-----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, P+DMAY445wa+QIyPaTMWCiTlHUhBXyD9F4fCVktzwwOUH9wpJgx2KI6hcwkG2nzY /6Vuase8UYpzOiumpPdRwg== 0000950123-06-005442.txt : 20060428 0000950123-06-005442.hdr.sgml : 20060428 20060428165852 ACCESSION NUMBER: 0000950123-06-005442 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20060325 FILED AS OF DATE: 20060428 DATE AS OF CHANGE: 20060428 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: 06790949 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 y20347e10vq.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 25, 2006 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 check mark whether the registrant is a large accelerated filer, an accelerated filer (as defined in Rule 12b-2 of the Act), or a non-accelerated filer. Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). [ ] Yes [X] No The number of shares of EDO common stock outstanding as of April 25, 2006 was 20,347,750 shares, with a par value $1 per share. ================================================================================ EDO CORPORATION TABLE OF CONTENTS
PART I Financial Information Page ITEM 1 Financial Statements........................................................................ Consolidated Balance Sheets - March 25, 2006 (unaudited) and December 31, 2005........................................... 3 Consolidated Statements of Earnings - Three Months Ended March 25, 2006 and March 26, 2005 (unaudited)........................... 4 Consolidated Statements of Cash Flows - Three Months Ended March 25, 2006 and March 26, 2005 (unaudited)........................... 5 Notes to Consolidated Financial Statements (unaudited)...................................... 6 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................................. 15 ITEM 3 Quantitative and Qualitative Disclosures about Market Risk.................................. 20 ITEM 4 Controls and Procedures..................................................................... 20 PART II Other Information........................................................................... ITEM 1A Risk Factors................................................................................ 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 25, DECEMBER 31, 2006 2005 --------- ------------ (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS Current assets: Cash and cash equivalents ............................................................... $ 117,487 $ 108,731 Accounts receivable, net ................................................................ 168,040 189,190 Inventories ............................................................................. 71,017 56,567 Deferred income tax asset, net .......................................................... 9,278 8,946 Notes receivable ........................................................................ 7,000 7,100 Prepayments and other ................................................................... 6,192 3,809 --------- --------- Total current assets ................................................................. 379,014 374,343 --------- --------- Property, plant and equipment, net ........................................................ 51,105 49,574 Goodwill .................................................................................. 152,336 152,347 Other intangible assets, net .............................................................. 54,311 55,925 Deferred income tax asset, net ............................................................ 29,637 29,637 Other assets .............................................................................. 25,221 25,573 --------- --------- $ 691,624 $ 687,399 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ........................................................................ $ 22,385 $ 33,111 Accrued liabilities ..................................................................... 48,519 52,126 Contract advances and deposits .......................................................... 58,179 42,244 Note payable ............................................................................ 2,000 2,000 --------- --------- Total current liabilities ............................................................ 131,083 129,481 --------- --------- Income taxes payable ...................................................................... 6,513 6,513 Note payable, long-term ................................................................... 5,000 5,000 Long-term debt ............................................................................ 201,250 201,250 Post-retirement benefits obligations ...................................................... 104,011 103,815 Environmental obligation .................................................................. 1,402 1,392 Other long-term liabilities ............................................................... 226 55 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, 20,437,045 issued in 2006 and 20,305,815 issued in 2005................ 20,437 20,306 Additional paid-in capital .............................................................. 166,388 167,219 Retained earnings ....................................................................... 118,613 120,103 Accumulated other comprehensive loss, net of income tax benefit (32,651 in 2006 and 32,711 in 2005)........................................... (46,985) (47,072) Treasury shares at cost (109,520 shares in 2006 and 111,317 shares in 2005 ) ............ (1,838) (1,868) Unearned Employee Stock Ownership Plan shares ........................................... (14,476) (14,789) Deferred compensation under Long-Term Incentive Plan .................................... -- (3,866) Management group receivables ............................................................ -- (140) --------- --------- Total shareholders' equity ........................................................... 242,139 239,893 --------- --------- $ 691,624 $ 687,399 ========= =========
See accompanying Notes to Consolidated Financial Statements. 3 EDO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED MARCH 25, MARCH 26, 2006 2005 ------------- --------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NET SALES ........................................................................... $ 119,709 $ 116,508 --------- --------- COSTS AND EXPENSES Cost of sales ...................................................................... 91,244 85,054 Selling, general and administrative ................................................ 25,358 20,288 Research and development ........................................................... 3,206 4,418 --------- --------- 119,808 109,760 --------- --------- OPERATING (LOSS) EARNINGS ........................................................... (99) 6,748 NON-OPERATING INCOME (EXPENSE) Interest income .................................................................... 1,021 501 Interest expense ................................................................... (2,424) (2,191) Other, net ......................................................................... (146) (45) --------- --------- (1,549) (1,735) --------- --------- (Loss) earnings before income taxes ................................................... (1,648) 5,013 Income tax benefit (expense) .......................................................... 709 (2,105) --------- --------- NET (LOSS) EARNINGS ................................................................... $ (939) $ 2,908 ========= ========= NET (LOSS) EARNINGS PER COMMON SHARE: Basic .............................................................................. $ (0.05) $ 0.16 ========= ========= Diluted ............................................................................ $ (0.05) $ 0.16 ========= ========= Weighted-average common shares outstanding: Basic ............................................................................... 18,012 17,936 ========= ========= Diluted ............................................................................. 18,012 18,236 ========= ========= 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 25, MARCH 26, 2006 2005 ------------ -------- (UNAUDITED) (IN THOUSANDS) OPERATING ACTIVITIES: (Loss) earnings from operations .................................... $ (939) $ 2,908 Adjustments to (loss) earnings to arrive at cash provided (used) by operations: Depreciation .................................................... 2,778 2,642 Amortization .................................................... 1,614 1,310 Bad debt (recovery) expense ..................................... (66) 139 Loss on disposal of property, plant and equipment ............... 29 -- Long-Term Incentive Plan compensation expense ................... 972 397 Stock option compensation expense ............................... 865 -- Employee Stock Ownership Plan compensation expense .............. 1,186 1,314 Dividends on unallocated Employee Stock Ownership Plan shares ........................................................ 58 65 Common shares issued for directors' fees ........................ 55 45 Changes in operating assets and liabilities, excluding effects of acquisitions: Accounts receivable ........................................... 21,216 (1,607) Inventories ................................................... (14,450) (9,661) Prepayments and other assets .................................. (1,692) (42) Accounts payable, accrued liabilities and other ............... (13,544) (4,096) Contract advances and deposits ................................ 15,935 1,173 --------- --------- Cash provided (used) by operations ................................... 14,017 (5,413) --------- --------- INVESTING ACTIVITIES: Settlement of purchase price on 2005 acquisition ................... (353) -- Purchase of plant and equipment .................................... (4,971) (6,470) Payments received on notes receivable .............................. 100 75 --------- --------- Cash used by investing activities .................................... (5,224) (6,395) --------- --------- FINANCING ACTIVITIES: Proceeds from exercise of stock options ............................ 258 125 Excess income tax benefit from stock options and Long-Term Incentive Plan .................................................. 174 173 Proceeds from management group receivables ......................... 140 -- Payment of common share cash dividends ............................. (609) (604) --------- --------- Cash used by financing activities .................................... (37) (306) --------- --------- Net increase (decrease) in cash and cash equivalents ................. 8,756 (12,114) Cash and cash equivalents at beginning of year ....................... 108,731 98,884 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 117,487 $ 86,770 ========= ========= Supplemental disclosures: Cash paid for: Interest ........................................................ $ -- $ -- ========= ========= Income taxes .................................................... $ 6,109 $ 2,393 ========= =========
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, 2005 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. Certain reclassifications have been made to prior year presentations to conform to current year presentations. (2) ACQUISITIONS On December 20, 2005, the Company acquired for cash all of the stock of NexGen Communications LLC (NexGen), a privately-held company specializing in the design and production of communications systems for a diverse set of U.S. government organizations. The acquisition strengthened EDO's fast-growing position in specialized communication products. The acquired company became part of the Company's Electronic Systems and Communications segment. The Company has not yet completed its analysis of the fair value of the acquired assets and liabilities. Consequently, the excess purchase price over the net assets acquired has been temporarily assigned to goodwill, and amounts recorded are subject to change. The excess of the purchase price over the net assets acquired related to NexGen is not deductible for income tax purposes. On September 19, 2005, the Company acquired for cash all of the stock of Fiber Innovations, Inc., (Fiber Innovations) a privately-held company that is a designer and manufacturer of fiber reinforced-composites. This acquisition has added important complementary design and manufacturing capabilities to EDO's integrated-composite-structures business. The acquired company became part of the Company's Engineered Systems and Services segment. The excess of the purchase price over the net assets acquired related to Fiber Innovations is not deductible for income tax purposes. During the first quarter of 2006, the purchase accounting for Fiber Innovations was finalized and resulted in an additional cash payment of $0.4 million. On May 2, 2005, the Company acquired for cash all of the units of EVI Technology, LLC (EVI), a privately-held company. EVI is a designer, manufacturer and integrator of classified intelligence systems. EVI has strengthened and expanded EDO's range of products and engineering expertise in a number of synergistic areas. The acquired company became part of the Company's Electronic Systems and Communications segment. The excess of the purchase price over the net assets acquired related to EVI recorded as goodwill and other intangible assets is deductible for income tax purposes over 15 years. (3) STOCK-BASED COMPENSATION The Company has granted non-qualified stock options and restricted shares under the 2002 Long-Term Incentive Plan (LTIP) and the 2002 Non-Employee Director Stock Option Plan (NEDSOP). These plans are described in Note 13 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2005. Prior to January 1, 2006, the Company accounted 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, as permitted by Financial Accounting Standard Board (FASB) Statement No. 123, "Accounting for Stock-based Compensation." 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 employee compensation expense was recognized in the Statement of Earnings. Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R) (FAS 123 (R)), Share-Based Payment, using the modified prospective transition method. Under this method, compensation cost recognized in the three months ended March 25, 2006 includes: (a) compensation cost for all options granted prior to January 1, 2006, but not yet vested, based on the fair value on the grant date and (b) compensation cost for all options granted to Directors under the NEDSOP subsequent to January 1, 2006, which are 100% vested on the date of grant. Results of prior periods are not required to be restated. As a result of adopting FAS 123(R), the Company's earnings before income taxes for the three months ended March 25, 2006, were $0.9 million lower than if it had continued to account for its share-based compensation under APB No. 25. Loss per common share would have been $(0.02) if the Company had not adopted Statement 123(R), compared to the reported loss per common share of $(0.05). 6 Prior to the adoption of FAS 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as an operating cash flow in the Statement of Cash Flows. FAS 123(R) requires that this excess tax benefit now be classified as a financing cash flow. For the three months ended March 25, 2006 the $0.2 million excess tax benefit classified as a financing cash flow would have been classified as an operating cash flow if the Company had not adopted FAS 123(R). During the three months ended March 25, 2006, the Company only granted options to its Board of Directors, which when issued were 100% vested. The Company estimated the fair value of the 2006 stock option awards as of the grant date by applying the Black-Scholes pricing valuation model. The application of this valuation model involves assumptions that are judgmental and sensitive in the determination of compensation expense. The weighted average for key assumptions used in determining the fair value of options granted are as follows: expected dividend yield of 1%, risk free interest rate of 4.3%, expected volatility of 44%, and an expected option life of 7 years. A summary of the Company's stock option activity during the three months ended March 25, 2006 is as follows:
WEIGHTED- AVERAGE WEIGHTED- REMAINING AGGREGATE AVERAGE CONTRACTUAL INTRINSIC OPTIONS EXERCISE TERM VALUE (IN THOUSANDS) PRICE (IN YEARS) (IN THOUSANDS) ----------------------------------------------------------- Outstanding on January 1, 2006........................... 1,045 $17.25 Options granted.......................................... 55 27.39 Options exercised........................................ (23) 11.06 Options expired/cancelled................................ (1) 27.02 ----------- -------- ---------------------------- Outstanding on March 25, 2006............................ 1,076 $17.89 5.57 $13,688 =========== ======== =========== ======= Exercisable on March 25, 2006............................ 1,070 $17.89 5.56 $13,626 =========== ======== =========== =======
As of March 25, 2006, the total future compensation expense related to non-vested options not yet recognized in the consolidated statement of earnings is approximately $47,000, all of which will vest and be recognized in 2006. Stock based compensation expense recognized for restricted share awards was $1.0 million and $0.4 million for the three months ended March 25, 2006 and March 26, 2005, respectively. The unrecognized compensation cost related to the unvested restricted shares at March 25, 2006 is approximately $5.5 million and will be recognized over a weighted-average period of 2.3 years A summary of the activity of restricted shares under the Company's 2002 LTIP plan for the three months ended March 25, 2006 is as follows:
WEIGHTED- AVERAGE GRANT DATE SHARES FAIR PRICE ---------------------------------------- (IN THOUSANDS) Outstanding on January 1, 2006........................... 219 $27.78 Granted.................................................. 108 26.54 Vested................................................... - - Forfeited/Canceled....................................... (2) 28.96 ----------- -------- Outstanding on March 25, 2006............................ 325 $27.37 =========== ========
Prior to adoption of FAS 123(R) the fair value of restricted share awards was recorded as deferred compensation expense as a separate component of shareholders equity. In accordance with FAS 123(R), the deferred compensation balance of $3.9 million at December 31, 2005 was reclassified to additional paid-in-capital. The restricted share awards cliff vest in 3 years and are subject to continued employment. If such goal is not met, no compensation cost is recognized and any previously recognized compensation cost is reversed. The following table illustrates the effect on net earnings and earnings per share if, for the three months ended March 26, 2005, the Company had applied the fair value recognition provisions of SFAS No. 123. 7
MARCH 26, 2005 ---------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net earnings, as reported.................................... $ 2,908 Add: Stock-based compensation expense included in reported earnings, net of tax. 234 Deduct: Total stock-based compensation expense based on fair value method, net of tax........................... (1,199) ---------- Pro forma earnings........................................... $ 1,943 ========== Basic earnings per common share: As reported................................................ $ 0.16 Pro forma.................................................. $ 0.11 Diluted earnings per common share: As reported................................................ $ 0.16 Pro forma.................................................. $ 0.11 ==========
(4) 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. The changes in the carrying amount of goodwill by segment during the three months ended March 25, 2006 are as follows:
ENGINEERED ELECTRONIC SYSTEMS AND SYSTEMS AND SERVICES COMMUNICATIONS TOTAL ---------- -------------- ----- (IN THOUSANDS) Balance as of January 1, 2006......................................................... $43,846 $108,501 $152,347 Purchase accounting adjustments ...................................................... 328 (339) (11) ---------- ---------- ----------- Balance as of March 25, 2006.......................................................... $44,174 $108,162 $152,336 ========== ========== ===========
Summarized below are intangible assets:
MARCH 25, DECEMBER 31, 2006 2005 LIFE --------- ----------- ---- (IN THOUSANDS) Intangible assets subject to amortization: Capitalized non-compete agreements related to Acquisitions................................................ $ 3,118 $ 3,118 1-5 years Purchased technologies related to acquisitions................. 21,103 21,103 8-25 years Customer contracts and relationships related to acquisitions... 45,698 45,698 6-20 years Tradename related to acquisitions.............................. 2,069 2,069 5-10 years ------- ------- 71,988 71,988 Less accumulated amortization................................ (18,077) (16,463) -------- ------- $53,911 $55,525 Intangible assets not subject to amortization: Tradename related to acquisitions............................. 400 400 -------- ------- $54,311 $55,925
8 The amortization expense for the three months ended March 25, 2006 and March 26, 2005 amounted to $1.6 million and $1.3 million, respectively. Total remaining amortization expense for 2006, 2007, 2008, 2009, 2010 and thereafter related to these intangible assets is estimated to be $4.9 million, $6.4 million, $5.7 million, $5.7 million, $4.9 million and $26.3 million, respectively. (5) INVENTORIES Inventories are summarized by major classification as follows:
MARCH 25, DECEMBER 31, 2006 2005 ---------- ------- (IN THOUSANDS) Raw material and supplies................. $10,615 $11,976 Work-in-process........................... 65,275 49,829 Finished goods............................ 1,948 1,690 Less: Unliquidated progress payments (6,821) (6,928) -------- -------- $71,017 $56,567 ======== ========
(6) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
FOR THE THREE MONTHS ENDED MARCH 25, MARCH 26, 2006 2005 ---- ---- (IN THOUSANDS) Numerator: Net (loss) earnings for basic and diluted calculation........ $ (939) $ 2,908 Denominator: Denominator for basic calculation............................ 18,012 17,936 Effect of dilutive securities: Stock options............................................. -- 300 ---------- ---------- Denominator for diluted calculation.......................... 18,012 18,236 ========== ==========
The assumed conversion of the 4.0% Notes and the 5.25% Notes was anti-dilutive for the first three months of 2006 and 2005, respectively. 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 25, MARCH 26, 2006 2005 ---- ---- (IN THOUSANDS) 5.25% Convertible Subordinated Notes.............. -- 4,408 4.00% Convertible Subordinated Notes.............. 5,886 -- Unexercised stock options......................... 74 12 ----- ----- 5,960 4,420 ===== =====
(7) DEFINED BENEFIT PLAN The Company maintains a qualified noncontributory defined benefit pension plan covering less than half of its employees. In November 2002, the plan was amended whereby benefits accrued under the plan were frozen as of December 31, 2002. The Company's funding policy is to make annual contributions to the extent such contributions are actuarially determined and tax deductible. For the three months ended March 25, 2006 and March 26, 2005, the Company recorded pension expense of $1.2 million and $1.1 million, respectively, based on the total for the respective years of $4.8 million in 2006 and $4.3 million in 2005. Summarized below are the components of the expense for each period presented. 9
FOR THE THREE MONTHS ENDED MARCH 25, MARCH 26, 2006 2005 ----------- -------- (IN THOUSANDS) Interest cost................................ $3,038 $3,089 Expected return on plan assets............... (3,209) (3,181) Amortization of unrecognized net loss........ 1,365 1,162 ------- -------- $1,194 $1,070 ======= ========
(8) 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. (9) COMPREHENSIVE INCOME As of March 25, 2006, accumulated other comprehensive loss included in the accompanying consolidated balance sheet primarily represents additional minimum liabilities on benefit plans. Comprehensive loss for the three months ended March 25, 2006 was $0.9 million compared to comprehensive income for the three months ended March 26, 2005 of $2.8 million. (10) BUSINESS SEGMENTS The Company determines its operating segments based upon an analysis of its products and services, production processes, types of customers, economic characteristics and the related regulatory environment, which is consistent with how management operates the Company. The Company's operations are reflected in two business segments: Engineered Systems and Services and Electronic Systems and Communications. The Engineered Systems and Services segment addresses the Integrated Systems and Structures, Undersea Warfare, and Professional Services markets. Primary products include aircraft armament systems, integrated composite structures, mine countermeasure systems, sonar systems and flight line products. The Company also offers a wide range of professional engineering services. The Electronic Systems and Communications segment includes products that serve the Electronic Warfare and the C4 (Command, Control, Communications and Computers) markets. Primary products include electronic force protection equipment, interference cancellation technology, airborne electronic warfare systems, reconnaissance and surveillance systems, other specialized electronic systems, C4 products and services and antenna products.
FOR THE THREE MONTHS ENDED MARCH 25, MARCH 26, 2006 2005 ----------- -------- (IN THOUSANDS) Net Sales: Engineered Systems and Services.............................. $ 59,266 $51,023 Electronic Systems and Communications........................ 60,443 65,485 ---------- ---------- $119,709 $116,508 Operating (loss) earnings: Engineered Systems and Services.............................. 1,628 3,768 Electronic Systems and Communications........................ (1,727) 2,980 ---------- ---------- (99) 6,748 Net interest expense......................................... (1,403) (1,690) Other, net................................................... (146) (45) ---------- ---------- (Loss) earnings before income taxes.......................... $ (1,648) $ 5,013 ========= ==========
(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 the condensed consolidating financial information for the Company and the contemplated subsidiary guarantors and non-guarantors at March 25, 2006 and December 31, 2005 and for the three months ended March 25, 2006 and March 26, 2005. 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 10 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 four quarters.
EDO CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET MARCH 25, 2006 EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated ---- ---------- -------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 106,626 $ 5,389 $ 5,472 -- $ 117,487 Accounts receivable, net 64,899 99,466 3,675 -- 168,040 Inventories 14,831 53,140 3,046 -- 71,017 Deferred income tax asset, net 9,278 -- -- -- 9,278 Notes receivable 7,000 -- -- -- 7,000 Prepayments and other 3,865 2,093 234 -- 6,192 --------------------------------------------------------------------------------- Total current assets 206,499 160,088 12,427 -- 379,014 --------------------------------------------------------------------------------- Investment in subsidiaries 314,225 -- -- (314,225) -- Property, plant and equipment, net 26,534 21,320 3,251 -- 51,105 Goodwill -- 143,626 8,710 -- 152,336 Other intangible assets, net -- 42,945 11,366 -- 54,311 Deferred income tax asset, net 29,637 -- -- -- 29,637 Other assets 23,953 1,268 -- -- 25,221 --------------------------------------------------------------------------------- $ 600,848 $ 369,247 $ 35,754 $(314,225) $ 691,624 --------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 28,207 $ 38,537 $ 4,160 -- $ 70,904 Contract advances and deposits 12,973 45,206 -- -- 58,179 Notes Payable 2,000 -- -- -- 2,000 --------------------------------------------------------------------------------- Total current liabilities 43,180 83,743 4,160 -- 131,083 Long-term debt 201,250 -- -- -- 201,250 Note payable, long-term 5,000 -- -- -- 5,000 Income taxes payable 6,513 -- -- -- 6,513 Deferred income tax liabilities, net (2,852) 2,497 355 -- -- Other long-term liabilities 52 174 -- -- 226 Post retirement benefits obligations 104,011 -- -- -- 104,011 Environmental obligation 1,402 -- -- -- 1,402 Inter-company accounts -- 174,135 24,749 (198,884) -- Shareholders' equity: Preferred shares -- -- -- -- -- Common shares 20,437 98 -- (98) 20,437 Additional paid-in capital 166,388 25,221 6,418 (31,639) 166,388 Retained earnings 118,613 87,445 211 (87,656) 118,613 Accumulated other comprehensive loss, net of income tax benefit (46,832) (14) (139) -- (46,985) Treasury shares (1,838) (4,052) -- 4,052 (1,838) Unearned ESOP shares (14,476) -- -- -- (14,476) --------------------------------------------------------------------------------- Total shareholders' equity 242,292 108,698 6,490 (115,341) 242,139 --------------------------------------------------------------------------------- $ 600,848 $ 369,247 $ 35,754 $(314,225) $ 691,624 ========= ========= ========= ========= =========
11
EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS MARCH 25, 2006 EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated ---- ---------- -------------- ------------ ------------ Continuing Operations: Net Sales $ 46,987 $ 69,086 $ 6,354 $ (2,718) $ 119,709 Costs and expenses: Cost of sales 38,835 50,709 4,418 (2,718) 91,244 Selling, general and administrative 5,508 17,142 2,708 25,358 Research and development 882 2,137 187 3,206 ----------------------------------------------------------------------------- 45,225 69,988 7,313 (2,718) 119,808 ----------------------------------------------------------------------------- Operating Earnings (Loss) 1,762 (902) (959) -- (99) Non-operating income (expense) Interest income 967 -- 54 -- 1,021 Interest expense (2,440) 16 -- -- (2,424) Other, net (16) (86) (44) -- (146) ----------------------------------------------------------------------------- (1,489) (70) 10 -- (1,549) (Loss) earnings from continuing operations before income taxes 273 (972) (949) -- (1,648) Income tax benefit (expense) 1,105 (603) 207 -- 709 ----------------------------------------------------------------------------- (Loss) earnings from continuing operations 1,378 (1,575) (742) -- (939) Equity in undistributed earnings of subsidiaries (2,317) -- -- 2,317 -- ----------------------------------------------------------------------------- Net loss $ (939) $ (1,575) $ (742) $ 2,317 $ (939) ========= ========= ========= ========= =========
EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS MARCH 25, 2006 EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated ---- ---------- -------------- ------------ ------------ OPERATING ACTIVITIES: Loss from continuing operations $ (939) $ (1,575) $ (742) 2,317 $ (939) Adjustments to loss to arrive at cash provided (used) by continuing operations: Depreciation 1,183 1,416 179 2,778 Amortization -- 1,363 251 1,614 Bad debt (recovery) expense (83) 17 -- (66) Loss on sale of property and equipment 18 11 -- 29 LTIP compensation expense 972 -- -- -- 972 Stock option compensation expense 865 -- -- -- 865 Employee Stock Ownership Plan compensation expense 1,186 -- -- -- 1,186 Dividends on unallocated Employee Stock Ownership Plan shares 58 -- -- -- 58 Common shares issued for directors' fees 55 -- -- -- 55 Changes in operating assets and liabilities, excluding effects of acquisitions: Equity in earnings of subsidiaries 2,317 -- -- (2,317) -- Inter-company/Investments in subsidiaries 814 (792) (22) -- -- Accounts receivable 3,786 17,682 (252) -- 21,216 Inventories 2,457 (16,993) 86 -- (14,450) Prepayments and other assets (772) (1,020) 100 -- (1,692) Accounts payable, accrued liabilities and other (8,853) (5,313) 622 -- (13,544) Contract advances and deposits 6,853 9,082 -- -- 15,935 ------------------------------------------------------------------------------ Cash provided (used) by continuing operations 9,917 3,878 222 -- 14,017 INVESTING ACTIVITIES: Settlement of purchase price on 2005 acquisition -- (353) -- -- (353) Purchase of plant and equipment (2,421) (2,368) (182) -- (4,971) Payments received on notes receivable 100 -- -- -- 100 ------------------------------------------------------------------------------ Cash used by investing activities (2,321) (2,721) (182) -- (5,224) FINANCING ACTIVITIES: Proceeds from exercise of stock options 258 -- -- -- 258 Excess Income tax benefit from stock options and Long-Term Incentive Plan 174 -- -- -- 174 Proceeds from management group receivables 140 -- -- -- 140 Payment of common share cash dividends (609) -- -- -- (609) ------------------------------------------------------------------------------ Cash used by financing activities (37) -- -- -- (37) ------------------------------------------------------------------------------ Net increase in cash and cash equivalents 7,559 1,157 40 -- 8,756 Cash and cash equivalents at beginning of year 99,067 4,232 5,432 -- 108,731 ------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 106,626 $ 5,389 $ 5,472 $ -- $ 117,487 ========= ========= ========= ========= =========
12
EDO CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2005 EDO Corporation Parent Company Subsidiary Only Guarantors Non-Guarantors Eliminations Consolidated ---- ---------- -------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 99,067 $ 4,232 $ 5,432 -- $ 108,731 Accounts receivable, net 68,603 117,164 3,423 -- 189,190 Inventories 17,288 36,147 3,132 -- 56,567 Deferred income tax asset, net 8,946 -- -- -- 8,946 Notes receivable 7,358 (258) -- -- 7,100 Prepayments and other 2,037 1,438 334 -- 3,809 ------------------------------------------------------------------------------- Total current assets 203,299 158,723 12,321 -- 374,343 Investment in subsidiaries 317,356 -- -- (317,356) -- Property, plant and equipment, net 25,946 20,380 3,248 -- 49,574 Goodwill -- 143,637 8,710 -- 152,347 Other intangible assets, net -- 44,308 11,617 -- 55,925 Deferred income tax asset, net 29,637 -- -- -- 29,637 Other assets 24,751 822 -- -- 25,573 ------------------------------------------------------------------------------- $ 600,989 $ 367,870 $ 35,896 $(317,356) $ 687,399 ------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 37,942 $ 43,729 $ 3,566 -- $ 85,237 Contract advances and deposits 6,120 36,124 -- -- 42,244 Notes payable 2,000 -- -- -- 2,000 ------------------------------------------------------------------------------- Total current liabilities 46,062 79,853 3,566 -- 129,481 Long-term debt 201,250 -- -- -- 201,250 Income taxes payable 6,513 -- -- -- 6,513 Deferred income tax liabilities, net (3,244) 2,891 353 -- -- Post retirement benefits obligations 103,815 -- -- -- 103,815 Notes payable 5,000 -- -- -- 5,000 Environmental obligation 1,392 -- -- -- 1,392 Other long-term liabilities 55 -- -- -- 55 Inter-company accounts -- 174,844 24,771 (199,615) -- Shareholders' equity: Preferred shares -- -- -- -- -- Common shares 20,306 98 -- (98) 20,306 Additional paid-in capital 167,219 25,221 6,418 (31,639) 167,219 Retained earnings 120,103 89,103 953 (90,056) 120,103 Accumulated other comprehensive loss, net of income tax benefit (46,819) (88) (165) -- (47,072) Treasury shares (1,868) (4,052) -- 4,052 (1,868) Unearned ESOP shares (14,789) -- -- -- (14,789) Management group receivables (140) -- -- -- (140) Deferred compensation under Long-Term Incentive Plan (3,866) -- -- -- (3,866) ------------------------------------------------------------------------------- Total shareholders' equity 240,146 110,282 7,206 (117,741) 239,893 ------------------------------------------------------------------------------- $ 600,989 $ 367,870 $ 35,896 $(317,356) $ 687,399 ========= ========= ========= ========= =========
13
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 ========= ========= ========= ========= =========
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 Changes in operating assets and liabilities, excluding effects of acquisitions: Equity in earnings of subsidiaries (3,062) -- -- 3,062 -- Inter-company/Investments 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 (5,806) 203 190 -- (5,413) 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) Excess income tax benefit from stock options 173 -- -- -- 173 ------------------------------------------------------------------------- Cash used by financing activities (306) -- -- -- (306) ------------------------------------------------------------------------- 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 year $ 82,817 $ (620) $ 4,573 $ -- $ 86,770 ======== ======== ======== ======= ========
14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION EDO Corporation (the "Company") designs and manufactures a diverse range of products with core competencies in critical defense areas. We are a leading supplier of sophisticated, highly engineered products and systems for defense, aerospace and intelligence applications. We believe our advanced systems are mission-critical on a wide range of military programs and are at the core of transforming defense capabilities. We have two reporting segments: Engineered Systems and Services and Electronic Systems and Communications. Our Engineered Systems and Services segment comprises aircraft armament systems, integrated composite structures, undersea warfare sonar systems, and professional engineering services. Our Electronic Systems and Communications segment provides highly-engineered electronic systems and equipment including electronic warfare systems, reconnaissance and surveillance systems, and command, control, communications, and computers (C4) products and systems. The Company has a disciplined acquisition program which is diversifying its 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. 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, 15 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 25, 2006. THREE MONTHS ENDED MARCH 25, 2006 COMPARED WITH THREE MONTHS ENDED MARCH 26, 2005 Net sales by segment were as follows:
THREE MONTHS ENDED INCREASE/(DECREASE) MARCH 25, MARCH 26, FROM SEGMENT 2006 2005 PRIOR PERIOD ------- -------- ---------- ------------ (IN THOUSANDS) Engineered Systems and Services.......... 59,266 51,023 16.2% Electronic Systems and Communications.... 60,443 65,485 (7.7%) -------- -------- ----- Total.................................... $119,709 $116,508 2.7% ======== ======== -----
In the Engineered Systems and Services segment, the increase in sales was attributable to sales of aircraft armament systems due to progress made on the F-22 missile launcher program and other programs. In addition, there were increases in sales of integrated composite structures, due in part to the sales contributed by Fiber Innovations which was acquired in the third quarter of 2005. In the Electronic Systems and Communications segment, the decrease in sales was attributable to lower sales of reconnaissance and surveillance systems due to timing of milestone achievements on various programs in this year's first quarter compared to last year's first quarter. In addition, sales of electronic force protection systems were lower in the three months ended March 25, 2006 16 compared to the three months ended March 26, 2005 attributable to a delay in commencing production due to extended testing requirements in the development phase. This decrease was partially offset by sales contributed by EVI and NexGen, which were acquired in the second and fourth quarter of 2005, respectively. Operating (loss) earnings by segment were as follows:
THREE MONTHS ENDED MARCH 25, MARCH 26, SEGMENT 2006 2005 ------- ---- ---- (IN THOUSANDS) Engineered Systems and Services......... 1,628 $ 3,768 Electronic Systems and Communications... (1,727) 2,980 ------- ------- Total................................... $ (99) $ 6,748 ======= =======
For the three months ended March 25, 2006, we had an operating loss of $0.1 million compared to operating earnings for the three months ended March 26, 2005 of $6.7 million or 5.8% of net sales. Items of note affecting operating earnings are summarized here to help clarify the comparison of results.
THREE MONTHS ENDED MARCH 25, MARCH 26, 2006 2005 ---- ---- (IN THOUSANDS) Pension........................................ $1,194 $1,070 ESOP compensation expense...................... $1,186 $1,314 Intangible asset amortization.................. $1,614 $1,310 Stock-Based Compensation Expense re: options... $ 865 $ -- ------ ------ $4,859 $3,694 ====== ======
The Engineered Systems and Services segment's operating earnings for the three months ended March 25, 2006 were $1.6 million or 2.7% of this segment's net sales compared to operating earnings of $3.8 million or 7.4% of this segment's net sales for the three months ended March 26, 2005. This decrease is due to a provision for an estimated settlement of a lawsuit and related legal costs and the mix of programs that comprised sales. In the Electronic Systems and Communications segment, we had an operating loss of $1.7 million or 2.9% of net sales for the three months ended March 25, 2006 compared to operating earnings of $3.0 million or 4.6% of net sales for the three months ended March 26, 2005. The decrease is attributable to the aforementioned lower sales volume of reconnaissance and surveillance systems and electronic force protection systems. There was also cost growth of $1.4 million on an interference cancellation program which was offset by the release of a reserve of $0.7 million on a completed electronic force protection systems program and the release of a reserve of $0.6 million which had been held for fulfillment of contractual offset commitments that have now been satisfied. Furthermore, we provided for estimated liabilities and legal costs incurred in connection with a contract dispute. Legal costs, estimated settlements and estimated liabilities for the legal matters referred to in the two immediately preceding paragraphs had an adverse effect on the results of operations for the three months ended March 25, 2006 of approximately $2.7 million. Selling, general and administrative expenses for the three months ended March 25, 2006 were $25.4 million or 21.2% of net sales compared to $20.3 million or 17.4% of net sales for the comparable prior year period ended March 26, 2005. The increase is attributable to the three acquisitions made in 2005, the aforementioned legal matters and the effect of the implementation of Financial Accounting Standards Board Statement No. 123(R), Accounting for Stock-Based Compensation, (FAS 123(R)). In addition, there were some continued start-up costs for an undersea warfare operation in Panama City, Florida. Intangible asset amortization also increased slightly due to the acquisitions of EVI and Fiber Innovations made in 2005. We expect to complete the allocation of the purchase price of NexGen in the second quarter, at which time we will recognize additional intangible asset amortization expense. With respect to FAS 123(R), the remaining compensation cost in 2006 related to non-vested stock options is less than $0.1 million. Prior to adoption of FAS 123(R) as of January 1, 2006, we accounted for our 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 was recognized and pro-forma disclosure information was provided. In 2006, we only issued 17 options to Directors, which when issued were 100% vested and therefore accounted for most of the $0.9 million of expense recorded in the first quarter. Research and development expense for the three months ended March 25, 2006 decreased to $3.2 million or 2.7% of net sales from $4.4 million or 3.8% of net sales for the three months ended March 26, 2005, during which there was higher than usual spending on electronic force protection and aircraft armament systems. Interest expense, net of interest income, for the three months ended March 25, 2006 decreased to $1.4 million from $1.7 million to the three months ended March 26, 2005 due to a higher average cash balance for the first three months of 2006 compared to 2005. Interest expense for the three months ended March 25, 2006 is associated primarily with our 4.0% Convertible Subordinated Notes ("Notes") due 2025 and issued in November 2005. Also, included in interest expense is the 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 income tax benefit for the three months ended March 25, 2006 reflects an estimated annual effective tax rate of 43% compared with 42% for the three months ended March 26, 2005. For the three months ended March 25, 2006, we incurred a net loss of $0.9 million or $0.05 per common share on 18.0 million shares. Since there was a net loss, the basic and diluted results are the same. 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. LIQUIDITY AND CAPITAL RESOURCES BALANCE SHEET Cash and cash equivalents increased 8.1% to $117.5 million at March 25, 2006 from $108.7 million at December 31, 2005. This increase was due primarily to cash provided by operations of $14.0 million. This was partially offset by $5.0 million used for capital expenditures and $0.6 million for the payment of common share dividends. Accounts receivable decreased 11.2% to $168.0 million at March 25, 2006 from $189.2 million at December 31, 2005 due to collections of billed receivables. At March 25, 2006 approximately 74% of billed receivables are in the under-60 days aging category. Inventories increased 25.6% to $71.0 million at March 25, 2006 from $56.6 million at December 31, 2005 due primarily to the work-in-progress on several programs and the delays in milestone achievements which would have generated sales and reduced inventories. The note receivable of $7.0 million at March 25, 2006 relates to the sale of our facility in Deer Park in 2003. The Deer Park facility note was due on October 9, 2005 or the date EDO achieves "Material Closure" defined as the investigation, assessment and remediation of an Environmental Condition sufficient to not cause any material interference with the Buyer's ability to develop, construct, finance or lease the Premises. We believe that this note is currently due, but it has not yet been collected; however, we see no reason to change its current classification. In the three months ended March 25, 2006, capital expenditures were $5.0 million. This compares to $6.5 million for the three months ended March 26, 2005. In the first quarter of 2005, the higher expenditures were attributable to new facility capital for our Antenna Products business unit which was relocated to a new leased facility, as well as expansion and upgrades at several other facilities. FINANCING ACTIVITIES Credit Facility In November 2005, we entered into a $300 million credit facility which replaced our expiring $200 million credit facility. The new credit facility is a five-year 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 2010. The Credit Agreement provides for a revolving credit facility in an aggregate amount equal to $300 million which includes a swing loan facility with a sublimit of $20 million and a letter of credit facility with a sublimit of $100 million. The potential cash borrowing under the facility is reduced by the amount of outstanding letters of credit. The Company has the option to select Base Rate or Eurodollar Rate loans under the terms of the Credit Agreement. Any borrowings under the facility would be priced initially at LIBOR plus a predetermined amount depending on our consolidated leverage ratio at the time of the borrowing. At March 25, 2006, LIBOR was approximately 4.82% and the applicable adjustment to LIBOR was 1.5%. 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%. 18 There were no direct borrowings outstanding under the credit facility at March 25, 2006 nor at December 31, 2005. Letters of credit outstanding at March 25, 2006 pertaining to the credit facility were $42.3 million, resulting in $257.7 million available for borrowings. In connection with the credit facility, the Company is required to maintain both financial and non-financial covenants and ratios, including, but not limited to, leverage ratio, fixed charge coverage ratio, and senior secured leverage ratio. As of March 25, 2006, the Company was in compliance with its covenants. The credit facility is secured by the Company's accounts receivable, inventory and machinery and equipment. 4.0% Convertible Subordinated Notes due 2025 ("4.0% Notes") In November 2005, we completed the offering of $201.2 million principal of 4.0% Notes and received proceeds of $195.7 million, net of $5.5 million of commissions. Interest payments are due May 15 and November 15 of each year commencing on May 15, 2006. Accrued interest payable was $2.9 million at March 25, 2006. The Notes are convertible, unless previously redeemed or repurchased by the Company, at the option of the holder at any time prior to maturity, into the Company's common stock at an initial conversion price of $34.19 per share, subject to adjustment in certain events. As of March 25, 2006, there had been no such conversions. Shelf Registration At March 25, 2006, our remaining capacity under the universal shelf registration statement that became effective in January 2004, was approximately $298.8 million. 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, actively seek 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 25, 2006, we have included the following table. We are obligated under building and equipment leases expiring between 2006 and 2019. 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): ------------------------------ 2011 AND COMMITMENTS AND CONTRACTUAL OBLIGATIONS: TOTAL 2006 2007 2008 2009 2010 BEYOND - ---------------------------------------- ----- ---- ---- ---- ---- ---- ------ Note payable.............................. $ 7.0 $ 2.0 $ 2.0 $ 3.0 $ -- $ -- $ -- 4.0% Convertible Subordinated Notes due 2025 (1)................................ $ 201.2 -- -- -- -- -- $ 201.2 Operating leases.......................... $ 134.5 12.6 16.1 15.6 15.5 14.3 60.4 Letters of credit......................... $ 42.3 12.6 19.0 -- 10.2 -- 0.5 Projected pension contributions........... $ 23.0 6.0 6.0 6.0 5.0 -- -- Advance payment and performance bonds..... $ 1.9 0.2 -- -- 1.7 -- -- -------- ------- ------- ----- ------- -------- -------- Total $ 409.9 $ 33.4 $ 43.1 $24.6 $ 32.4 $ 14.3 $ 262.1 ======== ======= ======= ===== ======= ======== ========
(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 are unlikely to have a material adverse effect on our consolidated financial position, results of operations or 19 liquidity. However, certain legal matters did have a material adverse effect on results of operations for this quarter as noted above under Results of Operations. 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 25, 2006 increased to $585.5 million from $558.7 million at December 31, 2005. Our backlog consists primarily of current orders under long-lived, mission-critical programs of key defense platforms. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements in this Quarterly Report and in oral statements that may be made by representatives of the Company relating to plans, strategies, economic performance and trends and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27(a) of the Securities Act of 1933 and Section 21(e) of the Securities Exchange Act of 1934. Forward looking statements are inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to the following for each of the types of information noted below. U.S. and international military program sales, follow on procurement, contract continuance, and future program awards, upgrades and spares support are subject to: U.S. and international military budget constraints and determinations; U.S. congressional and international legislative body discretion; U.S. and international government administration policies and priorities; changing world military threats, strategies and missions; competition from foreign manufacturers of platforms and equipment; NATO country determinations regarding participation in common programs; changes in U.S. and international government procurement timing, strategies and practices, the general state of world military readiness and deployment; and the ability to obtain export licenses. Commercial satellite programs and equipment sales, follow-on procurement, contract continuance and future program awards, upgrades and spares support are subject to: establishment and continuance of various consortiums for satellite constellation programs; delay in launch dates due to equipment, weather or other factors beyond our control; and development of sufficient customer base to support a particular satellite constellation program. Commercial product sales are subject to: success of product development programs currently underway or planned; competitiveness of current and future production costs and prices and market and consumer base development of new product programs. Achievement of margins on sales, earnings, cash flow, adequate liquidity and sufficient capital 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 For quantitative and qualitative disclosures about market risk, see Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of our annual report on Form 10-K for the year ended December 31, 2005. ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES 20 As of the end of the period covered by this Quarterly Report on Form 10-Q the Company carried out an evaluation, under the supervision and with the participation of the Company's senior management, including the Chief Executive Officer and the Chief Financial Officer, as well the audit committee of the Board of Directors, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. The Company's conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the Nexgen Communications LLC, Fiber Innovations, Inc. and EVI Technology, LLC, (the "2005 acquisitions"). Based on their evaluation, the Chief Executive Officer and the Chief Financial Officer of the Company have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. CHANGES IN INTERNAL CONTROLS There were no changes in EDO's internal controls over financial reporting during EDO's last fiscal quarter that have materially affected, or are likely to materially affect internal controls over financial reporting. PART II -- OTHER INFORMATION ITEM 1A. RISK FACTORS The risk factor under the heading "The unsuccessful integration of a business or business segment we acquire could have a material adverse effect on our operating results." should be reworded as follows: One of our key strategies is to pursue selective acquisitions. We review and actively pursue possible acquisitions on a continuous basis. Our acquisition strategy may require additional debt or equity financing, resulting in additional leverage or dilution of ownership. We cannot assure you that any future acquisition will be consummated, or that if consummated, we will be able to integrate such acquisition successfully without a material adverse effect on our financial condition or results of operations. Moreover, any acquisition could involve other risks, including: - diversion of management's attention from existing operations; - potential loss of key employees or customers of acquired companies; and - exposure to unforeseen liabilities of acquired companies. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 10.1* Amendment No. 1, dated March 6, 2006, to the Credit Agreement dated as of November 4, 2005. 10.2* Amendment No. 2, dated April 24, 2006, to the Credit Agreement dated as of November 4, 2005. 10.3* Retainer agreement between EDO UK LTD and Robert Walmsley dated April 1, 2006. 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. 21 (b) REPORTS ON FORM 8-K The following report on Form 8-K was filed during the three months ended March 25, 2006:
DATE OF REPORT ITEMS REPORTED ------------------------------- -------------------------------------------------------------------- February 1, 2006 Officers' Change in Control Agreements were extended on January 27, 2006 to December 31, 2006. February 23, 2006 Earnings release dated February 23, 2006, announcing financial results for the quarter and year ended December 31, 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) By: /s/ FREDERIC B. BASSETT ----------------------- Dated: April 27, 2006 Frederic B. Bassett Vice President Finance, Treasurer and Chief Financial Officer 22 EX-10.1 2 y20347exv10w1.txt EX-10.1: AMENDMENT #1 TO CREDIT AGREEMENT AMENDMENT AND WAIVER NO. 1 AMENDMENT AND WAIVER NO. 1, dated as of March 6, 2006 (this "Amendment"), by and among EDO Corporation (the "Borrower"), the Lenders party hereto and Citicorp USA, Inc., as administrative agent (in such capacity, the "Administrative Agent"). WITNESSETH: WHEREAS, the Borrower, the Lenders party hereto and the Administrative Agent are parties to that certain Credit Agreement, dated as of November 4, 2005 (the "Credit Agreement"), among the Borrower, the Lenders and Issuers party thereto and the Administrative Agent; and WHEREAS, the Borrower has requested that the Lenders and the Administrative Agent enter into this Amendment to amend and waive the Credit Agreement as set forth herein; NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the Credit Agreement. 2. Amendments. Effective as of the Effective Date (as defined below) and subject to the terms and conditions set forth herein, the Credit Agreement is hereby amended as follows: (a) Section 6.1 (a) of the Credit Agreement is amended by (i) adding immediately after the phrase "Within 45 days after the end of each Fiscal Quarter of each Fiscal Year" the following: "(other than the last Fiscal Quarter of each Fiscal Year)" and (ii) amending and restating the proviso at the end of such Section in its entirety to read as follows: "provided, however, that delivery of a Form 10-Q of the Borrower that is in compliance with all applicable Requirements of Law or the requirements of this clause (a) shall satisfy the delivery requirements of this clause (a)". (b) Section 6.1(b) of the Credit Agreement is amended by amending and restating the proviso at the end of such Section in its entirety to read as follows: "provided, however, that delivery of a Form 10-K of the Borrower that is in compliance with all applicable Requirements of Law or the requirements of this clause (b) shall satisfy the delivery requirements of this clause (b)". (c) Section 6.1(e) of the Credit Agreement is amended by amending the reference to "60 days" therein to "90 days". (d) Section 6.1(g) of the Credit Agreement is amended and restated in its entirety to read as follows: "Together with each delivery of any Financial Statement pursuant to clause (a) or (b) above, a "job status report" substantially in the form previously provided to the Lenders, certified by a Responsible Officer of the Borrower and current as of the last Business Day of the preceding Fiscal Quarter." 3. Waiver. The Lenders hereby waive any Default or Event of Default arising as a result of the Borrower's failure to furnish to the Administrative Agent (a) Financial Statements for the Fiscal Quarter ended December 31, 2005 within 45 days after the end of such Fiscal Quarter pursuant to Section 6.1 (a) of the Credit Agreement prior to giving effect to this Amendment, (b) the Borrower's annual business plan for the Fiscal Year 2006 within 60 days after the end of the preceding Fiscal Year pursuant to Section 6.1(e) of the Credit Agreement prior to giving effect to this Amendment and (c) a job status report on or prior to the 20th day of the calendar quarter commencing January 1,2006 pursuant to Section 6.1 (g) of the Credit Agreement prior to giving effect to this Amendment. 4. Conditions to Effectiveness of this Amendment. This Amendment shall become effective as of the date the following conditions precedent have been satisfied (the "Effective Date"): (a) The Administrative Agent shall have received (i) this Amendment, duly executed and delivered by the Borrower and Lenders constituting the Requisite Lenders and (ii) the Consent and Affirmation, in the form attached hereto as Annex A, duly executed and delivered by each of the Guarantors. (b) After giving effect to this Amendment, each of the representations and warranties made by any Loan Party in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of the date hereof, as if made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date. (c) After giving effect to this Amendment, no Default or Event of Default shall have occurred and be continuing on the date hereof. 5. Representations and Warranties. The Borrower hereby represents and warrants to the Administrative Agent and the Lenders, on and as of the date hereof, that: (a) (i) The Borrower has taken all necessary action to authorize the execution, delivery and performance of this Amendment, (ii) this Amendment has been duly executed and delivered by the Borrower and (iii) this Amendment is the legal, valid and binding obligation of the Borrower, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles. (b) After giving effect to this Amendment, each of the representations and warranties made by any Loan Party in or pursuant to the Loan Documents is true and correct in all material respects on and as of the date hereof, as if made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties are true and correct in all material respects as of such earlier date. 2 (c) After giving effect to this Amendment, no Default or Event of Default has occurred and is continuing as of the date hereof. 6. Continuing Effect. Except as expressly set forth in this Amendment, all of the terms and provisions of the Credit Agreement are and shall remain in full force and effect and the Borrower shall continue to be bound by all of such terms and provisions. This Amendment is limited to the specific provisions of the Credit Agreement specified herein and shall not constitute an amendment or waiver of, or an indication of the Administrative Agent's or the Lenders' willingness to amend or waive, any other provisions of the Credit Agreement or the same provisions for any other date or purpose. 7. Expenses. The Borrower agrees to pay and reimburse the Administrative Agent for all its reasonable out-of-pocket costs and expenses incurred in connection with the negotiation, preparation, execution and delivery of this Amendment, and all other documents prepared in connection herewith, and the transactions contemplated hereby, including, without limitation, reasonable fees and disbursements and other charges of counsel to the Administrative Agent. 8. Choice of Law. This Amendment and the rights and obligations of the parties hereto shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York. 9. Counterparts. This Amendment may be executed in any number of counterparts and by different parties and separate counterparts, each of which when so executed and delivered, shall be deemed an original, and all of which, when taken together, shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment by facsimile or e-mail shall be effective as delivery of a manually executed counterpart of this Amendment. 10. Integration. This Amendment, together with the other Loan Documents, incorporates all negotiations of the parties hereto with respect to the subject matter hereof and is the final expression and agreement of the parties hereto with respect to the subject matter hereof. 11. Severability. In case any provision in this Amendment shall be invalid, illegal or unenforceable, such provision shall be severable from the remainder of this Amendment and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 12. Loan Document. This Amendment is a Loan Document. 13. Waiver of Jury Trial. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING WITH RESPECT TO THIS AMENDMENT AND ANY OTHER LOAN DOCUMENT. [SIGNATURE PAGES FOLLOW] 3 IN WITNESS WHEREOF, the parties have entered into this Amendment as of the date first above written. EDO CORPORATION By: /s/ F.B. Bassett -------------------------------- Name: F.B. Bassett Title: CFO [SIGNATURE PAGE TO AMENDMENT AND WAIVER NO. 1] CITICORP USA, INC., as Administrative Agent and Lender By: /s/ Juan Carlos Lorenzo ------------------------------------ Name: Juan Carlos Lorenzo Title: Vice President [SIGNATURE PAGE TO AMENDMENT AND WAIVER NO. 1] Wachovia Bank, N.A. By: /s/ William F. Fox ------------------------------- Name: William F. Fox Title: Director Bank of America, N.A. ------------------------------------- [INSERT NAME OF LENDER] By: /s/ Steven J. Melicharek ------------------------------- Name: Steven J. Melicharek Title SVP/CPO [SIGNATURE PAGE TO AMENDMENT AND WAIVER NO. 1] JPMorgan ------------------------------------- [INSERT NAME OF LENDER] By: /s/ Andrsa Compten ------------------------------- Name: Andrsa Compten Title VP [SIGNATURE PAGE TO AMENDMENT AND WAIVER NO. 1] Sovereign Bank ------------------------------------- [INSERT NAME OF LENDER] By: /s/ Jeffrey B. Carstens ------------------------------- Name: Jeffrey B. Carstens Title Senior Vice President [SIGNATURE PAGE TO AMENDMENT AND WAIVER NO. 1] ------------------------------------- NATIONAL CITY BANK By: /s/ Thomas J. McDonnell ------------------------------------- Name: Thomas J. McDonnell Title Senior Vice President [SIGNATURE PAGE TO AMENDMENT AND WAIVER NO. 1] MANUFACTURERS AND TRADERS TRUST COMPANY By: /s/ Robert T. Stratford, Jr. ------------------------------- Name: Robert T. Stratford, Jr. Title: Vice President [SIGNATURE PAGE TO AMENDMENT AND WAIVER NO. 1] PNC Bank, N.A. By: /s/ Anthony Frasso ------------------------------- Name: Anthony Frasso Title: Vice President [Signature Page to Amendment and Waiver No. 1] -------------------------------------- SOCIETE GENERALE By: /s/ R.D. Boyd Harman ---------------------------------- Name: R.D. Boyd Harman Title: Vice President [SIGNATURE PAGE TO AMENDMENT AND WAIVER NO. 1] Key Bank National Association -------------------------------------- [INSERT NAME OF LENDER] By: /s/ Suzannah Harris ---------------------------------- Name: SUZANNAH HARRIS Title: Vice President [SIGNATURE PAGE TO AMENDMENT AND WAIVER NO. 1] Regions Bank -------------------------------------- [INSERT NAME OF LENDER] By: /s/ Jim Schwartz ---------------------------------- Name: Jim Schwartz Title: S.V.P. [SIGNATURE PAGE TO AMENDMENT AND WAIVER NO. 1] The Governor & Company of the Bank of Ireland ---------------------------------------- [INSERT NAME OF LENDER] By: /s/ Elaine Crawley ------------------------------------ Name: Elaine Crawley Title: Manager /s/ Pat MacBride ------------------------------------ Pat MacBride Authorized Signatory [Signature Page to Amendment and Waiver No. 1] --------------------------------- Bank Leumi USA By: /s/ Paul Tine ------------------------------ Name: Paul Tine Title: First Vice President [SIGNATURE PAGE TO AMENDMENT AND WAIVER NO. 1] --------------------------------- COMERICA BANK By: /s/ Sarah R. West ----------------------------- Name: Sarah R. West Title: Assistant Vice President [SIGNATURE PAGE TO AMENDMENT AND WAIVER NO. 1] Commerce Bank, N.A. By: /s/ Anthony P. Giovi ------------------------------- Name: Anthony P. Giovi Title: Vice President [SIGNATURE PAGE TO AMENDMENT AND WAIVER NO. 1] The Bank of New York By: /s/ Kenneth P. Sneider, Jr. ------------------------------ Name: Kenneth P. Sneider, Jr. Title: Vice President [SIGNATURE PAGE TO AMENDMENT AND WAIVER NO. 1] UNITED OVERSEAS BANK LIMITED, New York Agency By: /s/ Kwong Yew Wong ------------------------------- Name: Kwong Yew Wong Title: FVP & General Manager By: /s/ Philip Cheong ------------------------------- Name: Philip Cheong Title: VP & Deputy General Manager [SIGNATURE PAGE TO AMENDMENT AND WAIVER NO. 1] EDO CORPORATION Chiao Tung Bank Co., Ltd. New York Agency By: /s/ Chun-Kai Hu ---------------------------------- Name: Chun-Kai Hu Title: VP & DGM [SIGNATURE PAGE TO AMENDMENT AND WAIVER NO. 1] ANNEX A CONSENT AND AFFIRMATION Each Guarantor hereby consents to the Amendment and Waiver No. 1 (the "Amendment") to which this Consent and Affirmation is attached and agrees that the terms thereof shall not affect in any way its obligations and liabilities under the Loan Documents (as amended and otherwise expressly modified by the Amendment) to which it is a party, all of which obligations and liabilities shall remain in full force and effect and each of which is hereby reaffirmed. Consented to and agreed as of the date of the Amendment: DARLINGTON INC. EDO AEROTECH LIMITED (UK) EDO ARTISAN INC. EDO COMMUNICATIONS AND COUNTERMEASURES SYSTEMS INC. EDO MBM TECHNOLOGY LIMITED EDO MTECH INC. EDO PROFESSIONAL SERVICES INC. EDO RECONNAISSANCE AND SURVEILLANCE SYSTEMS, INC. EDO RUGGED SYSTEMS LIMITED EDO (UK) LIMITED EDO WESTERN CORPORATION EVI TECHNOLOGY LLC FIBER INNOVATIONS, INC. SPECIALTY PLASTICS, INC. By: /s/ F. B. Bassett -------------------------- Name: F. B. Bassett Title: VP Finance EX-10.2 3 y20347exv10w2.txt EX-10.2: AMENDMENT #2 TO CREDIT AGREEMENT EXECUTION COPY AMENDMENT NO. 2 AMENDMENT NO. 2, dated as of April 24,2006 (this "Amendment"), by and among EDO Corporation (the "Borrower"), the Lenders party hereto and Citicorp USA, Inc., as administrative agent (in such capacity, the "Administrative Agent"). WITNESSETH: WHEREAS, the Borrower, the Lenders party hereto and the Administrative Agent are parties to that certain Credit Agreement, dated as of November 4, 2005 (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, the Lenders and Issuers party thereto and the Administrative Agent; and WHEREAS, the Borrower has requested that the Lenders and the Administrative Agent enter into this Amendment to amend the Credit Agreement as set forth herein; NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the Credit Agreement. 2. Amendment. Effective as of the Effective Date (as defined below) and subject to the terms and conditions set forth herein, Section 8.5(c) of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "(c) dividends and distributions declared and paid by the Borrower on the outstanding Borrower Common Stock for any Fiscal Quarter in an amount not to exceed (i) 50% of the Consolidated Net Income (after deducting any net loss) of the Borrower for the immediately preceding four Fiscal Quarters (treated as one accounting period) minus (ii) the amount of all other dividends and distributions declared and paid by the Borrower in such preceding four Fiscal Quarters pursuant to this clause (c);" 3. Conditions to Effectiveness of this Amendment. This Amendment shall become effective as of the date the following conditions precedent have been satisfied (the "Effective Date"): (a) The Administrative Agent shall have received (i) this Amendment, duly executed and delivered by the Borrower and Lenders constituting the Requisite Lenders and (ii) the Consent and Affirmation, in the form attached hereto as Annex A, duly executed and delivered by each of the Guarantors. (b) After giving effect to this Amendment, each of the representations and warranties made by any Loan Party in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of the date hereof, as if made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date. (c) After giving effect to this Amendment, no Default or Event of Default shall have occurred and be continuing on the date hereof. 4. Representations and Warranties. The Borrower hereby represents and warrants to the Administrative Agent and the Lenders, on and as of the date hereof, that: (a) (i) The Borrower has taken all necessary action to authorize the execution, delivery and performance of this Amendment, (ii) this Amendment has been duly executed and delivered by the Borrower and (iii) this Amendment is the legal, valid and binding obligation of the Borrower, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles. (b) After giving effect to this Amendment, each of the representations and warranties made by any Loan Party in or pursuant to the Loan Documents is true and correct in all material respects on and as of the date hereof, as if made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties are true and correct in all material respects as of such earlier date. (c) After giving effect to this Amendment, no Default or Event of Default has occurred and is continuing as of the date hereof. 5. Continuing Effect. Except as expressly set forth in this Amendment, all of the terms and provisions of the Credit Agreement are and shall remain in full force and effect and the Borrower shall continue to be bound by all of such terms and provisions. This Amendment is limited to the specific provisions of the Credit Agreement specified herein and shall not constitute an amendment or waiver of, or an indication of the Administrative Agent's or the Lenders' willingness to amend or waive, any other provisions of the Credit Agreement or the same provisions for any other date or purpose. 6. Expenses. The Borrower agrees to pay and reimburse the Administrative Agent for all its reasonable out-of-pocket costs and expenses incurred in connection with the negotiation, preparation, execution and delivery of this Amendment, and all other documents prepared in connection herewith, and the transactions contemplated hereby, including, without limitation, reasonable fees and disbursements and other charges of counsel to the Administrative Agent. 7. Choice of Law. This Amendment and the rights and obligations of the parties hereto shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York. 8. Counterparts. This Amendment may be executed in any number of counterparts and by different parties and separate counterparts, each of which when so executed and delivered, shall be deemed an original, and all of which, when taken together, shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page 2 to this Amendment by facsimile or e-mail shall be effective as delivery of a manually executed counterpart of this Amendment. 9. Integration. This Amendment, together with the other Loan Documents, incorporates all negotiations of the parties hereto with respect to the subject matter hereof and is the final expression and agreement of the parties hereto with respect to the subject matter hereof. 10. Severability. In case any provision in this Amendment shall be invalid, illegal or unenforceable, such provision shall be severable from the remainder of this Amendment and the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 11. Loan Document. This Amendment is a Loan Document. 12. Waiver of Jury Trial. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING WITH RESPECT TO THIS AMENDMENT AND ANY OTHER LOAN DOCUMENT. [SIGNATURE PAGES FOLLOW] 3 IN WITNESS WHEREOF, the parties have entered into this Amendment as of the date first above written. EDO CORPORATION By: /s/ F.B. Bassett -------------------------- Name: F.B. Bassett Title: CFO/Sr. V.P. [Signature Page to Amendment No. 2] CITICORP USA, INC., as Administrative Agent and Lender: By: /s/ Juan Carlos Lorenzo ------------------------------- Name: Juan Carlos Lorenzo Title: Vice President [Signature Page to Amendment No. 2] National City Bank ----------------------------------- [INSERT NAME OF LENDER] By: /s/ Thomas J. McDonnell ------------------------------- Name: Thomas J. McDonnell Title: Senior Vice President [Signature Page to Amendment No. 2] Sovereign Bank By: /s/ William Conlan -------------------------- Name: William Conlan Title: Vice President [SIGNATURE PAGE TO AMENDMENT NO. 2] Wachovia Bank, National Association By: /s/ William F. Fox ---------------------------------- Name: William F. Fox Title: Director [SIGNATURE PAGE TO AMENDMENT NO. 2] Bank of America, NA ----------------------------------- [INSERT NAME OF LENDER] By: /s/ Steven J. Melicharek -------------------------------- Name: Steven J. Melicharek Title: SVP/Credit Product Officer [SIGNATURE PAGE TO AMENDMENT NO. 2] ------------------------------------ JPMorganChase Bank, N.A. By: /s/ George Catallo --------------------------------- Name: George Catallo Title: Vice President [SIGNATURE PAGE TO AMENDMENT NO. 2] ----------------------------------- WestLB AG, New York Branch By: /s/ Salvatore Battinelli -------------------------------- Name: Salvatore Battinelli Title: Managing Director By: /s/ Rolf Schmitz -------------------------------- Name: Rolf Schmitz Title: Director [SIGNATURE PAGE TO AMENDMENT No. 2] ----------------------------------- COMERICA BANK By: /s/ Sarah R. West ------------------------------- Name: Sarah R. West Title: Assistant Vice President [Signature Page to Amendment No. 2] The Governor & Company of the Bank of Ireland -------------------------------------- [INSERT NAME OF LENDER] By: /s/ Niamh O'Flynn ---------------------------------- Name: NIAMH O'FLYNN Title: SENIOR MANAGER /s/ Noelle McGrath ---------------------------------- Noelle McGrath Authorised Signatory [SIGNATURE PAGE TO AMENDMENT NO. 2] Commerce Bank, N.A., By: /s/ Anthony P. Giovi ---------------------------------- Name: Anthony P. Giovi Title: Vice President [Signature Page to Amendment No. 2] -------------------------------------- MANUFACTURERS AND TRADERS TRUST COMPANY By: /s/ Robert T. Stratford, Jr. ---------------------------------- Name: Robert T. Stratford, Jr. Title: Vice President [Signature Page to Amendment No. 2] PNC Bank, N.A. By: /s/ Anthony Frasso ------------------------------- Name: Anthony Frasso Title: Vice President [Signature Page to Amendment No. 2] The Bank of New York By: /s/ Joanna Bellocq ------------------------------- Name: Joanna Bellocq Title: Vice President [Signature Page to Amendment No. 2] Societe Generale By: /s/ R.D. Boyd Harman ------------------------------ Name: R.D. Boyd Harman Title: Vice President [SIGNATURE PAGE TO AMENDMENT NO. 2] ANNEX A CONSENT AND AFFIRMATION Each Guarantor hereby consents to the Amendment No. 2 (the "Amendment") to which this Consent and Affirmation is attached and agrees that the terms thereof shall not affect in any way its obligations and liabilities under the Loan Documents (as amended and otherwise expressly modified by the Amendment) to which it is a party, all of which obligations and liabilities shall remain in full force and effect and each of which is hereby reaffirmed. Consented to and agreed as of the date of the Amendment: DARLINGTON INC. EDO AEROTECH LIMITED (UK) EDO ARTISAN INC. EDO COMMUNICATIONS AND COUNTERMEASURES SYSTEMS INC. EDO MBM TECHNOLOGY LIMITED EDO MTECH INC. EDO PROFESSIONAL SERVICES INC. EDO RECONNAISSANCE AND SURVEILLANCE SYSTEMS, INC. EDO RUGGED SYSTEMS LIMITED EDO (UK) LIMITED EDO WESTERN CORPORATION EVI TECHNOLOGY LLC FIBER INNOVATIONS, INC. SPECIALTY PLASTICS, INC. By: /s/ F. B. Bassett ----------------------------------- Name: F. B. Bassett Title: CFO/Sr V.P. EX-10.3 4 y20347exv10w3.txt EX-10.3: RETAINER AGREEMENT [EDO CORPORATION GLOBAL TECHNOLOGY REACH LOGO] RETAINER FOR SERVICE AS NON-EXECUTIVE CHAIRMAN AGREEMENT effective as of April 1, 2006 between EDO (UK) LTD., a company registered in England and Wales under No. 3881155 having offices at Emblem House, Home Farm Business Park, Brighton, East Sussex, BN1 9HU (the "Company") and SIR ROBERT WALMSLEY, KCB, FRENG, having an address at 41 Beltran Road, London, SW6 3AL ("You" or the "Individual"). WHEREAS, the Company wishes to engage You to accept appointment as a non-executive (non-employee) Chairman of EDO UK Ltd., and You consent to perform such duties; In this agreement the following expressions shall, unless the context otherwise requires, have the following meanings:- "Affiliate" means in relation to any company, any subsidiary undertaking or parent undertaking of that company and any subsidiary undertaking of that parent undertaking in each case from time to time and, for the purposes of this agreement "Confidential Information": any trade secrets, customer lists, trading details or other information of a confidential nature relating to the goodwill and secrets of EDO (including, without limitation, details of the activities, businesses, expansion plans, business strategy, marketing plans, sales forecasts, forward planning programmes, investments, prospective investments (and their terms), research activities, inventions, ideas, computer programs, secret processes, designs, manufacturing processes, financial information, results and forecasts of any such company and details of its employees and contractors and of the requirements, terms of trade and identity of its suppliers and customers and prospective suppliers and customers); and any other information specifically designated by EDO as confidential; and any information in relation to which EDO owes a duty of confidentiality to any third party; "EDO" means EDO Corporation and each Affiliate of EDO Corporation. NOW THEREFORE, the parties, with the intent to be legally bound, agree as follows: 1. DESCRIPTION OF DUTIES. You shall perform the duties (the "duties") as described in attachment hereto and executed pursuant to and made a part of this Agreement. Duties rendered under this Agreement will include any rendered in person, by telephone and/or by any other electronic means. 2. FEES AND TAXES. Company shall pay You an annual retainer at of (pound)28,980 per annum, payable monthly in arrears, at a rate of (pound)2,415 commencing April 1, 2006. Your Agreement and retainer amount shall be reviewed annually on the anniversary of this Agreement beginning in 2007 by the board of directors of the Company. Unless otherwise agreed, You shall pay any taxes, imposts, levies, fees or duties imposed by law upon or on account of the Duties furnished hereunder. However, you will not participate in any Company and/or group share, bonus or pension schemes or other benefit in kind arrangements of the Company and/or group nor will you be entitled to any compensation for loss of office. Subject to clause 40 below, on termination of your appointment you will be paid your director's fee on a pro-rata basis, to the extent that they are unpaid, up to the date of termination. 3. REIMBURSABLE EXPENSES. Upon submission of invoices in proper form and with support documentation acceptable to Company, Company shall reimburse You in accordance with its policies for transportation and reasonable living expenses for travel required on behalf of the Company. First class air travel will be reimbursed at business class rates only. 4. TERM. This Agreement shall commence on April 1, 2006 and shall continue until terminated by either party upon the giving of 60 days prior written notice; provided however, under the Company's Articles of Association, you may be terminated immediately in the event of: (i) Your misconduct or material breach of the Agreement's terms; (ii) Your disqualification from being a director by reason of any order made under the Company Directors Disqualification Act 1986 or any other enactment; (iii) if You become bankrupt or make any arrangement or composition with Your creditors generally; (iv) if You are admitted to hospital in pursuance of an application for admission for treatment under the Mental Health Act 1983, or an order is made by a Court having jurisdiction (whether in the United Kingdom or elsewhere) in matters concerning mental disorder for his detention or for the 2 appointment of a receiver, curator bonis or other person to exercise powers with respect to Your property or affairs; Upon termination in accordance with this paragraph 4: (a) You shall resign as a director of the Company and if the appropriate resignation shall not be signed and delivered by you within 7 days after such termination, you agree that the board of directors of the Company may appoint any other director of the Company to sign such notice of resignation for You and on Your behalf and in your name for such purpose; (b) the Company will pay all fees and proper reimbursable expenses for duties rendered prior to termination; and (c) You will return all property of EDO in Your possession. 5. INTELLECTUAL PROPERTY RIGHTS. You understand and acknowledge that, in the course of performance of your duties, You may become involved with inventions, discoveries and ideas, whether or not patentable, copyrightable, protectable as a mask work, or protectable as a trade secret, including but not limited to: processes, methods, formulas and techniques, improvements thereof, and know-how related thereto, all of which may be intellectual property of Company or any of its affiliates (collectively, "Company Technology"). To the extent that You have any interest in same, You hereby assign all rights, title and interest in Company Technology, including without limitation, all copyrights, trade secrets, patentable inventions and other rights, to Company or its nominee. You will execute and deliver all documents necessary to enable Company to secure copyright and patent protection in the United States, the United Kingdom or any foreign country or otherwise to protect the interests of the Company. These obligations apply to any work done by You under this Agreement. These obligations shall continue beyond the termination of this Agreement. You hereby irrevocably appoint the Company to be Your attorney in Your name and on Your behalf to complete any such instrument or do any such thing and generally to use Your name for the purpose of giving the Company the full benefit of this clause. 6. SERVICES FOR OTHERS. You are free to perform services for other companies during the term of this Agreement, provided that such other services will not interfere with Your obligations under this Agreement, except that You may not provide any services to any person or entity which sells or is 3 engaged in or is about to sell or become engaged in any product, process, system or service, which is the same as or similar to or competes with, or has a usage allied to, a product, process, system or service of the Company (such person or entities hereinafter referred to as a "Competitor") without prior written approval of the Company. You shall give reasonable advance notice to Company of all companies for whom you provide or intend to provide services. You shall keep the Company advised as to Your future plans and work schedule as such relates to Your availability to perform agreed Services for the Company. 7. CONFIDENTIALITY. You acknowledge that while engaged as described herein, You will have access to and become acquainted with proprietary and Confidential Information regarding the Company and EDO and their respective customers and vendors, which is not available to the public. You agree that you shall not, at any time, directly or indirectly, (i) use or disclose the Confidential Information, except as is necessary and appropriate in connection with the rendering of duties to the Company under this Agreement, or (ii) make, or cause to be made, any statement or publication about or concerning the Company or EDO or their respective affiliates, subsidiaries, employees, officers and directors, without the prior consent of the Company and/or EDO. 8. NON-SOLICITATION; NON-COMPETITION. You further agree that, without the prior express written consent of the Company's Board of Directors, You shall refrain, for the entire term of this Agreement and for one year thereafter, (i) from, directly or indirectly, employing or soliciting the employment of any officer or other employee the Company or any subsidiary or affiliate of the Company, and (ii) from entering into or accepting an employment position or any other situation or arrangement with a Competitor of the Company or any parent, affiliate or subsidiary of the Company. 9. STATUS OF INDIVIDUAL. The parties hereto agree and understand that You are an independent contractor and not an employee of the Company. In addition, You understand and acknowledge that the duties to be performed hereunder will not entitle You to participate in, nor accrue benefits under any employee pension benefit scheme or welfare benefit scheme maintained by the Company, notwithstanding any provision in any such plan to the contrary. You shall have no right or authority to enter into any contract or make any commitment on behalf of Company or obligate the Company in any manner, except as specifically authorized and to the extent as instructed to by the Company. 4 10. COMPLIANCE WITH LAW AND COMPANY POLICIES. You will comply with the EDO Ethical Business Conduct Policy, Company security procedures, receipt of each of which by You is hereby acknowledged, and all applicable laws, regulations, procedures and standards, including but not limited to those relating to the environment, health and safety, in the performance of duties under this Agreement. The Company will request the issuance and or retention of appropriate Security Clearances by the appropriate authorizing agency, as may be necessary for your performance of the Duties. 11. ENTIRE AGREEMENT; AMENDMENTS. This Agreement, including all attachments hereto and any items incorporated by reference herein, constitutes the entire agreement and complete and exclusive statement of agreement between the Company and You and supersedes any and all prior agreements between the parties. Its terms may not be amended, modified or waived except in a writing duly executed by both parties. 12. NO ASSIGNMENT. This agreement is personal between You and the Company and may not be assigned without the prior written consent of the Company. You shall perform all Duties personally and You shall not employ any other organization or any other person to perform the Duties. Any assignment by You in contravention of this section shall be void. 13. SEVERABILITY. If any provision of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby, and such provision shall be deemed to be restated to reflect, as nearly as possible, the original intentions of the parties in accordance with applicable law(s). 14. GOVERNING LAW; JURISDICTION. This contract between the Company and You shall be governed by and interpreted in accordance with English law and the English courts shall have exclusive jurisdiction to resolve any disputes hereunder. 5 IN WITNESS WHEREOF, the undersigned authorized representatives of the parties have executed this Agreement as a Deed as of the day and year first written above. INDIVIDUAL: EDO (UK) LTD. /s/ R. Walmsley BY: /s/ Lisa M. Palumbo ---------------------------- ------------------------ SIR ROBERT WALMSLEY, KCB FREng TITLE: Special Director ------------------------ DATE: 28 April 2006 DATE: 26 April 2006 ------------------------ Attachments: 1. Description of Activities 6 ATTACHMENT 1 DESCRIPTION OF DUTIES Company and You agree that You shall undertake the following duties: Attend each meeting of the board and of committees to which You are appointed and any General Meetings of the Company, including Annual General Meetings. You will be notified of the dates of all such meetings 4 weeks in advance, unless circumstances make it impracticable to do so. It is anticipated that this will be a part-time position, but in any event, you are required to devote such time to the affairs of EDO (UK) Ltd. as may be reasonably necessary for the proper performance of Your duties as a non-executive Chairman. As an independent director You will be expected to bring an objectivity and independence of view to the discussions of the board in relation (but not limited to) strategy, performance and resources and provide EDO UK LTD with effective leadership, as well as ensuring the continuing effectiveness of the management team and high standards of financial probity and corporate governance. You will be asked to review, from an independent standpoint, the Company's operational performance, financial reports and any proposals presented to the Board. You will assist EDO Corporation by giving independent/external views on potential ideas for change in the Company. You will provide input into the strategic planning process and critique the finished plan. (You will keep EDO Corporation appropriately informed of events (governmental, regulatory, market) in UK/Europe that could affect EDO's business interests in those areas. In addition, your responsibilities would include your acting as Chair of the EDO UK Remuneration Committee; effecting introductions to senior MOD Officials and Prime Contractors; representing EDO and the Company at high-level functions and meetings; and any other reasonable task that would assist the Company. This Description of Duties is issued pursuant to the Agreement between You and EDO (UK) Ltd. effective April 1, 2006 (the "Agreement"). By their execution and delivery of this Description of Duties, the parties hereby affirm all of the terms, conditions and representations of the Agreement. INDIVIDUAL EDO (UK) LTD. BY -------------------------------- ----------------------------- SIR ROBERT WALMSLEY, KCB, FrEng TITLE: -------------------------------- ----------------------------- DATE: DATE: -------------------------------- ----------------------------- 7 EX-31.1 5 y20347exv31w1.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 27, 2006 /s/ JAMES M. SMITH ------------------------------------ Title: Chairman, President and Chief Executive Officer EX-31.2 6 y20347exv31w2.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 27, 2006 /s/ FREDERIC B. BASSETT ------------------------------ Title: Senior Vice President-Finance, Treasurer and Chief Financial Officer EX-32 7 y20347exv32.txt EX-32: CERTIFIATION EXHIBIT 32 CERTIFICATION Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned certifies that (1) this Quarterly Report of EDO Corporation (the "Company") on Form 10-Q for the three months ended March 25, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or Rule 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ JAMES M. SMITH ------------------ James M. Smith Chief Executive Officer April 27, 2006 /s/ FREDERIC B. BASSETT ----------------------- Frederic B. Bassett Chief Financial Officer April 27, 2006 -----END PRIVACY-ENHANCED MESSAGE-----