10-Q 1 y60460e10-q.txt EDO CORPORATION 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 March 30, 2002 [ ] 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 March 30, 2002 ------------------------------------- --------------------------------- Common shares, par value $1 per share 19,632,925
Page 2 EDO CORPORATION INDEX
Page No. Face Sheet 1 Index 2 Part I Financial Information Item 1. Financial Statements Consolidated Balance Sheets - March 30, 2002 and December 31, 2001 3 Consolidated Statements of Earnings - Three Months Ended March 30, 2002 and March 31, 2001 4 Consolidated Statements of Cash Flows - Three Months Ended March 30, 2002 and March 31, 2001 5 Notes to Consolidated Financial Statements 6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-15 Part II Other Information Item 4. Submission of Matters to a Vote of 15 Security Holders Item 6. Exhibits and Reports on Form 8-K 15 Signature 16 Exhibit Index 17
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)
March 30, 2002 Dec. 31, 2001 Assets (unaudited) Current assets: Cash and cash equivalents $ 49,260 $ 57,841 Marketable securities 191 190 Accounts receivable, less allowances 85,498 83,407 Inventories 25,782 22,937 Deferred income tax asset, net 3,018 3,018 Prepayments and other 3,854 2,346 --------- --------- Total current assets 167,603 169,739 Property, plant and equipment, net 60,757 62,255 Notes receivable 2,822 2,910 Cost in excess of fair value of net assets acquired 22,874 22,874 Deferred income tax asset, net 2,553 2,553 Other assets 24,317 25,299 --------- --------- $ 280,926 $ 285,630 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities $ 42,981 $ 47,397 Contract advances and deposits 11,812 16,702 Current portion of note payable 463 463 --------- --------- Total current liabilities 55,256 64,562 Postretirement benefits obligations 45,306 44,675 Environmental obligation 1,910 1,895 Shareholders' equity: Common shares, par value $1 per share, authorized 25,000,000 shares, issued 19,790,477 in 2002 and 2001 19,790 19,790 Additional paid-in capital 144,577 143,747 Retained earnings 50,046 47,744 Accumulated other comprehensive loss, net of income tax benefit (13,385) (13,385) --------- --------- 201,028 197,896 Less: Treasury shares at cost (157,552 shares in 2002 and 182,459 shares in 2001) (2,125) (2,461) Unearned ESOP shares (19,480) (19,792) Deferred compensation under Long-Term Incentive Plan (274) (300) Management group receivable (695) (845) --------- --------- Total shareholders' equity 178,454 174,498 --------- --------- $ 280,926 $ 285,630 ========= =========
See accompanying Notes to Consolidated Financial Statements. Page 4 EDO Corporation and Subsidiaries Consolidated Statements of Earnings (in thousands, except per share amounts)
For the three months ended March 30, 2002 March 31, 2001 (unaudited) Continuing Operations: Net sales $ 66,909 $ 60,151 Costs and expenses Cost of sales 50,707 44,910 Selling, general and administrative 9,722 7,808 Research and development 1,765 1,792 Merger-related costs -- 546 -------- -------- 62,194 55,056 -------- -------- Operating earnings 4,715 5,095 Non-operating income (expense) Interest income 208 319 Interest expense (46) (893) Other, net 53 137 -------- -------- 215 (437) -------- -------- Earnings before income taxes 4,930 4,658 Income tax expense (2,120) (1,815) -------- -------- Net earnings 2,810 2,843 Dividends on preferred shares -- (194) -------- -------- Net earnings available for common shares $ 2,810 $ 2,649 ======== ======== Earnings per common share: Basic $ 0.17 $ 0.23 Diluted $ 0.16 $ 0.22 Weighted average common shares outstanding: Basic 16,974 11,439 ======== ======== Diluted 17,300 12,213 ======== ========
See accompanying Notes to Consolidated Financial Statements. Page 5 EDO Corporation and Subsidiaries Consolidated Statements of Cash Flows (in thousands)
For the three months ended March 30, 2002 March 31, 2001 (unaudited) Operating activities: Earnings from continuing operations $ 2,810 $ 2,843 Adjustments to earnings from continuing operations to arrive at cash (used) provided by continuing operations: Depreciation 2,448 2,441 Amortization 49 324 Gain on repurchase of debentures -- (158) Gain on sale of property, plant and equipment -- (26) Gain on sale of marketable securities -- (12) Deferred compensation expense 26 60 Non-cash ESOP compensation expense 1,105 878 Dividends on unallocated ESOP shares 80 -- Common shares issued for directors' fees 62 52 Income tax benefit from stock options 162 86 Real estate tax assessment adjustment -- 7,846 Changes in: Accounts receivable (2,091) (2,986) Inventories (2,845) (2,756) Prepayments and other assets (575) (2,954) Accounts payable and accrued liabilities (3,770) 4,366 Contract advances and deposits (4,890) (6,580) -------- -------- Cash (used) provided by continuing operations (7,429) 3,424 Investing activities: Payments received on notes receivable 88 86 Purchase of plant and equipment (950) (1,514) Proceeds from sale of property, plant and equipment -- 84 Purchase of marketable securities (1) (44) Sale or redemption of marketable securities -- 4,161 -------- -------- Cash (used) provided by investing activities (863) 2,773 Financing activities: Proceeds from exercise of stock options 150 482 Proceeds from management receivables 150 289 Repayments of long-term debt -- (950) Repurchase of debentures -- (3,062) Purchase of treasury shares -- (260) Payment of common share cash dividends (589) (442) Payment of preferred share cash dividends -- (194) -------- -------- Cash used by financing activities (289) (4,137) Net (decrease) increase in cash and cash equivalents (8,581) 2,060 Cash and cash equivalents at beginning of year 57,841 2,208 -------- -------- Cash and cash equivalents at end of period $ 49,260 $ 4,268 ======== ======== Supplemental disclosures: Cash paid for: Interest $ 0 $ 365 Income taxes 5,074 938
See accompanying Notes to Consolidated Financial Statements. Page 6 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 year ended December 31, 2001 filed by the Company on Form 10-K with the Securities and Exchange Commission on March 18, 2002. 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. Acquisitions In October 2001, we acquired Dynamic Systems, Inc., a privately held company based in Alexandria, Virginia for $13.9 million in cash, including transaction costs. Dynamic Systems, Inc., became part of our Defense segment and provides professional and information technology services primarily to the U.S. Department of Defense and other government agencies. The acquisition is expected to strengthen and expand the range of services we offer to both existing and new customers. The acquisition has been accounted for as a purchase and is included in our results of operations from its acquisition date. The results of operations for the periods presented are not materially affected by the timing of this acquisition. On April 28, 2000, our wholly-owned subsidiary merged with AIL Technologies Inc. (AIL). This merger (the "EDO-AIL merger"), was accounted for as a purchase and is included in our results of operations from that date. Under the merger agreement and share purchase agreements with certain AIL shareholders, all of the outstanding shares of common stock and preferred stock of AIL were exchanged for 6,553,194 newly-issued EDO common shares valued at $39.4 million and cash payments 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, referred to as the AIL ESOP. 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. In our public offering completed October 30, 2001, the ESOP sold 1,458,900 shares reducing its ownership of EDO to about 22% of outstanding common shares as of March 30, 2002. In March 2002, we made an offer to purchase substantially all of the assets of a privately-held defense electronics company (the "Target") for $70.0 million and the assumption of certain current liabilities incurred in the ordinary course of business. We believe that for the most recent twelve-month period the Target had revenue of approximately $80 million. The Target is currently operating under protection of Chapter 11 of the U.S. Bankruptcy Code, and our offer contemplates that the purchase of the assets would be accomplished pursuant to Section 363 of the Bankruptcy Code. Assuming any agreement were to be reached on a transaction between us and the Target, such agreement would be subject to Bankruptcy Court approval. Page 7 Business Combinations and Goodwill and Other Intangibles 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." Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. Statement 142 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 finite lives will continue to be amortized over their estimated useful lives. Statement 142 was adopted by the Company effective January 1, 2002, however the provisions that provide for the non-amortization of goodwill were effective July 1, 2001 for acquisitions completed after the issuance of Statement 141. Accordingly, the goodwill acquired in connection with the purchase of Dynamic Systems, Inc., in October 2001 was not amortized. The Company will test goodwill for impairment using the two-step process prescribed in Statement 142. The first step is a review for potential impairment, while the second step measures the amount of the impairment. The Company expects to perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 in the second quarter of 2002. Any impairment charge resulting from these transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle 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. Net earnings for the three months ended March 31, 2001 included approximately $0.2 million of goodwill amortization expense. Excluding this amount would have resulted in net earnings per common share and diluted net earnings per common share of $0.25 and $0.23, respectively, for the three months ended March 31, 2001. Impairment or Disposal of Long-Lived Assets In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations" for a disposal of a segment of a business. The Company adopted FAS 144 as of January 1, 2002. The effect of the adoption of this Statement was not material to the Company's operating results or financial position. Inventories Inventories are summarized by major classification as follows:
March 30, 2002 Dec. 31, 2001 (in thousands) Raw materials and supplies $ 4,197 $ 6,539 Work-in-process 20,953 14,680 Finished goods 632 1,718 ------- ------- $25,782 $22,937 ======= =======
Page 8 Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share.
Three months ended March 30, March 31, 2002 2001 (in thousands) Numerator: Earnings from continuing operations available for common shares for basic calculation $ 2,810 $ 2,649 Effect of dilutive securities: Convertible preferred shares -- 19 ------- ------- Numerator for diluted calculation $ 2,810 $ 2,668 ======= ======= Denominator: Denominator for basic calculation 16,974 11,439 Effect of dilutive securities: Stock options 326 152 Convertible preferred shares -- 622 ------- ------- Denominator for diluted calculation 17,300 12,213 ======= =======
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 ("merged ESOP"), 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. As of June 30, 2001, the merged ESOP restructured its indirect loan from the Company to extend the maturity date to December 31, 2017. As part of this restructuring, the EDO ESOP bank loan obligation was paid in full on July 30, 2001. The merged ESOP is being accounted for under SOP 93-6. Accordingly, unallocated shares of common stock held by the merged ESOP are not considered outstanding for the purposes of computing earnings per share. The cost basis of the unearned/unallocated shares is initially recorded as a reduction in shareholders' equity. As quarterly payments are made under the indirect loan, unallocated common shares in the merged ESOP are committed-to-be-released. Compensation expense is recorded based on the Page 9 market value of the Company's common shares as they are committed-to-be-released. The difference between the market value and the cost basis of the shares is recorded as additional paid-in capital. Dividends on unallocated shares are recorded as compensation expense. Comprehensive Income As of March 30, 2002, accumulated other comprehensive loss included in the accompanying consolidated balance sheet represents additional minimum liabilities on benefit plans. Comprehensive income for the three-month period ended March 30, 2002 was $2,810,000. Comprehensive income for the three-month period ended March 31, 2001 was $2,986,000. Business Segments EDO Corporation is a supplier of highly engineered products for governments and industry worldwide. The Company's advanced electronic, electromechanical and information systems and engineered materials are products, the vast majority of 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 systems and components including electronic warfare systems, subsystems and test equipment, aircraft stores suspension and release systems, airborne mine countermeasures systems, integrated combat systems, undersea warfare sonar systems, operational, technical and information technology services for military forces and governments worldwide. The Communications and Space Products segment supplies antenna products, interference cancellation products and space sensor communications products for the remote sensing, communication, and navigation industries. The Engineered Materials segment supplies electro-ceramic products and advanced fiber composite structural products for the communication, navigation, chemical, petrochemical, paper and oil industries for the commercial infrastructure and military markets.
Three months ended March 30, March 31 2002 2001 Net sales from continuing operations: Defense $49,230 $42,593 Communications and Space Products 8,917 8,604 Engineered Materials 8,762 8,954 ------- ------- $66,909 $60,151 ======= =======
Page 10
Three months ended March 30, March 31 2002 2001 Operating earnings (loss) from continuing operations: Defense $ 5,992 $ 5,124 Communications and Space Products (1,824) (893) Engineered Materials 547 864 ------- ------- 4,715 5,095 Net interest income (expense) 162 (574) Other, net 53 137 ------- ------- Earnings before income taxes $ 4,930 $ 4,658 ======= =======
In 2001, merger-related costs attributable to the EDO-AIL Merger are included in the segments as follows:
Three months ended March 31, 2001 Defense $372 Communications and Space Products 86 Engineered Materials 88 ---- Total $546 ====
Subsequent Event In April 2002, we completed our offering of $137.8 million of 5.25% Convertible Subordinated Notes due 2007. We received $133.7 million, net of commissions paid. Interest payments on these notes are due April 15 and October 15 of each year, commencing on October 15, 2002. 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. Page 11 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 March 30, 2002. Three Months Ended March 30, 2002 compared with the Three Months Ended March 31, 2001 Net sales from continuing operations for the three months ended March 30, 2002 increased to $66.9 million from $60.2 million for the three months ended March 31, 2001. This increase comprised sales growth of $6.6 million in the Defense segment and $0.3 million in the Communications and Space Products segment, partially offset by a decrease of $0.2 million in the Engineered Materials segment. In the Defense segment there were increases in sales of electronic warfare systems, sonar systems, and technology services. The latter increase was attributable in part to the acquisition of Dynamic Systems, Inc. in October 2001. These increases were partially offset by decreases in sales of mine countermeasures systems. In the Communications and Space Products segment, increases in sales of antenna products and interference cancellation products were partially offset by lower sales of space sensor communication products. In the Engineered Materials segment, there were increases in sales of electro-ceramic products, partially offset by lower sales of advanced fiber composite structural products. Operating earnings from continuing operations for the three months ended March 30, 2002 decreased to $4.7 million or 7.0% of net sales from $5.6 million (before considering one-time EDO-AIL merger-related costs of $0.5 million) or 9.4% of net sales for the three months ended March 31, 2001. The decrease in operating earnings is attributable to losses in the Communications and Space Products segment. The losses primarily relate to a $1.5 million charge taken in the three months ended March 30, 2002 to provide for manufacturing inefficiencies resulting from lowered production levels of Ku-Band down converters. The lowered production levels are due to one of our primary customers lowering its forecast of the quantity of Ku-Band down converters it was to purchase from us in 2002. In addition, the Company recorded pension expense of $1.0 million in the three months ended March 30, 2002 compared to pension income of $0.7 million in the three months ended March 31, 2001. Pension expense/income is allocated between cost of sales and selling, general and administrative expense. For the three months ended March 30, 2002, net earnings from continuing operations available for common shares increased to $2.8 million or $0.16 per diluted common share on 17.3 million diluted shares from $2.6 million or $0.22 per diluted common share on 12.2 million diluted shares for the three months ended March 31, 2001. Selling, general and administrative expenses for the three months ended March 30, 2002 increased to $9.7 million or 14.5% of net sales from $7.8 million or 13.0% of net sales for the three months ended March 31, 2001. This increase is partially attributable to the aforementioned change in pension expense versus pension income. Interest expense for the three months ended March 30, 2002 decreased to $0.1 million from $0.9 million for the three months ended March 31, 2001 due to the absence of borrowings and subordinated debentures which were paid/redeemed in 2001. Page 12 Income tax expense for the three months ended March 30, 2002 reflects our estimated effective rate of 43% for the year ending December 31, 2002. This compares to an income tax expense at an effective rate of 39% for the three months ended March 31, 2001. This increase in the effective rate is primarily attributable to the non-deductible portion of the non-cash ESOP compensation expense, which is based on the market value of common shares committed-to-be-released. Company-sponsored research and development expenditures of $1.8 million in the three months ended March 30, 2002 are the same level as expenditures in the three months ended March 31, 2001. Liquidity and Capital Resources Our cash, cash equivalents and marketable securities decreased to $49.5 million at March 30, 2002 from $58.0 million at December 31, 2001. This decrease was due to $7.4 million of cash used by continuing operations, $0.9 million for purchases of capital equipment, and $0.6 million for payment of common dividends. Accounts receivable increased to $85.5 million at March 30, 2002 from $83.4 million at December 31, 2001. Inventories increased to $25.8 million at March 30, 2002 from $22.9 million at December 31, 2001 primarily attributable to increases in work-in-progress. The notes receivable of $3.2 million at March 30, 2002 (of which $0.4 million is in current assets) are comprised of a note related to the sale of property at Deer Park in June 2000, which had a balance at March 30, 2002 of $1.1 million, and $2.1 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% per annum. The latter notes receivable are secured by a mortgage on the facility. Contract advances decreased to $11.8 million at March 30, 2002 from $16.7 million at December 31, 2001 reflecting the use of these advances for costs incurred on foreign contracts. We have a $69.0 million long-term credit facility with a consortium of banks co-led by Mellon Bank and Citibank. The credit facility includes $19.0 million in five-year term debt and $50.0 million in revolving debt. At March 30, 2002 there were no borrowings under the revolving credit facility of $50.0 million, but there were outstanding letters of credit of $19.3 million, leaving available borrowing capacity of $30.7 million. At March 30, 2002, the Company was in compliance with its debt covenants. In April 2002, we completed our offering of $137.8 million of 5.25% Convertible Subordinated Notes due 2007. We received $133.7 million, net of commissions paid. Interest payments on these notes are due April 15 and October 15 of each year, commencing on October 15, 2002. 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. Capital expenditures for the three months ended March 30, 2002 decreased to $0.9 million from $1.5 million for the three months ended March 31, 2001. Page 13 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 affect our ability to acquire additional funds from our revolving credit facility due to covenant restrictions or from other sources. We believe that we have adequate liquidity and sufficient capital to fund our currently anticipated requirements for working capital, capital expenditures, research and development expenditures and principal and interest payments. We focused on positioning ourselves during 2001 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 agreement; issuance of our common stock or other equity securities; and/or convertible or other debt offerings. We have commitments under a note payable and facility and equipment operating leases that will be funded from operating sources. We also have commitments under letters of credit ($19.3 million at March 30, 2002) and advance payment and performance bonds ($15.9 million at March 30, 2002) related primarily to foreign contracts. We do not expect to have to make payments under these letters of credit or bonds since these obligations are removed as we perform under the related contracts. The backlog of unfilled orders at March 30, 2002 decreased to $285.7 million from $294.8 million at December 31, 2001. Critical Accounting Policies Revenue Recognition We record revenues and profits on substantially all of our contracts using percentage of completion methods of accounting. As a result, revisions made to our estimates of total costs to complete our contracts are recorded in the period in which the conditions that dictate such revisions become known and can be estimated. We believe that our profits are fairly stated. Revisions to estimates do occur and at times are material to our results of operations and financial position. Inventory We manufacture certain products prior to receiving firm contracts in anticipation of future demand. These products often relate to a specific technology or application and may not have alternative uses. We believe that sufficient markets exist and that these products will ultimately be sold. New Accounting Standards Business Combinations and Goodwill and Other Intangibles 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." Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Statement 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. Statement 142 prohibits the amortization of goodwill and Page 14 intangible assets with indefinite useful lives and requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Statement 142 was adopted by the Company effective January 1, 2002, however the provisions that provide for the non-amortization of goodwill were effective July 1, 2001 for acquisitions completed after the issuance of Statement 141. Accordingly, the goodwill acquired in connection with the purchase of Dynamic Systems, Inc., in October 2001 was not amortized. The Company will test goodwill for impairment using the two-step process prescribed in Statement 142. The first step is a review for potential impairment, while the second step measures the amount of the impairment. The Company expects to perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 in the second quarter of 2002. Any impairment charge resulting from these transitional impairment tests will be reflected as the cumulative effect of a change in accounting principle 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. Impairment or Disposal of Long-Lived Assets In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations" for a disposal of a segment of a business. The Company adopted FAS 144 as of January 1, 2002. The effect of the adoption of this Statement was not material to the Company's operating results or financial position. "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. Page 15 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. 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 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 The Exhibits to this report are listed in the Exhibit Index appearing on page 17 hereof. (b) Reports on Form 8-K On March 20, 2002, the Corporation filed a Current Report on Form 8-K, dated March 11, 2002, disclosing its offer to purchase the assets of a defense electronics company. On April 5, 2002, the Corporation filed a Current Report on Form 8-K, dated March 21, 2002, announcing the pricing and completion of the sale of Convertible Subordinated Notes. On April 16, 2002, the Corporation filed a Current Report on Form 8-K, dated April 15, 2002, providing an update to comments made earlier this year about its Communications and Space Products Segment. Page 16 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: May 10, 2002 Page 17 Exhibit Index
Exhibit Description ------- ----------- 4(a) Indenture, dated as of April 2, 2002, by and between EDO Corporation and HSBC Bank, USA, as trustee. 4(b) Registration Rights Agreement, dated as of April 2, 2002, by and among EDO Corporation and Salomon Smith Barney, Inc., SG Cowen Securities Corporation and Robertson Stephens, Inc., as representatives of the initial purchasers.