UNITED INDUSTRIAL
CORPORATION
ANNUAL REPORT
1997
United Industrial Corporation is a high technology company focused on the design
and production of defense, training, transportation, and energy systems.
Its products include unmanned air vehicles, training and simulation systems,
automated aircraft test and maintenance equipment, and combat vehicles and
ordnance systems.
It also manufactures ground transportation components, combustion equipment for
biomass and refuse fuels, and specialized firefighter training installations.
Financial Highlights
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(Dollars in thousands, except per share data) 1997 1996
NET SALES $ 235,183 $ 220,822
NET INCOME 14,825 6,404
EARNINGS PER SHARE
BASIC 1.22 .53
DILUTED 1.19 .52
DIVIDENDS PAID PER SHARE .29 .20
SHAREHOLDERS' EQUITY 102,024 90,145
SHAREHOLDERS' EQUITY PER SHARE 8.33 7.40
SALES BACKLOG AS OF YEAR END $ 188,000 $ 159,000
SHARES OUTSTANDING 12,249,000 12,174,000
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RETURN ON
SHAREHOLDERS' EQUITY
For the Year Ending December 31
Percent
1995 1.0%
1996 7.1%
1997 14.5%
INTERNATIONAL SALES
For the Year Ending December 31
Percent of Total Sales
1995 7.4%
1996 12%
1997 17.1%
DEBT TO EQUITY
As of December 31
Percent
1995 23.2%
1996 15.3%
1997 5.6%
1
To Our Shareholders:
We are delighted to report on United Industrial's achievements in 1997 and, in
particular, on the excellent progress we have made in implementing the Strategic
Program announced in December 1996. We are accomplishing what we set out to do,
and that is translating into enhanced financial performance and greater value
for our shareholders.
SOLID FINANCIAL AND DIVIDEND GROWTH
For 1997, net income, including special items, increased to $14.8 million, or
$1.19 per diluted share, from $6.4 million, or $0.52 per diluted share, in 1996.
Excluding special items and income from operations that were divested in Fall
1997, net income for 1997 was $6.9 million, or $0.56 per diluted share, up 19.3%
from $5.8 million, or $0.48 per diluted share in 1996. Sales for 1997 reached
$235.2 million, an increase of 7% from $220.8 million in 1996. These gains were
driven by the strong results of our core defense-related businesses, as well
asour success in capitalizing on new opportunities in other areas, such as
engineering and maintenance services, firefighter training, and energy systems.
Our bottom line also benefitted from a wide range of cost reduction initiatives
and greater operating efficiencies. Moreover, we have every reason to believe
the Company's strong performance will continue, with 1997 backlog up 18% from a
year ago to $188 million.
The Company's financial position remains very sound, with little debt
at year-end. As a result of the strength of our balance sheet and the improved
financial performance, the Board of Directors has raised the quarterly dividend
significantly over the last year, from 5 cents per share in February 1997 to a
current rate of 10 cents per share, approved in February 1998. This increase is
a clear testament to the Board's confidence in the Company's continued growth
prospects. We are also pleased to report that, in addition to the higher
dividend rate, the total return on a share of UIC stock was 85% in 1997.
The total return on a share
of UIC stock was 85% in 1997
2
STRATEGIC OBJECTIVES MET
The comprehensive Strategic Program we announced in December 1996, developed
under the leadership of a newly revamped management team, was designed to
reposition United Industrial for long-term profitable growth by refocusing on
the Company's core businesses and strengths. These included our defense and
technology-related businesses as well as transportation systems. Our strategy
was to capitalize on our core competencies and competitive advantages to
aggressively pursue new opportunities for growth. As part of our plan, we also
decided to divest certain non-core operations to concentrate our attention and
resources on our core businesses.
Since that time, our entire organization has been one-hundred percent
focused on achieving the objectives we laid out for ourselves. We have targeted
our energies on building our businesses in five distinct areas:
o Unmanned Air Vehicles (UAVs)
o Simulation & Test Systems
o Engineering & Maintenance Services
o Defense-Related Advanced Technology Programs
o Transportation Systems
The progress we have made in expanding each of these businesses is
discussed in the pages that follow. Two key highlights include a $20 million
contract from the Romanian Ministry of Defense for a UAV System and Moving
Target Simulator and a $35 million contract to upgrade Maintenance Training
Devices for the C-17 aircraft for the U.S. Air Force. We also completed the
divestiture of two non-core businesses in Fall 1997; these included Neo Products
Co., a plastics producer, and Systems Management, Inc., a weather systems
business. The proceeds from these sales, which totaled $19.1 million, were used
to retire debt with the balance to be reinvested in growing our core businesses.
An important component of our strategy to build our core businesses was to
aggressively pursue international opportunities, and we have dramatically
increased our presence overseas. International contracts accounted for 17% of
our new business in 1997,
We have refocused on the Company's
core businesses and strengths
3
compared to 12% in 1996. Among the key contracts won were the $20 million
defense systems contract from the Government of Romania; an $8 million contract
from British Airways for a pneumatic test cell center and hydraulic test
equipment for its new facility in the United Kingdom; and a $3.85 million
contract for firefighting training systems for the new Royal Netherlands Air
Force Training Facility.
Detroit Stoker, our energy systems subsidiary, also turned in an
excellent performance for the year. Substantial gains in sales and earnings were
fueled by strong product demand in the U.S. and abroad as well as increased
operating efficiencies. We believe the future for Detroit Stoker is very bright,
and, in October 1997, we appointed Michael DiMonte as President of this
business. Michael has 23 years of experience in the power generation industry
and expertise serving customers around the world. His leadership will be
invaluable as Detroit Stoker continues to build its business.
CONTINUED COMMITMENT TO EXCELLENCE
Providing our customers with the highest quality products and superior service
has long been a hallmark of United Industrial. This relentless commitment to
excellence continued to serve us well in the past year as we sought to expand
the scope of our business and exceed the expectations of new customers. We take
pride in our accomplishments and thank all of our employees for a job extremely
well done.
Our efforts were recognized in 1997 when the International
Standards Organization gave our Engineering and Maintenance Services (ESI)
division its highest level of certification, ISO 9001. This award makes ESI one
of the few U.S. service organizations to hold this internationally recognized
quality certification. Moreover, this award follows the ISO 9001 certification,
in 1996, of our defense systems subsidiary AAI Corporation. AAI Corporation was
also honored in 1997 with the Maryland Award for International Business
Leadership and the Regional Manufacturing Institute's Manufacturers' Cup.
As we look ahead, we are excited about the opportunities for further
growth. Our new strategy is working and there is great potential in our core
businesses for expansion. We have laid a solid foundation for the future, and
our management team is committed to building on our strengths to generate
long-term growth and greater shareholder value.
We provide customers with the
highest quality products and
superior service
4
[Photograph of Richard R. Erkeneff, President and Chief Executive Officer,
Harold S. Gelb, Chairman of the Board]
To left
Richard R. Erkeneff,
President and Chief
Executive Officer,
Harold S. Gelb,
Chairman of the Board
We would like to thank Howard M. Bloch, who is retiring from our Board of
Directors in May, for his 23 years of outstanding service and wise counsel. At
the same time, we are fortunate to be able to attract Joseph S. Schneider, who
will be joining our Board in May. Mr. Schneider is President of JSA Partners,
Inc., a consulting firm in the aerospace and defense industry, and the Chairman
and Co-Founder of JSA Research, Inc., an independent aerospace and defense
research firm serving institutional investors.
We also thank our shareholders and customers for their continued
support and our employees, again, for their hard work and dedication. We look
forward to reporting on the Company's continued achievements in 1998 and the
years ahead.
Sincerely,
/s/ Richard R. Erkeneff /s/ Harold S. Gelb
President and Chief Executive Officer Chairman of the Board
5
UAVs
UNMANNED AIR VEHICLES
The production of Unmanned Air Vehicles (UAVs) is an important -- and growing --
area of strength for United Industrial's AAI subsidiary. We are the only U.S.
company that manufactures UAVs in significant volumes and that provides us with
key competitive advantages. Our Pioneer UAV program for the U.S. government has
established an excellent record of success over the past twelve years, and we
continue to see increased demand for the Pioneer and AAI's newer Shadow 200/600
UAVs.
This greater demand for UAV products has been fueled by both domestic
and international customers. Domestically, the U.S. military has recognized the
valuable role UAVs can play in combat, as demonstrated by the Pioneer's success
during Desert Storm and later, the conflicts in Somalia and Bosnia. As a result,
the government is investing greater resources in developing state-of-the-art UAV
systems, and AAI has played a key role in these efforts. At the same time, there
has been growing interest abroad. Numerous countries are now seeking UAV
capability as a means of timely surveillance and reconnaissance, particularly in
light of territorial disputes and insurgent activities in many parts of the
world. Reflecting these and other factors, independent industry sources
currently project the UAV market to grow approximately 300% in the next five
years.
AAI's multi-million dollar award from the Romanian Ministry of Defense,
in May 1997, for a Shadow 600 unmanned air vehicle system highlights the growth
of the international UAV marketplace -- as well as our ability to serve this
customer base. Our Shadow 200 and 600 UAVs provide affordable, off-the-shelf
capability, and are, thus, very attractive to new international customers
seeking a proven product at a cost effective price. Recognizing our strong
competitive position in this market, we plan to aggressively pursue emerging
opportunities for international UAV sales.
We also made significant strides in building our domestic UAV business
during 1997. Our Pioneer program with the U.S. government has continued, and we
recently completed the final delivery of 30 air vehicles under the Pioneer FY94
Procurement Program. We also started deliveries under the FY96 Spare Parts
Procurement Program, a $7.6 million contract. The Pioneer program has been
extended by the government through the year 2003, and we anticipate a number of
new contracts in the near term, including an order for 15 additional air
vehicles.
We continue to see increased
demand for UAV products
{Photo opposite page]
right page
AAI's Shadow 600 UAVs are inspected prior to shipment to Romania. Under a $20
million contract, AAI is providing Romania with a UAV System and a Moving Target
Simulator air defense training system.
6
A key highlight of the Pioneer program during 1997 was the integration,
test and delivery of a modified Pioneer air vehicle incorporating the first
Modular Integrated Avionics Group (MIAG). The MIAG, which is a state-of-the-art
avionics unit that replaces the original flight computer, enhances reliability
of the UAV, improves its overall performance and lowers operating costs. A MIAG
upgrade of the entire Pioneer fleet is anticipated in 1998/1999.
In addition, under a $1.77 million contract award, we have been
installing an advanced automated landing system, Common Automatic Recovery
System (CARS), in the entire Pioneer fleet. The initial testing was very
successful, hav-ing thus far completed fully autonomous runway landings of the
Pioneer as well as at-sea shipboard recoveries, using the CARS system. We have
also moved ahead on a $1.9 million contract for repair of Pioneer Unmanned Air
Vehicles and associated Line Replaceable Units and a $1.38 million contract for
a Portable Control Station Autotrack & Azimuth Indicator for the Pioneer.
Simulation and Test Systems
SIMULATION AND TEST
The production of simulation and test systems has long been the core of our
business. We count among our customers the U.S. military as well as foreign and
domestic governments, and have, in recent years, been successful in expanding
into the commercial marketplace. With our advanced capabilities in signal
generation, hydraulics and software technology, we are able to leverage our
skills across a wide range of applications - from advanced combat training
systems to aircraft test equipment to firefighter training systems. As a result,
we believe there will be significant opportunities to continue to build our
simulation and test businesses in both defense-related and other sectors.
We operate in the simulation and test systems market primarily through
our AAI subsidiary, which has a strong history of serving the U.S. government. A
key program underway is the production of maintenance training systems for the
gov-ernment's Joint Surveillance Target Attack Radar System (JointSTARS).
Shortly after the close of the year, we delivered JointSTARS maintenance
training equipment to Keesler Air Force Base in Biloxi, Mississippi. This system
incorporates state-of-the-art technology and is now being utilized for lesson
development, with training classes to begin later in 1998. Currently,
We continue to build our
simulation and test businesses
8
[PHOTO OMITTED]
right page AAI's state-of-the-art simulators are used to teach Air Force
personnel to operate and maintain JointSTARS Prime Mission Equipment. Here,
technicians work on an AAI training simulator at Keesler Air Force Base.
9
we are completing a state-of-the-art simulator for the JointSTARS Prime Mission
Equipment Maintenance Training System for Robins Air Force Base in
Warner-Robins, Georgia.
AAI has been selected by the U.S. Air Force's Aeronautical Systems
Center (ASC) at Wright-Patterson Air Force Base in Dayton, Ohio to develop and
produce two Surveillance Radar Training Sets that provide the U.S. Air Force
with maintenance training for the radar systems aboard the E-3 Airborne Warning
and Control System (AWACS). AAI and ASC are currently in negotiations, and
contract award is expected in April 1998.
The Joint Service Electronic Combat Systems Tester is another important
program in place for the U.S. government. Our Critical Design Review for the
complex system is planned for March of 1998. We recently negotiated a $9.1
million increase in contract value for additional work and cost growth,
including the incorporation of new capabilities for the F-15C aircraft.
We have also begun design work on the Carry On Combat Systems Trainer
(COCST) for the U.S. Navy. The COCST will use existing shipboard interfaces to
develop a portable Combat Systems Trainer. This program is expected to grow
significantly in the next two years.
Overseas expansion is a key
element of our strategy
10
A key element of our strategy has been to build our simulation and test
business overseas as well. In May 1997, we received a significant contract for a
Moving Target Simulator (MTS) from the Romanian Ministry of Defense in
conjunction with its contract to purchase a Shadow 600 UAV. This MTS is a
state-of-the-art visual simulation device used to train military short-range air
defense gunners. It provides tactical training through simulation of targets,
geographical and meteorological environments and countermeasures, which
represent changing world conditions and support new air defense training
requirements.
We also continued work on our Japanese MTS program, with the completion
of an M87E system at Chitose Air Base on the island of Hokkaido. This system was
our fourth completed in Japan. The Japanese Defense Agency has been very pleased
with the results of these training systems, which are being used to train
operators of two types of shoulder-fired anti-aircraft missiles and two types of
a radar-equipped anti-aircraft gun system. We are at work on our fifth MTS
system, to be delivered to the Misawa Air Base, and expect completion by
November 1998. During 1997, we also completed the upgrade of the MTS system at
the Hyakuri Air Base in Ibaraki, which was the first MTS system we installed in
Japan. Based on our strong track record, we are confident there will be
continued contract opportunities in Japan in the years ahead.
[Photo top of page]
top of page An engineer makes an adjustment on an AAI/ACL high-flow test stand,
which is used by Hamilton Standard, one of the world's leading engine controls
manufacturers, to test production fuel controls for aircraft engines.
11
[PHOTO OMITTED]
[Photograph left page]
left page Local firefighters train at the Bucks County, Pennsylvania
Emergency Services Training Center. Symtron Systems is currently producing
similar equipment for the U.S. Army.
12
A particularly exciting recent win for AAI was the Generic Navy
Stimulator/Simulator program(GNSS), valued at approximately $12.7 million with
additional production options. The GNSS system simulates a threat situation via
stimulation of a warship's onboard radar to provide training for shipboard
operators. The system allows single ships or entire battle groups to be
integrated into a training scenario. At the heart of the GSNN system is a
revolutionary AAI-developed technology called a "Programmable Pulse Compression
Wave-form Generator." The Waveform Generator is a major breakthrough in the
radar stimulation field with numerous applications for training and testing. We
are optimistic this award will lead to significant additional opportunities in
domestic and foreign sales.
Outside of the defense industry, AAI's ACL Technologies division has
focused on leveraging its capabilities in hydraulics to expand in the commercial
marketplace, particularly through new contracts from major airlines and aircraft
producers worldwide. Reflecting its efforts, new orders increased 79% from last
year, coming in significantly ahead of plan. This performance was highlighted by
an $8 million contract award from British Airways to provide all pneumatic test
equipment for its new facility at London's Heathrow Airport. We are optimistic
this program may lead to a longer-term partnership with British Airways. In
addition, ACL received new contracts from customers in Singapore, China, Turkey,
United Kingdom, Mexico, Egypt, Israel and Korea, with international orders
accounting for 65% of new business.
Symtron Systems, our firefighting simulation subsidiary, had a record
year for bookings in 1997, winning a number of significant new contracts. We
were awarded a multi-million dollar contract by the U.S. Army's Simulation,
Training and Instrumentation Command (STRICOM) for fire training systems, with
options for approximately $15 million in future business. Symtron received
awards for Aircraft Rescue Fire Fighter Trainers (ARFFT) from government
authorities in Kenai, Alaska; Monroe County, New York; and Lexington, Kentucky.
We also completed delivery of ARFFT trainers for airports in Salt Lake City,
Utah and Washington, D.C.
Internationally, Symtron received a $3.85 million contract from
Krantz-TKT for the Netherlands Air Force firefighter training system. This
system, based on its current design, will be the largest fire training system of
its kind in the world. Symtron also won contracts for structural firefighter
trainers from the cities of Dresden, Germany and Yokohama, Japan.
Our hydraulics capabilities have led to
contracts from major airlines worldwide
13
Engineering and Maintenance Services
ENGINEERING AND MAINTENANCE
AAI achieved excellent results in 1997 in building its business in engineering
and maintenance ser-vices, with our Engineering Support Incorporated (ESI)
subsidiary generating an increase of 90% in new business bookings from 1996
levels. This strong performance has been attributable to continued growth in
outsourcing of engineering and maintenance services by the U.S. government and
commercial customers, as well as a more aggressive approach we have instituted
to capitalize on these new opportunities. We recognized the increasing demand
for high quality outsourcing partners with special technical expertise such as
ours, and we made it a priority to make sure we had the right management team
and infrastructure in place to win these contracts. As a result, an increasing
number of customers
ESI's new business bookings increased
90% in 1997
are now counting on us for support services as they focus on their core
operations.
We have found our advanced capabilities in a range of areas -- such as
hydraulic component testing, UAV design and system integration, firefighter and
combat simulation and the manufacture of military test equipment -- to be not
only an important competitive advantage but also enable us to provide a wide
array of logistics support services to customers.
One of ESI's most significant contract awards during 1997 was the C-17
Maintenance Training System program, under which we will upgrade Maintenance
Training Devices for the C-17 Aircraft for the U.S.
[Photograph bottom of page]
bottom of page Air Force maintenance technicians sharpen their skills on the
C-17 Aircraft Engine Trainer, one of eleven training devices designed to
provide realistic hands-on experience while the actual aircraft remains in
service.
Growth in outsourcing
provides new opportunities
Air Force and provide logistics support for a five-year period. This contract
has an initial value of $22 million with projected growth over the next five
years to $75 million.
Work is underway on our program, initial-ly valued at $7 million, to
relocate the U.S. Navy's Naval Propulsion Test Facility in Trenton, New Jersey
to Patuxent River, Maryland, and we began construction on a Fire Trainer
Academy, to be located in Kenai, Alaska, where we will provide maintenance and
training services. The academy will be operational in mid-1998. In addition, ESI
has partnered with the Maryland Fire Rescue Institute to provide Mobile Fire
Training Services to airport and municipal fire departments.
During 1997, ESI also achieved initial cer-tification for ISO 9001,
which makes ESI one of the few U.S. service organizations to hold this
internationally recognized quality certification.
Defense-Related Programs
ADVANCED TECHNOLOGY
United Industrial has two key advanced techno-logy programs underway:
the Objective Individual Combat Weapon (OICW) and Advanced Boresight Equipment
(ABE). Under the OICW program, we have teamed up with a number of industry
leaders to develop an advanced dual-barreled weapon. We recently completed Phase
III of this program, including systems demonstrations. We expect the U.S. Army
to select a single contracting team in mid-1998 to continue on Phase IV. The ABE
program consists of the development of a state-of-the-art technology, including
computer, laser and gyroscope components, for precision alignment of parts. Our
new prototypes have met system test requirements, and we are working with the
Army, Navy and Air Force to harness the benefits of this exciting new
technology. In addition, we have submitted proposals to Boeing for the
incorporation of ABE technology in support of C-17 aircraft production and are
at work on a proposal for Daimler Benz in Germany to supply ABE for the
Eurofighter.
As part of our growth strategy, we plan to increasingly leverage our
strengths in advanced technologies to expand into new areas. We expect there
will be a growing number of opportunities and believe we are well-positioned to
compete in this marketplace.
We are well-positioned in the advanced
technology marketplace
16
[PHOTO OMITTED]
[Photograph right page]
right page
Two Army maintenance technicians use AAI's Advanced Boresight Equipment (ABE)
on an Apache Attack Helicopter. AAI's ABE equipment represents a major
revolution in boresighting technology.
17
Transportation Systems
TRANSPORTATION
Our entrance into the U.S. electric trolley bus market three years ago, through
Electric Transit Inc. (ETI), AAI's jointly-owned company with Czech
Republic-based SKODA, has provided new opportunities for growth. Within a short
period of time, ETI has established itself in the marketplace and won key
contracts. A major award received last year was from the City and County of San
Francisco to manufacture 250 new electric trolley coaches, with the possibility
of an additional 40 units to replace existing San Francisco MUNI coaches. This
contract is valued at $168 million and, with options, could reach up to $193
million. Approximately $53 million of the total value will go to AAI.
We have found that our core competencies in systems engineering,
manufacturing and integration serve us well in producing mass transportation
vehicles and systems. During 1997, AAI Transportation Systems completed a number
of significant projects. We produced a total of 36 carshells and 54 trucks for
the Baltimore Central Light Rail System as a subcontractor to Adtranz and, as a
subcontractor to ETI, manufactured nine of the electric trolley buses for the
Miami Valley Regional Transit Authority in Dayton, Ohio. In addition, we
completed the conversion of two people mover vehicles for the O'Hare Airport
Transit System in Chicago, Illinois, and received a follow-on contract, valued
at $3.7 million, for the comprehensive overhaul of the entire fleet.
Our core competencies serve us
well in producing mass transit systems
18
[PHOTO OMITTED]
[Photograph right page]
right page Technicians begin integrating the traction system into electric
trolley buses for Dayton, Ohio. More than three miles of wires and cables are
installed on each bus.
19
Energy Systems
ENERGY SYSTEMS
In 1998, Detroit Stoker Company, our energy systems subsidiary, celebrates its
100th year in operation, and has continued to demonstrate leadership performance
in the combustion industry, recording substantial gains in sales and earnings in
1997. Shipments increased 26.4% from 1996, while pre-tax earnings more than
doubled. The excellent results were driven by higher market share of aftermarket
products and services, improved operating efficiencies and the delivery of
Hydrograte(R) stokers for the combustion of biomass and refuse fuels. In
addition, Detroit Stoker has been successful in its efforts to expand its
business on a global level.
International sales included a multi-million dollar contract from
Foster Wheeler Energia, S.A. to supply three stokers for the Valorsul municipal
waste-to-energy plant to be constructed near Lisbon, Portugal. The contract
includes the supply of three Detroit Reciprograte(R) stokers consisting of 27
modules and necessary auxiliaries including more than 200 tons of stainless
steel alloy grate castings. The project was initiated in 1997 and is expected to
be completed in 1998. When completed, the facility will be capable of treating
2,016 metric tons of refuse per day and will generate 43.3 megawatts of electric
power that will be sold to Electricidade de Portugal on a long-term basis.
Domestically, we have seen continued opportunities in the area of
renewable biomass fuels, where our Hydrograte(R) stoker won new contracts in
Arkansas and Georgia to re-power existing boilers. In addition, aftermarket
sales of stoker replacement parts and retrofits increased 4.2% last year, making
a significant bottom-line impact.
We have also experienced steady demand for our newer line of low
nitrous oxide burner products, which incorporate a more environmen-tally
advanced burner technology. We received contracts from NASA and the state of
Indiana to retrofit existing boilers with this new technology, and we expect
demand for these products to continue to grow, particularly in an environment of
increased regulatory scrutiny.
In addition, during 1997, one of our products featuring this more
advanced burner technology, our new Methane de-Nox system, was honored by R&D
Magazine as one of the "100 Most Technologically Significant New Products of the
Year." The award was presented to Detroit Stoker and the Institute of Gas
Technology for the development of the new system, which significantly reduces
the emission of nitrous oxides from stoker fired boilers.
Energy systems continues to demonstrate
leadership performance
20
[PHOTO OMITTED]
[Photograph right page]
right page
Plant personnel inspect grate castings from one of the Detroit Reciprogate(R)
stoker modules being assembled for the waste-to-energy plant under construction
near Lisbon, Portugal.
21
BOARD OF DIRECTORS
Susan Fein Zawel Vice President Corporate Communications, Associate General
Counsel and Secretary of United Industrial Corporation. Director since 1995.
Richard R. Erkeneff President and CEO President of United Industrial Corporation
and AAI Corporation. Former Senior Vice President of the Aerospace Group at
McDonnell Douglas Corporation and President of McDonnell Douglas Electronics
Systems Company. Director since 1995.
Howard M. Bloch Vice Chairman of the Board and retired Vice President of the
Company. Director since 1975 and retiring from the Board in May, 1998.
Edward C. Aldridge, Jr. President and Chief Executive Officer of the Aerospace
Corporation. Former President of McDonnell Douglas Electronic Systems Company
and Secretary and Under Secretary of the U.S. Air Force. Director since 1995.
Joseph S. Schneider President of JSA Partners, Inc. and Chairman and Co-Founder
of JSA Research, Inc. Former President of JSA International, Inc. and EDS/JSA
International, Inc. Mr. Schneider also serves on the Board of Signal Technology
Corporation. Nominee for director in May, 1998.
Harold S. Gelb Chairman of the Board Chairman of the Board of United Industrial
Corporation. Former senior partner of Ernst & Young LLP. Director since 1995.
E. Donald Shapiro The Joseph Solomon Distinguished Professor of Law and former
Dean/ Professor of Law of New York Law School. Mr. Shapiro also serves on the
Boards of Loral Space and Communications, Ltd., Bank Leumi Trust Co., and
several other corporations. Director since 1996.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996.
Net sales of $235,183,000 in 1997 rose by 7% from $220,822,000 in 1996.
The 1997 sales included $29,838,000 of sales from the Neo Products company, the
operating assets of which were sold in August 1997 and the Weather Systems
Business (together the "Disposed Businesses") sold in September 1997. In 1996
the sales from the Disposed Businesses amounted to $42,331,000. Excluding the
sales from the Disposed Businesses, net sales increased $26,854,000 or 15% from
1996 to 1997.
Excluding the disposed Weather Systems business, the net sales in the
defense segment increased 13% or $18,939,000 to $167,418,000 in 1997 from
$148,479,000 in 1996. The growth was attributable to a general increase in sales
including a major contract to deliver an Unmanned Air Vehicle System and an Air
Defense Training System to the Government of Romania.
The defense segment's business is heavily influenced by changes in the
budgetary plans and procurement policies of the U.S. Government. Reductions in
defense spending and program cancellations in recent years have adversely
affected operating results. Further, government contracts are subject to price
redetermination under certain circumstances and may be terminated for the
convenience of the government. The Company intends to maintain a strong focus on
Department of Defense opportunities and believes it is well positioned over the
long term to benefit from the demand for advanced technological systems by the
U.S. and foreign governments. Sales to agencies of the U.S. Government,
primarily by the defense segment, were $129,933,000 in 1997 and $144,749,000 in
1996. Included in these figures are Weather Systems Business sales of
$25,233,000 in 1997 and $37,000,000 in 1996. Export sales by the defense segment
were $31,515,000 in 1997 and $22,400,000 in 1996, an increase of $9,115,000 or
41%.
Net sales in the energy segment increased 26% or $7,915,000 to
$37,927,000 in 1997 from $30,012,000 in 1996, due primarily to installations of
stoker equipment.
Gross profit and margin increased to $58,791,000 and 25% in 1997 from
$54,966,000 and 24.9% in 1996. Excluding the Disposed Businesses the gross
profit and margin were $52,859,000 and 25.7% in 1997 and $47,225,000 and 26.5%
in 1996. The 7.8% increase in the gross profit percentage in the energy segment
to 38.3% in 1997 from 30.5% in 1996 was generally attributable to an improved
pricing structure, product mix and improved operating efficiencies. In the
defense segment the gross profit percentage decreased to 22.7% in 1997 from
24.5% in 1996. Excluding the Disposed Business from the defense segment the
gross profit percentage decreased to 22.9% in 1997 from 26% in 1996. A
fluctuation in the mix of contracts from a "fixed price production" to "cost
plus development" in part caused a decrease in the gross profit percentage.
However, the current contract mix includes lower financial risk programs that
offer opportunities for follow-on higher-margin, long-term, sole source
production awards. Also contributing to the lower margins was a lower than
expected backlog in certain product areas at the end of 1996 and the early part
of 1997.
Selling and administrative expenses as a percentage of net sales were
18.4% in 1997 and 19.6% in 1996. Excluding the Disposed Businesses the selling
and administrative expenses as a percentage of net sales were 19.4% in 1997 and
21.8% in 1996. Selling and administrative expenses decreased $136,000 in 1997
compared to 1996. Excluding the Disposed Businesses the selling and
administrative expenses increased $856,000 or 2.2%. The increase was generally
attributable to expenses relating to increased sales in the energy segment.
Interest expense was $915,000 in 1997 and $1,997,000 in 1996. The decrease was
due to reduced borrowings.
23
Other income-net, increased $2,340,000 to $1,150,000 in 1997 from a net
expense of $1,190,000 in 1996. The increase was primarily due to a favorable
litigation settlement of approximately $3,000,000, net of legal expenses,
($1,779,000 net of taxes or $.14 per diluted share), partially offset by an
increase in a charge related to a contingent payment to the sellers of a
subsidiary.
Interest income increased $411,000 or 40% due to increased investments.
In 1997, net income increased $8,421,000 or 131.5% to $14,825,000 or
$1.19 per diluted share from $6,404,000 or $.52 per diluted share in 1996.
Included in the 1997 net income was the above mentioned favorable litigation
settlement and a net gain on the sales of Disposed Businesses of $8,470,000 net
of taxes or $.68 per diluted share, partially offset by a reserve recorded in
the third quarter related to a local tax matter. The year ended December 31,
1996 results included charges of approximately $2,100,000 net of taxes, or $.17
per diluted share, related to a contract dispute that was settled during 1996
and approximately $573,000 net of taxes, or $.05 per diluted share, regarding
non-contract inventory reserves, partially offset by favorable contract
adjustments totaling approximately $1,400,000 net of taxes, or $.11 per diluted
share. For 1997, operating income, net of taxes, related to Disposed Businesses
totaled $1,595,000 or $.13 per diluted share, compared to $1,827,000 or $.15 per
diluted share in 1996. Excluding the above special items and the operating
results from the Disposed Businesses in both years, net income for 1997
increased 19.3% to $6,981,000, or $.56 per diluted share, from $5,850,000 or
$.48 per diluted share, in 1996.
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995
Net sales of $220,822,000 in 1996 trailed those in 1995 by $6,576,000
or 3%. All business segments contributed to this decline. In the Company's
defense segment, net sales were
$2,632,000 or 1% lower than the prior year. Although sales in this
segment decreased slightly, the mix of business shifted to the niche markets
that the Company will focus on in the future.
Sales to agencies of the U.S. Government, primarily by the defense
segment, were $144,749,000 in 1996 and $154,346,000 in 1995. Export sales by the
defense segment were $22,400,000 in 1996 and $13,117,000 in 1995, an increase of
$9,283,000 or 71%.
Net sales in the energy segment were down $2,537,000 or nearly 8% in
1996 compared to 1995 primarily due to lower Hydrograte and Rotograte stoker
deliveries during 1996. Significant stoker orders were received late in 1996,
and sales regarding these orders were recorded in 1997.
Gross profit and margin increased to $54,966,000 and 24.9% in 1996 from
$47,309,000 and 20.8% in 1995. These increases during 1996 compared to 1995
represent improved profit performance by the defense and energy segments. During
1996, the defense segment's gross margin increased 4.8% to 24.5% due essentially
to the Company's efforts to control costs on its long- term contracts. During
1995, the defense segment's gross profit was reduced by the recognition of a
$6,600,000 loss on the SH-60 Helicopter Simulator Visual Upgrade Program and a
charge of $2,000,000 related to the reduction of the estimated net realizable
value of certain non-contract inventories. During 1996, the Company incurred an
additional loss of $3,300,000 on the SH-60 program. However, in November 1996
the Company signed a settlement agreement with the U.S. Navy providing for an
orderly conclusion of the contract, precluding the possibility of additional
losses to the Company. The agreement also provided for the payment of
approximately $8,500,000 to the Company, which was received in January 1997.
During 1996 the Company increased its reserve for the non-contract inventory
noted above by $900,000.
24
Gross margin in the Company's energy segment improved 1.9% to 30.5%.
Higher sales of aftermarket stoker replacement parts and of natural gas and oil
burners, as well as cost-saving initiatives and greater operating efficiencies
were generally responsible for this increase.
Selling and administrative expenses as a percentage of sales were 19.6%
in 1996 and 19% in 1995. The increase was due to lower sales volume in 1996.
Actual selling and administrative expenses were at the same level in 1996 as
compared to 1995. Interest expense was $1,997,000 in 1996 and $2,360,000 in
1995. This decrease was due to lower borrowings, which were partially offset by
higher interest rates during 1996. Interest income decreased $168,000 in 1996
from 1995 due to the payment of the note receivable of $8,540,000 in February
1995. Other expense was $1,190,000 in 1996 compared to other income of $127,000
in 1995 or a net increase in expense of $1,317,000. The increase in expense was
primarily due to losses in 1996 by a joint venture which had profits in 1995.
In 1996, net income of $6,404,000 increased $5,516,000 or 621% from
$888,000 in 1995. Both the defense and energy segments contributed to this
favorable result. At the defense segment, the increased profitability was due
principally to improved performance on most long-term contracts. As described
earlier, in 1995 income was reduced by the recognition of $8,600,000 of pretax
charges regarding certain long-term contracts and inventory write-downs as
compared to $4,200,000 of such charges in 1996. In the energy segment, higher
margins and the elimination of certain selling and administrative costs were the
source of improved earnings.
Liquidity and Capital Resources
Cash and cash equivalents amounted to $23,098,000 at the end of 1997
and $13,427,000 at the end of 1996. In 1997, the Company invested $6,102,000 in
marketable securities. The primary reasons for the increase were the cash
received from the sale of the Disposed Businesses and cash received from
borrowings under the Agreement referred to below. The Company's principal uses
of capital during the past several years related to new projects and the
repayment of long-term debt and bank borrowings.
The Company expects to meet its cash requirements for 1998, including
amounts necessary to fund new business ventures, from current cash, operations
and borrowings under its existing line of credit. Factors relating to the
amounts of cash from operating, financing and investing activities are presented
in detail in the Consolidated Statements of Cash Flows.
The Company paid cash dividends of $.29 per share in 1997, $.20 per
share in 1996 and $.26 per share in 1995. Aggregate payments amounted to
$3,536,000 in 1997, $2,434,000 in 1996 and $3,165,000 in 1995.
The ratio of current assets to current liabilities was 3.0 at the end
of 1997, and 1.8 at the end of 1996. The increase in 1997 was principally due to
the increase in cash from the sale of Disposed Businesses and reduced
borrowings.
Capital expenditures were $6,926,000 in 1997 and $6,299,000 in 1996.
There were no material commitments for acquisition of capital assets as of
December 31, 1997.
On June 11, 1997, the Company and its subsidiaries entered into a
Revolving Line of a Credit Agreement, Term Loan Agreement and Security Agreement
("Agreement") (amending and restating a credit agreement, dated as of October
13, 1994) with an institutional lender. In July 1997, the Company borrowed
$6,250,000 under the Term Loan Agreement, at LIBOR plus a fluctuating margin.
The principal is payable in sixty consecutive monthly installments. At December
31, 1997 the outstanding borrowings were $5,729,000, none of which were
revolving credit borrowings. The amount available under the Revolving Line of
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
25
Agreement provides for restrictive covenants among which are debt service
coverage ratio, quick ratio, senior 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.
Environmental and Other Litigation
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. The Company intends to vigorously
contest these actions and believes that the resolution of these actions will not
be material to the Company (see Note 16).
Year 2000
The Company has developed a plan to modify its information technology
to be ready for the year 2000 and has begun converting critical data processing
systems. The Company currently expects the project to be substantially complete
by early 1999. The Company does not expect this project to have a material
effect on its operations or financial condition.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (Statement 131), which is effective for years
beginning after December 15, 1997. Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company will adopt the new
requirements retroactively in 1998. Management has not completed its review of
Statement 131. The adoption of this statement will not affect results of
operations or financial position but may affect certain disclosures.
Forward Looking Information
This Annual Report contains "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such forward
looking statements are based on management's expectations, estimates,
projections and assumptions. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "estimates," and variations of such words and similar
expressions are intended to identify such forward looking statements which
include, but are not limited to, projections of revenues, earnings, segment
performance, cash flows and contract awards. These forward looking statements
are subject to risks and uncertainties which could cause the Company's actual
results or performance to differ materially from those expressed or implied in
such statements. These risks and uncertainties include, but are not limited to,
the following: the Company's successful execution of internal performance plans;
performance issues with key suppliers, subcontractors and business partners;
legal proceedings; product demand and market acceptance risks; the effect of
economic conditions; the impact of competitive products and pricing; product
development, commercialization and technological difficulties; capacity and
supply constraints or difficulties; legislative or regulatory actions impacting
the Company's energy segment and transportation business; changing priorities or
reductions in the U.S. Government defense budget; contract continuation and
future contracting awards; and U.S. and international military budget
constraints and determinations.
26
Consolidated Statements of Operations
United Industrial Corporation
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) Year ended December 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
NET SALES $235,183 $220,822 $227,398
OPERATING COSTS AND EXPENSES:
COST OF SALES 176,392 165,856 180,089
SELLING AND ADMINISTRATIVE 43,170 43,306 43,296
(GAIN) LOSS ON SALE OF ASSETS-- NET (13,306) (1,135) 336
OTHER (INCOME) EXPENSE-- NET (1,150) 1,190 (127)
INTEREST INCOME (1,444) (1,033) (1,201)
INTEREST EXPENSE 915 1,997 2,360
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING COSTS AND EXPENSES 204,577 210,181 224,753
INCOME BEFORE INCOME TAXES 30,606 10,641 2,645
PROVISION (CREDIT) FOR INCOME TAXES
FEDERAL
CURRENT 6,802 3,192 4,139
DEFERRED 1,176 198 (2,726)
STATE 7,803 847 344
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME TAXES 15,781 4,237 1,757
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 14,825 $ 6,404 $ 888
EARNINGS PER SHARE
BASIC $ 1.22 $ .53 $ .07
DILUTED $ 1.19 $ .52 $ .07
- ----------------------------------------------------------------------------------------------------------------------------------
See notes to financial statements
27
Consolidated Balance Sheets
United Industrial Corporation
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) December 31 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
CASH AND CASH EQUIVALENTS $ 23,098 $ 13,427
MARKETABLE SECURITIES 6,102 --
TRADE RECEIVABLES
U.S. GOVERNMENT 11,238 25,781
OTHER 16,581 14,353
- ----------------------------------------------------------------------------------------------------------------------------------
27,819 40,134
INVENTORIES 31,790 39,507
PREPAID EXPENSES AND OTHER CURRENT ASSETS 11,282 1,217
DEFERRED INCOME TAXES 4,982 6,131
ASSETS HELD FOR SALE 12,516 --
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 117,589 100,416
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS 40,126 38,018
PROPERTY AND EQUIPMENT
LAND 631 1,880
BUILDINGS AND IMPROVEMENTS 28,404 49,761
MACHINERY AND EQUIPMENT 69,064 74,046
FURNITURE AND FIXTURES 4,784 5,103
- ----------------------------------------------------------------------------------------------------------------------------------
102,883 130,790
LESS ALLOWANCES FOR DEPRECIATION AND AMORTIZATION 77,307 89,256
- ----------------------------------------------------------------------------------------------------------------------------------
25,576 41,534
$183,291 $179,968
- ----------------------------------------------------------------------------------------------------------------------------------
28
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) December 31 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
ACCOUNTS PAYABLE $ 7,604 $ 10,135
ACCRUED EMPLOYEE COMPENSATION AND TAXES 7,777 7,690
CUSTOMER ADVANCES 3,542 5,873
PROVISION FOR CONTRACT LOSSES 5,776 9,166
FEDERAL INCOME TAXES 630 963
CURRENT PORTION OF LONG-TERM DEBT 1,250 13,750
OTHER LIABILITIES 13,134 8,105
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 39,713 55,682
LONG-TERM DEBT, LESS CURRENT PORTION 4,479 --
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 22,356 21,825
OTHER LIABILITIES 5,029 2,654
DEFERRED INCOME TAXES 9,690 9,662
SHAREHOLDERS' EQUITY
COMMON STOCK -- PAR VALUE $1.00 PER SHARE
AUTHORIZED SHARES -- 15,000,000
OUTSTANDING SHARES:
1997-- 12,249,309; 1996-- 12,173,743 14,374 14,374
ADDITIONAL CAPITAL 89,929 90,196
RETAINED EARNINGS 14,165 2,876
COST OF SHARES IN TREASURY:
1997-- 2,124,839 SHARES; 1996 - 2,200,405 SHARES (16,444) (17,301)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 102,024 90,145
- ----------------------------------------------------------------------------------------------------------------------------------
$183,291 $179,968
- ----------------------------------------------------------------------------------------------------------------------------------
See notes to financial statements
29
Consolidated Statements of Cash Flows
United Industrial Corporation
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Year ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 14,825 $ 6,404 $ 888
ADJUSTMENT TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 9,559 8,306 8,300
DEFERRED INCOME TAXES 1,176 198 (2,726)
(GAIN) LOSS ON SALE OF ASSETS (13,306) (1,135) 336
CHANGES IN OPERATING ASSETS AND LIABILITIES -- NET
(DECREASE) INCREASE IN CURRENT INCOME TAXES (333) 1,024 (3,333)
DECREASE (INCREASE) IN TRADE RECEIVABLES 7,855 (7,223) 653
DECREASE IN INVENTORIES 5,839 8,415 5,564
(INCREASE) DECREASE IN PREPAID EXPENSES AND OTHER CURRENT ASSETS(10,133) 544 (94)
(DECREASE) INCREASE IN ACCOUNTS PAYABLE, ACCRUALS,
ADVANCES AND OTHER CURRENT LIABILITIES (890) 2,218 (139)
OTHER-- NET (96) (1,514) (3,175)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,496 17,237 6,274
INVESTING ACTIVITIES
- -----------------------------------------------------------------------------------------------------------------------------------
PURCHASE OF MARKETABLE SECURITIES (6,102) -- --
PURCHASE OF PROPERTY AND EQUIPMENT (6,926) (6,299) (5,705)
NET PROCEEDS FROM SALE OF ASSETS 19,183 2,250 370
DECREASE IN NOTE RECEIVABLE -- -- 8,540
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 6,155 (4,049) 3,205
FINANCING ACTIVITIES
- -----------------------------------------------------------------------------------------------------------------------------------
INCREASE IN LONG-TERM LIABILITIES -- -- 653
PROCEEDS FROM BORROWINGS 6,250 9,000 9,000
PAYMENTS ON LONG-TERM DEBT AND BORROWINGS (14,271) (18,250) (10,200)
DIVIDENDS (3,536) (2,434) (3,165)
PROCEEDS FROM EXERCISE OF STOCK OPTIONS 577 8 16
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (10,980) (11,676) (3,696)
INCREASE IN CASH AND CASH EQUIVALENTS 9,671 1,512 5,783
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 13,427 11,915 6,132
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 23,098 $ 13,427 $ 11,915
- -----------------------------------------------------------------------------------------------------------------------------------
See notes to financial statements
30
Notes to Financial Statements
United Industrial Corporation
- --------------------------------------------------------------------------------
NOTE 1 NATURE OF OPERATIONS
United Industrial Corporation is a high technology company applying the
majority of its resources to the research, development, and production of
military electronics and aerospace systems and components under defense
contracts. Other products include transportation systems, firefighter training
systems, and energy systems for industry and utilities.
The principal lines of business are defense and related products, and
energy generating systems.
- --------------------------------------------------------------------------------
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Significant intercompany accounts and transactions
have been eliminated in consolidation. Certain amounts in prior years have been
reclassified to conform to the current year's classifications. The Company
includes in income its proportionate share of the net earnings or losses of
unconsolidated investees, when the Company's ownership interest is between 20%
and 50%.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. Marketable
securities consist primarily of investment grade bonds, commercial paper and
other short-term investment funds.
Inventories
Inventories are stated at the lower of cost or market. At December 31,
1997 and 1996, approximately 9% and 10%, respectively, of total inventory was
priced by the last-in, first-out (LIFO) method with the remainder priced at
actual, average, or standard cost. If the first-in, first-out (FIFO) method of
inventory pricing had been used, inventories would have been approximately
$3,863,000 higher than reported on December 31, 1997 and $4,090,000 higher than
reported on December 31, 1996.
Inventories include amounts principally related to long-term contracts
of the Company's defense segment, as determined by the percentage-of-completion
method of accounting. Sales and gross profit are principally recognized as work
is performed based on the relationship between actual costs incurred and total
estimated costs at completion. Alternatively, certain contracts provide for the
production of various units throughout the contract period and sales and gross
profit on these contracts are accounted for based on the units delivered. See
Note 5.
Property and Equipment
Property and equipment are stated at cost. The policy of the Company is
to provide for depreciation on the straight-line, sum-of-the-years digits, and
declining-balance methods, by annual charges to operations calculated to
amortize the cost over the estimated useful lives of the various classes of
property and equipment.
Earnings per Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes dilutive
effects of options, warrants and convertible securities.
31
Notes to Financial Statements (continued)
United Industrial Corporation
Diluted earnings per share is very similar to the previously reported
fully diluted earnings per share. All earnings per share amounts for all periods
have been presented, and where appropriate, restated to conform to the Statement
128 requirements.
Stock-Based Compensation
The Company has elected to continue to account for its stock-based
compensation plan in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), whereby compensation cost
for stock options is recognized in income based on the excess, if any, of the
quoted market price of the stock at the grant date of the award or other
measurement date over the amount an employee must pay to acquire the stock. See
Note 8.
New Accounting Pronouncements
During 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Adoption of this standard did
not have a significant impact on the Company.
- --------------------------------------------------------------------------------
NOTE 3 MARKETABLE SECURITIES
At December 31, 1997, the Company's short-term investments consist of
debt securities, whose carrying amount of $6,102,000 approximates market value
and are classified as held-to-maturity securities. In accordance with Financial
Accounting Statement No. 115, management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity.
- --------------------------------------------------------------------------------
NOTE 4 TRADE RECEIVABLES
Amounts due from the U.S. Government primarily related to long-term
contracts of the Company's defense segment were as follows:
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) December 31 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
AMOUNTS BILLED $ 9,221 $22,282
UNBILLED RECOVERABLE COSTS AND EARNED FEES 1,704 3,251
RETAINAGE PER CONTRACT PROVISIONS 313 248
$11,238 $25,781
- ----------------------------------------------------------------------------------------------------------------------------------
Billed and unbilled amounts above include $2,176,000 and $2,283,000 at
December 31, 1997 and 1996, respectively, related to contracts for which a
subsidiary of the Company is a subcontractor to other government contractors.
Unbilled recoverable costs and earned fees represent amounts that will
be substantially collected within one year. Retainage amounts will generally be
billed over the next twelve months.
32
NOTE 5 INVENTORIES
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) December 31 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
FINISHED GOODS AND WORK IN PROGRESS $ 4,023 $ 11,320
- ----------------------------------------------------------------------------------------------------------------------------------
COSTS AND EARNINGS RELATING TO LONG-TERM CONTRACTS 45,537 43,557
DEDUCT PROGRESS PAYMENTS RELATED TO LONG-TERM CONTRACTS (21,009) (19,454)
COSTS AND EARNINGS IN EXCESS OF BILLINGS 24,528 24,103
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FINISHED GOODS AND WORK IN PROGRESS 28,551 35,423
MATERIALS AND SUPPLIES 3,239 4,084
$ 31,790 $ 39,507
- ----------------------------------------------------------------------------------------------------------------------------------
The inventoried costs associated with long-term contracts include costs
and earnings ($24,528,000 in 1997 and $24,103,000 in 1996) of incomplete
contracts not yet billable to the customer. These amounts represent the
difference between the percentage-of-completion method of accounting for
long-term contracts used to record operating results by the Company's defense
segment and the amounts billable to the customer under the terms of the specific
contracts. Estimates of final contract costs and earnings (including earnings
subject to future determination through negotiation or other procedures) are
reviewed and revised periodically throughout the lives of the contracts.
Adjustments of earnings resulting from the revisions are recorded on a current
basis. The Company recognized losses of $6,009,000 ($3,745,000 net of tax
benefit, or $.30 per diluted share) and $6,997,000 ($4,443,000 net of tax
benefit, or $.36 per diluted share) during 1997 and 1996, respectively,
resulting primarily from revision of cost estimates on certain major long-term
contracts.
Included in the 1997 and 1996 costs and earnings in excess of billings
were $1,700,000 and $1,400,000, respectively, on certain government contracts in
excess of negotiated contract value which are or will be the subject of formal
claims if not resolved by negotiation.
In connection with certain of its contracts, the Company commits to
certain performance guarantees. The ability of the Company to perform under
these guarantees may, in part, be dependent on the performance of other parties,
including partners and subcontractors. The Company monitors the progress of its
partners and subcontractors and does not believe that their performance will
adversely affect these contracts as of December 31, 1997.
Inventories do not include any significant amounts of unamortized
tooling, learning curve, and other deferred costs, claims, or other similar
items whose recovery is uncertain.
- ----------------------------------------------------------------------------------------------------------------------------------
NOTE 6 OTHER ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) December 31 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
NET PENSION ASSET $ 31,070 $ 27,896
PATENTS AND OTHER INTANGIBLE ASSETS 6,256 8,140
OTHER 2,800 1,982
$ 40,126 $ 38,018
- ----------------------------------------------------------------------------------------------------------------------------------
33
Notes to Financial Statements (continued)
United Industrial Corporation
Patents and other intangible assets represent assets acquired in
connection with purchased businesses and are being amortized primarily on a
straight-line basis over 5 to 10 years. Amortiza-tion expense amounted to
$1,543,000 in 1997, $1,704,000 in 1996, and $1,694,000 in 1995.
Accumulated amortization amounted to $7,559,000 and $6,707,000 at
December 31, 1997 and 1996, respectively. Intangible assets were decreased by
$342,000 (net of accumulated amortization of $690,000) in connection with the
disposal of businesses. See Note 17.
- --------------------------------------------------------------------------------
NOTE 7 LONG-TERM DEBT AND CREDIT ARRANGEMENTS
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 a credit agreement, dated as of October
13, 1994) with an institutional lender. In July 1997, the Company borrowed
$6,250,000 under the Term Loan Agreement, at LIBOR plus a fluctuating margin.
The principal is payable in sixty consecutive monthly installments. At December
31, 1997 the outstanding borrowings were $5,729,000, none of which were
revolving credit borrowings. The amount available under the Revolving Line of
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 letter of credit obligations outstanding at December 31, 1997 were
$7,700,000. The Agreement provides for restrictive covenants among which are
debt service coverage ratio, quick ratio, senior debt ratio and a tangible net
worth requirement, all as defined. All assets now owned or hereafter acquired
are pledged as collateral under the Agreement. The carrying amounts of the
Company's borrowings under its long-term debt arrangement approximate the fair
value.
Interest expense was $915,000 in 1997, $1,997,000 in 1996 and
$2,360,000 in 1995. Interest paid was $1,290,000 in 1997, $2,122,000 in 1996,
and $2,270,000 in 1995.
- --------------------------------------------------------------------------------
NOTE 8 STOCK OPTIONS
In May 1994, the shareholders approved the 1994 Stock Option Plan (the
"Plan"), which provides for the granting of options with respect to the purchase
of an aggregate of up to 600,000 (increased in May 1996 to 1,200,000) shares of
common stock of the Company from time to time to key employees of the Company
and its subsidiaries. Options granted may be either "incentive stock options,"
within the meaning of Section 422A of the Internal Revenue Code, or
non-qualified options.
The options are granted at not less than market value at the date of
grant; and in accordance with APB 25 and related interpretations no compensation
cost has been recognized for grants made under the Plan. Options are exercisable
over a period determined by the Board of Directors, but no longer than ten years
after the date they are granted. Options vest one-third each year after a
one-year waiting period.
In May 1997, the shareholders approved the 1996 Stock Option Plan for
Non-employee Directors, which provides for the granting of options with respect
to the purchase of an aggregate of up to 300,000 shares of common stock of the
Company. Options may be exercised up to one-third as of the date of grant of an
option and up to an additional one-third may be be exercised as of the date of
each subsequent annual meeting of shareholders, but no longer than ten years
after the date they are granted. The options are granted at not less than market
value at the date of grant.
Had compensation cost been determined consistent with the fair value
method set forth under FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), for all
34
awards during 1997, 1996 and 1995 under the plans, net income and net income per
common share would have decreased to the pro forma amounts indicated below:
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)Year ended December 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME:
AS REPORTED $14,825 $6,404 $888
PRO FORMA $14,536 $6,248 $887
NET INCOME PER COMMON SHARE:
AS REPORTED:
BASIC $1.22 $.53 $.07
DILUTED $1.19 $.52 $.07
PRO FORMA:
BASIC $1.19 $.52 $.07
DILUTED $1.17 $.52 $.07
- -----------------------------------------------------------------------------------------------------------------------------------
FAS 123 is applicable only to stock options granted subsequent to December 31,
1994. Accordingly, since compensation expense associated with such grants would
generally be recognized over a three-year vesting period, the initial impact of
applying FAS 123 on pro forma net income is not representative of the potential
impact on pro forma net income in future years, when the pro forma effect would
be fully reflected.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively: dividend
yields of 3.7%, 4% and 3.6%; expected volatility of 36%, 37% and 36%; risk-free
interest rates of 6.2%, 6% and 6%; and expected lives of five years in all
periods. The weighted-average fair value of an option granted was $2.19, $1.51,
and $1.59 for the years ended December 31, 1997, 1996, and 1995, respectively.
A summary of stock option activity under all plans is as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted
Average
Exercise
(Shares in thousands) Number of shares Price
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1995 94 $4.75
GRANTED 139 5.55
EXERCISED (3) 4.75
CANCELED (116) 5.53
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 114 4.94
GRANTED 368 5.30
EXERCISED (2) 4.75
CANCELED (13) 4.75
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 467 5.23
GRANTED 483 7.35
EXERCISED (109) 5.31
CANCELED (1) 4.75
BALANCE AT DECEMBER 31, 1997 840 $6.44
- -----------------------------------------------------------------------------------------------------------------------------------
35
Notes to Financial Statements (continued)
United Industrial Corporation
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands) December 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
EXERCISABLE 155 57 25
AVAILABLE FOR FUTURE GRANTS 546 728 483
- -----------------------------------------------------------------------------------------------------------------------------------
Exercise prices for options outstanding as of December 31, 1997, ranged
from $4.50 to $10.25. The weighted-average remaining life of these options is
8.6 years.
- --------------------------------------------------------------------------------
NOTE 9 LEASES
Total rental expense for all operating leases amounted to $1,543,000 in
1997, $2,391,000 in 1996, and $2,632,000 in 1995. Contingent rental payments
were not significant.
- --------------------------------------------------------------------------------
The future minimum rental commitments as of December 31, 1997, for all
noncancel-able leases are $2,157,000 in 1998; $1,866,000 in 1999; $1,263,000 in
2000; $691,000 in 2001; and $474,000 in 2002.
- --------------------------------------------------------------------------------
NOTE 10 CHANGES IN SHAREHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
Retained Share-
Common Additional Earnings Treasury holders'
(Dollars in thousands) Stock Capital (Deficit) Stock Equity
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 $14,374 $94,596 $ (3,199) $(17,350) $ 88,421
NET INCOME -- -- 888 -- 888
CASH DIVIDENDS DECLARED ($.26 PER SHARE) -- (3,165) -- -- (3,165)
STOCK OPTIONS -- (10) -- 26 16
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 14,374 91,421 (2,311) (17,324) 86,160
NET INCOME -- -- 6,404 -- 6,404
CASH DIVIDENDS DECLARED ($.20 PER SHARE) -- (1,217) (1,217) -- (2,434)
STOCK OPTIONS -- (8) -- 23 15
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 14,374 90,196 2,876 (17,301) 90,145
NET INCOME -- -- 14,825 -- 14,825
CASH DIVIDENDS DECLARED ($.29 PER SHARE) -- -- (3,536) -- (3,536)
STOCK OPTIONS -- (267) -- 857 590
BALANCE, DECEMBER 31, 1997 $14,374 $89,929 $14,165 $(16,444) $102,024
- ----------------------------------------------------------------------------------------------------------------------------------
36
- --------------------------------------------------------------------------------
NOTE 11 PENSION ARRANGEMENTS AND SPECIAL TERMINATION BENEFITS
The Company and its subsidiaries have a number of noncontributory
defined benefit pension plans covering substantially all employees. In prior
years the Company converted the defined benefit plans into a single cash balance
plan. In accordance with the Cash Balance Plan, a participant's benefit includes
the actuarial equivalent of the participant's accrued benefit under the
applicable predecessor plan, annual allocations based upon a percentage of
salary, and interest earned on such participant's account. The Company's funding
policy for the plans is to make the minimum annual contributions required by
applicable regulations.
A summary of the components of net periodic pension (income) cost for
the plans is as follows:
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
SERVICE COST-- BENEFITS EARNED DURING THE PERIOD $ 913 $ 903 $ 682
INTEREST COST ON PROJECTED BENEFIT OBLIGATION 10,404 11,133 10,689
ACTUAL RETURN ON PLAN ASSETS (28,869) (23,191) (29,770)
NET AMORTIZATION AND DEFERRAL 14,350 8,194 19,075
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL PENSION (INCOME) COSTS $ (3,202) $ (2,961) $ 676
ASSUMPTIONS PRIMARILY USED IN THE ACCOUNTING FOR THE PLANS WERE:
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE DISCOUNT RATES 7.5% 7.5% 7.3%
RATES OF INCREASE IN COMPENSATION LEVELS 4% 4% 4%
EXPECTED LONG-TERM RATE OF RETURN ON ASSETS 8.5% 8.5% 8.5%
- ----------------------------------------------------------------------------------------------------------------------------------
The following table sets forth the funded status and amounts recognized
in the Consolidated Balance Sheets at December 31, 1997 and 1996, for the
Company's pension plans:
PLANS WITH ASSETS IN EXCESS OF ACCUMULATED BENEFIT OBLIGATION:
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS:
VESTED BENEFIT OBLIGATION $141,658 $143,480
- ----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED BENEFIT OBLIGATION $144,085 $145,795
PROJECTED BENEFIT OBLIGATION $144,370 $145,892
PLAN ASSETS AT FAIR VALUE 184,120 169,004
- ----------------------------------------------------------------------------------------------------------------------------------
PROJECTED BENEFIT OBLIGATION LESS THAN PLAN ASSETS 39,750 23,112
UNRECOGNIZED NET (GAIN) LOSS INCLUDING PRIOR SERVICE COST (8,235) 5,314
UNRECOGNIZED NET ASSET AT BEGINNING OF YEAR, NET OF AMORTIZATION (445) (530)
NET PENSION ASSET RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS $ 31,070 $ 27,896
- ----------------------------------------------------------------------------------------------------------------------------------
37
Notes to Financial Statements (continued)
United Industrial Corporation
The plans' assets are invested in listed stocks and bonds and
interest-bearing cash equivalents.
The Company sponsors a 401(k) plan with employee and employer matching
contributions based on specified formulas. The Company's contribution to the
401(k) plan was $1,304,000 in 1997, $1,208,000 in 1996, and $1,158,000 in 1995.
- --------------------------------------------------------------------------------
NOTE 12 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In addition to the Company's defined benefit pension plans, a
subsidiary of the Company sponsors a defined benefit health care plan that
provides postretirement medical benefits to full-time employees who have worked
10 years and attained age 62 or 30 years of service with the Company. The plan
is non-contributory for retirees and contributory for spouses. The retiree
spousal contributions are adjusted annually. Both the retiree and spousal plan
contain cost-sharing features such as deductibles and coinsurance. The
accounting for the plan anticipates future cost- sharing changes to the written
plan that are consistent with the Company's expressed intent to increase the
spousal contribution to the point that the entire cost for spouses will be
contributory at the end of 5 years commencing from January 1, 1998, and limit
the amount it will contribute for retiree insurance costs, as well as each
active employee who later becomes a retiree, to no more than double the amount
which the Company paid for coverage on January 1, 1993. The actuarial and
recorded liabilities for these benefits have not been funded. The accumulated
benefit obligation was determined using the unit credit method and an assumed
discount rate of 7.5% in 1997, 1996 and 1995. The assumed health care cost trend
rate used was 8.65% for medical, decreasing to 5.25% in the year 2005. An
increase of 1% in the health care trend rate would not materially increase the
cost or accumulated postretirement benefit due to the Company not being
obligated to pay more than double the amount which the Company was paying for
coverage on January 1, 1993.
Another subsidiary also sponsors a defined benefit health care plan
that provides postretirement medical and dental benefits to full-time employees
who have worked 10 years and attained age 60. Dental benefits cease for both
retiree and spouse once the retiree reaches age 65. Surviving spouses are
eligible for preretirement death benefits. Employees age 55, but less than 60,
with at least 20 years of service receive only medical benefits commencing when
the retiree reaches age 65. No dental benefit is provided. The accumulated
benefit obligation was determined using the unit credit method and an assumed
discount rate of 7.0% in 1997, 7.5% in 1996, and 7.25% in 1995. The assumed
health care cost trend rate was 10.1% decreasing to 5.5% in the year 2005. The
effect of a 1% increase in the health care trend rate would not materially
increase the net periodic cost or the accumulated postretirement benefit
obligation at December 31, 1997.
The costs of certain health care provided by the Company for eligible
retired employees were $1,635,000 in 1997, $1,586,000 in 1996, and $1,694,000 in
1995.
38
The following table shows the two plans' combined funded status
reconciled with the amounts recognized in the Company's consolidated balance
sheets:
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) December 31 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION:
RETIREES $12,490 $13,221
FULLY ELIGIBLE ACTIVE PLAN PARTICIPANTS 1,724 1,289
OTHER ACTIVE PLAN PARTICIPANTS 8,262 7,465
- ----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION 22,476 21,975
UNRECOGNIZED NET LOSS (120) (150)
- ----------------------------------------------------------------------------------------------------------------------------------
ACCRUED POSTRETIREMENT BENEFIT OBLIGATION $22,356 $21,825
NET PERIODIC POSTRETIREMENT BENEFIT COST INCLUDED THE FOLLOWING COMPONENTS:
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Year ended December 31 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
SERVICE COST $ 598 $ 538 $ 548
INTEREST COST 1,568 1,540 1,824
- ----------------------------------------------------------------------------------------------------------------------------------
NET PERIODIC POSTRETIREMENT BENEFIT COST $2,166 $2,078 $2,372
- ----------------------------------------------------------------------------------------------------------------------------------
NOTE 13 INDUSTRY SEGMENTS DATA
The Company is engaged in the design, development, manufacture, and
sale of products and services in three principal industries: simulation and test
equipment, unmanned air vehicles, ordnance systems, transportation systems, and
weather reporting systems, which line of business was sold in September 1997,
for defense and other government and non-government entities in the United
States and abroad; energy systems for industries and utilities; and specialty
plastic products, substantially all of the operating assets of which were sold
in August 1997.
Sales to agencies of the United States Government, primarily by the
defense segment, were $129,933,000 in 1997, $144,749,000 in 1996, and
$154,346,000 in 1995. No single customer, other than the United States
Government, accounted for 10 percent or more of net sales in any year. Export
sales were $40,322,000 in 1997, $26,491,000 in 1996 and amounted to less than
10% of net sales in 1995.
39
Notes to Financial Statements (continued)
United Industrial Corporation
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
NET SALES
DEFENSE $192,651 $185,479 $ 188,111
ENERGY SYSTEMS 37,927 30,012 32,549
PLASTIC PRODUCTS 4,605 5,331 6,738
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL NET SALES $235,183 $220,822 $227,398
OPERATING INCOME (LOSS)
DEFENSE $ 28,485 $ 12,497 $ 6,436
ENERGY SYSTEMS 7,894 3,892 2,598
PLASTIC PRODUCTS (942) (51) 389
CORPORATE (4,831) (5,697) (6,778)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME $ 30,606 $ 10,641 $ 2,645
IDENTIFIABLE ASSETS
DEFENSE $149,643 $149,037 $150,507
ENERGY SYSTEMS 30,174 25,588 23,103
PLASTIC PRODUCTS 1,014 2,978 2,943
CORPORATE 2,460 2,365 6,553
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL IDENTIFIABLE ASSETS $183,291 $179,968 $183,106
CAPITAL EXPENDITURES
DEFENSE $ 6,414 $ 4,833 $ 4,572
ENERGY SYSTEMS 486 959 805
PLASTIC PRODUCTS 26 494 289
CORPORATE -- 13 39
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL EXPENDITURES $ 6,926 $ 6,299 $ 5,705
DEPRECIATION EXPENSE
DEFENSE $ 7,018 $ 5,401 $ 5,616
ENERGY SYSTEMS 815 805 839
PLASTIC PRODUCTS 157 198 134
CORPORATE 26 16 17
TOTAL DEPRECIATION EXPENSE $ 8,016 $ 6,420 $ 6,606
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income for each segment is total revenue less operating
expenses, excluding interest and corporate management fees. Research and
development costs included in costs and expenses amounted to $2,067,000 in 1997,
$2,641,000 in 1996, and $2,270,000 in 1995. Corporate loss includes net interest
income of $529,000 in 1997, and net interest expense of $964,000 in 1996 and
$1,159,000 in 1995. Corporate assets consist primarily of cash and cash
equivalents.
- --------------------------------------------------------------------------------
NOTE 14 INCOME TAXES
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. In addition, the effect on deferred taxes
of a change in tax rates is recognized in the period that includes the enactment
date.
40
Following is a reconciliation of the difference between total tax
expense and the amount computed by applying the federal statutory income tax
rate to income from operations before income taxes:
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
FEDERAL INCOME TAXES AT STATUTORY RATE $10,712 $3,618 $ 899
STATE AND LOCAL INCOME TAXES, NET OF FEDERAL INCOME TAX BENEFIT
(INCLUDING $4,000 RELATING TO A TAX CONTINGENCY) 5,072 480 227
PROVISION FOR NONDEDUCTIBLE EXPENSES (INCLUDING $238, $86 AND $340
RELATED TO CONTINGENT PAYMENTS IN 1997, 1996 AND 1995
ON AN ACQUISITION) 537 119 460
NON-TAXABLE INCOME (632) -- --
OTHER-- NET 92 20 171
INCOME TAXES $15,781 $4,237 $1,757
- ----------------------------------------------------------------------------------------------------------------------------------
Income tax payments were $6,875,000 in 1997, $2,000,000 in 1996, and
$7,400,000 in 1995.
Deferred income tax balances:
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) December 31 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
DEFERRED TAX ASSET
LOSSES ON LONG-TERM CONTRACTS NOT CURRENTLY DEDUCTIBLE $ 2,257 $ 2,826
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS AND OTHER
EMPLOYEE BENEFITS 9,945 9,802
PRODUCT WARRANTY AND OTHER PROVISIONS 2,107 1,868
VACATION PAY ACCRUALS 730 974
BASIS DIFFERENCES FOR ASSET SALES 2,092 2,188
OTHER 42 110
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX ASSET 17,173 17,768
- ---------------------------------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITY
PENSION PLANS AND OTHER EMPLOYEE BENEFITS (12,902) (11,765)
EXCESS TAX DEPRECIATION (7,314) (7,837)
PATENT AMORTIZATION (1,349) (1,520)
OTHER (316) (177)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED TAX LIABILITY (21,881) (21,299)
NET DEFERRED TAX LIABILITY $ (4,708) $ (3,531)
- ---------------------------------------------------------------------------------------------------------------------------------
The net deferred tax liability is classified as follows:
NET CURRENT DEFERRED INCOME TAX ASSET $ 4,982 $ 6,131
NET NON-CURRENT DEFERRED INCOME TAX LIABILITY $ (9,690) $ (9,662)
- ---------------------------------------------------------------------------------------------------------------------------------
41
Notes to Financial Statements (continued)
United Industrial Corporation
- -----------------------------------------------------------------------------------------------------------------------------------
NOTE 15 SELECTED QUARTERLY DATA (UNAUDITED)
(Dollars in thousands,
except per share data 1997 1996
and stock prices) FOURTH THIRD SECOND FIRST Fourth Third Second First
- -----------------------------------------------------------------------------------------------------------------------------------
NET SALES $ 69,001 $ 52,089 $ 55,649 $ 58,444 $ 56,897 $ 54,159 $ 55,265 $ 54,501
GROSS PROFIT 19,569 12,251 10,795 16,176 17,993 9,345 13,218 14,410
NET INCOME 4,714(C) 6,678(B) 1,670 1,763 3,352 163 1,458 1,431
- -----------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
BASIC(a) $.38 $.55 $.14 $.14 $.28 $.01 $.12 $.12
DILUTED $.37 $.54 $.14 $.14 $.27 $.01 $.12 $.12
- -----------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS DECLARED
PER SHARE $.08 $.07 $.07 $.07 $.05 $.05 $.05 $.05
STOCK PRICES:
HIGH $113/8 $915/16 $91/8 $8 $61/4 $61/2 $63/8 $63/4
LOW $ 93/4 $85/16 $67/8 $57/8 $51/8 $51/2 $51/8 $43/4
- -----------------------------------------------------------------------------------------------------------------------------------
(a) For each of the quarters in 1996 and the first three quarters of 1997
earnings per share amounts have been restated to comply with Statement
of Financial Accounting Standards No. 128 "Earnings per Share."
(b) Includes net gain on sale of assets of $13,306,000 ($8,470,000 net of
taxes)
(c) Includes income from a favorable litigation settlement of $3,000,000
($1,779,000 net of taxes)
The Company's common stock is listed on the New York Stock Exchange.
The approximate number of shareholders of record as of February 25, 1998, was
2,500.
- --------------------------------------------------------------------------------
NOTE 16 LITIGATION
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 at a site in the State of Arizona that
manufactured semiconductors between 1959 and 1960. All such operations of the
Company were sold by 1961. 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 complaint 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 incidental and consequential damages, punitive damages and an
injunction against actions causing further exposures. The property and medical
classes have been 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.
42
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. 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. 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 August 1997, the Company sold substantially all the operating assets
of Neo Products Company for $587,000 of cash and promissory notes of $853,000
secured by a mortgage on all fixed assets sold. The contract contains an "earn
out" provision based on net income earned through August 2002. The sale resulted
in a loss of $340,000, after taxes.
In September 1997, the Company sold all the capital stock of AAI
Systems Management, Inc., its Weather Systems Business, for $18,500,000 of cash
and a promissory note of $2,375,000, which was recorded at no value. The sale
resulted in a gain of $14,169,000 ($8,810,000 net of taxes or $.68 per diluted
share.)
The Consolidated Statements of Income include the combined net sales of
the two companies of $29,838,000, $42,331,000 and $43,156,000; and the combined
net income of $1,595,000 ($.13 per diluted share), $1,827,000 ($.15 per diluted
share) and $3,239,000 ($.27 per diluted share) for the years ended December 31,
1997, 1996 and 1995, respectively.
- --------------------------------------------------------------------------------
NOTE 17 SALES OF ASSETS
In August 1997, the Company sold substantially all the operating assets
of Neo Products Co. for $587,000 of cash and promissory notes of $853,000
secured by a mortgage on all fixed assets sold. The contract contains an "earn
out" provision based on net income earned through August 2002. The sale resulted
in a loss of $340,000, after taxes.
In September 1997, the Company sold all the capital stock of AAI
Systems Management, Inc., its Weather Systems Business, for $18,500,000 of cash
and a promissory note of $2,375,000. The sale resulted in a realized gain of
$14,169,000 ($8,810,000 net of taxes or $.71 per diluted share.)
The Consolidated Statements of Operations include the combined net
sales of the two companies of $29,838,000, $42,331,000 and $43,156,000; and the
combined net income of $1,595,000 ($.13 per diluted share), $1,827,000 ($.15 per
diluted share) and $3,239,000 ($.27 per diluted share) for the years ended
December 31, 1997, 1996 and 1995, respectively.
The Company is currently negotiating the sale of certain of its
properties of its AAI subsidiary. The Company believes the net proceeds from the
sale of these asstes will exceed their carrying value.
43
Notes to Financial Statements (continued)
United Industrial Corporation
- --------------------------------------------------------------------------------
NOTE 18 EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $14,825,000 $ 6,404,000 $ 888,000
BASIC EARNINGS PER SHARE-
WEIGHTED-AVERAGE SHARES 12,195,000 12,173,000 12,169,000
EFFECT OF DILUTIVE SECURITIES:
EMPLOYEE STOCK OPTIONS 225,000 38,000 24,000
- -----------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER-SHARE-
ADJUSTED WEIGHTED-AVERAGE
AND ASSUMED CONVERSIONS 12,420,000 12,211,000 12,193,000
BASIC EARNINGS PER SHARE $1.22 $.53 $.07
DILUTED EARNINGS PER SHARE $1.19 $.52 $.07
44
Report of Independent Auditors
United Industrial Corporation
Board of Directors and Shareholders
United Industrial Corporation
New York, New York
We have audited the accompanying consolidated balance sheets of United
Industrial Corporation and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of United
Industrial Corporation and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
New York, New York
February 24, 1998
45
Consolidated Statements of Operation
Five-Year Financial Data
United Industrial Corporation
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Year ended December 31 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
- -----------------------------------------------------------------------------------------------------------------------------------
NET SALES $ 235,183 $ 220,822 $ 227,398 $ 209,727 $ 252,993
OPERATING COSTS 219,562 209,162 223,385 202,766 252,919
INTEREST (INCOME) EXPENSE-- NET (529) 964 1,159 1,362 (639)
INCOME (LOSS) BEFORE INCOME TAXES 30,606 10,641 2,645 8,427 (20,151)(a)
INCOME TAX (CREDIT) 15,781 4,237 1,757 3,215 (8,134)
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGES 14,825 6,404 888 5,212 (12,017)(a)
CUMULATIVE EFFECT OF ACCOUNTING
CHANGES -- -- -- -- 994
INCOME (LOSS) FROM CONTINUING
OPERATIONS 14,825 6,404 888 5,212 (11,023)(a)
EARNINGS (LOSS) PER SHARE:(b)
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGES
BASIC 1.22 .53 .07 .43 (.98)(a)
DILUTED 1.19 .52 .07 .43 (.98)
CUMULATIVE EFFECT OF ACCOUNTING
CHANGES -- -- -- -- .08
EARNINGS (LOSS)
BASIC 1.22 .53 .07 .43 (.90)(a)
DILUTED 1.19 .52 .07 .43 (.90)
CASH DIVIDENDS PAID ON
COMMON STOCK 3,536 2,434 3,165 3,425 5,381
CASH DIVIDENDS DECLARED PER
COMMON SHARE .29 .20 .26 .21 .35
SHARES OUTSTANDING AS OF YEAR END
(IN THOUSANDS) 12,249 12,174 12,171 12,167 12,259
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 183,291 $ 179,968 $ 183,106 $ 188,794 $ 202,653
PROPERTY AND EQUIPMENT 25,576 41,534 42,586 45,214 46,635
LONG-TERM DEBT 4,479 -- 13,750 20,000 25,000
SHAREHOLDERS' EQUITY 102,024 90,145 86,160 88,421 85,354
SHAREHOLDERS' EQUITY PER SHARE 8.33 7.40 7.08 7.27 6.96
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
- -----------------------------------------------------------------------------------------------------------------------------------
RETURN ON SHAREHOLDERS' EQUITY 14.5% 7.1% 1.0% 6.0% --
NET INCOME AS A PERCENT OF SALES 6.3 2.9 .4 2.5 --
LONG-TERM DEBT AS A PERCENT OF
TOTAL CAPITALIZATION 4.2 -- 13.8 18.4 22.6
- -----------------------------------------------------------------------------------------------------------------------------------
STATISTICAL DATA
- -----------------------------------------------------------------------------------------------------------------------------------
SALES BACKLOG AS OF YEAR END $ 188,000 $ 159,000 $ 206,000 $ 218,000 $ 208,000
CAPITAL EXPENDITURES 6,926 6,299 5,705 4,146 5,931
DEPRECIATION AND AMORTIZATION 9,559 8,306 8,300 8,291 7,430
NUMBER OF EMPLOYEES 1,800 1,900 2,000 1,900 2,300
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(a) Includes restructuring charge of $22,500,000 ($14,400,000 or $1.17 per
share net of income tax benefit)
(b) The 1993 through 1996 earnings per share amounts have been restated to
comply with Statement of Financial Accounting Standards No. 128 "Earnings
per Share."
46
Corporate Organization
United Industrial Corporation
- ---------------------------------------------------------------------------------------------------------
BOARD OF DIRECTORS
Harold S. Gelb Richard R. Erkeneff Honorary Director (nonvoting),
Chairman of the Board President and Chief Executive Bernard Fein
Officer of the Company and Chairman Emeritus
Howard M. Bloch AAI Corporation Retired Chairman and
Vice Chairman of the Board President of the Company
E. Donald Shapiro
Edward C. Aldridge, Jr. Professor of Law
President and Chief New York Law School
Executive Officer
The Aerospace Corporation Susan Fein Zawel
Vice President Corporate
Communications, Associate General
Counsel and Secretary of the Company
CORPORATE OFFICERS
- ---------------------------------------------------------------------------------------------------------
Richard R. Erkeneff James H. Perry Edward A. Smolinski
President and Chief Financial Officer Assistant Treasurer and
Chief Executive Officer and Treasurer Assistant Secretary
Robert W. Worthing Susan Fein Zawel
Vice President and Vice President Corporate
General Counsel Communications, Associate General
Counsel and Secretary
SENIOR MANAGEMENT
- ---------------------------------------------------------------------------------------------------------
AAI CORPORATION Jackson R. Bell SYMTRON SYSTEMS, INC.
Richard R. Erkeneff Vice President and John J. Henning
President and General Manager, President and Chief
Chief Executive Officer Transportation Systems Executive Officer
Paul J. Michaud Joseph F. Burger, James W. Hanson
Vice President, Chief Financial Vice President and General Vice President and
Officer and Treasurer Manager, Hunt Valley General Manager
Operations
Robert W. Worthing Richard A. Brandt
Vice President, General Counsel G. Russell Zink Treasurer
and Secretary Vice President,
Business Development
George J. Kersels
Vice President and General DETROIT STOKER COMPANY
Manager, Defense Systems Michael J. DiMonte
President and
Maurice P. Ranc Chief Executive Officer
Vice President and General
Manager, Engineering and Mark A. Eleniewski
Maintenance Services Executive Vice President
Thomas E. Wurzel Gary K. Ludwig
President Vice President, Finance
AAI/ACL Technologies, Inc.
- ---------------------------------------------------------------------------------------------------------
Corporate and Shareholder Information
United Industrial Corporation
CORPORATE HEADQUARTERS
United Industrial Corporation
570 Lexington Avenue
New York, New York 10022
(212) 752-8787
SUBSIDIARIES
AAICORPORATION
P.O. Box 126
Hunt Valley, Maryland 21030
(410) 666-1400
DETROIT STOKER COMPANY
1510 East First Street
Monroe, Michigan 48161
(313) 241-9500
SYMTRON SYSTEMS, INC.
17-01 Pollitt Drive
Fair Lawn, New Jersey 07410
(201) 794-0200
TRANSFER AGENT, REGISTRAR
AND DIVIDEND
DISBURSING AGENT
Shareholders may obtain information relating to their share position, dividends,
transfer requirements, lost certificates and other related matters by
contacting:
American Stock Transfer
and Trust Company
40 Wall Street
New York, New York 10005
(800) 937-5449
For information about the Company's Dividend Reinvestment and Share Purchase
Plan, contact:
American Stock Transfer
and Trust Company
(800) 278-4353
SHAREHOLDER RELATIONS
Security analysts, investment professionals and shareholders should direct their
inquiries to:
Investor Relations
United Industrial Corporation
570 Lexington Avenue
New York, New York 10022
INDEPENDENT AUDITORS
Ernst & Young LLP
787 Seventh Avenue
New York, New York 10019
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 10:00 a.m. on Tuesday, May
12, 1998, at:
The Park Lane Hotel
36 Central Park South
New York, New York
CORPORATE COUNSEL
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
FORM 10-K REPORT
A copy of the United Industrial Corporation Annual Report on Form 10-K as filed
with the Securities and Exchange Commission may be obtained without cost by
writing to:
Susan Fein Zawel, Secretary
United Industrial Corporation
570 Lexington Avenue
New York, New York 10022
STOCK LISTING
United Industrial Corporation common stock is traded on the New York Stock
Exchange
(Ticker Symbol: UIC)
INTERNET ADDRESS
http://www.unitedindustrial.com
48
DESIGNED AND PRODUCED BY TAYLOR & IVES, INC., NYC
PHOTOGRAPHY: TED HOROWITZ, KAY CHERNUSH