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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 MARCH 26, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER 1-3985
-----------------------------
EDO CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 11-0707740
(State of Incorporation) (IRS Employer Identification No.)
60 EAST 42ND STREET, 42ND FLOOR, 10165
NEW YORK, NEW YORK (Zip Code)
(Address of principal executive offices)
(212) 716-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
The number of shares of EDO common stock outstanding as of April 27, 2005
was 20,144,130 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 - March 26, 2005 (unaudited) and December 31, 2004..... 3
Consolidated Statements of Earnings - Three Months Ended March 26, 2005 (unaudited)
and March 27, 2004 ................................................................ 4
Consolidated Statements of Cash Flows - Three Months Ended March 26, 2005
and March 27, 2004 (unaudited)..................................................... 5
Notes to Consolidated Financial Statements (unaudited)............................. 6
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................... 13
ITEM 3 Quantitative and Qualitative Disclosures about Market Risk......................... 21
ITEM 4 Controls and Procedures............................................................ 21
PART II Other Information ................................................................. 21
ITEM 6 Exhibits and Reports on Form 8-K................................................... 21
SIGNATURE PAGE ...................................................................................... 22
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 26, DECEMBER 31,
2005 2004
----------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 86,770 $ 98,884
Accounts receivable, net...................................................... 155,278 153,810
Inventories................................................................... 62,528 52,867
Deferred income tax asset, net................................................ 5,046 5,046
Notes receivable, current..................................................... 7,193 7,202
Prepayments and other......................................................... 4,541 3,493
----------- -----------
Total current assets....................................................... 321,356 321,302
----------- -----------
Property, plant and equipment, net.............................................. 38,658 34,830
Goodwill........................................................................ 91,651 91,651
Other intangible assets, net.................................................... 49,046 50,356
Deferred income tax asset, net.................................................. 30,241 30,241
Other assets.................................................................... 17,237 18,309
----------- -----------
$ 548,189 $ 546,689
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 23,311 $ 32,406
Accrued liabilities........................................................... 53,199 48,492
Contract advances and deposits................................................ 14,869 13,696
----------- -----------
Total current liabilities.................................................. 91,379 94,594
----------- -----------
Income taxes payable............................................................ 5,768 5,768
Long-term debt.................................................................. 137,800 137,800
Post-retirement benefits obligations............................................ 95,365 94,936
Environmental obligation........................................................ 1,666 1,663
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, 20,236,246 issued in 2005 and 20,112,243 issued in 2004............ 20,236 20,112
Additional paid-in capital.................................................... 163,090 158,548
Retained earnings............................................................. 98,373 96,004
Accumulated other comprehensive loss, net of income tax benefit............... (42,760) (42,619)
Treasury shares at cost (93,116 shares in 2005 and 94,585 shares in 2004)..... (1,427) (1,449)
Unearned Employee Stock Ownership Plan shares................................. (15,727) (16,039)
Deferred compensation under Long-Term Incentive Plan.......................... (5,353) (2,408)
Management group receivables.................................................. (221) (221)
----------- -----------
Total shareholders' equity................................................. 216,211 211,928
----------- -----------
$ 548,189 $ 546,689
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
3
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED
MARCH 26, MARCH 27,
2005 2004
----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
NET SALES..................................................... $ 116,508 $ 110,877
----------- -----------
COSTS AND EXPENSES
Cost of sales............................................... 85,054 80,658
Selling, general and administrative......................... 20,288 20,087
Research and development.................................... 4,418 1,465
----------- -----------
109,760 102,210
----------- -----------
OPERATING EARNINGS............................................ 6,748 8,667
NON-OPERATING INCOME (EXPENSE)
Interest income............................................. 501 242
Interest expense............................................ (2,191) (2,223)
Other, net.................................................. (45) (22)
----------- -----------
(1,735) (1,959)
----------- -----------
Earnings before income taxes.................................. 5,013 6,708
Income tax expense............................................ (2,105) (2,851)
----------- -----------
NET EARNINGS.................................................. $ 2,908 $ 3,857
=========== ===========
NET EARNINGS PER COMMON SHARE:
Basic....................................................... $ 0.16 $ 0.22
=========== ===========
Diluted..................................................... $ 0.16 $ 0.22
=========== ===========
Weighted-average common shares outstanding:
Basic....................................................... 17,936 17,549
=========== ===========
Diluted..................................................... 18,236 17,834
=========== ===========
Dividends declared per common share......................... $ 0.03 $ 0.03
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
4
EDO CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 26, MARCH 27,
2005 2004
------------- -----------
(UNAUDITED)
(IN THOUSANDS)
OPERATING ACTIVITIES:
Earnings from operations .......................................... $ 2,908 $ 3,857
Adjustments to earnings to arrive at cash used by operations:
Depreciation ................................................... 2,642 2,585
Amortization ................................................... 1,310 1,441
Bad debt expense ............................................... 139 -
Deferred tax provision ......................................... - 119
Loss on disposal of property, plant and equipment .............. - 6
Deferred compensation expense................................... 397 201
Non-cash Employee Stock Ownership Plan compensation expense .... 1,314 1,051
Dividends on unallocated Employee Stock Ownership Plan shares .. 65 70
Common shares issued for directors' fees ....................... 45 31
Income tax benefit from stock options and Long-Term
Incentive Plan ............................................... 173 353
Changes in operating assets and liabilities, excluding
effects of acquisitions:
Accounts receivable .......................................... (1,607) (7,731)
Inventories .................................................. (9,661) (8,729)
Prepayments and other assets ................................. (42) (814)
Accounts payable, accrued liabilities and other .............. (4,096) (11,425)
Contract advances and deposits ............................... 1,173 61
------------- -----------
Cash used by operations ............................................. (5,240) (18,924)
------------- -----------
INVESTING ACTIVITIES:
Purchase of plant and equipment ................................... (6,470) (1,991)
Payments received on notes receivable ............................. 75 75
------------- -----------
Cash used by investing activities ................................... (6,395) (1,916)
------------- -----------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options ........................... 125 511
Proceeds from management group receivables ........................ - 117
Payment of common share cash dividends ............................ (604) (597)
------------- -----------
Cash (used) provided by financing activities ........................ (479) 31
------------- -----------
Net decrease in cash and cash equivalents ........................... (12,114) (20,809)
Cash and cash equivalents at beginning of year ...................... 98,884 86,632
------------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 86,770 $ 65,823
============= ===========
Supplemental disclosures:
Cash paid for:
Interest ....................................................... $ - $ -
============= ===========
Income taxes ................................................... $ 2,393 $ 4,583
============= ===========
See accompanying Notes to Consolidated Financial Statements.
5
EDO CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(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, 2004 filed by the
Company on Form 10-K with the Securities and Exchange Commission.
The accompanying consolidated financial statements include all adjustments
(consisting of normal recurring adjustments) that management considers necessary
for a fair presentation of its consolidated financial position and results of
operations for the interim periods presented. The results of operations for the
interim periods are not necessarily indicative of the results that may be
expected for the entire year.
(2) STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans in accordance
with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations. Under APB No. 25, because the
exercise price of the Company's stock options is set equal to the market price
of the underlying stock on the date of grant, no compensation expense is
recognized. The following table illustrates the effect on net earnings and
earnings per share if the Company had applied the fair market value recognition
provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" whereby
compensation expense would be recognized as incurred for stock-based employee
compensation. For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period.
FOR THE THREE MONTHS ENDED
MARCH 26, MARCH 27,
2005 2004
---------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
Earnings:
As reported................................................ $ 2,908 $ 3,857
Deferred compensation expense, net of tax 230 116
Stock option compensation expense based on fair value
method, net of tax...................................... (812) (541)
---------- ----------
Pro forma.................................................. $ 2,326 $ 3,432
========== ==========
Basic earnings per common share:
As reported................................................ $ 0.16 $ 0.22
Pro forma.................................................. $ 0.13 $ 0.20
Diluted earnings per common share:
As reported................................................ $ 0.16 $ 0.22
Pro forma.................................................. $ 0.13 $ 0.19
========== ==========
During the three months ended March 26, 2005, the Company issued 17,753
common shares for the exercise of stock options and 106,250 restricted common
shares for long-term incentive awards.
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (revised 2004), "Share-Based Payment," which is a revision
of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS 123(R)
supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees," and amends SFAS No. 95, "Statement of Cash Flows."
Generally, the approach in SFAS 123(R) is similar to the approach described in
SFAS 123. However, SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an
alternative. SFAS 123(R) must be adopted in the first annual period beginning
after June 15, 2005. We expect to adopt Statement 123(R) in the first quarter of
fiscal 2006.
As permitted by SFAS 123, we currently account for share-based payments to
employees using APB No. 25's intrinsic value method and generally recognize no
compensation cost for employee stock options. Accordingly, the adoption of SFAS
123(R)'s fair value method will have a significant impact on our result of
operations, although it will have no impact on our overall financial position.
The impact of the adoption of SFAS 123(R) cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future.
However, had we adopted Statement 123(R) in prior periods, the impact of that
standard would have approximated the impact of SFAS 123 as described in the
disclosure of pro forma net income and earnings per share.
6
(3) BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS
Statement of Financial Accounting Standard ("SFAS") No. 141, "Business
Combinations," includes guidance on the initial recognition and measurement of
goodwill and other intangible assets arising from business combinations
completed after June 30, 2001. SFAS No. 142, "Goodwill and Other Intangible
Assets," prohibits the amortization of goodwill and intangible assets with
indefinite useful lives and requires that these assets be reviewed for
impairment at least annually. Intangible assets with definite lives are
amortized over their estimated useful lives.
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 Company performs the required impairment tests of goodwill as of
October 1 each year.
There were no changes in the carrying amount of goodwill during the three months
ended March 26, 2005.
Summarized below are intangible assets subject to amortization.
MARCH 26, DECEMBER 31,
2005 2004 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.......................... (12,758) (11,448)
-------- --------
$ 49,046 $ 50,356
======== ========
The amortization expense for the three months ended March 26, 2005 and
March 27, 2004 amounted to $1.3 million and $1.4 million, respectively. Total
amortization expense for 2005, 2006, 2007, 2008, 2009 and thereafter related to
these intangible assets is estimated to be $3.9 million, $5.3 million, $5.1
million, $4.5 million, $4.4 million and $25.8 million, respectively.
All intangible assets other than goodwill are subject to amortization.
(4) INVENTORIES
Inventories are summarized by major classification as follows:
MARCH 26, DECEMBER 31,
2005 2004
--------- ------------
(IN THOUSANDS)
Raw material and supplies................ $10,120 $10,461
Work-in-process.......................... 56,701 44,752
Finished goods........................... 2,063 2,043
Less: Unliquidated progress payments.... (6,356) (4,389)
------- -------
$62,528 $52,867
======= =======
7
(5) EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
FOR THE THREE MONTHS ENDED
MARCH 26, MARCH 27,
2005 2004
--------- ---------
Numerator:
Net earnings for basic and diluted
calculation...................... $ 2,908 $ 3,857
Denominator:
Denominator for basic calculation... 17,936 17,549
Effect of dilutive securities:
Stock options.................... 300 285
------- -------
Denominator for diluted
calculation...................... 18,236 17,834
======= =======
The assumed conversion of the Notes was anti-dilutive for the first three
months of 2005 and 2004.
The following table summarizes, for each year presented, the number of
shares excluded from the computation of diluted earnings per share, as their
effect upon potential issuance was anti-dilutive.
FOR THE THREE MONTHS ENDED
MARCH 26, MARCH 27,
2005 2004
--------- ---------
(IN THOUSANDS)
5.25 % Convertible Subordinated Notes... 4,408 4,408
Unexercised stock options............... 12 288
----- -----
4,420 4,696
===== =====
(6) DEFINED BENEFIT PLAN
The Company maintains a qualified noncontributory defined benefit pension
plan covering less than half of its employees. In November 2002, the plan was
amended whereby benefits accrued under the plan were frozen as of December 31,
2002. The Company's funding policy is to make annual contributions to the extent
such contributions are actuarially determined and tax deductible.
For the three months ended March 26, 2005 and March 27, 2004, the Company
recorded pension expense of $1.1 million and $0.6 million, respectively, based
on the total for the respective years of $4.3 million in 2005 and $2.2 million
in 2004. Summarized below are the components of the expense for each period
presented.
FOR THE THREE MONTHS ENDED
MARCH 26, MARCH 27,
2005 2004
--------- ---------
(IN THOUSANDS)
Interest cost............................ $ 3,089 $ 3,037
Expected return on plan assets........... (3,181) (3,176)
Amortization of unrecognized net loss... 1,162 689
------- -------
$ 1,070 $ 550
======= =======
(7) EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
The Company sponsors an employee stock ownership plan ("ESOP") which
provides retirement benefits to substantially all employees. The cost basis of
the unearned/unallocated shares was initially recorded as a reduction to
shareholders' equity. Compensation expense is recorded based on the market value
of the Company's common shares as they are committed-to-be-released quarterly,
as payments are made under the related indirect loan. The difference between the
market value and the cost basis of the shares was recorded as additional paid-in
capital. Dividends on unallocated shares are recorded as compensation expense.
(8) COMPREHENSIVE INCOME
As of March 26, 2005, accumulated other comprehensive loss included in the
accompanying consolidated balance sheet primarily represents additional minimum
liabilities on benefit plans. Comprehensive income from continuing operations
for the three months ended March 26, 2005 was $2.8 million compared to
comprehensive income for the three months ended March 27, 2004 of $3.9 million.
8
(9) 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 and computers (C4) products
and systems, undersea-warfare systems and professional, operational, technical
and information technology services for military forces and governments
worldwide. The Communications and Space Products segment supplies antenna
products and ultra-miniature electronics and systems for the remote sensing and
electronic warfare industries. The Engineered Materials segment supplies
commercial and military piezo-electric ceramic products and integrated composite
structures for the aircraft and oil industries.
FOR THE THREE MONTHS ENDED
MARCH 26, MARCH 27,
2005 2004
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net Sales:
Defense................................... $ 86,127 $ 88,040
Communications and Space Products......... 19,800 11,552
Engineered Materials...................... 10,581 11,285
-------- ---------
$116,508 $ 110,877
-------- ---------
Operating earnings (loss):
Defense................................... $ 6,387 $ 9,030
Communications and Space Products......... (115) (1,091)
Engineered Materials...................... 476 728
-------- ---------
6,748 8,667
Net interest expense...................... (1,690) (1,981)
Other, net................................ (45) 22
-------- ---------
Earnings before income taxes.............. $ 5,013 $ 6,708
======== =========
(10) 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
March 26, 2005 and December 31, 2004 and for the three months ended March 26,
2005 and March 27, 2004. 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.
On January 1, 2005 the Company merged two wholly owned subsidiaries into
itself, the result of which caused three divisions of the former subsidiaries to
become part of the Parent Company.
EDO CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 26, 2005
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- ---------- -------------- ------------ ------------
ASSETS
Current assets:
Current assets:
Cash and cash equivalents $ 82,817 $ (620) $ 4,573 - $ 86,770
Accounts receivable, net 54,979 96,471 3,828 - 155,278
Inventories 21,397 36,985 4,146 - 62,528
Deferred income tax asset, - - -
net 5,046 5,046
Notes receivable 7,193 - - - 7,193
Prepayments and other 3,175 998 368 - 4,541
--------- ---------- ---------- ------ ----------
Total current assets 174,607 133,834 12,915 - 321,356
9
Investment in subsidiaries 250,105 - - (250,105) -
Property, plant and
equipment, net 19,876 15,407 3,375 - 38,658
Goodwill - 82,941 8,710 - 91,651
Other intangible assets, net - 36,681 12,365 - 49,046
Deferred income tax asset,
net 30,241 - - - 30,241
Other assets 16,287 950 - - 17,237
--------- --------- --------- --------- ---------
$ 491,116 $ 269,813 $ 37,365 $(250,105) $ 548,189
========= ========= ========= ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued liabilities $ 31,094 $ 41,197 $ 4,219 - $ 76,510
Contract advances and
deposits 2,713 12,156 - - 14,869
--------- --------- --------- --------- ---------
Total current liabilities 33,807 53,353 4,219 - 91,379
Long-term debt 137,800 - - - 137,800
Income taxes payable 5,768 - - - 5,768
Deferred income tax
liabilities, net (166) - 166 - -
Post retirement benefits
obligations 95,365 - - - 95,365
Environmental obligation 1,666 - - - 1,666
Intercompany accounts - 134,855 26,066 (160,921) -
Shareholders' equity:
Preferred shares - - - - -
Common shares 20,236 98 - (98) 20,236
Additional paid-in capital 163,090 25,221 6,418 (31,639) 163,090
Retained earnings 98,373 61,147 352 (61,499) 98,373
Accumulated other
comprehensive loss, net of
income tax benefit (42,095) (809) 144 - (42,760)
Treasury shares (1,427) (4,052) - 4,052 (1,427)
Unearned ESOP shares (15,727) - - - (15,727)
Management group receivables (221) - - - (221)
Deferred compensation under
Long-Term Incentive Plan (5,353) - - - (5,353)
--------- --------- --------- --------- ---------
Total shareholders' equity 216,876 81,605 6,914 (89,184) 216,211
--------- --------- --------- --------- ---------
$ 491,116 $ 269,813 $ 37,365 $(250,105) $ 548,189
========= ========= ========= ========= =========
EDO CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
MARCH 26, 2005
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- ---------- -------------- ------------ ------------
Continuing Operations:
Net Sales $ 36,250 $ 86,065 $ 7,404 $ (13,211) $ 116,508
Costs and expenses:
Cost of sales 29,690 63,176 5,399 (13,211) 85,054
Selling, general and
administrative 3,728 14,968 1,592 - 20,288
Research and development 1,383 2,769 266 - 4,418
--------- --------- --------- --------- ---------
34,801 80,913 7,257 (13,211) 109,760
--------- --------- --------- --------- ---------
Operating Earnings 1,449 5,152 147 - 6,748
Non-operating income
(expense)
Interest income 463 17 21 - 501
Interest expense (2,191) - - - (2,191)
Other, net 10 (6) (49) - (45)
--------- --------- --------- --------- ---------
(1,718) 11 (28) - (1,735)
(Loss) earnings from
continuing operations
before income taxes (269) 5,163 119 - 5,013
Income tax benefit (expense) 115 (2,104) (116) - (2,105)
--------- --------- --------- --------- ---------
(Loss) earnings from
continuing operations (154) 3,059 3 - 2,908
Equity in undistributed
earnings of subsidiaries 3,062 - - (3,062) -
--------- --------- --------- --------- ---------
Net earnings $ 2,908 $ 3,059 $ 3 $ (3,062) $ 2,908
========= ========= ========= ========= =========
10
EDO CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
MARCH 26, 2005
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- ---------- -------------- ------------ ------------
Operating Activities:
Earnings from continuing operations $ 2,908 $ 3,059 $ 3 $ (3,062) $ 2,908
Adjustments to earnings to arrive at cash
provided (used) by continuing operations:
Depreciation 1,329 1,173 140 2,642
Amortization -- 1,056 254 1,310
Bad debt expense 15 124 -- 139
Deferred compensation expense 397 -- -- 397
Non-cash Employee Stock Ownership Plan
compensation expense 1,314 -- -- 1,314
Dividends on unallocated Employee Stock Ownership
Plan shares 65 -- -- 65
Common shares issued for directors' fees 45 -- -- 45
Income tax benefit from stock options 173 -- -- 173
Changes in operating assets and liabilities,
excluding effects of acquisitions:
Equity in earnings of subsidiaries (3,062) 3,062 --
Intercompany/Investment in subsidiaries 3,921 (4,076) 155 --
Accounts receivable (327) (2,184) 904 (1,607)
Inventories (6,740) (3,249) 328 (9,661)
Prepayments and other assets (105) 95 (32) (42)
Accounts payable, accrued liabilities and other (3,045) 511 (1,562) (4,096)
Contract advances and deposits (2,521) 3,694 -- 1,173
-------------------------------------------------------------------
Cash provided (used) by continuing operations (5,633) 203 190 -- (5,240)
Investing Activities:
Purchase of plant and equipment (4,275) (2,137) (58) (6,470)
Payments received on notes receivable 75 -- -- 75
-------------------------------------------------------------------
Cash used by investing activities (4,200) (2,137) (58) -- (6,395)
Financing Activities:
Proceeds from exercise of stock options 125 -- -- 125
Payment of common share cash dividends (604) -- -- (604)
-------------------------------------------------------------------
Cash (used) provided by financing activities (479) -- -- -- (479)
-------------------------------------------------------------------
Net decrease in cash and cash equivalents (10,312) (1,934) 132 -- (12,114)
Cash and cash equivalents at beginning of year 93,129 1,314 4,441 98,884
-------------------------------------------------------------------
Cash and cash equivalents at end of period $ 82,817 $ (620) $ 4,573 $ -- $ 86,770
===================================================================
EDO CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2004
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- ---------- -------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 93,129 $ 1,314 $ 4,441 - $ 98,884
Accounts receivable, net 54,667 94,411 4,732 - 153,810
Inventories 14,657 33,735 4,474 - 52,866
Deferred income tax asset, net 5,046 - - - 5,046
Notes receivable 7,202 - - - 7,202
Prepayments and other 2,029 1,128 336 - 3,493
--------------- ---------- -------------- ------------ ------------
11
Total current assets 176,730 130,589 13,983 - 321,302
Investment in subsidiaries 150,136 - - (150,136) -
Property, plant and equipment, net 16,931 14,442 3,457 - 34,830
Goodwill - 82,941 8,710 - 91,651
Other intangible assets, net - 37,737 12,619 - 50,356
Deferred income tax asset, net 30,241 - - - 30,241
Other assets 17,394 915 - - 18,309
--------- --------- --------- --------- ---------
$ 391,432 $ 266,624 $ 38,769 $(150,136) $ 546,689
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 34,489 $ 40,677 $ 5,732 - $ 80,898
Contract advances and deposits 5,234 8,462 - - 13,696
--------- --------- --------- --------- ---------
Total current liabilities 39,723 49,139 5,732 - 94,594
Long-term debt 137,800 - - - 137,800
Income taxes payable, long-term 5,768 - - - 5,768
Deferred income tax liabilities, net (169) - 169 - -
Post retirement benefits obligations 94,936 - - - 94,936
Environmental obligation 1,663 - - - 1,663
Intercompany accounts (100,828) 138,931 25,911 (64,014) -
Shareholders' equity:
Preferred shares - - - - -
Common shares 20,112 98 - (98) 20,112
Additional paid-in capital 158,548 25,221 6,418 (31,639) 158,548
Retained earnings 96,004 58,088 349 (58,437) 96,004
Accumulated other comprehensive loss,
net of income tax benefit (42,008) (801) 190 - (42,619)
Treasury shares (1,449) (4,052) - 4,052 (1,449)
Unearned ESOP shares (16,039) - - - (16,039)
Management group receivables (221) - - - (221)
Deferred compensation under Long-Term
Incentive Plan (2,408) - - - (2,408)
--------- --------- --------- --------- ---------
Total shareholders' equity 212,539 78,554 6,957 (86,122) 211,928
--------- --------- --------- --------- ---------
$ 391,432 $ 266,624 $ 38,769 $(150,136) $ 546,689
========= ========= ========= ========= =========
EDO CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
MARCH 27, 2004
EDO Corporation
Parent Company
Only Subsidiary Guarantors Non-Guarantors Eliminations Consolidated
--------------- --------------------- -------------- ------------ ------------
Continuing Operations:
Net Sales $ 46,150 $ 60,872 $ 7,346 $ (3,491) $ 110,877
Costs and expenses:
Cost of sales 35,189 45,021 3,939 (3,491) 80,658
Selling, general and administrative 6,587 10,106 3,394 - 20,087
Research and development 708 757 - - 1,465
--------- --------- --------- --------- ---------
42,484 55,884 7,333 (3,491) 102,210
--------- --------- --------- --------- ---------
Operating Earnings 3,666 4,988 13 - 8,667
Non-operating income (expense)
Interest income 171 29 42 - 242
Interest expense (2,223) - - - (2,223)
Other, net (51) 73 - - 22
--------- --------- --------- --------- ---------
(2,103) 102 42 - (1,959)
(Loss) earnings from continuing operations
before income taxes 1,563 5,090 55 - 6,708
Income tax expense 220 2,536 95 - 2,851
--------- --------- --------- --------- ---------
12
(Loss) earnings from continuing operations 1,343 2,554 (40) - 3,857
Equity in undistributed earnings of
subsidiaries 2,514 - - (2,514) -
-------- -------- -------- --------- ---------
Net earnings $ 3,857 $ 2,554 $ (40) $ (2,514) $ 3,857
======== ======== ======== ========= =========
EDO CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
MARCH 27, 2004
EDO Corporation
Parent Company Subsidiary
Only Guarantors Non-Guarantors Eliminations Consolidated
--------------- ---------- -------------- ------------ ------------
OPERATING ACTIVITIES:
Earnings from continuing operations $ 3,857 $ 2,554 $ (40) $ (2,514) $ 3,857
Adjustments to earnings to arrive at
cash provided (used) by continuing
operations:
Depreciation 1,074 1,314 197 -- 2,585
Amortization -- 1,192 249 -- 1,441
Deferred tax benefit 119 -- -- -- 119
Loss on sale of property, plant
and equipment -- 6 -- -- 6
Impairment loss on assets held for sale -- --
Deferred compensation expense 201 -- -- -- 201
Non-cash Employee Stock Ownership Plan
compensation expense 1,051 -- -- -- 1,051
Dividends on unallocated Employee Stock
Ownership Plan shares 70 -- -- -- 70
Common shares issued for directors' fees 31 -- -- -- 31
Income tax benefit from stock options 353 -- -- -- 353
Changes in operating assets and
liabilities,
excluding effects of acquisitions:
Equity in earnings of subsidiaries (2,514) -- -- 2,514 --
Intercompany/Investment in subsidiaries (1,214) 977 237 -- --
Accounts receivable (2,348) (3,911) (1,472) -- (7,731)
Inventories (1,362) (7,450) 83 -- (8,729)
Prepayments and other assets (1,953) 1,251 (112) -- (814)
Accounts payable, accrued liabilities
and other (8,722) (2,583) (120) -- (11,425)
Contract advances and deposits (2,104) 2,165 -- -- 61
----------------------------------------------------------------------------------
Cash provided (used) by continuing
operations (13,461) (4,485) (978) -- (18,924)
INVESTING ACTIVITIES:
Purchase of plant and equipment (625) (1,250) (116) -- (1,991)
Payments received on notes receivable 75 -- -- -- 75
----------------------------------------------------------------------------------
Cash used by investing activities (550) (1,250) (116) -- (1,916)
FINANCING ACTIVITIES:
Proceeds from exercise of stock options 511 -- -- -- 511
Proceeds from management group
receivables 117 -- -- -- 117
Payment of common share cash dividends (597) -- -- -- (597)
----------------------------------------------------------------------------------
Cash (used) provided by financing
activities 31 -- -- -- 31
----------------------------------------------------------------------------------
Net decrease in cash and cash
equivalents (13,980) (5,735) (1,094) -- (20,809)
Cash and cash equivalents at beginning
of year 73,834 7,630 5,168 -- 86,632
----------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 59,854 $ 1,895 $ 4,074 $ -- $ 65,823
=========== ======== ======== ======== =========
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
13
- Undersea Warfare
- Professional Services
- C4 - Command, Control, Communications and Computers
- 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 and
computers (C4) products and systems, undersea-warfare systems and professional
and engineering services for military forces and friendly governments worldwide.
Our Communications and Space Products segment supplies antenna products and
ultra-miniature electronics and systems for the remote sensing and electronic
warfare industries. Our Engineered Materials segment supplies commercial and
military piezo-electric ceramic products and integrated composite structures for
the aircraft and oil industries. 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 Shareholders 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.
14
In those cases where we determine that the useful life of property, plant
and equipment should be shortened, we depreciate the net book value in excess of
salvage value over its revised remaining useful life thereby increasing
depreciation expense. Factors such as technological advances, changes to our
business model, changes in our capital strategy, changes in the planned use of
equipment, fixtures, software or changes in the planned use of facilities could
result in shortened useful lives. Long-lived assets, other than goodwill, are
reviewed by us for impairment whenever events or changes in circumstances
indicate that the carrying amount of any such asset may not be recoverable. The
estimate of cash flow, which is used to determine recoverability, is based upon,
among other things, certain assumptions about future operating performance.
Our estimates of undiscounted cash flow may differ from actual cash flow
due to such factors including technological advances, changes to our business
model, or changes in our capital strategy or planned use of long-lived assets.
If the sum of the undiscounted cash flows, excluding interest, is less than the
carrying value, we would recognize an impairment loss, measured as the amount by
which the carrying value exceeds the fair value of the asset.
In accordance with SFAS No. 142, goodwill must be tested at least annually
for impairment at the reporting unit level. If an indication of impairment
exists, we are required to determine if such goodwill's implied fair value is
less than the unit carrying value in order to determine the amount, if any, of
the impairment loss required to be recorded. Impairment indicators include,
among other conditions, cash flow deficits, an historic or anticipated decline
in revenue or operating profits, adverse legal or regulatory developments,
accumulation of costs significantly in excess of amounts originally expected to
acquire the asset and/or a material decrease in the fair value of some or all of
the assets.
To determine the fair value of our reporting units, we generally use a
present value technique (discounted cash flow) corroborated by market multiples
when available and as appropriate, for all of the reporting units. The
discounted cash flow method measures intrinsic value by reference to an
enterprise's or an asset's expected annual free cash flows. We applied what we
believe to be the most appropriate valuation methodology for each of the
reporting units. If we had established different reporting units or utilized
different valuation methodologies, the impairment test results could differ.
PENSION AND POST-RETIREMENT BENEFIT OBLIGATIONS
We sponsor defined benefit pension and other retirement plans in various
forms covering all eligible employees. Several statistical and other factors
which attempt to anticipate future events are used in calculating the expense
and liability related to the plans. These factors include assumptions about the
discount rate and expected return on plan assets within certain guidelines and
in conjunction with our actuarial consultants. In addition, our actuarial
consultants also use subjective factors such as withdrawal and mortality rates
to estimate the expense and liability related to these plans. The actuarial
assumptions used by us may differ significantly, either favorably or
unfavorably, from actual results due to changing market, economic or regulatory
conditions, higher or lower withdrawal rates or longer or shorter life spans of
participants.
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.
RESULTS OF OPERATIONS
The following information should be read in conjunction with the
Consolidated Financial Statements as of March 26, 2005.
THREE MONTHS ENDED MARCH 26, 2005 COMPARED WITH THREE MONTHS ENDED MARCH 27,
2004
Net sales by segment were as follows:
THREE MONTHS ENDED INCREASE/(DECREASE)
MARCH 26, MARCH 27, FROM
SEGMENT 2005 2004 PRIOR PERIOD
- ------- ---------- ---------- -------------------
(DOLLARS IN THOUSANDS)
Defense................................. $ 86,127 $ 88,040 (2.2%)
Communications and Space Products....... 19,800 11,552 71.4%
Engineered Materials.................... 10,581 11,285 (6.2%)
---------- ---------- -------
Total................................... $ 116,508 $ 110,877 5.1%
========== ==========
15
In the Defense segment, the decrease in sales was attributable to lower
sales of electronic warfare systems and aircraft armament systems. This decrease
was partially offset by increased sales of our C4 products and systems,
including our mobile Joint Enhanced Core Communication Systems (JECCS), and
reconnaissance and surveillance systems.
In the Communications and Space Products segment, the increase in sales
was attributable to sales of our Warlock force protection systems. We continue
to receive orders for various versions of this system which will continue to be
a significant contributor to sales and margin this year.
In the Engineered Materials segment, the decrease was primarily
attributable to higher sales of fiber composite piping in the prior year first
quarter, wherein we had been awarded a contract to replace a competitor's
composite piping that had failed.
Operating earnings by segment were as follows:
THREE MONTHS ENDED
MARCH 26, MARCH 27,
SEGMENT 2005 2004
- ------- ----------- -----------
(DOLLARS IN THOUSANDS)
Defense................................. $ 6,387 $ 9,030
Communications and Space Products....... (115) (1,091)
Engineered Materials.................... 476 728
----------- -----------
Total................................... $ 6,748 $ 8,667
=========== ===========
Items of note affecting operating earnings are summarized here to help clarify
the comparison of results.
THREE MONTHS ENDED
MARCH 26, MARCH 27,
2005 2004
---------- -----------
(DOLLARS IN THOUSANDS)
Pension....................................... $ 1,070 $ 550
ESOP compensation expense..................... $ 1,314 $ 1,051
Intangible asset amortization................. $ 1,310 $ 1,441
Operating earnings for the three months ended March 26, 2005 were $6.7
million or 5.8% of net sales. This compares to operating earnings for the three
months ended March 27, 2004 of $8.7 million or 7.8% of net sales. This decrease
is attributable in part to higher pension expense and ESOP compensation expense.
The increased pension expense is due to changes in actuarial assumptions such as
discount rate and return on plan assets. The higher ESOP compensation expense is
due to the higher average market price of our common stock for the three months
ended March 26, 2005 compared to the three months ended March 27, 2004. In
addition, as discussed below, our investment in research and development
activities increased in the first three months of 2005 compared to 2004.
The Defense segment's operating earnings for the three months ended March
26, 2005 were $6.4 million or 7.4% of this segment's net sales compared to $9.0
million or 10.3% of this segment's net sales for the three months ended March
27, 2004. The decrease is attributable in part to the lower sales volume as well
as cost increases totaling approximately $1.2 million recorded on the F/A-22
AMRAAM Vertical Eject Launcher and the BRU-57 production programs due to revised
estimates at completion driven primarily by overhead rate impacts.
The Communications and Space Products segment experienced an operating
loss for the three months ended March 26, 2005 of $0.1 million or 0.6% of this
segment's net sales compared to an operating loss of $1.1 million or 9.4% of
this segment's net sales for the three months ended March 27, 2004. While sales
were higher than in the prior year comparable quarter, the low earnings level
was attributable to low margins in the antenna product line, as well as
increased research and development expenditures. For the three months ended
March 27, 2004, there were losses related to development and start-up costs on
certain interference cancellation programs resulting from issues discovered
during testing.
The Engineered Materials segment's operating earnings for the three months
ended March 26, 2005 were $0.5 million or 4.5% of this segment's net sales
compared to operating earnings of $0.7 million or 6.5% of this segment's net
sales for the three months ended March 27, 2004. This decrease is primarily due
to the mix of programs and a write-off of a commercial receivable of $0.1
million.
Selling, general and administrative expenses for the three months ended
March 26, 2005 was $20.6 million or 17.6% of net sales compared to $20.1 million
or 18.1% of net sales for the same period ended March 27, 2004. This is
considered relatively consistent with the prior year.
Research and development expense for the three months ended March 26, 2005
increased to $4.4 million or 3.8% of net sales from $1.5 million or 1.3% of net
sales for the three months ended March 27, 2004. The increase is attributable to
spending on force protection, composite application studies and miniature
precision weapon technologies.
Interest expense, net of interest income, for the three months ended March
26, 2005 decreased to $1.7 million from $2.0 million to the three months ended
March 27, 2004 due to a higher average cash balance for the first three months
of 2005 compared to 2004. 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.
The provision for income tax expense reflects an estimated annual
effective rate of 42% for the three months ended March 26, 2005 compared with
42.5% for the three months ended March 27, 2004.
For the three months ended March 26, 2005, net earnings were $2.9 million
or $0.16 per diluted common share on 18.2 million diluted shares compared to net
earnings of $3.9 million or $0.22 per diluted common share on 17.8 million
diluted shares for the three months ended March 27, 2004.
LIQUIDITY AND CAPITAL RESOURCES
BALANCE SHEET
Our cash and cash equivalents decreased 12.3% to $86.8 million at March
26, 2005 from $98.9 million at December 31, 2004. This decrease was due
primarily to cash used by operations of $5.2 million driven by a temporary
growth in inventory, discussed below. In addition, $6.5 million was used for
capital expenditures and $0.6 million for the payment of common share dividends.
Accounts receivable increased 1.0% to $155.3 million at March 26, 2005
from $153.8 million at December 31, 2004 due in part to timing of collections of
billed receivables. At March 26, 2005 approximately 77% of billed receivables
are in the under-60 days aging category.
Inventories increased 18.3% to $62.5 million at March 26, 2005 from $52.9
million at December 31, 2004 due primarily to the efforts expended on
work-in-progress on major programs, such as the Warlock program.
The note receivable of $7.2 million at March 26, 2005 and December 31,
2004 represents notes receivable from the sale of our facility in Deer Park in
2003 and the sale of our former College Point facility in January 1996. The Deer
Park facility note is due no later than October 9, 2005. The College Point
facility note is due in annual amounts through September 2005 with a final
payment due on December 31, 2005 and bears interest at 7% per annum. The latter
note receivable is secured by a mortgage on the facility.
In the three months ended March 26, 2005, capital expenditures were $6.5
million. This compares to $2.0 million for the three months ended March 27,
2004. The increase is attributable to new facility capital for the Antenna
business unit which was relocated to a new leased facility, expansion and
upgrades at two other facilities, as well as at the corporate offices.
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 March 26, 2005, LIBOR was approximately 3.08% and the
applicable adjustment to LIBOR was 1.25%. The facility requires us to pay each
lender in the consortium a commitment fee on the average daily unused portion of
their respective commitment at a rate equal to 0.25%.
There were no direct borrowings outstanding under the credit facility at
March 26, 2005 and December 31, 2004. Letters of credit outstanding at March 26,
2005 pertaining to the credit facility were $31.3 million, resulting in $93.7
million available at March 26, 2005 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 March 26,
2005, we were in compliance with our covenants. The credit facility is secured
by our accounts receivable, inventory and machinery and equipment.
16
5.25% Convertible Subordinated Notes due 2007("Notes")
In April 2002, issued the $137.8 million of Notes. Interest payments on
the Notes are due April 15 and October 15 of each year. Accrued interest
payable, included in accrued liabilities on our consolidated balance sheet, was
$3.4 million at March 26, 2005 and $1.5 million at December 31, 2004.
The Notes are convertible, unless previously redeemed or repurchased by
us, at the option of the holder at any time prior to maturity, into our common
shares at an initial conversion price of $31.26 per share, subject to adjustment
in certain events. As of March 26, 2005, there had been no conversions.
Shelf Registration
On December 23, 2003, we filed a shelf registration statement to
potentially offer for sale common shares, preferred shares, debt securities and
warrants. We may sell any combination of the foregoing securities in one or more
offerings up to an aggregate initial offering price of $500,000,000.
We believe that, for the foreseeable future, we have adequate liquidity
and sufficient capital to fund our currently anticipated requirements for
working capital, capital expenditures, including acquisitions, research and
development expenditures, interest payments and funding of our pension and
post-retirement benefit obligations. We continue to focus on positioning
ourselves to be a significant player in the consolidation of first-tier defense
suppliers and, to that end, have actively sought candidates for strategic
acquisitions. Future acquisitions may be funded from any of the following
sources: cash on hand; borrowings under our credit facility; issuance of our
common stock or other equity securities; and/or convertible or other debt
offerings.
COMMITMENTS AND CONTINGENCIES
In order to aggregate all commitments and contractual obligations as of March
26, 2005, we have included the following table. We are obligated under building
and equipment leases expiring between 2005 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):
------------------------------
2010 and
Contractual obligations Total 2005 2006 2007 2008 2009 Beyond
-------- ------- ------ ------- --------- ------ --------
5.25% Convertible Subordinated Notes due
2007 (1)............................... $ 137.8 $ - $ - $ 137.8 $ - $ - $ -
Operating leases......................... 106.3 10.8 12.5 11.5 11.0 10.7 49.8
Letters of credit........................ 31.3 28.9 0.2 2.2 - - -
Projected pension contributions.......... 29.0 6.0 6.0 6.0 6.0 5.0 -
Advance payment and performance bonds.... 1.9 - 0.2 - - 1.7 -
-------- ------- ------ ------- --------- ------ --------
Total.................................... $ 306.3 $ 45.7 $ 18.9 $ 157.5 $ 17.0 $ 17.4 $ 49.8
======== ======= ====== ======= ========= ====== ========
(1) Excludes interest
Actual pension contributions may differ from amounts presented above and
are contingent on cash flow and liquidity.
Additionally, we are subject to certain legal actions that arise out of
the normal course of business. It is our belief that the ultimate outcome of
these actions will not have a material adverse effect on our consolidated
financial position, results of operations or liquidity.
CONCENTRATION OF SALES
We conduct a significant amount of our business with the United States
Government. Although there are currently no indications of a significant change
in the status of government funding of certain programs, should this occur, our
results of operations, financial position and liquidity could be materially
affected. Such a change could have a significant impact on our profitability and
our stock price. This could also affect our ability to acquire funds from our
credit facility due to covenant restrictions or from other sources.
BACKLOG
The funded backlog of unfilled orders at March 26, 2005 increased to
$505.5 million from $474.6 million at December 31, 2004. Our backlog consists
primarily of current orders under long-lived, mission-critical programs of key
defense platforms.
18
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The statements in this Quarterly Report and in oral statements that may be
made by representatives of the Company relating to plans, strategies, economic
performance and trends and other statements that are not descriptions of
historical facts may be forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, Section 27(a) of the
Securities Act of 1933 and Section 21(e) of the Securities Exchange Act of 1934.
Forward looking statements are inherently subject to risks and uncertainties,
and actual results could differ materially from those currently anticipated due
to a number of factors, which include, but are not limited to the following for
each of the types of information noted below.
U.S. and international military program sales, follow on procurement,
contract continuance, and future program awards, upgrades and spares support are
subject to: U.S. and international military budget constraints and
determinations; U.S. congressional and international legislative body
discretion; U.S. and international government administration policies and
priorities; changing world military threats, strategies and missions;
competition from foreign manufacturers of platforms and equipment; NATO country
determinations regarding participation in common programs; changes in U.S. and
international government procurement timing, strategies and practices, the
general state of world military readiness and deployment; and the ability to
obtain export licenses.
Commercial satellite programs and equipment sales, follow-on procurement,
contract continuance and future program awards, upgrades and spares support are
subject to: establishment and continuance of various consortiums for satellite
constellation programs; delay in launch dates due to equipment, weather or other
factors beyond our control; and development of sufficient customer base to
support a particular satellite constellation program.
Commercial product sales are subject to: success of product development
programs currently underway or planned; competitiveness of current and future
production costs and prices and market and consumer base development of new
product programs.
Achievement of margins on sales, earnings and cash flow can be affected
by: unanticipated technical problems; government termination of contracts for
convenience; decline in expected levels of sales; underestimation of anticipated
costs on specific programs; the ability to effect acquisitions; and risks
inherent in integrating recent acquisitions into our overall structure.
Expectations of future income tax rates can be affected by a variety of
factors, including statutory changes in Federal and state tax rates,
nondeductibility of goodwill amortization and IPR&D acquired in a stock purchase
business combination and the nondeductibility of our noncash ESOP compensation
expense.
The Company has no obligation to update any forward-looking statements.
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.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS
(a) EXHIBITS
3(a)(1) Restated Certificate of Incorporation of the Company dated May 10, 2004
(incorporated herein by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2004, Exhibit 3(a)(1)).
3(b) By-Laws of the Company as amended October 26, 2004 (incorporated herein
by reference to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 25, 2004, Exhibit 3 (b)).
31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and
15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32* Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Filed herewith.
(b) REPORTS ON FORM 8-K
The following report on Form 8-K was filed during the three months ended March
26, 2005:
DATE OF REPORT ITEMS REPORTED
- ----------------- -------------------------------------------------------
January 24, 2005 Letter contract signifying the intention of the
Department of the Army to execute a formal Firm Fixed
Price contractual modification to existing contract
W15P7T-04-C-L001.
January 26, 2005 Press release announcing the election of Mr. Paul J.
Kern, General, U.S.A. (Ret.) was elected to EDO Board of
Directors.
February 15, 2005 The Board of Directors appointed Kern to the
Nominating and Governance Committee and the Management
Development Committee effective as of the 2005 Annual
Meeting of Shareholders.
February 24, 2005 Earnings release, dated February 24, 2005 announcing
financial results for the quarter and year ended
December 31, 2004.
March 16, 2005 Departures of Directors or Principal Officers; election
of directors; appointments of principal officers. As of
March 14, 2005, Frank W. Otto is reassigned from the
position of Chief Operating Officer and has assumed the
position of Senior Vice President, Strategic Development.
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: April 29, 2005 Frederic B. Bassett
Vice President Finance, Treasurer and
Chief Financial Officer
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