10-Q 1 y67861e10vq.txt EDO CORPORATION ================================================================================ 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 SEPTEMBER 25, 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 October 25, 2004 was 19,994,671 shares, with a par value $1 per share. ================================================================================ EDO CORPORATION TABLE OF CONTENTS
Page PART I FINANCIAL INFORMATION ITEM 1 Financial Statements ......................................................... 3 Consolidated Balance Sheets - September 25, 2004 and December 31, 2003 ..................................... 3 Consolidated Statements of Earnings - Three months ended September 25, 2004 and September 27, 2003 ................. 4 Consolidated Statements of Earnings - Nine months ended September 25, 2004 and September 27, 2003 .................. 5 Consolidated Statements of Cash Flows - Nine months ended September 25, 2004 and September 27, 2003 .................. 6 Notes to Consolidated Financial Statements ................................... 7 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................................... 16 ITEM 3 Quantitative and Qualitative Disclosures about Market Risk ................... 24 ITEM 4 Controls and Procedures ...................................................... 24 PART II OTHER INFORMATION ITEM 1 Legal Proceedings ............................................................ 24 ITEM 4 Submission of Matters to a Vote of Security Holders .......................... 24 ITEM 5 Other Information ............................................................ 24 ITEM 6 Exhibits ..................................................................... 24 SIGNATURES 26
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EDO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 25, DECEMBER 31, 2004 2003 -------------- -------------- (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS Current assets: Cash and cash equivalents .................................................... $ 99,825 $ 86,632 Accounts receivable, net ..................................................... 131,298 134,303 Inventories .................................................................. 51,294 34,733 Deferred income tax asset, net ............................................... 3,594 3,594 Prepayments and other ........................................................ 4,170 5,954 -------------- -------------- Total current assets ........................................................ 290,181 265,216 -------------- -------------- Property, plant and equipment, net ............................................. 30,255 31,355 Notes receivable ............................................................... 6,736 6,538 Goodwill ....................................................................... 92,249 92,527 Other intangible assets, net ................................................... 51,661 55,898 Deferred income tax asset, net ................................................. 21,610 21,774 Other assets ................................................................... 19,547 21,388 -------------- -------------- $ 512,239 $ 494,696 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ............................................................. $ 16,474 $ 22,801 Accrued liabilities .......................................................... 60,774 61,942 Contract advances and deposits ............................................... 13,548 8,195 -------------- -------------- Total current liabilities ................................................... 90,796 92,938 -------------- -------------- Long-term debt ................................................................. 137,800 137,800 Post-retirement benefits obligations ........................................... 72,704 71,898 Environmental obligation ....................................................... 1,686 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, 20,067,045 issued in 2004 and 19,832,108 issued in 2003 ..................... 20,067 19,832 Additional paid-in capital ................................................... 156,666 150,097 Retained earnings ............................................................ 82,378 69,059 Accumulated other comprehensive loss, net of income tax benefit .............. (29,191) (29,281) Treasury shares at cost (91,650 shares in 2004 and 88,128 shares in 2003) .... (1,387) (1,255) Unearned Employee Stock Ownership Plan shares ................................ (16,352) (17,290) Deferred compensation under Long-Term Incentive Plan ......................... (2,705) (479) Management group receivables ................................................. (223) (351) -------------- -------------- Total shareholders' equity .................................................. 209,253 190,332 -------------- -------------- $ 512,239 $ 494,696 ============== ==============
See accompanying Notes to Consolidated Financial Statements. 3 EDO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED SEPTEMBER 25, SEPTEMBER 27, 2004 2003 -------------- -------------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NET SALES ...................................... $ 129,875 $ 118,783 -------------- -------------- COSTS AND EXPENSES Cost of sales ................................. 94,168 84,818 Selling, general and administrative ........... 18,326 20,388 Research and development ...................... 3,333 1,450 Acquisition-related costs ..................... -- 249 -------------- -------------- 115,827 106,905 -------------- -------------- OPERATING EARNINGS ............................. 14,048 11,878 NON-OPERATING INCOME (EXPENSE) Interest income ............................... 337 273 Interest expense .............................. (2,304) (2,295) Other, net .................................... (126) (103) -------------- -------------- (2,093) (2,125) -------------- -------------- Earnings before income taxes ..................... 11,955 9,753 Income tax expense ............................... (5,081) (4,194) -------------- -------------- NET EARNINGS AVAILABLE FOR COMMON SHARES ......... $ 6,874 $ 5,559 ============== ============== NET EARNINGS PER COMMON SHARE: Basic ......................................... $ 0.39 $ 0.32 ============== ============== Diluted ....................................... $ 0.35 $ 0.30 ============== ============== Weighted-average common shares outstanding: Basic .......................................... 17,737 17,336 ============== ============== Diluted ........................................ 22,406 21,999 ============== ============== Dividends declared per common share .............. $ 0.03 $ 0.03 ============== ==============
See accompanying Notes to Consolidated Financial Statements. 4 EDO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 25, SEPTEMBER 27, 2004 2003 -------------- -------------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NET SALES .......................................................... $ 367,042 $ 324,896 -------------- -------------- COSTS AND EXPENSES Cost of sales ..................................................... 270,090 233,838 Selling, general and administrative ............................... 57,237 57,088 Research and development .......................................... 7,649 5,938 Impairment loss on assets held for sale ........................... -- 9,160 Acquisition-related costs ......................................... -- 669 -------------- -------------- 334,976 306,693 -------------- -------------- OPERATING EARNINGS ................................................. 32,066 18,203 NON-OPERATING INCOME (EXPENSE) Interest income ................................................... 781 673 Interest expense .................................................. (6,771) (6,769) Other, net ........................................................ (151) 25 -------------- -------------- (6,141) (6,071) -------------- -------------- Earnings before income taxes ......................................... 25,925 12,132 Income tax expense ................................................... (11,018) (5,217) -------------- -------------- Earnings from continuing operations before discontinued operations ... 14,907 6,915 Earnings from discontinued operations, net of tax .................... -- 1,398 -------------- -------------- NET EARNINGS AVAILABLE FOR COMMON SHARES ............................. $ 14,907 $ 8,313 ============== ============== NET EARNINGS PER COMMON SHARE: Basic: Continuing operations ............................................. $ 0.84 $ 0.40 Discontinued operations ........................................... -- 0.08 -------------- -------------- $ 0.84 $ 0.48 ============== ============== Diluted: Continuing operations ............................................. $ 0.81 $ 0.39 Discontinued operations ........................................... -- 0.08 -------------- -------------- $ 0.81 $ 0.47 ============== ============== Weighted-average common shares outstanding: Basic .............................................................. 17,652 17,281 ============== ============== Diluted ............................................................ 22,328 17,526 ============== ============== Dividends declared per common share .................................. $ 0.09 $ 0.09 ============== ==============
See accompanying Notes to Consolidated Financial Statements 5 EDO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 25, SEPTEMBER 27, 2004 2003 -------------- -------------- (UNAUDITED) (IN THOUSANDS) OPERATING ACTIVITIES: Earnings from operations ................................................ $ 14,907 $ 6,915 Adjustments to earnings to arrive at cash provided by operations: Depreciation ........................................................... 8,073 9,017 Amortization ........................................................... 4,254 3,529 Bad debt expense ....................................................... 289 170 Deferred tax provision (benefit) ....................................... 164 (3,756) Loss on disposal of property, plant and equipment ...................... 32 92 Impairment loss on assets held for sale ................................ -- 9,160 Deferred compensation expense .......................................... 699 182 Non-cash Employee Stock Ownership Plan compensation expense ............ 3,086 2,356 Non-cash stock option compensation expense ............................. -- 292 Dividends on unallocated Employee Stock Ownership Plan shares .......... 206 221 Common shares issued for directors' fees ............................... 104 79 Income tax benefit from stock options and Long-Term Incentive Plan ..... 700 147 Changes in operating assets and liabilities, excluding effects of acquisitions: Accounts receivable .................................................. 2,716 13,579 Inventories .......................................................... (16,561) 874 Prepayments and other assets ......................................... 3,185 (126) Accounts payable, accrued liabilities and other ...................... (6,860) (17,804) Contribution to defined benefit pension plan ......................... -- (5,000) Contract advances and deposits ....................................... 5,353 (13,041) -------------- -------------- Cash provided by operations ............................................... 20,347 6,886 -------------- -------------- Cash provided by discontinued operations .................................. -- 47 INVESTING ACTIVITIES: Purchase of plant and equipment ......................................... (7,005) (6,938) Payments received on notes receivable ................................... 225 1,310 Restricted cash ......................................................... -- 27,347 Purchase of marketable securities ....................................... -- (23) Cash paid for acquisitions, net of cash acquired ........................ 301 (87,647) -------------- -------------- Cash used by investing activities ......................................... (6,479) (65,951) -------------- -------------- FINANCING ACTIVITIES: Proceeds from exercise of stock options ................................. 991 226 Proceeds from management group receivables .............................. 128 242 Repayments of acquired debt ............................................. -- (11,998) Payment of common share cash dividends .................................. (1,794) (1,774) -------------- -------------- Cash used by financing activities ......................................... (675) (13,304) -------------- -------------- Net increase (decrease) in cash and cash equivalents ...................... 13,193 (72,322) Cash and cash equivalents at beginning of year ............................ 86,632 132,320 -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 99,825 $ 59,998 ============== ============== Supplemental disclosures: Cash paid for: Interest ............................................................... $ 3,617 $ 3,617 ============== ============== Income taxes ........................................................... $ 10,092 $ 10,621 ============== ==============
See accompanying Notes to Consolidated Financial Statements. 6 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 FOR THE NINE MONTHS ENDED SEPTEMBER 25, SEPTEMBER 27, SEPTEMBER 25, SEPTEMBER 27, 2004 2003 2004 2003 -------------- -------------- -------------- -------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Earnings: As reported .......................... $ 6,874 $ 5,559 $ 14,907 $ 8,313 Stock option compensation expense based on fair value method, net of tax .......................... (367) (384) (1,143) (1,208) -------------- -------------- -------------- -------------- Pro forma ............................ $ 6,507 $ 5,175 $ 13,764 $ 7,105 ============== ============== ============== ============== Basic earnings per common share: As reported .......................... $ 0.39 $ 0.32 $ 0.84 $ 0.48 Pro forma ............................ $ 0.37 0.30 $ 0.78 $ 0.41 Diluted earnings per common share: As reported .......................... $ 0.35 $ 0.30 $ 0.81 $ 0.47 Pro forma ............................ $ 0.34 $ 0.28 $ 0.76 $ 0.41 ============== ============== ============== ==============
During the nine months ended September 25, 2004, the Company issued 118.9 thousand common shares for the exercise of stock options and 116.0 thousand restricted common shares for long-term incentive awards. (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 Ltd. unit in England, now known as EDO MBM Technology 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 reinforces 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)16.1 million ($27.0 million), excluding transaction costs of approximately $1.9 million. In the second quarter of 2004 we received $0.3 million from an escrow account resulting in a decrease in purchase price and, therefore, goodwill. 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 has enhanced the Company's existing positions on long-range 7 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 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 expanded 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 NINE MONTHS ENDED SEPTEMBER 27, 2003 -------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales .............................. $ 353,313 ========== Earnings available for common shares ... $ 8,473 ========== Diluted earnings per common share ...... $ 0.48 ==========
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 9,307 13,462 11,649 Other assets - 446 414 Liabilities (7,257) (16,326) (7,791) -------------- -------------- -------------- Total purchase price $ 28,941 $ 25,889 $ 38,362 ============== ============== ==============
Allocations of the purchase prices for AERA, Darlington and Emblem have been finalized. There are outstanding amounts held in escrow which, when settled, may result in further adjustments to goodwill. (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 8 indefinite useful lives and requires that these assets be reviewed for impairment at least annually. Intangible assets with definite lives are amortized over their estimated useful lives. In accordance with SFAS No. 142, goodwill must be tested at least annually for impairment at the reporting unit level. If an indication of impairment exists, the Company is required to determine if such goodwill's implied fair value is less than the carrying value in order to determine the amount, if any, of the impairment loss required to be recorded. Impairment indicators include, among other conditions, cash flow deficits, an historic or anticipated decline in revenue or operating profits, adverse legal or regulatory developments, accumulation of costs significantly in excess of amounts originally expected to acquire the asset and/or a material decrease in the fair value of some or all of the assets. The changes in the carrying amount of goodwill by segment for the nine months ended September 25, 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 Emblem purchase price adjustment ............ (301) -- (301) ------------ ------------ ------------ Balance as of September 25, 2004 ............ $ 90,588 $ 1,661 $ 92,249 ============ ============ ============
Summarized below are intangible assets subject to amortization.
SEPTEMBER 25, 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 ............................................ (10,143) (5,906) -------- -------- $ 51,661 $ 55,898 ======== ========
The amortization expense for the three months ended September 25, 2004 and September 27, 2003 amounted to $1.4 million in both periods. The amortization expense for the nine months ended September 25, 2004 and September 27, 2003 amounted to $4.2 million and $3.5 million, respectively. Total remaining amortization expense for 2004, 2005, 2006, 2007, 2008 and thereafter related to these intangible assets is estimated to be $1.3 million, $5.3 million, $5.3 million, $5.1 million, $4.5 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:
SEPTEMBER 25, DECEMBER 31, 2004 2003 -------------- -------------- (IN THOUSANDS) Raw material and supplies ................... $ 9,908 $ 8,624 Work-in-process ............................. 54,310 38,052 Finished goods .............................. 1,875 1,870 Less: Unliquidated progress payments ...... (14,799) (13,813) -------------- -------------- $ 51,294 $ 34,733 ============== ==============
9 (6) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 25, SEPTEMBER 27, SEPTEMBER 25, SEPTEMBER 27, 2004 2003 2004 2003 -------------- -------------- -------------- -------------- (IN THOUSANDS) Numerator: Net Earnings for basic and diluted calculation .... $ 6,874 $ 5,559 $ 14,907 $ 8,313 Effect of dilutive securities: 5.25% Convertible Subordinated Notes ............. 1,040 1,031 3,120 -- -------------- -------------- -------------- -------------- Numerator for diluted calculation ................. $ 7,914 $ 6,590 $ 18,027 $ 8,313 ============== ============== ============== ============== Denominator: Denominator for basic calculation ................. 17,737 17,336 17,652 17,281 Effect of dilutive securities: Stock options .................................... 261 255 268 245 5.25% Convertible Subordinated Notes ............. 4,408 4,408 4,408 -- -------------- -------------- -------------- -------------- Denominator for diluted calculation ............... 22,406 21,999 22,328 17,526 ============== ============== ============== ==============
The assumed conversion of the Notes was anti-dilutive for the nine months ended September 27, 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.
AS OF SEPTEMBER 25, SEPTEMBER 27, 2004 2003 ------------- ------------- 5.25 % Convertible Subordinated Notes..... -- 4,408 Unexercised stock options................. 320 471 --- ----- 320 4,879 === =====
(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 September 25, 2004 and September 27, 2003, the Company recorded pension expense of $0.5 million and $1.0 million, respectively. For the nine months ended September 25, 2004 and September 27, 2003, the Company recorded pension expense of $1.6 million and $3.0 million, respectively. Summarized below are the components of the expense for each period presented.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED SEPTEMBER 25, SEPTEMBER 27, SEPTEMBER 25, SEPTEMBER 27, 2004 2003 2004 2003 -------------- -------------- -------------- -------------- (IN THOUSANDS) Service cost ........................... $ -- $ -- $ -- $ -- Interest cost .......................... 3,037 3,182 9,111 9,546 Expected return on plan assets ......... (3,176) (3,062) (9,528) (9,186) Amortization of unrecognized net loss .. 689 880 2,067 2,640 -------------- -------------- -------------- -------------- $ 550 $ 1,000 $ 1,650 $ 3,000 ============== ============== ============== ==============
(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 10 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 September 25, 2004, accumulated other comprehensive loss included in the accompanying consolidated balance sheet primarily represents additional minimum liabilities on benefit plans. Comprehensive income for the three months ended September 25, 2004 was $6.9 million compared to comprehensive income for the three months ended September 27, 2003 of $5.5 million. Comprehensive income for the nine months ended September 25, 2004 was $15.0 million compared to comprehensive income from continuing operations for the nine months ended September 27, 2003 of $6.8 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. 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 FOR THE NINE MONTHS ENDED SEPTEMBER 25, SEPTEMBER 27, SEPTEMBER 25, SEPTEMBER 27, 2004 2003 2004 2003 -------------- -------------- -------------- -------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net Sales: Defense .................................. $ 98,781 $ 94,108 $ 286,248 $ 251,051 Communications and Space Products ........ 20,485 13,308 46,547 41,011 Engineered Materials ..................... 10,609 11,367 34,247 32,834 -------------- -------------- -------------- -------------- $ 129,875 $ 118,783 $ 367,042 $ 324,896 -------------- -------------- -------------- -------------- Operating earnings (loss): Defense .................................. $ 9,503 $ 10,781 $ 27,503 $ 23,520 Communications and Space Products ........ 2,633 295 1,639 2,346 Engineered Materials ..................... 1,912 802 2,924 1,497 Impairment loss on assets held for sale .. -- -- -- (9,160) -------------- -------------- -------------- -------------- 14,048 11,878 32,066 18,203 Net interest expense ..................... (1,967) (2,022) (5,990) (6,096) Other, net ............................... (126) (103) (151) 25 -------------- -------------- -------------- -------------- Earnings before income taxes ............. $ 11,955 $ 9,753 $ 25,925 $ 12,132 -------------- -------------- -------------- --------------
(11) GUARANTOR AND NON-GUARANTOR SUBSIDIARIES The Company may, from time to time, issue indebtedness, a condition of which would be the guarantee of this indebtedness by certain of its subsidiaries. Presented below is condensed consolidating financial information for the Company and the contemplated subsidiary guarantors and non-guarantors at September 25, 2004 and December 31, 2003 and for the three and nine month periods ended September 25, 2004 and September 27, 2003. Each contemplated subsidiary guarantor is 100% owned, directly or indirectly, by the Company. Any guarantees that may be issued will be full and unconditional, as well as joint and several. In connection with the Company's credit facility, the Company cannot declare or pay any dividend on its outstanding common stock in an amount that exceeds fifty percent of its consolidated net income for the immediately preceding quarter. 11 EDO CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET SEPTEMBER 25, 2004
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- ---------- --------------- --------------- --------------- ASSETS Current assets: Cash and cash equivalents $ 90,391 $ 4,365 $ 5,069 $ -- $ 99,825 Accounts receivable, net 29,101 98,396 3,814 (13) 131,298 Inventories 2,502 44,735 4,057 -- 51,294 Deferred income tax asset, net 3,594 -- -- -- 3,594 Prepayments and other 2,288 1,722 160 -- 4,170 --------------- ---------- --------------- --------------- --------------- Total current assets 127,876 149,218 13,100 (13) 290,181 Investment in subsidiaries 246,888 -- -- (246,888) -- Property, plant and equipment, net 7,516 19,415 3,324 -- 30,255 Notes receivable 6,736 -- -- -- 6,736 Goodwill -- 82,942 9,307 -- 92,249 Other intangible assets, net -- 38,793 12,868 -- 51,661 Deferred income tax asset, net 21,610 -- -- -- 21,610 Other assets 18,286 1,261 -- -- 19,547 --------------- ---------- --------------- --------------- --------------- $ 428,912 $ 291,629 $ 38,599 $ (246,901) $ 512,239 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 16,898 $ 55,367 $ 4,871 $ 112 $ 77,248 Contract advances and deposits 2,018 11,530 -- -- 13,548 --------------- ---------- --------------- --------------- --------------- Total current liabilities 18,916 66,897 4,871 112 90,796 Long-term debt 137,800 -- -- -- 137,800 Post retirement benefits obligations 61,217 11,487 -- -- 72,704 Environmental obligation 1,686 -- -- -- 1,686 Intercompany accounts -- 95,003 26,902 (121,905) -- Shareholders' equity: Preferred shares -- -- -- -- -- Common shares 20,067 99 -- (99) 20,067 Additional paid-in capital 156,666 25,223 6,486 (31,709) 156,666 Retained earnings 82,378 97,078 274 (97,352) 82,378 Accumulated other comprehensive loss, net of income tax benefit (29,374) 117 66 -- (29,191) Treasury shares (1,387) (4,052) -- 4,052 (1,387) Unearned ESOP shares (16,352) -- -- -- (16,352) Management group receivables -- (223) -- -- (223) Deferred compensation under Long-Term Incentive Plan (2,705) -- -- -- (2,705) --------------- ---------- --------------- --------------- --------------- Total shareholders' equity 209,293 118,242 6,826 (125,108) 209,253 --------------- ---------- --------------- --------------- --------------- $ 428,912 $ 291,629 $ 38,599 $ (246,901) $ 512,239 =============== ========== =============== =============== ===============
EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED SEPTEMBER 25, 2004
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- --------------- --------------- --------------- --------------- Net Sales $ 22,948 $ 103,008 $ 6,717 $ (2,798) $ 129,875 Costs and expenses: Cost of sales 19,143 72,314 5,509 (2,798) 94,168 Selling, general and administrative 168 17,217 941 -- 18,326 Research and development 728 2,180 425 -- 3,333 --------------- --------------- --------------- --------------- --------------- 20,039 91,711 6,875 (2,798) 115,827 --------------- --------------- --------------- --------------- --------------- Operating earnings (loss) 2,909 11,297 (158) -- 14,048 Non-operating income (expense) Interest income 288 30 19 -- 337 Interest expense (2,304) -- -- -- (2,304) Other, net (48) (78) -- -- (126) --------------- --------------- --------------- --------------- --------------- (2,064) (48) 19 -- (2,093) Earnings (loss) before income taxes 845 11,249 (139) -- 11,955 Income tax expense 699 4,343 39 -- 5,081 --------------- --------------- --------------- --------------- --------------- Earnings (loss) after income taxes 146 6,906 (178) -- 6,874 Equity in undistributed earnings of subsidiaries 6,728 -- -- (6,728) -- --------------- --------------- --------------- --------------- --------------- Net earnings (loss) $ 6,874 $ 6,906 $ (178) $ (6,728) $ 6,874 =============== =============== =============== =============== ===============
12 EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS FOR THE NINE MONTHS ENDED SEPTEMBER 25, 2004
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- --------------- --------------- --------------- --------------- Net Sales $ 64,786 $ 290,401 $ 21,100 $ (9,245) $ 367,042 Costs and expenses: Cost of sales 54,625 208,280 16,430 (9,245) 270,090 Selling, general and administrative 2,983 50,558 3,696 -- 57,237 Research and development 1,969 4,573 1,107 -- 7,649 --------------- --------------- --------------- --------------- --------------- 59,577 263,411 21,233 (9,245) 334,976 --------------- --------------- --------------- --------------- --------------- Operating earnings (loss) 5,209 26,990 (133) -- 32,066 Non-operating income (expense) Interest income 615 94 72 -- 781 Interest expense (6,771) -- -- -- (6,771) Other, net (164) 13 -- -- (151) --------------- --------------- --------------- --------------- --------------- (6,320) 107 72 -- (6,141) (Loss) earnings before income taxes (1,111) 27,097 (61) -- 25,925 Income tax (benefit) expense (92) 10,897 213 -- 11,018 --------------- --------------- --------------- --------------- --------------- (Loss) earnings after income taxes (1,019) 16,200 (274) -- 14,907 Equity in undistributed earnings of subsidiaries 15,926 -- -- (15,926) -- --------------- --------------- --------------- --------------- --------------- Net earnings $ 14,907 $ 16,200 $ (274) $ (15,926) $ 14,907 =============== =============== =============== =============== ===============
EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 25, 2004
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- ---------- -------------- ------------ ------------ OPERATING ACTIVITIES: Earnings (loss) from continuing operations $ 14,907 $ 16,200 $ (274) $ (15,926) $ 14,907 Adjustments to earnings to arrive at cash provided (used) by continuing operations: Depreciation 1,393 6,125 555 -- 8,073 Amortization -- 3,500 754 -- 4,254 Deferred tax benefit 246 -- (82) -- 164 Bad debt expense -- 289 -- -- 289 Loss on sale of property, plant and equipment -- 32 -- -- 32 Deferred compensation expense 699 -- -- -- 699 Non-cash Employee Stock Ownership Plan compensation expense 3,086 -- -- -- 3,086 Dividends on unallocated Employee Stock Ownership Plan shares 206 -- -- -- 206 Common shares issued for directors' fees 104 -- -- -- 104 Income tax benefit from stock options 700 -- -- -- 700 Changes in operating assets and liabilities, excluding effects of acquisitions: Equity in earnings of subsidiaries (15,926) -- -- 15,926 -- Intercompany 30,687 (31,279) 592 -- -- Accounts receivable (14) 2,560 170 -- 2,716 Inventories 2,818 (18,611) (768) -- (16,561) Prepayments and other assets 1,463 1,552 170 -- 3,185 Accounts payable, accrued liabilities and other (17,080) 11,272 (1,052) -- (6,860) Contract advances and deposits (770) 6,123 -- -- 5,353 --------------- ---------- -------------- ------------ ------------ Cash provided (used) by operations 22,519 (2,237) 65 -- 20,347 --------------- ---------- -------------- ------------ ------------ INVESTING ACTIVITIES: Purchase of plant and equipment (1,944) (4,897) (164) -- (7,005) Payments received on notes receivable 225 -- -- -- 225 Cash received from Emblem Escrow settlement 301 -- -- -- 301 --------------- ---------- -------------- ------------ ------------ Cash used by investing activities (1,418) (4,897) (164) -- (6,479) --------------- ---------- -------------- ------------ ------------ FINANCING ACTIVITIES: Proceeds from exercise of stock options 991 -- -- -- 991 Proceeds from management group receivables -- 128 -- -- 128
13 Payment of common share cash dividends (1,794) -- -- -- (1,794) --------------- ---------- -------------- ------------ ------------ Cash (used) provided by financing activities (803) 128 -- -- (675) --------------- ---------- -------------- ------------ ------------ Net increase (decrease) in cash and cash equivalents 20,298 (7,006) (99) -- 13,193 Cash and cash equivalents at beginning of year 70,093 11,371 5,168 -- 86,632 --------------- ---------- -------------- ------------ ------------ Cash and cash equivalents at end of period $ 90,391 $ 4,365 $ 5,069 $ -- $ 99,825 =============== ========== ============== ============ ============
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 $ 70,093 $ 11,371 $ 5,168 $ -- $ 86,632 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 STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED SEPTEMBER 27, 2003
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- ----------- --------------- --------------- --------------- Continuing Operations: Net Sales $ 22,769 $ 92,439 $ 7,448 $ (3,873) $ 118,783 Costs and expenses: Cost of sales 19,736 65,262 3,693 (3,873) 84,818
14 Selling, general and administrative 1,219 16,065 3,104 -- 20,388 Research and development 545 905 -- -- 1,450 Acquisition-related costs 62 187 -- -- 249 --------------- ----------- --------------- --------------- --------------- 21,562 82,419 6,797 (3,873) 106,905 --------------- ----------- --------------- --------------- --------------- Operating Earnings 1,207 10,020 651 -- 11,878 Non-operating income (expense) Interest income 87 176 10 -- 273 Interest expense (2,295) -- -- -- (2,295) Other, net 14 (119) 2 -- (103) --------------- ----------- --------------- --------------- --------------- (2,194) 57 12 -- (2,125) (Loss) earnings from continuing operations before income taxes (987) 10,077 663 -- 9,753 Income tax expense 3,190 639 365 -- 4,194 --------------- ----------- --------------- --------------- --------------- (Loss) earnings from continuing operations (4,177) 9,438 298 -- 5,559 Equity in undistributed earnings of subsidiaries 9,736 -- -- (9,736) -- --------------- ----------- --------------- --------------- --------------- Net earnings $ 5,559 $ 9,438 $ 298 $ (9,736) $ 5,559 =============== =========== =============== =============== ===============
EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS FOR THE NINE MONTHS ENDED SEPTEMBER 27, 2003
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- --------------- --------------- --------------- --------------- Continuing Operations: Net Sales $ 63,997 $ 265,335 $ 9,117 $ (13,553) $ 324,896 Costs and expenses: Cost of sales 54,569 188,240 4,582 (13,553) 233,838 Selling, general and administrative 4,186 49,445 3,457 -- 57,088 Research and development 2,153 3,785 -- -- 5,938 Acquisition-related costs 187 482 -- -- 669 Impairment loss on assets held for sale -- 9,160 -- -- 9,160 --------------- --------------- --------------- --------------- --------------- 61,095 251,112 8,039 (13,553) 306,693 --------------- --------------- --------------- --------------- --------------- Operating Earnings 2,902 14,223 1,078 -- 18,203 Non-operating income (expense) Interest income 431 232 10 -- 673 Interest expense (6,769) -- -- -- (6,769) Other, net (87) 112 -- -- 25 --------------- --------------- --------------- --------------- --------------- (6,425) 344 10 -- (6,071) (Loss) earnings from continuing operations before income taxes (3,523) 14,567 1,088 -- 12,132 Income tax (benefit) expense (1,331) 6,038 510 -- 5,217 --------------- --------------- --------------- --------------- --------------- (Loss) earnings from continuing operations (2,192) 8,529 578 -- 6,915 Equity in undistributed earnings of subsidiaries 9,107 -- -- (9,107) -- --------------- --------------- --------------- --------------- --------------- Net earnings from continuing operations 6,915 8,529 578 (9,107) 6,915 Earnings from discontinued operations 1,398 -- -- -- 1,398 --------------- --------------- --------------- --------------- --------------- Net earnings $ 8,313 $ 8,529 $ 578 $ (9,107) $ 8,313 =============== =============== =============== =============== ===============
EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 27, 2003
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- ----------- --------------- ------------ ------------ OPERATING ACTIVITIES: Earnings from continuing operations $ 6,915 $ 8,529 $ 578 $ (9,107) $ 6,915 Adjustments to earnings to arrive at cash provided (used) by continuing operations: Depreciation 1,315 7,558 144 -- 9,017 Amortization -- 3,302 227 -- 3,529 Deferred tax benefit (3,756) -- -- -- (3,756) Bad debt expense -- 170 -- -- 170 Loss on sale of property, plant and equipment -- 92 -- -- 92 Impairment loss on assets held for sale -- 9,160 -- -- 9,160
15 Deferred compensation expense 182 -- -- -- 182 Non-cash Employee Stock Ownership Plan compensation expense 2,356 -- -- -- 2,356 Non-cash Employee Stock Ownership Plan compensation expense 292 -- -- -- 292 Dividends on unallocated Employee Stock Ownership Plan shares 221 -- -- -- 221 Common shares issued for directors' fees 79 -- -- -- 79 Income tax benefit from stock options 147 -- -- -- 147 Changes in operating assets and liabilities, excluding effects of acquisitions: Equity in earnings of subsidiaries (9,107) -- -- 9,107 -- Intercompany 55,476 (31,776) 6,208 (29,908) -- Accounts receivable 5,250 8,414 (85) -- 13,579 Inventories (2,707) 3,228 353 -- 874 Prepayments and other assets (31,223) 1,163 26 29,908 (126) Contribution to defined benefit pension plan (5,000) -- -- -- (5,000) Accounts payable, accrued liabilities and other (2,226) (12,069) (3,509) -- (17,804) Contract advances and deposits (7,540) (5,501) -- -- (13,041) --------------- ----------- -------------- ------------ ------------ Cash provided (used) by continuing operations 10,674 (7,730) 3,942 -- 6,886 --------------- ----------- -------------- ------------ ------------ Net cash provided by discontinued operations 47 -- -- -- 47 INVESTING ACTIVITIES: Purchase of plant and equipment (2,795) (3,830) (313) -- (6,938) Payments received on notes receivable 225 1,085 -- -- 1,310 Purchase of marketable securities (23) -- -- -- (23) Restricted cash 27,347 -- -- -- 27,347 Cash paid for acquisitions, net of cash acquired (87,647) -- -- -- (87,647) --------------- ----------- -------------- ------------ ------------ Cash used by investing activities (62,893) (2,745) (313) -- (65,951) --------------- ----------- -------------- ------------ ------------ FINANCING ACTIVITIES: Proceeds from exercise of stock options 226 -- -- -- 226 Proceeds from management group receivables -- 242 -- -- 242 Repayments of acquired debt (11,998) -- -- -- (11,998) Payment of common share cash dividends (1,774) -- -- -- (1,774) --------------- ----------- -------------- ------------ ------------ Cash (used) provided by financing activities (13,546) 242 -- -- (13,304) --------------- ----------- -------------- ------------ ------------ Net (decrease) increase in cash and cash equivalents (65,718) (10,233) 3,629 -- (72,322) Cash and cash equivalents at beginning of year 115,160 17,160 -- -- 132,320 --------------- ----------- -------------- ------------ ------------ Cash and cash equivalents at end of period $ 49,442 $ 6,927 $ 3,629 -- $ 59,998 =============== =========== ============== ============ ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION EDO Corporation (the "Company") provides military and commercial products and professional services, with core competencies in a wide range of critical defense areas, including: - Defense Electronics - Aircraft Armament - 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 16 products and integrated composite structures for the aircraft and oil industries. The Company has a disciplined acquisition program which is diversifying the base of major platforms and customers. The Company's Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and the Proxy Statement for its Annual Meeting of 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. 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. 17 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 BENEFITS 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. RESULTS OF OPERATIONS The following information should be read in conjunction with the Consolidated Financial Statements as of September 25, 2004. THREE MONTHS ENDED SEPTEMBER 25, 2004 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 27, 2003 Net sales by segment were as follows:
THREE MONTHS ENDED INCREASE/(DECREASE) SEPTEMBER 25, SEPTEMBER 27, FROM SEGMENT 2004 2003 PRIOR PERIOD ------- -------------- -------------- ------------------ (DOLLARS IN THOUSANDS) Defense .............................. $ 98,781 $ 94,108 5.0% Communications and Space Products .... 20,485 13,308 53.9% Engineered Materials ................. 10,609 11,367 (6.7)% -------------- -------------- ---- Total ................................ $ 129,875 $ 118,783 9.3% ============== ============== ====
In the Defense segment, there were increases in sales of C4I, airborne mine countermeasures systems, which includes OASIS, and professional services. These increases were partially offset by a decrease in undersea warfare systems. In the Communications and Space Products segment, the increase in sales was attributable to deliveries on our contract with the U.S. Army for the new force protection systems. Earlier this year, we received a $6.8 million incremental award as part of a $45.3 million contract for additional force protection systems for the U.S. Army. This "rapid response" program will be a significant contributor to sales and margin in this segment for the remainder of the year. In the Engineered Materials segment, there were decreases in sales of integrated composite structures, primarily attributable to the absence of sales on the Comanche program which was terminated. Operating earnings by segment were as follows: 18
THREE MONTHS ENDED SEPTEMBER 25, SEPTEMBER 27, SEGMENT 2004 2003 ------- -------------- -------------- (DOLLARS IN THOUSANDS) Defense ................................ $ 9,503 $ 10,781 Communications and Space Products ...... 2,633 295 Engineered Materials ................... 1,912 802 -------------- -------------- Total .................................. $ 14,048 $ 11,878 ============== ==============
Items of note affecting operating earnings are summarized here to help clarify the comparison of results.
THREE MONTHS ENDED SEPTEMBER 25, SEPTEMBER 27, 2004 2003 -------------- -------------- (DOLLARS IN THOUSANDS) Pension expense ................... $ 550 $ 1,000 ESOP Compensation expense ......... $ 1,058 $ 846 Intangible asset amortization ..... $ 1,366 $ 1,429
The lower pension expense in 2004 compared to 2003 is attributable to the cash contribution we made to our defined benefit plan in 2003. The higher ESOP compensation expense for the third quarter of 2004 is attributable to our higher average stock price compared to the third quarter of 2003. Pension and ESOP compensation expense are allocated between cost of sales and selling, general and administrative expense. The intangible asset amortization expense is associated with the acquisitions made in 2002 and 2003 and affects primarily the Defense segment. The Defense segment's operating earnings for the three months ended September 25, 2004 were $9.5 million or 9.6% of this segment's net sales compared to $10.8 million or 11.5% of this segment's net sales for the three months ended September 27, 2003. This decrease in operating earnings was attributable to lower profitability in electronic warfare systems due to the completion of production activities on the Universal Exciter Upgrade ("UEU") program in 2003 which resulted in earnings at a relatively high margin. The Communications and Space Products segment's operating earnings for the three months ended September 25, 2004 were $2.6 million or 12.9% of this segment's net sales compared to $0.3 million or 2.2% of this segment's net sales for the three months ended September 27, 2003. Operating earnings for the third quarter of 2003 included a $1.1 million charge to write-down satellite-related inventory to net realizable value, resulting from competitive price pressure from our major customer as well as some obsolescence determined as part of our normal ongoing review of recoverability. The increase in operating earnings for the three months ended September 25, 2004 is attributable to sales associated with the aforementioned U.S. Army program for force protection systems which will continue to be a significant contributor to operating earnings in this segment for the year. The Engineered Materials segment's operating earnings for the three months ended September 25, 2004 were $1.9 million or 18.0% of this segment's net sales compared to operating earnings of $0.8 million or 7.1% of this segment's net sales for the three months ended September 27, 2003. Operating earnings for the three months ended September 25, 2004 were positively affected by a net $0.8 million, resulting from $1.1 million received in a settlement of a legal matter, partially offset by related legal fees. Selling, general and administrative expenses for the three months ended September 25, 2004 decreased to $18.3 million or 14.1% of net sales from $20.4 million or 17.2% of net sales for the three months ended September 27, 2003. This decrease was attributable primarily to facilities consolidations and other synergies achieved on the AERA and Darlington acquisitions. Research and development expense for the three months ended September 25, 2004 increased to $3.3 million or 2.6% of net sales from $1.5 million or 1.2% of net sales for the three months ended September 27, 2003. The increase is attributable to expenditures in the Defense segment in reconnaissance and surveillance systems, aircraft weapons suspension and release equipment and force protection systems. Interest expense, net of interest income, for the three months ended September 25, 2004 remained virtually unchanged at $2.0 million compared to the three months ended September 27, 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. For the three months ended September 25, 2004, net earnings were $6.9 million or $0.35 per diluted common share on 22.4 million diluted shares compared to net earnings of $5.6 million or $0.30 per diluted common share on 22.0 million diluted shares for the three months ended September 27, 2003. The convertible notes had a dilutive effect in both quarters. 19 NINE MONTHS ENDED SEPTEMBER 25, 2004 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 27, 2003 Net sales by segment were as follows:
NINE MONTHS ENDED INCREASE/(DECREASE) SEPTEMBER 25, SEPTEMBER 27, FROM SEGMENT 2004 2003 PRIOR PERIOD ------- -------------- -------------- ------------------- (DOLLARS IN THOUSANDS) Defense ........................... $ 286,248 $ 251,051 14.0% Communications and Space Products . 46,547 41,011 13.5% Engineered Materials .............. 34,247 32,834 4.3% -------------- -------------- ---- Total ............................. $ 367,042 $ 324,896 13.0% ============== ============== ====
In the Defense segment, approximately $11.2 million of the increase in sales was attributable to sales of Emblem Group Ltd. ("Emblem") since its acquisition date of June 16, 2003. In addition, there were increases in sales of reconnaissance and surveillance systems, professional services and C4I. These increases were partially offset by decreases in sales of electronic warfare equipment due to the completion of the UEU production program in 2003. In addition there was a decrease in sales of $2.3 million in the second quarter of 2004 to reflect an increase to the estimate-to-complete of an undersea warfare systems program accounted for under the percentage of completion method. The increase in the estimate resulted in a decrease to the percent complete and therefore the decrease to sales. The revision to the estimate resulted from performance issues discovered during testing phases. There was a comparable reduction to operating earnings as discussed below. In the Communications and Space Products segment, the increase in sales was attributable to deliveries on our contract with the U.S. Army for the new force protection systems. In 2004, we received a $6.8 million incremental award as part of a $45.3 million contract for additional force protection systems. This "rapid response" program will be a significant contributor to sales and margin in this segment for the remainder of the year. The increase in sales was partially offset by a decrease due to completion of production deliveries of interference cancellation systems and the basic shortstop electronic protection systems ("SEPS") in the first quarter of 2003. In the Engineered Materials segment, there were increases in sales of integrated composite structures including production and installation of our composite pipe on offshore oil rig projects. Operating earnings by segment were as follows:
NINE MONTHS ENDED SEPTEMBER 25, SEPTEMBER 27, SEGMENT 2004 2003 ------- -------------- -------------- (DOLLARS IN THOUSANDS) Defense ................................ $ 27,503 $ 23,520 Communications and Space Products ...... 1,639 2,346 Engineered Materials ................... 2,924 1,497 Impairment loss on Deer Park Facility .. -- (9,160) -------------- -------------- Total .................................. $ 32,066 $ 18,203 ============== ==============
Items of note affecting operating earnings are summarized here to help clarify the comparison of results.
NINE MONTHS ENDED SEPTEMBER 25, SEPTEMBER 27, 2004 2003 -------------- -------------- (DOLLARS IN THOUSANDS) Pension ........................ $ 1,650 $ 3,000 ESOP Compensation expense ...... $ 3,086 $ 2,356 Intangible asset amortization .. $ 4,237 $ 3,457
The lower pension expense in 2004 compared to 2003 is attributable to the cash contribution we made to our defined benefit plan in 2003. The higher ESOP compensation expense for the first nine months of 2004 is attributable to our higher average stock price compared to the first nine months of 2003. Pension and ESOP compensation expense are allocated between cost of sales and selling, general and administrative expense. The intangible asset amortization expense is associated with the acquisitions made in 2002 and 2003 and affects primarily the Defense segment. The $9.2 million impairment charge related to our Deer Park facility which was later sold in 2003. Operating earnings for the nine months ended September 25, 2004 were also affected by several contract-related items which are described in further detail below in the discussion of segment operating earnings. The Defense segment's operating earnings for the nine months ended September 25, 2004 were $27.5 million or 9.6% of this segment's net sales compared to $23.5 million or 9.4% of this segment's net sales for the nine months ended September 27, 2003. This 20 increase in operating earnings was attributable to continuing higher-margin sales of reconnaissance and surveillance systems and radar signal simulators. In addition, there was a positive impact to operating earnings of approximately $3.4 million resulting from the release of a reserve which had been previously established for a potential issue on MK105-related contracts. The release of the reserve was triggered by final closeout of MK105 programs and proven performance resulting from system utilization over the course of the year. These increases were partially offset by the effect of increasing the estimate-to-complete on an aircraft armament program resulting in a $1.6 million negative impact to operating earnings and the aforementioned $2.3 million impact on an undersea warfare systems program. We believe that our current estimates accurately reflect the total potential impacts. The Communications and Space Products segment's operating earnings for the nine months ended September 25, 2004 were $1.6 million or 3.5% of this segment's net sales compared to operating earnings of $2.3 million or 5.7% of this segment's net sales for the nine months ended September 27, 2003. In the first quarter of 2004, there were operating losses related 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. In addition, there was a loss in the antenna product line in the second quarter due to production inefficiencies that resulted in inventory adjustments as well as increases in estimates-to-complete. This segment's operating results were positively affected by sales associated with the aforementioned force protection systems program which will continue to be a significant contributor to operating earnings in this segment for the remainder of the year. The Engineered Materials segment's operating earnings for the nine months ended September 25, 2004 were $2.9 million or 8.5% of this segment's net sales compared to operating earnings of $1.5 million or 4.6% of this segment's net sales for the nine months ended September 27, 2003. In the second quarter of 2004, there was a negative impact of $0.8 million which related to the undersea warfare systems program issue in the Defense segment. A component for sonar equipment produced in the engineered materials segment experienced failures during testing. The estimate of the cost to remedy the problem resulted in the $0.8 million charge to earnings. For the nine months ended September 25, 2004, this segment's operating earnings were positively affected by a net $0.4 million, resulting from $1.1 million received in a settlement of a legal matter, partially offset by related legal fees. In the nine months ended September 27, 2003, we incurred a charge of $0.7 million to write-down inventory and receivables related to the microwave product line that serviced the telecommunications industry. As sales were not materializing to expected levels, we conducted an analysis which resulted in the write-down of $0.6 million of inventory and $0.1 million of unbilled receivables. Selling, general and administrative expenses for the nine months ended September 25, 2004 of $57.2 million decreased as a percent of net sales to 15.6% from 17.6% for the nine months ended September 27, 2003. This decrease was attributable primarily to facilities consolidations and other synergies achieved on the AERA and Darlington acquisitions. Research and development expense for the nine months ended September 25, 2004 increased to $7.6 million or 2.1% of net sales from $5.9 million or 1.8% of net sales for the nine months ended September 27, 2003. The increase is attributable to expenditures in the Defense segment in reconnaissance and surveillance systems and force protection systems. Interest expense, net of interest income, for the nine months ended September 25, 2004 decreased slightly to $6.0 million compared to $6.1 for the nine months ended September 27, 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 nine months ended September 25, 2004 and 43.0% for the nine months ended September 27, 2003. For the nine months ended September 25, 2004, net earnings were $14.9 million or $0.81 per diluted common share on 22.3 million diluted shares compared to net earnings from continuing operations of $6.9 million or $0.39 per diluted common share on 17.5 million diluted shares for the nine months ended September 27, 2003. The convertible notes had a dilutive effect in the nine months ended September 25, 2004, but not in the nine months ended September 27, 2003. In the nine months ended September 27, 2003, we received notification of final settlement of bankruptcy matters pertaining to our former energy business. Upon the discontinuance of such business in 1996, a liability was established pending final settlement of the bankruptcy. This liability was reversed as of September 27, 2003. Consequently, $1.4 million, which was net of income tax expense of $0.9 million, was reported as earnings from discontinued operations in the accompanying statement of earnings. Net earnings including discontinued operations, were $8.3 million or $0.47 per diluted share for the nine months ended September 27, 2003. LIQUIDITY AND CAPITAL RESOURCES BALANCE SHEET Our cash and cash equivalents increased 15.2% to $99.8 million at September 25, 2004 from $86.6 million at December 31, 2003. This increase was due primarily to $20.3 million of cash provided by operations, $1.0 million of proceeds from the exercise of stock options, and $0.3 million of cash received upon settlement of an escrow related to the purchase of Emblem. These increases were 21 partially offset by $7.0 million used for the purchase of capital equipment and $1.8 million for the payment of common share dividends. Accounts receivable decreased 2.2% to $131.3 million at September 25, 2004 from $134.3 million at December 31, 2003. Inventories increased 47.7% to $51.3 million at September 25, 2004 from $34.7 million at December 31, 2003 due primarily to the efforts expended on work-in-progress on major programs, such as the force protection systems program for which deliveries will continue for the remainder of the year. The note receivable of $6.7 million at September 25, 2004 and $6.5 million at December 31, 2003 represents the note receivable from the sale of our facility in Deer Park in 2003 and is due no later that October 9, 2005. Included in other current assets is $1.4 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% per annum. The latter notes receivable are secured by a mortgage on the facility. Subsequent to the end of the third quarter, we received a $0.9 million payment against the College Point facility notes. FINANCING ACTIVITIES Credit Facility We have a $200.0 million credit facility with a consortium of banks, led by Citibank, N.A. as the administrative agent, Bank of America as the syndication agent and Wachovia Bank, N.A. as the documentation agent. The facility expires in November 2005. The credit facility provides us with sub-limits of borrowing up to $125.0 million for acquisition-related financing and up to $125.0 million in standby letters of credit financing. The potential cash borrowing under the facility is reduced by the amount of outstanding letters of credit. Borrowings under the facility will be priced initially at LIBOR plus a predetermined amount, ranging from 1.25% to 1.75%, depending on our consolidated leverage ratio at the time of the borrowing. At September 25, 2004, LIBOR was approximately 1.97% 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 September 25, 2004 and December 31, 2003. Letters of credit outstanding at September 25, 2004 pertaining to the credit facility were $41.1 million, resulting in $83.9 million available at September 25, 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 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 September 25, 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 September 25, 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 September 25, 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 22 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 September 25, 2004, we have included the following table. We are obligated under building and equipment leases expiring between 2004 and 2017. The aggregate future minimum lease commitments under those obligations with noncancellable terms in excess of one year are shown below. Our commitments under letters of credit and advance payment and performance bonds relate primarily to advances received on foreign contracts should we fail to perform in accordance with the contract terms. We do not expect to have to make payments under these letters of credits or bonds since these obligations are removed as we perform under the related contracts. The amounts for letters of credit and performance bonds represent the amount of commitment expiration per period.
Payments Due In (in millions): --------------------------------------------------------------- 2009 and Total 2004 2005 2006 2007 2008 Beyond -------- -------- -------- -------- -------- -------- -------- 5.25% Convertible Subordinated Notes due 2007 .... $ 137.8 $ -- $ -- $ -- $ 137.8 $ -- $ -- Operating leases ................................. 85.5 3.9 13.2 9.7 9.3 8.6 40.8 Letters of credit ................................ 41.5 3.2 36.1 0.1 2.1 -- -- Advance payment and performance bonds ............ 1.9 0.2 -- -- -- -- 1.7 -------- -------- -------- -------- -------- -------- -------- Total ............................................ $ 266.7 $ 7.3 $ 49.3 $ 9.8 $ 149.2 $ 8.6 $ 42.5 ======== ======== ======== ======== ======== ======== ========
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. A hedging contract was put in place at the end of June 2004 which related to a long-term contract denominated in Euros. There was no significant impact on reported results as of and for the nine months ended September 25, 2004. 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 September 25, 2004 increased to $501.3 million from $462.3 million at December 31, 2003. Our backlog consists primarily of current orders under long-lived, mission-critical programs on 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; 23 delay in launch dates due to equipment, weather or other factors beyond our control; and development of sufficient customer base to support a particular satellite constellation program. Commercial product sales are subject to: success of product development programs currently underway or planned; competitiveness of current and future production costs and prices and market and consumer base development of new product programs. Achievement of margins on sales, earnings and cash flow can be affected by: unanticipated technical problems; government termination of contracts for convenience; decline in expected levels of sales; underestimation of anticipated costs on specific programs; the ability to effect acquisitions; and risks inherent in integrating recent acquisitions into our overall structure. Expectations of future income tax rates can be affected by a variety of factors, including statutory changes in Federal and state tax rates, nondeductibility of goodwill amortization and IPR&D acquired in a stock purchase business combination and the nondeductibility of our noncash ESOP compensation expense. The Company has no obligation to update any forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS The information called for by this item is provided under Item 2 - "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of the end of the period covered by this Quarterly Report on Form 10-Q, EDO carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures under the supervision and with the participation of its management, including its Review and Disclosure Committee, its Chief Executive Officer and its Chief Financial Officer. The Chief Executive Officer and Chief Financial Officer concluded that EDO's disclosure controls and procedures are effective to ensure that material information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. CHANGES IN INTERNAL CONTROLS There were no changes in EDO's internal controls over financial reporting during EDO's last fiscal quarter that have materially affected, or are likely to materially affect internal controls over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. In September, 2004 the Company and Technip Offshore, Inc. reached a settlement in the matter Technip Offshore Inc. v. EDO Fiber Science and EDO Corporation (U.S. District Court for the Southern District of Texas). The settlement provided for the termination of all prior agreements between the parties bearing on the dispute, payment to the Company of $1.1 million and the assignment to Technip and license back to the Company of certain patented technology. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE. ITEM 5. OTHER INFORMATION. Effective October 26, 2004, the Company amended its by-laws Sections 5.11(b) and 6.03 to provide for investment of funds pursuant to a Board of Directors-approved investment policy. The previous by-laws did not refer to the Company's investment policy. ITEM 6. EXHIBITS (a) EXHIBITS 3(a)(1) Restated Certificate of Incorporation of the Company dated May 15, 2003 (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, Exhibit 3(a)(1)). 3(a)(2) Amendment of the Restated Certificate of Incorporation of the Company dated May 10, 2004. 3(b)* By-Laws of the Company as amended October 26, 2004. 10 Amended and Restated Employment Agreement by and between the Company and James M. Smith dated as of October 1, 2004 (incorporated herein by reference to the Company's Form 8-K filed on October 28, 2004 Exhibit 10). 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. 24 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. 25 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: October 29, 2004 Frederic B. Bassett Vice President Finance, Treasurer and Chief Financial Officer 26