-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CJmY2NgjAtoRp4HB7CGIPw1A2g4KT/53B5t5sH7Kdd3rKn780j8wtjBToMq3jMb3 oU9bGOAVBBaZmThurOKwsQ== 0000950123-05-005313.txt : 20050429 0000950123-05-005313.hdr.sgml : 20050429 20050429155332 ACCESSION NUMBER: 0000950123-05-005313 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050326 FILED AS OF DATE: 20050429 DATE AS OF CHANGE: 20050429 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDO CORP CENTRAL INDEX KEY: 0000031617 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 110707740 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03985 FILM NUMBER: 05785784 BUSINESS ADDRESS: STREET 1: 60 EAST 42ND STREET STREET 2: 42ND FLOOR CITY: NEW YORK STATE: NY ZIP: 10165 BUSINESS PHONE: 2127162000 MAIL ADDRESS: STREET 1: 60 EAST 42ND STREET STREET 2: 42ND FLOOR CITY: NEW YORK STATE: NY ZIP: 10165 10-Q 1 y08104e10vq.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 26, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _______________ COMMISSION FILE NUMBER 1-3985 ----------------------------- EDO CORPORATION (Exact name of registrant as specified in its charter) NEW YORK 11-0707740 (State of Incorporation) (IRS Employer Identification No.) 60 EAST 42ND STREET, 42ND FLOOR, 10165 NEW YORK, NEW YORK (Zip Code) (Address of principal executive offices) (212) 716-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] The number of shares of EDO common stock outstanding as of April 27, 2005 was 20,144,130 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 - March 26, 2005 (unaudited) and December 31, 2004..... 3 Consolidated Statements of Earnings - Three Months Ended March 26, 2005 (unaudited) and March 27, 2004 ................................................................ 4 Consolidated Statements of Cash Flows - Three Months Ended March 26, 2005 and March 27, 2004 (unaudited)..................................................... 5 Notes to Consolidated Financial Statements (unaudited)............................. 6 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................................... 13 ITEM 3 Quantitative and Qualitative Disclosures about Market Risk......................... 21 ITEM 4 Controls and Procedures............................................................ 21 PART II Other Information ................................................................. 21 ITEM 6 Exhibits and Reports on Form 8-K................................................... 21 SIGNATURE PAGE ...................................................................................... 22
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EDO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARCH 26, DECEMBER 31, 2005 2004 ----------- ------------ (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS Current assets: Cash and cash equivalents..................................................... $ 86,770 $ 98,884 Accounts receivable, net...................................................... 155,278 153,810 Inventories................................................................... 62,528 52,867 Deferred income tax asset, net................................................ 5,046 5,046 Notes receivable, current..................................................... 7,193 7,202 Prepayments and other......................................................... 4,541 3,493 ----------- ----------- Total current assets....................................................... 321,356 321,302 ----------- ----------- Property, plant and equipment, net.............................................. 38,658 34,830 Goodwill........................................................................ 91,651 91,651 Other intangible assets, net.................................................... 49,046 50,356 Deferred income tax asset, net.................................................. 30,241 30,241 Other assets.................................................................... 17,237 18,309 ----------- ----------- $ 548,189 $ 546,689 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.............................................................. $ 23,311 $ 32,406 Accrued liabilities........................................................... 53,199 48,492 Contract advances and deposits................................................ 14,869 13,696 ----------- ----------- Total current liabilities.................................................. 91,379 94,594 ----------- ----------- Income taxes payable............................................................ 5,768 5,768 Long-term debt.................................................................. 137,800 137,800 Post-retirement benefits obligations............................................ 95,365 94,936 Environmental obligation........................................................ 1,666 1,663 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, 20,236,246 issued in 2005 and 20,112,243 issued in 2004............ 20,236 20,112 Additional paid-in capital.................................................... 163,090 158,548 Retained earnings............................................................. 98,373 96,004 Accumulated other comprehensive loss, net of income tax benefit............... (42,760) (42,619) Treasury shares at cost (93,116 shares in 2005 and 94,585 shares in 2004)..... (1,427) (1,449) Unearned Employee Stock Ownership Plan shares................................. (15,727) (16,039) Deferred compensation under Long-Term Incentive Plan.......................... (5,353) (2,408) Management group receivables.................................................. (221) (221) ----------- ----------- Total shareholders' equity................................................. 216,211 211,928 ----------- ----------- $ 548,189 $ 546,689 =========== ===========
See accompanying Notes to Consolidated Financial Statements. 3 EDO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 26, MARCH 27, 2005 2004 ----------- ----------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NET SALES..................................................... $ 116,508 $ 110,877 ----------- ----------- COSTS AND EXPENSES Cost of sales............................................... 85,054 80,658 Selling, general and administrative......................... 20,288 20,087 Research and development.................................... 4,418 1,465 ----------- ----------- 109,760 102,210 ----------- ----------- OPERATING EARNINGS............................................ 6,748 8,667 NON-OPERATING INCOME (EXPENSE) Interest income............................................. 501 242 Interest expense............................................ (2,191) (2,223) Other, net.................................................. (45) (22) ----------- ----------- (1,735) (1,959) ----------- ----------- Earnings before income taxes.................................. 5,013 6,708 Income tax expense............................................ (2,105) (2,851) ----------- ----------- NET EARNINGS.................................................. $ 2,908 $ 3,857 =========== =========== NET EARNINGS PER COMMON SHARE: Basic....................................................... $ 0.16 $ 0.22 =========== =========== Diluted..................................................... $ 0.16 $ 0.22 =========== =========== Weighted-average common shares outstanding: Basic....................................................... 17,936 17,549 =========== =========== Diluted..................................................... 18,236 17,834 =========== =========== Dividends declared per common share......................... $ 0.03 $ 0.03 =========== ===========
See accompanying Notes to Consolidated Financial Statements. 4 EDO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 26, MARCH 27, 2005 2004 ------------- ----------- (UNAUDITED) (IN THOUSANDS) OPERATING ACTIVITIES: Earnings from operations .......................................... $ 2,908 $ 3,857 Adjustments to earnings to arrive at cash used by operations: Depreciation ................................................... 2,642 2,585 Amortization ................................................... 1,310 1,441 Bad debt expense ............................................... 139 - Deferred tax provision ......................................... - 119 Loss on disposal of property, plant and equipment .............. - 6 Deferred compensation expense................................... 397 201 Non-cash Employee Stock Ownership Plan compensation expense .... 1,314 1,051 Dividends on unallocated Employee Stock Ownership Plan shares .. 65 70 Common shares issued for directors' fees ....................... 45 31 Income tax benefit from stock options and Long-Term Incentive Plan ............................................... 173 353 Changes in operating assets and liabilities, excluding effects of acquisitions: Accounts receivable .......................................... (1,607) (7,731) Inventories .................................................. (9,661) (8,729) Prepayments and other assets ................................. (42) (814) Accounts payable, accrued liabilities and other .............. (4,096) (11,425) Contract advances and deposits ............................... 1,173 61 ------------- ----------- Cash used by operations ............................................. (5,240) (18,924) ------------- ----------- INVESTING ACTIVITIES: Purchase of plant and equipment ................................... (6,470) (1,991) Payments received on notes receivable ............................. 75 75 ------------- ----------- Cash used by investing activities ................................... (6,395) (1,916) ------------- ----------- FINANCING ACTIVITIES: Proceeds from exercise of stock options ........................... 125 511 Proceeds from management group receivables ........................ - 117 Payment of common share cash dividends ............................ (604) (597) ------------- ----------- Cash (used) provided by financing activities ........................ (479) 31 ------------- ----------- Net decrease in cash and cash equivalents ........................... (12,114) (20,809) Cash and cash equivalents at beginning of year ...................... 98,884 86,632 ------------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 86,770 $ 65,823 ============= =========== Supplemental disclosures: Cash paid for: Interest ....................................................... $ - $ - ============= =========== Income taxes ................................................... $ 2,393 $ 4,583 ============= ===========
See accompanying Notes to Consolidated Financial Statements. 5 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (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, 2004 filed by the Company on Form 10-K with the Securities and Exchange Commission. The accompanying consolidated financial statements include all adjustments (consisting of normal recurring adjustments) that management considers necessary for a fair presentation of its consolidated financial position and results of operations for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the entire year. (2) STOCK-BASED COMPENSATION The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Under APB No. 25, because the exercise price of the Company's stock options is set equal to the market price of the underlying stock on the date of grant, no compensation expense is recognized. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair market value recognition provisions of SFAS No. 123 "Accounting for Stock-Based Compensation" whereby compensation expense would be recognized as incurred for stock-based employee compensation. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period.
FOR THE THREE MONTHS ENDED MARCH 26, MARCH 27, 2005 2004 ---------- ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Earnings: As reported................................................ $ 2,908 $ 3,857 Deferred compensation expense, net of tax 230 116 Stock option compensation expense based on fair value method, net of tax...................................... (812) (541) ---------- ---------- Pro forma.................................................. $ 2,326 $ 3,432 ========== ========== Basic earnings per common share: As reported................................................ $ 0.16 $ 0.22 Pro forma.................................................. $ 0.13 $ 0.20 Diluted earnings per common share: As reported................................................ $ 0.16 $ 0.22 Pro forma.................................................. $ 0.13 $ 0.19 ========== ==========
During the three months ended March 26, 2005, the Company issued 17,753 common shares for the exercise of stock options and 106,250 restricted common shares for long-term incentive awards. On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), "Share-Based Payment," which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS 123(R) supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and amends SFAS No. 95, "Statement of Cash Flows." Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. SFAS 123(R) must be adopted in the first annual period beginning after June 15, 2005. We expect to adopt Statement 123(R) in the first quarter of fiscal 2006. As permitted by SFAS 123, we currently account for share-based payments to employees using APB No. 25's intrinsic value method and generally recognize no compensation cost for employee stock options. Accordingly, the adoption of SFAS 123(R)'s fair value method will have a significant impact on our result of operations, although it will have no impact on our overall financial position. The impact of the adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net income and earnings per share. 6 (3) BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations," includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. SFAS No. 142, "Goodwill and Other Intangible Assets," prohibits the amortization of goodwill and intangible assets with indefinite useful lives and requires that these assets be reviewed for impairment at least annually. Intangible assets with definite lives are amortized over their estimated useful lives. 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 Company performs the required impairment tests of goodwill as of October 1 each year. There were no changes in the carrying amount of goodwill during the three months ended March 26, 2005. Summarized below are intangible assets subject to amortization.
MARCH 26, DECEMBER 31, 2005 2004 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.......................... (12,758) (11,448) -------- -------- $ 49,046 $ 50,356 ======== ========
The amortization expense for the three months ended March 26, 2005 and March 27, 2004 amounted to $1.3 million and $1.4 million, respectively. Total amortization expense for 2005, 2006, 2007, 2008, 2009 and thereafter related to these intangible assets is estimated to be $3.9 million, $5.3 million, $5.1 million, $4.5 million, $4.4 million and $25.8 million, respectively. All intangible assets other than goodwill are subject to amortization. (4) INVENTORIES Inventories are summarized by major classification as follows:
MARCH 26, DECEMBER 31, 2005 2004 --------- ------------ (IN THOUSANDS) Raw material and supplies................ $10,120 $10,461 Work-in-process.......................... 56,701 44,752 Finished goods........................... 2,063 2,043 Less: Unliquidated progress payments.... (6,356) (4,389) ------- ------- $62,528 $52,867 ======= =======
7 (5) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
FOR THE THREE MONTHS ENDED MARCH 26, MARCH 27, 2005 2004 --------- --------- Numerator: Net earnings for basic and diluted calculation...................... $ 2,908 $ 3,857 Denominator: Denominator for basic calculation... 17,936 17,549 Effect of dilutive securities: Stock options.................... 300 285 ------- ------- Denominator for diluted calculation...................... 18,236 17,834 ======= =======
The assumed conversion of the Notes was anti-dilutive for the first three months of 2005 and 2004. The following table summarizes, for each year presented, the number of shares excluded from the computation of diluted earnings per share, as their effect upon potential issuance was anti-dilutive.
FOR THE THREE MONTHS ENDED MARCH 26, MARCH 27, 2005 2004 --------- --------- (IN THOUSANDS) 5.25 % Convertible Subordinated Notes... 4,408 4,408 Unexercised stock options............... 12 288 ----- ----- 4,420 4,696 ===== =====
(6) DEFINED BENEFIT PLAN The Company maintains a qualified noncontributory defined benefit pension plan covering less than half of its employees. In November 2002, the plan was amended whereby benefits accrued under the plan were frozen as of December 31, 2002. The Company's funding policy is to make annual contributions to the extent such contributions are actuarially determined and tax deductible. For the three months ended March 26, 2005 and March 27, 2004, the Company recorded pension expense of $1.1 million and $0.6 million, respectively, based on the total for the respective years of $4.3 million in 2005 and $2.2 million in 2004. Summarized below are the components of the expense for each period presented.
FOR THE THREE MONTHS ENDED MARCH 26, MARCH 27, 2005 2004 --------- --------- (IN THOUSANDS) Interest cost............................ $ 3,089 $ 3,037 Expected return on plan assets........... (3,181) (3,176) Amortization of unrecognized net loss... 1,162 689 ------- ------- $ 1,070 $ 550 ======= =======
(7) EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST The Company sponsors an employee stock ownership plan ("ESOP") which provides retirement benefits to substantially all employees. The cost basis of the unearned/unallocated shares was initially recorded as a reduction to shareholders' equity. Compensation expense is recorded based on the market value of the Company's common shares as they are committed-to-be-released quarterly, as payments are made under the related indirect loan. The difference between the market value and the cost basis of the shares was recorded as additional paid-in capital. Dividends on unallocated shares are recorded as compensation expense. (8) COMPREHENSIVE INCOME As of March 26, 2005, accumulated other comprehensive loss included in the accompanying consolidated balance sheet primarily represents additional minimum liabilities on benefit plans. Comprehensive income from continuing operations for the three months ended March 26, 2005 was $2.8 million compared to comprehensive income for the three months ended March 27, 2004 of $3.9 million. 8 (9) 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 and computers (C4) products and systems, undersea-warfare systems and professional, operational, technical and information technology services for military forces and governments worldwide. The Communications and Space Products segment supplies antenna products and ultra-miniature electronics and systems for the remote sensing and electronic warfare industries. The Engineered Materials segment supplies commercial and military piezo-electric ceramic products and integrated composite structures for the aircraft and oil industries.
FOR THE THREE MONTHS ENDED MARCH 26, MARCH 27, 2005 2004 --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net Sales: Defense................................... $ 86,127 $ 88,040 Communications and Space Products......... 19,800 11,552 Engineered Materials...................... 10,581 11,285 -------- --------- $116,508 $ 110,877 -------- --------- Operating earnings (loss): Defense................................... $ 6,387 $ 9,030 Communications and Space Products......... (115) (1,091) Engineered Materials...................... 476 728 -------- --------- 6,748 8,667 Net interest expense...................... (1,690) (1,981) Other, net................................ (45) 22 -------- --------- Earnings before income taxes.............. $ 5,013 $ 6,708 ======== =========
(10) 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 March 26, 2005 and December 31, 2004 and for the three months ended March 26, 2005 and March 27, 2004. 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. On January 1, 2005 the Company merged two wholly owned subsidiaries into itself, the result of which caused three divisions of the former subsidiaries to become part of the Parent Company. EDO CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET MARCH 26, 2005
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- ---------- -------------- ------------ ------------ ASSETS Current assets: Current assets: Cash and cash equivalents $ 82,817 $ (620) $ 4,573 - $ 86,770 Accounts receivable, net 54,979 96,471 3,828 - 155,278 Inventories 21,397 36,985 4,146 - 62,528 Deferred income tax asset, - - - net 5,046 5,046 Notes receivable 7,193 - - - 7,193 Prepayments and other 3,175 998 368 - 4,541 --------- ---------- ---------- ------ ---------- Total current assets 174,607 133,834 12,915 - 321,356
9 Investment in subsidiaries 250,105 - - (250,105) - Property, plant and equipment, net 19,876 15,407 3,375 - 38,658 Goodwill - 82,941 8,710 - 91,651 Other intangible assets, net - 36,681 12,365 - 49,046 Deferred income tax asset, net 30,241 - - - 30,241 Other assets 16,287 950 - - 17,237 --------- --------- --------- --------- --------- $ 491,116 $ 269,813 $ 37,365 $(250,105) $ 548,189 ========= ========= ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 31,094 $ 41,197 $ 4,219 - $ 76,510 Contract advances and deposits 2,713 12,156 - - 14,869 --------- --------- --------- --------- --------- Total current liabilities 33,807 53,353 4,219 - 91,379 Long-term debt 137,800 - - - 137,800 Income taxes payable 5,768 - - - 5,768 Deferred income tax liabilities, net (166) - 166 - - Post retirement benefits obligations 95,365 - - - 95,365 Environmental obligation 1,666 - - - 1,666 Intercompany accounts - 134,855 26,066 (160,921) - Shareholders' equity: Preferred shares - - - - - Common shares 20,236 98 - (98) 20,236 Additional paid-in capital 163,090 25,221 6,418 (31,639) 163,090 Retained earnings 98,373 61,147 352 (61,499) 98,373 Accumulated other comprehensive loss, net of income tax benefit (42,095) (809) 144 - (42,760) Treasury shares (1,427) (4,052) - 4,052 (1,427) Unearned ESOP shares (15,727) - - - (15,727) Management group receivables (221) - - - (221) Deferred compensation under Long-Term Incentive Plan (5,353) - - - (5,353) --------- --------- --------- --------- --------- Total shareholders' equity 216,876 81,605 6,914 (89,184) 216,211 --------- --------- --------- --------- --------- $ 491,116 $ 269,813 $ 37,365 $(250,105) $ 548,189 ========= ========= ========= ========= =========
EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS MARCH 26, 2005
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- ---------- -------------- ------------ ------------ Continuing Operations: Net Sales $ 36,250 $ 86,065 $ 7,404 $ (13,211) $ 116,508 Costs and expenses: Cost of sales 29,690 63,176 5,399 (13,211) 85,054 Selling, general and administrative 3,728 14,968 1,592 - 20,288 Research and development 1,383 2,769 266 - 4,418 --------- --------- --------- --------- --------- 34,801 80,913 7,257 (13,211) 109,760 --------- --------- --------- --------- --------- Operating Earnings 1,449 5,152 147 - 6,748 Non-operating income (expense) Interest income 463 17 21 - 501 Interest expense (2,191) - - - (2,191) Other, net 10 (6) (49) - (45) --------- --------- --------- --------- --------- (1,718) 11 (28) - (1,735) (Loss) earnings from continuing operations before income taxes (269) 5,163 119 - 5,013 Income tax benefit (expense) 115 (2,104) (116) - (2,105) --------- --------- --------- --------- --------- (Loss) earnings from continuing operations (154) 3,059 3 - 2,908 Equity in undistributed earnings of subsidiaries 3,062 - - (3,062) - --------- --------- --------- --------- --------- Net earnings $ 2,908 $ 3,059 $ 3 $ (3,062) $ 2,908 ========= ========= ========= ========= =========
10 EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS MARCH 26, 2005
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- ---------- -------------- ------------ ------------ Operating Activities: Earnings from continuing operations $ 2,908 $ 3,059 $ 3 $ (3,062) $ 2,908 Adjustments to earnings to arrive at cash provided (used) by continuing operations: Depreciation 1,329 1,173 140 2,642 Amortization -- 1,056 254 1,310 Bad debt expense 15 124 -- 139 Deferred compensation expense 397 -- -- 397 Non-cash Employee Stock Ownership Plan compensation expense 1,314 -- -- 1,314 Dividends on unallocated Employee Stock Ownership Plan shares 65 -- -- 65 Common shares issued for directors' fees 45 -- -- 45 Income tax benefit from stock options 173 -- -- 173 Changes in operating assets and liabilities, excluding effects of acquisitions: Equity in earnings of subsidiaries (3,062) 3,062 -- Intercompany/Investment in subsidiaries 3,921 (4,076) 155 -- Accounts receivable (327) (2,184) 904 (1,607) Inventories (6,740) (3,249) 328 (9,661) Prepayments and other assets (105) 95 (32) (42) Accounts payable, accrued liabilities and other (3,045) 511 (1,562) (4,096) Contract advances and deposits (2,521) 3,694 -- 1,173 ------------------------------------------------------------------- Cash provided (used) by continuing operations (5,633) 203 190 -- (5,240) Investing Activities: Purchase of plant and equipment (4,275) (2,137) (58) (6,470) Payments received on notes receivable 75 -- -- 75 ------------------------------------------------------------------- Cash used by investing activities (4,200) (2,137) (58) -- (6,395) Financing Activities: Proceeds from exercise of stock options 125 -- -- 125 Payment of common share cash dividends (604) -- -- (604) ------------------------------------------------------------------- Cash (used) provided by financing activities (479) -- -- -- (479) ------------------------------------------------------------------- Net decrease in cash and cash equivalents (10,312) (1,934) 132 -- (12,114) Cash and cash equivalents at beginning of year 93,129 1,314 4,441 98,884 ------------------------------------------------------------------- Cash and cash equivalents at end of period $ 82,817 $ (620) $ 4,573 $ -- $ 86,770 ===================================================================
EDO CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2004
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- ---------- -------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 93,129 $ 1,314 $ 4,441 - $ 98,884 Accounts receivable, net 54,667 94,411 4,732 - 153,810 Inventories 14,657 33,735 4,474 - 52,866 Deferred income tax asset, net 5,046 - - - 5,046 Notes receivable 7,202 - - - 7,202 Prepayments and other 2,029 1,128 336 - 3,493 --------------- ---------- -------------- ------------ ------------
11 Total current assets 176,730 130,589 13,983 - 321,302 Investment in subsidiaries 150,136 - - (150,136) - Property, plant and equipment, net 16,931 14,442 3,457 - 34,830 Goodwill - 82,941 8,710 - 91,651 Other intangible assets, net - 37,737 12,619 - 50,356 Deferred income tax asset, net 30,241 - - - 30,241 Other assets 17,394 915 - - 18,309 --------- --------- --------- --------- --------- $ 391,432 $ 266,624 $ 38,769 $(150,136) $ 546,689 ========= ========= ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 34,489 $ 40,677 $ 5,732 - $ 80,898 Contract advances and deposits 5,234 8,462 - - 13,696 --------- --------- --------- --------- --------- Total current liabilities 39,723 49,139 5,732 - 94,594 Long-term debt 137,800 - - - 137,800 Income taxes payable, long-term 5,768 - - - 5,768 Deferred income tax liabilities, net (169) - 169 - - Post retirement benefits obligations 94,936 - - - 94,936 Environmental obligation 1,663 - - - 1,663 Intercompany accounts (100,828) 138,931 25,911 (64,014) - Shareholders' equity: Preferred shares - - - - - Common shares 20,112 98 - (98) 20,112 Additional paid-in capital 158,548 25,221 6,418 (31,639) 158,548 Retained earnings 96,004 58,088 349 (58,437) 96,004 Accumulated other comprehensive loss, net of income tax benefit (42,008) (801) 190 - (42,619) Treasury shares (1,449) (4,052) - 4,052 (1,449) Unearned ESOP shares (16,039) - - - (16,039) Management group receivables (221) - - - (221) Deferred compensation under Long-Term Incentive Plan (2,408) - - - (2,408) --------- --------- --------- --------- --------- Total shareholders' equity 212,539 78,554 6,957 (86,122) 211,928 --------- --------- --------- --------- --------- $ 391,432 $ 266,624 $ 38,769 $(150,136) $ 546,689 ========= ========= ========= ========= =========
EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS MARCH 27, 2004
EDO Corporation Parent Company Only Subsidiary Guarantors Non-Guarantors Eliminations Consolidated --------------- --------------------- -------------- ------------ ------------ Continuing Operations: Net Sales $ 46,150 $ 60,872 $ 7,346 $ (3,491) $ 110,877 Costs and expenses: Cost of sales 35,189 45,021 3,939 (3,491) 80,658 Selling, general and administrative 6,587 10,106 3,394 - 20,087 Research and development 708 757 - - 1,465 --------- --------- --------- --------- --------- 42,484 55,884 7,333 (3,491) 102,210 --------- --------- --------- --------- --------- Operating Earnings 3,666 4,988 13 - 8,667 Non-operating income (expense) Interest income 171 29 42 - 242 Interest expense (2,223) - - - (2,223) Other, net (51) 73 - - 22 --------- --------- --------- --------- --------- (2,103) 102 42 - (1,959) (Loss) earnings from continuing operations before income taxes 1,563 5,090 55 - 6,708 Income tax expense 220 2,536 95 - 2,851 --------- --------- --------- --------- ---------
12 (Loss) earnings from continuing operations 1,343 2,554 (40) - 3,857 Equity in undistributed earnings of subsidiaries 2,514 - - (2,514) - -------- -------- -------- --------- --------- Net earnings $ 3,857 $ 2,554 $ (40) $ (2,514) $ 3,857 ======== ======== ======== ========= =========
EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS MARCH 27, 2004
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- ---------- -------------- ------------ ------------ OPERATING ACTIVITIES: Earnings from continuing operations $ 3,857 $ 2,554 $ (40) $ (2,514) $ 3,857 Adjustments to earnings to arrive at cash provided (used) by continuing operations: Depreciation 1,074 1,314 197 -- 2,585 Amortization -- 1,192 249 -- 1,441 Deferred tax benefit 119 -- -- -- 119 Loss on sale of property, plant and equipment -- 6 -- -- 6 Impairment loss on assets held for sale -- -- Deferred compensation expense 201 -- -- -- 201 Non-cash Employee Stock Ownership Plan compensation expense 1,051 -- -- -- 1,051 Dividends on unallocated Employee Stock Ownership Plan shares 70 -- -- -- 70 Common shares issued for directors' fees 31 -- -- -- 31 Income tax benefit from stock options 353 -- -- -- 353 Changes in operating assets and liabilities, excluding effects of acquisitions: Equity in earnings of subsidiaries (2,514) -- -- 2,514 -- Intercompany/Investment in subsidiaries (1,214) 977 237 -- -- Accounts receivable (2,348) (3,911) (1,472) -- (7,731) Inventories (1,362) (7,450) 83 -- (8,729) Prepayments and other assets (1,953) 1,251 (112) -- (814) Accounts payable, accrued liabilities and other (8,722) (2,583) (120) -- (11,425) Contract advances and deposits (2,104) 2,165 -- -- 61 ---------------------------------------------------------------------------------- Cash provided (used) by continuing operations (13,461) (4,485) (978) -- (18,924) INVESTING ACTIVITIES: Purchase of plant and equipment (625) (1,250) (116) -- (1,991) Payments received on notes receivable 75 -- -- -- 75 ---------------------------------------------------------------------------------- Cash used by investing activities (550) (1,250) (116) -- (1,916) FINANCING ACTIVITIES: Proceeds from exercise of stock options 511 -- -- -- 511 Proceeds from management group receivables 117 -- -- -- 117 Payment of common share cash dividends (597) -- -- -- (597) ---------------------------------------------------------------------------------- Cash (used) provided by financing activities 31 -- -- -- 31 ---------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (13,980) (5,735) (1,094) -- (20,809) Cash and cash equivalents at beginning of year 73,834 7,630 5,168 -- 86,632 ---------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 59,854 $ 1,895 $ 4,074 $ -- $ 65,823 =========== ======== ======== ======== =========
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 13 - Undersea Warfare - Professional Services - C4 - Command, Control, Communications and Computers - 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 and computers (C4) products and systems, undersea-warfare systems and professional and engineering services for military forces and friendly governments worldwide. Our Communications and Space Products segment supplies antenna products and ultra-miniature electronics and systems for the remote sensing and electronic warfare industries. Our Engineered Materials segment supplies commercial and military piezo-electric ceramic products and integrated composite structures for the aircraft and oil industries. 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 Shareholders 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. 14 In those cases where we determine that the useful life of property, plant and equipment should be shortened, we depreciate the net book value in excess of salvage value over its revised remaining useful life thereby increasing depreciation expense. Factors such as technological advances, changes to our business model, changes in our capital strategy, changes in the planned use of equipment, fixtures, software or changes in the planned use of facilities could result in shortened useful lives. Long-lived assets, other than goodwill, are reviewed by us for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The estimate of cash flow, which is used to determine recoverability, is based upon, among other things, certain assumptions about future operating performance. Our estimates of undiscounted cash flow may differ from actual cash flow due to such factors including technological advances, changes to our business model, or changes in our capital strategy or planned use of long-lived assets. If the sum of the undiscounted cash flows, excluding interest, is less than the carrying value, we would recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. In accordance with SFAS No. 142, goodwill must be tested at least annually for impairment at the reporting unit level. If an indication of impairment exists, we are required to determine if such goodwill's implied fair value is less than the unit carrying value in order to determine the amount, if any, of the impairment loss required to be recorded. Impairment indicators include, among other conditions, cash flow deficits, an historic or anticipated decline in revenue or operating profits, adverse legal or regulatory developments, accumulation of costs significantly in excess of amounts originally expected to acquire the asset and/or a material decrease in the fair value of some or all of the assets. To determine the fair value of our reporting units, we generally use a present value technique (discounted cash flow) corroborated by market multiples when available and as appropriate, for all of the reporting units. The discounted cash flow method measures intrinsic value by reference to an enterprise's or an asset's expected annual free cash flows. We applied what we believe to be the most appropriate valuation methodology for each of the reporting units. If we had established different reporting units or utilized different valuation methodologies, the impairment test results could differ. PENSION AND POST-RETIREMENT BENEFIT OBLIGATIONS We sponsor defined benefit pension and other retirement plans in various forms covering all eligible employees. Several statistical and other factors which attempt to anticipate future events are used in calculating the expense and liability related to the plans. These factors include assumptions about the discount rate and expected return on plan assets within certain guidelines and in conjunction with our actuarial consultants. In addition, our actuarial consultants also use subjective factors such as withdrawal and mortality rates to estimate the expense and liability related to these plans. The actuarial assumptions used by us may differ significantly, either favorably or unfavorably, from actual results due to changing market, economic or regulatory conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. 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. RESULTS OF OPERATIONS The following information should be read in conjunction with the Consolidated Financial Statements as of March 26, 2005. THREE MONTHS ENDED MARCH 26, 2005 COMPARED WITH THREE MONTHS ENDED MARCH 27, 2004 Net sales by segment were as follows:
THREE MONTHS ENDED INCREASE/(DECREASE) MARCH 26, MARCH 27, FROM SEGMENT 2005 2004 PRIOR PERIOD - ------- ---------- ---------- ------------------- (DOLLARS IN THOUSANDS) Defense................................. $ 86,127 $ 88,040 (2.2%) Communications and Space Products....... 19,800 11,552 71.4% Engineered Materials.................... 10,581 11,285 (6.2%) ---------- ---------- ------- Total................................... $ 116,508 $ 110,877 5.1% ========== ==========
15 In the Defense segment, the decrease in sales was attributable to lower sales of electronic warfare systems and aircraft armament systems. This decrease was partially offset by increased sales of our C4 products and systems, including our mobile Joint Enhanced Core Communication Systems (JECCS), and reconnaissance and surveillance systems. In the Communications and Space Products segment, the increase in sales was attributable to sales of our Warlock force protection systems. We continue to receive orders for various versions of this system which will continue to be a significant contributor to sales and margin this year. In the Engineered Materials segment, the decrease was primarily attributable to higher sales of fiber composite piping in the prior year first quarter, wherein we had been awarded a contract to replace a competitor's composite piping that had failed. Operating earnings by segment were as follows:
THREE MONTHS ENDED MARCH 26, MARCH 27, SEGMENT 2005 2004 - ------- ----------- ----------- (DOLLARS IN THOUSANDS) Defense................................. $ 6,387 $ 9,030 Communications and Space Products....... (115) (1,091) Engineered Materials.................... 476 728 ----------- ----------- Total................................... $ 6,748 $ 8,667 =========== ===========
Items of note affecting operating earnings are summarized here to help clarify the comparison of results.
THREE MONTHS ENDED MARCH 26, MARCH 27, 2005 2004 ---------- ----------- (DOLLARS IN THOUSANDS) Pension....................................... $ 1,070 $ 550 ESOP compensation expense..................... $ 1,314 $ 1,051 Intangible asset amortization................. $ 1,310 $ 1,441
Operating earnings for the three months ended March 26, 2005 were $6.7 million or 5.8% of net sales. This compares to operating earnings for the three months ended March 27, 2004 of $8.7 million or 7.8% of net sales. This decrease is attributable in part to higher pension expense and ESOP compensation expense. The increased pension expense is due to changes in actuarial assumptions such as discount rate and return on plan assets. The higher ESOP compensation expense is due to the higher average market price of our common stock for the three months ended March 26, 2005 compared to the three months ended March 27, 2004. In addition, as discussed below, our investment in research and development activities increased in the first three months of 2005 compared to 2004. The Defense segment's operating earnings for the three months ended March 26, 2005 were $6.4 million or 7.4% of this segment's net sales compared to $9.0 million or 10.3% of this segment's net sales for the three months ended March 27, 2004. The decrease is attributable in part to the lower sales volume as well as cost increases totaling approximately $1.2 million recorded on the F/A-22 AMRAAM Vertical Eject Launcher and the BRU-57 production programs due to revised estimates at completion driven primarily by overhead rate impacts. The Communications and Space Products segment experienced an operating loss for the three months ended March 26, 2005 of $0.1 million or 0.6% of this segment's net sales compared to an operating loss of $1.1 million or 9.4% of this segment's net sales for the three months ended March 27, 2004. While sales were higher than in the prior year comparable quarter, the low earnings level was attributable to low margins in the antenna product line, as well as increased research and development expenditures. For the three months ended March 27, 2004, there were losses related to development and start-up costs on certain interference cancellation programs resulting from issues discovered during testing. The Engineered Materials segment's operating earnings for the three months ended March 26, 2005 were $0.5 million or 4.5% of this segment's net sales compared to operating earnings of $0.7 million or 6.5% of this segment's net sales for the three months ended March 27, 2004. This decrease is primarily due to the mix of programs and a write-off of a commercial receivable of $0.1 million. Selling, general and administrative expenses for the three months ended March 26, 2005 was $20.6 million or 17.6% of net sales compared to $20.1 million or 18.1% of net sales for the same period ended March 27, 2004. This is considered relatively consistent with the prior year. Research and development expense for the three months ended March 26, 2005 increased to $4.4 million or 3.8% of net sales from $1.5 million or 1.3% of net sales for the three months ended March 27, 2004. The increase is attributable to spending on force protection, composite application studies and miniature precision weapon technologies. Interest expense, net of interest income, for the three months ended March 26, 2005 decreased to $1.7 million from $2.0 million to the three months ended March 27, 2004 due to a higher average cash balance for the first three months of 2005 compared to 2004. 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. The provision for income tax expense reflects an estimated annual effective rate of 42% for the three months ended March 26, 2005 compared with 42.5% for the three months ended March 27, 2004. For the three months ended March 26, 2005, net earnings were $2.9 million or $0.16 per diluted common share on 18.2 million diluted shares compared to net earnings of $3.9 million or $0.22 per diluted common share on 17.8 million diluted shares for the three months ended March 27, 2004. LIQUIDITY AND CAPITAL RESOURCES BALANCE SHEET Our cash and cash equivalents decreased 12.3% to $86.8 million at March 26, 2005 from $98.9 million at December 31, 2004. This decrease was due primarily to cash used by operations of $5.2 million driven by a temporary growth in inventory, discussed below. In addition, $6.5 million was used for capital expenditures and $0.6 million for the payment of common share dividends. Accounts receivable increased 1.0% to $155.3 million at March 26, 2005 from $153.8 million at December 31, 2004 due in part to timing of collections of billed receivables. At March 26, 2005 approximately 77% of billed receivables are in the under-60 days aging category. Inventories increased 18.3% to $62.5 million at March 26, 2005 from $52.9 million at December 31, 2004 due primarily to the efforts expended on work-in-progress on major programs, such as the Warlock program. The note receivable of $7.2 million at March 26, 2005 and December 31, 2004 represents notes receivable from the sale of our facility in Deer Park in 2003 and the sale of our former College Point facility in January 1996. The Deer Park facility note is due no later than October 9, 2005. The College Point facility note is due in annual amounts through September 2005 with a final payment due on December 31, 2005 and bears interest at 7% per annum. The latter note receivable is secured by a mortgage on the facility. In the three months ended March 26, 2005, capital expenditures were $6.5 million. This compares to $2.0 million for the three months ended March 27, 2004. The increase is attributable to new facility capital for the Antenna business unit which was relocated to a new leased facility, expansion and upgrades at two other facilities, as well as at the corporate offices. 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 March 26, 2005, LIBOR was approximately 3.08% and the applicable adjustment to LIBOR was 1.25%. The facility requires us to pay each lender in the consortium a commitment fee on the average daily unused portion of their respective commitment at a rate equal to 0.25%. There were no direct borrowings outstanding under the credit facility at March 26, 2005 and December 31, 2004. Letters of credit outstanding at March 26, 2005 pertaining to the credit facility were $31.3 million, resulting in $93.7 million available at March 26, 2005 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 March 26, 2005, we were in compliance with our covenants. The credit facility is secured by our accounts receivable, inventory and machinery and equipment. 16 5.25% Convertible Subordinated Notes due 2007("Notes") In April 2002, issued the $137.8 million of Notes. Interest payments on the Notes are due April 15 and October 15 of each year. Accrued interest payable, included in accrued liabilities on our consolidated balance sheet, was $3.4 million at March 26, 2005 and $1.5 million at December 31, 2004. The Notes are convertible, unless previously redeemed or repurchased by us, at the option of the holder at any time prior to maturity, into our common shares at an initial conversion price of $31.26 per share, subject to adjustment in certain events. As of March 26, 2005, there had been no conversions. Shelf Registration On December 23, 2003, we filed a shelf registration statement to potentially offer for sale common shares, preferred shares, debt securities and warrants. We may sell any combination of the foregoing securities in one or more offerings up to an aggregate initial offering price of $500,000,000. We believe that, for the foreseeable future, we have adequate liquidity and sufficient capital to fund our currently anticipated requirements for working capital, capital expenditures, including acquisitions, research and development expenditures, interest payments and funding of our pension and post-retirement benefit obligations. We continue to focus on positioning ourselves to be a significant player in the consolidation of first-tier defense suppliers and, to that end, have actively sought candidates for strategic acquisitions. Future acquisitions may be funded from any of the following sources: cash on hand; borrowings under our credit facility; issuance of our common stock or other equity securities; and/or convertible or other debt offerings. COMMITMENTS AND CONTINGENCIES In order to aggregate all commitments and contractual obligations as of March 26, 2005, we have included the following table. We are obligated under building and equipment leases expiring between 2005 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): ------------------------------ 2010 and Contractual obligations Total 2005 2006 2007 2008 2009 Beyond -------- ------- ------ ------- --------- ------ -------- 5.25% Convertible Subordinated Notes due 2007 (1)............................... $ 137.8 $ - $ - $ 137.8 $ - $ - $ - Operating leases......................... 106.3 10.8 12.5 11.5 11.0 10.7 49.8 Letters of credit........................ 31.3 28.9 0.2 2.2 - - - Projected pension contributions.......... 29.0 6.0 6.0 6.0 6.0 5.0 - Advance payment and performance bonds.... 1.9 - 0.2 - - 1.7 - -------- ------- ------ ------- --------- ------ -------- Total.................................... $ 306.3 $ 45.7 $ 18.9 $ 157.5 $ 17.0 $ 17.4 $ 49.8 ======== ======= ====== ======= ========= ====== ========
(1) Excludes interest Actual pension contributions may differ from amounts presented above and are contingent on cash flow and liquidity. Additionally, we are subject to certain legal actions that arise out of the normal course of business. It is our belief that the ultimate outcome of these actions will not have a material adverse effect on our consolidated financial position, results of operations or liquidity. CONCENTRATION OF SALES We conduct a significant amount of our business with the United States Government. Although there are currently no indications of a significant change in the status of government funding of certain programs, should this occur, our results of operations, financial position and liquidity could be materially affected. Such a change could have a significant impact on our profitability and our stock price. This could also affect our ability to acquire funds from our credit facility due to covenant restrictions or from other sources. BACKLOG The funded backlog of unfilled orders at March 26, 2005 increased to $505.5 million from $474.6 million at December 31, 2004. Our backlog consists primarily of current orders under long-lived, mission-critical programs of key defense platforms. 18 "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements in this Quarterly Report and in oral statements that may be made by representatives of the Company relating to plans, strategies, economic performance and trends and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27(a) of the Securities Act of 1933 and Section 21(e) of the Securities Exchange Act of 1934. Forward looking statements are inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to the following for each of the types of information noted below. U.S. and international military program sales, follow on procurement, contract continuance, and future program awards, upgrades and spares support are subject to: U.S. and international military budget constraints and determinations; U.S. congressional and international legislative body discretion; U.S. and international government administration policies and priorities; changing world military threats, strategies and missions; competition from foreign manufacturers of platforms and equipment; NATO country determinations regarding participation in common programs; changes in U.S. and international government procurement timing, strategies and practices, the general state of world military readiness and deployment; and the ability to obtain export licenses. Commercial satellite programs and equipment sales, follow-on procurement, contract continuance and future program awards, upgrades and spares support are subject to: establishment and continuance of various consortiums for satellite constellation programs; delay in launch dates due to equipment, weather or other factors beyond our control; and development of sufficient customer base to support a particular satellite constellation program. Commercial product sales are subject to: success of product development programs currently underway or planned; competitiveness of current and future production costs and prices and market and consumer base development of new product programs. Achievement of margins on sales, earnings and cash flow can be affected by: unanticipated technical problems; government termination of contracts for convenience; decline in expected levels of sales; underestimation of anticipated costs on specific programs; the ability to effect acquisitions; and risks inherent in integrating recent acquisitions into our overall structure. Expectations of future income tax rates can be affected by a variety of factors, including statutory changes in Federal and state tax rates, nondeductibility of goodwill amortization and IPR&D acquired in a stock purchase business combination and the nondeductibility of our noncash ESOP compensation expense. The Company has no obligation to update any forward-looking statements. 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. 19 PART II - OTHER INFORMATION ITEM 6. EXHIBITS (a) EXHIBITS 3(a)(1) Restated Certificate of Incorporation of the Company dated May 10, 2004 (incorporated herein by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004, Exhibit 3(a)(1)). 3(b) By-Laws of the Company as amended October 26, 2004 (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 25, 2004, Exhibit 3 (b)). 31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32* Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Filed herewith. (b) REPORTS ON FORM 8-K The following report on Form 8-K was filed during the three months ended March 26, 2005:
DATE OF REPORT ITEMS REPORTED - ----------------- ------------------------------------------------------- January 24, 2005 Letter contract signifying the intention of the Department of the Army to execute a formal Firm Fixed Price contractual modification to existing contract W15P7T-04-C-L001. January 26, 2005 Press release announcing the election of Mr. Paul J. Kern, General, U.S.A. (Ret.) was elected to EDO Board of Directors. February 15, 2005 The Board of Directors appointed Kern to the Nominating and Governance Committee and the Management Development Committee effective as of the 2005 Annual Meeting of Shareholders. February 24, 2005 Earnings release, dated February 24, 2005 announcing financial results for the quarter and year ended December 31, 2004. March 16, 2005 Departures of Directors or Principal Officers; election of directors; appointments of principal officers. As of March 14, 2005, Frank W. Otto is reassigned from the position of Chief Operating Officer and has assumed the position of Senior Vice President, Strategic Development.
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: April 29, 2005 Frederic B. Bassett Vice President Finance, Treasurer and Chief Financial Officer 20 EX-31.1 2 y08104exv31w1.txt EX-31.1: CERTIFICATION EXHIBIT 31.1 Certification I, James M. Smith, certify that: 1. I have reviewed this quarterly report on Form 10-Q of EDO Corporation (the "Registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d - 15(f)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal a control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: April 29, 2005 /s/ JAMES M. SMITH --------------------------------- Title: Chairman, President and Chief Executive Officer EX-31.2 3 y08104exv31w2.txt EX-31.2: CERTIFICATION EXHIBIT 31.2 Certification I, Frederic B. Bassett, certify that: 1. I have reviewed this quarterly report on Form 10-Q of EDO Corporation (the "Registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d - 15(f)) for the Registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal a control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: April 29, 2005 /s/ FREDERIC B. BASSETT ---------------------------------------- Title Vice President-Finance, Treasurer and Chief Financial Officer EX-32 4 y08104exv32.txt EX-32: CERTIFICATION EXHIBIT 32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of EDO Corporation, a New York corporation (the "Company"), does hereby certify that: The Quarterly Report on Form 10-Q for the quarter ended March 26, 2005 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ JAMES M. SMITH Dated: April 29, 2005 -------------------------------- Name: James M. Smith Title: Chairman, President and Chief Executive Officer /s/ FREDERIC B. BASSETT Dated: April 29, 2005 -------------------------------- Name: Frederic B. Bassett Title: Vice President-Finance, Treasurer and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----