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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 March 27, 1999
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 requirement 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 Mar. 27, 1999
- ------------------------------------- ----------------------------
Common shares, par value $1 per share 6,642,268
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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 -
March 27, 1999 and
December 31, 1998 3
Consolidated Statements of Earnings -
Three Months Ended
March 27, 1999 and
March 28, 1998 4
Consolidated Statements of Cash Flows -
Three Months Ended
March 27, 1999 and
March 28, 1998 5
Notes to Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 8-11
Part II Other Information 12
Signature 13
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EDO Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
Assets Mar. 27, 1999 Dec. 31, 1998
(unaudited)
Current assets:
Cash and cash equivalents $ 10,565 $ 21,801
Marketable securities 16,038 11,519
Accounts receivable 44,749 39,853
Inventories 10,269 9,830
Deferred tax asset, net 1,280 1,280
Prepayments and other 2,745 2,177
--------- ---------
Total current assets 85,646 86,460
Property, plant and equipment, net 13,661 13,964
Notes receivable 2,088 2,300
Cost in excess of fair value of net
assets acquired, net 11,578 11,736
Other assets 12,207 12,293
--------- ---------
$ 125,180 $ 126,753
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 23,605 $ 24,427
Contract advances and deposits 18,151 14,538
Note payable - 5,460
Current portion of long-term debt 1,317 1,317
--------- ----------
Total current liabilities 43,073 45,742
Long-term debt 28,000 28,000
ESOT loan obligation 8,574 8,955
Postretirement obligation 3,443 3,443
Environmental obligation 2,562 2,562
Shareholders' equity:
Preferred shares, par value $1 per share
(liquidation preference $213.71 per share
or $12,960 in the aggregate in 1999),
authorized 500,000 shares, 60,641 issued
in 1999 and 1998) 61 61
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 30,035 30,142
Retained earnings 36,256 35,294
--------- ---------
74,806 73,951
Less: Treasury shares at cost
(1,811,634 shares in 1999 and
1,821,634 shares in 1998) (25,634) (25,775)
ESOT loan obligation ( 8,574) ( 8,955)
Deferred compensation under
Long-Term Incentive Plan ( 1,070) ( 1,170)
--------- ---------
Total shareholders' equity 39,528 38,051
--------- ---------
$125,180 $126,753
========= =========
See accompanying Notes to Consolidated Financial Statements.
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EDO Corporation and Subsidiaries
Consolidated Statements of Earnings
(in thousands, except per share amounts)
For the three months ended
Mar. 27, 1999 Mar. 28, 1998
(unaudited)
Net sales $ 27,227 $ 23,301
Costs and expenses
Cost of sales 20,130 17,056
Selling, general and administrative 4,139 3,580
Research and development 736 722
-------- --------
25,005 21,358
Operating earnings 2,222 1,943
Non-operating income (expense)
Interest income 391 545
Interest expense (593) (558)
Other, net - ( 25)
--------- ---------
(202) ( 38)
--------- ---------
Earnings before Federal income taxes 2,020 1,905
Federal income tax expense 600 -
--------- ---------
Net earnings 1,420 1,905
Dividends on preferred shares 259 277
--------- ---------
Net earnings available for common shares $ 1,161 $ 1,628
========= =========
Earnings per common share:
Basic $ 0.17 $ 0.25
========= =========
Diluted $ 0.15 $ 0.22
========= =========
Weighted average shares outstanding:
Basic 6,642 6,448
========= =========
Diluted 7,992 7,623
========= =========
See accompanying Notes to Consolidated Financial Statements.
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EDO Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
For the three months ended
Mar. 27, 1999 Mar. 28, 1998
(unaudited)
Operating activities:
Net earnings $ 1,420 $ 1,905
Adjustments to net earnings to arrive at
cash provided by operations:
Depreciation and amortization 1,379 1,124
Deferred compensation expense 100 100
Changes in, excluding effects of
acquisition:
Accounts receivable (4,896) (1,895)
Inventories (439) (1,555)
Prepayments, other current assets
and other (375) 2,336
Accounts payable and accrued liabilities (822) 813
Contract advances and deposits 3,613 (1,495)
-------- --------
Cash (used) provided by operating activities (20) 1,333
Investing activities:
Purchase of property, plant and equipment (813) (1,116)
Purchase of marketable securities (8,053) (6,024)
Sale or redemption of marketable securities 3,534 5,313
-------- --------
Cash used by investing activities (5,332) (1,827)
Financing activities:
Proceeds from exercise of stock options 34 29
Payments made on notes payable (5,460) -
Payment of common share cash dividends (199) (162)
Payment of preferred share cash dividends (259) (277)
-------- --------
Cash used by financing activities (5,884) (410)
Net decrease in cash and cash equivalents (11,236) (904)
Cash and cash equivalents at beginning
of year 21,801 20,351
-------- --------
Cash and cash equivalents at end of period $10,565 $19,447
======== ========
Supplemental disclosures:
Cash paid for: Interest $ - $ -
Income taxes
(Federal, state and local) 306 272
See accompanying Notes to Consolidated Financial Statements.
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Notes to Consolidated Financial Statements
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 generally accepted accounting
principles. They should be read in conjunction with the consolidated financial
statements of EDO Corporation and subsidiaries (the "Company") for the fiscal
year ended December 31, 1998, filed by the Company on Form 10-K with the
Securities and Exchange Commission on March 17, 1999.
The accompanying consolidated financial statements are unaudited and include
all adjustments (consisting of normal recurring adjustments and accruals) 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.
Backlog Data
The dollar amount of backlog of firm orders at March 27, 1999 was $164,030,000
compared to $98,818,000 at March 28, 1998.
Inventories
Inventories are summarized by major classification as follows:
Mar. 27, 1999 Dec. 31, 1998
(in thousands)
Raw material and supplies $ 4,450 $ 4,292
Work in process 5,495 5,262
Finished goods 324 276
------- -------
$ 10,269 $ 9,830
======= =======
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
Three months ended
Mar. 27, 1999 Mar. 28, 1998
(in thousands)
Numerator:
Net earnings available
for common shares $ 1,161 $ 1,628
Impact of assumed conversion
of preferred shares 38 25
------- -------
Numerator for diluted
calculation $ 1,199 $ 1,653
======= =======
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Denominator:
Weighted average common
shares outstanding 6,642 6,448
Dilutive effect of stock
options 69 192
Dilutive effect of conversion
of preferred shares 1,281 983
------- -------
Denominator for diluted
calculation 7,992 7,623
======= =======
Business Segments
The Company operates in two segments that have been organized by the products
and services they offer, as follows: Defense and Aerospace Systems and
Satellite Products. The Defense and Aerospace Systems segment sells its
products and services primarily to customers in the defense industry. The
Satellite Products segment sells its products to customers in the satellite
industry.
Principal products and services by segment are as follows:
Defense and Aerospace Systems Segment
Aircraft Stores Suspension and Release Equipment
Airborne Mine Countermeasures Systems
Command, Control and Communications Systems
Undersea Warfare Sonar
Technology and Analysis Services
Electro-Ceramic Products
Fiber Composite Products
Satellite Products Segment
Satellite Products
Three months ended
Mar. 27, 1999 Mar. 28, 1998
(in thousands)
Net sales:
Defense and Aerospace Systems $ 23,022 $ 18,886
Satellite Products 4,205 4,415
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$ 27,227 $ 23,301
======= =======
Operating earnings (loss):
Defense and Aerospace Systems $ 2,074 $ 2,180
Satellite Products 148 (237)
------- -------
2,222 1,943
Net interest expense 202 13
Other expense - 25
------- -------
Earnings before
Federal income taxes $ 2,020 $ 1,905
======= =======
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Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
First Three Months of 1999 Compared with First Three Months of 1998
Net sales for the first three months of 1999 were $27.2 million compared with
$23.3 million reported in the same period in 1998. The increase is
attributable to increased sales in the Defense and Aerospace Systems segment,
partially offset by a decrease in the Satellite Products segment.
Within the Defense and Aerospace Systems segment, sales increases were recorded
in aircraft armament products, command and control systems and sonar systems.
These increases were more than offset by decreased ceramic product sales and
fiber composite sales primarily due to delays in the receipt of orders.
Accordingly, the increase within the segment resulted from the sales of
technical services by TSA acquired in July 1998 and the sales of Specialty
Plastics acquired in December 1998. Sales in the Satellite Products segment
were $0.2 million lower than the prior year quarter due to the winding down of
certain programs, partially offset by new programs.
Earnings from operations in the first three months of 1999 were $2.2 million
compared with $1.9 million in the same period in 1998. Operating earnings and
margin in the Defense and Aerospace Systems segment were lower than the prior
year quarter due to a less favorable mix of programs. The decrease in
operating earnings was offset by a marginal contribution of earnings from the
recent acquisitions where margins were also lower than anticipated due to the
mix of business and initial reorganization expenses. Operating earnings and
margin in the Satellite Products segment improved compared to the first quarter
of 1998 due to the mix of programs and the resolution of technical issues on
certain programs.
Selling, general and administrative expenses in the first three months of 1999
were $0.6 million higher than the first three months of 1998. As a percent of
sales, the level of expenses is consistent with the prior year quarter.
Company-sponsored research and development expenditures of $0.7 million were
comparable to the corresponding period in 1998.
Non-operating expense, net, was $0.2 million in the first three months of 1999,
compared with $0.04 million in the corresponding period of 1998. This increase
was principally due to lower interest income as a result of lower levels of
average invested cash.
The Company provided for Federal income taxes for the first three months of
1999 at an effective rate of 30%, which is currently the expected effective
rate for the full year 1999. The Company recorded a tax provision in the first
quarter of 1999 as it had previously fully recognized the benefit associated
with its tax net operating loss carryforward.
Financial Condition
The Company's cash, cash equivalents and marketable securities decreased by
$6.7 million from December 31, 1998 to $26.6 million at March 27, 1999. This
decrease was primarily due to the $5.5 million payment of the note related to
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the acquisition of Specialty Plastics, $0.8 million for purchases of capital
equipment and $0.5 million for payment of common and preferred dividends.
The notes receivable of $3.2 million at March 27, 1999, of which $1.1 million
is included in current assets, relate to the sale of the Company's College
Point facility in January 1996. The notes are due in varying annual amounts
through 2004 and bear interest at 7%. The payer of the note is currently in
arrears. The notes are fully secured by the related facility. The Company is
working to resolve this matter with the payer and believes that the ultimate
resolution of this matter will not have a material effect on the Company's
consolidated financial statements.
The Company has outstanding $29.3 million of 7% Convertible Subordinated
Debentures Due 2011. Commencing in 1996 and until retirement of these
debentures, the Company is making annual sinking fund payments of $1.8 million
which are due each December 15th. As of March 27, 1999, the Company had $0.4
million of these debentures remaining in treasury to be used for these annual
requirements. The remaining amount due in 1999 of $1.3 million is reflected in
the current portion of long-term debt.
The Company also has an ESOT loan obligation with a balance at March 27, 1999
of $8.6 million at an interest rate of 82% of the prime lending rate. The
repayment of this obligation is funded through dividends on the Company's
preferred shares and cash contributions.
Capital expenditures in the first three months of 1999 totaled $0.8 million
compared with $1.1 million in the same period in 1998. The total expenditures
for 1999 are expected to be slightly higher than the total $3.6 million in
1998.
The Company believes that it has adequate liquidity and sufficient capital to
fund its current operating plans.
The backlog of unfilled orders at March 27, 1999 was $164.0 million compared
with $98.8 million a year ago and $151.8 million at December 31, 1998.
New Accounting Standard
Statement of Financial Accounting Standards No. 133 establishes standards for
the accounting and reporting of derivative instruments and hedging activities.
This Statement, which is effective for all quarters of fiscal years beginning
after June 15, 1999, requires companies to record derivatives on the balance
sheet as assets or liabilities at their fair value. In certain circumstances,
changes in the value of such derivatives may be required to be recorded as
gains or losses. The Company believes that the impact of this Statement will
not have a material impact on its consolidated financial statements.
Year 2000
The year 2000 issue ("Y2K") affects computer systems having date-sensitive
programs that may not properly recognize the year 2000. Y2K is reputed to be
able to cause computers and computer controlled equipment to cease functioning.
The Company has been addressing the Y2K issue for some time and established a
formal Y2K Program in 1998.
The Company has conducted several informal and formal Y2K reviews over the last
two years of its products and internal systems. Based on these reviews, the
only area where the Company has noted that Y2K could materially affect the
Company's operations or products is that failures or miscalculations could be
caused in the computerized accounting programs provided by outside vendors and
used at the Company. The applicable vendors have provided
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modifications to their programs to deal with Y2K and these modifications are
currently being tested. Initial testing has shown these modifications to be
mostly effective. If these modifications do not prove to be entirely
successful, the Company would be required to seek other methods to process its
accounting information.
The Company's formal Y2K program was established to ensure that the Company's
initial conclusions were correct. The program is conducted under the direction
of its Vice President & General Counsel and oversight of the Audit Committee of
the Board of Directors. The Y2K "Committee" consists of a Y2K coordinator from
each operating location and has met twice to date. The Committee will meet
formally four times over the next eight months to review plans and to share
results of each of the Committee member's efforts.
The Company's Y2K Program addresses Y2K from four perspectives:
* the Company looks at the products and services it sells to determine whether
Y2K will impact their performance;
* the Company looks at the materials, products and services it buys to
determine whether the suppliers of such materials, products and services or the
materials, products or services themselves will be impacted by Y2K in such a
way as to adversely impact the Company's operations;
* the Company looks at its interfaces with its customers and suppliers to
determine whether Y2K will adversely affect such interfaces; and
* the Company reviews its internal operations, including engineering,
manufacturing, finance and administrative (office and facilities equipment,
general purpose computers and related systems) to determine whether Y2K will
adversely affect any of these functions.
The formalized Y2K program encompasses three phases:
* Phase 1 established a baseline of Y2K compliance by a thorough review and
audit of each of the above four perspectives and determined readiness by
analysis and/or actual testing as necessary. This phase has been completed.
* Phase 2 determines a budget and actions necessary to bring into compliance
any areas determined to be either deficient, potentially deficient or in an
indeterminable state and a schedule for implementation completion. This phase
is nearly complete. To date, a budget of $250,000 has been established for
costs of those areas and actions identified. These costs are being expensed as
incurred.
* Phase 3 will verify by analysis and actual test that any material Y2K issues
have been corrected and that all systems are Y2K compliant. This phase is
expected to be completed by the third quarter of 1999. Contingency plans will
also be established at that time. Significant testing has already taken place,
and no material issues have been identified.
Based upon the Company's review over the last two years and its testing and
findings to date, the Company does not believe that any costs associated with
Y2K will be material. However, if the modifications to accounting programs
provided by outside vendors, which to date have proven successful, do not
eventually prove entirely successful, the cost of replacing these programs
could have a material adverse effect. The Company presently expects that any
necessary remedial costs will be expensed.
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As part of the Company's Y2K program, the Company is currently seeking
information regarding Y2K compliance from vendors, customers, manufacturers and
financial institutions associated with the Company. However, given the
reliance on third party information as it relates to their compliance programs,
no assurance can be given that the Company's information systems or operations
will not be affected by third-party failures to complete their Y2K projects on
a timely basis.
"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 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.
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; 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; and
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; and
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; underestimation of
anticipated costs on specific programs; risks inherent in integrating recent
acquisitions into the Company's overall structure; and risks associated with
year 2000 compliance by the Company, its customers, suppliers and other third
parties. Expectations of future Federal income tax rates can be affected by a
variety of factors, including amounts of profits relating to foreign sales.
The Company has no obligation to update any forward-looking statements.
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PART II - OTHER INFORMATION
Item 5. Submissions of Matters to a Vote of Security Holders.
At the Company's Annual Meeting of Shareholders held on April 27, 1999, the
following actions were taken:
a. Messrs. Frank A. Fariello, Robert M. Hanisee, George A. Strutz, Jr., and
James M. Smith were elected as directors, each receiving at least 6,499,439
votes.
b. The appointment of KPMG LLP as independent auditors for the Company for the
year 1999 was ratified: there were 6,756,899 votes cast in favor, 30,209 votes
cast against, and 130,486 abstentions.
Item 6. (a) Exhibits
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)
Date: May 5, 1999
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-27-1999
<CASH> 10,565
<SECURITIES> 16,038
<RECEIVABLES> 44,749
<ALLOWANCES> 0
<INVENTORY> 10,269
<CURRENT-ASSETS> 85,646
<PP&E> 54,103
<DEPRECIATION> 40,442
<TOTAL-ASSETS> 125,180
<CURRENT-LIABILITIES> 43,073
<BONDS> 36,574
<COMMON> 8,454
0
61
<OTHER-SE> 31,013
<TOTAL-LIABILITY-AND-EQUITY> 125,180
<SALES> 27,227
<TOTAL-REVENUES> 27,227
<CGS> 20,130
<TOTAL-COSTS> 25,005
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 25
<INTEREST-EXPENSE> 593
<INCOME-PRETAX> 2,020
<INCOME-TAX> 600
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