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, 1997 ------------------ [ ] 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.) incorporaation or organization) 18 East 48th Street, New York, NY 10017 - -------------------------------------------------------------------------------- (Address of principal executive offices) 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. 12,218,643 shares of common stock as of November 1, 1997. UNITED INDUSTRIAL CORPORATION INDEX ----- Page # ------ Part I - Financial Information Item 1. Financial Statements Consolidated Condensed Balance Sheets - Unaudited September 30, 1997 and December 31, 1996 1 Consolidated Condensed Statements of Operations - Three Months and Nine Months Ended September 30, 1997 and 1996 2 Consolidated Condensed Statements of Cash Flows Nine Months Ended September 30, 1997 and 1996 3 Notes to Consolidated Condensed Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 5 PART II - Other Information 7 PART I - FINANCIAL INFORMATION UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in Thousands) SEPTEMBER 30 DECEMBER 31 1997 1996 ------------ ----------- ASSETS (Unaudited) - ------ Current Assets Cash & cash equivalents $ 16,588 $ 13,427 Trade receivables 26,617 40,134 Inventories Finished goods & work-in-process 30,013 35,423 Materials & supplies 3,024 4,084 -------- -------- 33,037 39,507 Deferred income taxes 6,303 6,131 Prepaid expenses & other current assets 20,440 1,217 -------- -------- Total Current Assets 102,985 100,416 Other assets 40,414 38,018 Property & equipment - less allowances for depreciation (1997-$91,996; 1996-$89,256) 38,094 41,534 -------- -------- $181,493 $179,968 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities - ------------------- Accounts payable $ 5,617 $ 10,135 Accrued employee compensation & taxes 8,414 7,690 Customer advances 2,344 5,873 Federal income taxes 4,114 963 Current portion of long-term debt 1,250 13,750 Other liabilities 14,759 8,105 Provision for contract losses 4,882 9,166 -------- -------- Total Current Liabilities 41,380 55,682 Long-term liabilities (less current maturities) 9,821 2,654 Deferred income taxes 9,711 9,662 Postretirement benefits other than pensions 22,465 21,825 Shareholders' Equity - -------------------- Common stock $1.00 par value Authorized - 15,000,000 shares; outstanding 12,218,643 and 12,173,743 shares - 1997 and 1996 (net of shares in treasury) 14,374 14,374 Additional capital 89,994 90,196 Retained earnings 10,430 2,876 Treasury stock, at cost, 2,155,505 at 1997 and 2,200,405 shares at 1996 (16,682) (17,301) -------- -------- 98,116 90,145 -------- -------- $181,493 $179,968 ======== ======== 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 ------------------- --------------- (Unaudited) 1997 1996 1997 1996 ---- ---- ---- ---- Net sales $ 52,089 $ 54,159 $166,182 $163,925 Operating costs & expenses Cost of sales 39,837 44,810 126,959 126,851 Selling & administrative 8,562 8,623 29,922 30,857 Other expense - net 356 331 368 472 Interest expense 238 523 829 1,738 Interest income (341) (348) (819) (905) Gain on sale of assets (13,323) - (13,323) - -------- -------- -------- -------- 35,329 53,939 143,936 159,013 -------- -------- -------- -------- Income before income taxes 16,760 220 22,246 4,912 Income taxes 10,082 57 12,135 1,860 -------- -------- -------- -------- Net income $ 6,678 $ 163 $ 10,111 $ 3,052 ======== ======== ======== ======== Net earnings per share $ .54 $ .01 $ .82 $ .25 ===== ===== ===== ===== See accompanying notes 2 UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in Thousands) NINE MONTHS ENDED SEPTEMBER 30 (Unaudited) 1997 1996 -------- -------- OPERATING ACTIVITIES Net income $ 10,111 $ 3,052 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,293 6,078 Increase in federal income taxes 3,151 (736) Deferred income taxes (134) 304 Gain on sale of assets (13,323) - Decrease in contract loss provision (4,284) (1,451) Changes in operating assets and liabilities 15,075 7,229 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 17,889 14,476 INVESTING ACTIVITIES Proceeds from sale of assets 696 - Purchase of property and equipment (3,964) (4,097) Increase in other assets - net (3,976) (2,046) -------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (7,244) (6,143) FINANCING ACTIVITIES Increase (decrease) in long-term liabilities 2,375 (1,875) Proceeds from borrowings 6,250 9,000 Payments on long-term debt & borrowings (13,958) (15,250) Dividends (2,557) (1,825) Proceeds from exercise of stock options 406 8 -------- -------- NET CASH USED IN FINANCING ACTIVITIES (7,484) (9,942) -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,161 (1,609) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,427 11,915 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,588 $ 10,306 ======== ======== See accompanying notes 3 UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Condensed Financial Statements September 30, 1997 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, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. 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, 1996. NOTE B - DIVIDENDS A quarterly dividend of $.08 per share is payable November 28,1997. NOTE C - LEGAL PROCEEDINGS Reference is made to Item 3. Legal Proceedings in the December 31, 1996 Form 10-K which is incorporated herein by reference. NOTE D - SALE OF ASSETS In the third quarter of 1997, the Company sold the assets of its Neo Products Company subsidiary (the Plastics business) and the capital stock of its AAI Systems Management, Inc. subsidiary (the Weather Systems business) for a net after tax gain of $8,549,000 or $.69 per share. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net sales increased $2,257,000 or 1.4% to $166,182,000 for the nine months of 1997 compared to the same period last year. However, excluding United Industrial Corporation's (the "Company") Weather Systems and Plastics Businesses ("Disposed Businesses") which were sold during the third quarter of 1997, net sales increased $3,948,000 or 3.0% to $136,344,000. The Energy segment experienced increased sales of $6,272,000 or 29%, due to new installations of stoker equipment. While this increase was partially offset by a $2,324,000 decrease in the Defense segment, this segment's results in 1996 included nearly $3,000,000 in sales related to a program to upgrade the visual system of an SH-60 helicopter simulator which was completed in 1996. Net sales decreased $2,070,000 or 3.8% in the three month period compared to the same period last year. Aside from the Company's Disposed Businesses, net sales during the third quarter of 1997 increased $1,814,000 or 4.3% over the same period in 1996. In the three month period sales increased $2,666,000 or 40.8% in the Energy segment which were offset by decreased sales in the Defense segment. The reductions in sales in the Defense segment was due generally to the timing of contract awards. The gross profit percentage increased 1% to 23.6% (.5% increase to 24.4% excluding the Disposed Businesses) for the nine months 1997 compared to the same period last year. The gross profit percentages increased in the Energy segment and decreased in the Defense segment. The growth in the Energy segment was generally attributable to an improved pricing structure as well as continued operating efficiencies. The decreases in the Defense segment generally resulted from a fluctuation in the mix of contracts from a "fixed price production" to "cost plus development." However, the current contract mix includes lower financial risk programs that offer opportunities for follow-on higher-margin, long-term, sole source production awards. For the three months ended September 30, 1997 the gross profit percentage increased 6.3% to 23.5% (6.6% increase to 24% without the Disposed Businesses) compared to the same period last year. The prior year's three month period gross profit was decreased by a $2.2 million pretax charge regarding the SH-60 helicopter program. Selling and administrative expenses as a percentage of net sales were 18.0% and 16.4% (19.6% and 17.4%, excluding the Disposed Businesses) for the nine and three month periods, respectively, ended September 30, 1997. Selling and administrative expenses were reduced $935,000 and $61,000 (reduced $820,000 and increased $15,000, excluding the Disposed Businesses) for the nine and three month periods, respectively, in 1997 compared to the same periods last year. The Company earned net income of $10,111,000 or $.82 per share and $6,678,000 or $.54 per share for the nine month and three month periods, respectively, in 1997. Both periods include the net after tax gain on the sale of assets of Neo Products Company and the capital stock of AAI Systems Management of $8,549,000 or $.69 per share and a reserve for potential liabilities relating to prior year tax examinations. Financial Accounting Standards Board (FASB) Statement No. 128 "Earnings Per Share," is effective in the fourth quarter of 1997. The impact of this FASB Statement in the calculation of earnings per share is not expected to be material. 5 In August 1997, the Company sold substantially all the operating assets of Neo Products Company, its Plastics Business. In September 1997, the Company sold all of the capital stock of AAI Systems Management, Inc., its Weather Systems Business. The net sales of Neo Products Company for the eight month periods in 1997 and 1996 were $4,605,000 and $3,707,000, respectively, and its net losses were $83,000 and $3,000 during the like periods, respectively. The Company's Weather Systems business posted net sales of $25,233,000 and $27,262,000 during the first nine months of 1997 and 1996, respectively. In addition, its net income during the like periods was $1,707,000 and $1,302,000, respectively. Reference is made to the Company's Current Reports on Form 8-K filed on September 3, 1997 and October 17, 1997. Liquidity and Capital Resources Cash increased $3,161,000 for the nine months of 1997 compared to a decrease of $1,609,000 for the nine months of 1996. Cash provided by operations was $17,889,000 for the nine-month period ended September 30, 1997, as compared to cash provided by operations of $14,476,000 for the same period in the prior year. In October 1997 the Company received $18,500,000 in cash for the receivable from the sale of the Weather Systems Business. 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, 1997. On June 11, 1997, the Company and its subsidiaries entered into a Revolving Line of Credit Agreement, Term Loan Agreement and Security Agreement, ("Agreement") (amending and restating Credit Agreement, dated as of October 13, 1994) with an institutional lender. In July 1997, the Company borrowed $6,250,000 under the Agreement, at LIBOR plus a fluctuating margin. The principal is payable in sixty consecutive monthly installments. The amount available under the Revolving Line of the Credit Agreement is $17,500,000 with various interest rate options, and is reduced by the Letter of Credit obligations, which may not exceed $12,500,000. The Agreement provides for restrictive covenants among which are debt service coverage ratio, quick ratio, service debt ratio and a tangible net worth requirement, all as defined. All assets now owned or hereafter acquired by the Company and its subsidiaries are pledged as collateral under the Agreement. At September 30, 1997, there were $6,042,000 of borrowings under the Agreement. Contingent Matters Reference is made to Item 3. Legal Proceedings, in the December 31, 1996 Form 10-K which is incorporated herein by reference. 6 UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES PART II - Other Information ITEM 2 - Changes in Securities and Use of Proceeds (c) Pursuant to an Asset Acquisition Agreement and Plan of Reorganization (the "Agreement") dated as of August 13, 1997 by and between the Company and Fein Investing Properties, Inc. ("FIP"), on August 18, 1997 the Company issued 530,444 shares of the Company's common stock, par value $1.00 per share ("Common Stock"), to FIP in exchange for 565,444 shares of Common Stock owned by FIP that were transferred and assigned by it to the Company. The exchange ratio resulted in the Company reacquiring some of its shares at a below-market price. The issuance of shares to FIP was exempt from registration under the Securities Act of 1933, as amended (the "Act"), pursuant to Section 3(a)(9) of the Act. Section 3(a)(9) exempts from registration securities issued by the Company to an existing stockholder where no other remuneration was paid for soliciting such exchange. Pursuant to the Agreement, the Company issued shares of Common Stock in exchange for shares of Common Stock held by an existing stockholder of the Company, and no remuneration was paid for soliciting such exchange. FIP is a New York corporation wholly-owned by the children, certain grandchildren and a son-in-law of Bernard Fein, Chairman Emeritus of the Company, including Susan Fein Zawel, an officer and director of the Company. ITEM 6 - Exhibits and Reports on Form 8-K (a) Exhibits 11 - Computation of Earnings per share 27 - Financial Data Schedule (b) Reports on Form 8-K 1. Relating to the sale of assets of Neo Products Company - filed on September 3, 1997. 2. Relating to the sale of the Weather Systems Business - filed on October 17, 1997. 7 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 13, 1997 By: /s/ James H. Perry ------------------------------ James H. Perry Chief Financial Officer and Treasurer 8 UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES INDEX OF EXHIBITS FILED HEREWITH Exhibit No. - ----------- 11 Computation of Earnings Per Share 27 Financial Data Schedule 9