10-Q 1 y96596e10vq.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 27, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _______________ COMMISSION FILE NUMBER 1-3985 ----------------------------- EDO CORPORATION (Exact name of registrant as specified in its charter) NEW YORK 11-0707740 (State of Incorporation) (IRS Employer Identification No.) 60 EAST 42ND STREET, 42ND FLOOR, 10165 NEW YORK, NEW YORK (Zip Code) (Address of principal executive offices) (212) 716-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] The number of shares of EDO common stock outstanding as of April 19, 2004 was 19,933,791 shares, with a par value $1 per share. ================================================================================ EDO CORPORATION TABLE OF CONTENTS PART I Financial Information ITEM 1 Financial Statements.......................................................................... 3 Consolidated Balance Sheets - March 27, 2004 and December 31, 2003......................................................... 3 Consolidated Statements of Earnings - Three Months Ended March 27, 2004 and March 29, 2003......................................... 4 Consolidated Statements of Cash Flows - Three Months Ended March 27, 2004 and March 29, 2003......................................... 5 Notes to Consolidated Financial Statements.................................................... 6 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................................... 14 ITEM 3 Quantitative and Qualitative Disclosures about Market Risk.................................... 20 ITEM 4 Controls and Procedures....................................................................... 20 PART II Other Information ITEM 6 Exhibits and Reports on Form 8-K.............................................................. 20 Signature Page.................................................................................................. 21
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EDO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 27, DECEMBER 31, 2004 2003 -------------- -------------- (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS Current assets: Cash and cash equivalents ..................................................... $ 65,823 $ 86,632 Accounts receivable, net ...................................................... 142,034 134,303 Inventories ................................................................... 43,462 34,733 Deferred income tax asset, net ................................................ 3,594 3,594 Prepayments and other ......................................................... 7,721 5,954 --------- --------- Total current assets ....................................................... 262,634 265,216 --------- --------- Property, plant and equipment, net .............................................. 30,755 31,355 Notes receivable ................................................................ 6,604 6,538 Goodwill ........................................................................ 92,550 92,527 Other intangible assets, net .................................................... 54,465 55,898 Deferred income tax asset, net .................................................. 21,655 21,774 Other assets .................................................................... 20,286 21,388 --------- --------- $ 488,949 $ 494,696 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable .............................................................. $ 15,587 $ 22,801 Accrued liabilities ........................................................... 57,489 61,942 Contract advances and deposits ................................................ 8,256 8,195 --------- --------- Total current liabilities .................................................. 81,332 92,938 --------- --------- Long-term debt .................................................................. 137,800 137,800 Post-retirement benefits obligations ............................................ 72,225 71,898 Environmental obligation ........................................................ 1,768 1,728 Shareholders' equity: Preferred shares, par value $1 per share, authorized 500,000 shares ............................................................. -- -- Common shares, par value $1 per share, authorized 50,000,000 shares, 20,014,170 issued in 2004 and 19,832,108 issued in 2003 . 20,014 19,832 Additional paid-in capital .................................................... 154,453 150,097 Retained earnings ............................................................. 72,389 69,059 Accumulated other comprehensive loss, net of income tax benefit .................................................................... (29,247) (29,281) Treasury shares at cost (91,979 shares in 2004 and 88,128 shares in 2003 ) .... (1,371) (1,255) Unearned Employee Stock Ownership Plan shares ................................. (16,978) (17,290) Deferred compensation under Long-Term Incentive Plan .......................... (3,202) (479) Management group receivables .................................................. (234) (351) --------- --------- Total shareholders' equity ................................................. 195,824 190,332 --------- --------- $ 488,949 $ 494,696 ========= =========
See accompanying Notes to Consolidated Financial Statements. 3 EDO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 27, MARCH 29, 2004 2003 --------------- ---------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NET SALES ...................................... $ 110,877 $ 94,377 --------- -------- COSTS AND EXPENSES Cost of sales ................................. 80,658 69,830 Selling, general and administrative ........... 20,087 15,207 Research and development ...................... 1,465 1,990 Acquisition-related costs ..................... -- 205 --------- -------- 102,210 87,232 --------- -------- OPERATING EARNINGS ............................. 8,667 7,145 NON-OPERATING INCOME (EXPENSE) Interest income ............................... 242 235 Interest expense .............................. (2,223) (2,227) Other, net .................................... 22 33 --------- -------- (1,959) (1,959) --------- -------- Earnings before income taxes ..................... 6,708 5,186 Income tax expense ............................... (2,851) (2,204) --------- -------- NET EARNINGS AVAILABLE FOR COMMON SHARES ......... $ 3,857 $ 2,982 ========= ======== NET EARNINGS PER COMMON SHARE: Basic ......................................... $ 0.22 $ 0.17 ========= ======== Diluted ....................................... $ 0.22 $ 0.17 ========= ======== Weighted-average common shares outstanding: Basic .......................................... 17,549 17,230 ========= ======== Diluted ........................................ 17,834 17,472 ========= ========
See accompanying Notes to Consolidated Financial Statements. 4 EDO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 27, MARCH 29, 2004 2003 -------------- ------------- (UNAUDITED) (IN THOUSANDS) OPERATING ACTIVITIES: Earnings from operations ...................................... $ 3,857 $ 2,982 Adjustments to earnings to arrive at cash provided by operations: Depreciation ............................................... 2,585 2,895 Amortization ............................................... 1,441 940 Bad debt expense ........................................... -- 180 Deferred tax provision ..................................... 119 -- Loss on disposal of property, plant and equipment .......... 6 33 Deferred compensation expense .............................. 201 57 Non-cash Employee Stock Ownership Plan compensation expense .................................................. 1,051 766 Dividends on unallocated Employee Stock Ownership Plan shares ................................................... 70 75 Common shares issued for directors' fees ................... 31 23 Income tax benefit from stock options and Long-Term Incentive Plan ........................................... 353 33 Changes in operating assets and liabilities, excluding effects of acquisitions: Accounts receivable ...................................... (7,731) 2,115 Inventories .............................................. (8,729) (2,399) Prepayments and other assets ............................. (814) (304) Accounts payable, accrued liabilities and other .......... (11,425) (8,829) Contract advances and deposits ........................... 61 (4,359) -------- --------- Cash used by operations ......................................... (18,924) (5,792) -------- --------- INVESTING ACTIVITIES: Purchase of plant and equipment ............................... (1,991) (2,112) Payments received on notes receivable ......................... 75 88 Release of restricted cash .................................... -- 16,181 Purchase of marketable securities ............................. -- (1) Cash paid for acquisitions, net of cash acquired .............. -- (65,182) -------- --------- Cash used by investing activities ............................... (1,916) (51,026) -------- --------- FINANCING ACTIVITIES: Proceeds from exercise of stock options ....................... 511 47 Proceeds from management group receivables .................... 117 125 Repayments of acquired debt ................................... -- (8,660) Payment of common share cash dividends ........................ (597) (591) -------- --------- Cash provided (used) by financing activities .................... 31 (9,079) -------- --------- Net decrease in cash and cash equivalents ....................... (20,809) (65,897) Cash and cash equivalents at beginning of year .................. 86,632 132,320 -------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 65,823 $ 66,423 ======== ========= Supplemental disclosures: Cash paid for: Interest ................................................... $ -- $ -- ======== ========= Income taxes ............................................... $ 4 ,583 $ 3,633 ======== =========
See accompanying Notes to Consolidated Financial Statements. 5 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and, therefore, do not include all information and footnotes normally included in consolidated financial statements prepared in conformity with accounting principles generally accepted in the United States. They should be read in conjunction with the consolidated financial statements and notes thereto of EDO Corporation and Subsidiaries (the "Company") for the year ended December 31, 2003 filed by the Company on Form 10-K with the Securities and Exchange Commission. The accompanying consolidated financial statements include all adjustments (consisting of normal recurring adjustments) that management considers necessary for a fair presentation of its consolidated financial position and results of operations for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the entire year. (2) STOCK-BASED COMPENSATION The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Under APB No. 25, because the exercise price of the Company's stock options is set equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair market value recognition provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" whereby compensation expense would be recognized as incurred for stock-based employee compensation. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period.
FOR THE THREE MONTHS ENDED MARCH 27, MARCH 29, 2004 2003 ------------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Earnings: As reported ................................................... $ 3,857 $ 2,982 Stock option compensation expense based on fair value method, net of tax ......................................... (425) (439) --------- --------- Pro forma ..................................................... $ 3,432 $ 2,543 ========= ========= Basic earnings per common share: As reported ................................................... $ 0.22 $ 0.17 Pro forma ..................................................... $ 0.20 0.15 Diluted earnings per common share: As reported ................................................... $ 0.22 $ 0.17 Pro forma ..................................................... $ 0.19 0.15 ========= =========
(3) ACQUISITIONS On June 16, 2003, the Company acquired for cash all of the stock of Emblem Group Ltd. ("Emblem"), a privately-held company based in Brighton, England. Emblem, now known as EDO (UK) Ltd., is a supplier of aerospace and defense products and services, primarily through its MBM Technology unit in England, now known as EDO (UK) Ltd., and Artisan Technologies, Inc. subsidiary in the United States, now known as EDO Artisan. Emblem has a core competency in aircraft weapons-carriage and interfacing systems that will reinforce EDO's position as a global leader in aircraft armament release systems. Emblem is expected to broaden the Company's customer base in Europe. The purchase price was (pound)16.3 million ($27.3 million), excluding transaction costs of approximately $1.9 million. Emblem became part of the Company's Defense segment. The excess of the purchase price over the net assets acquired recorded as goodwill and other intangibles related to Emblem's units located in England is deductible for U.S. income tax purposes over 15 years. The excess of the purchase price over the net assets acquired related to Artisan Technologies, Inc. is not deductible for income tax purposes. On March 10, 2003, the Company acquired for cash all of the stock of Darlington, Inc. ("Darlington"), a privately-held defense communications company based in Alexandria,Virginia. Darlington designs, manufactures and supports military communications equipment and information networking systems. The acquisition is expected to enhance the Company's existing positions on long-range platforms and programs across the U.S. military services and in particular the U.S. Marine Corps. The purchase price was $25.6 million, excluding transaction costs of approximately $0.3 million. In addition, the Company acquired and immediately paid off debt 6 of $4.9 million. Darlington became part of the Company's Defense segment. The excess of the purchase price over the net assets acquired recorded as goodwill and other intangible assets is deductible for income tax purposes over 15 years. On February 5, 2003, a wholly-owned subsidiary of the Company acquired for cash all of the stock of Advanced Engineering & Research Associates, Inc.("AERA"), a privately-held company located in Alexandria, Virginia. AERA, which was merged with another EDO subsidiary and renamed EDO Professional Services Inc., provides professional and information technology services primarily to the Department of Defense and other government agencies. The acquisition is expected to strengthen and expand the range of such services that the Company offers. The purchase price was $38.1 million, excluding transaction costs of $0.3 million. In addition, the Company acquired and immediately paid off debt of $3.8 million. AERA became part of the Company's Defense segment. The excess of the purchase price over the net assets acquired recorded as goodwill and other intangible assets is deductible for income tax purposes over 15 years. These acquisitions were accounted for as purchases and, accordingly, their operating results are included in the Company's consolidated financial statements since their respective acquisition dates. Unaudited pro forma results of operations, assuming the acquisitions of Emblem, Darlington, and AERA had been completed at the beginning of each period are summarized below. The results reflect adjustments to net sales, cost of sales, amortization expense, compensation expense, purchased in-process research and development costs, interest income and expense and income tax expense. The interest rate used in determining pro forma adjustments to interest income or expense was based on the average yield of the Company's invested cash and cash equivalents and approximated 1.0% for the period presented below.
FOR THE THREE MONTHS ENDED MARCH 29, 2003 ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net Sales .............................. $115,942 ======== Earnings available for common shares ... $ 5,148 ======== Diluted earnings per common share ...... $ 0.28 ========
The pro forma results of operations are not necessarily indicative of the actual results of operations that would have occurred had these acquisitions been completed at the beginning of the period, or of the results which may occur in the future. The following table summarizes the allocation of the purchase price to the assets acquired and liabilities assumed at the date of acquisition.
EMBLEM DARLINGTON AERA AT JUNE 16, AT MARCH 10, AT FEBRUARY 5, 2003 2003 2003 Current assets $ 9,314 $ 11,943 $ 13,022 Plant and equipment 3,537 1,534 1,048 Customer contracts and relationships 7,698 14,400 17,100 Purchased technologies 5,355 - - Non-compete agreements 318 30 2,420 Tradename 669 400 500 Goodwill 9,608 13,462 11,649 Other assets - 446 414 Liabilities (7,257) (16,326) (7,791) -------- -------- -------- Total purchase price $ 29,242 $ 25,889 $ 38,362 ======== ======== ========
Adjustments resulting from the settlement of purchase prices on AERA and Darlington have been made. Adjustments related to the settlement of the Emblem purchase price are expected to be determined in the first half of 2004. (4) BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations," requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. SFAS No. 142, "Goodwill and Other Intangible Assets," prohibits the amortization of goodwill and intangible assets with indefinite useful lives and requires that these assets be reviewed for impairment at least annually. Intangible assets with definite lives are amortized over their estimated useful lives. 7 In accordance with SFAS No. 142, goodwill must be tested at least annually for impairment at the reporting unit level. If an indication of impairment exists, the Company is required to determine if such goodwill's implied fair value is less than the carrying value in order to determine the amount, if any, of the impairment loss required to be recorded. Impairment indicators include, among other conditions, cash flow deficits, an historic or anticipated decline in revenue or operating profits, adverse legal or regulatory developments, accumulation of costs significantly in excess of amounts originally expected to acquire the asset and/or a material decrease in the fair value of some or all of the assets. The changes in the carrying amount of goodwill by segment for the three months ended March 27, 2004 are as follows: COMMUNI- CATIONS AND SPACE DEFENSE PRODUCTS TOTAL ------- -------- ------- (IN THOUSANDS) Balance as of January 1, 2004 ..... $90,866 $ 1,661 $92,527 Adjustment of certain AERA liabilities ..................... 23 -- 23 ------- ------- ------- Balance as of March 27, 2004 ...... $90,889 $ 1,661 $92,550 ======= ======= =======
Summarized below are intangible assets subject to amortization. MARCH 27, DECEMBER 31, 2004 2003 LIFE -------- -------- ---- (IN THOUSANDS) Capitalized non-compete agreements related to the acquisitions of DSI/AERA/Darlington/Emblem ............................. $ 3,118 $ 3,118 1-5 years Purchased technologies related to the acquisitions of Condor/Emblem ...... 17,003 17,003 8-20 years Customer contracts and relationships related to the acquisitions of AERA/Darlington/Emblem ............................................... 39,198 39,198 10-20 years Tradename related to the acquisitions of AERA/Darlington/Emblem ................................................... 1,569 1,569 5-10 years Other intangible assets related to the acquisition of Condor ............. 916 916 2 years -------- -------- 61,804 61,804 Less accumulated amortization ............................................ (7,339) (5,906) -------- -------- $ 54,465 $ 55,898 ======== ========
The amortization expense for the three months ended March 27, 2004 and March 29, 2003 amounted to $1.4 million and $0.9 million, respectively. Total amortization expense for 2004, 2005, 2006, 2007, 2008 and thereafter related to these intangible assets is estimated to be $5.5 million, $5.2 million, $5.2 million, $5.2 million, $4.6 million and $30.2 million, respectively. All intangible assets other than goodwill are subject to amortization. (5) INVENTORIES Inventories are summarized by major classification as follows: MARCH 27, DECEMBER 31, 2004 2003 -------- -------- (IN THOUSANDS) Raw material and supplies ............................ $ 8,773 $ 8,624 Work-in-process ...................................... 44,488 38,052 Finished goods ....................................... 1,774 1,870 Less: Unliquidated progress payments .... (11,573) (13,813) -------- -------- $ 43,462 $ 34,733 ======== ========
8 (6) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: FOR THE THREE MONTHS ENDED MARCH 27, MARCH 29, 2004 2003 ------- ------- (IN THOUSANDS) Numerator: Net Earnings for basic and diluted calculation ............................................... $ 3,857 $ 2,982 ======= ======= Denominator: Denominator for basic calculation ............................ 17,549 17,230 Effect of dilutive securities: Stock options ............................................. 285 242 Convertible preferred shares .............................. -- -- Convertible notes ......................................... -- -- ------- ------- Denominator for diluted calculation .......................... 17,834 17,472 ======= =======
The assumed conversion of the Notes was anti-dilutive for 2004 and 2003. The following table summarizes, for each year presented, the number of shares excluded from the computation of diluted earnings per share, as their effect upon potential issuance was anti-dilutive. FOR THREE MONTHS ENDED MARCH 27, MARCH 29, 2004 2003 ----- ----- (IN THOUSANDS) 5.25 % Convertible Subordinated Notes ........................... 4,408 4,408 Unexercised stock options ....................................... 288 530 ----- ----- 4,696 4,938 ===== =====
(7) DEFINED BENEFIT PLAN The Company maintains a qualified noncontributory defined benefit pension plan covering less than half of its employees. In November 2002, the plan was amended whereby benefits accrued under the plan were frozen as of December 31, 2002. The Company's funding policy is to make annual contributions to the extent such contributions are actuarially determined and tax deductible. For the three months ended March 27, 2004 and March 29, 2003, the Company recorded pension expense of $0.6 million and $1.0 million, respectively. Summarized below are the components of the expense for each period presented. For the Three Months Ended March 27, March 29, 2004 2003 --------- -------- (In thousands) Service cost.................................... $ -- $ -- Interest cost................................... 3,037 3,182 Expected return on plan assets.................. (3,176) (3,062) Amortization of unrecognized net loss........... 689 880 -------- -------- $ 550 $ 1,000 ======== ========
(8) EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST The Company sponsors an employee stock ownership plan which provides retirement benefits to substantially all employees. The cost basis of the unearned/unallocated shares was initially recorded as a reduction to shareholders' equity. Compensation expense is recorded based on the market value of the Company's common shares as they are committed-to-be-released quarterly, as payments are made under the related indirect loan. The difference between the market value and the cost basis of the shares was recorded as additional paid-in capital. Dividends on unallocated shares are recorded as compensation expense. (9) COMPREHENSIVE INCOME As of March 27, 2004, accumulated other comprehensive loss included in the accompanying consolidated balance sheet primarily represents additional minimum liabilities on benefit plans. Comprehensive income from continuing operations for the three months ended March 27, 2004 was $3.9 million compared to comprehensive income for the three months ended March 29, 2003 of $3.0 million. (10) BUSINESS SEGMENTS The Company determines its operating segments based upon an analysis of its products and services, production processes, types of customers, economic characteristics and the related regulatory environment, which is consistent with how management operates the Company. The Company's operations are conducted in three segments: Defense, Communications and Space Products, and Engineered Materials. 9 The Defense segment provides integrated front-line warfighting systems and components including electronic warfare, radar countermeasures systems, reconnaissance and surveillance systems, aircraft weapons suspension and release systems, airborne mine countermeasures systems, integrated combat and sonar systems, command, control, communications, computers and intelligence (C4I) products and systems, undersea-warfare systems and professional, operational, technical and information technology services for military forces and governments worldwide. The Communications and Space Products segment supplies antenna products and ultra-miniature electronics and systems for the remote sensing and electronic warfare industries. The Engineered Materials segment supplies commercial and military piezo-electric ceramic products and integrated composite structures for the aircraft and oil industries. FOR THE THREE MONTHS ENDED MARCH 27, MARCH 29, 2004 2003 --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net Sales: Defense................................... $ 88,040 $ 70,018 Communications and Space Products......... 11,552 14,380 Engineered Materials...................... 11,285 9,979 --------- -------- $ 110,877 $ 94,377 --------- -------- Operating earnings (loss): Defense................................... $ 9,030 $ 5,375 Communications and Space Products......... (1,091) 1,224 Engineered Materials...................... 728 546 --------- -------- 8,667 7,145 Net interest expense...................... (1,981) (1,992) Other, net................................ 22 33 --------- -------- Earnings before income taxes.............. $ 6,708 $ 5,186 --------- --------
(11) GUARANTOR AND NON-GUARANTOR SUBSIDIARIES EDO CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET MARCH 27, 2004
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- ---------- -------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 60,225 $ 1,524 $ 4,074 $ -- $ 65,823 Accounts receivable, net 32,602 104,390 5,456 (414) 142,034 Inventories 4,796 35,460 3,206 -- 43,462 Deferred income tax asset, net 3,594 -- -- -- 3,594 Prepayments and other 5,558 1,721 442 -- 7,721 --------- --------- --------- --------- --------- Total current assets 106,775 143,095 13,178 (414) 262,634 Investment in subsidiaries 260,790 -- -- (260,790) -- Property, plant and equipment, net 6,911 20,210 3,634 -- 30,755 Notes receivable 6,604 -- -- -- 6,604 Goodwill -- 82,942 9,608 -- 92,550 Other intangible assets, net -- 41,092 13,373 -- 54,465 Deferred income tax asset, net 21,655 -- -- -- 21,655 Other assets 19,135 1,151 -- -- 20,286 --------- --------- --------- --------- --------- $ 421,870 $ 288,490 $ 39,793 $(261,204) $ 488,949 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 23,407 $ 44,448 $ 5,820 $ (599) 73,076 Contract advances and deposits 2,020 6,236 -- -- 8,256 --------- --------- --------- --------- --------- Total current liabilities 25,427 50,684 5,820 (599) 81,332 Long-term debt 137,800 -- -- -- 137,800 Deferred income tax liabilities, net (84) -- 84 -- -- Post retirement benefits obligations 61,166 11,059 -- -- 72,225 Environmental obligation 1,768 -- -- -- 1,768 Intercompany accounts -- 120,852 26,848 (147,700) -- Shareholders' equity: Preferred shares -- -- -- -- -- Common shares 20,014 99 -- (99) 20,014 Additional paid-in capital 154,453 25,221 6,486 (31,707) 154,453 Retained earnings 72,389 84,872 508 (85,380) 72,389 Accumulated other comprehensive loss, net of income tax benefit (29,512) (11) 47 229 (29,247) Treasury shares (1,371) (4,052) -- 4,052 (1,371) Unearned ESOP shares (16,978) -- -- -- (16,978) Management group receivables -- (234) -- -- (234) Deferred compensation under Long-Term Incentive Plan (3,202) -- -- -- (3,202) --------- --------- --------- --------- --------- Total shareholders' equity 195,793 105,895 7,041 (112,905) 195,824 --------- --------- --------- --------- --------- $ 421,870 $ 288,490 $ 39,793 $(261,204) $ 488,949 ========= ========= ========= ========= =========
10 EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS MARCH 27, 2004
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- ---------- -------------- ------------ ------------ Continuing Operations: Net Sales $ 20,965 $86,057 $ 7,346 $ (3,491) $ 110,877 Costs and expenses: Cost of sales 17,090 63,120 3,939 (3,491) 80,658 Selling, general and administrative 2,091 14,602 3,394 -- 20,087 Research and development 539 926 -- -- 1,465 -------- ------- ------- --------- --------- 19,720 78,648 7,333 (3,491) 102,210 -------- ------- ------- --------- --------- Operating Earnings 1,245 7,409 13 -- 8,667 Non-operating income (expense) Interest income 166 34 42 -- 242 Interest expense (2,223) -- -- -- (2,223) Other, net (59) 81 -- -- 22 -------- ------- ------- --------- --------- (2,116) 115 42 -- (1,959) (Loss) earnings from continuing operations before income taxes (871) 7,524 55 -- 6,708 Income tax (benefit) expense (775) 3,531 95 -- 2,851 -------- ------- ------- --------- --------- (Loss) earnings from continuing operations (96) 3,993 (40) -- 3,857 Equity in undistributed earnings of subsidiaries 3,953 -- -- (3,953) -- -------- ------- ------- --------- --------- Net earnings $ 3,857 $ 3,993 $ (40) $ (3,953) $ 3,857 ======== ======= ======= ========= =========
EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS MARCH 27, 2004
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- ---------- -------------- ------------ ------------ OPERATING ACTIVITIES: Earnings from continuing operations $ 3,857 $ 3,993 $ (40) $(3,953) $ 3,857 Adjustments to earnings to arrive at cash provided (used) by continuing operations: Depreciation 464 1,924 197 -- 2,585 Amortization -- 1,192 249 -- 1,441 Deferred tax benefit 119 -- -- -- 119 Loss (gain) on sale of property, plant and equipment -- 6 -- -- 6 Deferred compensation expense 201 -- -- -- 201 Non-cash Employee Stock Ownership Plan compensation expense 1,051 -- -- -- 1,051 Dividends on unallocated Employee Stock Ownership Plan shares 70 -- -- -- 70 Common shares issued for directors' fees 31 -- -- 31 Income tax benefit from stock options 353 -- -- -- 353 Changes in operating assets and liabilities, excluding effects of acquisitions: Equity in earnings of subsidiaries (3,953) -- -- 3,953 -- Intercompany 5,115 (5,352) 237 -- -- Accounts receivable (3,515) (2,744) (1,472) -- (7,731) Inventories 524 (9,336) 83 -- (8,729) Prepayments and other assets (2,374) 1,672 (112) -- (814) Accounts payable, accrued liabilities and other (10,623) (4,635) (120) -- (11,425) Contract advances and deposits (768) 829 -- -- 61 -------- -------- ------- ------- -------- Cash provided (used) by continuing operations (9,448) (8,498) (978) -- (18,924) INVESTING ACTIVITIES: Purchase of plant and equipment (409) (1,466) (116) -- (1,991) Payments received on notes receivable 75 -- -- -- 75 Purchase of marketable securities -- -- -- -- -- Restricted cash -- -- -- -- -- Cash paid for acquisitions, net of cash acquired -- -- -- -- -- -------- -------- ------- ------- -------- Cash used by investing activities (334) (1,466) (116) -- (1,916) FINANCING ACTIVITIES: Proceeds from exercise of stock options 511 -- -- -- 511 Proceeds from management group receivables -- 117 -- -- 117 Repayments of acquired debt -- -- -- -- -- Payment of common share cash dividends (597) -- -- -- (597) -------- -------- ------- ------- -------- Cash (used) provided by financing activities (86) 117 -- -- 31 -------- -------- ------- ------- -------- Net decrease in cash and cash equivalents (9,868) (9,847) (1,094) -- (20,809) Cash and cash equivalents at beginning of year 70,093 11,371 5,168 -- 86,632 -------- -------- ------- ------- -------- Cash and cash equivalents at end of year $ 60,225 $ 1,524 $ 4,074 $ -- $ 65,823 ======== ======== ======= ======= ========
11 EDO CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2003
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- ---------- -------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 69,877 $ 11,371 $ 5,168 $ -- $ 86,416 Marketable securities 216 -- -- -- 216 Accounts receivable, net 29,087 101,233 3,984 (1) 134,303 Inventories 5,320 26,124 3,289 -- 34,733 Deferred income tax asset, net 3,594 -- -- -- 3,594 Prepayments and other 2,610 3,014 330 -- 5,954 --------- --------- --------- --------- --------- Total current assets 110,704 141,742 12,771 (1) 265,216 Investment in subsidiaries 261,950 -- -- (261,950) -- Property, plant and equipment, net 6,966 20,674 3,715 -- 31,355 Notes receivable 6,538 -- -- -- 6,538 Goodwill -- 82,919 9,608 -- 92,527 Other intangible assets, net -- 42,276 13,622 -- 55,898 Deferred income tax asset, net 21,774 -- -- -- 21,774 Other assets 19,850 1,538 -- -- 21,388 --------- --------- --------- --------- --------- $ 427,782 $ 289,149 $ 39,716 $(261,951) $ 494,696 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 34,061 $ 44,679 $ 6,004 $ (1) $ 84,743 Contract advances and deposits 2,788 5,407 -- -- 8,195 --------- --------- --------- --------- --------- Total current liabilities 36,849 50,086 6,004 (1) 92,938 Long-term debt 137,800 -- -- -- 137,800 Deferred income tax liabilities, net (82) -- 82 -- -- Post retirement benefits obligations 61,035 10,863 -- -- 71,898 Environmental obligation 1,728 -- -- -- 1,728 Intercompany accounts -- 126,326 26,611 (152,937) -- Shareholders' equity: Preferred shares -- -- -- -- -- Common shares 19,832 99 -- (99) 19,832 Additional paid-in capital 150,097 25,221 6,486 (31,707) 150,097 Retained earnings 69,059 80,878 548 (81,426) 69,059 Accumulated other comprehensive loss, net of income tax benefit (29,512) 79 (15) 167 (29,281) Treasury shares (1,255) (4,052) 4,052 (1,255) Unearned ESOP shares (17,290) -- -- -- (17,290) Management group receivables -- (351) -- -- (351) Deferred compensation under Long-Term Incentive Plan (479) -- -- -- (479) --------- --------- --------- --------- --------- Total shareholders' equity 190,452 101,874 7,019 (109,013) 190,332 --------- --------- --------- --------- --------- $ 427,782 $ 289,149 $ 39,716 $(261,951) $ 494,696 ========= ========= ========= ========= =========
EDO CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET MARCH 29, 2003
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- ---------- -------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 59,810 $ 6,613 $ -- $ -- $ 66,423 Restricted cash 11,166 -- -- -- 11,166 Marketable securities 194 -- -- -- 194 Accounts receivable, net 28,454 95,253 -- (1,727) 121,980 Inventories 1,231 33,574 -- -- 34,805 Deferred income tax asset, net (10,202) 13,424 -- -- 3,222 Prepayments and other 3,512 1,641 -- -- 5,153 --------- --------- --------- --------- --------- Total current assets 94,165 150,505 -- (1,727) 242,943 Investment in subsidiaries 253,386 -- -- (253,386) -- Property, plant and equipment, net 6,232 60,039 -- -- 66,271 Notes receivable 1,450 1,017 -- -- 2,467 Goodwill -- 83,534 -- -- 83,534 Other intangible assets, net -- 48,203 -- -- 48,203 Deferred income tax asset, net 20,439 -- -- -- 20,439 Other assets 19,447 1,766 -- -- 21,213 --------- --------- --------- --------- --------- $ 395,119 $ 345,064 $ -- $(255,113) $ 485,070 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 17,321 $ 63,493 $ -- $ (2,164) 78,650 Contract advances and deposits 9,332 6,586 -- -- 15,918 --------- --------- --------- --------- --------- Total current liabilities 26,653 70,079 $ -- (2,164) 94,568 Long-term debt 137,800 -- -- -- 137,800 Deferred income tax liabilities, net (12,227) 12,227 -- -- -- Post retirement benefits obligations 68,784 10,264 -- -- 79,048 Environmental obligation 2,041 -- -- -- 2,041 Intercompany accounts -- 160,465 -- (160,465) -- Shareholders' equity: Preferred shares -- -- -- -- -- Common shares 19,802 99 -- (99) 19,802 Additional paid-in capital 147,739 18,565 -- (18,565) 147,739 Retained earnings 58,790 77,872 -- (77,872) 58,790 Accumulated other comprehensive loss, net of income tax benefit (33,985) 13 -- -- (33,972) Treasury shares (1,284) (4,052) -- 4,052 (1,284) Unearned ESOP shares (18,229) -- -- -- (18,229) Management group receivables -- (468) -- -- (468) Deferred compensation under Long-Term Incentive Plan (765) -- -- -- (765) --------- --------- --------- --------- --------- Total shareholders' equity 172,068 92,029 -- (92,484) 171,613 --------- --------- --------- --------- --------- $ 395,119 $ 345,064 $ -- $(255,113) $ 485,070 ========= ========= ========= ========== =========
12 EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS MARCH 29, 2003
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- ---------- -------------- ------------ ------------ Continuing Operations: Net Sales $ 20,427 $79,056 $ -- $ (5,106) $ 94,377 Costs and expenses: Cost of sales 17,239 57,697 -- (5,106) 69,830 Selling, general and administrative 1,397 13,810 -- -- 15,207 Research and development 723 1,267 -- -- 1,990 Acquisition-related costs 63 142 205 -------- ------- ------- -------- -------- 19,422 72,916 -- (5,106) 87,232 -------- ------- ------- -------- -------- Operating Earnings 1,005 6,140 -- -- 7,145 Non-operating income (expense) Interest income 212 23 -- -- 235 Interest expense (2,227) -- -- -- (2,227) Other, net (50) 83 -- -- 33 -------- ------- ------- -------- -------- (2,065) 106 -- -- (1,959) (Loss) earnings from continuing operations before income taxes (1,060) 6,246 -- -- 5,186 Income tax (benefit) expense (284) 2,488 -- -- 2,204 -------- ------- ------- -------- -------- (Loss) earnings from continuing operations (776) 3,758 -- -- 2,982 Equity in undistributed earnings of subsidiaries 3,758 -- -- (3,758) -- -------- ------- ------- -------- -------- Net earnings $ 2,982 $ 3,758 $ -- $ (3,758) $ 2,982 ======== ======= ======= ======== ========
EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS MARCH 29, 2003
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- ---------- -------------- ------------ ------------ OPERATING ACTIVITIES: Earnings from continuing operations $ 2,982 $ 3,758 $ -- $(3,758) $ 2,982 Adjustments to earnings to arrive at cash provided (used) by continuing operations: Depreciation 390 2,505 -- -- 2,895 Amortization -- 940 -- -- 940 Bad debt expense -- 180 -- -- 180 Loss (gain) on sale of property, plant and equipment -- 33 -- -- 33 Deferred compensation expense 57 -- -- -- 57 Non-cash Employee Stock Ownership Plan compensation expense 766 -- -- -- 766 Dividends on unallocated Employee Stock Ownership Plan shares 75 -- -- -- 75 Common shares issued for directors' fees 23 -- -- -- 23 Income tax benefit from stock options 33 -- -- -- 33 Changes in operating assets and liabilities, excluding effects of acquisitions: Equity in earnings of subsidiaries (3,758) -- -- 3,758 -- Intercompany 9,597 (9,597) -- -- -- Accounts receivable (3,867) 5,982 -- -- 2,115 Inventories (138) (2,261) -- -- (2,399) Prepayments and other assets (1,195) 891 -- -- (304) Accounts payable, accrued liabilities and other 698 (9,527) -- -- (8,829) Contract advances and deposits (1,753) (2,606) -- -- (4,359) --------- -------- ---------- ------- --------- Cash provided (used) by continuing operations 3,910 (9,702) -- -- (5,792) INVESTING ACTIVITIES: Purchase of plant and equipment (1,127) (985) -- -- (2,112) Payments received on notes receivable 75 13 -- -- 88 Purchase of marketable securities (1) -- -- -- (1) Restricted cash 16,181 -- -- -- 16,181 Cash paid for acquisitions, net of cash acquired (65,182) -- -- -- (65,182) --------- -------- ---------- ------- --------- Cash used by investing activities (50,054) (972) -- -- (51,026) FINANCING ACTIVITIES: Proceeds from exercise of stock options 47 -- -- -- 47 Proceeds from management group receivables -- 125 -- -- 125 Repayments of acquired debt (8,660) -- -- -- (8,660) Payment of common share cash dividends (591) -- -- -- (591) --------- -------- ---------- ------- --------- Cash (used) provided by financing activities (9,204) 125 -- -- (9,079) --------- -------- ---------- ------- --------- Net decrease in cash and cash equivalents (55,348) (10,549) -- -- (65,897) Cash and cash equivalents at beginning of year 115,160 17,160 -- -- 132,320 --------- -------- ---------- ------- --------- Cash and cash equivalents at end of period $ 59,812 $ 6,611 $ -- $ -- $ 66,423 ======== ======= ======= ======== ========
13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION EDO Corporation was incorporated in New York in 1925 by Earl Dodge Osborn, from whose initials "EDO" is derived. EDO Corporation (the "Company") provides military and commercial products and professional services, with core competencies in a wide range of critical defense areas, including: - Defense Electronics - Aircraft Armament - Undersea Warfare - Professional Services - C4I - Command, Control, Communications, Computers, and Intelligence - Integrated Composite Structures We are a leading supplier of sophisticated, highly engineered products and systems for defense, aerospace and industrial applications. We believe our advanced electronic, electromechanical systems, information systems and engineered materials are mission-critical on a wide range of military programs. We have three reporting segments: Defense, Communications and Space Products, and Engineered Materials. Our Defense segment provides integrated front-line warfighting systems and components including electronic-warfare systems, reconnaissance and surveillance systems, aircraft weapons suspension and release systems, integrated combat systems, command, control, communications, computers, and intelligence (C4I) products and systems, undersea-warfare systems and professional and engineering services for military forces and friendly governments worldwide. Our Communications and Space Products segment supplies antenna products and ultra-miniature electronics and systems for the remote sensing and electronic warfare industries. Our Engineered Materials segment supplies commercial and military piezo-electric ceramic products and integrated composite structures for the aircraft and oil industries. A disciplined acquisition program is diversifying the base of major platforms and customers. The Company's Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and the Proxy Statement for its Annual Meeting of Stockholders are made available, free of charge, on its Web site www.edocorp.com, as soon as reasonably practicable after such reports have been filed with or furnished to the Securities and Exchange Commission. DISCUSSION OF CRITICAL ACCOUNTING POLICIES We make estimates and assumptions in the preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our consolidated financial condition and results of operations and which require our most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The following is a brief discussion of the critical accounting policies employed by us: REVENUE RECOGNITION Sales under long-term, fixed-price contracts, including pro-rata profits, are generally recorded based on the relationship of costs incurred to date to total projected final costs or, alternatively, as deliveries and other milestones are achieved or services are provided. These projections are revised throughout the lives of the contracts. Adjustments to profits resulting from such revisions are made cumulative to the date of change and may affect current period earnings. Sales on other than long-term contract orders (principally commercial products) are recorded as shipments are made. Our gross profit is affected by a variety of factors, including the mix of products, systems and services sold, production efficiencies, price competition and general economic conditions. Estimated losses on long-term contracts are recorded when identified. INVENTORIES Inventories under long-term contracts and programs reflect all accumulated production costs, including factory overhead, initial tooling and other related costs (including general and administrative expenses relating to certain of our defense contracts), less the portion of such costs charged to cost of sales. All other inventories are stated at the lower of cost (principally first-in, first-out method) or market. Inventory costs in excess of amounts recoverable under contracts and which relate to a specific technology or application and which may not have alternative uses are charged to cost of sales when such circumstances are identified. 14 From time to time, we manufacture certain products prior to receiving firm contracts in anticipation of future demand. Such costs are inventoried and are incurred to help maintain stable and efficient production schedules. Several factors may influence the sale and use of our inventories, including our decision to exit a product line, technological change, new product development and/or revised estimates of future product demand. If inventory is determined to be overvalued due to one or more of the above factors, we would be required to recognize such loss in value at the time of such determination. Under the contractual arrangements by which progress payments are received, the United States Government has a title to or a security interest in the inventories identified with related contracts. PROPERTY, PLANT AND EQUIPMENT AND OTHER LONG-LIVED ASSETS Property, plant and equipment is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of such assets. Leasehold improvements are amortized over the shorter of their estimated useful lives or their respective lease periods. In those cases where we determine that the useful life of property, plant and equipment should be shortened, we depreciate the net book value in excess of salvage value over its revised remaining useful life thereby increasing depreciation expense. Factors such as technological advances, changes to our business model, changes in our capital strategy, changes in the planned use of equipment, fixtures, software or changes in the planned use of facilities could result in shortened useful lives. Long-lived assets, other than goodwill, are reviewed by us for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The estimate of cash flow, which is used to determine recoverability, is based upon, among other things, certain assumptions about future operating performance. Our estimates of undiscounted cash flow may differ from actual cash flow due to such factors including technological advances, changes to our business model, or changes in our capital strategy or planned use of long-lived assets. If the sum of the undiscounted cash flows, excluding interest, is less than the carrying value, we would recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. In accordance with SFAS No. 142, goodwill must be tested at least annually for impairment at the reporting unit level. If an indication of impairment exists, we are required to determine if such goodwill's implied fair value is less than the unit carrying value in order to determine the amount, if any, of the impairment loss required to be recorded. Impairment indicators include, among other conditions, cash flow deficits, an historic or anticipated decline in revenue or operating profits, adverse legal or regulatory developments, accumulation of costs significantly in excess of amounts originally expected to acquire the asset and/or a material decrease in the fair value of some or all of the assets. PENSION AND POST-RETIREMENT BENEFIT OBLIGATIONS We sponsor defined benefit pension and other retirement plans in various forms covering all eligible employees. Several statistical and other factors which attempt to anticipate future events are used in calculating the expense and liability related to the plans. These factors include assumptions about the discount rate and expected return on plan assets within certain guidelines and in conjunction with our actuarial consultants. In addition, our actuarial consultants also use subjective factors such as withdrawal and mortality rates to estimate the expense and liability related to these plans. The actuarial assumptions used by us may differ significantly, either favorably or unfavorably, from actual results due to changing market, economic or regulatory conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. In 2003 we used the building block approach to the estimation of the long-term rate of return on assets. Under this approach, we reviewed the publicly available common source data for the range of returns on basic types of equity and fixed income instruments and the differential to those rates provided by active investment management. In consultation with our actuarial and active asset management consultants and taking into account the funds' actual performance and expected asset allocation going forward, we selected an overall return rate within the resulting range. The expected long-term rate of return on plan assets to be used for 2004 expense is 8.25%. This rate of return was determined by application of a statistical forecast modeling algorithm which, using the pension investment mix and pension demographic data, simulates the long term performance of the plan over a series of 2000 trials of variable economic conditions, rounded to the nearest quarter-percent. The resulting rate is a 50 basis-point reduction in the forecast from that used in 2003. The discount rate also reflects a similar 50 basis-point reduction from that used in 2003. The discount rate is selected based on review of selected widely available index information for high quality corporate bonds such as Factiva, adjusted for term. 15 RESULTS OF OPERATIONS The following information should be read in conjunction with the Consolidated Financial Statements as of March 27, 2004. THREE MONTHS ENDED MARCH 27, 2004 COMPARED WITH THREE MONTHS ENDED MARCH 29, 2003 Net sales by segment were as follows:
THREE MONTHS ENDED INCREASE/(DECREASE) MARCH 27, MARCH 29, FROM SEGMENT 2004 2003 PRIOR PERIOD ------- ------------ --------- ------------ (DOLLARS IN THOUSANDS) Defense ................................ $ 88,040 $70,018 25.7% Communications and Space Products ...... 11,552 14,380 (19.7)% Engineered Materials ................... 11,285 9,979 13.1% -------- ------- ---- Total .................................. $110,877 $94,377 17.5% ======== ======= ----
In the Defense segment, approximately $16.9 million of the net increase was attributable to sales of Emblem Group Ltd. ("Emblem"), Darlington, Inc. ("Darlington"), and Advanced Engineering & Research Associates, Inc. ("AERA") since their acquisition dates of June 16, March 10, and February 5, 2003, respectively. In addition, there were increases in sales of aircraft weapons suspension and release systems due to the F/A-22 AMRAAM Vertical Eject Launcher program, the BRU-57 Multiple Carriage Smart Bomb Rack program, and development efforts on the Joint Strike Fighter ("JSF") weapons suspension and release units programs. These increases were offset by decreases in sales of electronic warfare equipment. The decrease in sales of electronic warfare equipment was due to the completion of the Universal Exciter Upgrade ("UEU") production program in 2003. In the Communications and Space Products segment, the decrease in sales was attributable to the completion of large production deliveries in the first quarter of 2003 of interference cancellation systems and the basic shortstop electronic protection systems ("SEPS"). In 2004, we received a $6.8 million incremental award as part of a $45.3 million contract for additional "Warlock" SEPS units for the U.S. Army. This program will be a significant contributor to sales and margin later this year. In the Engineered Materials segment, there were increases in sales of electro-ceramic products attributable to transducers and sonar arrays. There were also increases in sales of integrated composite structures including work associated with the Sikorsky Comanche program as well as production and installation of our composite pipe on offshore oil rig projects. We recently received stop work orders from Sikorsky due to the termination of the Comanche program by the U.S. Department of Defense. The impact on the year is currently being assessed but is expected to be minimal. Operating earnings for the three months ended March 27, 2004 were $8.7 million or 7.8% of net sales. This compares to operating earnings for the three months ended March 29, 2003 of $7.1 million or 7.6% of net sales. Included in the results for the three months ended March 27, 2004 is $1.4 million of intangible asset amortization expense associated with the acquisitions made in 2002 and 2003, compared to amortization expense of approximately $0.9 million for the three months ended March 29, 2003. Also included in operating earnings for the three months ended March 27, 2004 is pension expense of $0.6 million and ESOP compensation expense of $1.1 million. Included in operating earnings for the three months ended March 29, 2003 is pension expense of $1.0 million and ESOP compensation expense of $0.8 million. The lower pension expense in 2004 compared to 2003 is attributable to the contribution made to the pension plan in 2003. The higher ESOP compensation expense for the first three months of 2004 is attributable to our higher average stock price compared to the first three months of 2003. Pension and ESOP compensation expense are allocated between cost of sales and selling, general and administrative expense. The Defense segment's operating earnings for the three months ended March 27, 2004 were $9.0 million or 10.3% of this segment's net sales compared to $5.4 million or 7.7% of this segment's net sales for the three months ended March 29, 2003. The increase in operating earnings in the first three months of 2004 was attributable to sales of reconnaissance and surveillance systems and international sales of our radar signal simulator. In addition, there was a positive impact to operating earnings of $0.8 million resulting from the resolution of a contractual issue related to funding for which a reserve had been previously established. Since the matter was resolved, the reserve was released. These increases were partially offset by the increase in amortization expense pertaining to intangible assets associated with the acquisitions made in 2003. The Communications and Space Products segment experienced an operating loss for the three months ended March 27, 2004 of $1.1 million or 9.4% of this segment's net sales compared to operating earnings of $1.2 million or 8.5% of this segment's net sales for the three months ended March 29, 2003. The loss related primarily to adjustments to estimates to complete on development and start-up production phases on certain interference cancellation programs resulting from issues discovered in the first quarter during testing 16 phases as well as some direct cost increases. All anticipated losses have been recognized, and the programs are expected to complete performance within the current estimates. This segment's operating results do not yet reflect the increased activity with respect to the aforementioned "Warlock" SEPS program which will be a significant contributor to operating earnings as the year progresses. The Engineered Materials segment's operating earnings for the three months ended March 27, 2004 were $0.7 million or 6.5% of this segment's net sales compared to operating earnings of $0.5 million or 5.5% of this segment's net sales for the three months ended March 29, 2003. The increase is attributable to higher margins on electro-ceramic products and the mix of sales of integrated composite structural products. Selling, general and administrative expenses for the three months ended March 27, 2004 increased to $20.1 million or 18.1% of net sales from $15.2 million or 16.1% of net sales for the same period ended March 29, 2003. This increase was attributable to three acquisitions made in 2003, including the increased amortization of intangible assets. Research and development expense for the three months ended March 27, 2004 decreased to $1.5 million or 1.3% of net sales from $2.0 million or 2.1% of net sales for the three months ended March 29, 2003. As a percent of sales, the decrease is attributable to the absence of such expenditures in the services-type businesses. In addition, there were some delayed expenditures in the first three months of 2004 which are expected to begin in the second quarter. Interest expense, net of interest income, for the three months ended March 27, 2004 remained unchanged at $2.0 million compared to the three months ended March 29, 2003. Interest expense is associated primarily with our $137.8 million principal amount of 5.25% Convertible Subordinated Notes ("Notes") issued in April 2002, amortization of deferred debt issuance costs associated with the offering of the Notes, and amortization of deferred financing costs associated with our credit facility. Income tax expense reflects an effective rate of 42.5% for the three months ended March 27, 2004 and for the three months ended March 29, 2003. For the three months ended March 27, 2004, net earnings were $3.9 million or $0.22 per diluted common share on 17.8 million diluted shares compared to net earnings of $3.0 million or $0.17 per diluted common share on 17.5 million diluted shares for the three months ended March 29, 2003. LIQUIDITY AND CAPITAL RESOURCES BALANCE SHEET Our cash and cash equivalents decreased 24.0% to $65.8 million at March 27, 2004 from $86.6 million at December 31, 2003. This decrease was due primarily to the cash used by operations of $18.9 million resulting from a temporary growth in receivables and inventories, discussed below, and a reduction in accounts payable and accrued liabilities due to timing. Also, $2.0 million was used for the purchase of capital equipment and $0.6 million for the payment of common share dividends. Accounts receivable increased 5.8% to $142.0 million at March 27, 2004 from $134.3 million at December 31, 2003 due in part to timing of collections of billed receivables. At March 27, 2004 approximately 78% of billed receivables are in the under-60 days aging category. There have been significant collections in billed receivables subsequent to the end of the quarter. There was also growth in the unbilled receivables resulting from work progressing on large programs such as JSF and F/A-22. Inventories increased 25.1% to $43.5 million at March 27, 2004 from $34.7 million at December 31, 2003 due primarily to the efforts expended on work-in-progress on major programs, particularly the SEPS program. The note receivable of $6.6 million at March 27, 2004 and $6.5 million at December 31, 2003 represents the note receivable from the sale of our facility in Deer Park in 2003. Included in other current assets is $1.5 million in notes related to the sale of our former College Point facility in January 1996. The College Point facility notes are due in annual amounts through September 2004 with a final payment of $1.3 million due on December 31, 2004 and bear interest at 7.0% per annum. The latter notes receivable are secured by a mortgage on the facility. In the three months ended March 27, 2004, capital expenditures were $2.0 million. This compares to $2.1 million for the three months ended March 29, 2003. 17 FINANCING ACTIVITIES Credit Facility We have a $200.0 million credit facility with a consortium of banks, led by Citibank, N.A. as the administrative agent, Fleet National Bank as the syndication agent and Wachovia Bank, N.A. as the documentation agent. The facility expires in November 2005. The credit facility provides us with sub-limits of borrowing up to $125.0 million for acquisition-related financing and up to $125.0 million in standby letters of credit financing. The potential cash borrowing under the facility is reduced by the amount of outstanding letters of credit. Borrowings under the facility will be priced initially at LIBOR plus a predetermined amount, ranging from 1.25% to 1.75%, depending on our consolidated leverage ratio at the time of the borrowing. At March 27, 2004, LIBOR was approximately 1.11% and the applicable adjustment to LIBOR was 1.25%. The facility requires us to pay each lender in the consortium a commitment fee on the average daily unused portion of their respective commitment at a rate equal to 0.25%. There were no direct borrowings outstanding under the credit facility at March 27, 2004 and December 31, 2003. Letters of credit outstanding at March 27, 2004 pertaining to the credit facility were $42.7 million, resulting in $82.3 million available at March 27, 2004 for standby letters of credit, if needed. In connection with the credit facility, we are required to maintain both financial and non-financial covenants and ratios, including but not limited to minimum tangible net worth plus subordinated debt, leverage ratio, fixed charge coverage ratio, earnings before interest and taxes to interest expense ratio, total unsubordinated debt to tangible net worth, net income and dividends. Also, the Company cannot declare or pay any dividend on its outstanding common stock in an amount that exceeds fifty percent of its consolidated net income for the immediately preceding quarter. As of March 27, 2004, we were in compliance with our covenants. The credit facility is secured by our accounts receivable, inventory and machinery and equipment. 5.25% Convertible Subordinated Notes due 2007("Notes") In April 2002, we completed the offering of the Notes and received proceeds of $133.7 million, net of $4.1 million of commissions paid. Interest payments on the Notes are due April 15 and October 15 of each year, commencing on October 15, 2002. Accrued interest payable, included in accrued liabilities on our consolidated balance sheet, was $3.3 million at March 27, 2004 and $1.5 million at December 31, 2003. The Notes are convertible, unless previously redeemed or repurchased by us, at the option of the holder at any time prior to maturity, into our common shares at an initial conversion price of $31.26 per share, subject to adjustment in certain events. As of March 27, 2004, there had been no conversions. Shelf Registration On December 23, 2003, we filed a shelf registration statement to potentially offer for sale common shares, preferred shares, debt securities and warrants. We may sell any combination of the foregoing securities in one or more offerings up to an aggregate initial offering price of $500,000,000. We believe that, for the foreseeable future, we have adequate liquidity and sufficient capital to fund our currently anticipated requirements for working capital, capital expenditures, including acquisitions, research and development expenditures, interest payments and funding of our pension and post-retirement benefit obligations. We continue to focus on positioning ourselves to be a significant player in the consolidation of first-tier defense suppliers and, to that end, have actively sought candidates for strategic acquisitions. Future acquisitions may be funded from any of the following sources: cash on hand; borrowings under our credit facility; issuance of our common stock or other equity securities; and/or convertible or other debt offerings. COMMITMENTS AND CONTINGENCIES In order to aggregate all commitments and contractual obligations as of March 27, 2004, we have included the following table. We are obligated under building and equipment leases expiring between 2004 and 2012. The aggregate future minimum lease commitments under those obligations with noncancellable terms in excess of one year are shown below. Our commitments under letters of credit and advance payment and performance bonds relate primarily to advances received on foreign contracts should we fail to perform in accordance with the contract terms. We do not expect to have to make payments under these letters of credits or bonds since these obligations are removed as we perform under the related contracts. The amounts for letters of credit and performance bonds represent the amount of commitment expiration per period. 18
Payments Due In (in millions): ---------------------------------------------------------------------------- 2009 and Total 2004 2005 2006 2007 2008 Beyond --------- ------- ------- ------ ------ ------ ------ 5.25% Convertible Subordinated Notes due 2007 ...................................... $ 137.8 $ -- $ -- $ -- $137.8 $ -- $ -- Operating leases ............................ 68.7 10.2 11.0 7.8 6.8 6.3 26.6 Letters of credit ........................... 43.1 13.3 29.5 -- -- 0.3 -- Advance payment and performance bonds ....... 1.9 0.2 -- -- -- -- 1.7 -------- ------- ------- ------ ------ ------ ----- Total ....................................... $ 251.5 $ 23.7 $ 40.5 $ 7.8 $144.6 $ 6.6 $28.3 ======== ======= ======= ====== ====== ====== =====
Additionally, we are subject to certain legal actions that arise out of the normal course of business. It is our belief that the ultimate outcome of these actions will not have a material adverse effect on our consolidated financial position, results of operations or liquidity. CONCENTRATION OF SALES We conduct a significant amount of our business with the United States Government. Although there are currently no indications of a significant change in the status of government funding of certain programs, should this occur, our results of operations, financial position and liquidity could be materially affected. Such a change could have a significant impact on our profitability and our stock price. This could also affect our ability to acquire funds from our credit facility due to covenant restrictions or from other sources. BACKLOG The funded backlog of unfilled orders at March 27, 2004 increased to $513.5 million from $462.3 million at December 31, 2003. Our backlog consists primarily of current orders under long-lived, mission-critical programs of key defense platforms. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements in this Quarterly Report and in oral statements that may be made by representatives of the Company relating to plans, strategies, economic performance and trends and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27(a) of the Securities Act of 1933 and Section 21(e) of the Securities Exchange Act of 1934. Forward looking statements are inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to the following for each of the types of information noted below. U.S. and international military program sales, follow on procurement, contract continuance, and future program awards, upgrades and spares support are subject to: U.S. and international military budget constraints and determinations; U.S. congressional and international legislative body discretion; U.S. and international government administration policies and priorities; changing world military threats, strategies and missions; competition from foreign manufacturers of platforms and equipment; NATO country determinations regarding participation in common programs; changes in U.S. and international government procurement timing, strategies and practices, the general state of world military readiness and deployment; and the ability to obtain export licenses. Commercial satellite programs and equipment sales, follow-on procurement, contract continuance and future program awards, upgrades and spares support are subject to: establishment and continuance of various consortiums for satellite constellation programs; delay in launch dates due to equipment, weather or other factors beyond our control; and development of sufficient customer base to support a particular satellite constellation program. Commercial product sales are subject to: success of product development programs currently underway or planned; competitiveness of current and future production costs and prices and market and consumer base development of new product programs. Achievement of margins on sales, earnings and cash flow can be affected by: unanticipated technical problems; government termination of contracts for convenience; decline in expected levels of sales; underestimation of anticipated costs on specific programs; the ability to effect acquisitions; and risks inherent in integrating recent acquisitions into our overall structure. Expectations of future income tax rates can be affected by a variety of factors, including statutory changes in Federal and state tax rates, nondeductibility of goodwill amortization and IPR&D acquired in a stock purchase business combination and the nondeductibility of our noncash ESOP compensation expense. The Company has no obligation to update any forward-looking statements. 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS The information called for by this item is provided under Item 2 -- "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this Quarterly Report on Form 10-Q, EDO carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures under the supervision and with the participation of its management, including its Review and Disclosure Committee, its Chief Executive Officer and its Chief Financial Officer. The Chief Executive Officer and Chief Financial Officer concluded that EDO's disclosure controls and procedures are effective to ensure that material information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. CHANGES IN INTERNAL CONTROLS There were no changes in EDO's internal controls over financial reporting during EDO's last fiscal quarter that have materially affected, or are likely to materially affect internal controls over financial reporting. PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 10(a)* Amendment, dated March 25, 2004, to the Credit Agreement, dated as of November 8, 2002, by and among the Company and AIL Systems Inc., with Citibank N.A., Fleet National Bank, Wachovia Bank, N.A., et al. (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002, Exhibit 10(a)(1)) 10(b)* EDO Corporation Non Qualified Deferred Compensation Plan I, effective as of January 1, 2004. 10(c)* EDO Corporation Non Qualified Deferred Compensation Plan II, effective as of January 1, 2004. 31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32* Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Filed herewith. (b) REPORTS ON FORM 8-K The following report on Form 8-K was filed during the three months ended March 27, 2004:
DATE OF REPORT ITEMS REPORTED ----------------- ------------------------------------------------------------- February 19, 2004 Earnings Release, dated February 19, 2004, announcing financial results for the quarter and year ended December 31, 2003.
20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, its principal financial officer, thereunto duly authorized. EDO CORPORATION (Registrant) By: /s/ FREDERIC B. BASSETT -------------------------------- Dated: May 3, 2004 Frederic B. Bassett Vice President Finance, Treasurer and Chief Financial Officer 21