E D O (NYSE:EDO)
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EDO Corporation (NYSE: EDO) reported record revenue of
$648.5 million in 2005, up 20.9 percent from the $536.2 million
recorded in 2004. Net earnings were $26.3 million, a decline of $2.8
million from the $29.1 million recorded in the prior year. On a
diluted per-share basis, earnings for 2005 were $1.33, down 10.7
percent from the $1.49 recorded in 2004.
For the quarter ended Dec. 31, 2005, revenue was $200.0 million,
up 18.2 percent from the $169.1 million recorded in the fourth quarter
of 2004. Net earnings for the fourth quarter of 2005 were $7.4
million, down $6.8 million from the $14.2 million recorded in the
fourth quarter of 2004. On a diluted per-share basis, which reflects
the new convertible notes, earnings for the fourth quarter of 2005
were $0.37, versus the $0.68 in the fourth quarter of 2004.
The decline in earnings reflects debt refinancing costs of $4.2
million. It also included approximately $7.3 million of expenses
related to facilities projects, of which $6.6 million was previously
announced in prior quarters. Excluding these costs and the additional
dilution related to the new convertible notes, the diluted per-share
earnings would have been $0.50 in the fourth quarter and $1.65 for the
full year.
"We continued to make substantial progress in 2005 towards our
long-term growth objectives," said Chief Executive Officer James M.
Smith. "We strengthened our capital resources with our refinancing and
credit facility, completed three acquisitions, and made investments in
R&D and new facilities and equipment that will support sustained
growth and profitability in the future.
"Our backlog has grown by 18 percent and we have won a number of
important new contracts. Looking ahead, we are confident that 2006
will see strong growth in revenue and earnings. The people and assets
needed to do the job are in place, and we expect continued progress in
achieving our goals."
Highlights for the Year
-- Acquired EVI Technologies and NexGen Communications in pursuit
of our stated objective to increase participation in markets
related to the intelligence communities.
-- Acquired Fiber Innovations in pursuit of our stated objective
to increase participation in weapons systems. Fiber
Innovations adds state-of-the-art composite-structure design
and manufacturing capabilities in this area.
-- Redeemed the company's 5.25% notes and replaced them with a
new 4% issue. At the same time, we took advantage of the
strong demand for our new issue to raise an additional $58
million, with a net after-tax increase in interest payments of
only $481,000.
-- Successfully fielded advanced Warlock
electronic-force-protection equipment, generating sales of
approximately $144 million, up from $40 million in 2004.
-- Won a $240 million contract with the Marine Corps for new
battlefield communications equipment, known as the Transition
Switch Module.
-- Awarded a $30 million contract by Lockheed Martin for sonar
equipment on the new Spanish S-80A submarine. The initial
award covers outboard sonar arrays on four
conventionally-powered submarines. This award positions the
Lockheed Martin team, including EDO, to compete for other
international submarine opportunities.
-- Secured $20 million in new development contracts on the P-8A
Multi-mission Maritime Aircraft. The contracts are for a
sonobouy-launch system and a weapon-release system. These
programs combine the technologies of pneumatics, composite
structures, and release electronics to enhance our product
line with applications to fixed and rotary wing aircraft.
These development projects are expected to result in long-term
production contracts.
-- Added $39 million in new development and support contracts for
the B-1B bomber.
-- Selected by General Dynamics to provide our ES 3601 tactical
radar Electronic Support Measures (ESM) and surveillance
system for use on their "Flight 0" Littoral Combat Ships. The
ES 3601 is a state-of-the-art precision system that enhances
ship survivability by detecting, identifying, and locating
hostile ship and missile radar signals early and efficiently.
-- Secured a $15.6 million contract to build the
microwave-receiver subsystem on the new Global Precipitation
Measurement satellite system. This was a key strategic win for
the Ball Aerospace/EDO team as we pursue other potential
radiometer opportunities.
-- Won an $11 million contract for the first production lot of
135 BRU-55 dual-carriage, "smart" bomb racks for the Navy's
F/A-18 aircraft.
-- Opened three major operating facilities and closed three older
facilities, thereby improving capabilities, efficiencies, and
capacity for sustainable future growth.
Financial Reporting Segments
The company is reporting in new business segments to better
reflect our current business and organization. The new business
segments are Engineered Systems and Services, and Electronic Systems
and Communications. Results by reporting segment are contained in the
attached tables.
Organic Revenue Growth
Organic revenue grew by approximately 17 percent in 2005. This
exceeds the company's 8 to 10 percent forecast made at the beginning
of 2005.
For the fourth quarter, organic revenue growth was approximately
13 percent. This growth was due primarily to strong sales in
force-protection and communications-related products, partially offset
by declines in professional and engineering services, aircraft
armament systems, and electronic warfare equipment, primarily on the
EA-6B aircraft.
- 2006 Forecast
Given the current contract base and internal projections, we are
maintaining our forecast of long-term organic revenue growth at a
range of 8 to 10 percent annually. Consequently, EDO estimates that
revenue for the full year 2006, excluding any new acquisitions, will
be in the range of $715 million to $730 million, as indicated on the
attached "Guidance Data Estimates" worksheet.
Margins
For the fourth quarter, the gross margin was 22.9 percent of
revenue, versus 27.4 percent in the prior year. The decline was
primarily related to lower sales, and thus less absorption of costs,
in professional services.
For the year, gross profit margins decreased to 24.3 percent of
revenue in 2005, versus 26.7 percent in 2004. In addition to the lower
professional services sales, margins were reduced by the previously
disclosed cost growth of $6 million related to the ALOFTS sonar
project and an aircraft data-link development project.
Operating margins for 2005 were 8.2 percent versus 9.8 percent in
2004. The lower operating margin in 2005 was due to a number of
factors in addition to those mentioned above. EDO incurred expenses of
$7.3 million for facilities projects, including an environmental cost
provision and the start-up of a new undersea-warfare operation in
Panama City, Florida. There was also a $5.5 million increase in
research and development expenses.
As a result, EBITDA, as adjusted, was 12.0 percent of revenue in
2005, below our expectations. However, we continue to maintain our
long-term target range of 13 to 14 percent.
EBITDA is a generally accepted metric employed by our industry.
Our adjustments include primarily ESOP and pension expenses, and are
identified in detail on the attached reconciliation schedule.
Cash Flow
Cash flow from operations for the year was $39.2 million, up 52.9
percent from the $25.7 million derived from operations in 2004. Our
cash balance was $108.7 million at year end.
Backlog
The total funded backlog of unfilled orders at Dec. 31, 2005
increased to $558.7 million from $474.6 million at Dec. 31, 2004.
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 $646 million in what we view as
high-confidence future revenue, for a total of more than $1.2 billion.
Conference Call
EDO will conduct a conference call at 10:30 a.m. EST on Feb. 23 to
review these results in more detail. A live web cast of the conference
call will be available at www.edocorp.com or www.vcall.com. For those
who cannot listen to the live broadcast, a replay of the call will be
available on the corporate site. There will also be a telephone replay
of the call available until March 2. To listen to the telephone
replay, dial 1-877-660-6853 (outside the U.S. dial 1-201-612-7415),
account #286, and conference ID #191148.
About EDO Corporation
EDO Corporation designs and manufactures a diverse range of
products for defense, intelligence, and commercial markets, and
provides related engineering and professional services.
Major product groups include: Defense Electronics, Communications,
Aircraft Armament Systems, Undersea Warfare, and Integrated Composite
Structures. EDO's advanced systems are at the core of the
transformation to lighter, faster, and smarter defense capabilities.
EDO (www.edocorp.com) was founded in 1925, and is headquartered in
New York City. The company employs 3,000 people.
Forward-Looking Statements
Certain statements made in this release, including statements
about revenue expectations (including revenue expectations for 2006),
organic revenue growth, earnings growth, EBITDA margin expectations,,
future profitability, pension expenses, effective tax rate ranges and
expected long-term production contracts 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, but not
limited to, those described above and the following: changes in demand
for the company's products and services, changes in product mix, the
timing of customer orders and deliveries, award or termination of
contracts, changes in the government's funding priorities, the impact
of competitive products and pricing, the failure to make or
successfully integrate acquisitions, changes in interest rates,
discount rates or other changes that may impact pension cost
assumptions, unanticipated cost growth 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.
-0-
*T
EDO Corporation and Subsidiaries
Condensed Consolidated Statements of Earnings
($000's omitted, except per share data)
Three months ended Year ended
Dec 31, Dec 31, Dec 31, Dec 31,
2005 2004 2005 2004
----------- --------- --------- ---------
(unaudited)
Net sales $199,978 $169,131 $648,482 $536,173
Costs and expenses:
Cost of sales 154,105 122,871 490,617 392,961
Selling, general and
administrative 23,993 21,554 85,921 78,791
Research and development 5,132 3,971 17,122 11,620
Environmental cost provision 5 - 1,543 -
----------- --------- --------- ---------
183,235 148,396 595,203 483,372
----------- --------- --------- ---------
Operating earnings 16,743 20,735 53,279 52,801
Interest income 1,098 490 2,300 1,271
Interest expense (2,547) (2,348) (9,420) (9,119)
Premium paid for redemption
of 5.25% Notes (2,894) - (2,894) -
Write-off of unamortized
costs on 5.25% Notes (1,277) - (1,277) -
Other, net (69) (168) (147) (319)
----------- --------- --------- ---------
Non-operating expense, net (5,689) (2,026) (11,438) (8,167)
----------- --------- --------- ---------
Earnings before income taxes 11,054 18,709 41,841 44,634
Income-tax expense (3,623) (4,548) (15,572) (15,566)
----------- --------- --------- ---------
----------- --------- --------- ---------
Net earnings $ 7,431 $ 14,161 $ 26,269 $ 29,068
=========== ========= ========= =========
Net earnings per common share:
Basic: $ 0.41 $ 0.79 $ 1.45 $ 1.64
Diluted: $ 0.37 $ 0.68 $ 1.33 $ 1.49
=========== ========= ========= =========
Weighted average shares
outstanding
Basic 18,192 17,824 18,081 17,695
=========== ========= ========= =========
Diluted (a) 23,762 22,526 23,001 22,377
=========== ========= ========= =========
Backlog of unfilled orders $558,685 $474,605
========= =========
(a) Assumes exercise of dilutive stock options, and conversion of
convertible notes into common shares.
EDO Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
($000's omitted)
Dec 31, Dec 31,
2005 2004
-------------------
Assets
Current Assets:
Cash and cash equivalents $108,731 $ 98,884
Accounts receivable, net 189,190 153,810
Inventories 56,567 52,867
Deferred income tax asset, net 8,946 5,046
Notes receivable 7,100 7,202
Prepayments & other 3,809 3,493
Assets held for sale 914 -
-------------------
Total Current Assets 375,257 321,302
Property, plant and equipment, net 48,660 34,830
Goodwill 152,347 91,651
Other intangible assets 55,925 50,356
Deferred income tax asset, net 29,637 30,241
Other assets 25,573 18,309
-------------------
Total Assets $687,399 $546,689
===================
Liabilities & Shareholders' Equity
Current Liabilities:
Accounts payable and accrued liabilities $ 85,237 $ 80,898
Contract advances and deposits 42,244 13,696
Note payable, current 2,000 -
-------------------
Total Current Liabilities 129,481 94,594
Income taxes payable 6,513 5,768
Note payable, long term 5,000 -
Long-term debt 201,250 137,800
Post-retirement benefits obligations 103,815 94,936
Environmental obligation 1,392 1,663
Other long-term liabilities 55 -
Shareholders' equity 239,893 211,928
-------------------
Total Liabilities & Shareholders' Equity $687,399 $546,689
===================
EDO Corporation and Subsidiaries
SEGMENT DATA
($000's omitted)
Year ended
Dec 31, Dec 31,
2005 2004
-----------------
Net sales:
Electronic Systems & Communications $408,217 $273,306
Engineered Systems & Services 240,265 262,867
-------- --------
$648,482 $536,173
======== ========
Operating earnings (loss):
Electronic Systems & Communications $ 42,071 $ 26,493
Engineered Systems & Services 12,751 26,308
Environmental cost provision (1,543) -
-------- --------
53,279 52,801
Net interest and debt redemption expense (11,291) (7,848)
Other, net (147) (319)
-------- --------
Earnings before income taxes $ 41,841 $ 44,634
======== ========
EDO Corporation and Subsidiaries
Calculation of EBITDA
(In thousands, except per share amounts)
Three months ended Year ended
Dec 31, Dec 31, Dec 31, Dec 31,
2005 2004 2005 2004
--------- -------- --------- ---------
(unaudited) (unaudited)
Earnings before income taxes $ 11,054 $18,709 $ 41,841 $ 44,634
Interest income (1,098) (490) (2,300) (1,271)
Interest expense 2,547 2,348 9,420 9,119
Premium paid for redemption of
5.25% Notes 2,894 - 2,894 -
Write-off of unamortized costs
on 5.25% Notes 1,277 - 1,277 -
-------- ------- -------- --------
Net interest expense 5,620 1,858 11,291 7,848
Depreciation 2,530 2,403 9,768 10,476
Amortization 1,612 1,310 5,931 5,564
-------- ------- -------- --------
Total depreciation &
amortization 4,142 3,713 15,699 16,040
--------- -------- --------- ---------
EBITDA 20,816 24,280 68,831 68,522
ESOP compensation expense 1,181 1,244 4,952 4,330
Pension expense 1,068 533 4,277 2,183
-------- ------- -------- --------
EBITDA, as adjusted $ 23,065 $26,057 $ 78,060 $ 75,035
Diluted shares outstanding 18,431 18,118 18,345 17,969
EBITDA, as adjusted, per share* $ 1.25 $ 1.44 $ 4.26 $ 4.18
======== ======= ======== ========
* Excludes potential impact of subordinated note conversion.
Summary of Cash Flows
(In thousands)
Three months ended Year ended
Dec 31, Dec 31, Dec 31, Dec 31,
2005 2004 2005 2004
--------- -------- --------- ---------
(unaudited) (unaudited)
Cash provided by operations $ 18,492 $ 5,340 $ 39,251 $ 25,687
Cash (used) by investing
activities $(21,099) $(6,226) $(84,458) $(12,705)
Cash (used) by financing
activities $ 62,950 $ (55) $ 55,054 $ (730)
-------- ------- -------- --------
$ 60,343 $ (941) $ 9,847 $ 12,252
======== ======= ======== ========
EDO Corporation and Subsidiaries
GUIDANCE DATA ESTIMATES
Fiscal 2006
-----------
Revenue range $715 million - $730 million
Pension expense $4.8 million
FAS 123(R) Option Expense $1.0 million (All in 1Q06)
Effective operating tax rate range 41% - 42%
EBITDA, as adjusted, margin range 13.0% - 14.0%
ESOP shares issued per quarter 42,376
Average diluted shares outstanding*:
- If Note conversion is NOT dilutive 18.6 million
- If Note conversion is dilutive 24.5 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.)
The Notes were dilutive to EPS this quarter and for the year to date.
- 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.
Based on current projections, the Notes are expected to be
dilutive for the 2006 full-year. If so, the EPS calculation will be
based on about 24.5 million shares.
This table contains estimates based on management's current
expectations.
This information is forward-looking, and actual results may differ
materially.
*T