SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number #1-4252
UNITED INDUSTRIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2081809
(State or other jurisdiction of (I.R.S. Identification No.)
incorporation or organization)
18 East 48th Street, New York, NY 10017
(Address of principal executive offices)
Registrant's telephone number, including area code (212) 752-8787
-------------------------
Not Applicable
Former name, former address and former fiscal year,
if changed since last report.
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 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 requirements 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 latest practicable date. 12,172,143
shares of common stock as of August 1, 1995.
UNITED INDUSTRIAL CORPORATION
INDEX
Page #
Part I - Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets - Unaudited
June 30, 1996 and December 31, 1995 1
Consolidated Condensed Statements of Operations -
Three Months and Six Months Ended June 30, 1996 and 1995 2
Consolidated Condensed Statements of Cash Flows
Six Months Ended June 30, 1996 and 1995 3
Notes to Consolidated Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operation 7
PART II - Other Information 9
PART I - FINANCIAL INFORMATION
UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
June 30 December 31
1996 1995
---- ----
(UNAUDITED)
ASSETS
- ------
Current Assets
Cash & cash equivalents $ 16,657 $ 11,915
Trade receivables 27,994 32,911
Inventories
Finished goods & work-in-process 49,622 43,185
Materials & supplies 4,200 4,737
-------- --------
53,822 47,922
Deferred income taxes 6,467 6,487
Prepaid expenses & other current assets 1,628 1,761
-------- --------
Total Current Assets 106,568 100,996
Other assets 39,113 39,524
Property & equipment - less allowances
for depreciation (1996 - $89,423 & 1995 - $86,637) 41,745 42,586
-------- --------
$187,426 $183,106
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities
- -------------------
Short-term borrowings $ 4,956 $ 3,000
Accounts payable 8,679 10,132
Accrued employee compensation & taxes 7,537 6,384
Customer advances 8,863 6,384
Current portion of long-term debt 6,250 6,250
Other liabilities 8,130 4,472
Reserve for contract losses 7,027 10,751
------- -------
Total Current Liabilities 51,442 47,525
Long-term liabilities (less current maturities) 16,404 18,279
Deferred income taxes 9,910 9,820
Postretirement benefits other than pensions 21,831 21,322
Shareholders' Equity
- --------------------
Common stock $1.00 par value
Authorized - 15,000,000 shares; outstanding
12,172,143 and 12,170,793 shares at
1996 and 1995(net of shares in treasury) 14,374 14,374
Additional capital 90,201 91,421
Retained earnings (deficit) 578 (2,311)
Treasury stock, at cost, 2,205,005 shares
and 2,203,355 shares at 1996 and 1995 (17,314) (17,324)
-------- --------
87,839 86,160
-------- --------
$187,426 $183,106
======== ========
See accompanying notes
1
UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share amounts)
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
(UNAUDITED)
1996 1995 1996 1995
---- ---- ---- ----
Net Sales $ 55,265 $ 57,869 $109,766 $109,522
Operating costs & expenses
Cost of sales 42,570 45,464 83,319 84,057
Selling & administrative 10,052 9,423 20,956 20,491
Other (income) expense - net (52) 445 141 423
Interest - expense 652 601 1,215 1,189
Interest Income (333) (347) (557) (792)
-------- -------- -------- --------
52,889 55,586 105,074 105,368
-------- -------- -------- --------
Income before income taxes 2,376 2,283 4,692 4,154
Income taxes 918 959 1,803 1,690
-------- -------- -------- --------
Net income $ 1,458 $ 1,324 $ 2,889 $ 2,464
======== ======== ======== ========
Net earnings per share $ .12 $ .11 $ .24 $ .20
====== ====== ====== ======
See accompanying notes
2
UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
SIX MONTHS ENDED JUNE 30
------------------------
(UNAUDITED)
1996 1995
-------- ------
OPERATING ACTIVITIES
- --------------------
Net income $ 2,889 $2,464
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 4,055 4,186
Deferred income taxes 110 (2,863)
Increase (decrease) in contract loss provision (3,724) 2,821
Changes in operating assets and liabilities 3,469 3,328
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,799 9,936
INVESTING ACTIVITIES
- --------------------
Decrease in note receivable - 8,540
Purchase of property and equipment (2,262) (2,855)
Increase in other assets - net (535) (2,320)
-------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (2,797) 3,365
FINANCING ACTIVITIES
- --------------------
Increase in long-term liabilities - 31
Proceeds from borrowings 7,956 3,000
Payments on long-term debt & borrowings (6,000) (4,200)
Dividends (1,216) (2,555)
Proceeds from exercise of Stock options - 5
-------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 740 (3,719)
-------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 4,742 9,582
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,915 6,132
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,657 $ 15,714
======== ========
See accompanying notes
3
UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
June 30, 1996
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period ended June 30, 1996
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1996. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1995.
NOTE B - DIVIDENDS
A quarterly dividend of $.05 per share is payable August 30, 1996.
NOTE C - LEGAL PROCEEDINGS
The Company, along with numerous other parties, has been named in five tort
actions relating to environmental matters based on allegations partially related
to a predecessor's operations. These tort actions seek recovery for personal
injury and property damage among other damages. One tort claim is a certified
property and medical class action.
A subsidiary of the Company owned and operated a small facility at a site in the
State of Arizona that manufactured semi-conductors between 1959 and 1961 at
which time the subsidiary was sold by the Company. Athough this facility may
have used trichloroethylene ("TCE") in small quantities, there is no evidence
that this facility released or disposed of TCE at this site.
On May 18, 1993, the State of Arizona filed suit against the Company seeking the
recovery of investigative costs, injunctive relief to require the Company to
perform a Remedial Investigation and Feasibility Study ("RI/FS"), and ultimately
to require the remediation of alleged soil and groundwater contamination at and
near a certain industrial site. Since then the State has brought in co-
defendants whose operations at the site were substantially larger than those of
the Company.
On June 20, 1995 the Company and the State of Arizona executed an agreement in
principle to settle the litigation in exchange for a full release from liability
by the State and the Arizona Department of Environmental Quality. Subsequently,
the Company and the State signed a Consent Decree and Work Plan incorporating
these terms and conditions. On May 16, 1996, the United States District Court
approved and entered the Consent Decree. The Company has provided approximately
$1,900,000 based on estimates of the total cost for the settlement. Resolution
of this matter will not have a material adverse effect on the consolidated
financial position of the Company.
On February 11, 1992 a complaint was filed against the Company and ten other
named and ten unnamed entities in the Maricopa County Superior Court of Arizona
by seven individuals seeking to represent a class. A class in excess of 10,000
was originally alleged. The plaintiffs have amended their complaints to separate
the larger property damage and medical monitoring classes into smaller
subclasses based on geographic location and alleged exposure to solvents. In the
process of
4
amendment, the overall sizes of the respective classes have been significantly
reduced. This suit alleges that the members of the class have been exposed to
contaminated groundwater in the Phoenix/Scottsdale, Arizona area and suffer
increased risk of disease and other physical effects. They also assert property
damages under various theories; seek to have certain scientific studies
performed concerning health risks, preventative measures and long-term effects;
and seek incidental and consequential damages, punitive damages and an
injunction against actions causing further exposures. The property and medical
classes recently were certified. The Company has joined with the other
defendants and appealed the class certification issue to the Arizona Supreme
Court. The Company intends to vigorously contest these actions and believes that
the resolution of these actions will not be material to the Company.
Four additional lawsuits were filed on April 7, 1993, December 20, 1993, June
10, 1994 and July 18, 1995 in the Maricopa County Superior Court of Arizona.
These matters allege personal injury and wrongful death by multiple plaintiffs
arising from the alleged contamination in the Phoenix/Scottsdale, Arizona area.
The Company intends to aggressively defend against these claims; however, at
this time, no estimate can be made as to the amount or range of potential loss,
if any, to the Company with respect to these matters. In comparison to the other
defendants, the operations of the Company were very limited in time and size.
Since January 1993, Detroit Stoker had been named a third-party defendant in
approximately thirty-four asbestos lawsuits pending in the United States
District Court for the Northern District of Ohio. The third-party plaintiffs in
these actions were ship owners who had been sued by Great Lakes maritime workers
who sought damages in unstated amounts for alleged personal injuries and disease
as a result of exposure to asbestos while working aboard the ships. The ship
owners claimed that Detroit Stoker and numerous other suppliers furnished
products, supplies or components of the ships that contained asbestos. These
cases were consolidated in the national multi-district asbestos litigation
pending in the United States District Court, Eastern District of Pennsylvania.
In May, 1996 these cases were administratively dismissed without prejudice.
While the Company does not know whether any of these cases will be refiled in
the future, the dismissal imposes strict conditions on any plaintiff attempting
to reinstate suit.
Detroit Stoker was notified in March 1992 by the Michigan Department of Natural
Resources (MDNR) that it is a potentially responsible party in connection with
the clean-up of a former industrial landfill located in Port of Monroe,
Michigan. MDNR is treating the Port of Monroe landfill site as a contaminated
facility within the meaning of the Michigan Environmental Response Act (MERA),
MCLA Section 299.601 et seq. Under MERA, if a release or a potential release of
a discarded hazardous substance is or may be injurious to the environment or to
the public health, safety, or welfare, MDNR is empowered to undertake or compel
investigation and response activities in order to alleviate any contamination
threat. Detroit Stoker intends to aggressively defend these claims, however, at
this time, no estimate can be made as to the amount or range of potential loss,
if any, to Detroit Stoker with respect to this action.
The Company is involved in various other lawsuits and claims, including certain
other environmental matters, arising out of the normal course of its business.
In the opinion of management, the ultimate amount of liability, if any, under
pending litigation, including claims described above, will not have a materially
adverse effect on the Company.
In May 1995, AAI Systems Management, Inc. (the "subsidiary"), an indirect
subsidiary of the Company, submitted to the U.S. Government (the "customer") a
Request for Equitable Adjustment ("REA") totaling approximately $11,800,000 in
connection with a contract relating to a helicopter simulator program. The REA
seeks monetary damages based on costs incurred by the subsidiary arising out of
or in connection with customer directed suspension of work and resulting
schedule delays, additional work directives, and other actions by the customer
in connection with the contract for which contractors are allowed recovery under
the Federal Acquisition Regulations. On July 14, 1995, the subsidiary received
the final decision of the customer rejecting the REA in its entirety. To fully
5
protect the Company's interest, on October 10, 1995, a Notice of Appeal of the
final decision was filed with the Armed Services Board of Contract Appeals
seeking monetary damages plus interest. While the Company believes that the
formal claims asserted against the customer are meritorious and the Company will
vigorously pursue recovery of the monies claimed, the customer has asserted
substantive defenses to these claims. Because the proceedings are currently in
the discovery phase, it is not possible at this time to determine the ultimate
amount of recovery of these costs.
In connection with this program, the subsidiary failed to meet a particular
milestone on June 10, 1996. Consequently, on June 12, 1996 the customer issued
to the subsidiary a Show Cause Notice (the "Notice") advising the subsidiary
that the customer is considering terminating the contract for default. The
Notice asked the subsidiary to furnish any facts demonstrating that the
subsidiary's failure to meet that milestone was beyond the subsidiary's control
and without its fault or negligence. On June 27, 1996, the subsidiary responded
to the Notice and provided evidence that the delay was unavoidable and not due
to the subsidiary's negligence. The subsidiary has not received any formal
response from the customer but it has received requests for additional
information. The subsidiary has continued to make significant progress on the
program and is in the process of preparing a revised schedule for submission to
the customer in response to the customer's request.
Under a termination for default, the customer would likely attempt to recover
all monies previously paid to the subsidiary. Further, if the customer
reprocures a substantially similar system, the subsidiary could be responsible
for the excess reprocurement cost. If the customer ultimately terminates the
contract for default and the subsidiary is unsuccessful in its appeal of the
termination for default decision, the termination would likely have a material
adverse effect upon the Company.
Management is hopeful that further discussion with the customer will resolve the
issues raised in the Notice and will permit the contract to proceed to a
conclusion. In the event the contract is terminated for default, the Company
will assert substantial defenses to the termination action.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Results of Operations
Net sales decreased $2,604,000 or 4% to $55,265,000, in the second quarter of
1996 as compared to the second quarter of 1995. For the first six months of
1996, net sales of $109,766,000 were $244,000 higher than the same period in
1995. Sales decreased in both periods in all segments except the Defense segment
which experienced a slight increase in sales for the six months ending June 30,
1996. In the second quarter of 1996, lower sales resulted primarily from the
impact of percentage of completion method of accounting for increased costs on a
certain helicopter simulator program. Further, contract award delays in all
segments during both periods have adversely impacted sales. During the six month
period, improved sales related to training systems in the Defense segment
slightly more than offset the effects of the helicopter simulator program and
contract award delays.
Gross profit percentages increased approximately 1.54 and .84 percentage points
for the three and six month periods ended June 30, 1996, respectively, as
compared to the same periods in the prior year. Only the Defense segment showed
gross profit percentage improvement for these two periods. These improvements
were generally attributable to the mix of contracts in this segment. Included in
the Defense segment's costs in 1996 is a pretax charge of $900,000 related to
the reduction of the estimated net realizable value of certain non-contract
inventories. At December 31, 1995, the Company indicated that the net realizable
value of these inventories was $7,700,000. Inasmuch as the Company has not
produced a buyer for such inventory at March 31, 1996, it has reduced its
estimated net realizable value at that date to $6,800,000. The Company still
identifies potential buyers for a substantial portion of such inventory and has
based the estimate of the net realizable value on its current assessment of the
salability of this inventory. However, the Company faces significant competition
from other producers of similar products and therefore the estimated net
realizable value of this inventory may be further reduced during the year. The
gross profit margin percentage in the Energy segment is essentially unchanged
for the six month period in 1996 as compared to the same period in 1995.
However, shifts in sales volume between lower margin contract work and higher
margin aftermarket products, resulted in an increased gross profit margin
percentage in the first quarter and lower gross profit margin percentage in the
second quarter, as compared to the like periods in 1995.
Selling and administrative expenses as a percentage of net sales were
approximately 18.2% and 19.1% for the three and six month periods ended June 30,
1996, as compared to 16.3% and 18.7% for the same periods in 1995. The elements
accountable for the increase during the second quarter of 1996 were increased
marketing activities and professional fees, as well as decreased sales as
explained above.
Other (income)expense-net for the three and six month periods in 1995 included a
loss on disposition of assets in the Defense segment of $336,000.
Net income increased approximately 10% and 17% for the three and six month
periods ending June 30, 1996, respectively, due to the increase in gross profit
which was partially offset by increased selling and administrative expenses.
Liquidity and Capital Resources
Cash flows from operations were $6,799,000 for the six month period ended June
30, 1996, as compared to $9,936,000 for the same period in the prior year. The
change was principally attributable to the decrease in the reserve for contract
losses. Funds from operations were sufficient for dividends and capital
expenditures. The Company currently has no significant fixed commitments for
capital expenditures or for investments. Its capital requirements consist
primarily of its obligation to fund operations and principal and interest
payments on indebtedness. The Company expects that available cash and existing
lines of credit will be sufficient to finance operations through December 31,
7
1996. The Company is pursuing an extension or replacement of certain lines of
credit which expire September 30, 1996.
Contingent Matters
Reference is made to Note C to the Financial Statements included herewith, which
Note is incorporated herein by reference.
8
UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES
PART II - Other Information
ITEM 1 - Legal Proceedings
Reference is made to Note C to the financial statements included
in Part I hereof, which Note is incorporated herein by
reference, for information concerning lawsuits against the
Company and certain of its subsidiaries relating to
environmental and other matters.
ITEM 4 - Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of the Registrant was
held on May 14, 1996.
(b) Richard R. Erkeneff and E. Donald Shapiro were elected
directors at the meeting, for terms ending in 1999. The
incumbent directors whose terms of office continued after
the meeting are Edward C. Aldridge, Jr., Howard M. Bloch,
Harold S. Gelb and Susan Fein Zawel.
(c) Voting for the election of directors of the Registrant:
WITHHELD (including
FOR broker non-votes)
--- -----------------
Richard R. Erkeneff 9,545,604 223,836
E. Donald Shapiro 9,539,050 230,391
Other Matters:
9,664,309 shares were voted in favor of the proposal to
ratify the appointment of Ernst & Young LLP as independent
auditors of the Registrant for 1996 with 62,387 shares
voted against, 42,742 abstentions and no broker non-votes.
2,637,071 shares were voted in favor of the stockholder
proposal concerning elimination of a classified Board of
Directors with 4,473,686 voted against, 333,293 abstentions
and 2,325,391 broker non-votes. 6,332,276 shares were
voted in favor of the proposed amendments to the Restated
Certificate of Incorporation and Amended and Restated
Bylaws of the Corporation with 1,128,757 voted against,
172,729 abstentions and 2,135,679 broker non-votes. Since
at least 80% of the outstanding shares have not voted for
the amendments, the amendments are not approved. 8,079,776
shares were voted in favor of the proposed amendments to
the 1994 Stock Option Plan with 1,300,013 shares voted
against, 198,936 abstentions and 190,716 broker non-votes.
Reference is made to the Registrant's Proxy Statement dated
March 29, 1996 for its 1996 Annual Meeting for additional
information concerning the matters voted on at the meeting.
9
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
10(t)- Credit Agreement, dated as of November 30, 1995, among NBD
Bank ("NBD"), the Company and Detroit Stoker Company ("Detroit
Stoker"), as extended by the Letter Agreement, dated as of July 18,
1996, among NBD, the Company and Detroit Stoker, together with
Guaranty Agreements, each dated as of November 30, 1995, by each of
the Company, Detroit Stoker and NEO Products Corporation in favor of
NBD.
11 - Computation of Earnings per share
27 - Financial Data Schedule
(b) The Registrant did not file any reports on Form 8-K during the
quarter ended June 30, 1996.
10
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.
UNITED INDUSTRIAL CORPORATION
Date August 13, 1996 By: /s/ James H. Perry
----------------------------
James H. Perry
Treasurer and
Chief Financial Officer
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10(t)- Credit Agreement, dated as of November 30, 1995, among NBD Bank
("NBD"), the Company and Detroit Stoker Company ("Detroit
Stoker"), as extended by the Letter Agreement, dated as of July
18, 1996, among NBD, the Company and Detroit Stoker, together with
Guaranty Agreements, each dated as of November 30, 1995, by each
of the Company, Detroit Stoker and NEO Products Corporation in
favor of NBD.
11 - Computation of Earnings per share
27 - Financial Data Schedule