EDO Edo Corp

EDO Corporation (NYSE: EDO) recorded revenue of $246.0 million in the second quarter of 2007, an increase of 61.4 percent from the $152.4 million recorded in the second quarter of 2006. The revenue increase was due primarily to the acquisitions of CAS Inc and Impact Science & Technology Inc in September of 2006, as well as strong sales of battlefield-communications equipment. Net earnings for the quarter were $5.7 million, versus $6.3 million in the prior year�s quarter. On a diluted per-share basis, earnings were $0.27 for the second quarter of 2007, versus $0.30 in the second quarter of 2006. The second quarter of both years included tax benefits related to the reversal of income-tax reserves. These benefits were $0.5 in the second quarter of 2007 versus $3.7 million in the second quarter of 2006. Because of a change in the timing of director awards, the second quarter of 2007 also included a $0.8 million option expense that was not included in the prior year�s quarter. Excluding these adjustments, net earnings were $5.7 million or $0.27 per diluted share in the second quarter of 2007, versus $2.6 million, or $0.14 per share in the prior year�s quarter. For the six-month period ended June 30, 2007, revenue was $501.4 million, an increase of 84.3 percent from the $272.1 million recorded in the first half of 2006. Net earnings for the first half of 2007 were $11.7 million, more than double the $5.3 million earned in the same period last year. On a diluted per-share basis, earnings were $0.56, versus $0.29 in the first half of 2006. �We have continued to execute on our fundamental strategy, and that strategy is generating superior results,� said Chief Executive Officer James M. Smith. �Even during the challenging year in 2006, we invested in our counter-IED and other promising technology, and we successfully pursued high-quality acquisitions. As a result, we are accelerating our record of revenue growth that has averaged more than 30 percent annually since 1999. �We expect continued strong revenue growth in the second half of 2007, as we begin production under our recently-awarded CREW 2.1 contracts. And as capacity utilization improves, we expect corresponding margin improvement for the remainder of 2007 and into 2008.� Organic Revenue Growth Organic revenue, which excludes revenue from acquisitions owned less than one year, increased by $38.5 million, or 25.3 percent, during the second quarter. This is due primarily to increased revenue from TSM (Transition Switch Module) battlefield-communications equipment and flight-line test systems, partially offset by a decline in electronic-support-measures systems. For the six-month period, organic revenue grew by $115.9 million, or 42.6 percent, over the prior year. Increased Revenue Guidance On May 3, we raised revenue guidance by $90 million to a range of $1,050 million to $1,100 million for 2007, following the competitive award in April of 2,200 �CREW 2.1� counter-IED systems. (CREW is an acronym for electronic equipment that counters radio-controlled IEDs.) On July 16, we received orders for an additional 3,000 CREW 2.1 systems, a portion of which are expected to be delivered in 2007. As a result, EDO is now forecasting revenue of $1,100 million to $1,150 million for 2007. Earnings Operating earnings in the second quarter of 2007 were $14.5 million, an increase of $8.7 million, or 149 percent over the $5.8 million recorded in the prior year�s quarter. The improvement was driven primarily by higher revenue, resulting in better absorption of overhead costs, as well as a corporate-wide effort to reduce controllable expenses. As expected, operating earnings are being negatively impacted by unabsorbed overhead costs in two facilities as we prepare for production of CREW devices. This impact will be reversed when CREW-related revenue begins late in the third quarter. Operating earnings in the second quarter were also reduced by acquisition-related retention expense and the timing of stock-option expense. The retention expense was approximately $2.2 million, of which $0.9 million was non-cash expense. As mentioned above, non-cash stock-option expense of $0.8 million was related to options awarded under the 2004 Non-Employee Director Stock Plan. These stock options were awarded primarily in the second quarter of 2007, whereas in 2006 such options were awarded in the first quarter. EBITDA, as adjusted, was $23.8 million, or 9.7 percent of revenue in the second quarter of 2007, versus $12.8 million, or 8.4 percent of revenue in the prior year�s quarter. Margins are expected to improve further in the fourth quarter, due to increased capacity utilization from CREW production. As a result, we are maintaining our guidance of 10.5 to 11.5 percent margins for the full year. (EBITDA � Earnings Before Interest, Taxes, Depreciation, and Amortization - 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 $65.3 million, versus a negative $4.1 million in the second quarter of 2006. We collected substantial cash from TSM sales during the second quarter, which was used primarily to reduce short-term debt. In the prior year, working capital needs were increasing as we geared up for initial TSM production, resulting in the negative cash flow during that period. As was the case with TSM, initial production under the company�s recently awarded CREW 2.1 contracts may require a similar temporary increase in 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 June 30, the money borrowed under this line of credit was $120 million, a reduction of $80 million from the $200 million originally borrowed in September to fund the acquisitions of CAS and IST. We expect to further reduce borrowings under this line of credit to below $100 million by year end. Backlog The total funded backlog of unfilled orders as of June 30 was $981.3 million, up 11.7 percent from $878.2 million on March 31, and up 61.4 percent from $608.0 million at the end of the second quarter of 2006. The funded backlog as of June 30 does not include the $210 million of new CREW 2.1-related orders received on July 16. 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 $2.65 billion of potential future revenue, for a total backlog of more than $3.6 billion. Conference Call EDO will conduct a conference call at 10:30 a.m. EDT on August 2 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 August 9. To listen to the telephone replay, dial 1-877-660-6853, account #286, and conference ID #247339 (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 EBITDA margins, and debt levels, 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 (In thousands, except per share amounts) � � Three months ended Six months ended June 30, June 24, June 30, June 24, 2007 2006 2007 2006 (unaudited) (unaudited) � Net sales $ 246,020 $ 152,398 $ 501,436 $ 272,107 � Costs and expenses: Cost of sales 191,290 119,657 392,320 210,901 Selling, general and administrative 35,614 23,903 69,327 49,261 Research and development 2,437 3,006 4,530 6,212 Acquisition-related retention expense � 2,151 � � - � � 4,303 � � - � 231,492 146,566 470,480 266,374 � � � � Operating earnings 14,528 5,832 30,956 5,733 � Interest income 165 1,101 351 2,122 Interest expense (5,600 ) (2,237 ) (11,776 ) (4,661 ) Other, net � 27 � � (111 ) � (12 ) � (257 ) Non-operating expense, net (5,408 ) (1,247 ) (11,437 ) (2,796 ) � � � � Earnings before income taxes 9,120 4,585 19,519 2,937 � Income tax (expense) benefit (3,408 ) 1,686 (7,819 ) 2,395 � � � � Net earnings $ 5,712 � $ 6,271 � $ 11,700 � $ 5,332 � � Net earnings per common share: Basic: $ 0.31 $ 0.35 $ 0.63 $ 0.30 Diluted: $ 0.27 � $ 0.30 � $ 0.56 � $ 0.29 � � Weighted average shares outstanding Basic 18,661 18,099 18,600 18,055 Diluted (a) � 25,204 � � 24,468 � � 25,049 � � 18,538 � � � Backlog of unfilled orders $ 981,325 � $ 608,034 � � � (a) Assumes exercise of dilutive stock options. The convertible notes were dilutive in the second quarter of both years, as well as the first half of 2007. They were anti-dilutive in the first half of 2006. EDO Corporation and Subsidiaries Condensed Consolidated Balance Sheets ($000's omitted) � � June 30, Dec 31, 2007 � 2006 � Assets � Current Assets: Cash and cash equivalents $ 19,641 $ 25,322 Accounts receivable, net 215,868 265,298 Inventories 70,735 56,255 Deferred income tax asset, net 12,448 12,160 Prepayments & other � 10,945 � � 13,682 Total Current Assets 329,637 372,717 � Property, plant and equipment, net 59,931 59,109 Goodwill 394,879 385,926 Other intangible assets 89,025 103,776 Deferred income tax asset, net 17,455 8,291 Other assets � 18,737 � � 20,003 Total Assets $ 909,664 � $ 949,822 � Liabilities & Shareholders' Equity � Current Liabilities: Accounts payable and accrued liabilities $ 117,369 $ 143,908 Borrowings from bank line of credit 120,000 180,000 Contract advances and deposits 58,133 44,323 Note payable, current � 7,766 � � 7,766 Total Current Liabilities 303,268 375,997 � 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 76,982 77,734 Environmental obligation 1,163 1,198 Other long-term liabilities 30 40 Shareholders' equity � 293,394 � � 274,916 Total Liabilities & Shareholders' Equity $ 909,664 � $ 949,822 EDO Corporation and Subsidiaries SEGMENT DATA (In thousands) � � Three months ended Six months ended June 30, June 24, June 30, June 24, � 2007 � � 2006 � 2007 � � 2006 (unaudited) (unaudited) Net sales: Engineered Systems & Services $ 119,594 $ 63,795 $ 235,980 $ 125,053 Electronic Systems & Communications � 126,426 � � � 88,603 � � 265,456 � � � 147,054 � $ 246,020 � � $ 152,398 � $ 501,436 � � $ 272,107 � � Operating earnings: Engineered Systems & Services $ 9,278 $ 1,636 $ 18,567 $ 3,344 Electronic Systems & Communications � 5,250 � � � 4,196 � � 12,389 � � � 2,389 � 14,528 5,832 30,956 5,733 � Net interest expense (5,435 ) (1,136 ) (11,425 ) (2,539 ) Other, net � 27 � � � (111 ) � (12 ) � � (257 ) � Earnings before income taxes $ 9,120 � � $ 4,585 � $ 19,519 � � $ 2,937 � EDO Corporation and Subsidiaries Calculation of EBITDA (In thousands, except per share amounts) � Three months ended Six months ended June 30, June 24, June 30, June 24, 2007 2006 2007 2006 (unaudited) (unaudited) � Net earnings before income taxes $ 9,120 $ 4,585 $ 19,519 $ 2,937 � Interest expense 5,600 2,237 11,776 4,661 Interest (income) � (165 ) � (1,101 ) � (351 ) � (2,122 ) Net interest expense 5,435 1,136 11,425 2,539 � Depreciation 3,509 2,958 7,018 5,736 Amortization � 2,586 � � 1,800 � � 5,151 � � 3,414 � Total depreciation & amortization 6,095 4,758 12,169 9,150 � � � � EBITDA 20,650 10,479 43,113 14,626 � Acquisition-related retention expense (non-cash) 852 - 1,704 - ESOP compensation expense 1,474 1,149 2,484 2,335 Pension expense � 812 � � 1,194 � � 1,623 � � 2,388 � EBITDA, as adjusted $ 23,788 $ 12,822 $ 48,924 $ 19,349 � Diluted shares outstanding * 19,317 18,581 19,162 18,538 � EBITDA, as adjusted, per share * $ 1.23 � $ 0.69 � $ 2.55 � $ 1.04 � � � * Excludes potential impact of subordinated note conversion. � � Summary of Cash Flows (In thousands) � Three months ended Six months ended June 30, June 24, June 30, June 24, 2007 2006 2007 2006 (unaudited) (unaudited) � Cash provided (used) by operations $ 65,335 $ (4,105 ) $ 70,702 $ 9,912 � Cash (used) by investing activities $ (5,114 ) $ (4,317 ) $ (17,233 ) $ (9,541 ) � Cash provided (used) by financing activities $ (40,580 ) $ 27 � $ (59,150 ) $ (10 ) $ 19,641 � $ (8,395 ) $ (5,681 ) $ 361 � EDO Corporation and Subsidiaries GUIDANCE DATA ESTIMATES � � Fiscal 2007 � Revenue range $1,100 million - $1,150 million � Pension expense $3.2 million � Acquisition-related retention expense $8.0 million � Effective tax rate (Fed & State) 40% (excluding adjustments to tax reserves) � 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 25.2 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. The Notes were dilutive to EPS in the second quarter of 2007 and 2006. � - 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 25.2 million shares. � This table contains estimates based on management's current expectations. This information is forward-looking, and actual results may differ materially.