-----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, MDPeXxw+DXTOpMZZwERjN2SnpwZrzxQzXTkNulXUQTM4Xmn6KJduUn8bRyy2s5Dy EXAA0+dlWW1adK2DVIhFjA== 0000950123-06-009659.txt : 20060731 0000950123-06-009659.hdr.sgml : 20060731 20060731171806 ACCESSION NUMBER: 0000950123-06-009659 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060624 FILED AS OF DATE: 20060731 DATE AS OF CHANGE: 20060731 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: 06991918 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 y23701e10vq.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 JUNE 24, 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 July 28, 2006 was 20,357,481 shares, with a par value $1 per share. ================================================================================ EDO CORPORATION TABLE OF CONTENTS
Page ---- PART I FINANCIAL INFORMATION ITEM 1 Financial Statements ......................................... 3 Consolidated Balance Sheets - June 24, 2006 (unaudited) and December 31, 2005 ......................................... 3 Consolidated Statements of Earnings - (unaudited) Three months ended June 24, 2006 and June 25, 2005 ........ 4 Consolidated Statements of Earnings - (unaudited) Six months ended June 24, 2006 and June 25, 2005 .......... 5 Consolidated Statements of Cash Flows - (unaudited) Six months ended June 24, 2006 and June 25, 2005 .......... 6 Notes to Consolidated Financial Statements (unaudited) ....... 7 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................. 17 ITEM 3 Quantitative and Qualitative Disclosures about Market Risk ... 25 ITEM 4 Controls and Procedures ...................................... 25 PART II OTHER INFORMATION ITEM 1A Risk Factors ITEM 4 Submission of Matters to a Vote of Security Holders .......... 25 ITEM 6 Exhibits and Reports on Form 8-K ............................. 26 SIGNATURE PAGE .......................................................... 26
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EDO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
JUNE 24, DECEMBER 31, 2006 2005 ----------- ------------ (UNAUDITED) (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents ............................. $109,092 $108,731 Accounts receivable, net .............................. 168,015 189,190 Inventories ........................................... 70,761 56,567 Deferred income tax asset, net ........................ 9,090 8,946 Notes receivable ...................................... 7,000 7,100 Prepayments and other ................................. 13,159 3,809 -------- -------- Total current assets ............................... 377,117 374,343 -------- -------- Property, plant and equipment, net ....................... 52,013 49,574 Goodwill ................................................. 149,419 152,347 Other intangible assets, net ............................. 58,211 55,925 Deferred income tax asset, net ........................... 27,300 29,637 Other assets ............................................. 25,217 25,573 -------- -------- $689,277 $687,399 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ...................................... $ 23,247 $ 33,111 Accrued liabilities ................................... 49,598 52,126 Contract advances and deposits ........................ 45,405 42,244 Note payable .......................................... 2,000 2,000 -------- -------- Total current liabilities .......................... 120,250 129,481 -------- -------- Income taxes payable ..................................... 6,513 6,513 Note payable, long-term debt ............................. 5,000 5,000 Long-term debt ........................................... 201,250 201,250 Post-retirement benefits obligations ..................... 104,268 103,815 Environmental obligation ................................. 1,386 1,392 Other long-term liabilities .............................. 48 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, 20,470,095 issued in 2006 and 20,305,815 issued in 2005 .......................... 20,470 20,306 Additional paid-in capital ............................ 168,636 167,219 Retained earnings ..................................... 124,331 120,103 Accumulated other comprehensive loss, net of income tax benefit (32,496 in 2006 and 32,711 in 2005) ........ (46,762) (47,072) Treasury shares at cost (112,614 shares in 2006 and 111,317 shares in 2005) ............................ (1,950) (1,868) Unearned Employee Stock Ownership Plan shares ......... (14,163) (14,789) Deferred compensation under Long-Term Incentive Plan .. -- (3,866) Management group receivables .......................... -- (140) -------- -------- Total shareholders' equity ......................... 250,562 239,893 -------- -------- $689,277 $687,399 ======== ========
See accompanying Notes to Consolidated Financial Statements. 3 EDO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED -------------------------- JUNE 24, JUNE 25, 2006 2005 -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NET SALES ............................................ $152,398 $156,112 COSTS AND EXPENSES Cost of sales ..................................... 119,657 118,360 Selling, general and administrative ............... 23,903 20,014 Research and development .......................... 3,006 3,994 Environmental cost provision, Deer Park facility .. -- 1,250 -------- -------- 146,566 143,618 -------- -------- OPERATING EARNINGS ................................... 5,832 12,494 NON-OPERATING INCOME (EXPENSE) Interest income ................................... 1,101 294 Interest expense .................................. (2,237) (2,274) Other, net ........................................ (111) (15) -------- -------- (1,247) (1,995) -------- -------- Earnings before income taxes ...................... 4,585 10,499 Income tax benefit (expense) ...................... 1,686 (4,410) -------- -------- NET EARNINGS ...................................... $ 6,271 $ 6,089 ======== ======== NET EARNINGS PER COMMON SHARE: Basic: ............................................ $ 0.35 $ 0.34 ======== ======== Diluted: .......................................... $ 0.30 $ 0.31 ======== ======== Weighted-average common shares outstanding: Basic ............................................. 18,099 18,065 ======== ======== Diluted ........................................... 24,467 22,741 ======== ======== Dividends declared per common share ............... $ 0.03 $ 0.03 ======== ========
See accompanying Notes to Consolidated Financial Statements. 4 EDO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE SIX MONTHS ENDED ------------------------ JUNE 24, JUNE 25, 2006 2005 -------- -------- (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NET SALES ............................................ $272,107 $272,620 COSTS AND EXPENSES Cost of sales ..................................... 210,901 203,414 Selling, general and administrative ............... 49,261 40,302 Research and development .......................... 6,212 8,412 Environmental cost provision, Deer Park facility .. -- 1,250 -------- -------- 266,374 253,378 -------- -------- OPERATING EARNINGS ................................... 5,733 19,242 NON-OPERATING INCOME (EXPENSE) Interest income ................................... 2,122 795 Interest expense .................................. (4,661) (4,465) Other, net ........................................ (257) (60) -------- -------- (2,796) (3,730) -------- -------- Earnings before income taxes ......................... 2,937 15,512 Income tax benefit (expense) ......................... 2,395 (6,515) -------- -------- NET EARNINGS ......................................... $ 5,332 $ 8,997 ======== ======== NET EARNINGS PER COMMON SHARE: Basic ............................................. $ 0.30 $ 0.50 ======== ======== Diluted ........................................... $ 0.29 $ 0.49 ======== ======== Weighted-average common shares outstanding: Basic ............................................. 18,055 17,998 ======== ======== Diluted ........................................... 18,538 22,690 ======== ======== Dividends declared per common share ............... $ 0.06 $ 0.06 ======== ========
See accompanying Notes to Consolidated Financial Statements 5 EDO CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED ------------------------ JUNE 24, JUNE 25, 2006 2005 ----------- -------- (UNAUDITED) (IN THOUSANDS) OPERATING ACTIVITIES: Earnings from operations ............................................... $ 5,332 $ 8,997 Adjustments to earnings to arrive at cash provided (used) by operations: Depreciation ........................................................ 5,736 4,942 Amortization ........................................................ 3,414 2,621 Bad debt (recovery) expense ......................................... (68) 824 Deferred tax provision .............................................. 15 113 Loss on disposal of property, plant and equipment ................... 33 -- Long-Term Incentive Plan compensation expense ....................... 1,599 866 Stock option compensation expense ................................... 877 -- Environmental cost provision, Deer Park facility .................... -- 1,250 Employee Stock Ownership Plan compensation expense .................. 2,335 2,550 Dividends on unallocated Employee Stock Ownership Plan shares ....... 116 128 Common shares issued for directors' fees ............................ 110 98 Changes in operating assets and liabilities, excluding effects of acquisitions: Accounts receivable .............................................. 21,243 (13,994) Inventories ...................................................... (14,194) (21,616) Prepayments and other assets ..................................... (8,655) 1,929 Accounts payable, accrued liabilities and other .................. (11,142) (638) Contract advances and deposits ................................... 3,161 4,043 -------- -------- Cash provided (used) by operations ........................................ 9,912 (7,887) -------- -------- INVESTING ACTIVITIES: Settlement of purchase price on 2005 acquisitions ...................... (800) -- Purchase of plant and equipment ........................................ (8,841) (13,089) Payments received on notes receivable .................................. 100 150 Cash paid for acquisitions, net of cash acquired ....................... -- (35,072) -------- -------- Cash used by investing activities ......................................... (9,541) (48,011) -------- -------- FINANCING ACTIVITIES: Proceeds from exercise of stock options ................................ 741 593 Excess income tax benefit from stock options and Long-Term Incentive Plan ...................................................... 329 435 Proceeds from management group receivables ............................. 140 -- Repayments of acquired debt ............................................ -- (4,877) Payment of common share cash dividends ................................. (1,220) (1,209) -------- -------- Cash used by financing activities ......................................... (10) (5,058) -------- -------- Net increase (decrease) in cash and cash equivalents ...................... 361 (60,956) Cash and cash equivalents at beginning of year ............................ 108,731 98,884 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $109,092 $ 37,928 ======== ======== Supplemental disclosures: Cash paid for: Interest ............................................................ $ 3,891 $ 3,617 ======== ======== Income taxes ........................................................ $ 10,838 $ 7,393 ======== ========
See accompanying Notes to Consolidated Financial Statements. 6 EDO CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and, therefore, do not include all information and footnotes normally included in consolidated financial statements prepared in conformity with accounting principles generally accepted in the United States. They should be read in conjunction with the consolidated financial statements and notes thereto of EDO Corporation and Subsidiaries (the "Company") for the year ended December 31, 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's presentations to conform to current year's 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 excess of the purchase price over the net assets acquired related to NexGen is not deductible for income tax purposes. During the second quarter of 2006, the purchase price for NexGen was finalized and resulted in an additional cash payment of $0.4 million. 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 price 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 asset 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 six months ended June 24, 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. 7 As a result of adopting Statement 123(R) on January 1, 2006, the company's income before income taxes and net income for the six months ended June 24, 2006, are $0.9 million and $0.5 million lower, respectively, than if it had continued to account for share-based compensation under Opinion 25. Basic and diluted earnings per share for the year ended June 24, 2006 are $0.03 and $0.03 lower, respectively, than if the company had continued to account for share-based compensation under Opinion 25. Prior to the adoption of FAS 123(R), the Company presented all excess 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 six months ended June 24, 2006 the $0.3 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 six months ended June 24, 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 six months ended June 24, 2006 is as follows:
WEIGHTED- WEIGHTED-AVERAGE AGGREGATE AVERAGE REMAINING INTRINSIC OPTIONS EXERCISE CONTRACTUAL 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................. (53) 13.93 Options expired/cancelled......... (4) 13.29 ----- ------ Outstanding on June 24, 2006...... 1,043 $17.96 5.33 $9,976 ===== ====== ==== ====== Exercisable on June 24, 2006...... 1,038 $17.95 5.57 $9,933 ===== ====== ==== ======
As of June 24, 2006, the total future compensation expense related to non-vested options not yet recognized in the consolidated statement of earnings is approximately $40 thousand all of which will vest and be recognized in 2006. Stock based compensation expense recognized for restricted share awards was $0.7 million and $0.4 million for the three months ended June 24, 2006 and June 25, 2005, respectively. Stock based compensation expense recognized for restricted share awards was $1.6 million and $0.9 million for the six months ended June 24, 2006 and June 25, 2005, respectively. The unrecognized compensation cost related to the unvested restricted shares at June 24, 2006 is approximately $5.0 million and will be recognized over a weighted-average period of 2.1 years. A summary of the activity of restricted shares under the Company's 2002 LTIP plan for the six months ended June 24, 2006 is as follows:
WEIGHTED- AVERAGE SHARES GRANT DATE (IN THOUSANDS) FAIR PRICE -------------- ---------- Outstanding on January 1, 2006.... 219 $ 27.78 Granted........................... 111 26.61 Vested............................ -- -- Forfeited/Canceled................ (5) 28.28 --- ------- Outstanding on June 24, 2006...... 325 $ 27.38 === =======
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. 8 The following table illustrates the effect on net earnings and earnings per share if, for the three and six months ended June 25, 2005, the Company had applied the fair value recognition provisions of SFAS No. 123.
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 25, JUNE 25, 2005 2005 ------------ ---------- Earnings: As reported ......................................... $6,089 $ 8,997 Deferred compensation expense, net of tax ........... 277 511 Stock option compensation expense based on fair value method, net of tax ............................... (389) (1,354) ------ ------- Pro forma ........................................... $5,977 $ 8,154 ====== ======= Basic earnings per common share: As reported ......................................... $ 0.34 $ 0.50 Pro forma ........................................... $ 0.33 $ 0.45 Diluted earnings per common share: As reported ......................................... $ 0.31 $ 0.49 Pro forma ........................................... $ 0.31 $ 0.44 ====== =======
(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 for the six months ended June 24, 2006 are as follows:
ENGINEERED SYSTEMS ELECTRONIC AND SYSTEMS AND SERVICES COMMUNICATIONS TOTAL ---------- -------------- -------- (IN THOUSANDS) Balance as of January 1, 2006.. $43,846 $108,501 $152,347 Purchase price adjustments..... 328 (3,256) (2,928) ------- -------- -------- Balance as of June 24, 2006.... $44,174 $105,245 $149,419 ======= ======== ========
Summarized below are intangible assets:
JUNE 24, DECEMBER 31, 2006 2005 LIFE --------- ------------ ---------- (IN THOUSANDS) Intangible assets subject to amortization: Capitalized non-compete agreements related to acquisitions. $ 2,888 $ 3,118 1-5 years Purchased technologies related to acquisitions................ 23,002 21,103 8-25 years Customer contracts and relationships related to acquisitions.. 49,498 45,698 6-20 years Tradename related to acquisitions............................. 2,069 2,069 5-10 years -------- -------- 77,457 71,988 Less accumulated amortization.............................. (19,646) (16,463) -------- -------- $ 57,811 $ 55,525 -------- -------- Intangible assets not subject to amortization: Tradename related to acquisitions............................. 400 400 -------- -------- $ 58,211 $ 55,925 ======== ========
9 The amortization expense for the three months ended June 24, 2006 and June 25, 2005 amounted to $1.8 million and $1.3 million, respectively. The amortization expense for the six months ended June 24, 2006 and June 25, 2005 amounted to $3.4 million and $2.6 million, respectively. Total remaining amortization expense for 2006, 2007, 2008, 2009, 2010 and thereafter related to these intangible assets is estimated to be $3.4 million, $6.8 million, $6.1 million, $6.0 million, $5.3 million and $30.2 million, respectively. (5) INVENTORIES Inventories are summarized by major classification as follows:
JUNE 24, DECEMBER 31, 2006 2005 -------- ------------ (IN THOUSANDS) Raw material and supplies................ $ 11,715 $11,976 Work-in-process........................... 70,587 49,829 Finished goods............................ 1,861 1,690 Less: Unliquidated progress payments... (13,402) (6,928) -------- ------- $ 70,761 $56,567 ======== =======
(6) INCOME TAXES In the second quarter of 2006, we recorded an income tax benefit of $3.7 million due to the reversal of income tax contingency reserves related to the resolution of an outstanding tax matter. (7) EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED ENDED -------------------- ------------------- JUNE 24, JUNE 25, JUNE 24, JUNE 25, 2006 2005 2006 2005 -------- -------- -------- -------- (IN THOUSANDS) Numerator: Earnings for basic and diluted calculation... $ 6,271 $ 6,089 $ 5,332 $ 8,997 Effect of dilutive securities: Convertible notes......................... 1,187 1,067 -- 2,134 ------- ------- ------- ------- Numerator for diluted calculation............ $ 7,458 $ 7,156 $ 5,332 $11,131 ======= ======= ======= ======= Denominator: Denominator for basic calculation............ 18,099 18,065 18,055 17,998 Effect of dilutive securities: Stock options............................. 483 268 483 284 Convertible notes......................... 5,886 4,408 -- 4,408 ------- ------- ------- ------- Denominator for diluted calculation.......... 24,468 22,741 18,538 22,690 ======= ======= ======= =======
The assumed conversion of the notes was anti-dilutive for the six months ended June 24, 2006. 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 SIX MONTHS ENDED ------------------- JUNE 24, JUNE 25, 2006 2005 -------- -------- 4.00% Convertible Subordinated Notes... 5,586 -- Unexercised stock options.............. 129 67 ----- --- 5,715 67 ===== ===
(8) DEFINED BENEFIT PLAN 10 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 June 24, 2006 and June 25, 2005, the Company recorded pension expense of $1.2 million and $1.1 million, respectively. For the six months ended June 24, 2006 and June 25, 2005, the Company recorded pension expense of $2.4 million and $2.1 million, respectively. Summarized below are the components of the expense for each period presented.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED -------------------------- ------------------------ JUNE 24, JUNE 25, JUNE 24, JUNE 25, 2006 2005 2006 2005 -------- -------- -------- ------- (IN THOUSANDS) Interest cost........................... $ 3,038 $ 3,088 $ 6,077 $ 6,177 Expected return on plan assets.......... (3,209) (3,181) (6,419) (6,362) Amortization of unrecognized net loss... 1,365 1,162 2,730 2,324 ------- ------- ------- ------- $ 1,194 $ 1,069 $ 2,388 $ 2,139 ======= ======= ======= =======
(9) EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST The Company sponsors an employee stock ownership plan which provides retirement benefits to substantially all employees. The cost basis of the unearned/unallocated shares was initially recorded as a reduction to shareholders' equity. Compensation expense is recorded based on the market value of the Company's common shares as they are committed-to-be-released quarterly, as payments are made under the related indirect loan. The difference between the market value and the cost basis of the shares was recorded as additional paid-in capital. Dividends on unallocated shares are recorded as compensation expense. (10) COMPREHENSIVE INCOME As of June 24, 2006, accumulated other comprehensive income included in the accompanying consolidated balance sheet primarily represents additional minimum liabilities on benefit plans. Comprehensive income for the three months ended June 24, 2006 was $6.5 million compared to comprehensive income for the three months ended June 25, 2005 of $6.4 million. Comprehensive income for the six months ended June 24, 2006 was $5.6 million compared to comprehensive income for the six months ended June 25, 2005 of $9.2 million. (11) 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 FOR THE SIX MONTHS ENDED -------------------------- ------------------------ JUNE 24, JUNE 25, JUNE 24, JUNE 25, 2006 2005 2006 2005 -------- -------- -------- -------- (IN THOUSANDS) Net Sales: Engineered Systems & Services .................. $62,164 $61,638 $121,430 $112,661 Electronic Systems & Communications ............ 90,234 94,474 150,677 159,959 ------- ------- -------- -------- 152,398 156,112 272,107 272,620 ------- ------- -------- -------- Operating earnings: Engineered Systems & Services .................. $ 1,589 $ 2,396 $ 3,217 $ 6,163 Electronic Systems & Communications ............ 4,243 11,348 2,516 14,329 Environmental cost provision, Deer Park facility -- (1,250) -- (1,250) ------- ------- -------- -------- 5,832 12,494 5,733 19,242 ------- ------- -------- -------- Net interest expense ........................... (1,136) (1,980) (2,539) (3,670) Other, net ..................................... (111) (15) (257) (60) ------- ------- -------- -------- Earnings before income taxes ................... $ 4,585 $10,499 $ 2,937 $ 15,512 ======= ======= ======== ========
11 (12) RECENT ACCOUNTING PRONOUNCEMENTS In June 2006, the FASB issued FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)" which is effective for fiscal years beginning after December 15, 2006. This interpretation was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We are currently evaluating the potential impact of this interpretation. (13) SUBSEQUENT EVENTS On July 26, 2006 the Company entered into an agreement to acquire CAS, Inc (CAS), a privately-held company that provides engineering services, logistic support and weapons-systems analysis to the Department of Defense (DOD). The agreed purchase price consists of (i) a cash component of $170.7 million payable at closing, (ii) the issuance of the Company's common shares valued at $4.9 million, and (iii) retention payments to certain key employees in the amount of $10 million to be paid over a three-year period. The source of funds for the acquisition is a combination of the Company's available cash, as well as advances under its existing credit facility. The transaction is subject to certain conditions, including applicable regulatory approval. The acquisition is expected to close in September 2006. On July 26, 2006 the Company entered into an agreement to acquire Impact Science & Technology Inc (IST), a privately-held company that provides Signals Intelligence (SIGINT) systems and analysis support to the intelligence community, and advanced countermeasures and electronic-attack systems to the DOD and other government agencies. The agreed purchase price consists of (i) a cash component of $106 million payable at closing, (ii) a promissory note in the amount of $18 million to be paid over three years, and (iii) retention payments to certain senior managers in the form of restricted common shares valued at approximately $9 million. The source of funds for the acquisition is a combination of the Company's available cash, as well as advances under its existing credit facility. The transaction is subject to certain conditions, including applicable regulatory approval. The acquisition is expected to close in September 2006. (14) GUARANTOR AND NON-GUARANTOR SUBSIDIARIES The Company may, from time to time, issue indebtedness, a condition of which would be the guarantee of this indebtedness by certain of its subsidiaries. Presented below is condensed consolidating financial information for the Company and the contemplated subsidiary guarantors and non-guarantors at June 24, 2006 and December 31, 2005 and for the three and six month periods ended June 24, 2006 and June 25, 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 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 JUNE 24, 2006 (IN THOUSANDS)
EDO Corporation Parent Subsidiary Company Only Guarantors Non-Guarantors Eliminations Consolidated ------------ ---------- -------------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents $102,193 $ 520 $ 6,379 -- $109,092 Accounts receivable, net 56,187 108,725 3,103 -- 168,015 Inventories 13,389 53,856 3,516 -- 70,761 Deferred income tax asset, net 9,090 -- -- -- 9,090 Notes receivable 7,000 -- -- -- 7,000 Prepayments and other 11,125 1,807 227 -- 13,159 -------- -------- ------- --------- -------- Total current assets 198,984 164,908 13,225 -- 377,117 Investment in subsidiaries 330,850 -- -- (330,850) -- Property, plant and equipment, net 26,577 21,992 3,444 -- 52,013 Goodwill -- 140,709 8,710 -- 149,419 Other intangible assets, net -- 47,094 11,117 -- 58,211 Deferred income tax asset, net 29,637 (2,337) -- -- 27,300 Other assets 23,440 1,777 -- -- 25,217 -------- -------- ------- --------- -------- $609,488 $374,143 $36,496 $(330,850) $689,277
12 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 27,791 $ 41,199 $ 3,855 -- $ 72,845 Contract advances and deposits 13,764 31,641 -- -- 45,405 Notes payable 2,000 -- -- -- 2,000 -------- -------- ------- --------- -------- Total current liabilities 43,555 72,840 3.855 -- 120,250 Income taxes payable 6,513 -- -- -- 6,513 Deferred income taxes (2,870) 2,497 373 -- -- Note payable, long-term 5,000 -- -- -- 5,000 Long-term debt 201,250 -- -- -- 201,250 Post retirement benefits obligations 104,268 -- -- -- 104,268 Environmental obligation 1,386 -- -- -- 1,386 Other long-term liabilities 48 -- -- -- 48 Intercompany accounts -- 188,999 25,344 (214,343) -- Shareholders' equity: Preferred shares -- -- -- -- -- Common shares 20,470 98 -- (98) 20,470 Additional paid-in capital 168,636 25,221 6,418 (31,639) 168,636 Retained earnings 124,331 88,554 268 (88,822) 124,331 Accumulated other comprehensive loss, net of income tax benefit (46,986) (14) 238 -- (46,762) Treasury shares (1,950) (4,052) -- 4,052 (1,950) Unearned ESOP shares (14,163) -- -- -- (14,163) -------- -------- ------- --------- -------- Total shareholders' equity 250,338 109,807 6,924 (116,507) 250,562 -------- -------- ------- --------- -------- $609,488 $374,143 $36,496 $(330,850) $689,277 ======== ======== ======= ========= ========
EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED JUNE 24, 2006 (IN THOUSANDS)
EDO Corporation Parent Subsidiary Company Only Guarantors Non-Guarantors Eliminations Consolidated ------------ ---------- -------------- ------------ ------------ Net Sales $50,353 $98,885 $6,057 $(2,897) $152,398 Costs and expenses: Cost of sales 42,355 76,317 3,882 (2,897) 119,657 Selling, general and administrative 4,185 17,816 1,902 -- 23,903 Research and development 933 1,982 91 -- 3,006 ------- ------- ------ ------- -------- 47,473 96,115 5,875 (2,897) 146,566 ------- ------- ------ ------- -------- Operating Earnings 2,880 2,770 182 -- 5,832 Non-operating income (expense) Interest income 1,048 -- 53 -- 1,101 Interest expense (2,255) 18 -- -- (2,237) Other, net (6) (66) (39) -- (111) ------- ------- ------ ------- -------- (1,213) (48) 14 -- (1,247) Earnings before income taxes 1,667 2,722 196 -- 4,585 Income tax benefit (expense) 3,439 (1,614) (139) -- 1,686 ------- ------- ------ ------- -------- Earnings after income taxes 5,106 1,108 57 -- 6,271 Equity in undistributed earnings of subsidiaries 1,165 -- -- (1,165) -- ------- ------- ------ ------- -------- Net earnings $ 6,271 $ 1,108 $ 57 $(1,165) $ 6,271 ======= ======= ====== ======= ========
EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS FOR THE SIX MONTHS ENDED JUNE 24, 2006 (IN THOUSANDS)
EDO Corporation Parent Subsidiary Company Only Guarantors Non-Guarantors Eliminations Consolidated ------------ ---------- -------------- ------------ ------------ Net Sales $ 97,340 $ 167,971 $ 12,411 $ (5,615) $ 272,107 Costs and expenses: Cost of sales 81,190 127,026 8,300 (5,615) 210,901 Selling, general and administrative 9,693 34,958 4,610 -- 49,261 Research and development 1,815 4,119 278 -- 6,212 --------- --------- -------- --------- --------- 92,698 166,103 13,188 (5,615) 266,374 --------- --------- -------- --------- --------- Operating Earnings (loss) 4,642 1,868 (777) -- 5,733
13 Interest income 2,015 -- 107 -- 2,122 Interest expense (4,695) 34 -- -- (4,661) Other, net (22) (152) (83) -- (257) --------- --------- -------- --------- --------- (2,702) (118) 24 -- (2,796) Earnings (loss) before income taxes 1,940 1,750 (753) -- 2,937 Income tax benefit (expense) 4,544 (2,217) 68 -- 2,395 --------- --------- -------- --------- --------- Earnings (loss) after income taxes 6,484 (467) (685) -- 5,332 Equity in undistributed earnings of subsidiaries (1,152) -- -- 1,152 -- --------- --------- -------- --------- --------- Net earnings (loss) $ 5,332 $ (467) $ (685) $ 1,152 $ 5,332 ========= ========= ======== ========= =========
EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 24, 2006 (IN THOUSANDS)
EDO Corporation Parent Subsidiary Company Only Guarantors Non-Guarantors Eliminations Consolidated ------------ ---------- -------------- ------------ ------------ OPERATING ACTIVITIES: Earnings (loss) from continuing operations $ 5,332 $ (467) $ (685) $ 1,152 $ 5,332 Adjustments to earnings (loss) to arrive at cash provided by continuing operations: Depreciation 2,444 2,839 453 -- 5,736 Amortization -- 2,914 500 -- 3,414 Deferred tax provision 389 (374) -- -- 15 Bad debt recovery (68) -- -- -- (68) Loss on sale of property, plant and equipment 22 11 -- -- 33 Long-Term Incentive Plan compensation expense 1,599 -- -- -- 1,599 Stock option compensation expense 877 -- -- -- 877 Employee Stock Ownership Plan compensation expense 2,335 -- -- -- 2,335 Dividends on unallocated Employee Stock Ownership Plan shares 116 -- -- -- 116 Common shares issued for directors' fees 110 -- -- -- 110 Changes in operating assets and liabilities, excluding effects of acquisitions: Equity in earnings of subsidiaries 1,152 -- -- (1,152) -- Intercompany (13,978) 13,405 573 -- -- Accounts receivable 12,484 8,439 320 -- 21,243 Inventories 3,899 (17,709) (384) -- (14,194) Prepayments and other assets (7,180) (1,582) 107 -- (8,655) Accounts payable, accrued liabilities and other (9,620) (2,234) 712 -- (11,142) Contract advances and deposits 7,644 (4,483) -- -- 3,161 -------- -------- ------ ------- -------- Cash provided by operations 7,557 759 1,596 -- 9,912 -------- -------- ------ ------- -------- INVESTING ACTIVITIES: Settlement of purchase price on 2005 acquisitions (800) -- -- -- (800) Purchase of plant and equipment (3,721) (4,471) (649) -- (8,841) Payments received on notes receivable 100 -- -- -- 100 -------- -------- ------ ------- -------- Cash used by investing activities (4,421) (4,471) (649) -- (9,541) -------- -------- ------ ------- -------- FINANCING ACTIVITIES: Proceeds from exercise of stock options 741 -- -- -- 741 Excess income tax benefit from stock options and Long-Term Incentive Plan 329 -- -- -- 329 Proceeds from management group receivables 140 -- -- -- 140 Payment of common share cash dividends (1,220) -- -- -- (1,220) -------- -------- ------ ------- -------- Cash used by financing activities (10) -- -- -- (10) -------- -------- ------ ------- -------- Net increase (decrease) in cash and cash equivalents 3,126 (3,712) 947 -- 361 Cash and cash equivalents at beginning of year 99,067 4,232 5,432 -- 108,731 -------- -------- ------ ------- -------- Cash and cash equivalents at end of period $102,193 $ 520 $6,379 $ -- $109,092 ======== ======== ====== ======= ========
14 EDO CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET DECEMBER 31, 2005 (IN THOUSANDS)
EDO Corporation Parent Subsidiary Company 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 ======== ======== ======= ========= ========
EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED JUNE 25, 2005 (IN THOUSANDS)
EDO Corporation Parent Subsidiary Company Only Guarantors Non-Guarantors Eliminations Consolidated ------------ ---------- -------------- ------------ ------------ Continuing Operations: Net Sales $50,690 $92,941 $ 6,801 $ 5,680 $156,112 Costs and expenses: Cost of sales 41,914 65,971 4,795 5,680 118,360 Selling, general and administrative 3,806 14,786 1,422 -- 20,014 Research and development 1,639 2,092 263 -- 3,994 Environmental cost provision, Deer Park 1,250 -- -- -- 1,250 ------- ------- ------- ------- -------- 48,609 82,849 6,480 5,680 143,618
15 ------- ------- ----- ------- ------- Operating Earnings 2,081 10,092 321 -- 12,494 ------- ------- ----- ------- ------- Non-operating income (expense) Interest income 246 11 37 -- 294 Interest expense (2,274) -- -- -- (2,274) Other, net 1 29 (45) -- (15) ------- ------- ----- ------- ------- (2,027) 40 (8) -- (1,995) Earnings before income taxes 54 10,132 313 -- 10,499 Income tax expense (248) (3,981) (181) -- (4,410) ------- ------- ----- ------- ------- (Loss) earnings after income taxes (194) 6,151 132 -- 6,089 Equity in undistributed earnings of subsidiaries 6,283 -- -- (6,283) -- ------- ------- ----- ------- ------- Net earnings $ 6,089 $ 6,151 $ 132 $(6,283) $ 6,089 ======= ======= ===== ======= =======
EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS FOR THE SIX MONTHS ENDED JUNE 25, 2005 (IN THOUSANDS)
EDO Corporation Subsidiary Parent Company Only Guarantors Non-Guarantors Eliminations Consolidated ------------------- ---------- -------------- ------------ ------------ Continuing Operations: Net Sales $86,940 $179,006 $14,205 $(7,531) $272,620 Costs and expenses: Cost of sales 71,604 129,147 10,194 (7,531) 203,414 Selling, general and administrative 7,534 29,754 3,014 -- 40,302 Research and development 3,022 4,861 529 -- 8,412 Environmental provision, Deer Park facility 1,250 -- -- -- 1,250 ------- -------- ------- ------- -------- 83,410 163,762 13,737 (7,531) 253,378 ------- -------- ------- ------- -------- Operating Earnings 3,530 15,244 468 -- 19,242 Non-operating income (expense) Interest income 709 28 58 -- 795 Interest expense (4,465) -- -- -- (4,465) Other, net 11 23 (94) -- (60) ------- -------- ------- ------- -------- (3,745) 51 (36) -- (3,730) (Loss) earnings from income taxes (215) 15,295 432 -- 15,512 Income tax expense (133) (6,085) (297) -- (6,515) ------- -------- ------- ------- -------- (loss) earnings after income taxes (348) 9,210 135 -- 8,997 Equity in undistributed earnings of subsidiaries 9,345 -- -- (9,345) -- ------- -------- ------- ------- -------- Net earnings $ 8,997 $ 9,210 $ 135 $(9,345) $ 8,997 ======= ======== ======= ======= ========
EDO CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 25, 2005 (IN THOUSANDS)
EDO Corporation Subsidiary Parent Company Only Guarantors Non-Guarantors Eliminations Consolidated ------------------- ---------- -------------- ------------ ------------ OPERATING ACTIVITIES: Earnings from continuing operations $ 8,997 $ 9,210 $ 135 $(9,345) $ 8,997 Adjustments to earnings to arrive at cash provided (used) by continuing operations: Depreciation 2,291 2,386 265 -- 4,942 Amortization -- 2,112 509 -- 2,621 Deferred tax benefit 113 -- -- -- 113 Bad debt expense 184 640 -- -- 824 Environmental cost provision, Deer Park facility 1,250 -- -- -- 1,250 Deferred compensation expense 866 -- -- -- 866 Employee Stock Ownership Plan compensation expense 2,550 -- -- -- 2,550 Dividends on unallocated Employee Stock Ownership Plan shares 128 -- -- -- 128
16 Common shares issued for directors' fees 98 -- -- -- 98 Changes in operating assets and liabilities, excluding effects of acquisitions: Equity in earnings of subsidiaries (9,345) -- -- 9,345 -- Inter-company 6,746 (6,629) (117) -- -- Accounts receivable (4,858) (10,481) 1,345 -- (13,994) Inventories (11,414) (10,483) 281 -- (21,616) Prepayments and other assets 1,870 51 8 -- 1,929 Accounts payable, accrued liabilities and other (7,202) 8,711 (2,147) -- (638) Contract advances and deposits (2,817) 6,860 -- -- 4,043 -------- -------- ------- ------- -------- Cash (used) provided by continuing operations (10,543) 2,377 279 -- (7,887) -------- -------- ------- ------- -------- INVESTING ACTIVITIES: Purchase of plant and equipment (8,505) (4,541) (43) -- (13,089) Payments received on notes receivable 150 -- -- -- 150 Cash paid for acquisition settlements, net of cash acquired (35,072) -- -- -- (35,072) -------- -------- ------- ------- -------- Cash used by investing activities (43,427) (4,541) (43) -- (48,011) -------- -------- ------- ------- -------- FINANCING ACTIVITIES: Proceeds from exercise of stock options 593 -- -- -- 593 Excess Income tax benefit from stock options and Long-Term Incentive Plan 435 -- -- -- 435 Repayment of acquired debt (4,877) -- -- -- (4,877) Payment of common share cash dividends (1,209) -- -- -- (1,209) -------- -------- ------- ------- -------- Cash used by financing activities (5,058)) -- -- -- (5,058) -------- -------- ------- ------- -------- Net (decrease) increase in cash and cash equivalents (59,028) (2,164) 236 -- (60,956) Cash and cash equivalents at beginning of year 93,129 1,314 4,441 -- 98,884 -------- -------- ------- ------- -------- Cash and cash equivalents at end of period $ 34,101 $ (850) $ 4,677 $ -- $ 37,928 ======== ======== ======= ======= ========
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 of 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. 17 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 title to or security interest in the inventories identified with related contracts. PROPERTY, PLANT AND EQUIPMENT AND OTHER LONG-LIVED ASSETS Property, plant and equipment is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of such assets. Leasehold improvements are amortized over the shorter of their estimated useful lives or their respective lease periods. In those cases where we determine that the useful life of property, plant and equipment should be shortened, we depreciate the net book value in excess of salvage value over its revised remaining useful life thereby increasing depreciation expense. Factors such as technological advances, changes to our business model, changes in our capital strategy, changes in the planned use of equipment, fixtures, software or changes in the planned use of facilities could result in shortened useful lives. Long-lived assets, other than goodwill, are reviewed by us for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The estimate of cash flow, which is used to determine recoverability, is based upon, among other things, certain assumptions about future operating performance. Our estimates of undiscounted cash flow may differ from actual cash flow due to such factors including technological advances, changes to our business model, or changes in our capital strategy or planned use of long-lived assets. If the sum of the undiscounted cash flows, excluding interest, is less than the carrying value, we would recognize an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. In accordance with SFAS No. 142, goodwill must be tested at least annually for impairment at the reporting unit level. If an indication of impairment exists, we are required to determine if such goodwill's implied fair value is less than the unit carrying value in order to determine the amount, if any, of the impairment loss required to be recorded. Impairment indicators include, among other conditions, cash flow deficits, an historic or anticipated decline in revenue or operating profits, adverse legal or regulatory developments, accumulation of costs significantly in excess of amounts originally expected to acquire the asset and/or a material decrease in the fair value of some or all of the assets. To determine the fair value of our reporting units, we generally use a present value technique (discounted cash flow) corroborated by market multiples when available and as appropriate, for all of the reporting units. The discounted cash flow method measures intrinsic value by reference to an enterprise's or an asset's expected annual free cash flows. We applied what we believe to be the most appropriate valuation methodology for each of the reporting units. If we had established different reporting units or utilized different valuation methodologies, the impairment test results could differ. PENSION AND POST-RETIREMENT BENEFITS OBLIGATIONS We sponsor defined benefit pension and other retirement plans in various forms covering all eligible employees. Several statistical and other factors which attempt to anticipate future events are used in calculating the expense and liability related to the plans. These factors include assumptions about the discount rate and expected return on plan assets within certain guidelines and in conjunction with our actuarial consultants. In addition, our actuarial consultants also use subjective factors such as withdrawal and mortality rates to estimate the expense and liability related to these plans. The actuarial assumptions used by us may differ significantly, either 18 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 June 24, 2006. THREE MONTHS ENDED JUNE 24, 2006 COMPARED WITH THREE MONTHS ENDED JUNE 25, 2005 Net sales by segment were as follows:
THREE MONTHS ENDED --------------------- INCREASE/(DECREASE) JUNE 24, JUNE 25, FROM SEGMENT 2006 2005 PRIOR PERIOD - ------- -------- -------- ------------------- (DOLLARS IN THOUSANDS) Engineered Systems & Services......... $ 62,164 $ 61,638 0.9% Electronic Systems & Communications... 90,234 94,474 (4.5%) -------- -------- ---- Total................................. $152,398 $156,112 (2.4%) ======== ======== ====
In the Engineered Systems and Services segment, the increase in sales was attributable to higher sales of integrated composite structures, due to the acquisition of Fiber Innovations, which was acquired in the third quarter of 2005 and increased sales in our undersea warfare products. These increases were partially offset by lower sales in aircraft armament systems. In the Electronic Systems and Communications segment, the decrease in sales was attributable to continued lower sales volume of electronic force protection systems resulting from a delay in commencing delivery due to expanded testing requirements in the development phase and lack of systems orders during the previous periods. This decrease was partially offset by increased sales of C4 products and systems, including the Transition Switch Module "TSM" in addition to sales contributed by EVI and NexGen, which were acquired in the second and fourth quarters of 2005, respectively. Operating earnings by segment were as follows:
THREE MONTHS ENDED --------------------- JUNE 24, JUNE 25, SEGMENT 2006 2005 - ------- -------- -------- (DOLLARS IN THOUSANDS) Engineered Systems & Services....................... $1,589 $ 2,396 Electronic Systems & Communications ................ 4,243 11,348 Environmental cost provision, Deer Park facility... -- (1,250) ------ ------- Total............................................... $5,832 $12,494 ====== =======
Operating earnings for the three months ended June 24 2006 were $5.8 million or 3.8% of net sales. This compares to operating earnings for the three months ended June 25, 2005 of $12.5 million or 8.0% of net sales. Items of note affecting operating earnings are summarized here to help clarify the comparison of results.
THREE MONTHS ENDED --------------------- JUNE 24, JUNE 25, 2006 2005 -------- -------- (DOLLARS IN THOUSANDS) Pension......................... $1,194 $1,069 ESOP Compensation expense....... $1,149 $1,236 Intangible asset amortization... $1,802 $1,311 ------ ------ $4,145 $3,616 ====== ======
The increase in pension expense in 2006 compared to 2005 is attributable to changes in actuarial assumptions such as discount rate and return on plan assets. The lower ESOP compensation expense for the three months ended June 24, 2006 is attributable to our lower average stock price compared to the three months ended June 25, 2005. Pension and ESOP compensation expense are allocated 19 between cost of sales and selling, general and administrative expense. The increase in intangible asset amortization expense is associated with the 2005 acquisitions and the finalizing of the related purchase price allocations. The Engineered Systems and Services segment's operating earnings for the three months ended June 24, 2006 were $1.6 million or 2.6% of this segment's net sales compared to operating earnings of $2.4 million or 3.9% of this segment's net sales for the three months ended June 25, 2005. Operating earnings for the three months ended June 24, 2006, were negatively impacted by a $1.7 million cost growth on an undersea warfare program and $1.4 million on an aircraft armament program. We believe that, based on our most current estimates, we have accounted for all future costs necessary to complete these programs. This was partially offset by a release of a $0.9 million reserve on an aircraft armament program which was delivered during the quarter as well as a $0.5 million reserve release on a completed undersea warfare systems program. The Engineered Systems and Services segment's operating earnings for the three months ended June 25, 2005 were negatively impacted by $2.2 million for the same undersea warfare systems program noted above. Additionally, earnings were negatively impacted by a write-off of a $0.2 million receivable from a customer in our fiber composite business. The Electronic Systems and Communications segment's operating earnings for the three months ended June 24, 2006 were $4.2 million or 4.7% of this segment's net sales compared to operating earnings of $11.4 million or 12.0% of this segment's net sales for the three months ended June 25, 2005. Operating Earnings were negatively impacted by cost growth of $1.1 million on an interference cancellation program, lower sales volume of electronic force protection systems. Operating earnings for the three months ended June 25, 2005 were positively influenced by sales relating to electronic force protection systems. Selling, general and administrative expenses for the three months ended June 24, 2006 of $23.9 million increased as a percent of net sales to 15.7% from 12.8% for the three months ended June 25, 2005. The increase is attributable to the three acquisitions made in 2005, which resulted in an increase in intangible amortization expense. Research and development expense for the three months ended June 24, 2006 decreased to $3.0 million or 2.0% of net sales from $4.0 million or 2.6% of net sales for the three months ended June 25, 2005, during which time there was higher than usual spending on electronic force protection and composite munitions. Interest expense, net of interest income, for the three months ended June 24, 2006 decreased to $1.1 million from $2.0 million for the three months ended June 25, 2005 due to a higher average cash balance for the three months ended June 24, 2006 compared to 2005 and a lower interest rate on the convertible notes. Interest expense for the three months ended June 24, 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. Income tax expense reflects a benefit of 37% for the three month period ended June 24, 2006 and an expense of 42% for the three month period ended June 25, 2005. For the three months ended June 24, 2006, we recorded an income tax benefit of $3.7 million due to the reversal of income tax contingency reserves related to the resolution of an outstanding tax matter. For the three months ended June 24, 2006, net earnings were $6.3 million or $0.30 per diluted common share on 24.5 million diluted shares compared to net earnings of $6.1 million or $0.31 per diluted common share on 22.7 million diluted shares for the three months ended June 25, 2005. The convertible notes had a dilutive effect in the second quarter of 2006 and all of 2005. SIX MONTHS ENDED JUNE 24, 2006 COMPARED WITH SIX MONTHS ENDED JUNE 25, 2005 Net sales by segment were as follows:
SIX MONTHS ENDED --------------------- INCREASE/(DECREASE) JUNE 24, JUNE 25, FROM SEGMENT 2006 2005 PRIOR PERIOD - ------- -------- -------- ------------------- (DOLLARS IN THOUSANDS) Engineered Systems & Services......... $121,430 $112,661 7.8% Electronic Systems & Communications... 150,677 159,959 (5.8%) -------- -------- ---- Total................................. $272,107 $272,620 (0.2%) ======== ======== ====
In the Engineered Systems and Services segment, the increase in sales was attributable to higher sales of aircraft armament systems relating to the F-22 missile launcher program, higher sales in composite structures which include Fiber Innovations which was acquired in the third quarter of 2005. These increases in sales were partially offset by lower sales in our Technical Services Operations division due to delayed funding. 20 In the Electronic Systems and Communications segment, the decrease in sales was attributable to lower sales of electronic force protection systems for the six months ended June 24, 2006 compared to the six months ended June 25, 2005. The lower sales of electronic force protection systems relates to a delay in commencing production due to extended testing requirements in the development phase. In addition, there were delays in milestone achievements of reconnaissance and surveillance systems. These lower sales were partially offset by sales of EVI and NexGen, which were acquired in the second and fourth quarter of 2005, respectively. In addition sales for the six months ended June 24, 2006 were positively influenced by the delivery of the Joint Enhanced Core Communication Systems ("JECCS) for the Marine Corps. Operating earnings by segment were as follows:
SIX MONTHS ENDED ---------------------- JUNE 24, JUNE 25, SEGMENT 2006 2005 - ------- -------- ------- (DOLLARS IN THOUSANDS) Engineered Systems & Services ...................... $3,217 $ 6,163 Electronic Systems & Communications ................ 2,516 14,329 Environmental cost provision, Deer Park facility ... -- (1,250) ------ ------- Total .............................................. $5,733 $19,242 ====== =======
Operating earnings for the six months ended June 24, 2006 were $5.7 million or 2.1% of net sales. This compares to operating earnings for the six months ended June 25, 2005 of $19.2 million or 7.1% of net sales. The Engineered Systems and Services segment's operating earnings for the six months ended June 24, 2006 were $3.2 million or 2.6% of this segment's net sales compared to operating earnings of $6.2 million or 5.5% of this segment's net sales for the six months ended June 25, 2005. For the six months ended June 24, 2006 operating earnings were negatively impacted by a $1.7 million cost growth on an undersea warfare program, $1.4 million on an aircraft armament program, as well as an estimated settlement of a lawsuit and related legal costs. This was partially offset by a release of a $0.9 million reserve on an aircraft armament program which was delivered during the quarter, as well as a $0.5 million reserve release on a sonar system program. We believe that, based on our most current estimates, we have accounted for all future costs necessary to complete these programs. The Engineered Systems and Services segment's operating earnings for the six months ended June 25, 2005 were negatively impacted by a $1.25 million reserve for an environmental cleanup effort relating to the Company's former Deer Park facility as well as cost growth of approximately $1.8 million on the undersea warfare systems program. This was offset by a positive impact to operating earnings of approximately $3.4 million resulting from the release of a reserve which was established for the MK105 related contract, which was delivered during the second quarter of 2005. In the Electronic Systems and Communications segment, operating earnings for the six months ended June 24, 2006 were $2.5 million or 1.7% of this segment's net sales compared to operating earnings of $14.3 million or 9.0% of this segment's net sales for the six months ended June 25, 2005. Operating Earnings were negatively impacted by cost growth of $2.5 million on an interference cancellation program, lower sales volume of electronic force protection systems and delays in milestone achievements of reconnaissance and surveillance systems. Furthermore, we provided for estimated liabilities and legal costs incurred in connection with a contract dispute. Legal costs and estimated liabilities for the legal matters referred to above had an adverse effect on the results of operations for the six months ended June 24, 2006 of approximately $3.3 million. Items of note affecting operating earnings are summarized here to help clarify the comparison of results.
SIX MONTHS ENDED ---------------------- JUNE 24, JUNE 25, 2006 2005 -------- -------- (DOLLARS IN THOUSANDS) Pension ......................................... $2,388 $2,139 ESOP compensation expense ....................... $2,335 $2,550 Intangible asset amortization ................... $3,414 $2,621 Stock-based compensation expense for options .... $ 877 $ -- ------ ------ $9,014 $7,310 ====== ======
The increase in pension expense in 2006 compared to 2005 is attributable to changes in actuarial assumptions such as discount rate and return on plan assets. The lower ESOP compensation expense for the first six months of 2006 is attributable to our lower average stock price compared to the first six months of 2005. Pension and ESOP compensation expense are allocated between cost of sales 21 and selling, general and administrative expense. The increase in intangible asset amortization expense is attributable to the three acquisitions made in 2005. The increase in Stock-Based Compensation Expense relates to the implementation of Financial Accounting Standards Board Statement No. 123(R), Accounting for Stock-Based Compensation, (FAS 123 (R)). With respect to FAS 123 (R), the remaining compensation cost in 2006 related to non-vested stock options is approximately $40 thousand. 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 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. Selling, general and administrative expenses for the six months ended June 24, 2006 of $49.3 million increased as a percent of net sales to 18.1% from 14.8% for the six months ended June 25, 2005. The increase is attributable to the three acquisitions made in 2005, the aforementioned legal matters and the effect of the implementation of FAS 123 (R). In addition, there were some continuing start-up costs for our undersea warfare operation in Panama City, Florida. Intangible asset amortization also increased slightly due to an increase in intangibles from the acquisitions of EVI, Fiber Innovations, and NexGen in 2005. Research and development expense for the six months ended June 24, 2006 decreased to $6.2 million or 2.3% of net sales from $8.4 million or 3.1% of net sales for the six months ended June 25, 2005, during which time there was higher spending on electronic force protection, aircraft armament and composite munitions. Interest expense, net of interest income, for the six months ended June 24, 2006 decreased to $2.5 million from $3.7 million for the six months ended June 25, 2005, primarily due to higher interest income on a higher average cash balance and a lower interest rate on our Convertible Notes. Interest expense for the six months ended June 24, 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. Income tax expense reflects a benefit of 82% for the six month period ended June 24, 2006 and an expense 42% for the six month period ended June 25, 2005. For the six months ended June 26, 2006, we recorded an income tax benefit of $3.7 million due to the reversal of income tax contingency reserves related to the resolution of an outstanding tax matter. For the six months ended June 24, 2006, net earnings were $5.3 million or $0.29 per diluted common share on 18.5 million diluted shares compared to net earnings of $9.0 million or $0.49 per diluted common share on 22.7 million diluted shares for the six months ended June 25, 2005. The convertible notes were anti-dilutive for the six months ended June 24, 2006 and dilutive for the six months ended June 25, 2005. LIQUIDITY AND CAPITAL RESOURCES BALANCE SHEET Our cash and cash equivalents at June 24, 2006 were consistent with year-end with a balance of $109.1 million compared to $108.7 million at December 31, 2005. Year-to-date cash from continuing operations was $9.9 million; $8.8 million was used for the purchase of capital equipment and $1.2 million for the payment of common share dividends. Accounts receivable decreased 11.2% to $168.0 million at June 24, 2006 from $189.2 million at December 31, 2005 due in part to timing of collections of billed receivables and increased collection efforts at the Company. At June 24, 2006 approximately 88% of billed receivables were in the under-60 days aging category compared with 81% at December 31, 2005. Inventories increased 25.1% to $70.8 million at June 24, 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 June 24, 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 achieved "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. In the six months ended June 24, 2006, capital expenditures were $8.8 million. This compares to $13.1 million for the six months ended June 25, 2005. For the six months ended June 25, 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. 22 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 sub-limit 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 June 24, 2006, LIBOR was approximately 5.3% 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%. There were no direct borrowings outstanding under the credit facility at June 24, 2006 or at December 31, 2005. Letters of credit outstanding at June 24, 2006 pertaining to the credit facility were $38.4 million, resulting in $261.6 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 June 24, 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 $0.9 million at June 24, 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 June 24, 2006, there had been no such conversions. Shelf Registration At June 24, 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, have actively sought candidates for strategic acquisitions. Future acquisitions may be funded from any of the following sources: cash on hand; borrowings under our credit facility; issuance of our common stock or other equity securities; and/or convertible or other debt offerings. COMMITMENTS AND CONTINGENCIES In order to aggregate all commitments and contractual obligations as of June 24, 2006, 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
23 Operating leases ....................... $138.3 8.8 17.4 16.7 16.5 15.3 63.6 Letters of credit ...................... $ 38.4 3.7 23.7 -- 10.5 -- 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 .................................. $409.8 $20.7 $49.1 $25.7 $33.7 $15.3 $265.3 ====== ===== ===== ===== ===== ===== ======
(1) Excludes interest of approximately $8 million annually. 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 liquidity. However, certain legal matters did have a material adverse effect on results of operations as noted above under Results of Operations for the six months ended June 24, 2006. 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. For the three and six months ended June 24, 2006, sales of Warlock force protection systems represented 0% of net sales compared to 19.3% and 13.1% for the three and six months ended June 25, 2005, respectively. BACKLOG The funded backlog of unfilled orders at June 24, 2006 increased to $608.0 million from $558.7 million at December 31, 2005. Our backlog consists primarily of current orders under long-lived, mission-critical programs on key defense platforms. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The statements in this Quarterly Report and in oral statements that may be made by representatives of the Company relating to plans, strategies, economic performance and trends and other statements that are not descriptions of historical facts may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27(a) of the Securities Act of 1933 and Section 21(e) of the Securities Exchange Act of 1934. Forward looking statements are inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to the following for each of the types of information noted below. U.S. and international military program sales, follow on procurement, contract continuance, and future program awards, upgrades and spares support are subject to: U.S. and international military budget constraints and determinations; U.S. congressional and international legislative body discretion; U.S. and international government administration policies and priorities; changing world military threats, strategies and missions; competition from foreign manufacturers of platforms and equipment; NATO country determinations regarding participation in common programs; changes in U.S. and international government procurement timing, strategies and practices, the general state of world military readiness and deployment; and the ability to obtain export licenses. Commercial satellite programs and equipment sales, follow-on procurement, contract continuance and future program awards, upgrades and spares support are subject to: establishment and continuance of various consortiums for satellite constellation programs; delay in launch dates due to equipment, weather or other factors beyond our control; and development of sufficient customer base to support a particular satellite constellation program. Commercial product sales are subject to: success of product development programs currently underway or planned; competitiveness of current and future production costs and prices and market and consumer base development of new product programs. Achievement of margins on sales, earnings and cash flow can be affected by: unanticipated technical problems; government termination of contracts for convenience; decline in expected levels of sales; underestimation of anticipated costs on specific programs; the ability to effect acquisitions; and risks inherent in integrating recent acquisitions into our overall structure. 24 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 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. 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 None. ITEM 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Meeting of Shareholders held on April 25, 2006, the following actions were taken: (a) Election of Directors. The following nominees were elected as directors. The votes cast for or withheld for each nominee were as follows:
Director Votes For Votes Withheld - -------- ------------- -------------- Robert E. Allen 16,641,038.00 766,223.00 Robert Alvine 16,904,746.00 503,015.00 Dennis C. Blair 17,265,806.00 141,955.00 Robert M. Hanisee 16,451,666.00 956,095.00 Michael J. Hegarty 16,336,647.00 1,071,114.00 Leslie F. Kenne 17,309,094.00 98,667.00 Paul J. Kern 17,309,008.00 98,753.00 Ronald L. Leach 16,860,866.00 546,895.00 James Roth 17,308,100.00 99,661.00 James M. Smith 16,718,732.00 689,029.00 Robert S. Tyrer 16,861,128.00 546,633.00 Robert Walmsley 16,860,851.00 546,910.00
25 (b) The EDO Corporation 2006 Long-Term Incentive Plan was approved by the shareholders. The votes cast for, against or withheld were as follows: 13,665,041 votes cast in favor, 1,806,520 votes cast against, 93,524 abstentions and 1,842,676 broker non-votes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 10.1 EDO Corporation 2006 Long-Term Incentive Plan. 31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32* Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Filed herewith. (B) REPORTS ON FORM 8-K The following report on Form 8-K was filed during the three months ended June 24, 2006:
DATE OF REPORT ITEMS REPORTED - -------------- -------------- April 27, 2006 Earnings Release dated April 27, 2006 announcing financial results for the quarter ended March 25, 2006.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, its principal financial officer, thereunto duly authorized. EDO CORPORATION (Registrant) Dated: July 31, 2006 By: /s/ FREDERIC B. BASSETT ------------------------------------ Frederic B. Bassett Senior Vice President Finance, Treasurer and Chief Financial Officer 26 EX-10.1 2 y23701exv10w1.txt 2006 LONG-TERM INCENTIVE PLAN EXHIBIT 10.1 EDO CORPORATION 2006 LONG-TERM INCENTIVE PLAN 1. PURPOSE. The purpose of the Plan is to foster and promote the long-term financial success of the Company and materially increase shareholder value by motivating superior performance by means of performance-related incentives, encouraging and providing for the acquisition of an ownership interest in the Company by Eligible Employees, and enabling the Company to attract and retain the services of an outstanding management team upon whose judgment, interest and special effort the successful conduct of its operations is largely dependent. 2. DEFINITIONS. For purposes of the Plan, the following terms have the indicated meaning: "Award" means an award granted under the Plan to an Eligible Participant in accordance with the provisions of the Plan in the form of Options, Stock Appreciation Rights, Performance Shares, Performance Units, Restricted Stock or, or any combination of the foregoing. "Award Agreement" means the written agreement evidencing each Award granted to a Participant under the Plan as provided in Section 11(b). "Beneficiary" means the estate of a Participant or such other beneficiary or beneficiaries lawfully designated pursuant to Section 11(o) to receive the amount, if any, payable under the Plan upon the death of a Participant. "Board" shall mean the Board of Directors of the Company. "Cause" shall have the meaning set forth in the applicable Award Agreement, or in any employment agreement with the Company that may be applicable to the Participant, or in the absence of any definition in the Award Agreement or such employment agreement, "Cause" shall have the meaning established by the Committee from time to time. "Change in Control" shall mean the occurrence of any of the following events: (i) a majority of the members of the Board at anytime cease for any reason other than due to death or disability to be persons who were members of the Board twenty-four months prior to such time (the "Incumbent Directors"); provided that, any director whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the members of the Board then still in office who are Incumbent Directors shall be treated as an Incumbent Director; or (ii) any "person," including a "group" (as such terms are used in Sections 13(d) and 14(d)(2) of the Exchange Act, but excluding the Company, its Subsidiaries, any employee benefit plan of the Company or any Subsidiary, all employees of the Company or any Subsidiary or any group of which any of the foregoing is a member) is or becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the Exchange Act), directly or indirectly, including, without limitation, by means of a tender or exchange offer, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or (iii) the shareholders of the Company shall approve a definitive agreement (x) for the merger or other business combination of the Company with or into another corporation immediately following which merger or combination (A) the stock of the surviving entity is not readily tradeable on an established securities market, (B) a majority of the directors of the surviving entity are persons who (1) were not directors of the Company immediately prior to the merger and (2) are not nominees or representatives of the Company or (C) any "person," including a "group" (as such terms are used in Sections 13(d) and 14(d)(2) of the Exchange Act, but excluding the Company, its Subsidiaries, any employee benefit plan of the Company or any Subsidiary, employees of the Company or any Subsidiary or any group of which any of the foregoing is a member) is or becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the Exchange Act), directly or indirectly, of 30% or more of the securities of the surviving entity or (y) for the direct or indirect sale or other disposition of all or substantially all of the assets of the Company, or (iv) any other event or transaction that is declared by resolution of the Board to constitute a Change in Control for purposes of the Plan. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to occur in the event the Company files for bankruptcy, liquidation or reorganization under the United States Bankruptcy Code. "Change in Control Price" shall mean the highest price per share of (A) the highest composite daily closing price of a share during the period beginning on the 60th calendar day prior to the date on which the Change in Control occurs and ending on the date of such Change in Control, (B) the highest gross price paid per share during the same period of time, as reported in a report on Schedule 13D filed with the Securities and Exchange Commission or (C) the highest gross price paid or to be paid for a share (whether by way of exchange, conversion, distribution upon merger, liquidation or otherwise) in any of the transactions set forth in the definition of Change in Control; provided that, the Change in Control Price shall not be greater than the price permitted for compliance with any provision of under the Code applicable to an Award. "Code" shall mean the Internal Revenue Code of 1986, as amended, and the regulations thereunder as they may be amended from time to time. "Committee" shall mean the Compensation Committee of the Board, or such other Board committee as may be designated by the Board to administer the Plan. "Common Shares" shall mean the Common Shares, par value $1.00 per share, of the Company. "Company" shall mean EDO Corporation and any successor thereto. "Disability" shall mean long-term disability as defined under the terms of the Company's applicable long-term disability plans or policies. "Eligible Employee" shall mean each Executive Officer and each other key employee of the Company or its Subsidiaries, but shall not include directors who are not employees of any such entity. "Employment" shall mean, for purposes of Section 5(d), continuous and regular salaried employment with the Company or a Subsidiary, which unless the Committee shall determine otherwise, shall include any period of vacation, any approved leave of absence or any salary continuation or severance pay period and may include service with any former Subsidiary of the Company. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Executive Officer" shall mean those persons who are officers of the Company within the meaning of Rule l6a-1(f) of the Exchange Act and "Named Executive Officer" shall have the meaning set forth in Item 402 of Regulation S-K under the Exchange Act, or any successor thereto, as it may be amended from time to time. "Fair Market Value" shall mean, on any date, the closing price of a Common Share, as reported for such day on a national exchange, or the mean between the closing bid and asked prices for a Common Share on such date, as reported on a nationally recognized system of price quotation. In the event that there are no Common Share transactions reported on such exchange or system on such date, Fair Market Value shall mean the closing price on the immediately preceding date on which Common Share transactions were so reported. "Nonstatutory Stock Option" shall mean an Option that is not intended to be an Incentive Stock Option. "Normal Retirement" shall mean retirement at or after age 65, or such other age as may hereafter be established by resolution of the Board from time to time; provided that, unless the Board by resolution determines otherwise "Early Retirement" shall include retirement after age 55, following not less than 20 years of service with the Company. "Option" shall mean the right to purchase the number of Common Shares specified by the Committee, at a price and for the term fixed by the Committee in accordance with the Plan and reflected in the Award Agreement, and subject to any other limitations and restrictions as this Plan and the Committee shall impose. 2 "Participant" shall mean an Eligible Employee who is selected by the Committee to receive an Award under the Plan. "Performance Period" shall mean the period during which performance measures are established for Performance Shares or Performance Units as determined by the Committee. For Named Executive Officers, the Performance Period shall be determined not later than the time period required by Section 162(m) of the Code to qualify as "performance based compensation" thereunder. "Performance Share" shall mean any contingent right granted under Section 8 to receive a Common Share, which right becomes vested upon the attainment, in whole or in part, of performance objectives determined by the Committee. Performance Unit" shall mean any contingent right granted under Section 8 to receive cash (or, at the discretion of the Committee, Common Shares), which right becomes vested upon the attainment, in whole or in part, of performance objectives determined by the Committee. "Plan" shall mean this EDO Corporation 2006 Long-Term Incentive Plan, as may be amended from time to time. "Predecessor Plans" means the Company's 1996 Long-Term Incentive Plan and 2002 Long-Term Incentive Plan. "Restricted Period" shall mean the period during which a grant of Restricted Shares is subject to forfeiture. "Restricted Share" shall mean a Common Share granted under Section 7 that becomes vested, in whole or in part, upon the completion of such period of service or performance objectives as shall be determined by the Committee. "Stock Appreciation Right" shall mean a contractual right granted under Section 6 to receive cash, Common Shares or a combination thereof "Subsidiary" shall mean any corporation of which the Company possesses directly or indirectly fifty percent (50%) or more of the total combined voting power of all classes of stock of such corporation and any other business organization, regardless of form, in which the Company possesses directly or indirectly fifty percent (50%) or more of the total combined equity interests in such organization. 3. ADMINISTRATION The Plan shall be administered by the Committee that shall consist of at least two directors of the Company chosen by the Board, each of whom is both a "non-employee director" within the meaning of Rule l6b-3 under the Exchange Act and an "outside director" within the meaning of Section 162(m) of the Code. The Committee shall have the responsibility of construing and interpreting the Plan and of establishing and amending such rules and regulations as it deems necessary or desirable for the proper administration of the Plan. Any decision or action taken or to be taken by the Committee, arising out of or in connection with the construction, administration, interpretation and effect of the Plan and of its rules and regulations, shall, to the maximum extent permitted by applicable law, be within its absolute discretion (except as otherwise specifically provided herein) and shall be conclusive and binding upon all Participants and any person claiming under or through any Participant. 4. MAXIMUM AMOUNT OF SHARES AVAILABLE FOR AWARDS. (a) Maximum Number of Shares. The maximum number of Common Shares in respect of which Awards may be made under the Plan shall be a total of 1,200,000 Common Shares. The maximum number of Common Shares in respect of which Awards may be granted to a Participant under this Plan in any 12 month period shall not exceed 200,000 shares, as each such number may be adjusted pursuant to Section 4(c). Whenever shares are received by the Company in connection with the exercise of or payment for any Award granted under the Plan, only the net number of shares actually issued shall be counted against the foregoing limits of 1,200,000 Common Shares and 200,000 Common Shares, respectively. 3 (b) Shares Available for Issuance. Common Shares may be made available from the authorized but unissued shares of the Company or from shares held in the Company's treasury and not reserved for some other purpose. In the event that any Award is payable solely in cash, no shares shall be deducted from the number of shares available for issuance under Section 4(a) by reason of such Award. In addition, if any Award under this Plan in respect of shares is canceled or forfeited for any reason without delivery of Common Shares, the shares subject to such Award shall thereafter again be available for award pursuant to this Plan. (c) Adjustment for Corporate Transactions. In the event that the Committee shall determine that any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares, warrants or rights offering to purchase Common Shares, or other similar event affects the Common Shares such that an adjustment is required to preserve, or to prevent enlargement of, the benefits or potential benefits made available under this Plan, then the Committee may, in such manner as the Committee may deem equitable, (A) adjust any or all of (i) the number and kind of shares that thereafter may be awarded or optioned and sold or made the subject of Stock Appreciation Rights under the Plan, (ii) the number and kinds of shares subject to outstanding Options and other Awards and (iii) the grant, exercise or conversion price with respect to any of the foregoing, or (B) with respect to a person who has an outstanding Option, make provisions for a cash payment of any extraordinary cash dividend or as an alternative means (in whole or in part) of affecting any adjustment deemed required by the Committee to preserve, or to prevent enlargement of, the benefits or potential benefits made available under this Plan with respect to such Option. However, the number of shares subject to any Option or other Award shall always be a whole number. With respect to Awards intended to qualify as "performance-based compensation" under Section 162(m) of the Code, such adjustments shall be made taking into account Sections 409A and 162(m) of the Code, to the extent applicable. 5. STOCK OPTIONS. (a) Grant. Subject to the provisions of the Plan, the Committee shall have the authority to grant Options to an Eligible Employee and to determine (i) the number of shares to be covered by each Option, (ii) the exercise price therefore and (iii) the conditions and limitations applicable to the exercise of the Option. The Committee shall have the authority to grant Nonstatutory Stock Options; provided that Stock Options may not be granted to any Participant who is not an employee of the Company or one of its Subsidiaries at the time of grant. (b) Option Price. The Committee shall establish the exercise price at the time each Option is granted, which price shall not be less than 100% of the Fair Market Value of the Common Shares at the date of grant, except that, for purposes of satisfying the foregoing requirement with respect to a Nonstatutory Stock Option, the Committee may elect to credit against the exercise price payable by a Participant the value of any compensation otherwise payable to the Participant under the terms of the Company's compensation practices and programs that is surrendered, foregone or exchanged pursuant to such rules or procedures as the Committee shall establish from time to time. (c) Exercise. Each Option shall be exercised at such times and subject to such terms and conditions as the Committee may specify in the applicable Award or thereafter; provided, however, that if the Committee does not establish a different exercise schedule at or after the date of grant of an Option, such Option shall become exercisable in full on the third anniversary of the date the Option is granted. The Committee may impose such conditions with respect to the exercise of Options as it shall deem appropriate, including, without limitation, any conditions relating to the application of federal or state securities laws. No shares shall be delivered pursuant to any exercise of an Option unless arrangements satisfactory to the Committee have been made to assure full payment of the option price therefore. Payment of the option price may be made in cash or its equivalent or, if and to the extent permitted by the Committee, by exchanging Common Shares owned by the optionee (which are not the subject of any pledge or other security interest), or by a combination of the foregoing, provided that the combined value of all cash and cash equivalents and the Fair Market Value of any such Common Shares so tendered to the Company, valued as of the date of such tender, is at least equal to such option price. 4 (d) Termination of Employment. Unless the Award Agreement shall otherwise provide or the Committee shall otherwise determine after grant, an Option shall be exercisable following the termination of a Participant's Employment only to the extent provided in this Section 5(d). If a Participant's Employment terminates due to the Participant's (i) death, (ii) Disability, or (iii) Normal Retirement, the then exercisable options held by the Participant at the time of such termination, may be exercised for a period of one year (or such greater or lesser period as the Committee shall determine at or after grant), but in no event after the date the Option otherwise expires. If a Participant's Employment is terminated for Cause (or, if after the Participant's termination of Employment, the Committee determines that the Participant's Employment could have been terminated for Cause had the Participant still been employed or has otherwise engaged in conduct that is detrimental to the interests of the Company, as determined by the Committee in its sole discretion), all Options held by the Participant shall immediately terminate, regardless of whether then exercisable. In the event of a Participant's termination of Employment for any reason not described in the preceding two sentences, the Participant (or, in the event of the Participant's death or Disability during the period during which an Option is exercisable under this sentence, the Participant's beneficiary, estate or legal representative) may exercise any Option that was exercisable at the time of such termination for 90 days (or such greater or lesser period as the Committee shall specify at or after the grant of such Option) following the date of such termination, but in no event after the date the Option otherwise expires. 6. STOCK APPRECIATION RIGHTS. (a) Grant of SARs. The Committee shall have the authority to grant Stock Appreciation Rights in tandem with an Option, in addition to an Option, or freestanding and unrelated to an Option. Stock Appreciation Rights granted in tandem or in addition to an Option may be granted either at the same time as the Option or at a later time. Stock Appreciation Rights shall not be exercisable after the expiration of seven years from the date of grant and shall have an exercise price determined in the same manner as, and subject to the same conditions as apply with respect to, a Nonstatutory Stock Option under Section 5(b). (b) Exercise of SARs. A Stock Appreciation Right shall entitle the Participant to receive from the Company an amount equal to the excess of the Fair Market Value of a Common Share on the date of exercise of the Stock Appreciation Right over the exercise price thereof. The Committee shall determine the time or times at which or the event or events (including, without limitation, a Change of Control) upon which a Stock Appreciation Right may be exercised in whole or in part, the method of exercise and whether such Stock Appreciation Right shall be settled in cash, Common Shares or a combination of cash and Common Shares; provided, however, that unless otherwise specified by the Committee at or after grant, a Stock Appreciation Right granted in tandem with an Option shall be exercisable only at the same time or times as the related Option is exercisable. 7. RESTRICTED SHARES. (a) Grant of Restricted Shares. The Committee may grant Awards of Restricted Shares with or without performance criteria to Eligible Employees at such times and in such amounts, and subject to such other terms and conditions not inconsistent with the Plan, as it shall determine. Each grant of Restricted Shares shall be evidenced by an Award Agreement. Unless the Award Agreement shall otherwise provide or the Committee provides otherwise after the date of grant, stock certificates evidencing any Restricted Shares so granted shall be held in the custody of the Secretary of the Company until the Restricted Period lapses, and, as a condition to the grant of any Award of Restricted Shares, the Participant shall have delivered to the Secretary of the Company a certificate, endorsed in blank, relating to the Common Shares covered by such Award. (b) Termination of Employment. Unless the Award Agreement shall otherwise provide or the Committee otherwise determines after grant, the rights of a Participant with respect to an Award of Restricted Shares outstanding at the time of the Participant's termination of Employment shall be determined under Section 5(d). Unless the Award Agreement shall otherwise provide or the Committee otherwise determines, any portion of any Restricted Shares Award that has not become vested at the date of a Participant's termination of Employment shall be forfeited as of such date. 5 (c) Restricted Period; Restrictions on Transferability during Restricted Period. Unless the Award Agreement shall otherwise provide or otherwise determined by the Committee after the date of grant, the Restricted Period applicable to any Award of Restricted Shares shall lapse, and the shares related to such Award of Restricted Shares shall become freely transferable, at such time as may be determined by the Committee. Restricted Shares may not be sold, assigned, pledged or otherwise encumbered, except as herein provided, during the Restricted Period. Any certificates issued in respect of Restricted Shares shall be registered in the name of the Participant and deposited by such Participant, together with a stock power endorsed in blank, with the Company. (d) Delivery of Shares. Upon the expiration or termination of the Restricted Period and the satisfaction (as determined by the Committee) of any other conditions determined by the Committee, the restrictions applicable to the Restricted Shares shall lapse and a stock certificate for the number of Common Shares with respect to which the restrictions have lapsed shall be delivered, free of all such restrictions, except any that may be imposed by law, to the Participant or the Participant's beneficiary, estate or legal representative, as the case may be. No payment will be required to be made by the Participant upon the delivery of such Common Shares and for cash, except as otherwise provided in Section 11(a) of the Plan. At or after the date of grant, the Committee may accelerate the vesting of any Award of Restricted Shares or waive any conditions to the vesting of any such Award. (e) Rights as a Shareholder; Dividends. Unless the Award Agreement shall otherwise provide or otherwise determined by the Committee after the date of grant, Participants granted Restricted Shares shall be entitled to vote the shares and to receive, either currently or at a future date, as specified by the Committee, all dividends and other distributions paid with respect to those shares, provided that if any such dividends or distributions are paid in Common Shares or other property (other than cash), such shares and other property shall be subject to the same forfeiture restrictions and restrictions on transferability as apply to the Restricted Shares with respect to which they were paid. The Committee will determine whether and to what extent to credit to the account of, or to pay currently to, each recipient of Restricted Shares, an amount equal to any dividends paid by the Company during the Restricted Period with respect to the corresponding number of Common Shares. To the extent provided by the Committee at or after the date of grant, any dividends with respect to cash dividends on the Common Shares credited to a Participant's account shall be deemed to have been invested in Common Shares on the record date established for the related dividend and, accordingly, a number of additional Restricted Shares shall be credited to such Participant's account equal to the greatest whole number that may be obtained by dividing (x) the value of such dividend on the record date by (y) the Fair Market Value of a Common Share on such date. 8. PERFORMANCE AWARDS. (a) Performance Shares and Performance Units. 1. Performance Periods and Grants. Subject to the provisions of the Plan, the Committee shall have the authority to grant Performance Shares and Performance Units to any Eligible Employee and to determine (i) the number of Performance Shares and the number of Performance Units to be granted to each Participant and (ii) the other terms and conditions of such Awards. The Committee shall certify that the applicable performance objectives established by the Committee have been attained prior to the payment of any Award hereunder to a Named Executive Officer and shall establish procedures for determining payout of Awards for other Participants. Such performance objectives may be related to the performance of (i) the Company, (ii) a Subsidiary, (iii) a division or unit of the Company or any Subsidiary, (v) the Participant or (vi) any combination of the foregoing, over a measurement period or periods established by the Committee. Performance Periods may overlap and Participants may participate simultaneously with respect to Performance Shares or Performance Units for which different Performance Periods are prescribed. Unless the Committee otherwise determines at the time, the actual grant of Performance Shares or Performance Units shall not be made until the end of the applicable Performance Period, though the maximum number of Common Shares potentially applicable to such Award under the particular program shall be reserved under the Plan. 2. Performance Objectives. With respect to any Executive Officer, the performance objectives with respect to such Award shall be expressed in terms of any of the following criteria, which may be determined solely by reference to the performance of the Company or a Subsidiary or based on comparative performance relative to other companies: (i) total return to shareholders, (ii) return on equity, (iii) operating income or net income, (iv) return on capital, (v) economic value added, (vi) earnings per Common Share, (vii) earnings 6 before interest, taxes, depreciation and amortization, (viii) cost reductions or savings, (ix) increase in surplus, (x) productivity improvements, (xi) return on invested capital, (xii) market price of the Common Shares, and (xii) total shareholder return. The Committee may, at any time and from time to time, change the performance objectives applicable with respect to future any Performance Shares or Performance Units to reflect such factors, including, without limitation, changes in a Participant's duties or responsibilities or changes in business objectives (e.g., from corporate to Subsidiary or business unit performance or vice versa), as the Committee shall deem necessary or appropriate. Payment for Performance Shares or Performance Units shall be made by the Company in Common Shares, cash or in any combination thereof, as determined by the Committee. 3. Adjustments. The Committee is authorized at any time during or after a Performance Period to reduce or eliminate the Performance Share Award of any Participant for any reason, including, without limitation, changes in the position or duties of any Participant with the Company during or after a Performance Period, whether due to any termination of employment (including death, disability, retirement, voluntary termination or termination with or without cause) or otherwise. In addition, to the extent necessary to preserve the intended economic effects of the Plan to the Company and the Participant, the Committee shall adjust performance objectives, the Performance Share Awards or Performance Units or each of these to take into account: (i) a change in corporate capitalization, (ii) a corporate transaction, such as any merger of the Company or any subsidiary into another corporation, any consolidation of the Company or any Subsidiary into another corporation, any separation of the Company or any Subsidiary (including a spin-off or the distribution of stock or property of the Company or any subsidiary), any reorganization of the Company or any subsidiary or a large, special and non-recurring dividend paid or distributed by the Company (whether or not such reorganization comes within the definition of Section 368 of the Code), (iii) any partial or complete liquidation of the Company or any Subsidiary or (iv) a change in accounting or other relevant rules or regulations; provided, however, that no adjustment hereunder shall be authorized or made if and to the extent that the Committee determines that such authority or the making of such adjustment would cause the Performance Shares or Performance Units to fail to qualify as "qualified performance-based compensation" under Section 162(m) of the Code with respect to a particular Participant. (b) Termination of Employment. Unless the Committee otherwise determines at or after grant, the rights of a Participant with respect to an Award of Performance Shares or Performance Units where the applicable Performance Period has not lapsed at the time of the Participant's termination of Employment shall be determined under this Section 8(b). In the event a Participant terminates employment for any reason during a Performance Period, he or she (or his or her Beneficiary, in the case of death) shall not be entitled to receive any Performance Award for such Performance Period unless the Committee, in its sole and absolute discretion, elects to pay all or any part of a Performance to such Participant. in the event that a Participant's Employment terminates due to the Participant's (i) death, (ii) Disability, or (iii) Normal Retirement, any Award of Performance Shares or Performance Units shall be forfeited; provided that, the Committee may at the end of the applicable Performance Period make the award as to that number of shares or units that is equal to that percentage, if any, of such award that would have been earned based on the attainment or partial attainment of such performance objectives. In all other cases, any portion of any Award of Performance Shares or Performance Units that has not become nonforfeitable at the date of a Participant's termination of Employment shall be forfeited as of such date. (c) Awards Nontransferable Performance Shares or Performance Units shall not be deemed granted until the end of the applicable Performance Period and may not be sold, assigned, pledged or otherwise encumbered, except as herein provided, during the Performance Period. Upon grant of the Performance Shares or payout of Performance Units, in the case of payouts in Common Shares, the Common Shares issuable may be subject to such restrictions as are determined by the Committee. (d) Award of Dividend Equivalents. Unless otherwise determined by the Committee at or after the date of grant, Participants granted Performance Shares or Performance Units shall be entitled to receive, either currently or at a future date, as specified by the Committee, all dividends and other distributions paid with respect to those shares and units, provided that if any such dividends or distributions are paid in Common Shares or other property (other than cash), such shares and units and other property shall be subject to the same forfeiture restrictions and restrictions on transferability as apply to the Performance Shares and Performance Units with respect to which they were paid. The Committee will determine whether and to what extent to credit to the account of, or to pay currently to, each recipient of Performance Shares or Performance Units, an amount equal to any dividends paid by the Company during the period of deferral with respect to the corresponding number of Common Shares ("Dividend Equivalents"). To the extent provided by the Committee at or after the date of grant, any Dividend Equivalents with respect to cash dividends on the Common Shares credited to a Participant's 7 account shall be deemed to have been invested in Common Shares on the record date established for the related dividend and, accordingly, a number of additional Performance Shares or Performance Units shall be credited to such Participant's account equal to the greatest whole number that may be obtained by dividing (x) the value of such Dividend Equivalent on the record date by (y) the Fair Market Value of a Common Share on such date. Amounts that may become due hereunder shall be paid in accordance with Section 409A of the Code to the extent applicable. 9. STOCK IN LIEU OF CASH. The Committee may grant Awards or Common Shares in lieu of all or a portion of an award otherwise payable in cash to an Executive Officer pursuant to any bonus or incentive compensation plan of the Company. If shares are issued in lieu of cash, the number of Common Shares to be issued shall be the greatest number of whole shares that has an aggregate Fair Market Value on the date the cash would otherwise have been payable pursuant to the terms of such other plan equal to or less than the amount of such cash. 10. CHANGE IN CONTROL. (a) Accelerated Vesting and Payment. Subject to the provisions of Section 10(b) below, in the event of a Change in Control, each Option and Stock Appreciation Right shall promptly be canceled in exchange for a payment in cash of an amount equal to the excess of the Change in Control Price over the exercise price for such Option or the exercise price for such Stock Appreciation Right, whichever is applicable; the Restricted Period applicable to all Restricted Shares, and the Performance Period applicable to Performance Shares and Performance Units shall expire and all such shares shall become non forfeitable and immediately transferable and the Common Shares with respect thereto shall be immediately payable. (b) Alternative Awards. Notwithstanding Section 10(a), no cancellation, acceleration of exercisability, vesting, cash settlement or other payment shall occur with respect to any Award or any class of Awards if the Committee reasonably determines in good faith prior to the occurrence of a Change in Control that such Award or class of Awards shall be honored or assumed, or new rights substituted therefor (such honored, assumed or substituted award hereinafter called an "Alternative Award") by a Participant's new employer (or the parent or a subsidiary of such employer) immediately following the Change in Control, provided that any such Alternative Award must: (i) be based on stock that is traded on an established securities market, or which will be so traded within 60 days following the Change in Control; (ii) provide such Participant (or each Participant in a class of Participants) with rights and entitlements substantially equivalent to or better than the rights and entitlements applicable under any such Award or class of Awards, including, but not limited to, an identical or better exercise or vesting schedule and identical or better timing and methods of payment; (iii) have substantially equivalent economic value to such Award or class of Awards (determined by the Committee as constituted immediately prior to the Change in Control, in its sole discretion, promptly after the Change in Control); and (iv) have terms and conditions that provide that in the event that the Participant's Employment is involuntarily terminated or constructively terminated (other than for Cause) upon or following such Change in Control, any conditions on a Participant's rights under, or any restrictions on transfer or exercisability applicable to, each such Alterative Award shall be waived or shall lapse, as the case may be. For this purpose, a constructive termination shall mean a termination by a Participant following a material reduction in the Participant's compensation, a material reduction in the Participant's responsibilities or the relocation of the Participant's principal place of Employment to another location a material distance farther away from the Participant's home, in each case, without the Participant's prior written consent. 8 11. GENERAL PROVISIONS. (a) Withholding. The Company shall have the right to deduct from all amounts paid to a Participant in cash (whether under this Plan or otherwise) any taxes required by law to be withheld in respect of Awards under this Plan. In the case of any Award satisfied in the form of Common Shares, no Common Shares shall be issued unless and until arrangements satisfactory to the Committee shall have been made to satisfy any withholding tax obligations applicable with respect to such Award. Without limiting the generality of the foregoing and subject to such terms and conditions as the Committee may impose, the Company shall have the right to retain, or the Committee may, subject to such terms and conditions as it may establish from time to time, permit Participants to elect to tender, Common Shares (including Common Shares issuable in respect of an Award) to satisfy, in whole or in part, the amount required to be withheld. (b) Awards. Each Award hereunder shall be evidenced in writing. The written agreement shall be delivered to the Participant and shall incorporate the terms of the Plan by reference and specify the terms and conditions thereof and any rules applicable thereto. (c) Nontransferability. Unless the Committee shall permit (on such terms and conditions as it shall establish) an Award to be transferred to a member of the Participant's immediate family or to a trust or similar vehicle for the benefit of such immediate family members (collectively, the "Permitted Transferees"), no Award shall be assignable or transferable except by will or the laws of descent and distribution, and except to the extent required by law, no right or interest of any Participant shall be subject to any lien, obligation or liability of the Participant. Except as otherwise expressly provided in this Plan, all rights with respect to Awards granted to a Participant under the Plan shall be exercisable during the Participant's lifetime only by such Participant or, if applicable, the Permitted Transferees. (d) No Right to Employment. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to Employment. Further, the Company and each Subsidiary expressly reserves the right at any time to terminate the Employment of a Participant free from any liability or any claim under the Plan, except as provided herein or in any agreement entered into with respect to an Award. (e) No Rights to Awards; No Shareholder Rights. No Participant or Eligible Employee shall have any claim to be granted any Award under the Plan, and there is no obligation of uniformity of treatment of Participants and Eligible Employees. Subject to the provisions of the Plan and the applicable Award, no person shall have any rights as a shareholder with respect to any Common Shares to be issued under the Plan prior to the issuance thereof. (f) Forfeiture of Gains on Exercise Except following a Change in Control, if the Participant terminates employment in breach of any covenants and conditions subsequent set forth in Section 11(g) and becomes employed by a competitor of the Company within one year after the date of exercise of any Option or the receipt of any Award, the Participant shall pay to the Company an amount equal to any gain from the exercise of the Option or the value of the Award other than Options, in each case measured by the amount reported as taxable compensation to the Participant by the Company for federal income tax purposes and in each case without regard to any subsequent fluctuation in the market price of the shares of Common Shares of the Company. Any such amount due hereunder shall be paid by the Participant within thirty days of becoming employed by a competitor. By accepting an Option or other Award hereunder, the Participant is authorizing the Company to withhold, to the extent permitted by law, the amount owed to the Company hereunder from any amounts that the Company may owe to the Participant in any capacity whatsoever. 9 (g) Condition Subsequent. Except after a Change in Control, the exercise of any Option or Stock Appreciation Right and the receipt of any Award shall be subject to the satisfaction of the following conditions subsequent: (i) that Participant refrain from engaging in any activity that in the opinion of the Committee is competitive with any activity of the Company or any Subsidiary, excluding any activity undertaken upon the written approval or request of the Company, (ii) that Participant refrain from otherwise acting in a manner inimical or in any way contrary to the best interests of the Company, and (iii) that the Participant furnish the Company such information with respect to the satisfaction of the foregoing conditions subsequent as the Committee shall reasonably request. In addition, except as may otherwise be excused by action of the Committee, the Participant by the exercise of the Option or the receipt of the Award agrees to remain in the employ of the Company, unless earlier terminated by the Company or by the Participant by reason of his or her death, disability or retirement. (h) Construction of the Plan. The validity, construction, interpretation, administration and effect of the Plan and of its rules and regulations, and rights relating to the Plan, shall be determined solely in accordance with the laws of the State of New York. (i) Legend. To the extent any stock certificate is issued to a Participant in respect of an Award of Restricted Shares under the Plan prior to the expiration of the applicable Restricted Period, such certificate shall be registered in the name of the Participant and shall bear an appropriate legend. Upon the lapse of the Restricted Period with respect to any such Restricted Shares, the Company shall issue or have issued new share certificates without a legend in exchange for those previously issued. (j) Effective Date. The effective date of this Plan is January 1, 2007. The Plan will become effective as of that date provided that the Plan receives the approval, within 12 months of its approval by the Board, and the shareholders of the Company. If such approval is not forthcoming, the Plan and all Awards shall be null and void. No Awards may be granted under the Plan after December 31, 2017. Subject to shareholder approval of the Plan, if the Committee so determines and the holder thereof shall consent to any amendment to any outstanding award that has an adverse affect on such holder's rights thereunder, the provisions of the Plan shall apply to, and govern, existing awards under the Predecessor Plans and, such awards shall be amended to provide such holder with any additional benefits available hereunder. (k) Amendment of Plan. The Board or the Committee may amend, suspend or terminate the Plan or any portion thereof at any time, provided that no amendment shall be made without shareholder approval if such amendment would: increase the number of Common Shares subject to the Plan, except pursuant to Section 4(c) change the price at which Options may be granted; or remove the administration of the Plan from the Committee. Without the written consent of an affected Participant, no termination, suspension or modification of the Plan shall adversely affect any right of such Participant under the terms of an Award granted before the date of such termination, suspension or modification. To the Committee determined that an amendment to the Plan or to any Awards issued under the Plan is required to comply with Section 409A of the Code with respect to any Participant or Section 162(m) of the Code with respect to any Named Executive Officer, the Committee may, without stockholder approval or approval of such Participant, amend the Plan or any Award hereunder, retroactively or prospectively, to the extent it determines necessary in order to comply with Sections 409A or 162(m) of the Code to preserve an exemption therefrom, the Company's Federal income tax deduction for compensation paid pursuant to the Plan and for avoid penalties to a Participant or the Company. To the extent that any Awards issued hereunder are or become subject to Section 409A of the Code, the provisions of this Plan and such Award shall be interpreted to comply with the requirements of such section. (l) Application of Proceeds. The proceeds received by the Company from the sale of its shares under the Plan will be used for general corporate purposes. (m) Compliance with Legal and Exchange Requirements. 10 The Plan, the granting and exercising of Awards thereunder, and the other obligations of the Company under the Plan, shall be subject to all applicable federal and state laws, rules, and regulations, and to such approvals by any regulatory or governmental agency as may be required. The Company, in its discretion, may postpone the granting and exercising of Awards, the issuance or delivery of Common Shares under any Award or any other action permitted under the Plan to permit the Company, with reasonable diligence, to complete such stock exchange listing or registration or qualification of such Common Shares or other required action under any federal or state law, rule, or regulation and may require any Participant to make such representations and furnish such information as it may consider appropriate in connection with the issuance or delivery of Common Shares in compliance with applicable laws, rules, and regulations. The Company shall not be obligated by virtue of any provision of the Plan to recognize the exercise of any Award or to otherwise sell or issue Common Shares in violation of any such laws, rules, or regulations; and any postponement of the exercise or settlement of any Award under this provision shall not extend the term of such Awards, and neither the Company nor its directors or officers shall have any obligation or liability to the Participant with respect to any Award (or Common Shares issuable thereunder) that shall lapse because of such postponement. (n) Deferrals. The Committee may postpone the exercising of Awards, the issuance or delivery of Common Shares under any Award or any action permitted under the Plan to prevent the Company or any of its Subsidiaries from being denied a federal income tax deduction with respect to any Award other than an Incentive Stock Option. Any such deferral shall comply with the provisions of Section 409A of the Code to the extent it is applicable. (o) Beneficiary The Beneficiary of a Participant shall be the Participant's estate, which shall be entitled to receive the Award, if any, payable under the Plan upon his or her death. A Participant may file with the Company a written designation of one or more persons as a Beneficiary in lieu of his or her estate, who shall be entitled to receive the Award, if any, payable under the Plan upon his or her death, subject to the enforceability of the designation under applicable law at that time. A Participant may from time-to-time revoke or change his or her Beneficiary designation, with or without the consent of any prior Beneficiary as required by applicable law, by filing a new designation with the Company. Subject to the foregoing, the last such designation received by the Company shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Company prior to the Participant's death, and in no event shall it be effective as of a date prior to such receipt. If the Committee is in doubt as to the right of any person to receive such Award, the Company may retain such Award, without liability for any interest thereon, until the Committee determines the rights thereto, or the Company may pay such Award into any court of appropriate jurisdiction and such payment shall be a complete discharge of the liability of the Company therefor. Adopted: _______________________________ 11 EX-31.1 3 y23701exv31w1.txt 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 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: July 31, 2006 /s/ JAMES M. SMITH ---------------------------------------- Title: Chairman, President and Chief Executive Officer EX-31.2 4 y23701exv31w2.txt 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 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: July 31, 2006 /s/ FREDERIC B. BASSETT ---------------------------------------- Title: Senior Vice President-Finance, Treasurer and Chief Financial Officer EX-32 5 y23701exv32.txt CERTIFICATION EXHIBIT 32 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of EDO Corporation, a New York corporation (the "Company"), does hereby certify that: The Quarterly Report on Form 10-Q for the quarter ended June 24, 2006 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: July 31, 2006 /s/ JAMES M. SMITH --------------------------------------- Name: James M. Smith Title: Chairman, President and Chief Executive Officer Dated: July 31, 2006 /s/ FREDERIC B. BASSETT ---------------------------------------- Name: Frederic B. Bassett Title: Senior Vice President-Finance, Treasurer and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----