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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 March 31, 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 Mar. 31, 2000
- ------------------------------------- ----------------------------
Common shares, par value $1 per share 6,762,660
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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 31, 2000 and
December 31, 1999 3
Consolidated Statements of Earnings -
Three Months Ended
March 31, 2000 and
March 27, 1999 4
Consolidated Statements of Cash Flows -
Three Months Ended
March 31, 2000 and
March 27, 1999 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis
of Results of Operations and
Financial Condition 8-11
Part II Other Information
Item 5. Submissions of Matters to a Vote of 11
Security Holders
Item 6. Exhibits and Reports on Form 8-K 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)
March 31, 2000 Dec. 31, 1999
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 15,425 $ 13,799
Marketable securities 15,912 15,843
Accounts receivable 36,974 32,818
Inventories 12,373 12,188
Deferred tax asset, net 2,336 2,336
Prepayments and other 3,007 2,299
--------- ---------
Total current assets 86,027 79,283
Plant and equipment, net 10,110 10,218
Notes receivable 1,263 1,450
Cost in excess of fair value of net
assets acquired, net 8,608 9,050
Other assets 17,059 16,351
Net assets of discontinued operations - 8,139
--------- ---------
$ 123,067 $ 124,491
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 20,581 $ 23,108
Contract advances and deposits 17,781 19,153
Liabilities of discontinued operations 1,835 -
Current portion of note payable 397 397
Current portion of long-term debt 333 1,515
--------- ----------
Total current liabilities 40,927 44,173
Note payable 892 892
Long-term debt 26,250 26,250
ESOT loan obligation 7,017 7,429
Postretirement benefits obligation 3,402 3,402
Environmental obligation 2,104 2,104
Shareholders' equity:
Preferred shares, par value $1 per share
(liquidation preference $213.71 per share
or $12,264 in the aggregate in 2000),
authorized 500,000 shares, 57,384 issued
in 2000 and 1999) 57 57
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 28,470 28,483
Retained earnings 37,350 35,667
Accumulated other comprehensive loss (258) (255)
--------- ---------
74,073 72,406
Less: Treasury shares at cost
(1,691,242 shares in 2000 and
1,693,867 shares in 1999) (23,930) (23,967)
ESOT loan obligation ( 7,017) ( 7,429)
Deferred compensation under
Long-Term Incentive Plan (651) (769)
--------- ---------
Total shareholders' equity 42,475 40,241
--------- ---------
$123,067 $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
March 31, 2000 March 27, 1999
(unaudited)
Continuing Operations:
Net sales $ 29,002 $ 23,022
Costs and expenses
Cost of sales 21,858 17,122
Selling, general and administrative 3,470 3,372
Research and development 584 636
-------- --------
25,912 21,130
-------- --------
Operating earnings 3,090 1,892
Non-operating income (expense)
Interest income 480 391
Interest expense (628) (593)
Other, net 103 -
--------- ---------
(45) (202)
--------- ---------
Earnings before Federal income taxes 3,045 1,690
Federal income tax expense 915 502
--------- ---------
Earnings from continuing operations 2,130 1,188
Discontinued Operations:
Earnings from discontinued
satellite products business, net of
income tax expense - 232
--------- ---------
Earnings from discontinued operations - 232
--------- ---------
Net earnings 2,130 1,420
Dividends on preferred shares 245 259
--------- ---------
Net earnings available for common shares $ 1,885 $ 1,161
========= =========
Earnings per common share:
Basic:
Continuing operations $ 0.28 $ 0.14
Discontinued operations - 0.03
--------- ---------
Net $ 0.28 $ 0.17
========= =========
Diluted:
Continuing operations $ 0.24 $ 0.12
Discontinued operations - 0.03
--------- ---------
Net $ 0.24 $ 0.15
========== =========
Weighted average common shares outstanding:
Basic 6,762 6,642
========= =========
Diluted 7,933 7,992
========= =========
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
March 31, 2000 March 27, 1999
(unaudited)
Operating activities:
Earnings from continuing operations $ 2,130 $ 1,188
Adjustments to earnings from continuing
operations to arrive at cash used
by continuing operations:
Depreciation and amortization 995 842
Gain on repurchase of convertible debentures (106) -
Deferred compensation expense 100 100
Changes in:
Accounts receivable (4,156) (5,698)
Inventories (185) (576)
Prepayments, other current assets
and other (1,352) (378)
Accounts payable and accrued liabilities (2,255) (787)
Contract advances and deposits (1,372) 3,614
-------- --------
Cash used by continuing operations (6,201) (1,695)
Net cash provided by discontinued operations 10,000 1,612
Investing activities:
Purchase of property, plant and equipment (620) (776)
Purchase of marketable securities (72) (8,053)
Sale or redemption of marketable securities - 3,534
------- --------
Cash used by investing activities (692) (5,295)
Financing activities:
Proceeds from exercise of stock options 42 34
Payment made on note payable - (5,460)
Repurchase of convertible debentures (1,076) -
Payment of common share cash dividends (202) (199)
Payment of preferred share cash dividends (245) (259)
-------- --------
Cash used by financing activities (1,481) (5,884)
Net increase (decrease) in cash and cash 1,626 (11,262)
equivalents
Cash and cash equivalents at beginning
of year 13,799 21,991
-------- --------
Cash and cash equivalents at end of period $15,425 $10,729
======== ========
Supplemental disclosures:
Cash paid for: Interest $ - $ -
Income taxes
(Federal, state and local) 150 306
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.
Discontinued Operations
In November 1999, the Board of Directors of the Company approved the decision
to sell its satellite products business. On January 31, 2000, the Company
completed the sale of its satellite products business (Barnes Engineering
Company). The sales price of $10.0 million is subject to adjustment relating
to changes in net assets of the business from July 31, 1999 through the closing
date estimated to result in a decrease of approximately $1.8 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:
March 31, 2000 Dec. 31, 1999
(in thousands)
Raw materials and supplies $ 4,299 $ 4,475
Work-in-process 7,560 7,182
Finished goods 514 531
------- -------
$ 12,373 $ 12,188
======= =======
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Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
Three months ended
March 31, March 27,
2000 1999
(in thousands)
Numerator:
Earnings from continuing
operations available for
common shares $ 1,885 $ 929
Impact of assumed conversion
of preferred shares 33 38
------- -------
Numerator for diluted
calculation $ 1,918 $ 967
======== =======
Denominator:
Weighted average common
shares outstanding 6,762 6,642
Dilutive effect of stock
options 45 69
Dilutive effect of conversion
of preferred shares 1,126 1,281
------- -------
Denominator for diluted
calculation 7,933 7,992
======= =======
Comprehensive Income
As of March 31, 2000, accumulated other comprehensive loss included in the
accompanying consolidated balance sheet represents unrealized holding losses on
available-for-sale marketable securities. Comprehensive income for the
three-month period ended March 31, 2000 was $2,127,000. Comprehensive income
equaled net income for the three-month period ended March 27, 1999.
Business Segments
The Company operates in two segments, which constitute its continuing opera-
tions and have been organized by the products and services they offer, as fol-
lows: Defense and Aerospace Systems and Engineered Materials. The Defense and
Aerospace Systems segment sells its products and services primarily to custom-
ers in the defense industry. The Engineered Materials segment sells its
products to customers in various commercial and defense industries.
Principal products and services by segment are as follows:
Defense and Aerospace Systems Segment
Aircraft Stores Suspension and Release Equipment
Airborne Mine Countermeasures Systems
Integrated Combat Systems
Command, Control and Communications Systems
Undersea Warfare Sonar Systems
Technology Services and Analysis
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Engineered Materials Segment
Electro-Ceramic Products
Advanced Fiber Composite Structural Products
Three months ended
March 31, March 27,
2000 1999
Net sales from continuing operations:
Defense and Aerospace Systems $20,700 $15,149
Engineered Materials 8,302 7,873
------- -------
$29,002 $23,022
======= =======
Operating earnings from continuing operations:
Defense and Aerospace Systems $ 2,451 $ 1,263
Engineered Materials 639 629
------- -------
3,090 1,892
Net interest expense (148) (202)
Other income 103 -
------- -------
Earnings before
Federal income taxes $ 3,045 $ 1,690
======= =======
Subsequent Event
As described in the notes to the consolidated financial statements for the year
ended December 31, 1999, which are included in the Company's 1999 Form 10-K, in
January 2000, the Company announced its wholly-owned subsidiary had entered
into a merger agreement with AIL Technologies Inc. (AIL). On April 28, 2000,
the Company completed the merger with AIL. In connection with the merger, the
Company issued 6,553,229 newly issued shares of common stock, valued at $39.3
million, and made cash payments aggregating $13.3 million in exchange for all
of the outstanding common and preferred shares of AIL. The Company also
assumed $29.7 million of AIL debt. The merger will be accounted for using the
purchase method. AIL's sales for the year ended December 31, 1999 were $146.1
million.
Item 2.
Management's Discussion and Analysis
of Results of Operations and Financial Condition
Results of Operations
The Company conducts its business in two segments: Defense and Aerospace
Systems and Engineered Materials.
Three Months Ended March 31, 2000 compared with Three Months Ended March 27,
1999
Net sales for the first quarter of 2000 were $29.0 million compared with $23.0
million reported in the same period in 1999. Sales increases were recorded in
both segments. In the Defense and Aerospace Systems segment, sales increases
were recorded in airborne mine countermeasures systems, aircraft stores
suspension and
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release equipment and integrated combat systems. These increases were
partially offset by a decrease in sales of undersea warfare sonar systems. The
increase in aircraft stores suspension and release equipment sales is partially
attributable to the acquisition in November 1999 of M. Technologies, Inc., now
operating as EDO M. Tech. The increase in sales in the Engineered Materials
segment is attributable to increased sales of electro-ceramic products,
partially offset by lower sales of advanced fiber composite products.
Operating earnings from continuing operations in the first quarter of 2000 were
$3.1 million compared with $1.9 million reported in the same period in 1999.
Operating earnings and operating margin were higher than the prior year quarter
primarily due to the increased sales in the Defense and Aerospace Systems
segment, which absorbed fixed costs, and an increase in pension income of $0.4
million.
Selling, general and administrative expenses in the first quarter of 2000 were
$3.5 million compared with $3.4 million in the first quarter of 1999.
Company-sponsored research and development expenditures of $0.6 million were at
the same level as the corresponding period in 1999.
Non-operating expense, net, was $45,000 in the first quarter of 2000, compared
with $0.2 million in the corresponding period of 1999. This reduction was
primarily due to a gain of $0.1 million in 2000 relating to the purchase on the
open market of the Company's outstanding debentures in order to meet short-term
sinking fund requirements.
The Company provided for Federal income taxes for the first quarter of 2000 at
an effective rate of approximately 30%, which is the expected effective rate
for the full year 2000.
Financial Condition
In November 1999, the Board of Directors of the Company approved the decision
to sell its satellite products business. On January 31, 2000, the Company
completed the sale of its satellite products business (Barnes Engineering
Company). The sales price of $10.0 million, which was received in the first
quarter of 2000, is subject to adjustment relating to changes in net assets of
the business from July 31, 1999 through the closing date estimated to result in
a decrease of approximately $1.8 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.
The Company's cash, cash equivalents and marketable securities increased by
$1.7 million from December 31, 1999 to $31.3 million at March 31, 2000. The
$10.0 million received from the sale of the satellite products business was
offset by cash used by continuing operations of $6.2 million, the repurchase of
debentures of $1.1 million, capital expenditures of $0.6 million, and the
payment of common and preferred dividends of $0.4 million.
The notes receivable of $2.7 million at March 31, 2000, of which $1.4 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%. Three payments on the notes receivable
aggregating $562,500 are past due as of March 31, 2000. The Company is
currently in discussions with the current owner of the properties about the
amounts 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
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is making annual sinking fund payments of $1.8 million, which are due each
December 15th. In March 2000, the Company purchased $1.2 million face value of
these debentures for $1.1 million. As of March 31, 2000, the Company had $1.4
million of these debentures in treasury to be used for these annual
requirements.
The Company also has an ESOT loan obligation with a balance at March 31, 2000
of $7.0 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.
Capital expenditures in the first three months of 2000 totaled $0.6 million
compared with $0.8 million in the comparable period in 1999. Total
expenditures in 2000 are expected to be slightly higher than the total $4.0
million in 1999.
The Company believes that it has adequate liquidity and sufficient capital to
fund its current operating plans.
The backlog of unfilled orders, excluding that of the discontinued operations,
at March 31, 2000 was $147.4 million compared with $145.4 million a year ago
and $133.9 million at December 31, 1999.
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.
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 function-
ing.
The Company has conducted several informal Y2K reviews over the last two years
of its products and internal systems. The Company's formal Y2K program was
established in 1998 to ensure that the Company's initial conclusions were
correct. The program was conducted under the direction of its Vice President &
General Counsel and the oversight of the Audit Committee of the Board of
Directors. The Y2K "Committee" consisted of a Y2K coordinator from each
operating location and met five times.
The costs of the above Y2K program were expensed as incurred and were
immaterial. Based upon the Company's review over the last two years and the
results of confirmatory testing after the changeover to 2000, no problems
related to Y2K have resulted that have any material impact on the Company's
consolidated financial position. The Company will continue to monitor any Y2K
issues for the remainder of 2000.
"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
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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 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. Submissions of Matters to a Vote of Security Holders.
At the Company's Annual Meeting of Shareholders held on April 28, 2000, the
following actions were taken:
a. Messrs. Robert E. Allen, Robert Alvine, and Michael J. Hegarty were elected
as directors, each receiving at least 5,903,272 votes.
b. The appointment of KPMG LLP as independent auditors for the Company for the
year 2000 was ratified: there were 6,239,222 votes cast in favor, 366,729
votes cast against, and 73,395 abstentions.
c. The issuance of 6,553,229 EDO Common Shares pursuant to the proposed merger
between AIL Technologies, Inc. and EDO Acquisition III Corporation was
approved: there were 4,259,464 votes cast in favor, 976,516 votes cast
against, and 69,629 abstentions.
d. The increase in the number of EDO Common Shares subject to EDO's 1996
Long-Term Incentive Plan from 600,000 EDO Common Shares to 1,050,000 EDO Common
Shares, which increase would become effective only if the merger was completed,
was approved: there were 3,972,788 votes cast in favor, 1,244,975 votes cast
against, and 87,845 abstentions.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27-Financial Data Schedule
(b) Reports on Form 8-K
On January 3, 2000, the Company filed Form 8-K enclosing a press release
announcing the execution of a definitive merger agreement with AIL Technologies
Inc.
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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: D.L. Reed
-----------------------------------------
D.L. Reed - Chief Financial Officer
(Principal Financial Officer)
Date: May 15, 2000
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