-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JioVjcDAd9DXknH6dGANIs16gbPz8s7Gee/G+Qiy4p2VcHSCwDSsi19Kvxj5AMUF r+H+R585uR/r1o6AdABXRw== 0000950123-02-007618.txt : 20020809 0000950123-02-007618.hdr.sgml : 20020809 20020809104742 ACCESSION NUMBER: 0000950123-02-007618 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020629 FILED AS OF DATE: 20020809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDO CORP CENTRAL INDEX KEY: 0000031617 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 110707740 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03985 FILM NUMBER: 02723930 BUSINESS ADDRESS: STREET 1: 60 EAST 42ND STREET STREET 2: SUITE 5010 CITY: NEW YORK STATE: NY ZIP: 10165 BUSINESS PHONE: 2127162000 MAIL ADDRESS: STREET 1: 14 04 111TH ST CITY: COLLEGE POINT STATE: NY ZIP: 11356-1434 10-Q 1 y62824e10vq.txt EDO CORPORATION Page 1 of 20 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 29, 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 June 29, 2002 - ------------------------------------- --------------------------------- Common shares, par value $1 per share 19,681,150
Page 2 EDO CORPORATION INDEX
Page No. Face Sheet 1 Index 2 Part I Financial Information Item 1. Financial Statements Consolidated Balance Sheets - 3 June 29, 2002 and December 31, 2001 Consolidated Statements of Earnings - 4 Three Months Ended June 29, 2002 and June 30, 2001 Consolidated Statement of Earnings 5 Six Months Ended June 29, 2002 and June 30, 2001 Consolidated Statements of Cash Flows - 6 Six Months Ended June 29, 2002 and June 30, 2001 Notes to Consolidated Financial Statements 7-11 Item 2. Management's Discussion and Analysis 12-17 of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosure 17 About Market Risk Part II Other Information Item 4. Submission of Matters to a Vote of 17 Security Holders Item 6. Exhibits and Reports on Form 8-K 18 Signature 19 Exhibit Index 20
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 29, 2002 Dec. 31, 2001 (unaudited) Assets Current assets: Cash and cash equivalents $ 178,020 $ 57,841 Marketable securities 192 190 Accounts receivable, less allowances 89,321 83,407 Inventories 22,685 22,937 Deferred income tax asset, net 3,018 3,018 Prepayments and other 2,710 2,346 --------- --------- Total current assets 295,946 169,739 Property, plant and equipment, net 59,745 62,255 Notes receivable 2,809 2,910 Cost in excess of fair value of net assets acquired 20,601 22,874 Deferred income tax asset, net 3,343 2,553 Other assets 33,272 25,299 --------- --------- $ 415,716 $ 285,630 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Accounts payable and accrued liabilities $ 41,688 $ 47,397 Contract advances and deposits 9,394 16,702 Current portion of note payable 463 463 --------- --------- Total current liabilities 51,545 64,562 Long-term debt 137,800 -- Postretirement benefits obligations 45,057 44,675 Environmental obligation 1,888 1,895 Shareholders' equity: Common shares, par value $1 per share, authorized 50,000,000 shares, issued 19,790,477 in 2002 and 2001 19,790 19,790 Additional paid-in capital 145,763 143,747 Retained earnings 49,245 47,744 Accumulated other comprehensive loss, net of income tax benefit (13,385) (13,385) --------- --------- 201,413 197,896 Less: Treasury shares at cost (109,327 shares in 2002 and 182,459 shares in 2001) (1,531) (2,461) Unearned ESOP shares (19,167) (19,792) Deferred compensation under Long-Term Incentive Plan (696) (300) Management group receivable (593) (845) --------- --------- Total shareholders' equity 179,426 174,498 --------- --------- $ 415,716 $ 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 June 29, 2002 June 30, 2001 (unaudited) Net sales $ 73,719 $ 66,776 Costs and expenses Cost of sales 56,139 49,858 Selling, general and administrative 8,619 8,477 Research and development 2,096 2,190 Merger-related costs -- 772 -------- -------- 66,854 61,297 -------- -------- Operating earnings 6,865 5,479 Non-operating income (expense) Interest income 564 268 Interest expense (2,079) (734) Other, net (47) 62 -------- -------- (1,562) (404) -------- -------- Earnings before income taxes 5,303 5,075 Income tax expense (2,229) (1,980) -------- -------- Net earnings available for common shares 3,074 3,095 ======== ======== Earnings per common share: Basic $ 0.18 $ 0.25 ======== ======== Diluted $ 0.18 $ 0.24 ======== ======== Pro forma amounts assuming retroactive effect of change in accounting principle: Net earnings -- $ 3,229 Basic net earnings per common share -- $ 0.26 Diluted net earnings per common share -- $ 0.25 Weighted average common shares outstanding: Basic 17,057 12,370 ======== ======== Diluted 17,386 13,824 ======== ========
See accompanying Notes to Consolidated Financial Statements. Page 5 EDO Corporation and Subsidiaries Consolidated Statements of Earnings (in thousands, except per share amounts)
For the six months ended June 29, 2002 June 30, 2001 (unaudited) Net sales $ 140,628 $ 126,927 Costs and expenses Cost of sales 106,846 94,768 Selling, general and administrative 18,341 16,285 Research and development 3,861 3,982 Merger-related costs -- 1,318 --------- --------- 129,048 116,353 --------- --------- Operating earnings 11,580 10,574 Non-operating income (expense) Interest income 772 587 Interest expense (2,125) (1,627) Other, net 6 199 --------- --------- (1,347) (841) --------- --------- Earnings before income taxes and cumulative effect of change in accounting principle 10,233 9,733 Income tax expense (4,349) (3,795) --------- --------- Net earnings before cumulative effect of change in accounting principle 5,884 5,938 Cumulative effect of change in accounting principle, net of tax (3,363) -- Dividends on preferred shares -- (194) --------- --------- Net earnings available for common shares $ 2,521 $ 5,744 ========= ========= Earnings (loss) per common share: Basic: Net earnings before cumulative effect of change in accounting principle $ 0.35 $ 0.48 Cumulative effect of change in accounting principle, net of tax (0.20) -- --------- --------- Net earnings $ 0.15 $ 0.48 ========= ========= Diluted: Net earnings before cumulative effect of change in accounting principle $ 0.34 $ 0.46 Cumulative effect of change in accounting principle, net of tax (0.19) -- --------- --------- Net earnings $ 0.15 $ 0.46 ========= ========= Pro forma amounts assuming retroactive effect of change in accounting principle: Net earnings -- $ 6,055 Basic net earnings per common share -- $ 0.51 Diluted net earnings per common share -- $ 0.49 Weighted average common shares outstanding: Basic 17,015 11,905 ========= ========= Diluted 17,343 12,433 ========= =========
See accompanying Notes to Consolidated Financial Statements. Page 6 EDO Corporation and Subsidiaries Consolidated Statements of Cash Flows (in thousands)
For the six months ended June 29, 2002 June 30, 2001 (unaudited) Operating activities: Net earnings $ 2,521 $ 5,938 Adjustments to earnings from operations to arrive at cash (used) provided by operations: Depreciation 4,750 4,876 Amortization 120 556 Bad debt expense -- 18 Gain on repurchase of debentures -- (171) Loss (gain) on sale of property, plant and equipment 6 (56) Gain on sale of marketable securities -- (81) Deferred compensation expense 85 121 ESOP compensation expense 2,315 1,115 Non-cash compensation expense -- 278 Dividends on unallocated ESOP shares 159 -- Common shares issued for directors' fees 96 87 Income tax benefit from stock options 413 799 Real estate tax assessment adjustment -- 7,846 Cumulative effect of change in accounting principle 3,363 -- Changes in: Accounts receivable (5,914) (6,114) Inventories 252 (1,704) Prepayments and other assets (3,412) (1,892) Accounts payable and accrued liabilities (5,463) (421) Contract advances and deposits (7,308) (11,035) --------- --------- Cash (used) provided by operations (8,017) 160 Investing activities: Deposit for acquisition of Condor Systems, Inc (7,000) -- Payments received on notes receivable 174 173 Purchase of plant and equipment (2,247) (6,797) Proceeds from sale of plant and equipment 1 226 Purchase of marketable securities (2) (56) Sale or redemption of marketable securities -- 14,454 --------- --------- Cash (used) provided by investing activities (9,074) 8,000 Financing activities: Proceeds from exercise of stock options 397 1,584 Proceeds from management group receivables 252 376 Issuance of convertible subordinated notes 137,800 -- Repayments of long-term debt -- (1,900) Repurchase of debentures -- (3,184) Purchase of treasury shares -- (1,021) Payment of common share cash dividends (1,179) (887) Payment of preferred share cash dividends -- (194) --------- --------- Cash provided (used) by financing activities 137,270 (5,226) Net increase in cash and cash equivalents 120,179 2,934 Cash and cash equivalents at beginning of year 57,841 2,208 --------- --------- Cash and cash equivalents at end of period $ 178,020 $ 5,142 ========= ========= Supplemental disclosures: Cash paid for: Interest $ -- $ 1,431 Income taxes $ 7,830 $ 4,770
See accompanying Notes to Consolidated Financial Statements. 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 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, the Company acquired all of the outstanding stock of Dynamic Systems, Inc., a privately held company based in Alexandria, Virginia, for $13.7 million in cash, including transaction costs, resulting in goodwill of $12.2 million. 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 the Company offers to both existing and new customers. The acquisition has been accounted for as a purchase and is included in the Company's 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 July 26, 2002, the Company acquired substantially all of the assets of Condor Systems, Inc., a privately-held defense electronics company and its domestic subsidiary (together, "Condor")for $61.9 million in cash and the assumption of certain current liabilities incurred in the ordinary course of business. For the most recent twelve-month period Condor had revenue of approximately $78 million. Condor had been operating under protection of Chapter 11 of the U.S. Bankruptcy Code. The acquisition is expected to expand the Company's electronic warfare business in the areas of intelligence, reconnaissance and surveillance systems. The acquisition will be accounted for as a purchase, and, accordingly, will be included in the Company's results of operations as of the acquisition date. The transaction will result in goodwill and other intangible assets of approximately $35 million. 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 Page 8 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 performed the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 in the second quarter of 2002 using the two-step process prescribed in Statement 142. The first step was a review for potential impairment, while the second step measured the amount of the impairment. The impairment charge resulting from these transitional impairment tests was reflected as a cumulative effect of a change in accounting principle as of January 1, 2002. The $3.4 million, net of tax, charge occurred in the Engineered Materials segment and is comprised of $2.2 million of impaired goodwill related to the acquisition of Specialty Plastics, $1.9 million of impaired value of a trademark related to Specialty Plastics, $0.1 million of goodwill related to the acquisition of Zenix, offset by a tax benefit of $0.8 million. The changes in the carrying amount of goodwill for the six months ended June 29, 2002 are as follows:
(dollars in thousands) Defense Engineered Materials Segment Segment Total Balance as of January 1, 2002 $ 20,601 $ 2,273 $ 22,874 Impairment loss -- (2,273) (2,273) -------- -------- -------- Balance as of June 29, 2002 $ 20,601 -- $ 20,601 ======== ======== ========
The goodwill impairment loss is comprised of $95,000 related to the acquisition of Zenix in December 1998 and $2,178,000 related to the acquisition of Specialty Plastics also in December 1998. In the case of Zenix, the trend in sales and earnings performance has been lower than expected resulting in the impairment of the entire goodwill carrying value. In the case of Specialty Plastics, the fair value of this reporting unit was estimated using a discounted cash flow analysis, also resulting in an impairment loss of the entire goodwill carrying value, and a trademark of $1,880,000 was also written off and included in the cumulative effect of the change in accounting principle. Summarized below are intangible assets subject to amortization:
(dollars in thousands) June 29, December 31, 2002 2001 Capitalized non-compete agreements related to the acquisition of Dynamic Systems, Inc.: Gross carrying amount $ 200 $ 200 Accumulated amortization (50) -- ----- ----- Net $ 150 $ 200 ===== =====
The non-compete agreements are being amortized on a straight-line basis over a two-year period. The amortization expense for the six months ended June 29, 2002 amounted to $50,000. Page 9 Since the total trademark carrying amount of $1.9 million was written off in the three months ended June 29, 2002 as part of the cumulative effect of a change in accounting principle, there are no intangible assets not subject to amortization as of June 29, 2002. Net earnings for the three-and six-months ended June 30, 2001 included amortization expense of approximately $0.2 million and $0.4 million, respectively. Excluding these amounts would have resulted in net earnings per common share and diluted net earnings per common share of $0.26 and $0.25, respectively, for the three months ended June 30, 2001 and $0.51 and $0.49, respectively for the six months ended June 30, 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:
June 29, 2002 Dec. 31, 2001 (in thousands) Raw materials and supplies $ 4,402 $ 6,539 Work-in-process 17,621 14,680 Finished goods 662 1,718 ------- ------- $22,685 $22,937 ======= =======
Page 10 Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share.
Three months ended Six months ended June 29, June 30, June 29, June 30, 2002 2001 2002 2001 (in thousands) (in thousands) Numerator: Earnings available for common shares for basic calculation $ 3,074 $ 3,095 $ 2,521 $ 5,744 Effect of dilutive securities: Convertible preferred shares -- -- -- 9 Convertible subordinated debentures -- 274 -- -- ------- ------- ------- ------- Numerator for diluted calculation $ 3,074 $ 3,369 $ 2,521 $ 5,753 ======= ======= ======= ======= Denominator: Denominator for basic calculation 17,057 12,370 17,015 11,905 Effect of dilutive securities: Stock options 329 287 328 219 Convertible preferred shares -- -- -- 309 Convertible subordinated debentures -- 1,167 -- -- ------- ------- ------- ------- Denominator for diluted calculation 17,386 13,824 17,343 12,433 ======= ======= ======= =======
Convertible Subordinated Notes In April 2002, the Company completed its offering of $137.8 million of 5.25% Convertible Subordinated Notes due 2007 and 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 the Company's common shares at an initial conversion price of $31.26 per share, subject to adjustment in certain events. Comprehensive Income As of June 29, 2002, accumulated other comprehensive loss included in the accompanying consolidated balance sheet represents additional minimum liabilities on benefit plans. Comprehensive income for the three-and six-month periods ended June 29, 2002 was $3,074,000 and $2,521,000. Comprehensive income for the three-and six-month periods ended June 30, 2001 was $3,044,000 and $6,030,000. Page 11 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, and for the commercial infrastructure and military markets.
Three months ended Six months ended June 29, June 30, June 29, June 30, 2002 2001 2002 2001 Net sales: Defense $ 54,129 $ 46,593 $ 103,359 $ 89,186 Communications and Space Products 10,199 11,039 19,116 19,643 Engineered Materials 9,391 9,144 18,153 18,098 --------- --------- --------- --------- $ 73,719 $ 66,776 $ 140,628 $ 126,927 ========= ========= ========= ========= Operating earnings (loss): Defense $ 6,474 $ 4,330 $ 12,466 $ 9,454 Communications and Space Products (209) 355 (2,033) (538) Engineered Materials 600 794 1,147 1,658 --------- --------- --------- --------- 6,865 5,479 11,580 10,574 Net interest expense (1,515) (466) (1,353) (1,040) Other, net (47) 62 6 199 --------- --------- --------- --------- Earnings before income taxes $ 5,303 $ 5,075 $ 10,233 $ 9,733 ========= ========= ========= =========
In 2001, merger-related costs attributable to the EDO-AIL Merger are included in the segments as follows:
Three months ended Six months ended June 30, 2001 June 30, 2001 Defense $ 565 $ 937 Communications and Space Products 98 184 Engineered Materials 109 197 ------ ------ Total $ 772 $1,318 ====== ======
Page 12 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 June 29, 2002. Three Months Ended June 29, 2002 compared with the Three Months Ended June 30, 2001 Net sales for the three months ended June 29, 2002 increased to $73.7 million from $66.8 million for the three months ended June 30, 2001. This increase comprised sales growth of $7.5 million in the Defense segment and $0.2 million in the Engineered Materials segment, partially offset by a decrease of $0.8 million in the Communications and Space Products segment. In the Defense segment there were increases in sales of aircraft stores suspension and release equipment, electronic warfare systems, sonar systems, and technology services. The increase in technology services was attributable in part to the acquisition of Dynamic Systems, Inc., in October 2001. These increases were partially offset by decreases in sales of airborne mine countermeasures systems. In the Communications and Space Products segment, increases in sales of antenna products were offset by lower sales of space sensor communication products and interference cancellation products. In the Engineered Materials segment, there were increases in sales of electro-ceramic products and advanced fiber composite structural products. Operating earnings for the three months ended June 29, 2002 increased to $6.9 million or 9.3% of net sales from $6.3 million (before considering one-time EDO-AIL merger-related costs of $0.8 million) or 9.4% of net sales for the three months ended June 30, 2001. The increase in operating earnings is attributable to the aforementioned increases in sales, partially offset by the recording of pension expense of $1.0 million in the three months ended June 29, 2002 compared to pension income of $0.7 million in the three months ended June 30, 2001. In addition, compensation expense related to the Company's Employee Stock Ownership Plan ("ESOP") increased to $1.2 million in the three months ended June 29, 2002 compared to $0.2 million in the three months ended June 30, 2001. Pension and ESOP compensation expense/income are allocated between cost of sales and selling, general and administrative expense. For the three months ended June 29, 2002, net earnings available for common shares were $3.1 million or $0.18 per diluted common share on 17.4 million diluted shares compared to $3.1 million or $0.24 per diluted common share on 13.8 million diluted shares for the three months ended June 30, 2001. Net earnings were impacted by interest expense incurred on the newly-issued subordinated notes, as discussed below. Selling, general and administrative expenses for the three months ended June 29, 2002 increased to $8.6 million or 11.7% of net sales from $8.5 million or 12.7% of net sales for the three months ended June 30, 2001. This increase is partially attributable to the aforementioned change in pension expense versus pension income and the increase in ESOP compensation expense, partially offset by reduced expenses at the Company's Deer Park facility. Interest expense for the three months ended June 29, 2002 increased to $2.1 million from $0.7 million for the three months ended June 30, 2001 due to the issuance of $137.8 million of 5.25% Convertible Subordinated Notes on April 2, 2002. Interest payments are due April 15 and October 15 of each year, commencing on October 15, 2002. Interest expense also includes amortization of debt issuance costs related to the Convertible Subordinated Notes. Page 13 Income tax expense for the three months ended June 29, 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 June 30, 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 $2.1 million in the three months ended June 29, 2002 decreased slightly from $2.2 million in the three months ended June 30, 2001. Six Months Ended June 29, 2002 compared with the Six Months Ended June 30, 2001 Net sales for the six months ended June 29, 2002 increased to $140.6 million from $126.9 million for the six months ended June 30, 2001. This increase comprised sales growth of $14.2 million in the Defense segment, partially offset by a decrease of $0.5 million in the Communications and Space Products 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. In the Communications and Space Products segment, lower sales of space sensor communication products and interference cancellation products were partially offset by increases in sales of antenna products. Operating earnings for the six months ended June 29, 2002 decreased to $11.6 million or 8.2% of net sales from $11.9 million (before considering one- time EDO-AIL merger-related costs of $1.3 million) or 9.4% of net sales for the six months ended June 30, 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 $2.0 million and ESOP compensation expense of $2.3 million in the six months ended June 29, 2002 compared to pension income of $1.3 million and ESOP compensation expense of $1.1 million in the six months ended June 30, 2001. Pension and ESOP compensation expense/income are allocated between cost of sales and selling, general and administrative expense. For the six months ended June 29, 2002, net earnings available for common shares before the cumulative effect of a change in accounting principle were $5.9 million or $0.34 per diluted common share on 17.3 million diluted shares compared to $5.7 million or $0.46 per diluted common share on 12.4 million diluted shares for the six months ended June 30, 2001. Net earnings were impacted by interest expense incurred on the newly-issued subordinated notes, as discussed below. Selling, general and administrative expenses for the six months ended June 29, 2002 increased to $18.3 million or 13.0% of net sales from $16.3 million or 12.8% of net sales for the six months ended June 30, 2001. This increase is principally attributable to the aforementioned change in pension expense versus pension income and the increase in ESOP compensation expense. Interest expense for the six months ended June 29, 2002 increased to $2.1 million from $1.6 million for the six months ended June 30, 2001. Interest expense for the six months ended June 29, 2002 reflects accruals for interest on the 5.25% Convertible Subordinated Notes issued in April 2002 and the amortization of the related debt issuance costs. Interest expense for the six months ended June 30, 2001 consists primarily of interest on the 7% Convertible Subordinated Debentures, which were converted into common shares in the fourth quarter of 2001. Page 14 Income tax expense for the six months ended June 29, 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 six months ended June 30, 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 $3.9 million in the six months ended June 29, 2002 are about the same level as expenditures in the six months ended June 30, 2001. In the six months ended June 29, 2002 a $3.4 million cumulative effect of a change in accounting principle charge was recorded and is shown net of a tax benefit of $0.8 million on the income statement. This charge pertains to the impairment of goodwill and a trademark resulting from impairment tests performed in the second quarter of 2002, as required under Statement of Financial Accounting Standard No. 142. The impairment occurred in the Engineered Materials segment and is comprised of the following: $2.2 million of goodwill related to the acquisition of Specialty Plastics, $1.9 million related to the trademark at Specialty Plastics, and $0.1 million of goodwill related to the acquisition of Zenix. Liquidity and Capital Resources Our cash, cash equivalents and marketable securities increased to $178.2 million at June 29, 2002 from $58.0 million at December 31, 2001. This increase was due to the issuance of $137.8 million of convertible subordinated notes, less commissions, resulting in $133.7 of net proceeds, offset by $8.0 million of cash used by operations(attributable to payments of income taxes accrued at December 31, 2001, $4.1 million of commissions paid on the subordinated notes offering which were capitalized in other assets, and lower accounts payable due to timing), $7.0 million paid as a deposit for the acquisition of Condor Systems, Inc., $2.2 million for purchases of capital equipment, and $1.2 million for payment of common dividends. Accounts receivable increased to $89.3 million at June 29, 2002 from $83.4 million at December 31, 2001. Inventories decreased to $22.7 million at June 29, 2002 from $22.9 million at December 31, 2001. The notes receivable of $3.1 million at June 29, 2002 (of which $0.3 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 June 29, 2002 of $1.1 million, and $2.0 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 $9.4 million at June 29, 2002 from $16.7 million at December 31, 2001 reflecting the use of these advances for costs incurred on foreign contracts. In prior years, we were awarded several large foreign contracts and received the associated advances. This year, as we continue to perform the work and recognize revenues under those contracts, the related advances are reduced. 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, which was paid in full in the fourth quarter of 2001, and $50.0 million in revolving debt. At June 29, 2002 there were no borrowings under the revolving credit facility of $50.0 million, but there were outstanding letters of credit of $21.7 million, leaving available borrowing capacity of $28.3 million. At June 29, 2002, the Company was in compliance with its debt covenants. Page 15 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 six months ended June 29, 2002 decreased to $2.2 million from $6.8 million for the six months ended June 30, 2001. 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 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 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 ($21.7 million at June 29, 2002) and advance payment and performance bonds ($15.9 million at June 29, 2002) related primarily to foreign contracts. As a result of the acquisition of Condor in July 2002, we assumed $28.3 million of letters of credit associated with 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 June 29, 2002 increased to $305.9 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. Page 16 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 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 performed the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002 in the second quarter of 2002 using the two-step process prescribed in Statement 142. The first step was a review for potential impairment, while the second step measured the amount of the impairment. The impairment charge resulting from these transitional impairment tests was reflected as a cumulative effect of a change in accounting principle as of January 1, 2002. The $3.4 million net of tax charge is comprised of $2.2 million of impaired goodwill related to the acquisition of Specialty Plastics, $1.9 million of impaired value of a trademark, $0.1 million of goodwill related to the acquisition of Zenix, net of a tax benefit of $0.8 million. On an annual basis, Specialty Plastics, a commercial business, has sales of about $6 million. 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 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 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 Page 17 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. 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. Item 3. Quantitative and Qualitative Disclosure About Market Risk The information called for by this item is provided under Item 2 - "Management's Discussion and Analysis of Financial Condition and Results of Operations." PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. At the Company's Annual Meeting of Shareholders held on May 7, 2002, the following actions were taken: (a) Messrs. Robert M. Hanisee, Ronald L. Leach, and George A. Strutz, Jr. were elected as directors, each receiving at least 13,259,944 votes. (b) The EDO Corporation 2002 Long-Term Incentive Plan was approved: there were 11,425,760 votes cast in favor, 1,780,387 votes cast against, and 178,123 abstentions. (c) The EDO Corporation 2002 Non-Employee Director Stock Option Plan was approved: there were 12,228,474 votes cast in favor, 970,122 votes cast against, and 185,674 abstentions. (d) The amendment to the certificate of incorporation to increase the number of authorized common shares from 25,000,000 to 50,000,000 was approved: there were 12,436,165 votes cast in favor, 905,810 votes cast against, and 42,296 abstentions. (e) The appointment of Ernst & Young LLP as independent auditors for the Company for the year 2002 was ratified: there were 12,922,742 votes cast in favor, 433,620 votes cast against, and 27,910 abstentions. Page 18 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 20 hereof. (b) Reports on Form 8-K On May 28, 2002, the Corporation filed a Current Report on Form 8-K, dated May 28, 2002, to announce its agreement to purchase the assets of Condor Systems, Inc. On June 26, 2002, the Corporation filed a Current Report on Form 8-K, dated June 25, 2002, announcing that the U.S. Bankruptcy Court had approved the sale of the assets of Condor Systems, Inc. to a wholly-owned subsidiary of the Corporation. Page 19 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 9, 2002 Page 20 Exhibit Index
Exhibit Description - ------- ----------- 99.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-99.1 3 y62824exv99w1.txt CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of EDO Corporation (the "Company") on Form 10-Q for the period ending June 29, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James M. Smith, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ James M. Smith James M. Smith Chief Executive Officer August 7, 2002 EX-99.2 4 y62824exv99w2.txt CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of EDO Corporation (the "Company") on Form 10-Q for the period ending June 29, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Darrell L. Reed, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Darrell L. Reed Darrell L. Reed Chief Financial Officer August 7, 2002 -----END PRIVACY-ENHANCED MESSAGE-----