplies ................ $ 9,666 $ 8,624
Work-in-process .......................... 53,609 38,052
Finished goods ........................... 1,726 1,870
Less: Unliquidated progress payments .. (15,598) (13,813)
---------- ------------
$ 49,403 $ 34,733
========== ============
9
(6) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 26, JUNE 28, JUNE 26, JUNE 28,
2004 2003 2004 2003
---------- ----------- ---------- ----------
(IN THOUSANDS)
Numerator:
Net Earnings for basic and diluted calculation ... $ 4,176 $ (228) $ 8,033 $ 2,754
========== =========== ========== ==========
Denominator:
Denominator for basic calculation ................ 17,670 17,276 17,610 17,253
Effect of dilutive securities:
Stock options ................................. 257 -- 270 240
Convertible notes ............................. -- -- -- --
---------- ----------- ---------- ----------
Denominator for diluted calculation .............. 17,927 17,276 17,880 17,493
========== =========== ========== ==========
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.
AS OF
JUNE 26, JUNE 28,
2004 2003
---- ----
5.25 % Convertible Subordinated Notes..... 4,408 4,408
Unexercised stock options..................... 342 523
----- -----
4,750 4,931
===== =====
(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 June 26, 2004 and June 28, 2003, the Company
recorded pension expense of $0.5 million and $1.0 million, respectively. For the
six months ended June 26, 2004 and June 28, 2003, the Company recorded pension
expense of $1.1 million and $2.0 million, respectively. Summarized below are the
components of the expense for each period presented.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 26, JUNE 28, JUNE 26, JUNE 28,
2004 2003 2004 2003
--------- -------- -------- --------
(IN THOUSANDS)
Service cost ..................................... $ -- $ -- $ -- $ --
Interest cost .................................... 3,037 3,182 6,074 6,364
Expected return on plan assets ................... (3,176) (3,062) (6,352) (6,124)
Amortization of unrecognized net loss ............ 689 880 1,378 1,760
---------- --------- --------- ---------
$ 550 1,000 $ 1,100 $ 2,000
========== ========= ========= =========
(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 June 26, 2004, accumulated other comprehensive loss included in the
accompanying consolidated balance sheet primarily represents additional minimum
liabilities on benefit plans. Comprehensive income for the three months ended
June 26, 2004 was $4.2
10
million compared to comprehensive loss for the three months ended June 28, 2003
of $0.4 million. Comprehensive income from continuing operations for the six
months ended June 26, 2004 was $8.1 million compared to comprehensive income for
the six months ended June 28, 2003 of $2.6 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. 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 FOR THE SIX MONTHS ENDED
JUNE 26, JUNE 28, JUNE 26, JUNE 28,
2004 2003 2004 2003
----------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net Sales:
Defense................................ $ 99,427 $ 86,925 $ 187,467 $ 156,943
Communications and Space Products...... 14,510 13,323 26,062 27,703
Engineered Materials................... 12,353 11,488 23,638 21,467
----------- ---------- ---------- ----------
$ 126,290 $ 111,736 $ 237,167 $ 206,113
----------- ---------- ---------- ----------
Operating earnings (loss):
Defense................................ $ 8,970 $ 7,364 $ 18,000 $ 12,739
Communications and Space Products...... 97 827 (994) 2,051
Engineered Materials................... 284 149 1,012 695
Impairment loss on assets
held for sale........................ -- (9,160) -- (9,160)
----------- ---------- ---------- ----------
9,351 (820) 18,018 6,325
Net interest expense................... (2,042) (2,082) (4,023) (4,074)
Other, net............................. (47) 95 (25) 128
----------- ---------- ---------- ----------
Earnings before income taxes........... $ 7,262 $ (2,807) $ 13,970 $ 2,379
----------- ---------- ---------- ----------
(11) GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
The Company may, from time to time, issue indebtedness, a condition of which
would be the guarantee of this indebtedness by certain of its subsidiaries.
Presented below is condensed consolidating financial information for the Company
and the contemplated subsidiary guarantors and non-guarantors at June 26, 2004
and December 31, 2003 and for the three and six month periods ended June 26,
2004 and June 28, 2003. Each contemplated subsidiary guarantor is 100% owned,
directly or indirectly, by the Company. Any guarantees that may be issued will
be full and unconditional, as well as joint and several. In connection with the
Company's credit facility, 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.
EDO CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 26, 2004
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- --------------- --------------- ------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 66,076 $ 9,637 $ 5,028 $ -- $ 80,741
Accounts receivable, net 27,544 103,966 4,408 189 136,107
Inventories 5,485 40,146 3,772 -- 49,403
Deferred income tax asset, net 3,594 -- -- -- 3,594
Prepayments and other 3,876 1,946 323 -- 6,145
------------- ------------ ----------- ----------- -----------
Total current assets 106,575 155,695 13,531 189 275,990
Investment in subsidiaries 264,387 -- -- (264,387) --
Property, plant and equipment, net 7,096 19,498 3,479 -- 30,073
11
Notes receivable 6,670 -- -- -- 6,670
Goodwill -- 82,942 9,307 -- 92,249
Other intangible assets, net -- 39,907 13,120 -- 53,027
Deferred income tax asset, net 21,610 -- -- -- 21,610
Other assets 17,948 1,234 -- -- 19,182
----------- ------------ ------------ --------- -----------
$ 424,286 $ 299,276 $ 39,437 $(264,198) $ 498,801
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 19,375 $ 49,556 $ 5,557 $ (728) $ 73,760
Contract advances and deposits 3,266 8,966 -- -- 12,232
----------- ------------ ------------ --------- -----------
Total current liabilities 22,641 58,522 5,557 (728) 85,992
Long-term debt 137,800 -- -- -- 137,800
Post retirement benefits obligations 61,141 11,272 -- -- 72,413
Environmental obligation 1,697 -- -- -- 1,697
Intercompany accounts -- 118,198 26,892 (145,090) --
Shareholders' equity:
Preferred shares -- -- -- -- --
Common shares 20,030 99 -- (99) 20,030
Additional paid-in capital 155,356 25,223 6,486 (31,709) 155,356
Retained earnings 76,036 90,172 452 (90,624) 76,036
Accumulated other comprehensive loss,
net of income tax benefit (29,341) 76 50 -- (29,215)
Treasury shares (1,408) (4,052) -- 4,052 (1,408)
Unearned ESOP shares (16,665) -- -- -- (16,665)
Management group receivables -- (234) -- -- (234)
Deferred compensation under Long-Term
Incentive Plan (3,001) -- -- -- (3,001)
----------- ------------ ------------ --------- -----------
Total shareholders' equity 201,007 111,284 6,988 (118,380) 200,899
----------- ------------ ------------ --------- -----------
$ 424,286 $ 299,276 $ 39,437 $(264,198) $ 498,801
=========== ============ ============ ========= ===========
EDO CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF
EARNINGS FOR THE THREE MONTHS ENDED
JUNE 26, 2004
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- --------------- --------------- ------------ -------------
Net Sales $ 20,873 $ 101,336 $ 7,037 $ (2,956) $ 126,290
Costs and expenses:
Cost of sales 18,392 72,846 6,982 (2,956) 95,264
Selling, general and administrative 724 18,739 (639) -- 18,824
Research and development 702 1,467 682 -- 2,851
----------- ------------- ---------- -------- ------------
19,818 93,052 7,025 (2,956) 116,939
----------- ------------- ---------- -------- ------------
Operating Earnings 1,055 8,284 12 -- 9,351
Non-operating income (expense)
Interest income 161 30 11 -- 202
Interest expense (2,244) -- -- -- (2,244)
Other, net (57) 10 -- -- (47)
----------- ------------- ---------- -------- ------------
(2,140) 40 11 -- (2,089)
(Loss) earnings before income taxes (1,085) 8,324 23 -- 7,262
Income tax (benefit) expense (16) 3,023 79 -- 3,086
----------- ------------- ---------- -------- ------------
(Loss) earnings after income taxes (1,069) 5,301 (56) -- 4,176
Equity in undistributed earnings of subsidiaries 5,245 -- -- (5,245) --
----------- ------------- ---------- -------- ------------
Net earnings $ 4,176 $ 5,301 $ (56) $ (5,245) $ 4,176
=========== ============= ========== ======== ============
EDO CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF
EARNINGS FOR THE SIX MONTHS ENDED
JUNE 26, 2004
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- --------------- --------------- ------------ -------------
Net Sales $ 41,838 $ 187,393 $ 14,383 $ (6,447) $ 237,167
Costs and expenses:
Cost of sales 35,482 135,966 10,921 (6,447) 175,922
12
Selling, general and administrative 2,815 33,341 2,755 -- 38,911
Research and development 1,241 2,393 682 -- 4,316
--------- --------- --------- --------- ---------
39,538 171,700 14,358 (6,447) 219,149
--------- --------- --------- --------- ---------
Operating Earnings 2,300 15,693 25 -- 18,018
Non-operating income (expense)
Interest income 327 64 53 -- 444
Interest expense (4,467) -- -- -- (4,467)
Other, net (116) 91 -- -- (25)
--------- --------- --------- --------- ---------
(4,256) 155 53 -- (4,048)
(Loss) earnings before income taxes (1,956) 15,848 78 -- 13,970
Income tax (benefit) expense (791) 6,554 174 -- 5,937
--------- --------- --------- --------- ---------
(Loss) earnings after income taxes (1,165) 9,294 (96) -- 8,033
Equity in undistributed earnings of subsidiaries 9,198 -- -- (9,198) --
--------- --------- --------- --------- ---------
Net earnings $ 8,033 $ 9,294 $ (96) $ (9,198) $ 8,033
========= ========= ========= ========= =========
EDO CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 26, 2004
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- ---------- -------------- ------------ ------------
OPERATING ACTIVITIES:
Earnings from continuing operations $ 8,033 $ 9,294 $ (96) $ (9,198) $ 8,033
Adjustments to earnings to arrive at cash
provided (used) by continuing operations:
Depreciation 928 4,147 380 -- 5,455
Amortization -- 2,383 502 -- 2,885
Deferred tax benefit -- 190 -- -- 190
Bad debt expense 246 (82) -- -- 164
Loss on sale of property, plant and equipment -- 26 -- -- 26
Deferred compensation expense 402 -- -- -- 402
Non-cash Employee Stock Ownership Plan
compensation expense 2,028 -- -- -- 2,028
Dividends on unallocated Employee Stock Ownership
Plan shares 139 -- -- -- 139
Common shares issued for directors' fees 67 -- -- 67
Income tax benefit from stock options 449 -- -- -- 449
Changes in operating assets and liabilities,
excluding effects of acquisitions:
Equity in earnings of subsidiaries (9,198) -- -- 9,198 --
Intercompany 6,460 (7,042) 582 -- --
Accounts receivable 1,543 (3,113) (424) -- (1,994)
Inventories (165) (14,022) (483) -- (14,670)
Prepayments and other assets 354 1,358 7 -- 1,719
Accounts payable, accrued liabilities and other (14,635) 4,448 (464) -- (10,651)
Contract advances and deposits 478 3,559 -- -- 4,037
--------------- ---------- -------------- ------------ ------------
Cash (used) provided by operations (2,871) 1,146 4 -- (1,721)
--------------- ---------- -------------- ------------ ------------
INVESTING ACTIVITIES:
Purchase of plant and equipment (1,058) (2,997) (144) -- (4,199)
Payments received on notes receivable 150 -- -- -- 150
Cash received from Emblem Escrow settlement 301 -- -- -- 301
--------------- ---------- -------------- ------------ ------------
Cash used by investing activities (607) (2,997) (144) -- (3,748)
--------------- ---------- -------------- ------------ ------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 656 -- -- -- 656
Proceeds from management group receivables -- 117 -- -- 117
Payment of common share cash dividends (1,195) -- -- -- (1,195)
--------------- ---------- -------------- ------------ ------------
Cash (used) provided by financing activities (539) 117 -- -- (422)
--------------- ---------- -------------- ------------ ------------
Net decrease in cash and cash equivalents (4,017) (1,734) (140) -- (5,891)
Cash and cash equivalents at beginning of year 70,093 11,371 5,168 -- 86,632
--------------- ---------- -------------- ------------ ------------
Cash and cash equivalents at end of period $ 66,076 $ 9,637 $ 5,028 $ -- $ 80,741
=============== ========== ============== ============ ============
13
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 $ 70,093 $ 11,371 $ 5,168 $ -- $ 86,632
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 STATEMENT OF
EARNINGS FOR THE THREE MONTHS ENDED
JUNE 28, 2003
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- ---------- -------------- ------------ ------------
Continuing Operations:
Net Sales $ 20,801 $ 93,840 $ 1,669 $ (4,574) $ 111,736
Costs and expenses:
Cost of sales 17,594 65,281 889 (4,574) 79,190
Selling, general and administrative 1,570 19,570 353 -- 21,493
Research and development 885 1,613 -- -- 2,498
Impairment on Deer Park facility -- 9,160 -- -- 9,160
Acquisition-related costs 62 153 -- -- 215
--------------- ---------- -------------- ------------ ------------
20,111 95,777 1,242 (4,574) 112,556
--------------- ---------- -------------- ------------ ------------
Operating Earnings 690 (1,937) 427 -- (820)
Non-operating income (expense)
Interest income 132 33 -- -- 165
14
Interest expense (2,247) -- -- -- (2,247)
Other, net (51) 146 -- -- 95
--------------- ---------- -------------- ------------ ------------
(2,166) 179 -- -- (1,987)
(Loss) earnings from continuing
operations before income taxes (1,476) (1,756) 425 -- (2,807)
Income tax (benefit) expense (4,237) 2,911 145 -- (1,181)
--------------- ---------- -------------- ------------ ------------
Earnings (loss) from continuing operations 2,761 (4,667) 280 -- (1,626)
Equity in undistributed earnings of subsidiaries (4,387) -- -- 4,387 --
--------------- ---------- -------------- ------------ ------------
Net earnings from continuing operations (1,626) (4,667) 280 4,387 (1,626)
Earnings from discontinued operations 1,398 -- -- -- 1,398
--------------- ---------- -------------- ------------ ------------
Net earnings $ (228) $ (4,667) $ 280 $ 4,387 $ (228)
=============== ========== ============== ============ ============
EDO CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF
EARNINGS FOR THE SIX MONTHS ENDED
JUNE 28, 2003
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- ---------- -------------- ------------ ------------
Continuing Operations:
Net Sales $ 41,228 $ 172,896 $ 1,669 $ (9,680) $ 206,113
Costs and expenses:
Cost of sales 34,833 122,978 889 (9,980) 149,020
Selling, general and administrative 2,967 33,380 353 -- 36,700
Research and development 1,608 2,880 -- -- 4,488
Impairment on Deer Park facility -- 9,160 -- -- 9,160
Acquisition-related costs 125 295 -- -- 420
--------------- ---------- -------------- ------------ ------------
39,533 168,693 1,242 (9,680) 199,788
--------------- ---------- -------------- ------------ ------------
Operating Earnings 1,695 4,203 427 -- 6,325
Non-operating income (expense)
Interest income 344 56 -- -- 400
Interest expense (4,474) -- -- -- (4,474)
Other, net (101) 231 (2) -- 128
--------------- ---------- -------------- ------------ ------------
(4,231) 287 (2) -- (3,946)
(Loss) earnings from continuing
operations before income taxes (2,536) 4,490 425 -- 2,379
Income tax (benefit) expense (4,521) 5,399 145 -- 1,023
--------------- ---------- -------------- ------------ ------------
Earnings (loss) from continuing operations 1,985 (909) 280 -- 1,356
Equity in undistributed earnings of subsidiaries (629) -- -- 629 --
--------------- ---------- -------------- ------------ ------------
Net earnings (loss) from continuing operations 1,356 (909) 280 629 1,356
Earnings from discontinued operations 1,398 -- -- -- 1,398
--------------- ---------- -------------- ------------ ------------
Net earnings $ 2,754 $ (909) $ 280 $ 629 $ 2,754
=============== ========== ============== ============ ============
EDO CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 28, 2003
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- ---------- -------------- ------------ ------------
OPERATING ACTIVITIES:
Earnings from continuing operations $ 1,356 $ (909) $ 280 $ 629 $ 1,356
Adjustments to earnings to arrive at cash
provided (used) by continuing operations:
Depreciation 898 5,100 -- -- 5,998
Amortization -- 2,105 -- -- 2,105
Deferred tax benefit (3,757) 1 -- -- (3,756)
Bad debt expense -- 154 -- -- 154
Loss on sale of property, plant and equipment 6 70 -- -- 76
Impairment loss on assets held for sale -- 9,160 -- -- 9,160
Deferred compensation expense 121 -- -- -- 121
Non-cash Employee Stock Ownership Plan
compensation expense 1,510 -- -- -- 1,510
Non-cash Employee Stock Ownership Plan
compensation expense 292 -- -- -- 292
Dividends on unallocated Employee Stock
Ownership Plan shares 148 -- -- -- 148
Common shares issued for directors' fees 51 -- -- -- 51
15
Income tax benefit from stock options 45 -- -- -- 45
Changes in operating assets and liabilities,
excluding effects of acquisitions:
Equity in earnings of subsidiaries 629 -- -- (629) --
Intercompany 15,255 (15,255) -- -- --
Accounts receivable 461 12,719 (974) -- 12,206
Inventories (1,223) (255) 328 -- (1,150)
Prepayments and other assets 5 584 41 -- 630
Accounts payable, accrued liabilities
and other 2,246 (14,770) (29) -- (12,553)
Contract advances and deposits (4,127) (5,390) -- -- (9,517)
--------- --------- --------- ----- ---------
Cash provided (used) by continuing operations 13,916 (6,686) (354) -- (6,876)
--------- --------- --------- ----- ---------
Net cash provided by discontinued
operations 47 -- -- -- 47
INVESTING ACTIVITIES:
Purchase of plant and equipment (2,302) (2,228) (43) -- (4,573)
Payments received on notes receivable 75 26 -- -- 101
Purchase of marketable securities (22) -- -- -- (22)
Restricted cash 27,153 -- -- -- 27,153
Cash paid for acquisitions, net of cash
acquired (88,792) -- -- -- (88,792)
--------- --------- --------- ----- ---------
Cash used by investing activities (63,888) (2,202) (43) -- (66,133)
--------- --------- --------- ----- ---------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 69 -- -- -- 69
Proceeds from management group
receivables -- 242 -- -- 242
Repayments of acquired debt (11,998) -- -- -- (11,998)
Payment of common share cash dividends (1,182) -- -- -- (1,182)
--------- --------- --------- ----- ---------
Cash (used) provided by financing activities (13,111) 242 -- -- (12,869)
--------- --------- --------- ----- ---------
Net decrease in cash and cash
equivalents (63,036) (8,646) (397) -- (72,079)
Cash and cash equivalents at beginning
of year 115,160 13,949 3,211 -- 132,320
--------- --------- --------- ----- ---------
Cash and cash equivalents at end of period $ 52,124 $ 5,303 $ 2,814 $ -- $ 60,241
========= ========= ========= ===== =========
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.
16
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.
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.
17
PENSION AND POST-RETIREMENT BENEFITS 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.
RESULTS OF OPERATIONS
The following information should be read in conjunction with the
Consolidated Financial Statements as of June 26, 2004.
THREE MONTHS ENDED JUNE 26, 2004 COMPARED WITH THREE MONTHS ENDED JUNE 28, 2003
Net sales by segment were as follows:
THREE MONTHS ENDED INCREASE/(DECREASE)
JUNE 26, JUNE 28, FROM
SEGMENT 2004 2003 PRIOR PERIOD
- ------- -------- -------- -------------------
(DOLLARS IN THOUSANDS)
Defense ............................ $ 99,427 $ 86,925 14.4%
Communications and Space Products... 14,510 13,323 8.9%
Engineered Materials ............... 12,353 11,488 7.5%
-------- -------- ----
Total .............................. $126,290 $111,736 13.0%
======== ======== ====
In the Defense segment, approximately $5.4 million of the increase in
sales was attributable to sales of Emblem Group Ltd. ("Emblem") since its
acquisition date of June 16, 2003. In addition, there were increases in sales of
reconnaissance and surveillance systems, professional services and aircraft
weapons suspension and release systems, as well as sales beginning to be
generated on the recently awarded Joint Enhanced Core Communications Systems
("JECCS") for the Marine Corps. These increases were partially offset by a
decrease of $2.3 million to reflect an increase to the estimate-to-complete of
an undersea warfare systems program accounted for under the percentage of
completion method. The increase in the estimate resulted in a decrease to the
percent complete and therefore a decrease to sales. The revision to the estimate
resulted from performance issues discovered during testing phases. There was a
comparable reduction to operating earnings as discussed below.
In the Communications and Space Products segment, the increase in sales
was attributable to deliveries on our contract with the U.S. Army for the new
electronic force protection devices. This increase in sales was partially offset
by a decrease attributable to completion of production deliveries of
interference cancellation systems and the basic shortstop electronic protection
systems ("SEPS") in the first quarter of 2003. In 2004, we received a $6.8
million incremental award as part of a $45.3 million contract for additional
force protection devices for the U.S. Army. This "rapid response" program will
be a significant contributor to sales and margin as deliveries increase in the
second half of the year.
In the Engineered Materials segment, there were increases in sales of
integrated composite structures including production and installation of our
composite pipe on offshore oil rig projects. These increases were partially
offset by decreases in sales of electro-ceramic products attributable to a $0.8
million increase to the estimate-to-complete on work related to the
aforementioned undersea warfare systems program accounted for under the
percentage of completion method. There was also a comparable reduction to
operating earnings as discussed below.
18
Operating earnings by segment were as follows:
THREE MONTHS ENDED
JUNE 26, JUNE 28,
SEGMENT 2004 2003
- ------- --------- ---------
(DOLLARS IN THOUSANDS)
Defense ................................ $ 8,970 $ 7,364
Communications and Space Products ...... 97 827
Engineered Materials ................... 284 149
Impairment loss on Deer Park Facility... -- (9,160)
--------- ---------
Total .................................. $ 9,351 $ (820)
========= =========
Items of note affecting operating earnings are summarized here to help
clarify the comparison of results.
THREE MONTHS ENDED
JUNE 26, JUNE 28,
2004 2003
-------- ---------
(DOLLARS IN THOUSANDS)
Pension ..................... $ 550 $ 1,000
ESOP Compensation expense ... $ 977 $ 744
Intangible asset amortization $ 1,438 $ 1,095
The lower pension expense in 2004 compared to 2003 is attributable to the
cash contribution we made to our defined benefit plan in 2003. The higher ESOP
compensation expense for the second quarter of 2004 is attributable to our
higher average stock price compared to the second quarter of 2003. Pension and
ESOP compensation expense are allocated between cost of sales and selling,
general and administrative expense. The intangible asset amortization expense is
associated with the acquisitions made in 2002 and 2003 and affects primarily the
Defense segment. The $9.2 million impairment charge related to our Deer Park
facility which was later sold in 2003. Operating earnings for the three months
ended June 26, 2004 were also affected by several contract-related items which
are described in further detail below in the discussion on segment operating
earnings.
The Defense segment's operating earnings for the three months ended June
26, 2004 were $9.0 million or 9.0% of this segment's net sales compared to $7.4
million or 8.5% of this segment's net sales for the three months ended June 28,
2003. This increase in operating earnings was attributable to continuing
higher-margin sales of reconnaissance and surveillance systems and efficiencies
achieved on sales of our radar signal simulator. In addition, there was a
positive impact to operating earnings of approximately $3.4 million resulting
from the release of a reserve which had been previously established for a
potential issue on MK105-related contracts. The release of the reserve was
triggered by final closeout of MK105 programs and proven performance resulting
from system utilization over the course of the year. These increases were
partially offset by the effect of increasing the estimate-to-complete on an
aircraft armament program resulting in a $1.3 million negative impact to
operating earnings and the aforementioned $2.3 million impact on an undersea
warfare systems program. We believe that our current estimates reflect the total
potential impacts.
The Communications and Space Products segment operating earnings for the
three months ended June 26, 2004 were $0.1 million or 0.7% of this segment's net
sales compared to $0.8 million or 6.2% of this segment's net sales for the three
months ended June 28, 2003. The decrease in operating earnings is related
primarily to $0.8 million of charges in the antenna product line due to
production inefficiencies resulting in inventory adjustments as well as
increases in estimates-to-complete. This segment's operating results will be
positively affected by the increased activity with respect to the aforementioned
U.S. Army program for force protection devices which will be a significant
contributor to operating earnings in this segment as the year progresses.
The Engineered Materials segment's operating earnings for the three months
ended June 26, 2004 were $0.3 million or 2.3% of this segment's net sales
compared to operating earnings of $0.1 million or 1.3% of this segment's net
sales for the three months ended June 28, 2003. In the second quarter of 2004,
there was a negative impact of $0.8 million which related to the undersea
warfare systems program issue in the Defense segment. A component for sonar
equipment produced in the engineered materials segment experienced failures
during testing. The estimate of the cost to remedy the problem resulted in the
$0.8 million charge to earnings. During the second quarter of 2003, we incurred
a charge of $0.7 million to write-down inventory and receivables related to the
microwave product line that serviced the telecommunications industry. As sales
were not materializing to expected levels we conducted an analysis which
resulted in the write-down of $0.6 million of inventory and $0.1 million of
unbilled receivables.
Selling, general and administrative expenses for the three months ended
June 26, 2004 decreased to $18.8 million or 14.9% of net sales from $21.5
million or 19.2% of net sales for the three months ended June 28, 2003. This
decrease was attributable primarily to synergies achieved on the AERA and
Darlington acquisitions.
Research and development expense for the three months ended June 26, 2004
increased slightly to $2.9 million or 2.3% of net sales from $2.5 million or
2.2% of net sales for the three months ended June 28, 2003.
19
Interest expense, net of interest income, for the three months ended June
26, 2004 remained virtually unchanged at $2.0 million compared to the three
months ended June 28, 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.
For the three months ended June 26, 2004, net earnings were $4.2 million
or $0.23 per diluted common share on 17.9 million diluted shares compared to a
net loss from continuing operations of $1.6 million or $0.09 per diluted common
share on 17.3 million diluted shares for the three months ended June 28, 2003.
The convertible notes did not have a dilutive effect in either quarter. In the
three months ended June 28, 2003, we received notification of final settlement
of bankruptcy matters pertaining to our former energy business. Upon the
discontinuance of such business in 1996, a liability was established pending
final settlement of the bankruptcy. This liability was reversed as of June 28,
2003. Consequently, $1.4 million, which was net of income tax expense of $0.9
million, was reported as earnings from discontinued operations in the
accompanying statement of earnings. The net loss including discontinued
operations was $0.2 million or $0.01 per diluted share for the three months
ended June 28, 2003.
SIX MONTHS ENDED JUNE 26, 2004 COMPARED WITH SIX MONTHS ENDED JUNE 28, 2003
Net sales by segment were as follows:
SIX MONTHS ENDED INCREASE/(DECREASE)
JUNE 26, JUNE 28, FROM
SEGMENT 2004 2003 PRIOR PERIOD
- ------- -------- -------- -------------------
(DOLLARS IN THOUSANDS)
Defense ............................ $187,467 $156,943 19.4%
Communications and Space Products... 26,062 27,703 (5.9)%
Engineered Materials ............... 23,638 21,467 10.1%
-------- -------- ----
Total .............................. $237,167 $206,113 15.1%
======== ======== ====
In the Defense segment, approximately $12.7 million of the increase in
sales was attributable to sales of Emblem Group Ltd. ("Emblem") since its
acquisition date of June 16, 2003. In addition, there were increases in sales of
reconnaissance and surveillance systems, professional services and aircraft
weapons suspension and release systems. There were also sales contributed by the
recently awarded Joint Enhanced Core Communication System ("JECCS"). These
increases were partially 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.
Also offsetting the increases was the aforementioned decrease of $2.3 million to
reflect an increase to the estimate-to-complete of an undersea warfare systems
program accounted for under the percentage of completion method. The increase in
the estimate resulted in a decrease to the percent complete and therefore a
decrease to sales. The revision to the estimate resulted from performance issues
discovered during testing phases. There was a comparable reduction to operating
earnings as discussed below.
In the Communications and Space Products segment, the decrease in sales
was attributable to completion of production deliveries of interference
cancellation systems and the basic shortstop electronic protection systems
("SEPS") in the first quarter of 2003, as well as a decrease in antenna sales.
This decrease in sales was partially offset by deliveries on our contract with
the U.S. Army for the new electronic force protection devices. In 2004, we
received a $6.8 million incremental award as part of a $45.3 million contract
for additional force protection devices. This "rapid response" program will be a
significant contributor to sales and margin as deliveries increase in the second
half of the year.
In the Engineered Materials segment, there were increases in sales of
integrated composite structures including production and installation of our
composite pipe on offshore oil rig projects.
Operating earnings by segment were as follows:
SIX MONTHS ENDED
JUNE 26, JUNE 28,
SEGMENT 2004 2003
- ------- -------- --------
(DOLLARS IN THOUSANDS)
Defense ............................. $ 18,000 $ 12,739
Communications and Space Products ... (994) 2,051
Engineered Materials ................ 1,012 695
Impairment loss on Deer Park Facility -- (9,160)
-------- --------
Total ............................... $ 18,018 $ 6,325
======== ========
Items of note affecting operating earnings are summarized here to help
clarify the comparison of results.
20
SIX MONTHS ENDED
JUNE 26, JUNE 28,
2004 2003
-------- --------
(DOLLARS IN THOUSANDS)
Pension ..................... $ 1,100 $ 2,000
ESOP Compensation expense ... $ 2,028 $ 1,510
Intangible asset amortization $ 2,871 $ 2,028
The lower pension expense in 2004 compared to 2003 is attributable to the
cash contribution we made to our defined benefit plan in 2003. The higher ESOP
compensation expense for the first six months of 2004 is attributable to our
higher average stock price compared to the first six months of 2003. Pension and
ESOP compensation expense are allocated between cost of sales and selling,
general and administrative expense. The intangible asset amortization expense is
associated with the acquisitions made in 2002 and 2003 and affects primarily the
Defense segment. The $9.2 million impairment charge related to our Deer Park
facility which was later sold in 2003. Operating earnings for the six months
ended June 26, 2004 were also affected by several contract-related items which
are described in further detail below in the discussion of segment operating
earnings.
The Defense segment's operating earnings for the six months ended June 26,
2004 were $18.0 million or 9.6% of this segment's net sales compared to $12.7
million or 8.1% of this segment's net sales for the six months ended June 28,
2003. This increase in operating earnings was attributable to continuing
higher-margin sales of reconnaissance and surveillance systems. In addition,
there was a positive impact to operating earnings of approximately $3.4 million
resulting from the release of a reserve which had been previously established
for a potential issue on MK105-related contracts. The release of the reserve was
triggered by final closeout of MK105 programs and proven performance resulting
from system utilization over the course of the year. These increases were
partially offset by the effect of increasing the estimate-to-complete on an
aircraft armament program resulting in a $1.6 million negative impact to
operating earnings and the aforementioned $2.3 million impact on undersea
warfare systems program. We believe that our current estimates reflect the total
potential impacts.
The Communications and Space Products segment operating loss for the six
months ended June 26, 2004 was $1.0 million or 3.8% of this segment's net sales
compared to operating earnings of $2.1 million or 7.4% of this segment's net
sales for the six months ended June 28, 2003. The loss occurred primarily in the
first quarter of 2004 and related 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.
In addition, there was a loss in the antenna product line in the second quarter
due to production inefficiencies resulting in inventory adjustments as well as
increases in estimates-to-complete. This segment's operating results will be
positively affected by the increased activity with respect to the aforementioned
force protection devices program which will be a significant contributor to
operating earnings in the second half of the year.
The Engineered Materials segment's operating earnings for the six months
ended June 26, 2004 were $1.0 million or 4.3% of this segment's net sales
compared to operating earnings of $0.7 million or 3.2% of this segment's net
sales for the six months ended June 28, 2003. In 2004, there was a negative
impact of $0.8 million which related to the undersea warfare systems program
issue in the Defense segment. A component for sonar equipment produced in the
engineered materials segment experienced failures during testing. The estimate
of the cost to remedy the problem resulted in the $0.8 million charge to
earnings. In 2003, we incurred a charge of $0.7 million to write-down inventory
and receivables related to the microwave product line that serviced the
telecommunications industry. As sales were not materializing to expected levels,
we conducted an analysis which resulted in the write-down of $0.6 million of
inventory and $0.1 million of unbilled receivables.
Selling, general and administrative expenses for the six months ended June
26, 2004 of $38.9 million decreased as a percent of net sales to 16.4% from
17.8% for the six months ended June 28, 2003. This decrease was attributable
primarily to synergies achieved on the AERA and Darlington acquisitions.
Research and development expense for the six months ended June 26, 2004
decreased slightly to $4.3 million or 1.8% of net sales from $4.5 million or
2.2% of net sales for the six months ended June 28, 2003.
Interest expense, net of interest income, for the six months ended June
26, 2004 remained virtually unchanged at $4.0 million compared to the six months
ended June 28, 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 six month
periods ended June 26, 2004 and June 28, 2003.
For the six months ended June 26, 2004, net earnings were $8.0 million or
$0.45 per diluted common share on 17.9 million diluted shares compared to net
earnings from continuing operations of $1.4 million or $0.08 per diluted common
share on 17.5 million diluted shares for the six months ended June 28, 2003. The
convertible notes did not have a dilutive effect in either six month period. In
the six months ended June 28, 2003, we received notification of final settlement
of bankruptcy matters pertaining to our former energy
21
business. Upon the discontinuance of such business in 1996, a liability was
established pending final settlement of the bankruptcy. This liability was
reversed as of June 28, 2003. Consequently, $1.4 million, which was net of
income tax expense of $0.9 million, was reported as earnings from discontinued
operations in the accompanying statement of earnings. Net earnings including
discontinued operations, were $2.8 million or $0.16 per diluted share for the
six months ended June 28, 2003.
LIQUIDITY AND CAPITAL RESOURCES
BALANCE SHEET
Our cash and cash equivalents decreased 6.8% to $80.7 million at June 26,
2004 from $86.6 million at December 31, 2003. This decrease was due primarily to
$1.7 million of cash used by operations, $4.2 million used for the purchase of
capital equipment and $1.2 million for the payment of common share dividends.
These decreases were partially offset by $0.7 million of proceeds from the
exercise of stock options and $0.3 million of cash received upon settlement of
an escrow related to the purchase of Emblem.
Accounts receivable increased 1.3% to $136.1 million at June 26, 2004 from
$134.3 million at December 31, 2003 due in part to timing of collections of
billed receivables. At June 26, 2004 approximately 79% of billed receivables are
in the under-60 days aging category. There was also growth in unbilled
receivables resulting from work progressing on large programs such as Joint
Strike Fighter and F/A-22.
Inventories increased 42.2% to $49.4 million at June 26, 2004 from $34.7
million at December 31, 2003 due primarily to the efforts expended on
work-in-progress on major programs, such as the force protection systems program
for which deliveries will increase in the second half of the year.
The note receivable of $6.7 million at June 26, 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 $1.4 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.
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 June 26, 2004, LIBOR was approximately 1.58% 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
June 26, 2004 and December 31, 2003. Letters of credit outstanding at June 26,
2004 pertaining to the credit facility were $43.8 million, resulting in $81.2
million available at June 26, 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
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 June 26,
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 $1.4 million at June 26, 2004 and $1.5
million at December 31, 2003.
22
The Notes are convertible, unless previously redeemed or repurchased by
us, at the option of the holder at any time prior to maturity, into our common
shares at an initial conversion price of $31.26 per share, subject to adjustment
in certain events. As of June 26, 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
June 26, 2004, we have included the following table. We are obligated under
building and equipment leases expiring between 2004 and 2017. 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.
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........................... 79.4 8.3 12.6 8.7 8.3 7.5 34.0
Letters of credit.......................... 44.2 4.3 37.9 -- 2.0 -- --
Advance payment and performance bonds...... 1.9 0.2 -- -- -- -- 1.7
------ ------ ------ ------ ------ ------ ------
Total...................................... $263.3 $ 12.8 $ 50.5 $ 8.7 $148.1 $ 7.5 $ 35.7
====== ====== ====== ====== ====== ====== ======
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.
A hedging contract was put in place at the end of June 2004 which related
to a long-term contract denominated in Euros. There was no significant impact on
reported results as of and for the six months ended June 26, 2004.
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 June 26, 2004 increased to $535.9
million from $462.3 million at December 31, 2003. Our backlog consists primarily
of current orders under long-lived, mission-critical programs on 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
23
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.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on April 27, 2004,
the following actions were taken:
(a) Messrs. George M. Ball, Leslie F. Kenne, James Roth, James M. Smith
and Robert S. Tyrer were elected as directors. The votes cast for, against or
withheld for each nominee were as follows:
24
Name Votes For Votes Against Votes Withheld
---- ---------- ------------- --------------
George M. Ball 17,465,156 N/A 799,665
Leslie F. Kenne 17,843,869 N/A 420,952
James Roth 17,838,370 N/A 426,451
James M. Smith 17,520,469 N/A 744,352
Robert S. Tyrer 18,134,100 N/A 130,721
(b) An amendment to the Certificate of Incorporation to eliminate the
classification of the Board of Directors and to remove the requirement that the
vote of the holders of 80% of the outstanding shares of the Corporation be
required to amend, alter, change or repeal the classification of Board of
Directors or to remove any director without cause was approved: there were
17,688,125 votes cast in favor, 560,035 votes cast against, and 36,660
abstentions.
(c) The EDO Corporation 2004 Non-Employee Director Stock Ownership Plan
was approved: there were 14,250,661 votes cast in favor, 1,942,917 votes cast
against, and 59,912 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3(a)(1) Restated Certificate of Incorporation of the Company dated May 15,
2003 (incorporated herein by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2003,
Exhibit 3(a)(1)).
3(a)(2)* Amendment of the Restated Certificate of Incorporation of the
Company dated May 10, 2004.
3(b)* By-Laws of the Company as amended July 27, 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 six months ended
June 26, 2004:
DATE OF REPORT ITEMS REPORTED
- -------------- --------------------------------------------------------------
April 29, 2004 Earnings Release, dated April 29, 2004, announcing financial
results for the quarter ended March 27, 2004.
25
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
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Dated: July 30, 2004 Frederic B. Bassett
Vice President Finance,
Treasurer and Chief Financial Officer
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