<PAGE>
Page 1 of 16
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended July 1, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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)
Registrant's telephone number, including area code (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 July 1, 2000
------------------------------------- ----------------------------
Common shares, par value $1 per share 13,595,628
<PAGE>
Page 2
EDO CORPORATION
INDEX
Page No.
Face Sheet 1
Index 2
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
July 1, 2000 and
December 31, 1999 3
Consolidated Statements of Earnings -
Three Months Ended
July 1, 2000 and
June 26, 1999 4
Consolidated Statements of Earnings -
Six Months Ended
July 1, 2000 and
June 26, 1999 5
Consolidated Statements of Cash Flows -
Six Months Ended
July 1, 2000 and
June 26, 1999 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis
of Results of Operations and
Financial Condition 10-15
Part II Other Information
Item 5. Submission of Matters to a Vote of
Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
<PAGE>
Page 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EDO Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
July 1, 2000 Dec. 31, 1999
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 1,238 $ 13,799
Marketable securities 15,728 15,843
Accounts receivable 74,608 32,818
Inventories 19,988 12,188
Deferred tax asset, net 8,817 2,336
Prepayments and other 4,793 2,299
--------- ---------
Total current assets 125,172 79,283
Property, plant and equipment, net 60,435 10,218
Notes receivable 2,195 1,450
Cost in excess of fair value of net
assets acquired, net 9,882 9,050
Other assets 21,145 16,351
Net assets of discontinued operations - 8,139
--------- ---------
$ 218,829 $ 124,491
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 42,374 $ 23,108
Contract advances and deposits 24,822 19,153
Current portion of note payable 397 397
Current portion of long-term debt 6,032 1,515
--------- ---------
Total current liabilities 73,625 44,173
Note payable 892 892
Long-term debt 46,380 26,250
Deferred income taxes 13,507 -
ESOT loan obligation 6,605 7,429
Postretirement benefits obligations 14,582 3,402
Environmental obligation 1,922 2,104
Shareholders' equity:
Preferred shares, par value $1 per share
(liquidation preference $213.71 per share
or $10,643 in the aggregate in 2000),
authorized 500,000 shares, 49,800 issued in
2000 and 57,384 in 1999 50 57
Common shares, par value $1 per share, authorized
25,000,000 shares, issued 15,007,096 in 2000
and 8,453,902 in 1999 15,007 8,454
Additional paid-in capital 58,726 28,483
Retained earnings 33,410 35,667
Accumulated other comprehensive loss (284) (255)
--------- ---------
106,909 72,406
Less: Treasury shares at cost
(1,411,468 shares in 2000 and
1,693,867 shares in 1999) (19,971) (23,967)
ESOT loan obligation ( 6,605) ( 7,429)
Unearned ESOP shares (16,948) -
Deferred compensation under
Long-Term Incentive Plan (848) (769)
Management group receivable ( 1,221) -
--------- ---------
Total shareholders' equity 61,316 40,241
--------- ---------
$218,829 $124,491
========= =========
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
Page 4
EDO Corporation and Subsidiaries
Consolidated Statements of Earnings
(in thousands, except per share amounts)
For the three months ended
July 1, 2000 June 26, 1999
(unaudited)
Continuing Operations:
Net sales $ 56,593 $ 23,661
Costs and expenses
Cost of sales 43,220 17,750
Selling, general and administrative 6,539 3,197
Research and development 1,552 626
Write-off of purchased in-process research
and development and change in control costs 8,943 -
-------- --------
60,254 21,573
-------- --------
Operating (loss) earnings (3,661) 2,088
Non-operating income (expense)
Interest income 396 397
Interest expense (1,012) (592)
Other, net (75) -
--------- ---------
(691) (195)
--------- ---------
(Loss) earnings before Federal income taxes (4,352) 1,893
Federal income tax benefit (expense) 1,033 (573)
--------- ---------
(Loss) earnings from continuing operations (3,319) 1,320
Discontinued Operations:
Earnings from discontinued satellite products
business, net of income tax expense - 210
--------- ---------
Earnings from discontinued operations - 210
--------- ---------
Net (loss) earnings (3,319) 1,530
Dividends on preferred shares 213 249
--------- ---------
Net (loss) earnings available for common shares $ (3,532) $ 1,281
========= =========
(Loss) earnings per common share:
Basic:
Continuing operations $ (0.37) $ 0.16
Discontinued operations - 0.03
--------- ---------
Net $ (0.37) $ 0.19
========= =========
Diluted:
Continuing operations $ - $ 0.14
Discontinued operations - 0.03
--------- ---------
Net $ - $ 0.17
========= =========
Weighted average common shares outstanding:
Basic 9,661 6,676
========= =========
Diluted 9,661 7,903
========= =========
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
Page 5
EDO Corporation and Subsidiaries
Consolidated Statements of Earnings
(in thousands, except per share amounts)
For the six months ended
July 1, 2000 June 26, 1999
(unaudited)
Continuing Operations:
Net sales $ 85,595 $ 46,683
Costs and expenses
Cost of sales 65,078 34,872
Selling, general and administrative 10,009 6,569
Research and development 2,136 1,262
Write-off of purchased in-process research
and development and change in control costs 8,943 -
-------- --------
86,166 42,703
-------- --------
Operating (loss) earnings (571) 3,980
Non-operating income (expense)
Interest income 876 788
Interest expense (1,640) (1,185)
Other, net 28 -
--------- ---------
(736) (397)
--------- ---------
(Loss) earnings before Federal income taxes (1,307) 3,583
Federal income tax benefit (expense) 118 (1,075)
--------- ---------
(Loss) earnings from continuing operations (1,189) 2,508
Discontinued Operations:
Earnings from discontinued satellite products
business, net of income tax expense - 442
--------- ---------
Earnings from discontinued operations - 442
--------- ---------
Net (loss) earnings (1,189) 2,950
Dividends on preferred shares 458 508
--------- ---------
Net (loss) earnings available for common shares $ (1,647) $ 2,442
========= =========
(Loss) earnings per common share:
Basic:
Continuing operations $ (0.20) $ 0.30
Discontinued operations - 0.07
--------- ---------
Net $ (0.20) $ 0.37
========= =========
Diluted:
Continuing operations $ - $ 0.26
Discontinued operations - 0.06
--------- ---------
Net $ - $ 0.32
========= =========
Weighted average common shares outstanding:
Basic 8,211 6,660
========= =========
Diluted 8,211 7,948
========= =========
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
Page 6
EDO Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
For the six months ended
July 1, 2000 June 26, 1999
(unaudited)
Operating activities:
(Loss) earnings from continuing operations $(1,189) $ 2,950
Adjustments to (loss) earnings from continuing
operations to arrive at cash used
by continuing operations:
Depreciation and amortization 3,189 1,916
Write-off of purchased in-process research
and development 6,700 -
Bad debt expense 70 -
Gain on repurchase of convertible debentures (129) -
Gain on sale of property, plant and equipment (7) -
Deferred compensation expense 312 201
ESOP compensation expense 399 -
Common shares issued for directors' fees 28 27
Changes in, excluding effects of acquisition:
Accounts receivable (9,756) (3,084)
Inventories 2,712 (2,956)
Prepayments, other current assets and other (3,603) (1,242)
Accounts payable and accrued liabilities (4,762) (2,171)
Contract advances and deposits 1,219 3,849
-------- --------
Cash used by continuing operations (4,817) (510)
Net cash provided by discontinued operations 8,641 4,866
Investing activities:
Cash paid for acquisition of AIL (15,004) -
Purchase of property, plant and equipment (1,407) (1,298)
Proceeds from sale of property, plant and equipment 5,858 -
Purchase of marketable securities (414) (8,112)
Sale or redemption of marketable securities 500 3,536
-------- --------
Cash used by investing activities (10,467) (5,874)
Financing activities:
Proceeds from exercise of stock options 44 34
Borrowings under line of credit 1,000 -
Repayments of borrowings under line of credit (3,000) -
Repayments of long-term debt (1,508) -
Payment made on note payable - (5,460)
Repurchase of convertible debentures (1,386) -
Payment of common share cash dividends (610) (401)
Payment of preferred share cash dividends (458) (508)
-------- --------
Cash used by financing activities (5,918) (6,335)
Net decrease in cash and cash equivalents (12,561) (7,853)
Cash and cash equivalents at beginning of year 13,799 21,991
-------- --------
Cash and cash equivalents at end of period $ 1,238 $14,138
======== ========
Supplemental disclosures:
Cash paid for: Interest $ 919 $ 1,026
Income taxes
(Federal, state and local) 673 800
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
Page 7
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, 1999, filed by the Company on Form 10-K with the
Securities and Exchange Commission on February 28, 2000.
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.
Acquisitions
On April 28, 2000, a wholly owned subsidiary of the Company merged with AIL
Technologies, Inc. (the "EDO-AIL Merger"). In connection with the merger, the
Company issued 6,553,194 of its common shares valued at $39.4 million, and made
cash payments aggregating $13.3 million in exchange for all of the outstanding
common and preferred shares of AIL Technologies, Inc. In addition, the Company
incurred $2.7 million in transaction costs. The merger was accounted for using
the purchase method and is included in the Company's results of operations from
April 28, 2000. This merger is described in the Joint Proxy
Statement/Prospectus dated March 23, 2000. This quarterly report on Form 10-Q
should be read giving consideration to the acquisition and the acquired
in-process research and development more fully described below.
Unaudited pro forma results of operations, assuming the acquisition had been
made at the beginning of each period, which include adjustments to interest
income, amortization expense and income tax expense are as follows:
Six months ended Six months ended
July 1, 2000 June 26, 1999
(in thousands)
Net sales from continuing operations $ 128,852 $ 119,466
Net loss from continuing operations
available for common shares $ (8,848) $ (3,635)
Basic loss per share from continuing
operations $ (0.83) $ (0.34)
<PAGE>
Page 8
Discontinued Operations
In November 1999, the Board of Directors of the Company approved the decision
to sell its satellite products business(Barnes Engineering Company), which sale
was completed on January 31, 2000. The sales price of $10.0 million was
subject to adjustment relating to changes in net assets of the business from
July 31, 1999 through the closing date, which resulted in a decrease of
approximately $1.3 million. In addition, the Company has agreed to indemnify
the buyer for certain contract related costs aggregating an estimated $2.3
million. The estimated adjustment for the changes in net assets and the
estimated indemnification costs were included in the loss on disposal of the
satellite products business in 1999.
Inventories
Inventories are summarized by major classification as follows:
July 1, 2000 Dec. 31, 1999
(in thousands)
Raw materials and supplies $ 7,237 $ 4,475
Work-in-process 12,039 7,182
Finished goods 712 531
------- -------
$ 19,988 $ 12,188
======= =======
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share. The effect of common stock equivalents is antidilutive for the
three- and six- month periods ended July 1, 2000. Thus, diluted earnings per
share is not presented for those periods.
Three months ended Six months ended
July 1, June 26, July 1, June 26,
2000 1999 2000 1999
(in thousands) (in thousands)
Numerator:
(Loss) earnings from continuing
operations available for
common shares $ (3,532) $ 1,281 $ (1,647) $ 2,442
Impact of assumed conversion
of preferred shares - 35 - 73
------- ------- ------- -------
Numerator for diluted
calculation $ (3,532) $ 1,316 $ (1,647) $ 2,515
======== ======= ======== =======
Denominator:
Weighted average common
shares outstanding 9,661 6,676 8,211 6,660
Dilutive effect of stock
options - 50 - 60
Dilutive effect of conversion
of preferred shares - 1,177 - 1,228
------ ------ ------- -------
Denominator for diluted
calculation 9,661 7,903 8,211 7,948
======= ======= ======= =======
<PAGE>
Page 9
Comprehensive Income
As of July 1, 2000, accumulated other comprehensive loss included in the
accompanying consolidated balance sheet represents unrealized holding losses on
available-for-sale marketable securities. Comprehensive loss for the three-
and six-month periods ended July 1, 2000 was $3,345,000 and $1,218,000,
respectively. Comprehensive income equaled net income for the three- and
six-month periods ended June 26, 1999.
Business Segments
EDO Corporation is a supplier of highly engineered products for governments and
industry worldwide. The Company's advanced electronic, electromechanical and
information systems and engineered materials are products which are critical to
the mission success of its customers. The Company has three reportable
segments: Defense, Space and Communication Products, and Engineered Materials.
The Defense segment provides integrated defense systems and components, remote
sensors, information technology, and support systems and services for military
forces and governments worldwide. The Space and Communication Products
addresses the remote sensing, communication, and navigation industries and
produces ultra-miniature electronics and a broad line of antennas. The
Engineered Materials segment supplies piezoelectric ceramics and advanced
composites for the communication, navigation, chemical, petrochemical, paper
and oil industries for civilian infrastructure and for the military.
Three months ended Six months ended
July 1, June 26, July 1, June 26,
2000 1999 2000 1999
Net sales from continuing operations:
Defense $40,726 $16,064 $61,426 $31,213
Space and Communications Products 7,624 - 7,624 -
Engineered Materials 8,243 7,597 16,545 15,470
------- ------- ------- -------
$56,593 $23,661 $85,595 $46,683
======= ======= ======= =======
Operating earnings (loss) from
continuing operations:
Defense $ 3,460 $ 1,561 5,911 $ 2,824
Space and Communications Products (7,476) - (7,476) -
Engineered Materials 355 527 994 1,156
------- ------- ------- -------
(3,661) 2,088 (571) 3,980
Net interest expense (616) (195) (764) (397)
Other (expense) income (75) - 28 -
------- ------- ------ -------
(Loss) earnings before
Federal income taxes $(4,352) $ 1,893 $(1,307) $3,583
======= ======= ======= =======
The $8,943,000 of costs related to the write-off of purchased in-process
research and development and change in control costs related to the EDO-AIL
Merger are included in the segments as follows: Defense-$1,563,000, Space and
Communications Products-$6,980,000 and Engineered Materials-$400,000.
<PAGE>
Page 10
Long-Term Debt
At July 1, 2000, the Company was in compliance with its debt covenants or
obtained appropriate waivers. In addition, the Company has received a
commitment letter from its banks to refinance the debt on a long-term basis.
Accordingly, the Company has classified the debt as long-term on the
accompanying balance sheet.
Item 2.
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Results of Operations
The following information should be read in conjunction with the Condensed
Consolidated Financial Statements as of July 1, 2000, which reflect the results
of operations of the Company including the EDO-AIL Merger from April 28, 2000
and the acquisition of M. Technologies, Inc. from November 1999. Accordingly,
the results of operations for the three and six months ended July 1, 2000 are
significantly affected by these acquisitions.
Three Months Ended July 1, 2000 compared with the Three Months Ended June 26,
1999
Sales from continuing operations for the second quarter of 2000 increased to
$56.6 million from $23.7 million reported in the second quarter of 1999. This
increase comprised sales growth of $24.7 million for the Defense segment, $7.6
million for the Space and Communication Products segment, and $0.6 million for
the Engineered Materials segment. The sales growth attributable to the EDO-AIL
Merger is $20.3 million in the Defense segment and $7.6 million in the Space
and Communication Products segment. The sales growth attributable to the M.
Technologies, Inc. acquisition is $1.7 million in the Defense segment. Higher
than expected sales during June 2000 on a Defense segment program due to
earlier than anticipated cost input also contributed to the increase in sales.
In addition, there were increases in sales of aircraft stores suspension and
release equipment, integrated combat systems and electro-ceramic products.
These increases were partially offset by lower sales of airborne mine
countermeasures systems and advanced fiber composite structural products.
Operating earnings from continuing operations in the second quarter of 2000
(before considering one-time EDO-AIL Merger related costs of $8.9 million)
increased to $5.3 million or 9.3% of sales from $2.1 million or 8.8% of sales
for the same period of 1999. The aforementioned higher than expected sales
during June 2000 on a Defense segment program contributed to the increase in
margin. Adjustments related to the EDO-AIL Merger include $6.7 million
associated with the write-off of purchased in-process research and development
and $2.2 million of change-of-control costs. Operating earnings increased $2.3
million from the EDO-AIL Merger and $0.5 million from pension income. For the
quarter, net loss available for common shares was $3.5 million or $0.37 per
common share, a decline of $0.56 per common share from the net earnings
available for common shares of $1.3 million or $0.19 per common share in the
comparable quarter of 1999.
Selling, general and administrative expenses in the second quarter of 2000 were
$6.5 million compared with $ 3.2 million in the comparable quarter of 1999.
The increase is attributable to the selling, general and administrative
expenses of AIL Technologies, Inc. At 11.6% of net sales in the second quarter
of 2000, the level of expenses is lower than the 13.5% of net sales in the
prior year's quarter due to the higher than expected sales volume discussed
previously.
Interest expense increased $0.4 million to $1.0 million from $0.6 million for
the quarter due to the borrowings made under the credit facility of AIL
Technologies, Inc.
<PAGE>
Page 11
The income tax benefit for the 2000 second quarter reflects the adjustment to
the Company's revised estimated effective income tax for the year ending
December 31, 2000 to 9%. This compares to an income tax provision at an
effective tax rate of 30% for the second quarter of 1999.
Company-sponsored research and development expenditures of $1.5 million in the
second quarter of 2000 are $0.9 million greater than the $0.6 million in the
second quarter of 1999. The increase is attributable to expenditures at AIL
Technologies, Inc., associated with the Ku-Ku Band Down Converter development
discussed under In-Process Research and Development, below.
In-Process Research and Development
Acquired in-process research and development ("IPR&D") charges relate to the
accounting for acquisitions under the purchase method, in which a portion of
the purchase price is allocated to acquired in-process technology and expensed
immediately since the technological feasibility of the research and development
projects has not yet been achieved and is believed to have no alternative
future use. Valuations of AIL Technologies Inc. were performed and used as an
aid in determining the fair value of the identifiable assets and in allocating
the purchase price among the acquired assets, including an independent
valuation of the portion of the purchase price attributed to IPR&D, which was
$6.7 million. Assets were identified through interviews with management and a
review of data provided by the Company and discussions with the acquired
company's management concerning the acquired assets, technologies in
development, costs necessary to complete the IPR&D, historical financial
performance, estimates of future performance, market potential, and the
assumptions underlying these estimates.
The "income approach" was utilized for the valuation analysis of the IPR&D.
This approach focuses on the income-producing capability of the asset, which
was determined through review of data provided by both the acquired company and
through analysis of relevant market sizes, growth factors, and expected trends
in technology. The steps followed in applying this approach included analysis
of the stage of completion of the project, estimating the costs to develop the
purchased in-process technology into commercially viable products, estimating
the resulting net cash flows from such projects, and discounting the net cash
flows back to their present value using a rate commensurate with the relative
risk levels. The approach excluded the value related to research and
development yet-to-be completed as part of the ongoing IPR&D project and
included only the incremental operating cash flows attributable to the IPR&D.
The ongoing development project at AIL Technologies Inc. at the time of the
purchase comprised a generic satellite subsystem development called a Ku-Ku
Band Down Converter for the fixed satellite service market. The development of
this new technology will have a direct impact on supplying global broadband
Internet services to the market. The converter represents a single channel
providing signal conversion from uplink frequencies in the 14GHz range to the
downlink frequencies in the 12GHz range. At the time of the EDO-AIL Merger, it
was estimated that 90% of the development effort had been completed and the
remaining development effort would take approximately six months to complete,
with a cost of approximately $1.0 million.
The resulting net cash flows from this project were based on management's
estimates of product revenues, cost of goods sold, operating expenses, R&D
costs, and income taxes from the project. The revenue projections used to
value the IPR&D were based on estimates of relevant market sizes and growth
factors, expected trends in technology, and the nature and expected timing of
new product introductions by the Company and its competitors. The rate used in
discounting the net cash flows from the IPR&D was 25%. This discount rate,
higher than that of the Company's cost of capital, is due to the uncertainties
surrounding the successful development of IPR&D.
<PAGE>
Page 12
The efforts required to develop the in-process technology of this project into
commercially viable products principally relate to the completion of planning,
designing, prototyping, and testing functions that are necessary to establish
that the down converter produced will meet its design specifications, including
technical performance, features, and function requirements. The Company has
reviewed its projections of revenue and estimated costs of completion and has
compared these projections with results through July 1, 2000. To date, in the
aggregate, the projections have not varied materially from original forecasts.
If this project does not continue to be successfully developed, the revenue and
profitability of the Company may be adversely affected in future periods.
Results will also be subject to uncertain market events and risks that are
beyond the Company's control, such as trends in technology, government
regulations, market size and growth, and product introduction by competitors.
Management believes that the assumptions used in the purchased IPR&D valuation
reasonably estimate the future benefits. There can be no assurances that in
future periods actual results will not deviate from current estimates.
Six Months ended July 1, 2000 compared with Six Months ended June 26, 1999
Sales from continuing operations for the first six months of 2000 increased to
$85.6 million from $46.7 million reported in the first six months of 1999.
This increase comprised sales growth of $30.2 million for the Defense segment,
$7.6 million for the Space and Communication Products segment, and $1.1 million
for the Engineered Materials segment. The sales growth attributable to the
EDO-AIL Merger is $20.3 million in the Defense segment and $7.6 million in the
Space and Communication Products segment. The sales growth attributable to the
M. Technologies, Inc. acquisition is $3.0 million in the Defense segment.
Higher than expected sales during June 2000 on a Defense segment program due to
earlier than anticipated cost input also contributed to the increase in sales.
In addition, sales increases were recorded in airborne mine countermeasure
systems, aircraft stores suspension and release equipment, integrated combat
systems and electro-ceramic products. These increases were partially offset by
lower sales of advanced fiber composite structural products.
Operating earnings from continuing operations for the first six months of 2000
(before considering one-time EDO-AIL Merger related costs of $8.9 million)
increased to $8.4 million from $4.0 million and operating margin increased to
9.8% of net sales compared to 8.5% of net sales for the same period of 1999.
The aforementioned higher than expected sales during June 2000 on a Defense
segment program contributed to the increase in margin. Adjustments related to
the EDO-AIL Merger include $6.7 million associated with the write-off of
purchased in-process research and development and $2.2 million of
change-of-control costs. Operating earnings increased $2.3 million from the
EDO-AIL Merger and $1.0 million from pension income. For the six months, net
loss from continuing operations available for common shares was $1.6 million or
$0.20 per common share, a decline of $0.50 per common share from the net
earnings available for common shares of $2.4 million or $0.30 per common share
in the comparable six months of 1999.
Interest expense for the first six months of 2000 increased $0.4 million to
$1.6 million from $1.2 million for the six months of 1999 due to the borrowings
made under the credit facility of AIL Technologies, Inc.
The income tax benefit for the first six months of 2000 reflects the Company's
estimated effective income tax for the year ending December 31, 2000 of 9%
compared with the effective tax rate of 30% for the same period in 1999.
<PAGE>
Page 13
Selling, general and administrative expenses in the first six months of 2000
were $10.0 million compared with $6.6 million in the comparable period of 1999.
The increase is attributable to the selling, general and administrative
expenses of AIL Technologies, Inc. At 11.7% of sales for the first six months
of 2000, the level of expenses is lower than the 14.1% of sales in first six
months of 1999 due to the higher than expected sales volume during the first
six months discussed earlier.
Company-sponsored research and development expenditures of $2.1 million in the
first six months of 2000 are $0.9 million greater than the $1.2 million in the
comparable period of 1999. The increase is attributable to expenditures at AIL
Technologies, Inc. associated with the Ku-Ku Band Down Converter development
discussed under In-Process Research and Development above.
Financial Condition
In November of 1999, the Board of Directors of the Company approved the
decision to sell its satellite products business (Barnes Engineering Company),
which sale was completed on January 31, 2000. The sale price of $10.0 million,
which was received in the first quarter of 2000, was adjusted for changes in
net assets of the business from July 31, 1999 through the closing date
resulting in a decrease of approximately $1.3 million. In addition, the
Company has agreed to indemnify the buyer for certain contract related costs
aggregating an estimated $2.3 million. In the six months ended July 1, 2000
the Company has paid $0.7 million related to these items.
In June 2000, the Company sold approximately 17 acres of land and a 30,000
square foot building at its Deer Park site for $4.6 million in cash and a $1.2
million note.
The Company's cash, cash equivalents and marketable securities decreased by
$12.7 million from December 1999 to $17.0 million at July 1, 2000. This
decrease was due to the $13.3 million of cash used to purchase common and
preferred shares of AIL Technologies, Inc., $2.7 million of EDO-AIL Merger
related costs, $3.8 million of cash used by continuing operations, $1.4 million
for purchases of capital equipment, $1.4 million for the repurchase of
subordinated debentures and $1.1 million for payment of common and preferred
dividends, offset by cash from discontinued operations of $8.6 million and
proceeds from the sale of property of $5.8 million.
Accounts Receivable increased by $41.8 million from December 31, 1999 to $74.6
million at July 1, 2000 due to the EDO-AIL Merger and progress billings.
Inventories increased by $7.8 million from December 31, 1999 to $20.0 million
at July 1, 2000 primarily attributable to the EDO-AIL Merger.
The notes receivable of $3.9 million at July 1, 2000 are comprised of the $1.2
million note related to the aforementioned sale of property at Deer Park and
$2.7 million in notes related to the sale of the Company's College Point
facility in January 1996. The latter notes are due in varying annual amounts
through 2004 and bear interest at 7%. Four payments on these latter notes
receivable aggregating $775,000 are past due as of July 1, 2000. The Company
is currently in discussions with the owner of the properties about the amount
in arrears. The notes receivable are secured by a mortgage on the facility.
The Company has outstanding $26.6 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. During the first six months of 2000 the
Company purchased $1.5 million face value of these debentures for $1.4 million.
As of July 1, 2000, the Company had $1.8 million of these debentures in
treasury to be used for these annual requirements.
The Company has an ESOT loan obligation with a balance at July 1, 2000 of $6.6
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 from the Company.
<PAGE>
Page 14
At July 1, 2000 available borrowings under the revolving credit facilities were
$22.0 million after reductions for borrowings of $7.0 million and outstanding
letters of credit of $13.0 million.
Capital expenditures in the first six months of 2000 totaled $1.4 million
compared with $1.3 million in the comparable period of 1999. The Company
expects that its total capital expenditures for 2000 will be approximately $8.0
million.
The Company believes that it has adequate liquidity and sufficient capital to
fund its current operating plans.
The backlog of unfilled orders at July 1, 2000 was $267.1 million compared with
$138.2 million a year ago and $133.9 million at December 31, 1999. Backlog at
July 1, 2000 includes the effect of the EDO-AIL Merger.
New Accounting Standard
Statement of Financial Accounting Standards No. 133, as amended, establishes
standards for the accounting and reporting of derivative instruments and
hedging activities. This Statement, as amended, which is effective for all
quarters of fiscal years beginning after June 15, 2000, requires companies to
record derivatives on the balance sheet as assets or liabilities at their fair
values. In certain circumstances, changes in the values of such derivatives
may be required to be recorded as gains or losses. The Company believes that
the adoption of this Statement will not have a material impact on its
consolidated financial statements.
"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
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; 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.
<PAGE>
Page 15
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 consumer 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 sales; 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.
PART II - OTHER INFORMATION
Item 5. Submission of Matters to a Vote of Security Holders.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 - Financial Data Schedule
(b) Reports on Form 8-K
On May 12, 2000, the Company filed Form 8-K in connection with completion of
the merger of its wholly-owned subsidiary, EDO Acquisition III Inc. with and
into AIL Technologies, Inc.
On June 2, 2000, the Company filed Form 8-K in connection with its change of
auditing firms from KPMG LLP to Ernst and Young.
<PAGE>
Page 16
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: D.L. Reed
-----------------------------------------
D.L. Reed - Chief Financial Officer
(Principal Financial Officer)
Date: August 14, 2000
