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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934
For Quarter Ended September 27, 1997
Commission File Number 1-3985
EDO CORPORATION
(Exact name of registrant as specified in its charter)
New York No. 11-0707740
(State or other jurisdiction (I.R.S Employee
of incorporation or organization) Identification No.)
60 East 42nd Street, Suite 5010, New York, NY 10165
(Address of principal executive offices) (Zip Code)
Telephone Number (212) 716-2000
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Outstanding at Sept. 27, 1997
Common shares, par value $1 per share 6,326,194
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EDO CORPORATION
INDEX
Page No.
Face Sheet 1
Index 2
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
September 27, 1997 and
December 31, 1996 3
Consolidated Statements of Operations -
Three Months Ended
September 27, 1997 and
September 28, 1996 4
Consolidated Statements of Operations -
Nine Months Ended
September 27, 1997 and
September 28, 1996 5
Consolidated Statements of Cash Flows -
Nine Months Ended
September 27, 1997 and
September 28, 1996 6
Other Financial Information 7
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 8-10
Part II Other Information 11
Signature 12
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PART I - FINANCIAL INFORMATION
Item I. Financial Statements
EDO Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands)
Assets Sept. 27, 1997 Dec. 31, 1996
(unaudited)
Current assets:
Cash and cash equivalents $ 32,462 $ 20,745
Accounts receivable 34,378 32,518
Inventories 7,828 7,994
Prepayments 2,579 2,678
--------- ---------
Total current assets 77,247 63,935
Property, plant and equipment, net 12,870 12,968
Notes Receivable 3,225 3,900
Cost in excess of fair value of net
assets acquired, net 6,884 7,159
Other assets 7,613 6,261
--------- ---------
$107,839 $ 94,223
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued
liabilities $ 24,505 $ 21,517
Contract advances and deposits 10,720 4,809
Net liabilities of discontinued
operations - 227
--------- ---------
Total current liabilities 35,225 26,553
Long-term debt 29,317 29,317
ESOT loan obligation 10,695 11,676
Postretirement obligation 3,995 3,995
Environmental obligation 2,459 2,859
Shareholders' Equity
ESOP Convertible Cumulative Preferred
Shares Series A, par value $1 per share,
(liquidation preference $213.71 per share),
authorized 500,000 shares (issued 65,346
in 1997, 67,832 in 1996) 65 68
Common shares, par value $1 per share,
authorized 25,000,000 shares, (issued
8,453,902 in both periods) 8,454 8,454
Additional paid-in capital 32,772 35,438
Retained earnings 26,191 22,368
--------- ---------
67,482 66,328
Less: Treasury shares at cost
2,127,708 shares in 1997 and
2,409,136 shares in 1996 (29,565) (34,240)
ESOT loan obligation (10,695) (11,676)
Deferral under long-term
incentive plan (1,074) (589)
--------- ---------
Total shareholders' equity 26,148 19,823
--------- ---------
$107,839 $ 94,223
========= =========
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EDO Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands except per share amounts)
For the three months ended
Sept. 27, 1997 Sept. 28, 1996
(unaudited)
Continuing operations:
Income
Net Sales $ 23,246 $ 23,107
Other 30 70
--------- ---------
23,276 23,177
Costs and expenses
Cost of sales 17,073 17,442
Selling, general and administrative 3,642 3,652
Research and development 645 216
Post retirement health care curtailment gain - ( 7,120)
--------- ---------
21,360 14,190
Earnings from continuing operations 1,916 8,987
Non-operating income (expense)
Interest income 535 331
Interest expense (553) (539)
--------- ---------
Other, net (20) (25)
--------- ---------
( 38) (233)
Earnings from continuing operations
before Federal income taxes 1,878 8,754
Provision for Federal income taxes - -
--------- ---------
Earnings from continuing operations 1,878 8,754
Loss from discontinued operations - (7,619)
--------- ---------
Net earnings 1,878 1,135
Dividends on preferred shares 281 293
--------- ---------
Net earnings available for Common Shares $ 1,597 $ 842
========= =========
Earnings (Loss) per Common Share:
Primary:
Continuing operations $ 0.25 $ 1.38
Discontinued operations - (1.24)
--------- ---------
$ 0.25 $ 0.14
========= =========
Fully Diluted:
Continuing operations $ 0.22 $ 1.18
Discontinued operations - (1.06)
--------- ---------
$ 0.22 $ 0.12
========= =========
Average shares outstanding (Primary) 6,502 6,141
========= =========
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EDO Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands except per share amounts)
For the nine month ended
Sept. 27, 1997 Sept. 28, 1996
(unaudited)
Continuing operations:
Income
Net Sales $ 70,143 $ 71,547
Other 83 361
--------- ---------
70,226 71,908
Costs and expenses
Cost of sales 52,252 55,365
Selling, general and administrative 10,992 10,708
Research and development 1,447 558
Post retirement health care curtailment gain - (7,120)
--------- ---------
64,691 59,511
Earnings from continuing operations 5,535 12,397
Non-operating income (expense)
Interest income 1,296 1,092
Interest expense ( 1,639) ( 1,646)
Other, net (50) (75)
--------- ---------
(393) (629)
Earnings from continuing operations
before Federal income taxes 5,142 11,768
Provision for Federal income taxes - -
--------- ---------
Earnings from continuing operations 5,142 11,768
Loss from discontinued operations - (8,637)
--------- ---------
Net earnings 5,142 3,131
Dividends on preferred shares 852 889
--------- ---------
Net earnings available for Common Shares $ 4,290 $ 2,242
========= =========
Earnings (Loss) per Common Share:
Primary:
Continuing operations $ 0.68 $ 1.80
Discontinued operations - (1.43)
--------- ---------
$ 0.68 $ 0.37
========= =========
Fully Diluted:
Continuing operations $ 0.60 $ 1.53
Discontinued operations - (1.21)
--------- ---------
$ 0.60 $ 0.32
========= =========
Average shares outstanding (Primary) 6,350 6,060
========= =========
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EDO Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
For the nine months ended
Sept. 27, 1997 Sept. 28, 1996
(unaudited)
Operating activities:
Earnings from continuing operations $ 5,142 $ 11,768
Adjustments to earnings from continuing
operations:
Depreciation and amortization 4,463 4,245
Post retirement health care curtailment gain - (7,120)
Deferred compensation expense and
Directors' fees 1,524 283
Changes in:
Accounts receivable (1,860) (7,725)
Inventories 166 (360)
Prepayments, other assets and other (2,305) (105)
Accounts payable and accrued liabilities 2,534 1,124
Contract advances and deposits 5,911 (1,693)
--------- ---------
Cash provided by continuing operations 15,575 417
Net cash provided (used) by discontinued operations 227 (1,095)
Investing activities:
Purchase of property, plant and equipment (3,001) (2,950)
Net proceeds from sale of assets - 2,000
--------- ---------
Cash used by investing activities (3,001) (950)
Financing activities:
Payments received on notes receivable 238 -
Payment of common share cash dividends (467) -
Payment of preferred share cash dividends (852) (889)
Other, net (3) (3)
--------- ---------
Cash used by financing activities (1,084) (892)
Increase (decrease) in cash and cash equivalents 11,717 (2,520)
Cash and cash equivalents at beginning
of year 20,745 22,918
--------- ---------
Cash and cash equivalents at end of period $ 32,462 $ 20,398
========= =========
Supplemental disclosures:
Cash paid for: Interest $ 1,026 $ 1,055
Income taxes 777 150
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Other Financial Information
Item 1.
Discontinued Operations
In October 1996, the Company announced its decision to discontinue its
energy-related businesses, consisting of the Company's 50.4% interest in EDO
(Canada) Limited, EDO Automotive Natural Gas Inc.("EDO ANGI"), and EDO Energy
Corporation.
On April 14, 1997 the Company announced the sale of the EDO ANGI business unit
to Hurricane Compressors, Inc., an established manufacturer and supplier of
natural gas fueling stations.
On April 25, 1997 EDO (Canada) Limited filed for protection from creditors
under the Companies' Creditors Arrangement Act of Canada. Subsequent thereto,
on May 13, 1997, EDO (Canada) Limited made a voluntary assignment in bankruptcy
pursuant to the Bankruptcy and Insolvency Act of Canada. The terms of the
EDO-ANGI sale and the EDO (Canada) Limited filings did not result in a change
to the reserves established in the third quarter of 1996.
The net operating results of these entities have been reported as "Loss from
discontinued operations"; the net liabilities of these entities have been
reported as "Net liabilities of discontinued operations"; and the cash flows of
these entities have been reported as "Net cash provided (used) by discontinued
operations."
Unaudited Financial Statements
The accompanying unaudited financial statements and other related financial
information furnished reflect all adjustments which are, in the opinion of
management, necessary to present a fair statement of the operating results for
the nine months ended September 27, 1997 and September 28, 1996.
Backlog Data
The dollar amount of backlog of firm orders at September 27, 1997 was
$111,954,000 compared to $81,754,000 at September 28, 1996.
Inventories
Inventories are summarized by major classification as follows:
Sept. 27, 1997 Dec. 31, 1996
(in thousands)
Raw material and supplies $ 3,457 $ 4,226
Work in process 3,966 3,380
Finished goods 405 388
------- -------
$ 7,828 $ 7,994
======= =======
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Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion relates only to the continuing operations of EDO
Corporation in its two business segments: Defense and Space Systems; and
Industrial Products.
Results of Operations
First Nine Months of 1997 compared with First Nine Months of 1996
Sales in the first nine months of 1997 were $70.1 million, 2% less than the
$71.5 million reported in 1996. Sales in the Defense and Space Systems segment
decreased 1% to $47.8 million. Higher sales in the Marine and Aircraft Systems
and Combat Systems business units were offset by lower sales in the
Electro-Optics business unit. The Industrial Products segment sales decreased
3% to $22.3 million. Sales increases in the Ceramics and Fiber Science
business units were offset by lower sales in the Acoustic Products business
unit.
Earnings from operations (before general corporate expense allocations) in the
first nine months of 1997 were $9.1 million, compared with $8.3 million in 1996
(excluding the post retirement health care curtailment gain of $7.1 million).
Operating earnings in the Defense and Space Systems segment increased to $5.7
million in the first nine months of 1997 from $4.8 million for the same period
in 1996. Increased earnings from both the Marine and Aircraft Systems and
Combat Systems business units were partially offset by a decrease in earnings
at the Electro-Optics business unit. The Industrial Products segment recorded
operating earnings of $3.4 million in the first nine months of 1997, compared
with $3.5 million for the same period in 1996. Increased earnings at the
Ceramics business unit were offset by lower earnings at the Fiber Science and
Acoustic Products business units.
Selling, general and administrative expenses in the first nine months of 1997
were $11.0 million, compared with $10.7 million reported in the first nine
months of 1996.
Company sponsored research and development expenditures increased 159% from the
like 1996 period to $1.4 million. While this increase was recorded principally
in the Defense and Space Systems segment, each of our business units recorded
higher funding levels in the first three quarters of 1997 compared with 1996.
This increased level of expenditure of Company funds is consistent with the
Company's current strategy of increased investment in product development for
products that will contribute to future growth.
Interest expense, net of interest income was $0.3 million in the first nine
months of 1997, compared with $0.6 million in the like period of 1996. This
reduction was due to increased interest income as a result of higher levels of
invested cash.
The Company reported net earnings available for common shares of $4,290,000 or
$0.68 per share in the first nine months of 1997, compared to net earnings of
$2,242,000, or $0.37 per share a year ago. Prior year results were negatively
impacted by the losses recorded in the discontinued operations, partially
offset by a gain from curtailment of post-retirement health care benefits.
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Earnings per share calculations were based on a weighted average of 6.4 million
shares outstanding for the first nine months of 1997 and 6.1 million shares for
the like period in 1996.
Liquidity and Capital Resources
The Company's cash and cash equivalents increased $11.7 million from December
31, 1996 to $32.5 million at September 27, 1997. The increase results from net
cash flow from operations of $15.6 million offset by $3.0 million for purchases
of capital equipment and $1.3 million for both common and preferred dividends.
The Company has an ESOT loan obligation that is currently $10.7 million. The
repayment of this obligation is funded principally through dividends on the
Company's ESOP Convertible Cumulative Preferred Shares, Series A. The Company
also has outstanding $29.3 million of 7% Convertible Subordinated Debentures
Due 2011. In accordance with authorization from the Board of Directors, the
Company has previously acquired $5.7 million of such debentures. These
debentures will be used to satisfy approximately three years of sinking fund
requirements that commenced in December of 1996.
The Company maintains a $15.0 million secured line of credit with a bank for
short-term cash borrowing and letters of credit (the "Agreement"). This
Agreement expires on June 30, 1998 and limits the cash portion of potential
borrowings to $10 million There have been no cash borrowings under the
Agreement.
Capital expenditures in the first nine months of 1997 amounted to $3.0 million,
the same as reported in the comparable period in 1996. The total expenditure
for 1997 is not expected to be significantly higher than the $4.2 million spent
in 1996.
In the third quarter of 1994, the Board of Directors suspended cash dividends
on the Company's common shares due to the financial circumstances at that time.
In 1997, the Board of Directors declared quarterly cash dividends of $0.025 per
common share in each of the first three quarters.
The Company believes it has adequate liquidity and sufficient capital resources
to fund its plans.
Backlog
The backlog of unfilled orders at September 27, 1997 stood at $112.0 million
compared with $81.8 million a year ago and $103.0 million at December 31, 1996.
The increased backlog occurred primarily in the Company's Defense and Space
Systems segment.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act of
1995
The statements in this Quarterly Report on Form 10-Q and in oral statements
which 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
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Page 10
27A of the Securities Act of 1993 and Section 21E of the Securities Exchange
Act of 1934. Forward-looking information is 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.
U.S. and international military program sales, follow-on procurement, contract
continuance, future program awards and 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;
changes in U.S. and international government procurement timing, strategies
and practices; and the general state of world military readiness and
deployment.
Commercial satellite programs and equipment sales, follow-on procurement,
contract continuance and future program awards 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 the
control of the Company;
development of sufficient customer base to support a particular satellite
constellation program;
Other commercial product sales are subject to:
success of product development programs currently underway or planned;
competitiveness of current and future product production costs and prices;
market and customer base development for 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 revenues and underestimation of
anticipated costs on specific programs.
The Company has no obligation to update any forward-looking statements.
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PART II - OTHER INFORMATION
Item 6.(a) Exhibits
4(a) - Amendment No. 11 to the Guarantee Agreement referred to in
exhibit 4(b) to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, effective as of October 31, 1997
27 - Financial Data Schedule
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SIGNATURE
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 thereunto duly authorized.
EDO Corporation
(Registrant)
by: K. A. Paladino
-------------------------------
K. A. Paladino - Vice President
Finance and Treasurer
(Principal Financial Officer)
Dated: November 10, 1997
AMENDMENT NO. 11 TO GUARANTEE AGREEMENT
AMENDMENT NO. 11 (the "Amendment") dated as of October 31, 1997 to that
certain Guarantee Agreement dated as of July 12, 1988 as amended by Amendment
and Waiver dated as of April 12, 1990, Amendment No. 2 dated as of October 9,
1990, Amendment No. 3 dated as of April 8, 1991, Amendment No. 4 dated March
26, 1992, Amendment No. 5 dated June 9, 1992, Amendment No. 6 dated July 30,
1993, Amendment No. 7 dated March 3, 1994, effective as of December 31, 1993,
Waiver and Amendment No. 8 to Guarantee Agreement dated February 10, 1995,
Amendment No. 9 to Guarantee Agreement dated as of June 30, 1995, Amendment No.
10 to Guarantee Agreement dated as of June 30, 1996 and Letter Agreement dated
May 12, 1997 (as so amended, the "Existing Guarantee") made by EDO CORPORATION,
a New York corporation (the "Guarantor") in favor of FLEET BANK, N.A.
(formerly NatWest Bank N.A. and hereinafter referred to as the "Bank") (as
successor in interest to Manufacturers Hanover Trust Company ("Manufacturers").
W I T N E S S E T H:
WHEREAS, the Guarantor and Manufacturers were parties to the Existing
Guarantee;
WHEREAS, the Bank succeeded to all of Manufacturers' right, title and
interest under the Guarantee Agreement pursuant to that certain
Assignment and Assumption Agreement dated as of June 8, 1990 between
Manufacturers and the Bank;
WHEREAS, the Guarantor has requested that the Bank amend certain
provisions of the Existing Guarantee;
WHEREAS, the Bank has agreed to such request subject to the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises contained herein
and other good and valuable consideration the receipt of which is hereby
acknowledged, the parties hereto agree as follows:
1. The Existing Guarantee is hereby amended as follows:
(a) The definition of "Consolidated Total Liabilities" appearing in
Schedule I is deleted in its entirety and the following is substituted
therefor:
"'Consolidated Total Liabilities': at a particular date, all items
which would, in conformity with GAAP, be classified as liabilities on a
consolidated balance sheet of the Guarantor and its Subsidiaries as at such
date, but in any event including (a) indebtedness arising as a result of
drawing(s) or the creation of acceptance(s) under letter(s) of credit issued by
the Bank for the account of the Guarantor or any Subsidiary (except that
portion, if any, of such liabilities which are fully cash collateralized), (b)
all liabilities secured by any Lien on any property owned by the Guarantor or
any Subsidiary even though such Person has not assumed or otherwise become
liable for the payment thereof, and (c) any liability of the Guarantor or any
Subsidiary or a Commonly Controlled Entity to a Multiemployer Plan."
(b) The following new definitions are added in the appropriate
alphabetical order in Schedule I:
"'EBITDA': for any period, with respect to the Guarantor, on a
consolidated basis, determined in accordance with GAAP, the sum of net income
(or net loss) for such period plus, the sum of all amounts treated as expenses
for: (a) interest, (b) depreciation, (c) amortization, and (d) all accrued
taxes on or measured by income to the extent included in the determination of
such net income (or net loss); provided, however, that net income (or net loss)
shall be computed without giving effect to extraordinary losses or gains."
"'Fixed Charge Ratio': as at the last day of any fiscal quarter,
with respect to the immediately preceding four (4) fiscal quarters of the
Guarantor ending on such date, the ratio of (x) EBITDA, to (y) the sum of
Consolidated Interest Expense, cash dividends, capital expenditures, income
taxes and scheduled payments in respect of Subordinated Debt."
(c) A new subsection 10(b)(xvii) is added reading as follows:
"(xvii) Fixed Charge Ratio. Permit, as of the last day of each
fiscal quarter of the Guarantor, the Fixed Charge Ratio to be less than 1.4 to
1.0."
2. Defined terms used in this Amendment No. 11 not otherwise defined
herein shall have the meanings set forth in the Existing Guarantee unless the
context otherwise requires. Except as expressly amended hereby, all of the
terms and conditions of the Existing Guarantee shall remain in full force and
effect.
3. This Amendment No. 11 shall be governed by and construed in
accordance with the laws of the State of New York and may be executed in any
number of counterparts, all of which taken together, shall constitute one and
the same document.
IN WITNESS WHEREOF, the parties hereto have set their signatures as of
the date first above written.
EDO CORPORATION
By__________________________
Title
FLEET BANK, N.A.
By__________________________
Title
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-27-1997
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<RECEIVABLES> 34,378
<ALLOWANCES> 384
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<BONDS> 40,012
<COMMON> 8,454
0
65
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<SALES> 70,143
<TOTAL-REVENUES> 70,226
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