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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 September 30, 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 September 30, 2000
------------------------------------- ---------------------------------
Common shares, par value $1 per share 13,613,216
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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 30, 2000 and
December 31, 1999 3
Consolidated Statements of Earnings -
Three Months Ended
September 30, 2000 and
September 25, 1999 4
Consolidated Statements of Earnings -
Nine Months Ended
September 30, 2000 and
September 25, 1999 5
Consolidated Statements of Cash Flows -
Nine Months Ended
September 30, 2000 and
September 25, 1999 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis
of Results of Operations and
Liquidity and Capital Resources 10-15
Part II Other Information
Item 5. Submission of Matters to a Vote of 15
Security Holders
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
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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)
Sept. 30, 2000 Dec. 31, 1999
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 3,789 $ 13,799
Marketable securities 15,175 15,843
Accounts receivable 66,267 32,818
Inventories 24,213 12,188
Deferred tax asset, net 8,817 2,336
Prepayments and other 2,901 2,299
--------- ---------
Total current assets 121,162 79,283
Property, plant and equipment, net 58,636 10,218
Notes receivable 3,313 1,450
Cost in excess of fair value of net
assets acquired, net 9,720 9,050
Other assets 22,766 16,351
Net assets of discontinued operations - 8,139
--------- ---------
$ 215,597 $ 124,491
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 41,611 $ 23,108
Contract advances and deposits 19,473 19,153
Current portion of note payable 397 397
Current portion of long-term debt 3,800 1,515
--------- ---------
Total current liabilities 65,281 44,173
Note payable 892 892
Long-term debt 51,006 26,250
Deferred income taxes 13,507 -
ESOT loan obligation 6,193 7,429
Postretirement benefits obligations 14,680 3,402
Environmental obligation 1,863 2,104
Shareholders' equity:
Preferred shares, par value $1 per share
(liquidation preference $213.71 per share
or $10,579 in the aggregate in 2000),
authorized 500,000 shares, 49,500 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 58,583 28,483
Retained earnings 32,827 35,667
Accumulated other comprehensive loss (154) (255)
--------- ---------
106,313 72,406
Less: Treasury shares at cost
(1,393,880 shares in 2000 and
1,693,867 shares in 1999) (19,723) (23,967)
ESOT loan obligation (6,193) (7,429)
Unearned ESOP shares (16,365) -
Deferred compensation under
Long-Term Incentive Plan (636) (769)
Management group receivable (1,221) -
--------- ---------
Total shareholders' equity 62,175 40,241
--------- ---------
$215,597 $124,491
========= =========
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
Sept. 30, 2000 Sept. 25, 1999
(unaudited)
Continuing Operations:
Net sales $ 59,979 $ 23,812
Costs and expenses
Cost of sales 45,213 17,323
Selling, general and administrative 8,595 3,342
Research and development 1,766 691
Merger-related costs 932 -
-------- --------
56,506 21,356
-------- --------
Operating earnings 3,473 2,456
Non-operating income (expense)
Interest income 414 431
Interest expense (1,527) (648)
Other, net 196 153
--------- ---------
(917) ( 64)
--------- ---------
Earnings before Federal income taxes 2,556 2,392
Federal income tax expense (2,518) (715)
--------- ---------
Earnings from continuing operations 38 1,677
Discontinued Operations:
Earnings from discontinued satellite products
business, net of income tax expense - 167
Estimated loss on disposal, net of income
tax benefit - (3,675)
--------- ---------
Loss from discontinued operations - (3,508)
Net earnings (loss) 38 (1,831)
Dividends on preferred shares (212) (246)
--------- ---------
Net loss available for common shares $ (174) $ (2,077)
========= =========
(Loss) earnings per common share:
Basic:
Continuing operations $ (0.02) $ 0.21
Discontinued operations - (0.52)
--------- ---------
Net $ (0.02) $ (0.31)
========= =========
Diluted:
Continuing operations $ (0.02) $ 0.18
Discontinued operations - (0.43)
--------- ---------
Net $ (0.02) $ (0.25)
========= =========
Weighted average common shares outstanding:
Basic 10,934 6,728
========= =========
Diluted 10,934 8,168
========= =========
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 nine months ended
Sept. 30, 2000 Sept. 25, 1999
(unaudited)
Continuing Operations:
Net sales $145,574 $ 70,495
Costs and expenses
Cost of sales 110,291 52,195
Selling, general and administrative 18,604 9,911
Research and development 3,902 1,953
Write-off of purchased in-process research
and development and merger-related costs 9,875 -
-------- --------
142,672 64,059
-------- --------
Operating earnings 2,902 6,436
Non-operating income (expense)
Interest income 1,290 1,219
Interest expense (3,167) (1,833)
Other, net 224 153
--------- ---------
(1,653) (461)
--------- ---------
Earnings before Federal income taxes 1,249 5,975
Federal income tax expense (2,400) (1,790)
--------- ---------
(Loss) earnings from continuing operations (1,151) 4,185
Discontinued Operations:
Earnings from discontinued satellite products
business, net of income tax expense - 609
Estimated loss on disposal, net of income
tax benefit - (3,675)
--------- ---------
Earnings from discontinued operations - (3,066)
--------- ---------
Net (loss) earnings (1,151) 1,119
Dividends on preferred shares (670) (755)
--------- ---------
Net (loss) earnings available for common shares $ (1,821) $ 364
========= =========
(Loss) earnings per common share:
Basic:
Continuing operations $ (0.20) $ 0.51
Discontinued operations - (0.46)
--------- ---------
Net $ (0.20) $ 0.05
========= =========
Diluted:
Continuing operations $ (0.20) $ 0.44
Discontinued operations - (0.38)
--------- ---------
Net $ (0.20) $ 0.06
========= =========
Weighted average common shares outstanding:
Basic 9,119 6,683
========= =========
Diluted 9,119 8,022
========= =========
See accompanying Notes to Consolidated Financial Statements.
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EDO Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
For the nine months ended
Sept. 30, 2000 Sept. 25, 1999
(unaudited)
Operating activities
(Loss) earnings from continuing operations $(1,151) $ 4,185
Adjustments to (loss) earnings from continuing
operations to arrive at cash used
by continuing operations:
Depreciation and amortization 6,221 2,753
Write-off of purchased in-process research
and development 6,700 -
Bad debt expense 151 -
Gain on repurchase of convertible debentures (201) (147)
Gain on sale of property, plant and equipment (7) -
Deferred compensation expense 526 301
ESOP compensation expense 1,029 -
Common shares issued for directors' fees 67 57
Changes in, excluding effects of acquisition:
Accounts receivable (1,496) (2,817)
Inventories (1,513) (2,759)
Prepayments, other current assets and other (2,228) (2,380)
Accounts payable and accrued liabilities (6,467) (703)
Contract advances and deposits (4,130) 2,391
-------- --------
Cash (used) provided by continuing operations (2,499) 881
Net cash provided by discontinued operations 8,641 4,964
Investing activities:
Cash paid for acquisition of AIL (15,004) -
Purchase of property, plant and equipment (2,273) (2,462)
Proceeds from sale of property, plant and equipment 4,404 -
Proceeds from notes receivable 7 -
Purchase of marketable securities (760) (8,176)
Sale or redemption of marketable securities 1,528 3,536
-------- --------
Cash used by investing activities (12,098) (7,102)
Financing activities:
Proceeds from exercise of stock options 63 34
Borrowings under line of credit 7,000 -
Repayments of borrowings under line of credit (5,000) -
Repayments of long-term debt (2,620) -
Payments received on notes receivable 575
Payment made on note payable - (5,460)
Repurchase of convertible debentures (1,808) (1,405)
Payment of common share cash dividends (1,019) (603)
Payment of preferred share cash dividends (670) (755)
-------- --------
Cash used by financing activities (4,054) (7,614)
Net decrease in cash and cash equivalents (10,010) (8,871)
Cash and cash equivalents at beginning of year 13,799 21,991
-------- --------
Cash and cash equivalents at end of period $ 3,789 $13,120
======== ========
Supplemental disclosures:
Cash paid for: Interest $ 2,204 $ 1,026
Income taxes
(Federal, state and local) 2,350 1,969
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, 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 EDO-AIL
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:
Nine months ended Nine months ended
Sept. 30, 2000 Sept. 25, 1999
(in thousands)
Net sales from continuing operations $188,832 $181,782
Net loss from continuing operations
available for common shares $ (7,120) $ (1,345)
Basic loss per share from continuing
operations $ (0.63) $ (0.12)
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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:
Sept. 30, 2000 Dec. 31, 1999
(in thousands)
Raw materials and supplies $ 7,181 $ 4,475
Work-in-process 15,787 7,182
Finished goods 1,245 531
------- -------
$ 24,213 $ 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 nine-month periods ended September 30, 2000. Thus, diluted earnings
per share is not presented for those periods.
Three months ended Nine months ended
Sept. 30, Sept. 25, Sept. 30, Sept. 25,
2000 1999 2000 1999
(in thousands) (in thousands)
Numerator:
(Loss) earnings from continuing
operations available for
common shares $ (174) $ 1,431 $ (1,821) $ 3,430
Impact of assumed conversion
of preferred shares - 41 - 115
------- ------- ------- -------
Numerator for diluted
calculation $ (174) $ 1,472 $ (1,821) $ 3,545
======== ======= ======== =======
Denominator:
Weighted average common
shares outstanding 10,934 6,728 9,119 6,683
Dilutive effect of stock
options - 65 - 62
Dilutive effect of conversion
of preferred shares - 1,375 - 1,277
-------- ------- ------- -------
Denominator for diluted
calculation 10,934 8,168 9,119 8,022
======== ======= ======= =======
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Comprehensive Income
As of September 30, 2000, accumulated other comprehensive loss included in the
accompanying consolidated balance sheet represents unrealized holding losses on
available-for-sale marketable securities. Comprehensive income (loss) for the
three- and nine-month periods ended September 30, 2000 was $168,000 and
($1,051,000), respectively. Comprehensive income (loss) for the three- and
nine-month periods ended September 25, 1999 was ($2,110,000) and $840,000,
respectively.
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 Nine months ended
Sept. 30, Sept. 25, Sept. 30, Sept. 25,
2000 1999 2000 1999
Net sales from continuing operations:
Defense $41,796 $16,904 $103,222 $48,117
Space and Communications Products 9,230 - 16,854 -
Engineered Materials 8,953 6,908 25,498 22,378
------- ------- -------- -------
$59,979 $23,812 $145,574 $70,495
======= ======= ======== =======
Operating earnings (loss) from
continuing operations:
Defense $ 4,592 $ 2,146 $ 10,504 $ 4,970
Space and Communications Products (1,778) - (9,255) -
Engineered Materials 659 310 1,653 1,466
------- ------- ------- -------
3,473 2,456 2,902 6,436
Net interest expense (1,113) (217) (1,877) (614)
Other, net 196 153 224 153
------- ------- ------- -------
Earnings before
Federal income taxes $ 2,556 $ 2,392 $ 1,249 $5,975
======= ======= ======== =======
In 2000, the costs related to the write-off of purchased in-process research
and development and merger-related costs attributable to the EDO-AIL Merger are
included in the segments as follows:
Three months ended Nine months ended
Sept. 30, 2000 Sept. 30, 2000
Defense $ 631 $ 2,194
Space and Communications Products 205 7,185
Engineered Materials 96 496
------- -------
Total $ 932 $ 9,875
======= =======
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Item 2.
Management's Discussion and Analysis of Results of
Operations and Liquidity and Capital Resources
Results of Operations
The following information should be read in conjunction with the Condensed
Consolidated Financial Statements as of September 30, 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 nine months ended
September 30, 2000 are significantly affected by these acquisitions.
Three Months Ended September 30, 2000 compared with the Three Months Ended
September 25, 1999
Sales from continuing operations for the third quarter of 2000 increased to
$60.0 million from $23.8 million reported in the third quarter of 1999. This
increase comprised sales growth of $24.9 million for the Defense segment, $9.2
million for the Space and Communication Products segment, and $2.1 million for
the Engineered Materials segment. The sales growth attributable to the EDO-AIL
Merger is $24.0 million in the Defense segment and $9.2 million in the Space
and Communication Products segment. The sales growth attributable to the M.
Technologies, Inc. acquisition is $1.5 million in the Defense segment. In
addition, there were increases in sales of airborne mine countermeasures
systems, integrated combat systems, electro-ceramic products and advanced fiber
composite structural products. These increases were partially offset by lower
sales of aircraft stores suspension and release equipment and sonar systems.
Operating earnings from continuing operations in the third quarter of 2000
(before considering one-time EDO-AIL Merger-related costs of $0.9 million)
increased to $4.4 million or 7.3% of sales from $2.5 million or 10.3% of sales
for the same period of 1999. The increase in operating earnings is
attributable to the EDO-AIL Merger, and the decrease in percent margin is due
to losses in the Space and Communications Products segment. Operating earnings
increased $0.3 million from pension income, attributable primarily due to AIL
Technologies, Inc. For the quarter, net loss from continuing operations
available for common shares was $0.2 million or $0.02 per common share. This
compares to net earnings from continuing operations available for common shares
of $1.4 million or $0.21 per common share in the third quarter of 1999.
Selling, general and administrative expenses in the third quarter of 2000 were
$8.6 million compared with $3.3 million in the comparable quarter of 1999. The
increase is attributable to the selling, general and administrative expenses of
AIL Technologies, Inc. At 14.3% of net sales in the third quarter of 2000, the
level of expenses is consistent with the 14.0% of net sales in the prior year's
quarter.
Interest expense in the current quarter increased $0.9 million to $1.5 million
compared to $0.6 million in the prior year quarter due to the borrowings made
under the credit facility associated with AIL Technologies, Inc.
The income tax expense for the 2000 third quarter reflects a cumulative
adjustment to the Company's estimated effective tax rate for the year ending
December 31, 2000 resulting from a reduction in anticipated merger-related
costs for the year. This compares to an income tax provision at an effective
tax rate of 30% for the third quarter of 1999.
Company-sponsored research and development expenditures of $1.8 million in the
third quarter of 2000 are $1.1 million greater than the $0.7 million in the
third quarter of 1999. The increase is attributable to expenditures at AIL
Technologies, Inc., primarily associated with the Ku-Ku Band Down Converter
development discussed under In-Process Research and Development, below.
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Nine Months ended September 30, 2000 compared with Nine Months ended September
25, 1999
Sales from continuing operations for the first nine months of 2000 increased to
$145.6 million from $70.5 million reported in the first nine months of 1999.
This increase comprised sales growth of $55.1 million for the Defense segment,
$16.9 million for the Space and Communication Products segment, and $3.1
million for the Engineered Materials segment. The sales growth attributable to
the EDO-AIL Merger is $44.3 million in the Defense segment and $16.9 million in
the Space and Communication Products segment. The sales growth attributable to
the M. Technologies, Inc. acquisition is $4.6 million in the Defense segment.
In addition, sales increases were recorded in airborne mine countermeasure
systems, aircraft stores suspension and release equipment, integrated combat
systems, technology services and electro-ceramic products. These increases
were partially offset by lower sales of advanced fiber composite structural
products and sonar systems.
Operating earnings from continuing operations for the first nine months of 2000
(before considering one-time EDO-AIL Merger related costs of $9.9 million)
increased to $12.8 million or 8.8% of net sales from $6.4 million or 9.1% of
net sales for the same period of 1999. Operating earnings increased $2.1
million from the EDO-AIL Merger and $1.3 million from pension income.
Adjustments related to the EDO-AIL Merger include $6.7 million associated with
the write-off of purchased in-process research and development and $3.2 million
of merger-related costs. For the nine months, net loss from continuing
operations available for common shares was $1.8 million or $0.20 per common
share. This compares to net earnings from continuing operations available for
common shares of $3.4 million or $0.51 per common share in the first nine
months of 1999.
Selling, general and administrative expenses in the first nine months of 2000
were $18.6 million compared with $9.9 million in the comparable period of
1999. The increase is attributable to the selling, general and
administrative expenses of AIL Technologies, Inc. At 12.8% of sales for the
first nine months of 2000, the level of expenses is lower than the 14.1% of
sales in first nine months of 1999.
Interest expense for the first nine months of 2000 increased $1.4 million to
$3.2 million from $1.8 million for the nine months of 1999 due to the
borrowings made under the credit facility of AIL Technologies, Inc.
The income tax expense for the first nine months of 2000 reflects the Company's
estimated effective income tax rate for the year ending December 31, 2000. The
increased effective income tax rate is principally due to the write-off of $6.7
million of purchased in-process research and development in the quarter-ended
July 1, 2000, which is not deductible for income tax purposes.
Company-sponsored research and development expenditures of $3.9 million in the
first nine months of 2000 are $1.9 million greater than the $2.0 million in the
comparable period of 1999. The increase is attributable to expenditures at AIL
Technologies, Inc. primarily 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 and charged in the second
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quarter of 2000. 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.
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 September 30, 2000. In the
aggregate, the expense projections have increased approximately $0.5 million
from the 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.
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Liquidity and Capital Resources
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 nine months ended September 30,
2000 the Company has paid $1.0 million related to these items.
The Company's cash, cash equivalents and marketable securities decreased by
$10.7 million from December 1999 to $19.0 million at September 30, 2000. This
decrease was due to the $13.3 million of cash used to purchase common and
preferred shares of AIL Technologies, Inc., $1.7 million of EDO-AIL Merger
related costs, $2.5 million of cash used by continuing operations, $2.3 million
for purchases of capital equipment, $1.8 million for the repurchase of
subordinated debentures and $1.7 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 $4.4 million.
Accounts Receivable increased by $33.5 million from December 31, 1999 to $66.3
million at September 30, 2000 primarily due to the EDO-AIL Merger.
Inventories increased by $12.0 million from December 31, 1999 to $24.2 million
at September 30, 2000 primarily attributable to the EDO-AIL Merger and
work-in-process.
The notes receivable of $3.8 million at September 30, 2000 (of which $0.5
million is in current assets) are comprised of the $1.2 million note related to
the sale of property at Deer Park in June 2000 and $2.6 million in notes
related to the sale of the Company's former College Point facility in January
1996. The latter notes are due in annual amounts through 2004 and bear
interest at 7%. In the third quarter of 2000, these notes, which were in
arrears at the end of the second quarter, were amended to change the payment
schedule. Principal and interest payments were received to bring the note
current in early October. The notes receivable are secured by a mortgage on
the facility.
The Company has outstanding $25.8 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 nine months of 2000 the
Company purchased $2.0 million face value of these debentures for $1.8 million.
As of September 30, 2000, the Company had $2.2 million of these debentures in
treasury to be used for these annual requirements.
The Company has an ESOT loan obligation with a balance at September 30, 2000 of
$6.2 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.
At September 30, 2000 available borrowings under the revolving credit facility
were $49.0 million after reductions for borrowings of $7.0 million and
outstanding letters of credit of $13.0 million.
Capital expenditures in the first nine months of 2000 totaled $2.3 million
compared with $2.5 million in the comparable period of 1999. The Company
expects that its total capital expenditures for 2000 will be approximately $4.0
million.
The Company believes that it has adequate liquidity and sufficient capital to
fund its current operating plans.
<PAGE>
Page 14
The backlog of unfilled orders at September 30, 2000 was $265.4 million
compared with $132.6 million a year ago and $133.9 million at December 31,
1999. Backlog at September 30, 2000 includes the effect of the EDO-AIL Merger.
Long-Term Debt
During the third quarter of 2000 the Company completed negotiations for a new
$69 million long-term credit facility with a consortium of banks co-led by
Mellon and EAB. The credit facility includes $19 million in five year term
debt and $50 million in revolving debt. Proceeds from the term debt were used
to repay existing term debt. The current portion of the term debt of $3.8
million at September 30, 2000 reflects the terms of the new credit facility.
The Company's 7% Convertible Subordinated Debentures due 2011 and ESOT loan
obligation remain outstanding. At September 30, 2000, the Company was in
compliance with its debt covenants.
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; and
risks inherent in integrating recent acquisitions into the Company's overall
structure.
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
4(a) - Credit Agreement dated as of August 24, 2000 by and among EDO
Corporation and AIL Systems Inc. with European American Bank and
Mellon Bank, N.A., et. al.
27 - Financial Data Schedule
(b) Reports on Form 8-K
None.
<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 - Vice President- Finance
(Principal Financial Officer)
Date: November 13, 2000
