WE MAY BE REQUIRED TO DEFEND LAWSUITS OR PAY DAMAGES IN CONNECTION WITH THE
ALLEGED OR ACTUAL HARM CAUSED BY OUR PRODUCTS.
We face an inherent business risk of exposure to product liability claim in the event that the use of some of our products is alleged to have resulted in unintended harm to others or to property. Although we maintain general liability and product liability insurance, we may incur significant liability if product liability lawsuits against us are successful. We cannot assure you that such coverage will be adequate to cover all claims that may arise or that it will continue to be available to us on acceptable terms.
MARKETING AND INTERNATIONAL SALES
We sell defense products as a prime contractor and through subcontracts with other prime contractors. In addition to defense sales to the U.S. DoD, we also sell defense equipment to the U.S. Government on behalf of foreign governments under the Foreign Military Sales program (*mainly Israel-Ed*). Subject to approval by the U.S. Department of State, we sell to foreign governments both directly and through Foreign Military Funded programs (*Israel again-Ed*) and commercial sales.
It is generally the policy of our U.S. business units to denominate all foreign contracts in U.S. dollars and seek not to incur significant costs in connection with long-term foreign contracts until we have received advance payments or letters-of-credit on amounts due under the contracts.
EDO (UK) Ltd. generally denominates its contracts in British Pounds Sterling. (*hmm.so.. EDO (UK) sell direct to foriegn governments...I wonder which ones they might be?*)
International sales comprised 14% of consolidated net sales in 2004, 18% in 2003, and 15% in 2002.
Net sales to the U.S. Government, as a prime contractor and through subcontracts with other prime contractors, accounted for $333.9 million or 62%
of our 2004 consolidated net sales compared with $348.3 million or 76% in 2003 and $245.5 million or 75% in 2002, and consisted primarily of sales to the DoD.
Such sales include sales of military equipment to the U.S. Government for resale to foreign governments under the Foreign Military Sales program. Our business is not substantially dependent on any contract.
Our defense business can be and has been significantly affected by changes in national-defense policy and spending. Our U.S. Government contracts and
subcontracts and certain foreign-government contracts contain the usual required provisions permitting termination at any time for the convenience of the
government with payment for work completed and committed along with associated profit at the time of termination.
Our contracts with the DoD are made on either a fixed-price or cost-reimbursable basis. Both types may include incentive provisions. Fixed-price contracts provide fixed compensation for specified work. Cost-
reimbursable contracts require us to perform specified work in return for reimbursement of costs (to the extent allowable under U.S. Government regulations) plus a specified fee. Under both contract types, an incentive
adjustment may be made to our fee based on attainment of performance, scheduling, cost, quality or other goals. In general, with fixed-price contracts we assume a greater risk of loss, but also have the potential for higher profit margins, compared to cost-reimbursable contracts. The distribution of our government contracts between fixed-price and cost-reimbursable contracts varies from time to time.
COMPETITION AND OTHER FACTORS
Some of our products are sold in markets containing a number of competitors substantially larger than us and with greater financial resources. Direct sales of military products to the U.S. and foreign governments are based principallyon product performance, cost and reliability. Such products are generally sold in competition with products of other manufacturers that may fulfill an
equivalent function, but which are not direct substitutes.
We purchase some materials and components used in our systems and equipment from independent suppliers. These materials and components are normally not purchased under long-term contracts unless a long-term sales contract with one of our customers so requires. We believe that most of the items we purchase are obtainable from a variety of suppliers. We normally seek to have alternative sources for major items, although we are sometimes dependent on a single
supplier or a few suppliers for some items.
It is difficult to state precisely our market position in all of our product lines because information as to the volume of sales of similar products by our competitors is not generally available and the relevant markets are often
not precisely defined. However, we believe that we are a significant factor in the markets for stores-release mechanisms for military aircraft, (*EDO (UK) make these*)military sonar systems, military data-links, helicopter-towed mine-countermeasures systems, piezoelectric ceramics, electronic-countermeasures systems, and antennas.
Although we own a significant number of patents and have filed applications for additional patents, we do not believe that our businesses depend heavily upon our patents. In addition, most of our U.S. Government contracts license us to use patents owned by others. Similar provisions in the U.S. government contracts awarded to other companies make it impossible for us to prevent the use by other companies of our patents in most domestic defense work.
Refer to Note 17 on page 63 of this Report for information regarding the cost of compliance with environmental regulations. (* EDO CORP are currently the subject of a legal action by the US Federal Government over enviromental damage caused by their
As of December 31, 2004, we employed 2,546 persons.
REDUCTIONS IN GOVERNMENT SPENDING WOULD ADVERSELY AFFECT OUR RESULTS OF
A reduction in purchases of our products by domestic and foreign government agencies would have a material adverse effect on our business because a significant portion of our net sales are derived from contracts directly or indirectly with government agencies. In 2004, 2003 and 2002, we derived about 62%, 76% and 75%, respectively, of net sales from direct and indirect contracts with the U.S. Government and derived about 14%, 18% and 15%, respectively, of net sales from international sales to foreign governments. The development of our business will depend upon the continued willingness of the U.S. and foreign
governments to fund existing and new defense programs and, in particular, to continue to purchase our products and services. Although defense spending in the
United States has recently increased, further increases may not continue and any proposed budget or supplemental budget request may not be approved. In addition, the U.S. Department of Defense may not continue to focus its spending on technologies that we incorporate in our products.
THE U.S. GOVERNMENT MAY TERMINATE OR MODIFY OUR EXISTING CONTRACTS OR ITS
CONTRACTS WITH THE PRIME CONTRACTORS FOR WHICH WE ARE A SUBCONTRACTOR, WHICH
WOULD ADVERSELY AFFECT OUR REVENUE.
A significant portion of our revenues are derived from U.S. Government contracts, directly or indirectly. There are inherent risks in contracting with the U.S. Government, including risks peculiar to the defense industry, which could have a material adverse effect on our business, financial condition or results of operations. Laws and regulations permit the U.S. Government to:
- terminate contracts for its convenience;
- reduce or modify contracts or subcontracts if its requirements or budgetary constraints change;
- cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable;
- adjust contract costs and fees on the basis of audits done by its agencies; and
- control or prohibit the export of our products.
If the U.S. Government terminates our contracts for convenience, we may only recover our costs incurred or committed for settlement expenses and profit on work completed before the termination. Additionally, most of our backlog could be adversely affected by any modification or termination of contracts with the U.S. Government or contracts the prime contractors have with the U.S. Government. The U.S. Government regularly reviews our costs and performance on its contracts, as well as our accounting and general business practices. The U.S. Government may reduce the reimbursement for our fees and contract-related costs as a result of an audit.
OUR BUSINESS IS SUBJECT TO VARIOUS RESTRICTIVE LAWS AND REGULATIONS BECAUSE WE ARE A CONTRACTOR AND SUBCONTRACTOR TO THE U.S. GOVERNMENT AND BECAUSE WE PROVIDE MILITARY PRODUCTS TO FOREIGN GOVERNMENTS.
As a contractor and subcontractor to the U.S. Government, we are subject to various laws and regulations that are more restrictive than those applicable to non-government contractors. We are required to obtain and maintain material governmental authorizations and approvals to run our business as it is currently conducted.
For example, we need a license to operate an FAA repair station. In addition, because we provide defense equipment and related services to foreign governments, we must obtain licenses from the U.S. State Department for our foreign exports. Our failure or inability to obtain these licenses could have a material adverse effect on our business. New or more stringent laws or government regulations concerning government contracts and defense exports, if adopted and enacted, could have a material adverse effect on our business. Responding to governmental audits, inquiries or investigations may involve significant expense and divert management attention from regular operations.
Also, an adverse finding in any such audit, inquiry or investigation could involve debarment, fines, injunctions *;-)* or other sanctions.
IF WE FAIL TO WIN COMPETITIVELY AWARDED CONTRACTS IN THE FUTURE, WE MAY
EXPERIENCE A REDUCTION IN OUR SALES, WHICH COULD NEGATIVELY AFFECT OUR
We obtain many of our U.S. Government contracts through a competitive bidding process. We cannot assure you that we will continue to win competitively
awarded contracts or that awarded contracts will generate sales sufficient to result in our profitability. We are also subject to risks associated with the following:
- the frequent need to bid on programs in advance of the completion o their design (which may result in unforeseen technological difficulties and cost overruns);
- the substantial time and effort, including the relatively unproductive design and development required to prepare bids and proposals, spent for competitively awarded contracts that may not be awarded to us;
- design complexity and rapid technological obsolescence; and
- the constant need for design improvement.
Our government contracts may be subject to protest or challenge by unsuccessful bidders or to termination, reduction or modification in the event of changes in government requirements, reductions in federal spending or other factors. In addition, failure to obtain a renewal or follow-on contract with respect to any significant contract or a number of lesser contracts with the U.S. Government or foreign governments would result in a loss of revenues. If revenues from the award of new contracts fail to offset this loss, it could have
a material adverse effect on our results of operations and financial position.
A LARGE MAJORITY OF OUR CONTRACTS ARE FIXED-PRICE, AND WE MAY FACE INCREASED
RISKS OF COST OVERRUNS OR LOSSES ON OUR CONTRACTS.
The majority of our government contracts and subcontracts are firm, fixed-price contracts providing for a predetermined fixed price for the products we make regardless of the costs we incur. At times, we must therefore make pricing commitments to our customers based on our expectation that we will achieve more cost-effective product designs and automate more of our
manufacturing operations. The manufacture of our products requires a complex integration of demanding processes involving unique technical skill sets. In
addition, the expense of producing products can rise due to increased costs of materials, components, labor, capital equipment or other factors. As a result, we face risks of cost overruns or order cancellations if we fail to achieve forecasted product design and manufacturing efficiencies or if products cost more to produce than expected.
THE UNSUCCESSFUL INTEGRATION OF A BUSINESS OR BUSINESS SEGMENT WE ACQUIRE
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS.
One of our key operating strategies is to pursue selective acquisitions. We review and actively pursue possible acquisitions on a continuous basis. Except
as previously disclosed in our public filings, we do not currently have any commitments, agreements or understandings to acquire any specific businesses or
other material assets. Our acquisition strategy may require additional debt or equity financing, resulting in additional leverage or dilution of ownership. We
cannot assure you that any future acquisition will be consummated, or that if consummated, we will be able to integrate such acquisition successfully without
a material adverse effect on our financial condition or results of operations. Moreover, any acquisition could involve other risks, including:
- diversion of management's attention from existing operations;
- potential loss of key employees or customers of acquired companies; and
- exposure to unforeseen liabilities of acquired companies.
Some of our partners are also potential competitors, which may impair the viability of new strategic relationships. While we must compete effectively in
the marketplace, our future alliances may depend on our partners' perception of us. Our ability to win new and/or follow-on contracts may be dependent upon our
relationships within the military industry.
WE HAVE DEVELOPED OUTSOURCING ARRANGEMENTS FOR THE MANUFACTURE OF MANY OF THE COMPONENTS AND SUB-ASSEMBLIES OF OUR PRODUCTS. IF THIRD PARTIES FAIL TO DELIVER QUALITY PRODUCTS AND COMPONENTS AT REASONABLE PRICES ON A TIMELY BASIS, WE MAY ALIENATE SOME OF OUR CUSTOMERS AND OUR REVENUES, PROFITABILITY AND CASH FLOW MAY DECLINE.
We use contract manufacturers as an alternative to our own manufacture of the components and sub-assemblies of our products. If these contract
manufacturers are not willing to contract with us on competitive terms or devote dequate resources to fulfill their obligations to us, or we do not properly manage these relationships, our existing customer relationships may suffer. In addition, by undertaking these activities, we run the risks that
- the reputation and competitiveness of our products and services may deteriorate as a result of the reduction of our control and quality and delivery schedules and the consequent risk that we will experience supply interruptions and be subject to escalating costs; and
- our competitiveness may be harmed by the failure of our contrac manufacturers to develop, implement or maintain manufacturing methods appropriate for our products and customers.
WE MAY BE REQUIRED TO DEFEND LAWSUITS OR PAY DAMAGES IN CONNECTION WITH THE
ALLEGED OR ACTUAL HARM CAUSED BY OUR PRODUCTS.
We face an inherent business risk of exposure to product liability claim in the event that the use of some of our products is alleged to have resulted in
unintended harm to others or to property. Although we maintain general liability and product liability insurance, we may incur significant liability if product liability lawsuits against us are successful. We cannot assure you that such coverage will be adequate to cover all claims that may arise or that it will continue to be available to us on acceptable terms.
WE MAY INCUR SUBSTANTIAL ENVIRONMENTAL LIABILITY ARISING FROM OUR ACTIVITIES
INVOLVING THE USE OF HAZARDOUS MATERIALS.
Our business is subject to federal, state, local and foreign laws, regulations and ordinances governing the use, manufacture, storage, handling and disposal of hazardous materials and waste products. From time to time, our operations have resulted or may result in noncompliance with environmental laws or liability for the costs of investigating and cleaning up, and certain damages resulting from, sites of past spills, disposals or other releases of hazardous materials. In addition, we have been identified as a potentially responsible
party pursuant to the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, or corresponding state
environmental laws, for the cleanup of contamination resulting from past disposals of hazardous materials at some sites where we, along with others, sent waste in the past. We are a party to consent decrees as a result of our potential responsibility for contamination caused by the disposal of hazardous materials. We cannot assure you that such matters, or any similar liabilities
that arise in the future, will not exceed our resources, nor can we completely eliminate the risk of accidental contamination or injury from these materials.
POLITICAL AND ECONOMIC INSTABILITY IN FOREIGN MARKETS MAY HAVE A MATERIAL
ADVERSE EFFECT ON OUR OPERATING RESULTS.
Foreign sales represented about 14% our total sales in 2004 and we intend
to increase the amount of foreign sales we make in the future. Foreign sales are
subject to numerous risks, including political and economic instability in
foreign markets, restrictive trade policies of foreign governments, economic
conditions in local markets, inconsistent product regulation by foreign agencies
or governments, the imposition of product tariffs and the burdens of complying
with a wide variety of international and U.S. export laws and differing
regulatory requirements. If we fail to increase our foreign sales it could have
a material adverse effect on our results of operations.
A FAILURE TO ATTRACT AND RETAIN TECHNICAL PERSONNEL COULD REDUCE OUR REVENUES
AND OUR OPERATIONAL EFFECTIVENESS.
There is a continuing demand for qualified technical personnel, and we
believe that our future growth and success will depend upon our ability to
attract, train and retain such personnel. Competition for personnel in the
military industry is intense, and there are a limited number of persons with
knowledge of, and experience in, this industry. Although we currently experience
relatively low rates of turnover for our technical personnel, the rate of
turnover may increase in the future. An inability to attract or maintain a
sufficient number of technical personnel could have a material adverse effect on
our contract performance or on our ability to capitalize on market