EDO Edo Corp

EDO Corporation (NYSE: EDO) recorded revenue of $255.4 million in the first quarter of 2007, an increase of 113 percent from the $119.7 million recorded in the first quarter of 2006. Net earnings for the quarter were $6.0 million, versus a net loss of $0.9 million in the prior year�s quarter. On a diluted per-share basis, earnings were $0.29 for the first quarter of 2007, versus a loss of $0.05 in the first quarter of 2006. The key drivers of these improvements were: the acquisitions of CAS Inc and Impact Science & Technology Inc in September of 2006; the strong sales of communications equipment, known as Transition Switch Modules (TSM), to the Marine Corps; a turnaround in electronic-systems sales that were weak in the prior year; and the absence of a number of previously disclosed events that reduced earnings in 2006 but not in 2007. Chief Executive Officer James M. Smith explained that �during 2006, we streamlined our management structure and addressed the significant non-operational issues affecting earnings. We did so while continuing our research and development projects and facilities expansion initiatives. We also maintained our strategic growth objectives, making 2006 our largest acquisition year. We are now a larger and stronger company, and our investments in new facilities and actions to restore historical margins are already showing results.� Organic Revenue Growth Organic revenue, which excludes revenue from acquisitions owned less than one year, increased by $77.4 million, or 64.7 percent. This is due primarily to revenue from TSM production, electronic support measures products, and flight-line test systems. Increased Revenue Guidance On February 22, EDO projected full-year revenue in the range of $960 million to $1,010 million. In April, the company was awarded two contracts totaling $144.9 million for �CREW 2.1� systems. CREW is an acronym for electronic equipment that counters radio-controlled improvised explosive devices. As a result of these two awards, as well as the government�s exercise of additional TSM options, EDO is now forecasting a $90 million increase in full-year revenue to a range of $1,050 million to $1,100 million for 2007. Full-scale CREW 2.1 production is expected to be underway by the fourth quarter of 2007. Margins Operating earnings in the first quarter of 2007 were $16.4 million, an increase of $16.5 million over the $0.1 million loss recorded in the prior year�s quarter. The improvement was driven primarily by higher revenue, a corporate-wide effort to reduce controllable expenses, and better absorption of overhead costs. In addition, earnings in the first quarter of 2006 were reduced by certain non-operational matters that have since been addressed. In the first quarter of 2006 there was also a $0.9 million non-cash compensation expense related to options awarded under the 2004 Non-Employee Director Stock Plan versus $0.2 million of such awards in the first quarter of 2007. The company expects approximately $0.7 million in option expense in the second quarter, when awards are to be granted pursuant to the terms of this Plan. Partially offsetting these margin improvements were acquisition-related retention expenses of approximately $2.2 million in the first quarter of 2007, of which $0.9 million was non-cash expense. EBITDA, as adjusted, was $25.1 million, or 9.8 percent of revenue in the first quarter of 2007, versus $6.5 million, or 5.5 percent of revenue in the prior year�s quarter. We are maintaining our guidance of 10.5 to 11.5 percent margins for the full year. EBITDA is a generally accepted metric employed by our industry. Our adjustments consist of non-cash ESOP, pension, and acquisition-related retention expenses. These adjustments are identified in detail on the attached reconciliation schedule. Cash Flow Cash flow provided by operations in the quarter was $5.4 million, versus $14.0 million in the first quarter of 2006. As expected, the company collected substantial cash from the TSM program during the first quarter, which was used to fund working capital and reduce short-term debt. The increase in working capital was needed to fund the company�s accelerating production levels. Funding of production under the company�s recently awarded CREW 2.1 contracts is expected to increase the company�s working-capital needs during the second half of 2007. We maintain a $300 million bank line of credit in order to provide for such short-term funding requirements. As of March 31, the money borrowed under this line of credit was $161.5 million, down from $180 million at the end of 2006. Backlog The total funded backlog of unfilled orders as of March 31 was $878.2 million, up 9.2 percent from $804.4 million at year end, and up 50 percent from $585.5 million at the end of the first quarter of 2006. The backlog as of March 31 does not include the $144.9 million of new CREW 2.1-related orders received in April 2007. Funded backlog does not include portions of contracts for which the U.S. government has not yet appropriated funds, nor does it include unexercised options in any contract. Such unfunded contracts and unexercised options add approximately $1.6 billion in what we view as high-confidence future revenue, for a total of approximately $2.5 billion. Conference Call EDO will conduct a conference call at 10:30 a.m. EDT on May 3 to review these results in more detail. A live webcast of the conference call, including presentation slides, will be available at www.edocorp.com or www.InvestorCalendar.com. For those who cannot listen to the live webcast, a replay of the call will be available on these websites. There will also be a telephone replay available until May 10. To listen to the telephone replay, dial 1-877-660-6853, account #286, and conference ID #237022 (outside the U.S. dial 1-201-612-7415). About EDO Corporation EDO designs and manufactures a diverse range of products for aerospace, defense, intelligence, and commercial markets. Major product groups include: Defense Electronics, Communications, Aircraft Armament Systems, Undersea Warfare, Integrated Composite Structures, and Professional and Engineering Services. EDO (www.edocorp.com) was founded in 1925, and is headquartered in New York City. The company employs 4,000 people. Forward-Looking Statements Statements made in this release, including statements about projected revenues, long-term organic revenue growth, projected expenses, and EBITDA margins, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations, estimates and projections about the Company�s business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including those described above and the following: changes in demand for the Company�s products and services, product mix, the timing of customer orders and deliveries, changes in the government�s funding priorities, the impact of competitive products and pricing, and other risks discussed from time to time in the Company�s Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic and international economic conditions. Such forward-looking statements speak only as of the date on which they are made, and the Company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this release. EDO Corporation and Subsidiaries Condensed Consolidated Statements of Earnings ($000's omitted, except per share data) � � Three months ended March 31, March 25, 2007� 2006� (unaudited) � Net sales $ 255,416� $ 119,709� � Costs and expenses: Cost of sales 201,030� 91,244� Selling, general and administrative 33,713� 25,358� Research and development 2,093� 3,206� Acquisition-related retention expense � 2,152� � -� 238,988� 119,808� � � Operating earnings (loss) 16,428� (99) � Interest income 186� 1,021� Interest expense (6,176) (2,424) Other, net � (39) � (146) Non-operating expense, net (6,029) (1,549) � � Earnings (loss) before income taxes 10,399� (1,648) � Income tax (expense) benefit (4,411) 709� � � Net earnings (loss) $ 5,988� $ (939) � Net earnings (loss) per common share: Basic: $ 0.32� $ (0.05) Diluted: $ 0.29� $ (0.05) � Weighted average shares outstanding Basic 18,538� 18,012� Diluted � 24,894� � 18,012� � � Backlog of unfilled orders $ 878,219� $ 585,502� EDO Corporation and Subsidiaries Condensed Consolidated Balance Sheets ($000's omitted) � � March 31, Dec. 31, 2007� � 2006� � Assets � Current Assets: Cash and cash equivalents $ -� $ 25,322� Accounts receivable, net 270,694� 265,298� Inventories 66,161� 56,255� Deferred income tax asset, net 12,549� 12,160� Prepayments & other � 15,542� � � 13,682� Total Current Assets 364,946� 372,717� � Property, plant and equipment, net 58,325� 59,109� Goodwill 394,647� 385,926� Other intangible assets 91,611� 103,776� Deferred income tax asset, net 17,890� 8,291� Other assets � 14,981� � � 20,003� Total Assets $ 942,400� � $ 949,822� � Liabilities & Shareholders' Equity � Current Liabilities: Accounts payable and accrued liabilities $ 130,316� $ 143,908� Borrowings from bank line of credit 161,500� 180,000� Contract advances and deposits 47,511� 44,323� Note payable, current � 7,766� � � 7,766� Total Current Liabilities 347,093� 375,997� � Income taxes payable 19,044� 4,154� Note payable, long term 14,533� 14,533� Long-term debt 201,250� 201,250� Post-retirement benefits obligations 77,220� 77,734� Environmental obligation 1,195� 1,198� Other long-term liabilities 37� 40� Shareholders' equity � 282,028� � � 274,916� Total Liabilities & Shareholders' Equity $ 942,400� � $ 949,822� EDO Corporation and Subsidiaries SEGMENT DATA ($000's omitted) � � Three months ended March 31, March 25, 2007� � 2006� � Net sales: Engineered Systems & Services $ 116,386� $ 59,266� Electronic Systems & Communications � 139,030� � � 60,443� $ 255,416� � $ 119,709� � Operating earnings (loss): Engineered Systems & Services $ 9,289� $ 1,628� Electronic Systems & Communications � 7,139� � � (1,727) 16,428� (99) � Net interest expense (5,990) (1,403) Other, net � (39) � � (146) � Earnings (loss) before income taxes $ 10,399� � $ (1,648) EDO Corporation and Subsidiaries Calculation of EBITDA (In thousands, except per share amounts) � � Three months ended March 31, March 25, 2007� 2006� (unaudited) � Earnings (loss) before income taxes $ 10,399� $ (1,648) � Interest income (186) (1,021) Interest expense � 6,176� � 2,424� Net interest expense 5,990� 1,403� � Depreciation 3,509� 2,778� Amortization � 2,565� � 1,614� Total depreciation & amortization 6,074� 4,392� � � EBITDA 22,463� 4,147� � Acquisition-related retention expense (non-cash) 852� -� ESOP compensation expense 1,010� 1,186� Pension expense � 811� � 1,194� EBITDA, as adjusted $ 25,136� $ 6,527� � Diluted shares outstanding 19,007� 18,012� � EBITDA, as adjusted, per share * $ 1.32� $ 0.36� � * Excludes potential impact of subordinated note conversion. � � Summary of Cash Flows (In thousands) � Three months ended March 31, March 26, 2007� 2005� (unaudited) � Cash provided by operations $ 5,367� $ 14,017� � Cash used by investing activities $ (12,119) $ (5,224) � Cash used by financing activities $ (18,570) $ (37) $ (25,322) $ 8,756� EDO Corporation and Subsidiaries GUIDANCE DATA ESTIMATES � � Fiscal 2007 � Revenue range $1,050 million - $1,100 million � Pension expense $3.2 million � Acquisition-related retention expense $8.0 million � Effective tax rate (Fed & State) 42% � EBITDA, as adjusted, margin 10.5% - 11.5% (see reconciliation table on previous page) � ESOP shares issued per quarter 55,700� � Average diluted shares outstanding*: - If Note conversion is NOT dilutive 18.7 million - If Note conversion is dilutive 25.0 million � � � * "If-converted method" (FAS 128) to determine diluted EPS: (Shares to be issued if 4.00% Notes are converted at $34.19/share would be 5,886,422.) � - Quarterly Dilution Test Since the after-tax interest on Notes reduces Net Earnings by $1,187,375 per quarter, the decision point for the dilution test is $1,187,375 / 5,886,422, or $0.20 per share. When basic EPS for a quarter are more than $0.20, the impact of the Notes is dilutive. (During the 4th quarter of 2005, this calculation was based on a weighted average of the 4.00% Notes and the 5.25% Notes that were redeemed in November 2005.) The Notes were dilutive to EPS in the fourth quarter. � - Annual Dilution Test Since the after-tax interest on Notes reduces Net Earnings by $4,749,500 per year, the decision point for the dilution test is $4,749,500 / 5,886,422, or $0.81 per share. When basic EPS for the year are more than $0.81, the impact of the Notes is dilutive. The Notes were not dilutive to EPS in the 2006 full year. � Based on current projections, the Notes are expected to be dilutive for the 2007 full year. If so, the EPS calculation will be based on about 24.6 million shares. � This table contains estimates based on management's current expectations. This information is forward-looking, and actual results may differ materially.