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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 SEPTEMBER 25, 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 October 25,
2004 was 19,994,671 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 -
September 25, 2004 and December 31, 2003 ..................................... 3
Consolidated Statements of Earnings -
Three months ended September 25, 2004 and September 27, 2003 ................. 4
Consolidated Statements of Earnings -
Nine months ended September 25, 2004 and September 27, 2003 .................. 5
Consolidated Statements of Cash Flows -
Nine months ended September 25, 2004 and September 27, 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 1 Legal Proceedings ............................................................ 24
ITEM 4 Submission of Matters to a Vote of Security Holders .......................... 24
ITEM 5 Other Information ............................................................ 24
ITEM 6 Exhibits ..................................................................... 24
SIGNATURES 26
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 25, DECEMBER 31,
2004 2003
-------------- --------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 99,825 $ 86,632
Accounts receivable, net ..................................................... 131,298 134,303
Inventories .................................................................. 51,294 34,733
Deferred income tax asset, net ............................................... 3,594 3,594
Prepayments and other ........................................................ 4,170 5,954
-------------- --------------
Total current assets ........................................................ 290,181 265,216
-------------- --------------
Property, plant and equipment, net ............................................. 30,255 31,355
Notes receivable ............................................................... 6,736 6,538
Goodwill ....................................................................... 92,249 92,527
Other intangible assets, net ................................................... 51,661 55,898
Deferred income tax asset, net ................................................. 21,610 21,774
Other assets ................................................................... 19,547 21,388
-------------- --------------
$ 512,239 $ 494,696
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 16,474 $ 22,801
Accrued liabilities .......................................................... 60,774 61,942
Contract advances and deposits ............................................... 13,548 8,195
-------------- --------------
Total current liabilities ................................................... 90,796 92,938
-------------- --------------
Long-term debt ................................................................. 137,800 137,800
Post-retirement benefits obligations ........................................... 72,704 71,898
Environmental obligation ....................................................... 1,686 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,
20,067,045 issued in 2004 and 19,832,108 issued in 2003 ..................... 20,067 19,832
Additional paid-in capital ................................................... 156,666 150,097
Retained earnings ............................................................ 82,378 69,059
Accumulated other comprehensive loss, net of income tax benefit .............. (29,191) (29,281)
Treasury shares at cost (91,650 shares in 2004 and 88,128 shares in 2003) .... (1,387) (1,255)
Unearned Employee Stock Ownership Plan shares ................................ (16,352) (17,290)
Deferred compensation under Long-Term Incentive Plan ......................... (2,705) (479)
Management group receivables ................................................. (223) (351)
-------------- --------------
Total shareholders' equity .................................................. 209,253 190,332
-------------- --------------
$ 512,239 $ 494,696
============== ==============
See accompanying Notes to Consolidated Financial Statements.
3
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED
SEPTEMBER 25, SEPTEMBER 27,
2004 2003
-------------- --------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
NET SALES ...................................... $ 129,875 $ 118,783
-------------- --------------
COSTS AND EXPENSES
Cost of sales ................................. 94,168 84,818
Selling, general and administrative ........... 18,326 20,388
Research and development ...................... 3,333 1,450
Acquisition-related costs ..................... -- 249
-------------- --------------
115,827 106,905
-------------- --------------
OPERATING EARNINGS ............................. 14,048 11,878
NON-OPERATING INCOME (EXPENSE)
Interest income ............................... 337 273
Interest expense .............................. (2,304) (2,295)
Other, net .................................... (126) (103)
-------------- --------------
(2,093) (2,125)
-------------- --------------
Earnings before income taxes ..................... 11,955 9,753
Income tax expense ............................... (5,081) (4,194)
-------------- --------------
NET EARNINGS AVAILABLE FOR COMMON SHARES ......... $ 6,874 $ 5,559
============== ==============
NET EARNINGS PER COMMON SHARE:
Basic ......................................... $ 0.39 $ 0.32
============== ==============
Diluted ....................................... $ 0.35 $ 0.30
============== ==============
Weighted-average common shares outstanding:
Basic .......................................... 17,737 17,336
============== ==============
Diluted ........................................ 22,406 21,999
============== ==============
Dividends declared per common share .............. $ 0.03 $ 0.03
============== ==============
See accompanying Notes to Consolidated Financial Statements.
4
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE NINE MONTHS ENDED
SEPTEMBER 25, SEPTEMBER 27,
2004 2003
-------------- --------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
NET SALES .......................................................... $ 367,042 $ 324,896
-------------- --------------
COSTS AND EXPENSES
Cost of sales ..................................................... 270,090 233,838
Selling, general and administrative ............................... 57,237 57,088
Research and development .......................................... 7,649 5,938
Impairment loss on assets held for sale ........................... -- 9,160
Acquisition-related costs ......................................... -- 669
-------------- --------------
334,976 306,693
-------------- --------------
OPERATING EARNINGS ................................................. 32,066 18,203
NON-OPERATING INCOME (EXPENSE)
Interest income ................................................... 781 673
Interest expense .................................................. (6,771) (6,769)
Other, net ........................................................ (151) 25
-------------- --------------
(6,141) (6,071)
-------------- --------------
Earnings before income taxes ......................................... 25,925 12,132
Income tax expense ................................................... (11,018) (5,217)
-------------- --------------
Earnings from continuing operations before discontinued operations ... 14,907 6,915
Earnings from discontinued operations, net of tax .................... -- 1,398
-------------- --------------
NET EARNINGS AVAILABLE FOR COMMON SHARES ............................. $ 14,907 $ 8,313
============== ==============
NET EARNINGS PER COMMON SHARE:
Basic:
Continuing operations ............................................. $ 0.84 $ 0.40
Discontinued operations ........................................... -- 0.08
-------------- --------------
$ 0.84 $ 0.48
============== ==============
Diluted:
Continuing operations ............................................. $ 0.81 $ 0.39
Discontinued operations ........................................... -- 0.08
-------------- --------------
$ 0.81 $ 0.47
============== ==============
Weighted-average common shares outstanding:
Basic .............................................................. 17,652 17,281
============== ==============
Diluted ............................................................ 22,328 17,526
============== ==============
Dividends declared per common share .................................. $ 0.09 $ 0.09
============== ==============
See accompanying Notes to Consolidated Financial Statements
5
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 25, SEPTEMBER 27,
2004 2003
-------------- --------------
(UNAUDITED)
(IN THOUSANDS)
OPERATING ACTIVITIES:
Earnings from operations ................................................ $ 14,907 $ 6,915
Adjustments to earnings to arrive at cash provided by operations:
Depreciation ........................................................... 8,073 9,017
Amortization ........................................................... 4,254 3,529
Bad debt expense ....................................................... 289 170
Deferred tax provision (benefit) ....................................... 164 (3,756)
Loss on disposal of property, plant and equipment ...................... 32 92
Impairment loss on assets held for sale ................................ -- 9,160
Deferred compensation expense .......................................... 699 182
Non-cash Employee Stock Ownership Plan compensation expense ............ 3,086 2,356
Non-cash stock option compensation expense ............................. -- 292
Dividends on unallocated Employee Stock Ownership Plan shares .......... 206 221
Common shares issued for directors' fees ............................... 104 79
Income tax benefit from stock options and Long-Term Incentive Plan ..... 700 147
Changes in operating assets and liabilities, excluding
effects of acquisitions:
Accounts receivable .................................................. 2,716 13,579
Inventories .......................................................... (16,561) 874
Prepayments and other assets ......................................... 3,185 (126)
Accounts payable, accrued liabilities and other ...................... (6,860) (17,804)
Contribution to defined benefit pension plan ......................... -- (5,000)
Contract advances and deposits ....................................... 5,353 (13,041)
-------------- --------------
Cash provided by operations ............................................... 20,347 6,886
-------------- --------------
Cash provided by discontinued operations .................................. -- 47
INVESTING ACTIVITIES:
Purchase of plant and equipment ......................................... (7,005) (6,938)
Payments received on notes receivable ................................... 225 1,310
Restricted cash ......................................................... -- 27,347
Purchase of marketable securities ....................................... -- (23)
Cash paid for acquisitions, net of cash acquired ........................ 301 (87,647)
-------------- --------------
Cash used by investing activities ......................................... (6,479) (65,951)
-------------- --------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options ................................. 991 226
Proceeds from management group receivables .............................. 128 242
Repayments of acquired debt ............................................. -- (11,998)
Payment of common share cash dividends .................................. (1,794) (1,774)
-------------- --------------
Cash used by financing activities ......................................... (675) (13,304)
-------------- --------------
Net increase (decrease) in cash and cash equivalents ...................... 13,193 (72,322)
Cash and cash equivalents at beginning of year ............................ 86,632 132,320
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 99,825 $ 59,998
============== ==============
Supplemental disclosures:
Cash paid for:
Interest ............................................................... $ 3,617 $ 3,617
============== ==============
Income taxes ........................................................... $ 10,092 $ 10,621
============== ==============
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 NINE MONTHS ENDED
SEPTEMBER 25, SEPTEMBER 27, SEPTEMBER 25, SEPTEMBER 27,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Earnings:
As reported .......................... $ 6,874 $ 5,559 $ 14,907 $ 8,313
Stock option compensation expense
based on fair value method,
net of tax .......................... (367) (384) (1,143) (1,208)
-------------- -------------- -------------- --------------
Pro forma ............................ $ 6,507 $ 5,175 $ 13,764 $ 7,105
============== ============== ============== ==============
Basic earnings per common share:
As reported .......................... $ 0.39 $ 0.32 $ 0.84 $ 0.48
Pro forma ............................ $ 0.37 0.30 $ 0.78 $ 0.41
Diluted earnings per common share:
As reported .......................... $ 0.35 $ 0.30 $ 0.81 $ 0.47
Pro forma ............................ $ 0.34 $ 0.28 $ 0.76 $ 0.41
============== ============== ============== ==============
During the nine months ended September 25, 2004, the Company issued 118.9
thousand common shares for the exercise of stock options and 116.0 thousand
restricted common shares for long-term incentive awards.
(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 reinforces
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
7
platforms and programs across the U.S. military services and in particular the
U.S. Marine Corps. The purchase price was $25.6 million, excluding transaction
costs of approximately $0.3 million. In addition, the Company acquired and
immediately paid off debt of $4.9 million. Darlington became part of the
Company's Defense segment. 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 NINE MONTHS ENDED
SEPTEMBER 27,
2003
--------------------------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Net sales .............................. $ 353,313
==========
Earnings available for common shares ... $ 8,473
==========
Diluted earnings per common share ...... $ 0.48
==========
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
8
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.
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 nine
months ended September 25, 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 September 25, 2004 ............ $ 90,588 $ 1,661 $ 92,249
============ ============ ============
Summarized below are intangible assets subject to amortization.
SEPTEMBER 25, 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 ............................................ (10,143) (5,906)
-------- --------
$ 51,661 $ 55,898
======== ========
The amortization expense for the three months ended September 25, 2004 and
September 27, 2003 amounted to $1.4 million in both periods. The amortization
expense for the nine months ended September 25, 2004 and September 27, 2003
amounted to $4.2 million and $3.5 million, respectively. Total remaining
amortization expense for 2004, 2005, 2006, 2007, 2008 and thereafter related to
these intangible assets is estimated to be $1.3 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:
SEPTEMBER 25, DECEMBER 31,
2004 2003
-------------- --------------
(IN THOUSANDS)
Raw material and supplies ................... $ 9,908 $ 8,624
Work-in-process ............................. 54,310 38,052
Finished goods .............................. 1,875 1,870
Less: Unliquidated progress payments ...... (14,799) (13,813)
-------------- --------------
$ 51,294 $ 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 NINE MONTHS ENDED
SEPTEMBER 25, SEPTEMBER 27, SEPTEMBER 25, SEPTEMBER 27,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
(IN THOUSANDS)
Numerator:
Net Earnings for basic and diluted calculation .... $ 6,874 $ 5,559 $ 14,907 $ 8,313
Effect of dilutive securities:
5.25% Convertible Subordinated Notes ............. 1,040 1,031 3,120 --
-------------- -------------- -------------- --------------
Numerator for diluted calculation ................. $ 7,914 $ 6,590 $ 18,027 $ 8,313
============== ============== ============== ==============
Denominator:
Denominator for basic calculation ................. 17,737 17,336 17,652 17,281
Effect of dilutive securities:
Stock options .................................... 261 255 268 245
5.25% Convertible Subordinated Notes ............. 4,408 4,408 4,408 --
-------------- -------------- -------------- --------------
Denominator for diluted calculation ............... 22,406 21,999 22,328 17,526
============== ============== ============== ==============
The assumed conversion of the Notes was anti-dilutive for the nine months
ended September 27, 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
SEPTEMBER 25, SEPTEMBER 27,
2004 2003
------------- -------------
5.25 % Convertible Subordinated Notes..... -- 4,408
Unexercised stock options................. 320 471
--- -----
320 4,879
=== =====
(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 September 25, 2004 and September 27, 2003, the
Company recorded pension expense of $0.5 million and $1.0 million, respectively.
For the nine months ended September 25, 2004 and September 27, 2003, the Company
recorded pension expense of $1.6 million and $3.0 million, respectively.
Summarized below are the components of the expense for each period presented.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 25, SEPTEMBER 27, SEPTEMBER 25, SEPTEMBER 27,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
(IN THOUSANDS)
Service cost ........................... $ -- $ -- $ -- $ --
Interest cost .......................... 3,037 3,182 9,111 9,546
Expected return on plan assets ......... (3,176) (3,062) (9,528) (9,186)
Amortization of unrecognized net loss .. 689 880 2,067 2,640
-------------- -------------- -------------- --------------
$ 550 $ 1,000 $ 1,650 $ 3,000
============== ============== ============== ==============
(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
10
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 September 25, 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 September 25, 2004 was $6.9 million compared to comprehensive income for
the three months ended September 27, 2003 of $5.5 million. Comprehensive income
for the nine months ended September 25, 2004 was $15.0 million compared to
comprehensive income from continuing operations for the nine months ended
September 27, 2003 of $6.8 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 NINE MONTHS ENDED
SEPTEMBER 25, SEPTEMBER 27, SEPTEMBER 25, SEPTEMBER 27,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net Sales:
Defense .................................. $ 98,781 $ 94,108 $ 286,248 $ 251,051
Communications and Space Products ........ 20,485 13,308 46,547 41,011
Engineered Materials ..................... 10,609 11,367 34,247 32,834
-------------- -------------- -------------- --------------
$ 129,875 $ 118,783 $ 367,042 $ 324,896
-------------- -------------- -------------- --------------
Operating earnings (loss):
Defense .................................. $ 9,503 $ 10,781 $ 27,503 $ 23,520
Communications and Space Products ........ 2,633 295 1,639 2,346
Engineered Materials ..................... 1,912 802 2,924 1,497
Impairment loss on assets held for sale .. -- -- -- (9,160)
-------------- -------------- -------------- --------------
14,048 11,878 32,066 18,203
Net interest expense ..................... (1,967) (2,022) (5,990) (6,096)
Other, net ............................... (126) (103) (151) 25
-------------- -------------- -------------- --------------
Earnings before income taxes ............. $ 11,955 $ 9,753 $ 25,925 $ 12,132
-------------- -------------- -------------- --------------
(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
September 25, 2004 and December 31, 2003 and for the three and nine month
periods ended September 25, 2004 and September 27, 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.
11
EDO CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 25, 2004
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- ---------- --------------- --------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 90,391 $ 4,365 $ 5,069 $ -- $ 99,825
Accounts receivable, net 29,101 98,396 3,814 (13) 131,298
Inventories 2,502 44,735 4,057 -- 51,294
Deferred income tax asset, net 3,594 -- -- -- 3,594
Prepayments and other 2,288 1,722 160 -- 4,170
--------------- ---------- --------------- --------------- ---------------
Total current assets 127,876 149,218 13,100 (13) 290,181
Investment in subsidiaries 246,888 -- -- (246,888) --
Property, plant and equipment, net 7,516 19,415 3,324 -- 30,255
Notes receivable 6,736 -- -- -- 6,736
Goodwill -- 82,942 9,307 -- 92,249
Other intangible assets, net -- 38,793 12,868 -- 51,661
Deferred income tax asset, net 21,610 -- -- -- 21,610
Other assets 18,286 1,261 -- -- 19,547
--------------- ---------- --------------- --------------- ---------------
$ 428,912 $ 291,629 $ 38,599 $ (246,901) $ 512,239
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 16,898 $ 55,367 $ 4,871 $ 112 $ 77,248
Contract advances and deposits 2,018 11,530 -- -- 13,548
--------------- ---------- --------------- --------------- ---------------
Total current liabilities 18,916 66,897 4,871 112 90,796
Long-term debt 137,800 -- -- -- 137,800
Post retirement benefits obligations 61,217 11,487 -- -- 72,704
Environmental obligation 1,686 -- -- -- 1,686
Intercompany accounts -- 95,003 26,902 (121,905) --
Shareholders' equity:
Preferred shares -- -- -- -- --
Common shares 20,067 99 -- (99) 20,067
Additional paid-in capital 156,666 25,223 6,486 (31,709) 156,666
Retained earnings 82,378 97,078 274 (97,352) 82,378
Accumulated other comprehensive loss, net
of income tax benefit (29,374) 117 66 -- (29,191)
Treasury shares (1,387) (4,052) -- 4,052 (1,387)
Unearned ESOP shares (16,352) -- -- -- (16,352)
Management group receivables -- (223) -- -- (223)
Deferred compensation under Long-Term
Incentive Plan (2,705) -- -- -- (2,705)
--------------- ---------- --------------- --------------- ---------------
Total shareholders' equity 209,293 118,242 6,826 (125,108) 209,253
--------------- ---------- --------------- --------------- ---------------
$ 428,912 $ 291,629 $ 38,599 $ (246,901) $ 512,239
=============== ========== =============== =============== ===============
EDO CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF
EARNINGS FOR THE THREE MONTHS ENDED
SEPTEMBER 25, 2004
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- --------------- --------------- --------------- ---------------
Net Sales $ 22,948 $ 103,008 $ 6,717 $ (2,798) $ 129,875
Costs and expenses:
Cost of sales 19,143 72,314 5,509 (2,798) 94,168
Selling, general and administrative 168 17,217 941 -- 18,326
Research and development 728 2,180 425 -- 3,333
--------------- --------------- --------------- --------------- ---------------
20,039 91,711 6,875 (2,798) 115,827
--------------- --------------- --------------- --------------- ---------------
Operating earnings (loss) 2,909 11,297 (158) -- 14,048
Non-operating income (expense)
Interest income 288 30 19 -- 337
Interest expense (2,304) -- -- -- (2,304)
Other, net (48) (78) -- -- (126)
--------------- --------------- --------------- --------------- ---------------
(2,064) (48) 19 -- (2,093)
Earnings (loss) before income taxes 845 11,249 (139) -- 11,955
Income tax expense 699 4,343 39 -- 5,081
--------------- --------------- --------------- --------------- ---------------
Earnings (loss) after income taxes 146 6,906 (178) -- 6,874
Equity in undistributed earnings of
subsidiaries 6,728 -- -- (6,728) --
--------------- --------------- --------------- --------------- ---------------
Net earnings (loss) $ 6,874 $ 6,906 $ (178) $ (6,728) $ 6,874
=============== =============== =============== =============== ===============
12
EDO CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
FOR THE NINE MONTHS ENDED
SEPTEMBER 25, 2004
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- --------------- --------------- --------------- ---------------
Net Sales $ 64,786 $ 290,401 $ 21,100 $ (9,245) $ 367,042
Costs and expenses:
Cost of sales 54,625 208,280 16,430 (9,245) 270,090
Selling, general and administrative 2,983 50,558 3,696 -- 57,237
Research and development 1,969 4,573 1,107 -- 7,649
--------------- --------------- --------------- --------------- ---------------
59,577 263,411 21,233 (9,245) 334,976
--------------- --------------- --------------- --------------- ---------------
Operating earnings (loss) 5,209 26,990 (133) -- 32,066
Non-operating income (expense)
Interest income 615 94 72 -- 781
Interest expense (6,771) -- -- -- (6,771)
Other, net (164) 13 -- -- (151)
--------------- --------------- --------------- --------------- ---------------
(6,320) 107 72 -- (6,141)
(Loss) earnings before income taxes (1,111) 27,097 (61) -- 25,925
Income tax (benefit) expense (92) 10,897 213 -- 11,018
--------------- --------------- --------------- --------------- ---------------
(Loss) earnings after income taxes (1,019) 16,200 (274) -- 14,907
Equity in undistributed earnings of
subsidiaries 15,926 -- -- (15,926) --
--------------- --------------- --------------- --------------- ---------------
Net earnings $ 14,907 $ 16,200 $ (274) $ (15,926) $ 14,907
=============== =============== =============== =============== ===============
EDO CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 25, 2004
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- ---------- -------------- ------------ ------------
OPERATING ACTIVITIES:
Earnings (loss) from continuing operations $ 14,907 $ 16,200 $ (274) $ (15,926) $ 14,907
Adjustments to earnings to arrive at cash
provided (used) by continuing operations:
Depreciation 1,393 6,125 555 -- 8,073
Amortization -- 3,500 754 -- 4,254
Deferred tax benefit 246 -- (82) -- 164
Bad debt expense -- 289 -- -- 289
Loss on sale of property, plant and
equipment -- 32 -- -- 32
Deferred compensation expense 699 -- -- -- 699
Non-cash Employee Stock Ownership
Plan compensation expense 3,086 -- -- -- 3,086
Dividends on unallocated Employee
Stock Ownership Plan shares 206 -- -- -- 206
Common shares issued for directors'
fees 104 -- -- -- 104
Income tax benefit from stock options 700 -- -- -- 700
Changes in operating assets and
liabilities, excluding effects of
acquisitions:
Equity in earnings of subsidiaries (15,926) -- -- 15,926 --
Intercompany 30,687 (31,279) 592 -- --
Accounts receivable (14) 2,560 170 -- 2,716
Inventories 2,818 (18,611) (768) -- (16,561)
Prepayments and other assets 1,463 1,552 170 -- 3,185
Accounts payable, accrued liabilities and
other (17,080) 11,272 (1,052) -- (6,860)
Contract advances and deposits (770) 6,123 -- -- 5,353
--------------- ---------- -------------- ------------ ------------
Cash provided (used) by operations 22,519 (2,237) 65 -- 20,347
--------------- ---------- -------------- ------------ ------------
INVESTING ACTIVITIES:
Purchase of plant and equipment (1,944) (4,897) (164) -- (7,005)
Payments received on notes receivable 225 -- -- -- 225
Cash received from Emblem Escrow
settlement 301 -- -- -- 301
--------------- ---------- -------------- ------------ ------------
Cash used by investing activities (1,418) (4,897) (164) -- (6,479)
--------------- ---------- -------------- ------------ ------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 991 -- -- -- 991
Proceeds from management group receivables -- 128 -- -- 128
13
Payment of common share cash dividends (1,794) -- -- -- (1,794)
--------------- ---------- -------------- ------------ ------------
Cash (used) provided by financing
activities (803) 128 -- -- (675)
--------------- ---------- -------------- ------------ ------------
Net increase (decrease) in cash and
cash equivalents 20,298 (7,006) (99) -- 13,193
Cash and cash equivalents at beginning of
year 70,093 11,371 5,168 -- 86,632
--------------- ---------- -------------- ------------ ------------
Cash and cash equivalents at end of period $ 90,391 $ 4,365 $ 5,069 $ -- $ 99,825
=============== ========== ============== ============ ============
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
SEPTEMBER 27, 2003
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- ----------- --------------- --------------- ---------------
Continuing Operations:
Net Sales $ 22,769 $ 92,439 $ 7,448 $ (3,873) $ 118,783
Costs and expenses:
Cost of sales 19,736 65,262 3,693 (3,873) 84,818
14
Selling, general and administrative 1,219 16,065 3,104 -- 20,388
Research and development 545 905 -- -- 1,450
Acquisition-related costs 62 187 -- -- 249
--------------- ----------- --------------- --------------- ---------------
21,562 82,419 6,797 (3,873) 106,905
--------------- ----------- --------------- --------------- ---------------
Operating Earnings 1,207 10,020 651 -- 11,878
Non-operating income (expense)
Interest income 87 176 10 -- 273
Interest expense (2,295) -- -- -- (2,295)
Other, net 14 (119) 2 -- (103)
--------------- ----------- --------------- --------------- ---------------
(2,194) 57 12 -- (2,125)
(Loss) earnings from continuing
operations before income taxes (987) 10,077 663 -- 9,753
Income tax expense 3,190 639 365 -- 4,194
--------------- ----------- --------------- --------------- ---------------
(Loss) earnings from continuing
operations (4,177) 9,438 298 -- 5,559
Equity in undistributed earnings of
subsidiaries 9,736 -- -- (9,736) --
--------------- ----------- --------------- --------------- ---------------
Net earnings $ 5,559 $ 9,438 $ 298 $ (9,736) $ 5,559
=============== =========== =============== =============== ===============
EDO CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF
EARNINGS FOR THE NINE MONTHS ENDED
SEPTEMBER 27, 2003
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- --------------- --------------- --------------- ---------------
Continuing Operations:
Net Sales $ 63,997 $ 265,335 $ 9,117 $ (13,553) $ 324,896
Costs and expenses:
Cost of sales 54,569 188,240 4,582 (13,553) 233,838
Selling, general and administrative 4,186 49,445 3,457 -- 57,088
Research and development 2,153 3,785 -- -- 5,938
Acquisition-related costs 187 482 -- -- 669
Impairment loss on assets held for sale -- 9,160 -- -- 9,160
--------------- --------------- --------------- --------------- ---------------
61,095 251,112 8,039 (13,553) 306,693
--------------- --------------- --------------- --------------- ---------------
Operating Earnings 2,902 14,223 1,078 -- 18,203
Non-operating income (expense)
Interest income 431 232 10 -- 673
Interest expense (6,769) -- -- -- (6,769)
Other, net (87) 112 -- -- 25
--------------- --------------- --------------- --------------- ---------------
(6,425) 344 10 -- (6,071)
(Loss) earnings from continuing
operations before income taxes (3,523) 14,567 1,088 -- 12,132
Income tax (benefit) expense (1,331) 6,038 510 -- 5,217
--------------- --------------- --------------- --------------- ---------------
(Loss) earnings from continuing
operations (2,192) 8,529 578 -- 6,915
Equity in undistributed earnings of
subsidiaries 9,107 -- -- (9,107) --
--------------- --------------- --------------- --------------- ---------------
Net earnings from continuing
operations 6,915 8,529 578 (9,107) 6,915
Earnings from discontinued operations 1,398 -- -- -- 1,398
--------------- --------------- --------------- --------------- ---------------
Net earnings $ 8,313 $ 8,529 $ 578 $ (9,107) $ 8,313
=============== =============== =============== =============== ===============
EDO CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 27, 2003
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- ----------- --------------- ------------ ------------
OPERATING ACTIVITIES:
Earnings from continuing operations $ 6,915 $ 8,529 $ 578 $ (9,107) $ 6,915
Adjustments to earnings to arrive at cash
provided (used) by continuing operations:
Depreciation 1,315 7,558 144 -- 9,017
Amortization -- 3,302 227 -- 3,529
Deferred tax benefit (3,756) -- -- -- (3,756)
Bad debt expense -- 170 -- -- 170
Loss on sale of property, plant and
equipment -- 92 -- -- 92
Impairment loss on assets held for sale -- 9,160 -- -- 9,160
15
Deferred compensation expense 182 -- -- -- 182
Non-cash Employee Stock Ownership Plan
compensation expense 2,356 -- -- -- 2,356
Non-cash Employee Stock Ownership Plan
compensation expense 292 -- -- -- 292
Dividends on unallocated Employee Stock
Ownership Plan shares 221 -- -- -- 221
Common shares issued for directors' fees 79 -- -- -- 79
Income tax benefit from stock options 147 -- -- -- 147
Changes in operating assets and liabilities,
excluding effects of acquisitions:
Equity in earnings of subsidiaries (9,107) -- -- 9,107 --
Intercompany 55,476 (31,776) 6,208 (29,908) --
Accounts receivable 5,250 8,414 (85) -- 13,579
Inventories (2,707) 3,228 353 -- 874
Prepayments and other assets (31,223) 1,163 26 29,908 (126)
Contribution to defined benefit pension plan (5,000) -- -- -- (5,000)
Accounts payable, accrued liabilities and
other (2,226) (12,069) (3,509) -- (17,804)
Contract advances and deposits (7,540) (5,501) -- -- (13,041)
--------------- ----------- -------------- ------------ ------------
Cash provided (used) by continuing
operations 10,674 (7,730) 3,942 -- 6,886
--------------- ----------- -------------- ------------ ------------
Net cash provided by discontinued
operations 47 -- -- -- 47
INVESTING ACTIVITIES:
Purchase of plant and equipment (2,795) (3,830) (313) -- (6,938)
Payments received on notes receivable 225 1,085 -- -- 1,310
Purchase of marketable securities (23) -- -- -- (23)
Restricted cash 27,347 -- -- -- 27,347
Cash paid for acquisitions, net of cash
acquired (87,647) -- -- -- (87,647)
--------------- ----------- -------------- ------------ ------------
Cash used by investing activities (62,893) (2,745) (313) -- (65,951)
--------------- ----------- -------------- ------------ ------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 226 -- -- -- 226
Proceeds from management group receivables -- 242 -- -- 242
Repayments of acquired debt (11,998) -- -- -- (11,998)
Payment of common share cash dividends (1,774) -- -- -- (1,774)
--------------- ----------- -------------- ------------ ------------
Cash (used) provided by financing
activities (13,546) 242 -- -- (13,304)
--------------- ----------- -------------- ------------ ------------
Net (decrease) increase in cash and cash
equivalents (65,718) (10,233) 3,629 -- (72,322)
Cash and cash equivalents at beginning
of year 115,160 17,160 -- -- 132,320
--------------- ----------- -------------- ------------ ------------
Cash and cash equivalents at end of period $ 49,442 $ 6,927 $ 3,629 -- $ 59,998
=============== =========== ============== ============ ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
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
16
products and integrated composite structures for the aircraft and oil
industries. The Company has a disciplined acquisition program which is
diversifying the base of major platforms and customers.
The Company's Annual Report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports, and the Proxy
Statement for its Annual Meeting of Stockholders are made available, free of
charge, on its Web site www.edocorp.com, as soon as reasonably practicable after
such reports have been filed with or furnished to the Securities and Exchange
Commission.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
We make estimates and assumptions in the preparation of our consolidated
financial statements in conformity with accounting principles generally accepted
in the United States. Actual results could differ significantly from those
estimates under different assumptions and conditions. We believe that the
following discussion addresses our critical accounting policies, which are those
that are most important to the portrayal of our consolidated financial condition
and results of operations and which require our most difficult and subjective
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. The following is a brief discussion of
the critical accounting policies employed by us.
REVENUE RECOGNITION
Sales under long-term, fixed-price contracts, including pro-rata profits,
are generally recorded based on the relationship of costs incurred to date to
total projected final costs or, alternatively, as deliveries and other
milestones are achieved or services are provided. These projections are revised
throughout the lives of the contracts. Adjustments to profits resulting from
such revisions are made cumulative to the date of change and may affect current
period earnings. Sales on other than long-term contract orders (principally
commercial products) are recorded as shipments are made. Our gross profit is
affected by a variety of factors, including the mix of products, systems and
services sold, production efficiencies, price competition and general economic
conditions. Estimated losses on long-term contracts are recorded when
identified.
INVENTORIES
Inventories under long-term contracts and programs reflect all accumulated
production costs, including factory overhead, initial tooling and other related
costs (including general and administrative expenses relating to certain of our
defense contracts), less the portion of such costs charged to cost of sales. All
other inventories are stated at the lower of cost (principally first-in,
first-out method) or market. Inventory costs in excess of amounts recoverable
under contracts and which relate to a specific technology or application and
which may not have alternative uses are charged to cost of sales when such
circumstances are identified.
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.
17
In accordance with SFAS No. 142, goodwill must be tested at least annually
for impairment at the reporting unit level. If an indication of impairment
exists, we are required to determine if such goodwill's implied fair value is
less than the unit carrying value in order to determine the amount, if any, of
the impairment loss required to be recorded. Impairment indicators include,
among other conditions, cash flow deficits, an historic or anticipated decline
in revenue or operating profits, adverse legal or regulatory developments,
accumulation of costs significantly in excess of amounts originally expected to
acquire the asset and/or a material decrease in the fair value of some or all of
the assets.
PENSION AND POST-RETIREMENT 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 September 25, 2004.
THREE MONTHS ENDED SEPTEMBER 25, 2004 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
27, 2003
Net sales by segment were as follows:
THREE MONTHS ENDED INCREASE/(DECREASE)
SEPTEMBER 25, SEPTEMBER 27, FROM
SEGMENT 2004 2003 PRIOR PERIOD
- ------- -------------- -------------- ------------------
(DOLLARS IN THOUSANDS)
Defense .............................. $ 98,781 $ 94,108 5.0%
Communications and Space Products .... 20,485 13,308 53.9%
Engineered Materials ................. 10,609 11,367 (6.7)%
-------------- -------------- ----
Total ................................ $ 129,875 $ 118,783 9.3%
============== ============== ====
In the Defense segment, there were increases in sales of C4I, airborne
mine countermeasures systems, which includes OASIS, and professional services.
These increases were partially offset by a decrease in undersea warfare systems.
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
force protection systems. Earlier this year, we received a $6.8 million
incremental award as part of a $45.3 million contract for additional force
protection systems for the U.S. Army. This "rapid response" program will be a
significant contributor to sales and margin in this segment for the remainder of
the year.
In the Engineered Materials segment, there were decreases in sales of
integrated composite structures, primarily attributable to the absence of sales
on the Comanche program which was terminated.
Operating earnings by segment were as follows:
18
THREE MONTHS ENDED
SEPTEMBER 25, SEPTEMBER 27,
SEGMENT 2004 2003
- ------- -------------- --------------
(DOLLARS IN THOUSANDS)
Defense ................................ $ 9,503 $ 10,781
Communications and Space Products ...... 2,633 295
Engineered Materials ................... 1,912 802
-------------- --------------
Total .................................. $ 14,048 $ 11,878
============== ==============
Items of note affecting operating earnings are summarized here to help
clarify the comparison of results.
THREE MONTHS ENDED
SEPTEMBER 25, SEPTEMBER 27,
2004 2003
-------------- --------------
(DOLLARS IN THOUSANDS)
Pension expense ................... $ 550 $ 1,000
ESOP Compensation expense ......... $ 1,058 $ 846
Intangible asset amortization ..... $ 1,366 $ 1,429
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 third quarter of 2004 is attributable to our higher
average stock price compared to the third 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 Defense segment's operating earnings for the three months ended
September 25, 2004 were $9.5 million or 9.6% of this segment's net sales
compared to $10.8 million or 11.5% of this segment's net sales for the three
months ended September 27, 2003. This decrease in operating earnings was
attributable to lower profitability in electronic warfare systems due to the
completion of production activities on the Universal Exciter Upgrade ("UEU")
program in 2003 which resulted in earnings at a relatively high margin.
The Communications and Space Products segment's operating earnings for the
three months ended September 25, 2004 were $2.6 million or 12.9% of this
segment's net sales compared to $0.3 million or 2.2% of this segment's net sales
for the three months ended September 27, 2003. Operating earnings for the third
quarter of 2003 included a $1.1 million charge to write-down satellite-related
inventory to net realizable value, resulting from competitive price pressure
from our major customer as well as some obsolescence determined as part of our
normal ongoing review of recoverability. The increase in operating earnings for
the three months ended September 25, 2004 is attributable to sales associated
with the aforementioned U.S. Army program for force protection systems which
will continue to be a significant contributor to operating earnings in this
segment for the year.
The Engineered Materials segment's operating earnings for the three months
ended September 25, 2004 were $1.9 million or 18.0% of this segment's net sales
compared to operating earnings of $0.8 million or 7.1% of this segment's net
sales for the three months ended September 27, 2003. Operating earnings for the
three months ended September 25, 2004 were positively affected by a net $0.8
million, resulting from $1.1 million received in a settlement of a legal matter,
partially offset by related legal fees.
Selling, general and administrative expenses for the three months ended
September 25, 2004 decreased to $18.3 million or 14.1% of net sales from $20.4
million or 17.2% of net sales for the three months ended September 27, 2003.
This decrease was attributable primarily to facilities consolidations and other
synergies achieved on the AERA and Darlington acquisitions.
Research and development expense for the three months ended September 25,
2004 increased to $3.3 million or 2.6% of net sales from $1.5 million or 1.2% of
net sales for the three months ended September 27, 2003. The increase is
attributable to expenditures in the Defense segment in reconnaissance and
surveillance systems, aircraft weapons suspension and release equipment and
force protection systems.
Interest expense, net of interest income, for the three months ended
September 25, 2004 remained virtually unchanged at $2.0 million compared to the
three months ended September 27, 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 September 25, 2004, net earnings were $6.9
million or $0.35 per diluted common share on 22.4 million diluted shares
compared to net earnings of $5.6 million or $0.30 per diluted common share on
22.0 million diluted shares for the three months ended September 27, 2003. The
convertible notes had a dilutive effect in both quarters.
19
NINE MONTHS ENDED SEPTEMBER 25, 2004 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
27, 2003
Net sales by segment were as follows:
NINE MONTHS ENDED INCREASE/(DECREASE)
SEPTEMBER 25, SEPTEMBER 27, FROM
SEGMENT 2004 2003 PRIOR PERIOD
- ------- -------------- -------------- -------------------
(DOLLARS IN THOUSANDS)
Defense ........................... $ 286,248 $ 251,051 14.0%
Communications and Space Products . 46,547 41,011 13.5%
Engineered Materials .............. 34,247 32,834 4.3%
-------------- -------------- ----
Total ............................. $ 367,042 $ 324,896 13.0%
============== ============== ====
In the Defense segment, approximately $11.2 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 C4I. These
increases were partially offset by decreases in sales of electronic warfare
equipment due to the completion of the UEU production program in 2003. In
addition there was a decrease in sales of $2.3 million in the second quarter of
2004 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 the 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
force protection systems. In 2004, we received a $6.8 million incremental award
as part of a $45.3 million contract for additional force protection systems.
This "rapid response" program will be a significant contributor to sales and
margin in this segment for the remainder of the year. The increase in sales was
partially offset by a decrease due to completion of production deliveries of
interference cancellation systems and the basic shortstop electronic protection
systems ("SEPS") in the first quarter of 2003.
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:
NINE MONTHS ENDED
SEPTEMBER 25, SEPTEMBER 27,
SEGMENT 2004 2003
- ------- -------------- --------------
(DOLLARS IN THOUSANDS)
Defense ................................ $ 27,503 $ 23,520
Communications and Space Products ...... 1,639 2,346
Engineered Materials ................... 2,924 1,497
Impairment loss on Deer Park Facility .. -- (9,160)
-------------- --------------
Total .................................. $ 32,066 $ 18,203
============== ==============
Items of note affecting operating earnings are summarized here to help
clarify the comparison of results.
NINE MONTHS ENDED
SEPTEMBER 25, SEPTEMBER 27,
2004 2003
-------------- --------------
(DOLLARS IN THOUSANDS)
Pension ........................ $ 1,650 $ 3,000
ESOP Compensation expense ...... $ 3,086 $ 2,356
Intangible asset amortization .. $ 4,237 $ 3,457
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 nine months of 2004 is attributable to our
higher average stock price compared to the first nine 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 nine months
ended September 25, 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 nine months ended
September 25, 2004 were $27.5 million or 9.6% of this segment's net sales
compared to $23.5 million or 9.4% of this segment's net sales for the nine
months ended September 27, 2003. This
20
increase in operating earnings was attributable to continuing higher-margin
sales of reconnaissance and surveillance systems and radar signal simulators. 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 an undersea
warfare systems program. We believe that our current estimates accurately
reflect the total potential impacts.
The Communications and Space Products segment's operating earnings for the
nine months ended September 25, 2004 were $1.6 million or 3.5% of this segment's
net sales compared to operating earnings of $2.3 million or 5.7% of this
segment's net sales for the nine months ended September 27, 2003. In the first
quarter of 2004, there were operating losses 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 that resulted in
inventory adjustments as well as increases in estimates-to-complete. This
segment's operating results were positively affected by sales associated with
the aforementioned force protection systems program which will continue to be a
significant contributor to operating earnings in this segment for the remainder
of the year.
The Engineered Materials segment's operating earnings for the nine months
ended September 25, 2004 were $2.9 million or 8.5% of this segment's net sales
compared to operating earnings of $1.5 million or 4.6% of this segment's net
sales for the nine months ended September 27, 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. For the nine months ended September 25, 2004,
this segment's operating earnings were positively affected by a net $0.4
million, resulting from $1.1 million received in a settlement of a legal matter,
partially offset by related legal fees. In the nine months ended September 27,
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 nine months ended
September 25, 2004 of $57.2 million decreased as a percent of net sales to 15.6%
from 17.6% for the nine months ended September 27, 2003. This decrease was
attributable primarily to facilities consolidations and other synergies achieved
on the AERA and Darlington acquisitions.
Research and development expense for the nine months ended September 25,
2004 increased to $7.6 million or 2.1% of net sales from $5.9 million or 1.8% of
net sales for the nine months ended September 27, 2003. The increase is
attributable to expenditures in the Defense segment in reconnaissance and
surveillance systems and force protection systems.
Interest expense, net of interest income, for the nine months ended
September 25, 2004 decreased slightly to $6.0 million compared to $6.1 for the
nine months ended September 27, 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 nine months
ended September 25, 2004 and 43.0% for the nine months ended September 27, 2003.
For the nine months ended September 25, 2004, net earnings were $14.9
million or $0.81 per diluted common share on 22.3 million diluted shares
compared to net earnings from continuing operations of $6.9 million or $0.39 per
diluted common share on 17.5 million diluted shares for the nine months ended
September 27, 2003. The convertible notes had a dilutive effect in the nine
months ended September 25, 2004, but not in the nine months ended September 27,
2003. In the nine months ended September 27, 2003, we received notification of
final settlement of bankruptcy matters pertaining to our former energy business.
Upon the discontinuance of such business in 1996, a liability was established
pending final settlement of the bankruptcy. This liability was reversed as of
September 27, 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 $8.3 million or $0.47 per diluted share for the nine months
ended September 27, 2003.
LIQUIDITY AND CAPITAL RESOURCES
BALANCE SHEET
Our cash and cash equivalents increased 15.2% to $99.8 million at
September 25, 2004 from $86.6 million at December 31, 2003. This increase was
due primarily to $20.3 million of cash provided by operations, $1.0 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. These increases
were
21
partially offset by $7.0 million used for the purchase of capital equipment and
$1.8 million for the payment of common share dividends.
Accounts receivable decreased 2.2% to $131.3 million at September 25, 2004
from $134.3 million at December 31, 2003.
Inventories increased 47.7% to $51.3 million at September 25, 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 continue for the remainder of the year.
The note receivable of $6.7 million at September 25, 2004 and $6.5 million
at December 31, 2003 represents the note receivable from the sale of our
facility in Deer Park in 2003 and is due no later that October 9, 2005. 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% per annum. The latter
notes receivable are secured by a mortgage on the facility. Subsequent to the
end of the third quarter, we received a $0.9 million payment against the
College Point facility notes.
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, Bank of America 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 September 25, 2004, LIBOR was approximately 1.97% 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
September 25, 2004 and December 31, 2003. Letters of credit outstanding at
September 25, 2004 pertaining to the credit facility were $41.1 million,
resulting in $83.9 million available at September 25, 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 September
25, 2004, we were in compliance with our covenants. The credit facility is
secured by our accounts receivable, inventory and machinery and equipment.
5.25% Convertible Subordinated Notes due 2007("Notes")
In April 2002, we completed the offering of the Notes and received
proceeds of $133.7 million, net of $4.1 million of commissions paid. Interest
payments on the Notes are due April 15 and October 15 of each year, commencing
on October 15, 2002. Accrued interest payable, included in accrued liabilities
on our consolidated balance sheet, was $3.3 million at September 25, 2004 and
$1.5 million at December 31, 2003.
The Notes are convertible, unless previously redeemed or repurchased by
us, at the option of the holder at any time prior to maturity, into our common
shares at an initial conversion price of $31.26 per share, subject to adjustment
in certain events. As of September 25, 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
22
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
September 25, 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 ................................. 85.5 3.9 13.2 9.7 9.3 8.6 40.8
Letters of credit ................................ 41.5 3.2 36.1 0.1 2.1 -- --
Advance payment and performance bonds ............ 1.9 0.2 -- -- -- -- 1.7
-------- -------- -------- -------- -------- -------- --------
Total ............................................ $ 266.7 $ 7.3 $ 49.3 $ 9.8 $ 149.2 $ 8.6 $ 42.5
======== ======== ======== ======== ======== ======== ========
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 nine months ended September 25, 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 September 25, 2004 increased to
$501.3 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 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;
23
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 1. LEGAL PROCEEDINGS. In September, 2004 the Company and Technip Offshore,
Inc. reached a settlement in the matter Technip Offshore Inc. v. EDO Fiber
Science and EDO Corporation (U.S. District Court for the Southern District of
Texas). The settlement provided for the termination of all prior agreements
between the parties bearing on the dispute, payment to the Company of $1.1
million and the assignment to Technip and license back to the Company of
certain patented technology.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
ITEM 5. OTHER INFORMATION. Effective October 26, 2004, the Company amended its
by-laws Sections 5.11(b) and 6.03 to provide for investment of funds pursuant
to a Board of Directors-approved investment policy. The previous by-laws did
not refer to the Company's investment policy.
ITEM 6. EXHIBITS
(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 October 26, 2004.
10 Amended and Restated Employment Agreement by and between the Company
and James M. Smith dated as of October 1, 2004 (incorporated herein
by reference to the Company's Form 8-K filed on October 28, 2004
Exhibit 10).
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.
24
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.
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
-----------------------
Dated: October 29, 2004 Frederic B. Bassett
Vice President Finance, Treasurer and
Chief Financial Officer
26