10-Q 1 y13829e10vq.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 SEPTEMBER 24, 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 October 26, 2005 was 20,204,111 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 24, 2005 (unaudited) and December 31, 2004........................................ 3 Consolidated Statements of Earnings - (unaudited) Three months ended September 24, 2005 and September 25, 2004........................................... 4 Consolidated Statements of Earnings - (unaudited) Nine months ended September 24, 2005 and September 25, 2004.. 5 Consolidated Statements of Cash Flows - (unaudited) Nine months ended September 24, 2005 and September 25, 2004.. 6 Notes to Consolidated Financial Statements (unaudited)....... 7 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 17 ITEM 3 Quantitative and Qualitative Disclosures about Market Risk... 25 ITEM 4 Controls and Procedures...................................... 25 PART II OTHER INFORMATION ITEM 6 Exhibits..................................................... 26 SIGNATURES............................................................... 26
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EDO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER 24, DECEMBER 31, 2005 2004 ------------- ------------ (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS Current assets: Cash and cash equivalents.................................................... $ 48,388 $ 98,884 Accounts receivable, net..................................................... 180,753 153,810 Inventories.................................................................. 64,558 52,867 Deferred income tax asset, net............................................... 4,990 5,046 Notes receivable, current 7,175 7,202 Prepayments and other........................................................ 4,472 3,493 -------- -------- Total current assets...................................................... 310,336 321,302 -------- -------- Property, plant and equipment, net.............................................. 47,002 34,830 Goodwill........................................................................ 132,388 91,651 Other intangible assets, net.................................................... 51,737 50,356 Deferred income tax asset, net.................................................. 30,092 30,241 Other assets.................................................................... 20,332 18,309 -------- -------- $591,887 $546,689 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable............................................................. $ 27,383 $ 32,406 Accrued liabilities.......................................................... 56,130 48,492 Contract advances and deposits............................................... 31,233 13,696 -------- -------- Total current liabilities................................................. 114,746 94,594 -------- -------- Income taxes payable 5,768 5,768 Long-term debt.................................................................. 137,800 137,800 Post-retirement benefits obligations............................................ 96,123 94,936 Environmental obligation........................................................ 1,648 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, 20,302,365 issued in 2005 and 20,112,243 issued in 2004................... 20,302 20,112 Additional paid-in capital................................................... 166,172 158,548 Retained earnings............................................................ 113,217 96,004 Accumulated other comprehensive loss, net of income tax benefit.............. (42,491) (42,619) Treasury shares at cost (99,204 shares in 2005 and 94,585 shares in 2004).... (1,625) (1,449) Unearned Employee Stock Ownership Plan shares................................ (15,101) (16,039) Deferred compensation under Long-Term Incentive Plan......................... (4,462) (2,408) Management group receivables................................................. (210) (221) -------- -------- Total shareholders' equity................................................ 235,802 211,928 -------- -------- $591,887 $546,689 ======== ========
See accompanying Notes to Consolidated Financial Statements. 3 EDO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED ----------------------------- SEPTEMBER 24, SEPTEMBER 25, 2005 2004 ------------- ------------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NET SALES ............................................ $175,884 $129,875 -------- -------- COSTS AND EXPENSES Cost of sales ..................................... 133,098 94,168 Selling, general and administrative ............... 21,626 18,326 Research and development .......................... 3,578 3,333 Environmental cost provision, Deer Park facility .. 288 -- -------- -------- 158,590 115,827 -------- -------- OPERATING EARNINGS ................................... 17,294 14,048 NON-OPERATING INCOME (EXPENSE) Interest income ................................... 407 337 Interest expense .................................. (2,408) (2,304) Other, net ........................................ (18) (126) -------- -------- (2,019) (2,093) -------- -------- Earnings before income taxes ......................... 15,275 11,955 Income tax expense ................................... (5,434) (5,081) -------- -------- NET EARNINGS ......................................... $ 9,841 $ 6,874 ======== ======== NET EARNINGS PER COMMON SHARE: Basic ............................................. $ 0.54 $ 0.39 ======== ======== Diluted ........................................... $ 0.48 $ 0.35 ======== ======== Weighted-average common shares outstanding: Basic ............................................. 18,136 17,737 ======== ======== Diluted ........................................... 22,794 22,406 ======== ======== 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 24, SEPTEMBER 25, 2005 2004 ------------- ------------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NET SALES ............................................ $448,504 $367,042 -------- -------- COSTS AND EXPENSES Cost of sales ..................................... 336,512 270,090 Selling, general and administrative ............... 61,928 57,237 Research and development .......................... 11,990 7,649 Environmental cost provision, Deer Park facility .. 1,538 -- ------- ------- 411,968 334,976 ------- ------- OPERATING EARNINGS ................................... 36,536 32,066 NON-OPERATING INCOME (EXPENSE) Interest income ................................... 1,202 781 Interest expense .................................. (6,873) (6,771) Other, net ........................................ (78) (151) -------- ------- (5,749) (6,141) -------- ------- Earnings before income taxes ......................... 30,787 25,925 Income tax expense ................................... (11,949) (11,018) -------- ------- NET EARNINGS ......................................... $ 18,838 $ 14,907 ======== ======== NET EARNINGS PER COMMON SHARE: Basic: ............................................ $ 1.04 $ 0.84 ======== ======== Diluted: .......................................... $ 0.97 $ 0.81 ======== ======== Weighted-average common shares outstanding: Basic ............................................. 18,044 17,652 ======== ======== Diluted ........................................... 22,725 22,328 ======== ======== 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 24, SEPTEMBER 25, 2005 2004 ------------- ------------- (UNAUDITED) (IN THOUSANDS) OPERATING ACTIVITIES: Earnings from operations ................................ $ 18,838 $ 14,907 Adjustments to earnings to arrive at cash provided by operations: Depreciation ......................................... 7,238 8,073 Amortization ......................................... 4,319 4,254 Bad debt expense ..................................... 999 289 Deferred tax provision (benefit) ..................... -- 164 Loss on disposal of property, plant and equipment .... 3 32 Environmental cost provision, Deer Park facility ..... 1,538 -- Deferred compensation expense ........................ 1,298 699 Non-cash Employee Stock Ownership Plan compensation expense ........................................... 3,771 3,086 Dividends on unallocated Employee Stock Ownership Plan shares ............................................ 191 206 Common shares issued for directors' fees ............. 148 104 Income tax benefit from stock options and Long-Term Incentive Plan ..................................... 661 700 Changes in operating assets and liabilities, excluding effects of acquisitions: Accounts receivable ............................... (22,214) 2,716 Inventories ....................................... (10,133) (16,561) Prepayments and other assets ...................... 3,614 3,185 Accounts payable, accrued liabilities and other ... (620) (6,860) Contribution to defined benefit pension plan ...... (6,000) -- Contract advances and deposits .................... 17,108 5,353 -------- -------- Cash provided by operations ............................. 20,759 20,347 -------- -------- INVESTING ACTIVITIES: Purchase of plant and equipment ......................... (18,404) (7,005) Payments received on notes receivable ................... 225 225 Cash paid for acquisitions, net of cash acquired ........ (45,180) 301 -------- -------- Cash used by investing activities .......................... (63,359) (6,479) -------- -------- FINANCING ACTIVITIES: Proceeds from exercise of stock options ................. 839 991 Proceeds from management group receivables .............. 11 128 Repayments of acquired debt ............................. (6,931) -- Payment of common share cash dividends .................. (1,815) (1,794) -------- -------- Cash used by financing activities .......................... (7,896) (675) -------- -------- Net (decrease) increase in cash and cash equivalents ....... (50,496) 13,193 Cash and cash equivalents at beginning of year ............. 98,884 86,632 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................. $ 48,388 $ 99,825 ======== ======== Supplemental disclosures: Cash paid for: Interest ............................................. $ 3,617 $ 3,617 ======== ======== Income taxes ......................................... $ 11,017 $ 10,092 ======== ========
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, 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 FOR THE NINE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER 24, SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 25, 2005 2004 2005 2004 ------------- ------------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Earnings: As reported ........................................ $9,841 $6,874 $18,838 $14,907 Deferred compensation expense, net of tax ............. 255 175 766 412 Stock based compensation expense based on fair value method, net of tax .............................. (470) (542) (1,685) (1,555) ------ ------ ------- ------- Pro forma .......................................... $9,626 $6,507 $17,919 $13,764 ====== ====== ======= ======= Basic earnings per common share: As reported ........................................ $ 0.54 $ 0.39 $ 1.04 $ 0.84 Pro forma .......................................... $ 0.53 $ 0.37 $ 0.99 $ 0.78 Diluted earnings per common share: As reported ........................................ $ 0.48 $ 0.35 $ 0.97 $ 0.81 Pro forma .......................................... $ 0.47 $ 0.34 $ 0.93 $ 0.76 ====== ====== ======= =======
During the three months ended September 24, 2005, the Company issued 26,375 common shares for the exercise of stock options and no restricted common shares for long-term incentive awards. For the nine months ended September 24, 2005, the Company issued 81,372 common shares for the exercise of stock options and 108,750 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. 7 (3) ACQUISITIONS On September 21, 2005 the Company acquired for cash all of the stock of Fiber Innovations, Inc. a privately-held company located in Walpole, Massachusetts. Fiber Innovations is a designer and manufacturer of fiber reinforced composites. The acquisition is expected to strengthen and expand the range of products that the Company offers. The purchase price was $12.4 million, excluding transaction costs of approximately $0.1 million and the provision for additional contingent consideration based on achievement of future performance goals. The Company has not yet completed its analysis of the fair value of the acquired assets and liabilities; therefore, amounts recorded are subject to change. The acquisition was accounted for as a purchase and, accordingly, the operating results are included in the Company's consolidated financial statements since the acquisition date. The acquired company became part of the Company's Engineered Materials segment. On May 2, 2005, the Company acquired for cash all of the units of EVI Technology, LLC, a privately-held company ("EVI"). EVI is a designer, manufacturer and integrator of classified intelligence systems. The acquisition is expected to expand the range of products and related services that the Company offers. The acquisition was accounted for as a purchase and, accordingly, the operating results are included in the Company's consolidated financial statements since the acquisition date. The acquired company became part of the Company's Defense segment. On a proforma basis, had the acquisitions taken place as of the beginning of each respective year, the results of operations would not have been materially affected for 2004 and 2005. The following table summarizes the allocation of the EVI purchase price to the assets acquired and liabilities assumed at the date of acquisition.
EVI AT MAY 2, 2005 --------- Current assets ........... $ 5,467 Plant and equipment ...... 322 Customer contracts and relationships ......... 5,200 Trade name ............... 500 Goodwill ................. 31,319 Liabilities .............. (9,449) ------- Total purchase price ..... $33,359 =======
The allocation of the purchase price for EVI has been finalized. There are outstanding amounts held in escrow which, when settled, may result in further adjustments to goodwill. The allocation of the purchase price for Fiber Innovations, Inc. is expected to be finalized in the fourth quarter of 2005. (4) BUSINESS COMBINATIONS AND GOODWILL AND OTHER INTANGIBLE ASSETS Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations," requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. SFAS No. 142, "Goodwill and Other Intangible Assets," prohibits the amortization of goodwill and intangible assets with indefinite useful lives and requires that these assets be reviewed for impairment at least annually. Intangible assets with definite lives are amortized over their estimated useful lives. 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. The changes in the carrying amount of goodwill by segment for the nine months ended September 24, 2005 are as follows: 8
COMMUNI- CATIONS AND SPACE ENGINEERED DEFENSE PRODUCTS MATERIALS TOTAL -------- --------- ---------- -------- (IN THOUSANDS) Balance as of January 1, 2005 ................... $ 89,990 $1,661 $ -- $ 91,651 Acquisition of EVI Technology ................... 31,319 -- -- 31,319 Preliminary allocation of acquisition of Fiber Innovations .................................. -- -- 9,418 9,418 -------- ------ ------ -------- Balance as of September 24, 2005 ................ $121,309 $1,661 $9,418 $132,388 ======== ====== ====== ========
Summarized below are intangible assets subject to amortization.
SEPTEMBER 24, 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/EVI ............................... 44,398 39,198 10-20 years Trade name related to the acquisitions of AERA/Darlington/Emblem/EVI .................................. 2,069 1,569 5-10 years Other intangible assets related to the acquisition of Condor ... 916 916 2 years -------- -------- 67,504 61,804 Less accumulated amortization .................................. (15,767) (11,448) -------- -------- $ 51,737 $ 50,356 ======== ========
The amortization expense for the three months ended September 24, 2005 and September 25, 2004 amounted to $1.7 million and $1.4 million, respectively. The amortization expense for the nine months ended September 24, 2005 and September 25, 2004 amounted to $4.3 million and $4.2 million, respectively. Total remaining amortization expense for 2005, 2006, 2007, 2008, 2009 and thereafter related to these intangible assets is estimated to be $1.6 million, $6.2 million, $6.1 million, $5.4 million, $5.4 million and $27.0 million, respectively. All intangible assets other than goodwill are subject to amortization. (5) INVENTORIES Inventories are summarized by major classification as follows:
SEPTEMBER 24, DECEMBER 31, 2005 2004 ------------- ------------ (IN THOUSANDS) Raw material and supplies ................. $ 10,264 $10,461 Work-in-process ........................... 67,267 44,752 Finished goods ............................ 1,415 2,043 Less: Unliquidated progress payments ... (14,388) (4,389) -------- ------- $ 64,558 $52,867 ======== =======
(6) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: 9
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER 24, SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 25, 2005 2004 2005 2004 ------------- ------------- ------------- ------------- (IN THOUSANDS) Numerator: Earnings from continuing operations for basic calculation ................................... $ 9,841 $ 6,874 $18,838 $14,907 Effect of dilutive securities: Convertible Notes ............................. 1,067 1,040 3,201 3,120 ------- ------- ------- ------- Numerator for diluted calculation ................ $10,908 $ 7,914 $22,039 $18,027 ======= ======= ======= ======= Denominator: Denominator for basic calculation ................ 18,136 17,737 18,044 17,652 Effect of dilutive securities: Stock options ................................. 250 261 273 268 Convertible Notes ............................. 4,408 4,408 4,408 4,408 ------- ------- ------- ------- Denominator for diluted calculation .............. 22,794 22,406 22,725 22,328 ======= ======= ======= =======
The assumed conversion of the Notes was dilutive for the 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.
AS OF ----------------------------- SEPTEMBER 24, SEPTEMBER 25, 2005 2004 ------------- ------------- 5.25 % Convertible Subordinated Notes .... -- -- Unexercised stock options ................ 69 320 --- --- 69 320 === ===
(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. Summarized below are the components of pension expense for each period presented.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER 24, SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 25, 2005 2004 2005 2004 ------------- ------------- ------------- ------------- (IN THOUSANDS) Interest cost ............................. $ 3,089 $ 3,037 $ 9,266 $ 9,111 Expected return on plan assets ............ (3,181) (3,176) (9,543) (9,528) Amortization of unrecognized net loss ..... 1,162 689 3,486 2,067 ------- ------- ------- ------- $ 1,070 $ 550 $ 3,209 $ 1,650 ======= ======= ======= =======
(8) EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST The Company sponsors an employee stock ownership plan which provides retirement benefits to substantially all employees. The cost basis of the unearned/unallocated shares was initially recorded as a reduction to shareholders' equity. Compensation expense is recorded based on the market value of the Company's common shares as they are committed-to-be-released quarterly, as payments are made under the related indirect loan. The difference between the market value and the cost basis of the shares was recorded as additional paid-in capital. Dividends on unallocated shares are recorded as compensation expense. (9) COMPREHENSIVE INCOME As of September 24, 2005, 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 24, 2005 was $9.8 million compared to comprehensive income for the three months ended September 25, 2004 of $6.9 million. Comprehensive income for the nine months ended September 24, 2005 was $19.0 million compared to comprehensive income from continuing operations for the nine months ended September 25, 2004 of $15.0 million. (10) BUSINESS SEGMENTS The Company determines its operating segments based upon an analysis of its products and services, production processes, types of customers, economic characteristics and the related regulatory environment, which is consistent with how management operates the Company. The Company's operations are conducted in three segments: Defense, Communications and Space Products, and 10 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 FOR THE NINE MONTHS ENDED ----------------------------- ----------------------------- SEPTEMBER 24, SEPTEMBER 25, SEPTEMBER 24, SEPTEMBER 25, 2005 2004 2005 2004 ------------- ------------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net Sales: Defense.................................... $ 96,823 $ 98,781 $286,986 $286,248 Communications and Space Products.......... 68,690 20,485 129,805 46,547 Engineered Materials....................... 10,371 10,609 31,713 34,247 -------- -------- -------- -------- $175,884 $129,875 $448,504 $367,042 -------- -------- -------- -------- Operating earnings (loss): Defense.................................... $ 7,507 $ 9,503 $ 22,848 $ 27,503 Communications and Space Products.......... 10,706 2,633 15,539 1,639 Engineered Materials....................... (631) 1,912 (313) 2,924 Environmental cost provision, Deer Park facility .................................. (288) -- (1,538) -- -------- -------- -------- -------- 17,294 14,048 36,536 32,066 Net interest expense....................... (2,001) (1,967) (5,671) (5,990) Other, net................................. (18) (126) (78) (151) -------- -------- -------- -------- Earnings before income taxes............... $ 15,275 $ 11,955 $ 30,787 $ 25,925 -------- -------- -------- --------
(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 24, 2005 and December 31, 2004 and for the three and nine month periods ended September 24, 2005 and September 25, 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 into itself two wholly owned subsidiaries resulting in three operating units of the former subsidiaries becoming operating units of the Company. EDO CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET SEPTEMBER 24, 2005
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- ---------- -------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 38,876 $ 5,205 $ 4,307 $ -- $ 48,388 Accounts receivable, net 61,153 114,448 5,152 -- 180,753 Inventories 16,148 44,137 4,273 -- 64,558 Deferred income tax asset, net 4,958 32 -- -- 4,990 Prepayments and other 1,558 2,566 348 -- 4,472 Notes receivable - current 7,175 7,175 -------- -------- ------- --------- -------- Total current assets 129,868 166,388 14,080 -- 310,336 Investment in subsidiaries 297,542 -- -- (297,542) -- Property, plant and equipment, net 25,503 18,267 3,232 -- 47,002 Goodwill -- 123,678 8,710 -- 132,388 Other intangible assets, net -- 39,869 11,868 -- 51,737 Deferred income tax asset, net 30,241 (149) -- -- 30,092
11 Other assets 19,433 899 -- -- 20,332 -------- -------- ------- --------- -------- $502,587 $348,952 $37,890 $(297,542) $591,887 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 23,392 $ 56,233 $ 4,714 $ (815) $ 83,524 Contract advances and deposits 2,066 29,167 -- -- 31,233 -------- -------- ------- --------- -------- Total current liabilities 25,458 85,400 4,714 (815) 114,757 Long-term debt 137,800 -- -- -- 137,800 Deferred income tax liabilities, net 5,599 -- 158 -- 5,757 Post retirement benefits obligations 96,123 -- -- -- 96,123 Environmental obligation 1,648 -- -- -- 1,648 Intercompany accounts -- 161,179 25,769 (186,948) -- Shareholders' equity: Preferred shares -- -- -- -- -- Common shares 20,302 98 -- (98) 20,302 Additional paid-in capital 166,172 25,221 6,418 (31,639) 166,172 Retained earnings 113,217 81,232 862 (82,094) 113,217 Accumulated other comprehensive loss, net of income tax benefit (42,334) (126) (31) -- (42,491) Treasury shares (1,625) (4,052) -- 4,052 (1,625) Unearned ESOP shares (15,101) -- -- -- (15,101) Management group receivables (210) -- -- -- (210) Deferred compensation under Long-Term Incentive Plan (4,462) -- -- -- (4,462) -------- -------- ------- --------- -------- Total shareholders' equity 235,959 102,373 7,249 (109,779) 235,802 -------- -------- ------- --------- -------- $502,587 $348,952 $37,890 $(297,542) $591,887 ======== ======== ======= ========= ========
EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED SEPTEMBER 24, 2005
EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated --------------- ---------- -------------- ------------ ------------ Net Sales $ 45,238 $125,549 $7,849 $(2,752) $175,884 Costs and expenses: Cost of sales 37,270 93,426 5,154 (2,752) 133,098 Selling, general and administrative 3,696 16,138 1,792 -- 21,626 Research and development 679 2,686 213 -- 3,578 Environmental cost provision, Deer Park facility 288 -- -- -- 288 -------- -------- ------ ------- -------- 41,933 112,250 7,159 (2,752) 158,590 -------- -------- ------ ------- -------- Operating earnings (loss) 3,305 13,299 690 -- 17,294 Non-operating income (expense) Interest income 351 16 40 -- 407 Interest expense (2,408) -- -- -- (2,408) Other, net (6) 29 (41) -- (18) -------- -------- ------ ------- -------- (2,063) 45 (1) -- (2,019) Earnings (loss) before income taxes 1,242 13,344 689 -- 15,275 Income tax (benefit) expense (628) 5,751 311 -- 5,434 -------- -------- ------ ------- -------- Earnings (loss) after income taxes 1,870 7,593 378 -- 9,841 Equity in undistributed earnings of subsidiaries 7,971 -- -- (7,971) -- -------- -------- ------ ------- -------- Net earnings (loss) $ 9,841 $ 7,593 $ 378 $(7,971) $ 9,841 ======== ======== ====== ======= ========
12 EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS FOR THE NINE MONTHS ENDED SEPTEMBER 24, 2005
EDO Corporation Parent Company Subsidiary Non- Only Guarantors Guarantors Eliminations Consolidated --------------- ---------- ---------- ------------ ------------ Net Sales $132,178 $304,555 $22,054 $(10,283) $448,504 Costs and expenses: Cost of sales 108,874 222,573 15,348 (10,283) 336,512 Selling, general and administrative 11,230 45,892 4,806 -- 61,928 Research and development 3,701 7,547 742 -- 11,990 Environmental cost provision, Deer Park facility 1,538 -- -- -- 1,538 -------- -------- ------- -------- -------- 125,343 276,012 20,896 (10,283) 411,968 -------- -------- ------- -------- -------- Operating earnings (loss) 6,835 28,543 1,158 -- 36,536 Non-operating income (expense) Interest income 1,060 44 98 -- 1,202 Interest expense (6,873) -- -- -- (6,873) Other, net 5 52 (135) -- (78) -------- -------- ------- -------- -------- (5,808) 96 (37) -- (5,749) (Loss) earnings before income taxes 1,027 28,639 1,121 -- 30,787 Income tax (benefit) expense (495) 11,836 608 -- 11,949 -------- -------- ------- -------- -------- (Loss) earnings after income taxes 1,522 16,803 513 -- 18,838 Equity in undistributed earnings of subsidiaries 17,316 -- -- (17,316) -- -------- -------- ------- -------- -------- Net earnings $ 18,838 $ 16,803 $ 513 $(17,316) $ 18,838 ======== ======== ======= ======== ========
EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 24, 2005
EDO Corporation Parent Company Subsidiary Non- Only Guarantors Guarantors Eliminations Consolidated --------------- ---------- ---------- ------------ ------------ OPERATING ACTIVITIES: Earnings (loss) from continuing operations $ 18,838 $ 16,803 $ 513 $(17,316) $ 18,838 Adjustments to earnings to arrive at cash provided (used) by continuing operations: Depreciation 3,205 3,616 417 -- 7,238 Amortization -- 3,568 751 -- 4,319 Bad debt expense 244 755 -- -- 999 Loss on sale of property, plant and equipment -- 3 -- -- 3 Environmental cost provision, Deer Park facility 1,538 -- -- -- 1,538 Deferred compensation expense 1,298 -- -- -- 1,298 Non-cash Employee Stock Ownership Plan compensation expense 3,771 -- -- -- 3,771 Dividends on unallocated Employee Stock Ownership Plan shares 191 -- -- -- 191 Common shares issued for directors' fees 148 -- -- -- 148 Income tax benefit from stock options 661 -- -- -- 661 Changes in operating assets and liabilities, excluding effects of acquisitions: Equity in earnings of subsidiaries (17,316) -- -- 17,316 -- Intercompany 22,997 (22,855) (142) -- -- Accounts receivable (6,730) (15,064) (420) -- (22,214) Inventories (1,491) (8,843) 201 -- (10,133) Prepayments and other assets 4,234 (608) (12) -- 3,614 Accounts payable, accrued liabilities and other (12,044) 12,674 (1,250) -- (620) Contribution to defined benefit pension plan (6,000) -- -- -- (6,000) Contract advances and deposits (3,168) 20,276 -- -- 17,108 -------- -------- ------- -------- --------- Cash provided (used) by operations 10,376 10,325 58 -- 20,759 -------- -------- ------- -------- --------- INVESTING ACTIVITIES: Purchase of plant and equipment (11,778) (6,434) (192) -- (18,404) Payments received on notes receivable 225 -- -- -- 225 Cash paid for acquisitions, net of cash acquired (45,180) -- -- -- (45,180) -------- -------- ------- -------- --------- Cash used by investing activities (56,733) (6,434) (192) -- (63,359) -------- -------- ------- -------- --------- FINANCING ACTIVITIES: Proceeds from exercise of stock options 839 -- -- -- 839 Proceeds from management group receivables 11 -- -- -- 11 Repayments of acquired debt (6,931) -- (6,931) Payment of common share cash dividends (1,815) -- -- -- (1,815) -------- -------- ------- -------- --------- Cash (used) provided by financing activities (7,896) -- -- -- (7,896) -------- -------- ------- -------- --------- Net increase (decrease) in cash and cash equivalents (54,253) 3,891 (134) -- (50,496) Cash and cash equivalents at beginning of year 93,129 1,314 4,441 -- 98,884 -------- -------- ------- -------- --------- Cash and cash equivalents at end of period $ 38,876 $ 5,205 $ 4,307 $ -- $ 48,388 ======== ======== ======= ======== =========
13 EDO CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2004
EDO Corporation Parent Company Subsidiary Non- Only Guarantors 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 33,736 4,474 -- 52,867 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 --------- -------- ------- --------- -------- 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 ========= ======== ======= ========= ========
14 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 $50,028 $75,928 $6,717 $(2,798) $129,875 Costs and expenses: Cost of sales 38,408 53,049 5,509 (2,798) 94,168 Selling, general and administrative 4,326 13,059 941 -- 18,326 Research and development 1,229 1,679 425 -- 3,333 ------- ------- ------ ------- -------- 43,963 67,787 6,875 (2,798) 115,827 ------- ------- ------ ------- -------- Operating earnings (loss) 6,065 8,141 (158) -- 14,048 Non-operating income (expense) Interest income 302 16 19 -- 337 Interest expense (2,304) -- -- -- (2,304) Other, net (33) (93) -- -- (126) ------- ------- ------ ------- -------- (2,035) (77) 19 -- (2,093) Earnings (loss) before income taxes 4,030 8,064 (139) -- 11,955 Income tax expense 3,820 1,222 39 -- 5,081 ------- ------- ------ ------- -------- Earnings (loss) after income taxes 210 6,842 (178) -- 6,874 Equity in undistributed earnings of subsidiaries 6,664 -- -- (6,664) -- ------- ------- ------ ------- -------- Net earnings (loss) $ 6,874 $ 6,842 $ (178) $(6,664) $ 6,874 ======= ======= ====== ======= ========
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 $145,059 $210,128 $21,100 $ (9,245) $367,042 Costs and expenses: Cost of sales 112,269 150,636 16,430 (9,245) 270,090 Selling, general and administrative 16,888 36,653 3,696 -- 57,237 Research and development 3,037 3,505 1,107 -- 7,649 -------- -------- ------- -------- -------- 132,194 190,794 21,233 (9,245) 334,976 -------- -------- ------- -------- -------- Operating earnings (loss) 12,865 19,334 (133) -- 32,066 Non-operating income (expense) Interest income 640 69 72 -- 781 Interest expense (6,771) -- -- -- (6,771) Other, net (128) (23) -- -- (151) -------- -------- ------- -------- -------- (6,259) 46 72 -- (6,141) Earnings (loss) before income taxes 6,606 19,380 (61) -- 25,925 Income tax expense 3,029 7,776 213 -- 11,018 -------- -------- ------- -------- -------- Earnings (loss) after income taxes 3,577 11,604 (274) -- 14,907 Equity in undistributed earnings of subsidiaries 11,330 -- -- (11,330) -- -------- -------- ------- -------- -------- Net earnings $ 14,907 $ 11,604 $ (274) $(11,330) $ 14,907 ======== ======== ======= ======== ========
15 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 $ 11,604 $ (274) $(11,330) $ 14,907 Adjustments to earnings to arrive at cash provided (used) by continuing operations: Depreciation 3,649 3,869 555 -- 8,073 Amortization -- 3,500 754 -- 4,254 Deferred tax benefit 246 -- (82) -- 164 Bad debt expense 190 99 -- -- 289 Loss on sale of property, plant and equipment 25 7 -- -- 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 (11,330) -- -- 11,330 -- Intercompany 17,223 (17,815) 592 -- -- Accounts receivable 4,685 (2,139) 170 -- 2,716 Inventories 682 (16,475) (768) -- (16,561) Prepayments and other assets 1,585 1,430 170 -- 3,185 Accounts payable, accrued liabilities and other (12,964) 7,156 (1,052) -- (6,860) Contract advances and deposits (1,412) 6,765 -- -- 5,353 -------- -------- ------- -------- -------- Cash provided (used) by operations 22,281 (1,999) 65 -- 20,347 -------- -------- ------- -------- -------- INVESTING ACTIVITIES: Purchase of plant and equipment (2,897) (3,944) (164) -- (7,005) Payments received on notes receivable 225 -- -- -- 225 Cash received from Emblem Escrow settlement 301 -- -- -- 301 -------- -------- ------- -------- -------- Cash used by investing activities (2,371) (3,944) (164) -- (6,479) -------- -------- ------- -------- -------- FINANCING ACTIVITIES: Proceeds from exercise of stock options 991 -- -- -- 991 Proceeds from management group receivables 128 -- -- -- 128 Payment of common share cash dividends (1,794) -- -- -- (1,794) -------- -------- ------- -------- -------- Cash (used) provided by financing activities (675) -- -- -- (675) -------- -------- ------- -------- -------- Net increase (decrease) in cash and cash equivalents 19,235 (5,943) (99) -- 13,193 Cash and cash equivalents at beginning of year 73,834 7,630 5,168 -- 86,632 -------- -------- ------- -------- -------- Cash and cash equivalents at end of period $ 93,069 $ 1,687 $ 5,069 $ -- $ 99,825 ======== ======== ======= ======== ========
16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION EDO Corporation was incorporated in New York in 1925 by Earl Dodge Osborn, from whose initials "EDO" is derived. EDO Corporation (the "Company") provides military and commercial products and professional services, with core competencies in a wide range of critical defense areas, including: - Defense Electronics - Aircraft Armament - Undersea Warfare - Professional Services - 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. A disciplined acquisition program is diversifying the base of major platforms and customers. The Company's Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and the Proxy Statement for its Annual Meeting of Stockholders are made available, free of charge, on its Web site www.edocorp.com, as soon as reasonably practicable after such reports have been filed with or furnished to the Securities and Exchange Commission. DISCUSSION OF CRITICAL ACCOUNTING POLICIES We make estimates and assumptions in the preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our consolidated financial condition and results of operations and which require our most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The following is a brief discussion of the critical accounting policies employed by us. REVENUE RECOGNITION Sales under long-term, fixed-price contracts, including pro-rata profits, are generally recorded based on the relationship of costs incurred to date to total projected final costs or, alternatively, as deliveries and other milestones are achieved or services are provided. These projections are revised throughout the lives of the contracts. Adjustments to profits resulting from such revisions are made cumulative to the date of change and may affect current period earnings. Sales on other than long-term contract orders (principally commercial products) are recorded as shipments are made. Our gross profit is affected by a variety of factors, including the mix of products, systems and services sold, production efficiencies, price competition and general economic conditions. Estimated losses on long-term contracts are recorded when identified. INVENTORIES Inventories under long-term contracts and programs reflect all accumulated production costs, including factory overhead, initial tooling and other related costs (including general and administrative expenses relating to certain of our defense contracts), less the portion of such costs charged to cost of sales. All other inventories are stated at the lower of cost (principally first-in, first-out method) or market. Inventory costs in excess of amounts recoverable under contracts and which relate to a specific technology or application and which may not have alternative uses are charged to cost of sales when such circumstances are identified. 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. 17 Several factors may influence the sale and use of our inventories, including our decision to exit a product line, technological change, new product development and/or revised estimates of future product demand. If inventory is determined to be overvalued due to one or more of the above factors, we would be required to recognize such loss in value at the time of such determination. Under the contractual arrangements by which progress payments are received, the United States Government has a title to or a security interest in the inventories identified with related contracts. PROPERTY, PLANT AND EQUIPMENT AND OTHER LONG-LIVED ASSETS Property, plant and equipment is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of such assets. Leasehold improvements are amortized over the shorter of their estimated useful lives or their respective lease periods. In those cases where we determine that the useful life of property, plant and equipment should be shortened, we depreciate the net book value in excess of salvage value over its revised remaining useful life thereby increasing depreciation expense. Factors such as technological advances, changes to our business model, changes in our capital strategy, changes in the planned use of equipment, fixtures, software or changes in the planned use of facilities could result in shortened useful lives. Long-lived assets, other than goodwill, are reviewed by us for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The estimate of cash flow, which is used to determine recoverability, is based upon, among other things, certain assumptions about future operating performance. Our estimates of undiscounted cash flow may differ from actual cash flow due to such factors including technological advances, changes to our business model, or changes in our capital strategy or planned use of long-lived assets. If the sum of the undiscounted cash flows, excluding interest, is less than the carrying value, we would recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. In accordance with SFAS No. 142, goodwill must be tested at least annually for impairment at the reporting unit level. If an indication of impairment exists, we are required to determine if such goodwill's implied fair value is less than the unit carrying value in order to determine the amount, if any, of the impairment loss required to be recorded. Impairment indicators include, among other conditions, cash flow deficits, an historic or anticipated decline in revenue or operating profits, adverse legal or regulatory developments, accumulation of costs significantly in excess of amounts originally expected to acquire the asset and/or a material decrease in the fair value of some or all of the assets. 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 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. 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. 18 RESULTS OF OPERATIONS The following information should be read in conjunction with the Consolidated Financial Statements as of September 24, 2005. THREE MONTHS ENDED SEPTEMBER 24, 2005 COMPARED WITH THREE MONTHS ENDED SEPTEMBER 25, 2004 Net sales by segment were as follows:
THREE MONTHS ENDED --------------------- INCREASE/(DECREASE) SEPT. 24, SEPT. 25, FROM SEGMENT 2005 2004 PRIOR PERIOD ------- --------- --------- ------------------- (DOLLARS IN THOUSANDS) Defense ............................ $ 96,823 $ 98,781 (2.0%) Communications and Space Products .. 68,690 20,485 235.3% Engineered Materials ............... 10,371 10,609 (2.2%) -------- -------- ----- Total .............................. $175,884 $129,875 35.4% ======== ======== -----
In the Defense segment, the decrease in sales was attributed to lower sales of professional services, reconnaissance and surveillance systems, electronic warfare systems, and mine countermeasures systems. The decreases are attributable primarily to timing of milestone achievements and deliveries, as well as timing of cost input on programs where revenue is recognized on the basis of percent complete. Another contributing factor was the loss of awards in our professional services business. These decreases were partially offset by increases in sales of C4 products and systems, including the Joint Enhanced Core Communication Systems ("JECCS") program for the Marine Corps, which was awarded last year. In addition, $7.6 million of sales were contributed from the acquisition of EVI. In the Communications and Space Products segment, the increase in sales was primarily attributable to deliveries of Warlock force protection systems to the U.S. Army. The Warlock program will continue to be a significant contributor to sales and margin for the remainder of this year. In the third quarter of 2005, Warlock sales accounted for 30.2% of our total sales. In addition, there was an increase in sales of antenna products in the three months ended September 24, 2005 compared to the three months ended September 25, 2004. In the Engineered Materials segment, sales for the third quarter were slightly lower than sales in the prior year third quarter, due primarily to increases in estimates-to-complete on several sonar array/depth sounder programs, resulting in decreases to the percent complete and, therefore, a decrease to sales of $1.1 million. A business unit in this segment located in Baton Rouge, LA was not affected by the hurricanes that recently hit the Gulf Coast. Operating earnings by segment were as follows:
THREE MONTHS ENDED --------------------- SEPT. 24, SEPT. 25, SEGMENT 2005 2004 ------- --------- --------- (DOLLARS IN THOUSANDS) Defense ................................. $ 7,507 $ 9,503 Communications and Space Products ....... 10,706 2,633 Engineered Materials .................... (631) 1,912 Environmental cost provision, Deer Park facility ............................. (288) -- ------- ------- Total ................................... $17,294 $14,048 ======= =======
Operating earnings for the three months ended September 24, 2005 were $17.3 million or 9.8% of net sales. This compares to operating earnings for the three months ended September 25, 2004 of $14.0 million or 10.8% of net sales. During the three months ended September 24, 2005, the Company incurred a charge of $0.3 million to reflect an increase in estimated costs for environmental cleanup efforts relating to the Company's former Deer Park facility. This charge is in addition to the $1.25 million recorded last quarter. Operating earnings this quarter were also impacted by program-related items discussed in further detail below. The Defense segment's operating earnings for the three months ended September 24, 2005 were $7.5 million or 7.8% of this segment's net sales compared to $9.5 million or 9.6% of this segment's net sales for the three months ended September 25, 2004. Operating earnings for the three months ended September 24, 2005 were negatively impacted by additional cost growth on an undersea warfare systems program amounting to $1.0 million. System testing and software modifications continue. We believe we have accounted for all costs for the modification and future re-testing in our estimate-to-complete. The next significant tests for the undersea warfare systems program are currently scheduled to occur later this year/early next year. There was also cost growth on an 19 electronic warfare systems program. In addition, the lower sales level and the increases in pension expense and intangible asset amortization, as shown in the table below, impacted this segment's earnings. Performance improvements on other programs partially offset these negative impacts to earnings. The Communications and Space Products segment operating earnings for the three months ended September 24, 2005 were $10.7 million or 15.6% of this segment's net sales compared to $2.6 million or 12.9% of this segment's net sales for the three months ended September 25, 2004. The increase in operating earnings is related primarily to sales of the Warlock force protection systems to the U.S. Army. This program will continue to be a significant contributor to operating earnings in this segment for the remainder of the year. The Engineered Materials segment experienced an operating loss for the three months ended September 24, 2005 of $0.6 million or 6.1% of this segment's net sales compared to operating earnings of $1.9 million or 18.0% of this segment's net sales for the three months ended September 25, 2004. In the third quarter of 2005, there was a negative impact of $1.4 million which related to the aforementioned cost growth on several sonar array/ depth sounder programs. 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. Other items of note affecting operating earnings are summarized here to help clarify the comparison of results.
THREE MONTHS ENDED --------------------- SEPT. 24, SEPT. 25, 2005 2004 --------- --------- (DOLLARS IN THOUSANDS) Pension ........................ $1,070 $ 550 ESOP Compensation expense ...... $1,221 $1,058 Intangible asset amortization .. $1,698 $1,366
The increased pension expense in 2005 compared to 2004 is attributable to changes in actuarial assumptions such as discount rate and return on plan assets. The higher ESOP compensation expense for the three months ended September 24, 2005 is attributable to our higher average stock price compared to the three months ended September 25, 2004. 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, 2003, and 2005 and affects primarily the Defense segment. Selling, general and administrative expenses for the three months ended September 24, 2005 of $21.6 million decreased as a percent of net sales to 12.3% from 14.1% for the three months ended September 25, 2004. The increase in sales is the primary driver of the decrease. Research and development expense for the three months ended September 24, 2005 increased to $3.6 million or 2.0% of net sales from $3.3 million or 2.6% of net sales for the three months ended September 25, 2004. The increase is due to increased spending on force protection and composite munitions. Interest expense, net of interest income, for the three months ended September 24, 2005 remained virtually unchanged at $2.0 million compared to the three months ended September 25, 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. Income tax expense reflects an effective rate of 35.6% for the three month period ended September 24, 2005 and 42.5% for the three month period ended September 25, 2004. In the third quarter of 2005, an income tax benefit of $0.8 million was recorded resulting from the reversal of income tax contingencies which were determined to no longer be needed. For the three months ended September 24, 2005, net earnings were $9.8 million or $0.48 per diluted common share on 22.8 million diluted shares compared to net earnings of $6.9 million or $0.35 per diluted common share on 22.4 million diluted shares for the three months ended September 25, 2004. The convertible notes had a dilutive effect in the third quarter of 2005 and in the 2004 comparable period. 20 NINE MONTHS ENDED SEPTEMBER 24, 2005 COMPARED WITH NINE MONTHS ENDED SEPTEMBER 25, 2004 Net sales by segment were as follows:
NINE MONTHS ENDED ---------------------- INCREASE/(DECREASE) SEPT. 24, SEPT. 25, FROM SEGMENT 2005 2004 PRIOR PERIOD ------- --------- --------- ------------------- (DOLLARS IN THOUSANDS) Defense................................. $286,986 $286,248 0.0% Communications and Space Products....... 129,805 46,547 178.9% Engineered Materials.................... 31,713 34,247 (7.4%) -------- -------- ----- Total................................... $448,504 $367,042 22.2% ======== ======== =====
In the Defense segment, there were increases in sales of C4 products and systems, including the Joint Enhanced Core Communication Systems ("JECCS") for the Marine Corps. There was also an $11.9 million contribution to sales from the acquisition of EVI. These increases were offset by decreases in sales of professional services, electronic warfare systems, mine countermeasures systems and aircraft armament systems. These decreases were primarily attributable to lower levels and losses of awards in our professional services business. With respect to the decreases in sales of electronic warfare systems, factors included completions of certain programs as well as timing of revenue events. For mine countermeasures and aircraft armament systems, the decrease is attributable to timing of cost input as well as some schedule shifts which are expected to generate sales in the upcoming quarter. In the Communications and Space Products segment, the increase in sales was attributable to deliveries of Warlock force protection systems to the U.S. Army. The Warlock program will continue to be a significant contributor to sales and margin for the remainder of this year. In the nine months ended September 24, 2005, Warlock sales accounted for 19.8% of our total sales. In addition, there were increased sales of antenna products in the first nine months of 2005 compared to the comparable period of 2004. In the Engineered Materials segment, the decrease in sales was primarily attributable to higher sales of fiber composite piping in the earlier part of the prior year, wherein we had been awarded a contract to replace a competitor's composite piping that had failed. Operating earnings by segment were as follows:
NINE MONTHS ENDED --------------------- SEPT. 24, SEPT. 25, SEGMENT 2005 2004 ------- --------- --------- (DOLLARS IN THOUSANDS) Defense................................. $22,848 $27,503 Communications and Space Products....... 15,539 1,639 Engineered Materials.................... (313) 2,924 Environmental cost provision, Deer Park facility.............................. (1,538) -- ------- ------- Total.................................... $36,536 $32,066 ======= =======
Operating earnings for the nine months ended September 24, 2005 were $36.5 million or 8.1% of net sales. This compares to operating earnings for the nine months ended September 25, 2004 of $32.1 million or 8.7% of net sales. During the nine months ended September 24, 2005, the Company incurred a charge of $1.5 million to reserve for environmental cleanup efforts relating to the Company's former Deer Park facility. Operating earnings for the nine months ended September 24, 2005 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 24, 2005 were $22.8 million or 8.0% of this segment's net sales compared to $27.5 million or 9.6% of this segment's net sales for the nine months ended September 25, 2004. Operating earnings in the first nine months of 2005 were negatively affected by cost growth totaling $2.8 million on the aforementioned undersea warfare systems program. Ongoing system testing identified various performance issues that required design and software modifications, which are continuing. We believe we have accounted for all costs for the modifications and future re-testing in our estimate-to-complete. The next significant tests for the undersea warfare systems program are currently scheduled to occur later this year/early next year. In the first nine months of 2004, there was a $2.3 million negative impact to earnings on the same program. In addition, operating earnings in the Defense segment for the nine months ended September 24, 2005 were significantly impacted by the decreased sales in our services business as well as cost growth on an electronic warfare systems program. These negative impacts were partially offset by an adjustment of $1.6 million of the estimated costs to complete on an aircraft armament program. 21 In the first nine months of 2004 there was a positive impact to operating earnings in the Defense segment 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 deliveries of MK105 systems made in 2003 and proven performance resulting from system utilization over the course of 2004. This increase in earnings was partially offset by a $1.6 million negative impact to operating earnings resulting from an increase in the estimate-to-complete on an aircraft armament program. The Communications and Space Products segment operating earnings for the nine months ended September 24, 2005 were $15.5 million or 12.0% of this segment's net sales compared to $1.6 million or 3.5% of this segment's net sales for the nine months ended September 25, 2004. This is primarily due to the increased sales of the Warlock force protection systems. In addition, the results for the first nine months of 2004 included losses relating to adjustments to estimates-to-complete on development and start-up production phases on certain interference cancellation programs resulting from issues discovered during testing. Furthermore, there was a loss in the antenna product line in the first nine months of 2004 due to production inefficiencies resulting in inventory adjustments as well as increases in estimates-to-complete. The Engineered Materials segment experienced an operating loss for the nine months ended September 24, 2005 of $0.3 million or 1.0% of this segment's net sales compared to operating earnings of $2.9 million or 8.5% of this segment's net sales for the nine months ended September 25, 2004. The decrease in operating earnings is due to the aforementioned cost growth on several sonar array and depth sounder programs. In addition, there were write-offs of receivables of $0.4 million in the fiber composite business. Furthermore, there was a negative impact of $0.4 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 charge to earnings. In the first nine months of 2004, there was a $0.8 million charge on the same program. Also in 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. Other items of note affecting operating earnings are summarized here to help clarify the comparison of results.
NINE MONTHS ENDED ---------------------- SEPT. 24, SEPT 25, 2005 2004 --------- -------- (DOLLARS IN THOUSANDS) Pension.................................. $3,209 $1,650 ESOP Compensation expense................ $3,771 $3,086 Intangible asset amortization............ $4,319 $4,237
The increase in pension expense in 2005 compared to 2004 is attributable to changes in actuarial assumptions such as discount rate and return on plan assets. The higher ESOP compensation expense for the first nine months of 2005 is attributable to our higher average stock price compared to the first nine months of 2004. 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, 2003, and 2005 and affects primarily the Defense segment. Selling, general and administrative expenses for the nine months ended September 24, 2005 of $61.9 million decreased as a percent of net sales to 13.8% from 15.6% for the nine months ended September 25, 2004. The decrease is attributable primarily to the increase in sales. Research and development expense for the nine months ended September 24, 2005 increased to $12.0 million or 2.7% of net sales from $7.6 million or 2.1% of net sales for the nine months ended September 25, 2004. This increase was attributable to increased spending on force protection systems and composite munitions. Interest expense, net of interest income, for the nine months ended September 24, 2005 decreased to $5.7 million from $6.0 million for the nine months ended September 25, 2004, primarily due to lower interest income on a lower average cash balance. 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 38.8% for the nine month period ended September 24, 2005 and 42.5% for the nine month period ended September 25, 2004. In the nine months ended September 24, 2005, an income tax benefit of $0.8 million was recorded resulting from the reversal of income tax reserves which were determined during the third quarter to no longer be needed. 22 For the nine months ended September 24, 2005, net earnings were $18.8 million or $0.97 per diluted common share on 22.7 million diluted shares compared to net earnings of $14.9 million or $0.81 per diluted common share on 22.3 million diluted shares for the nine months ended September 25, 2004. The convertible notes were dilutive for the nine months ended September 24, 2005 and for the nine months ended September 25, 2004. LIQUIDITY AND CAPITAL RESOURCES BALANCE SHEET Our cash and cash equivalents decreased 51.0% to $48.4 million at September 24, 2005 from $98.9 million at December 31, 2004. This decrease was due primarily to $45.2 million for acquisitions, $18.4 million used for the purchase of capital equipment, $6.9 million to repay acquired debt and $1.8 million for the payment of common share dividends. These decreases were partially offset by $20.8 million provided by operations. Accounts receivable increased 17.5% to $180.8 million at September 24, 2005 from $153.8 million at December 31, 2004 due in part to timing of collections of billed receivables and increased sales. There was also growth in billed receivables resulting from deliveries of Warlock force protection systems. At September 24, 2005 approximately 82% of billed receivables are in the under-60 days aging category. Inventories increased 22.2% to $64.6 million at September 24, 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 force protection systems program for which deliveries will continue to increase in the fourth quarter of the year. The notes receivable of $7.2 million at September 24, 2005 and at December 31, 2004 represent notes receivable from the sale of our facility in Deer Park in 2003 and the sale of our College Point facility in January 1996. The Deer Park facility note of $7.0 million was due no later than October 9, 2005. While this has not yet been collected, we see no reason to change its current classification status. 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. 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. We expect to have a new credit facility in place prior to the expiration of the current credit facility. 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 24, 2005, LIBOR was approximately 4.15% 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 24, 2005 and December 31, 2004. Letters of credit outstanding at September 24, 2005 pertaining to the credit facility were $23.9 million, resulting in $101.1 million available 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 24, 2005, 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") 23 In April 2002, we issued the $137.8 million of Notes. 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 24, 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 September 24, 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 September 24, 2005, 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. Actual pension contributions may differ from amounts presented below and are contingent on cash flow and liquidity.
Payments Due In (in millions): ---------------------------------------------------------- 2010 and Total 2005 2006 2007 2008 2009 Beyond ------ ----- ----- ------ ----- ----- -------- 5.25% Convertible Subordinated Notes due 2007, excluding interest ....... $137.8 $ -- $ -- $137.8 $ -- $ -- $ -- Operating leases ...................... 113.2 4.0 13.7 13.0 12.5 12.3 57.7 Letters of credit ..................... 23.9 12.9 9.0 2.0 -- -- -- Pension contributions ................. 23.0 -- 6.0 6.0 6.0 5.0 Advance payment & performance bonds ... 1.9 -- 0.2 -- -- 1.7 -- ------ ----- ----- ------ ----- ----- ----- Total ................................. $299.8 $16.9 $28.9 $158.8 $18.5 $19.0 $57.7 ====== ===== ===== ====== ===== ===== =====
In September 2005, we contributed $6.0 million to the defined benefit pension plan. 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. Sales of Warlock force protection systems represented 30.2% of net sales and 19.8% of net sales for the three and nine months ended September 24, 2005, respectively. BACKLOG The funded backlog of unfilled orders at September 24, 2005 increased to $533.9 million from $474.6 million at December 31, 2004. Our backlog consists primarily of current orders under long-lived, mission-critical programs on key defense platforms. 24 "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. 25 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 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 September 24, 2005:
DATE OF REPORT ITEMS REPORTED -------------- --------------------------------------------------------- July 28, 2005 Earnings Release dated July 28, 2005 announcing financial results for the quarter ended June 25, 2005.
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) Dated: October 28, 2005 By: /s/ FREDERIC B. BASSETT ------------------------------------ Frederic B. Bassett Vice President Finance, Treasurer and Chief Financial Officer 26