10-Q 1 y52421e10-q.txt EDO CORPORATION 1 Page 1 of 17 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2001 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 1-3985 EDO CORPORATION (Exact name of registrant as specified in its charter) New York No. 11-0707740 (State or other jurisdiction (I.R.S. Employee of incorporation or organization) Identification No.) 60 East 42nd Street, Suite 5010, New York, NY 10165 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 716-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Class Outstanding at June 30, 2001 ------------------------------------- --------------------------------- Common shares, par value $1 per share 14,836,294 2 Page 2 EDO CORPORATION INDEX
Page No. Face Sheet 1 Index 2 Part I Financial Information Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 3 Consolidated Statements of Earnings - Three Months Ended June 30, 2001 and July 1, 2000 4 Consolidated Statements of Earnings - Six Months Ended June 30, 2001 and July 1, 2000 5 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and July 1, 2000 6 Notes to Consolidated Financial Statements 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-16 Part II Other Information Item 4. Submission of Matters to a Vote of Security Holders 16 Item 6. Exhibits and Reports on Form 8-K 16 Signature 17
3 Page 3 PART I - FINANCIAL INFORMATION Item 1. Financial Statements EDO Corporation and Subsidiaries Consolidated Balance Sheets (in thousands, except share and per share amounts)
June 30, 2001 December 31, 2000 (unaudited) Assets Current assets: Cash and cash equivalents $ 5,142 $ 2,208 Marketable securities 188 14,413 Accounts receivable, less allowances 75,304 69,023 Inventories 26,618 24,914 Deferred tax asset, net 3,302 3,333 Prepayments and other 2,742 4,840 --------- --------- Total current assets 113,296 118,731 Property, plant and equipment, net 59,235 57,485 Notes receivable 3,081 3,254 Cost in excess of fair value of net assets acquired, net 10,359 14,724 Other assets 22,491 20,060 --------- --------- $ 208,462 $ 214,254 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities $ 46,713 $ 44,060 Contract advances and deposits 20,684 31,719 Current portion of note payable 429 429 Current portion of long-term debt 3,800 4,971 --------- --------- Total current liabilities 71,626 81,179 Note payable 463 463 Long-term debt 33,716 37,800 Deferred income taxes, net 1,239 1,239 ESOT loan obligation 4,891 5,781 Postretirement benefits obligations 20,011 19,973 Environmental obligation 1,836 2,001 Shareholders' equity: Preferred shares, par value $1 per share (liquidation preference $213.71 per share or $10,521 in the aggregate in 2000), authorized 500,000 shares, 49,229 issued in 2000 -- 49 Common shares, par value $1 per share, authorized 25,000,000 shares, issued 16,074,377 in 2001 and 15,007,096 in 2000 16,074 15,007 Additional paid-in capital 56,980 58,614 Retained earnings 39,661 34,803 Accumulated other comprehensive income (loss) -- (61) --------- --------- 112,715 108,412 Less: Treasury shares at cost (1,238,083 shares in 2001 and 1,370,222 shares in 2000) (16,733) (19,388) ESOT loan obligation (4,891) (5,781) Unearned ESOP shares (15,116) (15,782) Deferred compensation under Long-Term Incentive Plan (450) (423) Management group receivable (845) (1,220) --------- --------- Total shareholders' equity 74,680 65,818 --------- --------- $ 208,462 $ 214,254 ========= =========
See accompanying Notes to Consolidated Financial Statements. 4 Page 4 EDO Corporation and Subsidiaries Consolidated Statements of Earnings (in thousands, except per share amounts)
For the three months ended June 30, 2001 July 1, 2000 (unaudited) Net sales $ 66,776 $ 56,593 Costs and expenses Cost of sales 49,858 43,220 Selling, general and administrative 8,477 6,539 Research and development 2,190 1,552 Writeoff of purchased in-process research and development and merger-related costs 772 8,943 -------- -------- 61,297 60,254 -------- -------- Operating earnings (loss) 5,479 (3,661) Non-operating income (expense) Interest income 268 396 Interest expense (734) (1,012) Other, net 62 (75) -------- -------- (404) (691) -------- -------- Earnings (loss) before income taxes 5,075 (4,352) Federal Income tax (expense) benefit (1,980) 1,033 -------- -------- Earnings (loss) 3,095 (3,319) Dividends on preferred shares -- 213 -------- -------- Net earnings (loss) available for common shares $ 3,095 $ (3,532) ======== ======== Earnings (loss) per common share: Basic $ 0.25 $ (0.37) Diluted $ 0.24 $ (0.37) Weighted average common shares outstanding: Basic 12,370 9,661 ======== ======== Diluted 13,824 9,661 ======== ========
See accompanying Notes to Consolidated Financial Statements. 5 Page 5 EDO Corporation and Subsidiaries Consolidated Statements of Earnings (in thousands, except per share amounts)
For the six months ended June 30, 2001 July 1, 2000 (unaudited) Net sales $ 126,927 $ 85,595 Costs and expenses Cost of sales 94,768 65,078 Selling, general and administrative 16,285 10,009 Research and development 3,982 2,136 Write-off of purchased in-process research and development and merger-related costs 1,318 8,943 --------- --------- 116,353 86,166 --------- --------- Operating earnings (loss) 10,574 (571) Non-operating income (expense) Interest income 587 876 Interest expense (1,627) (1,640) Other, net 199 28 --------- --------- (841) (736) --------- --------- Earnings (loss) before income taxes 9,733 (1,307) Income tax (expense) benefit (3,795) 118 --------- --------- Earnings (loss) 5,938 (1,189) Dividends on preferred shares 194 458 --------- --------- Net earnings (loss) available for common shares $ 5,744 $ (1,647) ========= ========= Earnings (loss) per common share: Basic $ 0.48 $ (0.20) Diluted $ 0.46 $ (0.20) Weighted average common shares outstanding: Basic 11,905 8,211 ========= ========= Diluted 12,433 8,211 ========= =========
See accompanying Notes to Consolidated Financial Statements. 6 Page 6 EDO Corporation and Subsidiaries Consolidated Statements of Cash Flows (in thousands)
For the six months ended June 30, 2001 July 1, 2000 (unaudited) Operating activities: Earnings (loss) $ 5,938 $ (1,189) Adjustments to earnings (loss) to arrive at cash used: Depreciation 4,876 2,617 Amortization 556 572 Write-off of purchased in-process research and development -- 6,700 Bad debt expense 18 70 Gain on repurchase of debentures (171) (129) Gain on sale of property, plant and equipment (56) (7) Gain on sale of marketable securities (81) -- Deferred compensation expense 121 312 ESOP compensation expense 1,115 399 Non-cash compensation expense 278 -- Common shares issued for directors' fees 87 28 Real estate tax assessment adjustment 7,846 -- Changes in, excluding effects of acquisition: Accounts receivable (6,114) (9,756) Inventories (1,704) 2,712 Prepayments and other assets (1,892) (3,603) Accounts payable and accrued liabilities (421) (4,762) Contract advances and deposits (11,035) 1,219 -------- -------- Cash used by continuing operations (639) (4,817) Net cash provided by discontinued operations -- 8,641 Investing activities: Cash paid for acquisition of AIL -- (15,004) Payments received on notes receivable 173 -- Purchase of property, plant and equipment (6,797) (1,407) Proceeds from sale of property, plant and equipment 226 5,858 Purchase of marketable securities (56) (414) Sale or redemption of marketable securities 14,454 500 -------- -------- Cash provided (used) by investing activities 8,000 (10,467) Financing activities: Proceeds from exercise of stock options 2,383 44 Proceeds from management group receivables 376 -- Borrowings under line of credit -- 1,000 Repayments of borrowings under line of credit -- (3,000) Repayments of long-term debt (1,900) (1,508) Repurchase of debentures (3,184) (1,386) Purchase of treasury shares (1,021) -- Payment of common share cash dividends (887) (610) Payment of preferred share cash dividends (194) (458) -------- -------- Cash used by financing activities (4,427) (5,918) Net increase (decrease) in cash and cash equivalents 2,934 (12,561) Cash and cash equivalents at beginning of year 2,208 13,799 -------- -------- Cash and cash equivalents at end of period $ 5,142 $ 1,238 ======== ======== Supplemental disclosures: Cash paid for: Interest $ 1,431 $ 919 Income taxes $ 4,770 $ 673
See accompanying Notes to Consolidated Financial Statements. 7 Page 7 Notes to Consolidated Financial Statements Unaudited Consolidated Financial Statements The accompanying unaudited, consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and, therefore, do not include all information and footnotes normally included in consolidated financial statements prepared in conformity with generally accepted accounting principles. They should be read in conjunction with the consolidated financial statements of EDO Corporation and Subsidiaries (the "Company") for the fiscal year ended December 31, 2000 filed by the Company on Form 10-K with the Securities and Exchange Commission on April 2, 2001. The accompanying consolidated financial statements are unaudited and include all adjustments (consisting of normal recurring adjustments and accruals) 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. Acquisition On April 28, 2000, a wholly owned subsidiary of the Company merged with AIL Technologies, Inc. (the "EDO-AIL Merger"). In connection with the EDO-AIL merger, the Company issued 6,553,194 of its common shares valued at $39.4 million, and made cash payments aggregating $13.3 million in exchange for all of the outstanding common and preferred shares of AIL Technologies, Inc. In addition, the Company incurred $2.7 million in transaction costs. The merger was accounted for using the purchase method and is included in the Company's results of operations since the date of acquisition. The transaction resulted in goodwill of $2.8 million, which is being amortized over fifteen years. Unaudited pro forma results of operations, assuming the acquisition had been made at the beginning of 2000, which include adjustments to interest expense, amortization expense and income tax expense are as follows:
Six months ended July 1, 2000 (in thousands) Net sales from continuing operations $ 128,852 Net loss from continuing operations available for common shares $ (8,848) Basic loss per share from continuing operations $ (0.83)
8 Page 8 Inventories Inventories are summarized by major classification as follows:
June 30, 2001 Dec. 31, 2000 (in thousands) Raw materials and supplies $ 7,726 $ 7,431 Work-in-process 18,064 16,170 Finished goods 828 1,313 ------- ------- $26,618 $24,914 ======= =======
Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share.
Three months ended Six months ended June 30, July 1, June 30, July 1, 2001 2000 2001 2000 (in thousands) (in thousands) Numerator: Earnings (loss) available for common shares $ 3,095 $(3,532) 5,744 (1,647) Impact of assumed conversion of preferred shares -- -- 9 -- Interest expense avoided related to assumed conversion of subordinated debentures 274 -- -- -- ------- ------- ------- ------- Numerator for diluted calculation $ 3,369 $(3,532) 5,753 (1,647) ======= ======= ======= ======= Denominator: Weighted average common shares outstanding 12,370 9,661 11,905 8,211 Dilutive effect of stock options 287 -- 219 -- Dilutive effect of conversion of preferred shares -- -- 309 -- Dilutive effect of conversion of subordinated debentures 1,167 -- -- -- ------- ------- ------- ------- Denominator for diluted calculation 13,824 9,661 12,433 8,211 ======= ======= ======= =======
9 Page 9 Employee Stock Ownership Plan and Trust At the end of 2000, the Company sponsored two Employee Stock Ownership Plans, the existing EDO Employee Stock Ownership Plan ("EDO ESOP"); and the AIL Employee Stock Ownership Plan ("AIL ESOP") that was acquired in connection with the EDO-AIL merger. These two plans were merged into a single plan effective as of January 1, 2001, and the existing preferred shares in the former EDO ESOP were converted into 1,067,281 common shares on March 8, 2001. The merged ESOP provides retirement benefits to substantially all employees. Comprehensive Income As of June 30, 2001, accumulated other comprehensive income (loss) included in the accompanying consolidated balance sheet represents unrealized holding gains (losses) on available-for-sale marketable securities. Comprehensive income for the three-and six-month period ended June 30, 2001 was $3,044,000 and $6,030,000, respectively. Comprehensive loss for the three- and six-month periods ended July 1, 2000 was $3,345,000 and $1,218,000, respectively. Business Segments EDO Corporation supplies highly engineered products for governments and industries worldwide. The Company believes that the majority of its advanced electronic, electromechanical and information systems and engineered materials are products which are critical to the mission success of its customers. The Company has three reporting segments: Defense, Communications and Space Products, and Engineered Materials. The Defense segment provides integrated defense systems and components including radar countermeasure systems, aircraft weapons storage and release systems, airborne mine countermeasures systems, remote sensors, information technology, and support systems and services for military forces and governments worldwide. The Communications and Space Products segment addresses the remote sensing, communication, and navigation industries and produces ultra-miniature electronics and a broad line of antennas. The Engineered Materials segment supplies piezoelectric ceramics and advanced composites for the communication, navigation, chemical, petrochemical, paper and oil industries for the commercial infrastructure and military markets.
Three months ended Six months ended June 30, July 1 June 30, July 1, 2001 2000 2001 2000 Net sales: Defense $ 49,081 $ 40,726 $ 93,766 $ 61,426 Communications and Space Products 8,551 7,624 15,063 7,624 Engineered Materials 9,144 8,243 18,098 16,545 -------- -------- -------- -------- $ 66,776 $ 56,593 $126,927 $ 85,595 ======== ======== ======== ========
10 Page 10 Operating earnings (loss): Defense $ 4,445 $ 3,460 $ 9,691 $ 5,911 Communications and Space Products 240 (7,476) (775) (7,476) Engineered Materials 794 355 1,658 994 -------- -------- -------- -------- 5,479 (3,661) 10,574 (571) Net interest expense (466) (616) (1,040) (764) Other, net 62 (75) 199 28 -------- -------- -------- -------- Earnings (loss) before income taxes $ 5,075 $ (4,352) $ 9,733 $ (1,307) ======== ======== ======== ========
Merger-related costs attributable to the EDO-AIL Merger are included in the segments as follows:
Six months ended Six months ended June 30, 2001 July 1, 2000 Defense $ 898 $1,563 Space and Communications Products 208 6,980 Engineered Materials 212 400 ------ ------ Total $1,318 $8,943 ====== ======
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The following information should be read in conjunction with the Consolidated Financial Statements as of and for the period ended June 30, 2001, which reflect the results of operations of the Company including the EDO-AIL merger from April 28, 2000. Accordingly, the Company's results of operations for the three and six months ended June 30, 2001 and the Company's financial condition as of June 30, 2001 are significantly affected by this acquisition. Merger with AIL Technologies Inc. In January 2000, the Company announced that its Board of Directors approved the merger (the "EDO-AIL merger") of a wholly-owned subsidiary of the Company with AIL Technologies Inc. ("AIL"). The EDO-AIL merger, which was completed on April 28, 2000, was accounted for as a purchase and is included in the Company's results of operations from that date. The results of operations for the periods presented are materially affected by the inclusion of the results of AIL for the entire three- and six-month periods ended June 30, 2001 compared to a partial inclusion of the results of AIL for the three- and six-month periods ended July 1, 2000. 11 Page 11 Under the merger agreement and share purchase agreements with certain AIL shareholders, all of the outstanding common and preferred shares of AIL were exchanged or purchased for 6,553,194 newly issued EDO common shares valued at $39.4 million and a cash payment aggregating $13.3 million. The merged company also assumed AIL debt of $29.7 million. Of the newly-issued shares, 5.3 million were held in trust by AIL's Employee Stock Ownership Plan ("AIL ESOP"). The AIL ESOP was EDO's largest shareholder, holding approximately 39% of EDO's outstanding common shares upon completion of the EDO-AIL merger. As of January 1, 2001, the AIL ESOP and the existing EDO ESOP were merged into a single plan. As of March 8, 2001, the existing preferred shares in the EDO ESOP were converted into approximately 1.1 million common shares. The merged ESOP held approximately 42% of EDO's outstanding common shares as of June 30, 2001. In conjunction with this plan merger, the trust under the AIL ESOP was merged with and into the trust under the EDO ESOP effective June 30, 2001. Three Months Ended June 30, 2001 compared with the Three Months Ended July 1, 2000 Sales for the second quarter of 2001 increased to $66.8 million from $56.6 million reported in the second quarter of 2000. This increase comprised sales growth of $8.4 million for the Defense segment, $0.9 million for the Communications and Space Products segment, and $0.9 million for the Engineered Materials segment. Since the EDO-AIL merger was completed at the end of April 2000, the second quarter of 2000 reflected two months of combined operations, while the second quarter of 2001 reflected a full three months of combined operations. The sales growth for the second quarter of 2001 over the second quarter of 2000 attributable to the EDO-AIL merger is $6.5 million in the Defense segment and $0.9 million in the Communication and Space Products segment. In addition, there were increases in sales of airborne mine countermeasures systems, electro-ceramic products and advanced fiber composite structural products in the second quarter of 2001 compared to the second quarter of 2000. Operating earnings in the second quarter of 2001 (before considering one-time EDO-AIL merger-related costs of $0.8 million) increased to $6.3 million or 9.4% of sales from $5.3 million or 9.3% of sales for the same period of 2000. The increase in operating earnings was attributable primarily to the EDO-AIL merger. For the second quarter of 2001, net income available for common shares was $3.1 million, or $0.24 per diluted common share on 13.8 million diluted shares, which include 1.2 million dilutive shares associated with the assumed conversion of the Company's convertible subordinated debentures. This compares to a net loss available for common shares of $3.5 million, or $0.37 per diluted common share on 9.7 million diluted shares in the second quarter of 2000. Selling, general and administrative expenses in the second quarter of 2001 increased to $8.5 million from $6.5 million in the comparable quarter of 2000. This increase was primarily attributable to the selling, general and administrative expenses of AIL Technologies, Inc., which the Company acquired at the end of April, 2000, and increased bid and proposal expenses. At 12.7% of the net sales in the second quarter of 2001, the level of selling, general and administrative expenses was consistent with the 11.6% of net sales in the prior year's second quarter. Interest expense in the second quarter of 2001 decreased to $0.7 million from $1.0 million for the same period last year. The reduction is attributable to the lower average debt levels, partially due to the repurchase of debentures. 12 Page 12 The income tax expense for the 2001 second quarter reflected the Company's estimated effective rate of 39% for the year ending December 31, 2001. This compares to an income tax benefit at an effective rate of 24% for the second quarter of 2000. The effective tax benefit of 24% for the second quarter of 2000 is principally attributable to a write-off of $6.7 million of purchased in-process research and development and other expenses associated with the EDO-AIL merger which were not deductible for income tax purposes. Company-sponsored research and development expenditures increased to $2.2 million in the second quarter of 2001 from $1.6 million in the second quarter of 2000. The increase was primarily attributable to expenditures in the Communications and Space Products segment, relating to fiber optics product development. There were no dividends on preferred shares in the second quarter of 2001 compared to $0.2 million for the same period of 2000, since all outstanding preferred shares were converted into 1,067,281 common shares on March 8, 2001. Therefore, no preferred dividends were paid after March 8, 2001, nor will preferred dividends be paid for these shares in future quarters. Six Months Ended June 30, 2001 compared with the Six Months Ended July 1, 2000 Sales for the first six months of 2001 increased to $126.9 million from $85.6 million reported in the first six months of 2000. This increase comprised sales growth of $32.3 million for the Defense segment, $7.4 million for the Communications and Space Products segment, and $1.6 million for the Engineered Materials segment. The sales growth for the first six months of 2001 over the first six months of 2000 attributable to the EDO-AIL merger is $28.5 million in the Defense segment and $7.4 million in the Communication and Space Products segment. Since the EDO-AIL merger was completed at the end of April 2000, the first six months of 2000 reflected two months of combined operations, while the first six months of 2001 reflected a full six months of combined operations. In addition, there were increases in sales of aircraft stores suspension and release equipment, integrated combat systems, electro-ceramic products and advanced fiber composite structural products in the first six months of 2001 compared to the first six months of 2000. Operating earnings in the first six months of 2001 (before considering one-time EDO-AIL merger-related costs of $1.3 million) increased to $11.9 million or 9.4% of sales from $8.4 million or 9.8% of sales for the same period of 2000. The increase in operating earnings was primarily attributable to the EDO-AIL merger, and the decrease in percent margin was due to losses in the Communications and Space Products segment. For the six months ended June 30, 2001, net income available for common shares was $5.7 million or $0.46 per diluted common share on 12.4 million diluted shares. This compares to a net loss available for common shares of $1.6 million or $0.20 per diluted common share on 8.2 million diluted shares in the comparable six months of 2000. Selling, general and administrative expenses in the first six months of 2001 increased to $16.3 million from $10.0 million for the same period of 2000. This increase was primarily attributable to the selling, general and administrative expenses of AIL Technologies, Inc., which the Company acquired at the end of April 2000, and increased bid and proposal costs. At 12.8% of net sales in the first six months of 2001, the level of selling, general and administrative expenses was consistent with the 11.7% of net sales in the prior year's first six months. Interest expense was $1.6 million for both periods. 13 Page 13 The income tax expense for the first six months of 2001 reflected the Company's estimated effective rate of 39% for the year ending December 31, 2001. This compares to an income tax benefit at an effective rate of 9% for the first six months of 2000. The effective tax benefit of 9% for the first six months of 2000 is principally attributable to a write-off of $6.7 million of purchased in-process research and development and other expenses associated with the EDO-AIL merger which were not deductible for income tax purposes. Company-sponsored research and development expenditures increased to $3.9 million in the first six months of 2001 from the $2.1 million for the same period of 2000. The increase is primarily attributable to expenditures in the Communications and Space Products segment, relating to fiber optics product development. Dividends on preferred shares in the first six months of 2001 decreased to $0.2 million compared to $0.5 million for the same period of 2000, since all outstanding preferred shares were converted into 1,067,281 common shares on March 8, 2001. Therefore, no preferred dividends were paid after March 8, 2001, nor will preferred dividends be paid for these shares in future quarters. Liquidity and Capital Resources The Company's cash, cash equivalents and marketable securities decreased by $11.3 million to $5.3 million at June 30, 2001 from $16.6 million at December 31, 2000. This decrease was due to $0.6 million used by operations, $6.8 million for purchases of capital equipment, $3.2 million for the repurchase of subordinated debentures, $1.9 million payment of long-term debt, and $1.1 million for payment of common and preferred dividends. These decreases were partially offset by $2.4 million of proceeds from exercises of stock options. Accounts receivable increased to $75.3 million at June 30, 2001 from $69.0 million at December 31, 2000 primarily due to increases in billed receivables resulting from an increase in sales in the second quarter of 2001 compared to the fourth quarter of 2000. Inventories increased to $26.6 million at June 30, 2001 from $24.9 million at December 31, 2000 primarily due to increases in work-in-progress in the Communications and Space segment. The notes receivable of $3.5 million at June 30, 2001 (of which $0.4 million was in current assets) were comprised of the $1.2 million note related to the sale of property at Deer Park in June 2000 and $2.3 million in notes related to the sale of the Company's former College Point facility in January 1996. The Deer Park facility note is due in monthly installments through July 2015 and bears interest at a rate of 7.5% per annum. The College Point notes are due in annual amounts through September 2004 with a final payment of $1.3 million due on December 31, 2004 and bear interest at 7.0% per annum. The latter notes receivable are secured by a mortgage on the facility. The Company has outstanding $22.3 million of 7% Convertible Subordinated Debentures due 2011. Commencing in 1996 and until retirement of these debentures, the Company is making annual sinking fund payments of $1.8 million, which are due each December 15th. During the second quarter of 2001, the Company purchased $0.1 million face value of these debentures for $0.1 million. As of June 30, 2001, the Company had $3.9 million of these debentures in treasury to be used to satisfy its annual sinking fund requirements. 14 Page 14 The Company has an Employee Stock Ownership Trust ("EDO ESOT") loan obligation with a balance at June 30, 2001 of $4.9 million at an interest rate of 82% of the prime lending rate. This obligation represents the borrowing by the EDO ESOT guaranteed by the Company. The EDO ESOT services this obligation with the dividends received on the Company's preferred shares and cash contributions from the Company. As described above under "Merger with AIL Technologies Inc.," as of January 1, 2001 the AIL ESOP and the existing EDO ESOP were merged into a single plan, and the preferred shares issued by the Company and held by the EDO ESOP were converted into 1,067,281 shares of the Company's common stock effective March 8, 2001. As of June 30, 2001, the merged ESOP restructured its direct loan from the Company to extend the maturity date to December 31, 2017. As a result of the conversion of the preferred shares, debt service on the ESOP will be funded through dividends paid by the Company on its common shares and cash contributions from the Company. As part of this restructuring, the aforementioned EDO ESOT loan obligation of $4.9 million was paid in full on July 30, 2001. During the third quarter of 2000 the Company completed negotiations for a new $69 million long-term credit facility with a consortium of banks co-led by Mellon and EAB. The credit facility includes $19 million in five-year term debt, payable in quarterly installments of $950,000, and $50 million in revolving debt. Borrowings under the agreement bear interest based on LIBOR plus applicable margin of up to 2.00% depending on the consolidated leverage ratio as defined in the agreement. Borrowings are secured by the Company's accounts receivable, inventories and property, plant and equipment. Proceeds from the term debt were used to repay existing term debt acquired in the EDO-AIL merger. The current portion of long-term debt of $3.8 million at June 30, 2001 reflects the amounts due in the next twelve months. At June 30, 2001, the Company was in compliance with its debt covenants. At June 30, 2001 there were no borrowings under the revolving credit facility of $50.0 million and there were outstanding letters of credit of $18.8 million, leaving available borrowing capacity of $31.2 million. Capital expenditures in the first six months of 2001 increased to $6.8 million from $1.4 million for the same period of 2000. The increase was due primarily to expenditures at the Company's owned 726,000 square foot facility located in Deer Park, NY, in anticipation of its potential sale and leaseback. This facility houses the Defense Programs and Technologies, Antenna Products and Space and Communications Products operations. The Company believes that it has adequate liquidity and sufficient capital to fund its currently anticipated requirements for working capital, capital expenditures, research and development expenditures and interest payments. The backlog of unfilled orders at June 30, 2001 increased to $295.9 million from $267.1 million at July 1, 2000 and $252.9 million at December 31, 2000. New Accounting Standards Accounting for Derivative Instruments and Hedging Activities Effective January 1, 2001, EDO Corporation adopted Statement of Financial Accounting Standards ("FASB") No. 133, "Accounting for Derivative Instruments and Hedging Activities" and Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment to FASB Statement No. 133." These statements require all derivatives to be recorded on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. The effect of the adoption of these statements on the Company's financial position and results of operations was immaterial. 15 Page 15 Business Combinations and Goodwill and Other Intangible Assets In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and other intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. In addition, Statement 141 eliminates the pooling-of-interests method of accounting for business combinations. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the nonamortization provisions of the Statement is expected to result in a decrease in amortization expense in 2002 of approximately $0.7 million. In addition, goodwill recorded as a result of any acquisitions completed subsequent to the issuance of the Statement during 2001 would not be amortized. During 2002, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002. The Company has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. "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 representative 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 with 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 Exchanges Act of 1934. Forward-looking statements are inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include but are not limited to the following for each of the types of information noted below. U.S. and international military program sales, follow-on procurement, contract continuance, and future program awards, upgrades and spares support are subject to U.S. and international military budget constraints and determinations; U.S. congressional and international legislative body discretion; U.S. and international government administration policies and priorities; changing world military threats, strategies and missions; competition from foreign manufacturers of platforms and equipment; NATO country determinations regarding participation in common programs; changes in U.S. and international government procurement timing, strategies and practices; and the general state of world military readiness and deployment. Commercial satellite programs and equipment sales, follow-on procurement, contract continuance and future program awards 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 the control of the Company; 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 product production costs and prices and market and consumer base development of new product programs. 16 Page 16 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; and risks inherent in integrating recent acquisitions into the Company's overall structure. Expectations of future Federal income tax rates can be affected by a variety of factors, including amounts of profits relating to foreign sales. The Company has no obligation to update any forward-looking statements, PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10(j) Change of Control Agreement dated as of March 15, 2001, by and between the Company and Darrell L. Reed. 10(k) Change of Control Agreement dated as of March 17, 2001, by and between the Company and William J. Frost. (b) Reports on Form 8-K None. 17 Page 17 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EDO Corporation ----------------------------------------- (Registrant) by: D.L. Reed ----------------------------------------- D.L. Reed - Vice President - Finance (Principal Financial Officer) Date: August 14, 2001