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 September 30, 1996
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or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number #1-4252
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UNITED INDUSTRIAL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 95-2081809
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(State or other jurisdiction of (I.R.S. Identification No.)
incorporation or organization)
18 East 48th Street, New York, NY 10017
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(Address of principal executive offices)
Registrant's telephone number, including area code (212) 752-8787
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Not Applicable
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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. 12,173,743 shares of common
stock as of November 1, 1996.
UNITED INDUSTRIAL CORPORATION
INDEX
Page #
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Part I - Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets - Unaudited
September 30, 1996 and December 31, 1995 1
Consolidated Condensed Statements of Operations -
Three Months and Nine Months Ended September 30, 1996 and 1995 2
Consolidated Condensed Statements of Cash Flows
Nine Months Ended September 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 6
PART II - Other Information 8
PART I - FINANCIAL INFORMATION
UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
September 30 December 31
1996 1995
---- ----
(UNAUDITED)
ASSETS
- ------
Current assets
Cash & cash equivalents $ 10,306 $ 11,915
Trade receivables 30,311 32,911
Inventories
Finished goods & work-in-process 40,137 43,185
Materials & supplies 4,223 4,737
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44,360 47,922
Deferred income taxes 6,448 6,487
Prepaid expenses & other current assets 5,919 1,761
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Total Current Assets 97,344 100,996
Other assets 40,145 39,524
Property & equipment - less allowances
for depreciation (1996 - $90,821 & 1995 - $86,637) 42,035 42,586
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$179,524 $183,106
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LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities
- -------------------
Short term borrowings $ 3,000 $ 3,000
Accounts payable 9,050 10,132
Accrued employee compensation & taxes 8,377 6,536
Customer advances 4,005 6,384
Current portion of long-term debt 6,250 6,250
Other liabilities 9,816 4,472
Reserve for contract losses 9,300 10,751
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Total Current Liabilities 49,798 47,525
Long-term liabilities (less current maturities) 10,154 18,279
Deferred income taxes 10,085 9,820
Postretirement benefits other than pensions 22,085 21,322
Shareholders' Equity
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Common stock $1.00 par value
Authorized - 15,000,000 shares; outstanding
1996 - 12,173,743 and 1995 - 12,170,793 shares
(net of shares in treasury) 14,374 14,374
Additional capital 90,196 91,421
Retained earnings (deficit) 133 (2,311)
Treasury stock, at cost, 1996 - 2,200,405 shares
1995 - 2,203,355 shares (17,301) (17,324)
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87,402 86,160
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$179,524 $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 Nine Months Ended
September 30 September 30
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(UNAUDITED)
1996 1995 1996 1995
---- ---- ---- ----
Net Sales $54,159 $53,568 $163,925 $163,090
Operating costs & expenses
Cost of sales 45,333 42,833 128,652 126,890
Selling & administrative 8,100 9,115 29,056 29,606
Other expenses - net 331 241 472 664
Interest expense 523 574 1,738 1,763
Interest income (348) (186) (905) (978)
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53,939 52,577 159,013 157,945
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Income before income taxes 220 991 4,912 5,145
Income taxes 57 568 1,860 2,258
------- ------- -------- -------
Net income $ 163 $ 423 $ 3,052 $ 2,887
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Net earnings per share $ .01 $ .04 $ .25 $ .24
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See accompanying notes
2
UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
NINE MONTHS ENDED SEPTEMBER 30
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(UNAUDITED)
1996 1995
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OPERATING ACTIVITIES $ 3,052 $ 2,887
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Net income
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 6,078 6,402
Deferred income taxes 304 (2,781)
(Decrease) increase in contract loss provision (1,451) 715
Changes in operating assets and liabilities 6,493 (2,135)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 14,476 5,088
INVESTING ACTIVITIES
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Decrease in note receivable - 8,540
Purchase of property and equipment (4,097) (4,011)
Increase in other assets - net (2,046) (4,171)
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NET CASH PROVIDED BY INVESTING ACTIVITIES (6,143) 358
FINANCING ACTIVITIES
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Decrease in long-term liabilities (1,875) (5,467)
Increase in current portion of long term liabilities - 6,250
Proceeds from borrowings 9,000 9,000
Payments on long-term debt & borrowings (15,250) (10,200)
Dividends (1,825) (2,555)
Proceeds from exercise of stock options 8 16
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NET CASH USED IN FINANCING ACTIVITIES (9,942) (2,956)
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(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,609) 2,490
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,915 6,132
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,306 $ 8,622
======== ========
See accompanying notes
3
UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
September 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 nine month period ended September 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 November 29, 1996.
NOTE C - LEGAL PROCEEDINGS
A subsidiary of the Company owned and operated a small facility at a site in the
State of Arizona that manufactured semi-conductors from 1959 to 1961 at which
time the subsidiary was sold by the Company. Although 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.
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.
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 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
4
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.
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. Navy (the "customer") a Request
for Equitable Adjustment ("REA") totaling approximately $11.8 million in
connection with a contract to deliver helicopter simulator training devices to
the Navy. On July 14, 1995, the subsidiary received the final decision of the
customer rejecting the REA in its entirety. On October 10, 1995, the subsidiary
filed a Notice of Appeal of the final decision with the Armed Services Board of
Contract Appeals seeking monetary damages plus interest. On June 12, 1996 the
customer issued to the subsidiary a Show Cause Notice advising the subsidiary
that the customer is considering terminating the contract for default.
In early November 1996, the subsidiary reached an agreement in principle with
certain officials of the U.S. Navy to resolve this dispute. When reduced to
writing, the agreement will provide for an orderly conclusion of the contract, a
limitation on the Company's liability, precluding the possibility of additional
losses for the subsidiary under the contract, and an end of the pending
litigation against the Navy. The written agreement will also eliminate the
possibility that the contract might be terminated by the Navy based upon the
subsidiary's alleged default, which would likely have resulted in further
litigation and entailed the risk of a materially adverse result. Settlement of
5
the dispute and the abbreviated completion of the contract require an additional
charge of $2.2 million ($1.4 million net of taxes) against earnings for the
quarter.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
Results of Operations
Net sales increased $591,000 to $54,159,000 in the third quarter of 1996 as
compared to the third quarter of 1995. For the first nine months of 1996, net
sales of $163,925,000 were $835,000 higher than the same period in 1995. The
Defense segment experienced increases in sales of 2.8%, for the three and nine
month periods in 1996 as compared to the like periods in 1995. Both the three
and nine month periods in 1996 accomplished improved sales related to training
systems and unmanned air vehicles in the Defense segment. However, partially
offsetting these increases was the impact of percentage of completion method of
accounting for increased costs on the SH-60 helicopter simulator program. Sales
decreased in both periods in non-defense segments due to contract award delays.
The gross profit percentage remained essentially unchanged at 22% for the nine
month period ended September 30, 1996, as compared to the same period in 1995,
due primarily to the continued mix of higher cost contracts in the Defense
segment. Gross profit for the three months ending September 30, 1996 was 16%
compared to 20% for the same period in 1995. The reduction was principally due
to a reduction of $2.2 million on the helicopter simulator training devices for
the Navy. (See Note C - Legal Proceedings) Included in the Defense segment's
income for the nine months in 1996 is a reduction in pretax income of $3,300,000
related to the SH-60 helicopter program. $2,200,000 relating to the agreement
with the Navy was included in the third quarter. Also included in the first nine
months of 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 had not produced a buyer for
such inventory at March 31,1996, it had 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.
Selling and administrative expenses as a percentage of net sales were 15.0% and
17.7% for the three and nine month periods ended September 30, 1996,
respectively, as compared to 17.0% and 18.2% for the same periods in 1995. The
decrease for the three month period resulted principally from reduced expenses
at Corporate.
The Company earned net income of $163,000 and $3,052,000 for the three and nine
months ended September 30, 1996, respectively, compared to $423,000 and
$2,887,000 for the same periods in 1995.
The decrease in the income tax rate to 25.9% and 37.9% in the three and nine
month periods from 57.3% and 43.9% in the prior three and nine month periods was
due to refunds of state taxes in the three months ended September 30, 1996 and
the payment to the IRS in 1995 of obligations related to 1994.
6
Effective July 1, 1996 the operations of Electric Transit Inc. (ETI) are no
longer consolidated in the financial statements. The Company's ownership has
been reduced from 53% to 35%. The Company's 1996 nine month sales and gross
margin figures were not significantly effected. ETI's inventory is not included
in the Company's September 30, 1996 financial statements. At June 30, 1996 such
inventory was $4,930,000.
Liquidity and Capital Resources
Cash flows from operations were $14,476,000 for the nine month period ended
September 30, 1996, as compared to $5,088,000 for the same period in the prior
year. The major items accounting for the difference in changes in operating
assets and liabilities were a decrease in trade receivables and inventories and
an increase in other liabilities. Funds from operations were sufficient for
dividends, capital expenditures, and repayment of borrowings. Included in the
1995 cash flows was the receipt of the final installment payment of $8,540,000
on the Company's note receivable. The Company extended certain lines of credit
from September 30, 1996 to December 31, 1996. 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
interest payments on indebtedness. The Company expects that available cash and
existing lines of credit will be sufficient to finance operations for the
remainder of the year.
7
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 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
10 (U)- NBD Bank - United Industrial Corporation, Detroit
Stoker Company credit agreement extension to December
31, 1996.
10 (V)- Second amendment made as of September 20, 1996 to
Credit Agreement dated October 13, 1995 between First Union
Commercial Corporation and AAI Corporation (the "borrower")
and AAI subsidiaries, UIC-DEL Corporation, Symtron Systems,
Inc. and United Industrial Corporation as guarantors.
10 (W)- Amendment dated as of September 29, 1996, by and between
United Industrial Corporation and James H. Perry to that
Certain Employment Agreement dated February 29, 1996
between United Industrial Corporation and James H. Perry.
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 September 30, 1996.
8
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 November 14, 1996 By: /s/ James H. Perry
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James H. Perry
Chief Financial Officer
and Treasurer
9
EXHIBIT INDEX
Exhibit No. Description
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10 (U)- NBD Bank - United Industrial
Corporation, Detroit Stoker Company credit
agreement extension to December 31, 1996.
10 (V)- Second amendment made as of September 20,
1996 to Credit Agreement dated October 13, 1995
between First Union Commercial Corporation and
AAI Corporation (the "borrower") and AAI
subsidiaries, UIC-DEL Corporation, Symtron
Systems, Inc. and United Industrial Corporation
as guarantors.
10 (W)- Amendment dated as of September 29, 1996, by and
between United Industrial Corporation and James
H. Perry to that Certain Employment Agreement
dated February 29, 1996 between United Industrial
Corporation and James H. Perry.
11 - Computation of Earnings per share
27 - Financial Data Schedule