[logo] UNITED INDUSTRIAL
CORPORATION
Annual Report
----------------2002
Defense Sales*
$193,080 $208,575 $229,215
00 01 02
Defense Backlog*
$190,161 $201,221 $296,117
00 01 02
Defense Segment EBITDAP*+
$13,567 $15,923 $20,065
00 01 02
* For the year ending December 31
(Excludes divested business)
*+ Earnings before interest, taxes, depreciation,
amortization, pension and curtailment gain
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)
Year Ended December 31 2002 2001 2000
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Net Sales-Continuing Operations $ 258,767 $ 238,495 $ 236,283
Net(Loss) Income (39,077) 5,363 7,779
(Loss) Earnings Per Share
Basic (3.00) .42 .63
Diluted (2.85) .40 .62
Dividends Per Share .30 .40 .40
Shareholders' Equity 47,631 120,344 114,893
Shareholders' Equity Per Share 3.64 9.35 9.24
Sales Backlog-Continuing Operations $ 301,000 $ 207,000 $ 195,000
Shares Outstanding 13,068,000 12,872,000 12,435,000
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Before Income Taxes Per Diluted Share
(Unaudited) (Unaudited)
------------------------------- ----------------------------
Year Ended December 31 2002 2001 2000 2002 2001 2000
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GAAP earnings from continuing operations $ 4,438 $ 22,011 $ 32,861 $ 0.28 $ 1.10 $ 1.68
Plus: Asbestos related provision 11,509 - - 0.53 - -
Plus: Restructuring charge 4,707 - - 0.23 - -
Plus: Pension expense 1,321 - - 0.06 - -
Less: Pension income - (2,385) (5,277) - (.12) (.28)
Less: Post-retirement curtailment gain - (1,933) - - (.09) -
Less: Income from litigation settlement - (842) (3,483) - (.04) (.18)
Less: Income tax benefit - (1,000) - - (.05) -
Less: Gain on sale of subsidiary net of operating loss - - (3,851) - - (.20)
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Pro forma earnings from continuing operations $ 21,975 $ 15,851 $ 20,250 $ 1.10 $ .80 $ 1.02
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This table provides a reconciliation of United Industrial Corporation's
Generally Accepted Accounting Principles (GAAP) to Pro forma earnings before
taxes and per diluted share from continuing operations
United Industrial is a company focused on the design and production of defense
systems. * Its products include unmanned aerial vehicles, training and
simulation systems, and automated aircraft test and maintenance equipment. * The
Company also offers logistical/engineering services for government-owned
equipment and manufactures combustion equipment for biomass and refuse fuels.
[PHOTO]
Letter to Shareholders ............... 2
Unmanned Aerial Vehicles ............. 8
Simulation and Test Systems .......... 14
Engineering and Maintenance Services . 20
Financial Information ................ 25
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UNITED INDUSTRIAL CORPORATION AR02
TO OUR SHAREHOLDERS
2002 was quite a year for our Company, highlighted by the award of the Tactical
Unmanned Aerial Vehicle full-rate production contract from the U.S. Army,
perhaps the most significant program in our history. The year also included
important strategic decisions about the future of United Industrial as well as
major operating achievements across a number of our business platforms.
Moreover, these developments came against a backdrop in which interest and
investment in our nation's defense capabilities have shown continued growth.
From a financial perspective, our results reflect the solid operating momentum
we have generated across our defense businesses, but were negatively affected on
the bottom line by a number of special items and events, discussed below.
Consistent with our strategy to exit the transportation business in the near
future, revenue and income figures from continuing operations include the
results of our defense and energy businesses only. The Company's transportation
operations have been reported as discontinued.
For the 2002 year, revenues from continuing operations rose 8.5% to $258.8
million from $238.5 million in 2001. The Company's income from continuing
operations, including a restructuring charge of $4.7 million ($3.1 million net
of tax), or $.23 per diluted share, associated with closing the Company's
foundry operations and a net provision of $11.5 million ($7.3 million net of
tax) or $.53 per diluted share recorded for asbestos-related liabilities, was
$3.9 million, or $.28 per diluted share (on a weighted average of 13,698,000
diluted shares outstanding), for 2002.
Excluding the restructuring charge and the asbestos-related provision, the 2002
income from continuing operations was $14.2 million, or $1.04 per diluted share.
This compares to income from continuing operations in 2001 of $14.6 million, or
$1.10 per diluted share (on a weighted average of 13,289,000 diluted shares
outstanding), though the 2001 results included a number of special gains
totaling $2.6 million, net of tax, or $0.18 per share.
Excluding the impact of the restructuring charge and asbestos-related provision
in 2002, the special gains in 2001, and the pension results and curtailment
gains in both years, the Company's income from continuing operations before tax
for 2002 was $22.0 million ($15.1 million net of tax) or $1.10 per diluted
share, compared to $15.9 million ($10.5 million net of tax) or $.80 per diluted
share, in 2001.
Reflecting the Company's growing book of business, backlog for continuing
operations climbed 34% at 2002 year-end to $301 million, up from $207 million a
year earlier. This robust increase underscores our commitment to grow United
Industrial over the long term and is a strong endorsement of our products and
services from the marketplace.
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UNITED INDUSTRIAL CORPORATION AR02
From Left to Right
Richard R. Erkeneff
President and Chief Executive Officer
Harold S. Gelb
Chairman of the Board
[PHOTO]
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UNITED INDUSTRIAL CORPORATION AR02
STRATEGIC PROGRESS AND GROWTH
During 2002, United Industrial's long-term strategic plan continued to bear
fruit in delivering results and best positioning the Company for future growth.
For several years now, we have been executing a strategy of refocusing on our
core defense businesses, while divesting non-core operations. This strategy has
enabled us to leverage our capabilities and expertise in select segments of the
defense marketplace, and it has allowed us to focus our energies and resources
most productively. A major thrust of this effort has been to assure that our
strategies are well attuned to the objectives and priorities of our customers,
including, most importantly, the U.S. military.
Strong Defense Results. Reflecting this focus, the Company's defense operations
turned in an excellent performance in 2002. Contributing to these gains were
strong results from our unmanned aerial vehicle business, simulation and test
systems, and engineering and maintenance services. In particular, the Unmanned
Aerial Vehicle programs, the P-3 Aircraft Avionics Tester Program and our C-17
Maintenance Training program were standout performers.
These and our other programs are discussed in the pages that follow, but let us
here acknowledge the outstanding accomplishments of our TUAV team. Based on
their efforts, the U.S. Army awarded our AAI Corporation subsidiary in December
2002 a historic full-rate production contract for the next generation TUAV. This
is the first full-rate production contract ever awarded by the U.S. military for
an unmanned aerial vehicle program and represents the beginning of a long-term
production program by the Army to field AAI's Shadow(TM) TUAV system. With an
initial value of $86 million, this program has a potential value in excess of
$500 million in the upcoming years, excluding logistical support.
Transportation Divestiture. On July 26, 2002, United Industrial completed the
divestiture of its transportation overhaul contracts with the New Jersey Transit
Corporation and the Maryland Transit Administration for approximately $20.8
million. This sale marked a major milestone in the Company's long-term strategy
of divesting non-core operations. We are now moving forward to complete the one
remaining active contract in the transportation sector. We expect to complete
production on this contract for the San Francisco Municipal Railway during the
second half of 2003.
For the year, the discontinued transportation operations reported a loss of
$42.9 million, or a loss of $3.13 per diluted
United Industrial's long-term strategic
plan continued to bear fruit in delivering
results and best positioning the Company
for future growth.
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UNITED INDUSTRIAL CORPORATION AR02
share, compared to a loss of $9.3 million, or a loss of $.70 per diluted share,
in 2001. The loss for the 2002 period includes a $21.5 million provision
recorded in connection with the sale of the transportation overhaul contracts.
Strategic Review. With the sale of the transportation overhaul contracts in
July, the timing was right for United Industrial's Board of Directors to
re-assess the Company's strategy and long-term direction. Prior to the sale, the
Board had engaged Wachovia Securities, a well-known investment bank specializing
in companies like United Industrial, to help us analyze strategic alternatives
to enhance shareholder value. The Board determined that, simultaneously with the
Company's long-term strategy of building its core defense businesses, it would
initiate a process to explore a potential sale of all or part of the Company.
Since last summer, the Company has heldwith a variety of potential purchasers,
and the Board continues to explore the possibility of a sale as a means to
maximize shareholder value. We have found, however, that while we do not believe
the existence of the asbestos litigation will materially affect the Company in
the long term, it has impeded the interest of certain potential buyers.
At the same time, we continue to focus on the substantial organic growth
opportunities before us. The actions we have taken over the past years and
several recent high- profile program wins have positioned us well for the
future. In addition, recent events and the Bush Administration's commitment to
increase defense spending and continue to modernize our country's armed forces
have created additional potential for companies such as ours.
THE DEFENSE INDUSTRY LANDSCAPE
United Industrial's defense systems subsidiary, AAI Corporation, has a long and
distinguished history of working with the U.S. military. Our approach has been
to target specific specialized niches of the defense marketplace, such as
unmanned aerial vehicles and simulation and test systems, where we have unique
strengths and to build leadership positions in these areas. Consistent with this
focus, we have also worked hard to assure our products and services are aligned
with the needs of all of our customers.
Today, we believe our portfolio of technologies and platforms is well in tune
with key priorities including:
1. the transformation of our nation's Armed Forces to a more accurate and mobile
force that will be better able to deal with today's global crises. We are
leveraging our unmanned aerial vehicle systems and our ammunition and armaments
capabilities to actively pursue roles in the U.S. Army's Future Combat System
(FCS). Well-positioned as the exclusive U.S. technology licensee for the highly
effective Advanced Mortar System (AMOS(TM)) developed by the Finnish firm,
Patria Hagglunds, AAI's first market for AMOS will be FCS.
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UNITED INDUSTRIAL CORPORATION AR02
[PHOTO]
Frederick M. Strader, President and COO, AAI Corp.
2. the leveraging of information technology, to give our joint forces a common
operational picture. Our engineering and systems integration capabilities,
particularly in the area of unmanned aerial vehicles, have established AAI as a
world- class leader in acquiring, integrating and disseminating real-time,
tactical, battlefield intelligence.
3. the projection and sustainment of U.S. forces in distant theaters, as the
U.S. increases its ability and flexibility to engage in combat at any given time
and location around the world. The U.S. Air Force's C-17 and C-130 transports
are the linchpin of the U.S. quick reaction capabilities, resulting in increased
demand for these aircraft, which we service through our Maintenance Training
programs.
4. the enhancement of interoperability for coalition operations with our Allies.
Through our leadership in the development of On Board Training Systems, for
example, we are benefiting as countries such as Australia embrace U.S. Navy
standards that enable our joint forces to train together and become a cohesive
coalition.
These initiatives provide a strong tailwind as United Industrial continues to
leverage its capabilities and know-how to grow its business and expand its
presence in the defense industry.
ENHANCING DETROIT STOKER'S PERFORMANCE
Outside of our core defense business, we took steps in 2002 to increase the
profitability of our energy systems subsidiary, Detroit Stoker Company. These
actions included the closure of Detroit Stoker's foundry operations and a
decision to outsource our castings requirements. We have already begun to see
the benefits of this change including a significant improvement in
profitability.
ASSURING THE BEST LEADERSHIP TEAM
A vital part of our efforts to assure United Industrial's future success is
having a talented and experienced management team. We have placed a high
priority on attracting and retaining the right people, from our executive ranks
to our engineers to our administrative personnel, who can contribute positively
to the Company's growth and development.
Early in 2003, we took an important step in assuring the strength and continuity
of the Company's senior management team, by appointing Frederick M. Strader
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UNITED INDUSTRIAL CORPORATION AR02
to the newly created position of President and Chief Operating Officer of AAI
Corporation, with responsibility for day-to-day operations. Since joining AAI in
2001 as Executive Vice President and General Manager of the Company's Defense
Systems business, Fred has distinguished himself as an effective leader and
strategic thinker. He brings 20 years of experience in the defense industry, and
we look forward to his continued contributions.
Our commitment to having the best people extends to our Board of Directors as
well. That's why we took strong action when one of our shareholders challenged
our Board's composition through a proxy fight during 2002. Certainly, we place a
priority on being responsive to our shareholders' input, and we hope to avoid
any such similar situation in the future. Following the proxy fight, Glen
Kassan, a second representative of Steel Partners II, L.P., joined our Board of
Directors. In addition, the Board reelected Paul J. Hoeper, a seasoned defense
industry executive and former Assistant Secretary of the Army and Under
Secretary of Defense, as a Director, replacing Susan Fein Zawel, who resigned
from the Board following seven years of distinguished service in order to enable
Mr. Hoeper to continue in his valuable role as a Director.
FOCUSED ON BUILDING SHAREHOLDER VALUE
As we look to the future, our number one priority remains constant: to maximize
long-term shareholder value. We are confident that the strategies we have
underway have put us on a strong path to meet that objective, and our Board
continually evaluates our progress in this regard. We are clearly focused on our
obligations and are committed to assuring that United Industrial's assets and
resources are applied for optimal returns.
In closing, we would like to thank the 1,600 men and women of United Industrial
for their hard work and dedication over the past year. They are directly
responsible for the important strides we made in 2002. To our customers, we
appreciate your continued support, and, to our shareholders, we remain energized
and committed to delivering on the promise of your investment.
Sincerely,
/s/ Richard R. Erkeneff
Richard R. Erkeneff
President and Chief Executive Officer
/s/ Harold S. Gelb
Harold S. Gelb
Chairman of the Board
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UNITED INDUSTRIAL CORPORATION AR02
UNMANNED AERIAL VEHICLES
OUR UAV BUSINESS:
Leadership, Growth and Success.
The market for Unmanned Aerial Vehicles (UAVs) - powered, aerial vehicles that
do not carry human operators, and which are used for surveillance,
reconnaissance and target acquisition purposes - continues to expand at a rapid
pace. Recent global events continue to highlight the importance and
effectiveness of UAV use, particularly in combat situations where the military's
use of UAVs can save solders' lives by minimizing their exposure to enemy fire
while maximizing intelligence gathering.
2002 proved to be a banner year for our AAI subsidiary's Unmanned Aerial Vehicle
business, capping off a three-year period in which this business has grown
six-fold. Our recognized two decades of leadership within this field, combined
with the tremendous military and commercial potential of the UAV technology we
offer, have translated into significant contracts both in the United States and
across key foreign markets. This work has showcased the unparalleled skills we
bring to UAV development, particularly on the U.S. Army's next- generation
Tactical UAV, and continues to position our UAV business as a major growth
driver for years to come.
OUR ARMY TUAV PROGRAM:
Full-Rate Production Achieved.
The centerpiece of our UAV business remains our Tactical Unmanned Aerial Vehicle
(TUAV) program for the U.S. Army, through which we have been delivering a new
generation of UAVs for use by the Army. The TUAV program is an excellent example
of our strategy of assuring that our business is well attuned to the forward
direction of the U.S. Department of Defense (DoD) and major DoD customers, and
has met with great success on multiple fronts.
The undisputed highlight of the year was our historic receipt of the first
full-rate production award for the TUAV, marking the first full-rate production
contract ever awarded by the U.S. Department of Defense for an Unmanned Aerial
Vehicle system. This contract signals the Army's long-term commitment for use
and fielding of United Industrial's TUAV system and underscores the significant
future opportunities available to us in support of this pivotal program.
This initial contract is the first in what will be a series of full-rate
production contracts in upcoming years and was achieved only after successfully
meeting a sequence of testing and contractual milestones over the past three
years.
AAI received its first full-rate production TUAV contract, valued at $86
million, to produce nine systems. This is the first in what will be a series of
full-rate production contracts in upcoming years with a potential value of $500
million, excluding logistical support.
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UNITED INDUSTRIAL CORPORATION AR02
AAI/UAV Systems (left to right)
Suzanne Schwitalla
Director, Program Support
Pete Mullowney
Deputy for Technology and
Systems Development
Joe Thomas
Vice President and General Manager
Kirk Slenker
Technical Director, Chief Engineer
Steve Reid
Deputy for Production & Support
Allie Waldron
Director, International Programs
Jim Christner
Director, International Marketing
"From a seasoned team with a proven track record for outstanding performance, to
the latest in technologies and quality control, AAI over the past 16 years has
built the finest Tactical UAV business in the country, with all of the elements
necessary for success, a distinguished record of accomplishments, and enormous
potential for further achievement."
Joe Thomas
Vice President and General Manager, AAI/UAV Systems
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UNITED INDUSTRIAL CORPORATION AR02
[PHOTO]
Shadow 200
The Shadow 200 TUAV system is the newest addition to AAI's family of Shadow UAV
systems. The system sees targets 125 kilometers away from the brigade tactical
operations center and transmits imagery and telemetry data directly to Joint
STARS, All Sources Analysis Systems and the Army Field Artillery Targeting and
Direction System. Providing near real-time targeting data for precision weapons
using "leap ahead" technology and deployable in the military theater using only
three C-130 aircraft, the Shadow 200 has been chosen by the U.S. Army to be "the
eyes of brigade commanders to see first, understand first, and act
first-decisively."
[PHOTO]
Shadow 400
The Shadow 400 UAV system is deployed for intelligence, surveillance, targeting,
reconnaissance, observation and battle-damage assessment missions primarily in
support of naval operations. Shadow 400's can be launched and recovered from
ships or land, and air vehicle control can be transferred between ship-based or
land-based control stations. The system includes multiple air vehicles, a ground
control station, hydraulic launcher, logistics support, payloads, net recovery
system with automatic landing, ground support equipment, shipboard integration,
stabilization equipment and radome antenna set. Shadow 400 UAV systems are
currently deployed with U.S. allied naval forces.
[PHOTO]
Shadow 600
The Shadow 600 UAV system, the largest of AAI's UAVs, was developed following
the successful deployment of AAI's Pioneer UAV during the 1991 Gulf War. Based
on recommendations from battlefield operators, the Shadow 600 system includes
such key upgrades as increased endurance to 12-14 hours, ability to carry
payloads up to 90 pounds, powerful 52 horsepower engines, and digital
electronics and autopilot. With an airframe manufactured to ISO 9001 standards
and designed to carry multiple payloads, the versatile Shadow 600 is supporting
military requirements in several U.S. allied nations where the systems operate
in diverse and rigorous climate and terrain conditions.
[PHOTO]
Pioneer
AAI's Pioneer was the first U.S. tactical UAV system used to gather
intelligence, initial targeting data, adjust artillery, and conduct
battle-damage assessment during conventional armed conflict. Used during the
1991 Gulf War, Pioneer UAVs are still in service with the U.S. Navy and Marine
Corps. Beginning in FY-03, improvements to the system will enhance Pioneer
functionality by reducing the system footprint and increasing system
interoperability with other UAV programs.
In preparing for a mission launch, U.S. Army soldiers check the payload of a
Shadow 200 Tactical UAV, which includes an infrared sensor and a special radar
package.
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UNITED INDUSTRIAL CORPORATION AR02
[PHOTO]
Valued at $86 million, this first full-rate production contract provides
for the production of nine TUAV systems, including spare parts, maintenance,
ground and other equipment, from December 2003 through August 2004. While the
current Army procurement objective is 41 systems, our analysis indicates a
likely need for 80 or more systems through fiscal year 2010.
In addition to the production of the TUAV systems, we will also spearhead a
range of additional services, from logistics support to research and
development, under separate contracts. With the first of these contracts
expected to be awarded in the first half of 2003, we believe that the ultimate
value of these "support contracts" may eventually be worth as much as the
production portion of the program, now estimated to have a potential value in
excess of $500 million in the upcoming years.
Equally important, the progression of our TUAV program to this more advanced
production phase provides us with increased visibility in the UAV marketplace to
support our business development efforts and demonstrate the unique skills and
expertise we offer in this field.
OTHER TUAV PROGRAM ACHIEVEMENTS:
Continuing Innovation and Flexibility.
The award of the full-rate production contract was predicated on an enormous
amount of work on the TUAV throughout 2002, including the successful completion
of low-rate initial production (LRIP) contracts. These included a contract,
awarded in March 2002, authorizing the production of five TUAV systems, with
accompanying ground and support equipment, spare parts and tools. We also
received contract modifications on existing LRIP contracts, encompassing orders
for further support and AAI technician assembling a new Shadow Tactical UAV for
the U.S. Army in the production phase of the contract. *17 maintenance work, as
well as additional hardware and equipment. These LRIP contract awards totalled
$63 million.
Moreover, our commitment to constant innovation in meeting the specific needs of
our customers is clearly displayed in much of the engineering development work
that we have achieved on the TUAV program. For example,
[PHOTO]
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UNITED INDUSTRIAL CORPORATION AR02
under a $9.8 million contract, we are now developing Tactical Common Data Link
(TCDL) equipment for the TUAV, including a new flight computer, while creating
more efficient wing assemblies.
In addition, consistent with the Army's "One System" concept in which our Shadow
TUAV system's ground control equipment would be capable of controlling various
other UAVs, we are also working to develop integrated ground control equipment
with the Hunter UAV system. A flight test is scheduled later in 2003, and if
successful, we may proceed with integration development with other major UAV
systems, including the Pioneer and Predator platforms. We are confident that, by
continuing to prove the flexibility of our UAV system, we will create other UAV
platform integration opportunities with the Army in the future.
ACROSS THE MILITARY AND THROUGHOUT THE WORLD
In addition to the strong relationship our UAV business maintains with the Army
through our TUAV program, we have seen demand for our UAV expertise across other
service branches of our Armed Forces. We received contracts in 2002 for
continuing engineering and logistics support of the Pioneer UAV system for the
U.S. Navy and Marine Corps, including a contract for on-call engineering support
for 2003. This latter contract marks the 17th year of annual UAV support that we
have provided to both the Navy and Marine Corps, and reflects how the momentum
we have built in our UAV business is grounded in decades of solid experience.
We also continue to build a powerful global franchise, winning new contracts and
customers throughout the world. Among other achievements, in 2002 our UAV
business completed hardware and software modifications, finalizing acceptance
testing of a second Shadow 600 UAV system for delivery to Romania. We also
completed testing for a Shadow 400 UAV system for delivery to an Asian customer,
under a $25.8 million contract.
MOMENTUM IS ON OUR SIDE
As we enter 2003, positive momentum is clearly on our side. Our Shadow systems
are now in the hands of U.S. combat troops, and the TUAV is an integral part of
the Army's strategy of moving to an "Objective Force." We have embraced this
challenge and look forward to a long collaboration with the Army.
Moreover, the outstanding progress we have made in UAV development for the Army,
as well as for other customers, has allowed us to tap into a deep wellspring of
potential in this field, with the promise of much more to come. We remain
excited about the consistently rising demand for UAVs worldwide, our ability to
continue to capitalize on our leadership position in this field and our
prospects for continuing to grow our share of this key niche market.
AAI technician assembling a new Shadow Tactical UAV for the U.S. Army in the
production phase of the contract.
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UNITED INDUSTRIAL CORPORATION AR02
SIMULATION AND TEST SYSTEMS
The production and support of simulation and test systems remains a cornerstone
of our AAI subsidiary's business, comprised of a strong mix of growth platforms
encompassing cutting-edge U.S. Department of Defense (DoD) projects, as well as
long-standing, industry-leading products that have generated steady demand for
years. From projects associated with the ongoing transformation of America's
Armed Forces for the twenty-first century, to serving core ongoing personnel
training needs, we continue to leverage our expertise and leadership in this
niche market to win new customers and contracts domestically and overseas.
JSECST: A Key Growth Driver
At the forefront of our simulation and test systems business is our work
on the high-profile Joint Service Electronic Combat Systems Tester (JSECST).
This program has been designated by the DoD as the standard flight-line
electronic warfare test system, with plans to support all branches of the Armed
Forces. Under our contract, currently valued at $87 million, we developed a
state-of-the-art test system that stimulates electronic warfare radar detection
devices and measures radar jammer responses to assure mission readiness. We have
made steady progress, and based on our results, this program has now entered its
production phase. Due to the scope and potential of JSECST, we expect this
program to be a major contributor to our performance over the next six years and
a key driver of future growth.
Among some of the highlights of our JSECST work in 2002 was a $41.6 million
contract for 144 JSECST core test sets, with 65 for the U.S. Air Force, 76 for
the U.S. Navy and 3 for the Kuwaiti military. Our contract includes test
software and interface hardware sets that adapt the JSECST system to a range of
aircraft types, including the F-15C, F-16, A-10, F-14, AV-8B, and all variants
of the F/A-18. Also included were test program sets for the AN/ALQ-184 and
AN/ALQ-131 self-protection jammer pods. Delivery of the test sets will begin in
mid-2003 and be completed in 2005. Further, we have also received additional
contract funds of $1.8 million for our JSECST Test Program Set development
program. Under this contract, we are developing test program sets supporting
electronic combat systems on board all U.S. Fighter aircraft, and this most
recent award brings the total current value of this contract to $6.8 million.
Importantly, we are building our presence in key overseas markets as JSECST
continues to be adopted internationally.
The JSECST program, now valued at about $87 million, features the most advanced
electronic warfare test technology ever developed and the first test set
designed for compatibility with electronic combat and avionics systems in all
branches of worldwide military forces.
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[PHOTO]
AAI Test and Electronic Warfare Systems
(left to right)
John Allen
Boresight Equipment Program Manager
Michael Browne
Director, Test and EW Systems
Joe Auer
AN/USM-449 Program Manager
Linda P. Zimmerman
JSECST Support Leader
Ray Sherry
JSECST Program Manager
Bill Chambliss
JSECST Test Program Set Leader
John Kuhl
JSECST CTS Leader
"Our team's commitment to constant innovation and excellence accounts for our
successful track record in applying high technology solutions to satisfy complex
military needs. Defining attributes of our corporate culture, innovation and
excellence have spawned an entire new generation of cutting-edge products like
the JSECST, which has been designated by the U.S. Defense Department as the
standard flight-line electronic warfare test system, supporting all branches of
the U.S. military."
Michael Browne
Director, AAI Test and Electronic Warfare Test Systems
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For example, our AAI subsidiary recently received its first order for $1.25
million from the Swiss government for six JSECST Core Test Sets to be used in
support of electronic warfare systems on board its F/A-18 Hornet aircraft. We
are also in ongoing discussions with other overseas operators of electronic
warfare aircraft and electronic warfare system manufacturers. Most
significantly, we expect the growing worldwide popularity of the JSECST system
to position us well for continuing opportunities, and we intend to aggressively
pursue this potential.
SHIPBOARD TRAINING SYSTEMS
Reinforcing our traditionally close ties with the U.S. Navy, we continue to
solidify our position as a leader in the field of shipboard training systems
through the wide array of high-technology systems and products that we offer. We
are particularly proud of our ongoing involvement with the Navy's Battle Force
Tactical Training (BFTT) program, under which we continue to receive additional
contract orders for Generic Navy Stimulator/Simulator (GNSS) units and
engineering support services. Since 1998, we have designed 17 GNSS variants and
produced 398 units, bringing the total program value to over $35 million. Also
in connection with this program, we received two new contracts in August 2002,
valued in total at $3.4 million, for new GNSS units and 23 of our Navigation
Simulators of varying configurations. Reflecting how integral our products have
become under this program, upon delivery of these latter contracts, 63 U.S. Navy
ships will have AAI-designed and
[PHOTO]
AAI Training and Simulation Systems
(left to right)
Bob Wilhite
Director, Training and Simulation Systems
Don Wright
Program Manager II
Scott Waldron
Fellow Engineer
Mike Bitner
Fellow Engineer
Robin Rouleau
Principal Systems Engineer
Tom Jones
Program Director
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UNITED INDUSTRIAL CORPORATION AR02
produced Navigation Simulators on board. Over 150 ships will eventually have
AAI-products on board.
We also continue to pursue opportunities in support of growth projects with our
cutting-edge shipboard training offerings. This year, we were awarded a $3.6
million contract to develop seven Tactical Data Link Stimulators for the Navy's
BFTT program. Importantly, the U.S. Navy has a requirement for approximately 150
Tactical Data Link Stimulators over the next four years, and we believe the
initial work we are doing lays the groundwork for capturing much of this
business going forward.
In addition, the Navy has announced its intention to purchase 10 on-board Gun
Fire Support (NGFS) systems over the next 18 months, and we have received a
contract for the development of the first three of these training systems. The
NGFS will be utilized to enhance Naval Gun Fire Support when current live-fire
ranges are closed down. Building upon our GNSS product line for the BFTT
program, we were also awarded a contract to produce two Radar Environment
Stimulators for a groundbase air defense radar system, the first of many awards
expected over the course of the next several years.
OTHER KEY HIGHLIGHTS
We also continue to build on our relationships with major military contractors
across a range of areas. Our work with Northrop
[PHOTO]
AAI/ ACL Technologies (left to right)
David Abood
Vice President, Egyptian Program
Mike Perry
Director of Programs
and Customer Service
Tom Wurzel
President
Scott Konter
Vice President, Finance
Ted Marwitz
Director, Operations
Mark Krusemark
Director, Marketing
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UNITED INDUSTRIAL CORPORATION AR02
Grumman now spans a number of key projects, including the development of a Radar
Simulator for initial test use in a Sensor Fusion Product, with further orders
expected in 2003; contract awards to provide logistics and trainer support for
the JointSTARS Prime Mission Equipment Maintenance Trainer System at Robins Air
Force Base, Georgia; and a contract from Northrop Grumman's Ship Systems Ingalls
Operation for a monorail system for a Navy ship.
This year, we also completed the second phase of a three-phase effort with NLX
Corporation for development of an F-16C Modular Simulator Aircraft Maintenance
Trainer (MSAMT) program. We have been awarded the contract for phase three of
this effort, which will include model integration and test and verification
activities. Also, building on our long successful P-3 Aircraft Avionics Tester,
we completed delivery and installation of a service life upgrade for the
Japanese Navy which is designed to extend the system's life through at least
2015.
Other highlights for the year include the receipt of a $1.6 million modification
for our ongoing work in developing the PDCue(TM) Mobile Counter Fire System for
the USMC Warfighting laboratory; the receipt of a $1.0 million contract from the
U.S. Army Research Laboratory to install AAI's TDCue(TM) Infantry Target Scoring
System at its Aberdeen Proving Ground M-Range facility; the successful
completion of testing and receipt of additional contract modifications to
incorporate changes in our Guided Missile Maintenance Platform (GMMP) program
with Hill Air Force Base; and a contract to develop an integrated artillery
training system for the Marine Corps Closed Loop Artillery Simulation System
(CLASS) program, for which additional contracts and follow-on production
activities are in the planning stages.
PDCue(TM) and TDCue(TM) are both acoustic sensing systems designed to detect and
track bullets. The MCFS combines AAI's PDCue(TM) sniper detection system with a
remote weapon station mounted on a Humvee, and is one of the USMC Warfighting
Laboratory's key technology programs, which could lead to installation of the
system on over 600 vehicles. The MCFS system not only detects incoming shots,
but also automatically slews the weapon to point in the direction of the sniper,
providing invaluable time to help keep the war fighter alive. The TDCue(TM)
Infantry Target scoring system is used to provide instantaneous feedback on
where each round hits an infantry-size target during training, and fits the U.S.
Army's vision to outfit all future training ranges with "non-contact" scoring
systems. The sale of our TDCue(TM) Infantry Target scoring system represents the
first sale of this new product, which we hope becomes the U.S. Army standard for
all training ranges.
ACL TECHNOLOGIES
ACL Technologies, our hydraulic, fuel and pneumatic testing business, continues
to transition from a focus on manufacturing test equipment to providing fluid
test systems services. Although ACL has been impacted by both an ongoing
downturn in the commercial airline market as well as international contract
award delays, opportunities for performance improvement are clearly in sight,
with a number of strong potential programs being pursued.
A major program for ACL remains our ongoing contract to construct an F-16
Maintenance Depot in Egypt. Under this program, now valued at $40 million, we
recently received $2.2 million in initial funding for an engineering support
contract and have been selected to integrate a Surface Treatment Facility into
the Maintenance Depot. We are pleased with the outstanding progress on this
project, and we will continue our efforts to win opportunities at other depot
maintenance facilities.
ON A CONTINUING SUCCESS VECTOR
From partnering with America's Armed Forces, to working with major defense
contractors, and from building on our core competencies to embarking on a range
of cutting-edge projects, our simulation and test businesses are capturing
market share throughout the world. The superior expertise and specialized skills
that we bring to this market, and the mix of legacy businesses and
forward-looking platforms that we possess, have placed us on a continuing
success vector going forward.
Members of the 33rd Fighter Wing at Eglin Air Force Base work with AAI to test
the JSECST system for the F-15 C Air Superiority Aircraft.
[PHOTO]
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UNITED INDUSTRIAL CORPORATION AR02
ENGINEERING AND MAINTENANCE SERVICES
Our engineering and maintenance services business, ESI, delivered another year
of solid results and outstanding achievements. Our core strategy of focusing on
specialized engineering and logistics services for the defense and aerospace
industry continues to differentiate us in the marketplace and attract new
customers. Particularly well-attuned to the DoD's priority of increasing combat
engagement flexibility and mobility is our flagship C-17 Maintenance Training
System (MTS) program with the U.S. Air Force, a key growth platform for the
Company.
ESI'S C-17 AND C-130 PROGRAMS:
A Landmark Year
Based on an increased emphasis on quick-reaction capabilities for strategic and
tactical airlift purposes, we are experiencing rising demand for the specialized
services we provide in developing and maintaining training systems for such
critical military transport aircraft as the C-17 and C-130 airplanes.
Our C-17 program, with $51.5 million in backlog, is now the largest single
program in ESI's 21-year history, reaching a landmark milestone this year with
total contract value surpassing the $200 million threshold. In addition, as a
result of our role as prime contractor on the Air Force's Training System
Acquisition II (TSA II) program, we anticipate a new contract in 2003 that will
increase the total value of the contract. Moreover, through our successful
execution, this pivotal program has opened the door to an array of additional
opportunities with other parties.
For example, we are now at work on a $14.3 million program for the Mississippi
Air National Guard, under which we are developing a Training Evaluation
Performance Aircraft Training Set. This contract is proceeding smoothly, and we
are optimistic about further growth opportunities in this area. We also continue
to build on our strong overseas franchise by providing C-17 maintenance training
under Foreign Military Sales (FMS) contracts, such as our contract to train the
United Kingdom's Royal Air Force.
Where the C-17 performs a strategic airlift mission, the C-130 serves as the Air
Force's primary aircraft for tactical airlift, and we have been active in its
support as well. We are currently serving as subcontractor to Boeing on the Air
Force's C-130 Avionics Modernization Program under a program valued at $2.5
million. This work, focused on
ESI's flagship C-17 program, with $51.5 million in backlog and a total contract
value now surpassing $200 million, has opened the door to additional
opportunities, both in the U.S. and abroad.
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UNITED INDUSTRIAL CORPORATION AR02
[PHOTO]
ESI
(left to right)
David Warner
Director, Charleston Operations
John Foster
Training Requirements Manager,
Charleston Operations
Mike Boden
Vice President and General Manager, ESI
Paul Mueller
Deputy Program Manager,
Charleston Operations
Patrick Truitt
Director, Logistics Programs
"ESI's excellent performance on our key C-17 program, the wide range of
logistical capabilities we offer, and the rapid, customer-focused responsiveness
of our organization have all contributed to our strong results, our considerable
growth potential and our reputation as a market leader."
Mike Boden
Vice President and General Manager, ESI
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
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UNITED INDUSTRIAL CORPORATION AR02
analysis of maintenance training systems requirements, positions us well for
future C-130 maintenance trainer work. In fact, we believe that the C-130
program has the potential to ultimately be as large as our C-17 program.
CONTINUING SUCCESS IN LOGISTICS AND FIELD SUPPORT
A mainstay of ESI's business remains the provision of logistics and field
support products and services. Among ESI's major contracts this year was the
award of a four-year, $1.9 million contract from the Federal Highway
Administration to provide engineering and maintenance support for its Highway
Simulator (HYSIM), used to develop experimental driving scenarios for testing
planned safety changes to our nation's highways. This is an exciting new area,
and we are delighted to apply our capabilities to promote greater safety for
all.
In addition, ESI has provided critical support for a number of important
programs our Company is currently involved with, including developing new
performance-based logistics contracts in support of the JSECST project and our
TUAV program with the U.S. Army. In fact, ESI has provided field support for the
Navy's Pioneer system for more than 10 years, and we will continue to leverage
our unparalleled staff deployment capabilities in pursuit of additional
opportunities.
As a complement to its field work, ESI has capitalized on its logistics
expertise through the operation of technical and training centers. For example,
we just completed our second successful year of operation of our Utah Technical
Center (UTC), which continues to attract growing numbers of customers seeking an
increasingly diverse range of services. Among our recent programs, the U.S. Air
Force engaged the UTC in support of its procurement of a construction contract
for a major new facility. And with a backlog of over 50 work requests, ESI's UTC
is poised for a very strong year in 2003.
Looking forward, our technical centers offer an exciting platform for the
future, particularly to the extent we can help coordinate collaborative efforts
on large, more geographically dispersed projects. For example, by integrating
our existing federal supply schedule contracts with the General Services
Administration (GSA) into our Alaska Technical Center's (ATC) work base, we can
cultivate opportunities to grow our GSA contracts, while reaching out to
expanding government units such as the new Department of Homeland Security.
A FUTURE OF OPPORTUNITY
We are delighted with the ongoing success of our ESI
business. From flagship programs such as our C-17 contract with the Air Force,
to ongoing logistical and field support projects in key growth areas, to the
continuing strong potential offered by our technical centers, ESI is on-track in
reinforcing its market leadership, enhancing its network of opportunities and
growing its customer base.
Our success on the C-17 program positions us well for maintenance trainer work
on the C-130, the Air Force's primary aircraft for tactical airlift. This
program, we believe, has the potential to ultimately be as large as our C-17
contract.
The use of an actual C-17 Engine in the Aircraft Engine Cowling Trainer, being
checked here by ESI technicians, further enhances the maintenance training
experience.
[PHOTO]
FINANCIAL REVIEW
Managment's Discussion ................... 25
Consolidated Balance Sheets .............. 36
Consolidated Statements of Operations .... 38
Consolidated Statements of Cash Flows .... 39
Notes to Financial Statements ............ 40
Report of Independent Auditors ........... 59
Five Year Financial Data ................. 60
Corporate Organization ................... 61
Corporate and Shareholder Information .... 62
25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59
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UNITED INDUSTRIAL CORPORATION AR02
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following information primarily relates to the continuing operations of
United Industrial Corporation and consolidated subsidiaries that are
conducted through three business segments; defense, energy and other. The
transportation operations are reflected as a discontinued operation in the
Company's consolidated financial statements as of and for the years ended
December 31, 2002, 2001 and 2000. See Notes 2 and 16.
YEAR ENDED DECEMBER 31, 2002 COMPARED
WITH YEAR ENDED DECEMBER 31, 2001
Net sales of $258,767,000 in 2002 increased $20,272,000 or 8.5% from
$238,495,000 in 2001. The defense segment sales increased $20,640,000 or 9.9% to
$229,215,000 in 2002 from $208,575,000 in 2001. The sales growth in the defense
segment was driven by increases in the unmanned aerial vehicle, and simulation
and test systems product areas. Sales to agencies of the U.S. Government, by the
defense segment, were $161,406,000 in 2002 and $148,732,000 in 2001. Export
sales by the defense segment were $60,910,000 in 2002 and $50,455,000 in 2001,
an increase of $10,455,000 or 20.7%. The defense segment's business is heavily
influenced by changes in the budgetary plans and procurement policies of the
U.S. and foreign governments. Government contracts are subject to price
redetermination under certain circumstances and may be terminated for
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. Net sales in the energy segment were $29,552,000
in 2002, a decrease of $368,000 or 1.2% from $29,920,000 in 2001, due to
decreased spending by our customers in the pulp and paper industry.
Gross profit increased $2,152,000 to $56,117,000 in 2002 from $53,965,000
in 2001. The gross margin percentage was 21.7% in 2002 and 22.6% in 2001. The
defense segment gross margin percentage decreased to 20.8% in 2002 from 21.1% in
2001. Included in the defense segment's cost of sales is pension expense of
$2,952,000 in 2002 and pension income of $566,000 during 2001. Also included in
the 2001 defense segment's cost of sales is a curtailment gain of $1,933,000
resulting from changes the Company made to its postretirement benefits plan
that reduced the Company's future liabilities. Excluding the pension plan
performance in both years and the curtailment gain in 2001, the gross margin in
the defense segment would have been 22.1% during 2002 and 19.9% during 2001.
During 2002, the defense segment benefitted from higher margins on certain
foreign contracts. The energy segment gross margin percentage decreased to 28.9%
in 2002 from 33.4% in 2001 due to a charge of $3,420,000 for accelerated
depreciation of assets related to the closing of the foundry operated by Midwest
Metallurgical Laboratory, Inc., a wholly owned indirect subsidiary of the
Company in the energy segment. Excluding the depreciation charge, the energy
segment gross margin in 2002 would have been 40.4%. The energy segment's
increase in 2002 is attributable to lower cost castings, the manufacturing of
which was outsourced in connection with the decision to close the foundry.
Selling and administrative expenses increased $5,464,000 or 15.8% in 2002
to $40,163,000 from $34,699,000 in 2001. Selling and administrative expenses as
a percentage of net sales was 15.5% in 2002 and 14.6% in 2001. The defense
segment's selling and administrative expenses increased $4,761,000 or 18.6% to
$30,411,000. The increase in the defense segment is due to approximately
$1,930,000 of reallocated corporate expenses primarily caused by a reduced
allocation base in the discontinued transportation operations. The remainder of
the cost growth was generally due to higher insurance costs and salary
increases. The decrease in the energy segment of approximately $671,000 to
$8,400,000 was due to a reduction in research and development expense and the
closing of the foundry. The increase of $1,374,000 in the other segment resulted
primarily from increased professional and consulting fees. Generally, these fees
related to matters concerning the Company's environmental issues, sale process,
and proxy contest.
Other operating expenses, net increased $313,000 to $419,000 in 2002 from
$106,000 in 2001. The increase was primarily due to the expenses related to the
closing of the foundry operated by Midwest Metallurgical Laboratory, Inc., an
indirect subsidiary of the Company in the energy segment.
As discussed in more detail below, during 2002 the Company recorded a
provision of $31,852,000 for estimated asbestos related defense and indemnity
costs, offset by estimated insurance recoveries of $20,343,000.
26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60
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UNITED INDUSTRIAL CORPORATION AR02
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
Other income, net decreased $1,021,000 to $64,000 in 2002 from $1,085,000
in 2001. The decrease was primarily due to an insurance recovery in 2001 of
$842,000.
Other expenses decreased $74,000 to $666,000 in 2002 from $740,000 in 2001.
Interest expense increased to $843,000 in 2002 from $17,000 in 2001,
primarily due to interest paid on borrowings and lookback interest paid to the
Internal Revenue Service resulting from increased profits on long term
contracts.
Interest income decreased $491,000 in 2002 from $618,000 in 2001 due to
lower investments.
Income from continuing operations before income taxes decreased $17,573,000
to $4,438,000 in 2002 from $22,011,000 in 2001. The defense segment income from
continuing operations before income taxes decreased $1,309,000, to $17,113,000
in 2002 from $18,422,000 in 2001. However, the Company recorded a pension
expense of $2,952,000 in 2002 and pension income as well as a postretirement
curtailment gain of $566,000 and $1,933,000, respectively in 2001. Excluding the
pension results in both years and the curtailment gain in 2001, income from
continuing operations before taxes in the defense segment increased during 2002
by $4,142,000 or 26%. This increase was generally the result of improved gross
margin, partially offset by higher general and administrative expenses. The
energy segment loss from continuing operations before income taxes was
$10,108,000 in 2002 compared to a profit of $3,042,000 in 2001. The decrease of
$13,150,000 in 2002 was primarily due to an asbestos litigation provision to
cover the estimated liability through 2012 net of estimated probable insurance
recoveries, of $11,509,000 (see Environmental and Other litigation below), and
$4,707,000 of expenses related to the closing of the energy segment's Midwest
Metallurgical Laboratory, Inc. foundry which ceased operations effective May 17,
2002, partially offset by other efficiencies in gross profit and selling and
administrative expenses. Excluding the net asbestos litigation provision and the
foundry closure costs, income from operations before tax in the energy segment
was $6,108,000 in 2002, an increase of $3,066,000 or 100.8% from 2001. This
increase was generally due to lower costs from outsourcing the manufacturing of
castings.
The other segment income from continuing operations before income taxes
decreased $3,114,000 to a loss of $2,567,000 in 2002 from income of $547,000 in
2001 primarily due to an increase in professional and consulting fees related to
matters concerning the Company's environmental matters, sale process and proxy
contest. Included in 2001 is a reduction of a reserve for local taxes of
$1,000,000 related to the favorable settlement of a tax issue and an $842,000
insurance recovery.
Income after taxes from continuing operations was $3,864,000 or $.28 per
diluted share in 2002, a decrease of $10,764,000 or $.82 per diluted share from
$14,628,000 or $1.10 per diluted share in 2001. The year 2002 includes a net
charge for asbestos litigation of $7,330,000 or $.53 per diluted share, a
restructuring charge of $3,100,000 or $.23 per diluted share and a decrease of
$3,721,000 or $.27 per diluted share in pension results and curtailment gain.
These were partially offset by operating efficiencies.
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UNITED INDUSTRIAL CORPORATION AR02
The following table provides a reconciliation of United Industrial
Corporation's Generally Accepted Accounting Principles (GAAP) to Pro forma
earnings before taxes and per diluted share from continuing operations.
Twelve Months Ended Twelve Months Ended
December 31, December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) 2002 2001 2000 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Before Income Taxes Per Diluted Share
(unaudited) (unaudited)
GAAP earnings from continuing operations $4,438 $22,011 $32,861 $ .28 $1.10 $1.68
Plus: Asbestos related provision-- net 11,509 .53
Plus: Restructuring charge 4,707 .23
Plus: Pension expense 1,321 .06
Less: Pension income (2,385) (5,277) (.12) (.28)
Less: Post-retirement curtailment gain (1,933) (.09)
Less: Income from litigation settlement (842) (3,483) (.04) (.18)
Less: Income tax benefit (1,000) (.05)
Less: Gain on sale of subsidiary net of loss from operations (3,851) (.20)
- ------------------------------------------------------------------------------------------------------------------------------------
Pro forma earnings from continuing operations $21,975 $15,851 $20,250 $1.10 $.80 $1.02
- ------------------------------------------------------------------------------------------------------------------------------------
Sales in the discontinued transportation operations decreased $19,992,000
during 2002 to $27,447,000 from $47,439,000 during 2001. This was due primarily
to a reduction in production on the San Francisco electric trolley bus contract
of $16,458,000.
The loss, before taxes, during the year ended December 31, 2002 of the
discontinued transportation operations was $66,053,000 (or a loss of $42,941,000
net of tax or $3.13 per diluted share) compared to a loss of $14,886,000 (or a
loss of $9,265,000 net of tax or $.70 per diluted share) during 2001. Included
in the 2002 loss was a $21,500,000 provision related to the sale of the
Company's two overhaul contracts with the New Jersey Transit Corporation and the
Maryland Transit Administration, as well as related assets and liabilities, to
ALSTOM Transportation, Inc. The transaction closed on July 26, 2002. Also
included in the 2002 loss was an increase of $7,818,000 in estimated costs to
complete contracts, $4,799,000 of general and administrative expenses, and
$5,376,000 of other disposition costs related to the conveyed contracts.
Further, the Company recorded a provision of $9,296,000 related to its 35%
equity share of estimated losses by Electric Transit, Inc. (ETI), the Company's
joint venture with Skoda a.s. (Skoda), a Czech Republic company. In addition,
although ETI is owned 35% by AAI Corporation (AAI), a wholly owned subsidiary of
the Company, and 65% by Skoda, during 2002 the transportation segment recorded
100% of the ETI loss because of Skoda's perceived inability to meet its
financial obligations under ETI's shareholder agreement. The additional losses
recorded by the Company for Skoda's 65% share of ETI's losses totaled
$17,264,000 during 2002.
Included in the $7,818,000 increase for the 2002 year in estimated costs to
complete contracts is a loss provision of $4,730,000 recorded in the fourth
quarter of 2002 regarding a higher estimate to complete the Company's San
Francisco electric trolley bus subcontract from ETI. This increase is generally
due to a four-month schedule delay caused by production material issues and
shortages. At February 28, 2003 the Company has delivered 245 of the contracted
273 coaches to ETI. The last of the remaining 28 coaches are expected to be
delivered during the third quarter of 2003.
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UNITED INDUSTRIAL CORPORATION AR02
Management's Discussion and Analysis Continued
Also included in the 2002 year results are provisions resulting from cost
growth concerning ETI's final assembly scope of work on the San Francisco
electric trolley bus program. During the fourth quarter material issues started
to substantially impact the production line, and technical issues with some of
the major subassemblies contributed to an extension of the program schedule.
These events resulted in a replanning of the production line and the related
cost increases. Consequently, during the fourth quarter the Company recorded
provisions of $6,155,000 and $11,432,000, representing the Company's 35% equity
share of the additional loss and Skoda's 65% equity share in ETI. At February
28, 2003, ETI had delivered to the customer 139 of 273 contracted coaches. The
remaining 134 coaches are expected to be delivered by December 2003.
During the completion of the existing transportation work, the Company
anticipates that the amount of overhead to be absorbed by the San Francisco
electric trolley bus contract will not be sufficient to cover the total overhead
incurred. The Company will expense the unabsorbed overhead as incurred. These
charges are expected to be in the range of $4,500,000 to $5,500,000 subsequent
to December 31, 2002. Further, general and administrative expenses that will be
expensed as incurred are expected to be about $3,500,000. In addition, upon
completion of transportation's production operations the Company contemplates a
charge associated with the idle facility, primarily future operating lease
costs, of approximately $750,000. Subleasing the facility space may mitigate
these costs.
No assurances can be given, however, as to the actual amount of the
Company's liability to complete the one remaining contract for the San Francisco
electric trolley buses, and exit the discountinued operations.
As a result of the decline in overall stock market values and interest
rates, the Company was required, under accounting regulations, to record a
minimum pension liability of approximately $8,276,000 as of December 31, 2002,
compared to a net pension asset of $46,901,000 at December 31, 2001. The
adjustment resulted in a non-cash charge to stockholders' equity of
approximately $32,262,000, net of a deferred tax benefit of $17,333,000 and an
intangible asset of $4,268,000. The adjustment does not affect the Company's
income statement or earnings.
The Company's backlog related to continuing operations was $301,416,000 at
December 31, 2002 compared to $207,343,000 at December 31, 2001. Backlog in the
defense segment increased $94,896,000 or 47.2% to $296,117,000 at December 31,
2002 from $201,221,000 at December 31, 2001. Backlog in the energy segment
decreased $823,000 or 13.5% to $5,299,000 at December 31, 2002 compared to
$6,122,000 at December 31, 2001.
YEAR ENDED DECEMBER 31, 2001 COMPARED
WITH YEAR ENDED DECEMBER 31, 2000
On September 29, 2000 the Company sold Symtron Systems, Inc. (Symtron), a wholly
owned subsidiary included in the defense segment. The operations of Symtron for
the nine months of 2000 are included in the results of operations in the year
2000.
Net sales of $238,495,000 in 2001 increased $2,212,000 or 0.9% from
$236,283,000 in 2000. Excluding Symtron's sales from 2000, sales would have
increased $9,875,000 or 4.3%. The defense segment sales increased $7,832,000 or
3.9% to $208,575,000 in 2001 from $200,743,000 in 2000. Excluding Symtron's
sales from 2000, the defense segment sales would have increased $15,495,000 or
8.0%. The sales growth in the defense segment was primarily in the unmanned
aerial vehicles line of business partially offset by a decrease in simulation
and test system sales. Sales to agencies of the U.S. Government, by the defense
segment, were $148,732,000 in 2001 and $132,930,000 in 2000. Export sales by the
defense segment were $50,455,000 in 2001 and $51,161,000 in 2000, a decrease of
$706,000 or 0.1%. Net sales in the energy segment were $29,920,000 in 2001, a
decrease of $5,620,000 or 15.8% from $35,540,000 in 2000, due to the completion
of two large contracts totaling approximately $6,335,000 in 2000.
Gross profit decreased $6,924,000 to $53,965,000 in 2001 from $60,889,000
in 2000. Excluding Symtron's gross profit from 2000, the gross profit would have
decreased $4,641,000 or 7.9%. The gross margin percentage was 22.6% in 2001 and
25.8% in 2000. Excluding Symtron's operations, the gross margin percentage would
have been 25.6% in 2000. The defense segment gross margin percentage decreased
to 21.1% in 2001 from 24.7% in 2000, due to low gross margin percentage on a
large competitively awarded program as well as the volume, product mix and cost
structure in the fluid test systems line of business. A higher cost structure
has been maintained in pursuit of significant aircraft depot maintenance
opportunities. Excluding Symtron's operations from the defense segment, the 2000
defense segment gross mar-
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UNITED INDUSTRIAL CORPORATION AR02
gin percentage would have been 24.5%. The pension plan
income in both years and curtailment gain on post retirement benefits of
$1,933,000 in 2001, related to the defense segment are included in the cost of
sales and amounted to $2,499,000 in 2001 and $3,151,000 in 2000. The energy
segment gross margin percentage increased to 33.4% in 2001 from 31.2% in 2000
due to product mix.
Selling and administrative expenses decreased $5,264,000 or 13.2% to
$34,699,000 from $39,963,000 in 2000, primarily due to the inclusion of
Symtron's selling and administrative expenses of $3,384,000 in 2000. Selling and
administrative expenses as a percentage of net sales was 14.6% in 2001 and 16.9%
in 2000. Excluding Symtron's operations from 2000, selling and administrative
expenses as a percentage of net sales would have been 16.1%. The defense
segment's selling and administrative expenses decreased $4,631,000 or 15.3% to
$25,650,000, primarily due to the inclusion of Symtron's selling and
administrative expenses in 2000. Excluding Symtron's selling and administrative
expenses from the defense segment in 2000 would have resulted in a decrease of
$1,247,000 or 4.6%. The decrease in the defense segment is due to lower bid and
proposal costs and lower marketing expenses during 2001.
Other operating expenses, net decreased $563,000 to $106,000 in 2001 from
$669,000 in 2000. The decrease was primarily due to a reduction in the
amortization of intangible assets due to the disposition of Symtron in September
2000.
Other income, net decreased $2,642,000 to $1,085,000 in 2001 from
$3,727,000 in 2000. The decrease was primarily due to an insurance recovery of
$3,483,000 in 2000. Pension plan income decreased $307,000 to $1,819,000 in 2001
from $2,126,000 in 2000 in the energy segment.
Other expenses increased $39,000 to $740,000 in 2001 from $701,000 in 2000.
The increase was primarily due to a foreign currency exchange rate fluctuations
and a write-off of proposed acquisition costs included in 2001. In 2000 other
expenses included legal fees of $271,000 related to a potential disposition.
Interest expense decreased to $17,000 in 2001 from $28,000 in 2000.
Interest income decreased $879,000 in 2001 from $1,497,000 in 2000 due to
decreased investments.
Income from continuing operations before income taxes decreased $10,850,000
to $22,011,000 in 2001 from $32,861,000 in 2000. Excluding the Symtron loss of
$1,688,000 in 2000, the income from continuing operations would have decreased
$12,538,000 or 36.3%. The defense segment income from continuing operations
before income taxes decreased $2,147,000 to $18,422,000 in 2001 from $20,569,000
in 2000. Excluding the Symtron loss in 2000, the defense segment income before
income taxes would have decreased $3,835,000 or 17.2%. The energy segment income
from continuing operations before income taxes was $3,042,000 in 2001 and
$4,718,000 in 2000. The other segment income from continuing operations before
income taxes decreased $7,027,000 to $547,000 in 2001 from $7,574,000 in 2000.
Included in 2001 is a reduction of a reserve for local taxes of $1,000,000
related to the favorable settlement of a tax issue. Included in 2000 was a gain
on the sale of Symtron of $5,539,000 and income from an insurance recovery which
increased income by $3,483,000.
Sales in the transportation segment increased $27,364,000 to $47,439,000 in
2001 from $20,075,000 in 2000. The loss before taxes decreased $6,497,000 to
$14,886,000 in 2001 from $21,383,000 in 2000. The year 2000 pretax loss included
a charge of $19,700,000 to establish a reserve for estimated increased contract
costs on several programs. In the fourth quarter of 2001, the loss includes a
charge of $6,339,000 for increased contract costs due to anticipated severance
and accelerated depreciation resulting from the discontinuance of operations.
The Company's backlog related to continuing operations was $207,343,000 at
December 31, 2001 compared to $194,794,000 at December 31, 2000. Backlog in the
defense segment increased $11,060,000 or 5.8% to $201,221,000 at December 31,
2001 from $190,161,000 at December 31, 2000. Backlog in the energy segment
increased $1,489,000 or 32.0% to $6,122,000 at December 31, 2001 compared to
$4,633,000 at December 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $1,861,00 to $3,635,000 at the end of 2002
from $5,496,000 at the end of 2001.
The cash used in 2002 for operating activities of the discontinued
transportation operations was $37,806,000 or $7,653,000 less than the cash used
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UNITED INDUSTRIAL CORPORATION AR02
Management's Discussion and Analysis Continued
in 2001 of $45,459,000. Net cash provided in 2002 from operating activities by
the continuing operations was $22,866,000 or $20,304,000 less than the cash
provided in 2001 of $43,170,000. There were no capital expenditures of the
discontinued operations in 2002 and $2,610,000 in 2001. Capital expenditures for
continuing operations were $5,219,000, $2,028,000 and $4,921,000 in 2002, 2001
and 2000, respectively. There were no material commitments for the acquisition
of capital assets as of December 31, 2002. However, the Company expects to
acquire about $12,500,000 in capital assets during 2003.
The following analysis relates only to continuing operations. Trade
receivables decreased $87,000 at December 31, 2002 from December 31, 2001.
Included in trade receivables are U.S. Government receivables which increased
$2,381,000. Inventories were $4,763,000 higher at December 31, 2002 than at
December 31, 2001. The inventory increase was primarily in the defense segment
and resulted from the procurement of significant amounts of material necessary
for production on major programs. Accounts payable increased $310,000. Customer
advances decreased $831,000 at December 31, 2002 from December 31, 2001, in
accordance with the contractual terms of certain defense contracts.
The Company is in the process of preparing an application for tax refund
for about $15,000,000 regarding the Company's 2002 net loss. The cash benefit is
expected to be received during 2003. Although the Company has experienced lower
pension results due to a decline in stock market values and interest rates, the
Company does not anticipate having to contribute the cash to its pension plans
during 2003.
As of December 31, 2002, the Company has recorded a net deferred tax asset
of approximately $16,000,000. Management believes the Company will generate
sufficient taxable income in future years to realize this benefit.
During the completion of the existing transportation work, the Company
anticipates that the amount of overhead to be absorbed by the San Francisco
electric trolley bus contract will not be sufficient to cover the total over
head incurred. The Company will expense the unabsorbed overhead as incurred.
These charges are expected to be in the range of $4,500,000 to $5,500,000
subsequent to December 31, 2002. Further, general and administrative expenses
that will be expensed as incurred are expected to be about $3,500,000. In
addition, upon completion of transportation's production operations the Company
contemplates a charge associated with the idle facility, primarily future
operating lease costs, of approximately $750,000. Subleasing the facility space
may mitigate these costs.
The Company paid cash dividends of $.30 per share in 2002 and $.40 per
share in 2001 and 2000. Aggregate payments amounted to $3,912,000 in 2002,
$5,069,000 in 2001 and $4,954,000 in 2000.
The ratio of current assets to current liabilities was 2.1 at the end of
2002 and 1.8 at the end of 2001.
On July 26, 2002, the Company completed the previously announced sale of
its transportation overhaul contracts with the New Jersey Transit Corporation
and the Maryland Transit Administration and related assets and liabilities (such
as accounts receivable, inventory, special tools and supplier contracts), to
ALSTOM Transportation Inc. The purchase price received by the Company was
approximately $20,756,000 in cash. Pursuant to the sale agreement, the Company
was released from all obligations under the conveyed contracts and the
performance bonds relating thereto, which bonds totaled approximately
$156,000,000. In addition, the Company entered into a cost plus fee contract to
perform work on the conveyed contracts for the purchaser during a transition
period not to exceed six months.
On June 28, 2001, the Company and certain of its subsidiaries (the
Borrowers) entered into a Loan and Security Agreement (the Agreement) with Fleet
Capital Corporation, which replaced the Company's loan agreement with First
Union Commercial Corporation. The Agreement has a term of three years and
provides for letters of credit and cash borrowings of up to $25,000,000, with a
sublimit of $10,000,000 for cash borrowings, subject to a borrowing base. Credit
advances may increase to $32,000,000, provided that amounts in excess of
$25,000,000 are cash-collateralized. The Agreement contains certain restrictive
covenants, among which are a minimum fixed charge coverage ratio and a maximum
balance sheet leverage ratio. All assets of the Borrowers are pledged as
collateral under the Agreement. The stock of the Borrowers (other than the
Company) and AAI's Hunt Valley property are also pledged as collateral pursuant
to a pledge agreement and a deed of trust. In March 2003, the Company and the
lender entered into a waiver and amendment agreement pursuant to which the
financial covenant violations as of December 31, 2002 were waived and the
financial covenants were
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UNITED INDUSTRIAL CORPORATION AR02
amended. At December 31, 2002 there were no cash
borrowings under the Agreement. The letter of credit obligations outstanding at
December 31, 2002 were $8,736,000.
A subsidiary of the Company also has a $2,000,000 line of credit with a
bank which may be used for cash borrowings or letters of credit. This agreement
expires April 18, 2003. At December 31, 2002, the subsidiary had no cash
borrowings and $342,000 letters of credit outstanding.
The Company expects that available cash and existing lines of credit will
be sufficient to meet its cash requirements for the next twelve months. The cash
requirements consist primarily of obligations to fund operations.
The Company conducts a significant amount of business with the United
States Government. Sales to agencies of the U.S. Government were $161,569,000,
$149,047,000 and $132,975,000 for 2002, 2001 and 2000, respectively. Although
there are currently no indications of a significant change in the status of
government funding of certain programs, should this occur, our results of
operations, financial position and liquidity could be materially affected. Such
a change could have a significant impact on our profitability and our stock
price. This could affect our ability to acquire additional funds from our
revolving facility or from other sources.
At December 31, 2002, the Company has outstanding commitments under advance
payment and performance bonds. The Company has a commitment on a progress
payment bond in the discontinued transportation operations totaling
approximately $22,000,000 at December 31, 2002. In January 2003, the bond was
reduced to $9,100,000. The remaining commitment is expected to be eliminated
when the customer accepts certain deliveries in 2003. Further, the Company is
obligated to indemnify certain sureties under various performance bonds also
primarily in the discontinued transportation operations in the event of
non-performance on particular contracts up to approximately $49,000,000. In
February 2003, the Company was released from $16,000,000 of these bonds. The
Company expects satisfactory performance under each of these contracts.
In addition, the Company has operating leases. The minimum rental
commitments as of December 31, 2002 for non-cancellable leases are: 2003 --
$3,970,000; 2004 -- $2,183,000; 2005 -- $1,620,000; 2006 -- $1,286,000; 2007 --
$1,015,000 and $1,154,000 thereafter.
RESTRUCTURING
Detroit Stoker Company (Detroit Stoker), a wholly owned subsidiary of the
Company in the energy segment, ceased the foundry operation conducted by its
wholly owned subsidiary, Midwest Metallurgical Laboratory, Inc. (Midwest),
effective May 17, 2002. In conjunction with the ceased operations the Company
has written off the value of all Midwest's assets.
During 2002 Detroit Stoker incurred severance and other cash charges
totaling approximately $1,287,000 related to the restructuring including
operating losses of Midwest. In addition, the Company accelerated depreciation
of its foundry facility during the foundry's operating period in 2002.
Depreciation of this facility was $3,420,000 during 2002, and is included in
cost of sales.
ENVIRONMENTAL AND OTHER LITIGATION
Like many other companies, UIC and Detroit Stoker have been named as defendants
in asbestos-related personal injury litigation. Neither UIC nor Detroit Stoker
fabricated, milled, mined, manufactured or marketed asbestos. Detroit Stoker
stopped the use of asbestos-containing materials in connection with its products
sometime in 1981.
The litigation is pending in Michigan, Mississippi, New York and North
Dakota. During 2002, UIC and Detroit Stoker experienced a significant increase
in the volume of asbestos bodily-injury claims and as of December 31, 2002, the
Company is a named defendant in 422 active cases involving approximately 15,105
claimants. Most of these lawsuits do not include specific dollar claims for
damages, and many include a number of plaintiffs and multiple defendants. Based
on historical data and the large increase in claimants over and above the
projected incidence of disease relative to the Company's products, management
believes the claimants in the vast majority of these cases will not be able to
demonstrate that they have been exposed to the Company's asbestos-containing
products or suffered any compensable loss as a result of such exposure. The
direct asbestos-related expenses of the Company for defense and indemnity for
the past five years was not material.
The Company engaged a consulting firm (the Asbestos Consultant) with
expertise in evaluating asbestos bodily-injury claims to work with the Company
to project the amount that the Company may pay for its asbestos-related
liabilities and defense costs. The methodology employed by the Consultant to
project the Company's asbestos-
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UNITED INDUSTRIAL CORPORATION AR02
Management's Discussion and Analysis Continued
related liabilities and defense costs is primarily based on (1) estimates
of the labor force exposed to asbestos in the Company's products, (2)
epidemiological modeling of asbestos-related disease manifestation, and (3)
estimates of claim filings and settlement and defense costs that may occur in
the future. The Company's limited claims history was not a significant variable
in developing the estimates because such history was not significant as compared
to the number of claims filed in 2002.
The Company also retained another consultant (the Insurance Consultant) to
work with the Company to project its insurance coverage, including a non-binding
sharing agreement with certain of its primary insurance carriers that has been
in effect for approximately five years. The Insurance Consultant has prepared a
report evaluating the Company's potential insurance coverage for defense costs
and indemnification for asbestos bodily-injury claims. The Insurance
Consultant's conclusion was primarily based on a review of the Company's
coverage history, application of reasonable assumptions on the allocation of
coverage consistent with industry standards, an assessment of the
creditworthiness of the insurance carriers, experience and a review of the
report of the Asbestos Consultant.
Based on these assumptions, other variables, and the reports of both the
Asbestos and Insurance Consultants, the Company has recorded a reserve for its
bodily injury liabilities for asbestos-related matters through 2012 in the
amount of $31,852,000 as of December 31, 2002, including damages and defense
costs. The Company has also recorded an estimated insurance recovery as of
December 31, 2002 of $20,343,000 reflecting the estimate determined to be
probable of being available to mitigate the Company's potential asbestos
liability through 2012. These figures represent a net pretax charge of
$11,509,000 for the year ended December 31, 2002.
The Company has previously reported that its total asbestos damages and
defense costs could be about $75,000,000 and the liability projected by the
Asbestos Consultant through 2055 is materially consistent with that preliminary
estimate. In addition, the estimate prepared by the Insurance Consultant
indicates that after 2012, the Company's potential insurance recoveries will be
reduced. Although the extent of that reduction is not currently determinable,
the Company believes, based on the estimate of its Insurance Consultant, the
available insurance coverage from 2003 to 2055 would be about 50% of the
liability. The year 2055 was chosen because it is projected to be the last year
in which an asbestos-related claim is expected to be filed in the United States.
Nevertheless, management has concluded that consideration of asbestos-related
activity through 2012 represents a period for which a reasonable and reliable
forecast of liability and insurance recoveries can be projected. That conclusion
is based upon a number of factors, including 1) the uncertainties inherent in
estimating asbestos claims, payments and insurance recoveries, 2) knowledge that
prior to 2002 the number of claims filed against the Company and the related
average settlement costs were not significant, and 3) consultations with the
Asbestos and Insurance Consultants. Accordingly, the net provision does not take
into account either asbestos liabilities or insurance recoveries for any period
past 2012.
The Company believes that its ultimate net asbestos-related contingent
liability (i.e., its indemnity or other claim disposition costs plus related
legal fees less insurance recoveries) cannot be estimated with certainty.
Projecting future events, such as the number of new claims expected to be filed
each year, the average cost of resolving each claim, coverage issues among
layers of insurers and the continuing solvency of various insurance companies is
subject to many uncertainties which could cause the actual liabilities and
insurance recoveries to be higher or lower than those recorded or projected, and
such differences could be material. Moreover, were Federal tort reform
legislation to be enacted, the assumptions used in determining the potential
liability could be materially impacted.
After considering the efforts of both consultants and based upon the facts
as now known, including the reasonable possibility that claims will be received
and paid over the next 50 year period, the Company's management believes that
although asbestos claims could have a material adverse effect on the Company's
financial condition or results of operations in a particular reporting period,
asbestos claims should not have a material adverse effect on the Company's long
term financial condition, liquidity or results of operations. No assurance can
be given, however, as to the actual amount of the Company's liability for such
present and future claims or insurance recoveries, and the differences from
estimated amounts could be material.
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UNITED INDUSTRIAL CORPORATION AR02
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 cleanup of a former industrial landfill located in Port of
Monroe, Michigan. MDNR is treating the Port of Monroe landfill site as a
contaminated facility within the meaning of the Michigan Environmental Response
Act (MERA). 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
material adverse effect on the Company's financial position, results of
operations or cash flows. See Note 15.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Judgments and assessments of uncertainties are required in applying the
Company's accounting policies in many areas. For example, key assumptions are
particularly important in developing the Company's projected liabilities for
pension and other postretirement benefits. Other areas in which significant
uncertainties exist include, but are not limited to, projected costs to be
incurred in connection with legal matters. The Company recognizes a liability
for legal indemnification and defense costs when it believes it is probable a
liability has been incurred and the amount can be reasonably estimated. The
liabilities are developed based on currently available information. The
accruals are recorded at undiscounted amounts if the Company cannot reliably
determine timing of the cash payments, and the amounts are classified as
liabilities on the accompanying consolidated balance sheets. The Company also
has insurance that covers losses on certain legal matters and records a
receivable to the extent that the realization of the insurance is deemed
probable. This receivable is recorded at undiscounted amounts and is classified
as a noncurrent receivable in the accompanying consolidated balance sheets.
The Company generally follows the percentage-of-completion method of
accounting for its long-term contracts. Sales and gross profit are principally
recognized as work is performed based on the relationship between actual costs
incurred and total estimated costs, including warranties, 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. Amounts representing contract
change orders, claims or other items are included in sales only when they can be
reliably estimated and realization is probable. Incentives or penalties,
estimated warranty costs and awards applicable to performance on contracts are
considered in estimating sales and profit rates, and are recorded when there is
sufficient information to assess anticipated contract performance. When
adjustments in contract value or estimated costs are determined, any changes
from prior estimates are reflected in earnings in the current period.
Anticipated losses on contracts or programs in progress are charged to earnings
when identified. Although management believes that the profits are fairly stated
and that adequate provisions for losses on certain of the fixed price contracts
have been recorded in the financial statements, revisions to such estimates do
occur and at times are material to our results of operations and financial
position.
Inventory is recorded at the lower of cost or market. Inventoried costs
associated with long-term contracts include costs and earnings 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
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UNITED INDUSTRIAL CORPORATION AR02
Management's Discussion and Analysis Continued
(including earnings subject to future determination through negotiation or
other procedures) are reviewed and revised periodically throughout the lives of
the contracts. See Note 4.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, the Financial Accounting Standards Board issued FASB
Statement No. 148, Accounting for Stock-Based Compensation-- Transition and
Disclosure. Statement 148 amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition to
Statement 123's fair value method of accounting for stock-based employee
compensation. Statement 148 also amends the disclosure provisions of Statement
123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While the Statement does not amend Statement 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of Statement 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of Statement 123 or the intrinsic value method of
Opinion 25. The adoption of Statement 148 did not have a material effect on the
Company's financial position or results of operations.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, Accounting for the Impairment of Long- Lived Assets and for
Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations for a disposal of a
segment of a business. FAS 144 is effective for fiscal years beginning after
December 15, 2001, with earlier application encouraged. The Company adopted FAS
144 during the fourth quarter of 2001. The impact on the Company's financial
position and results of operations is reported in Notes 2 and 16, "Discontinued
Operations."
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite useful lives are no longer amortized but will be
subject to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives. The
adoption of Statement 142 did not have a material effect on the Company's
financial position or results of operations.
In June 2001, the Financial Accounting Standards Board issued
Statement No. 143, Accounting for Asset Retirement Obligations, (FAS 143). The
standard addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The Company will adopt the provisions of FAS 143
effective January 1, 2003. The adoption of this new statement is not expected to
have a material impact on the Company's financial statements.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
A portion of the Company's operations consists of manufacturing and sales
activities in foreign jurisdictions, and some of these transactions are
denominated in foreign currencies. As a result, the Company's financial results
could be affected by changes in foreign exchange rates. To mitigate the effect
of changes in these rates, the Company has entered into a foreign exchange
forward contract. At December 31, 2002, the Company had a foreign exchange
contract for delivery of Australian dollars between 2003 and 2005 with notional
values totaling $1,500,000, with an aggregate gain of $167,000 based on fair
market value, which has been recorded in earnings.
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UNITED INDUSTRIAL CORPORATION AR02
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; the
ability to negotiate financing arrangements with lenders; legal proceedings;
outcome of current and future litigation; the accuracy of the Company's analysis
of its potential asbestos related exposure and insurance coverage; 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 discontinued transportation operation; changing
priorities or reductions in the U.S. Government defense budget; contract
continuation and future contract awards; and U.S. and international military
budget constraints and determinations. The Company makes no commitment to update
any forward looking statement or to disclose any facts, events, or circumstances
after the date hereof that may affect the accuracy of any forward looking
statements.
CONSOLIDATED BALANCE SHEET
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UNITED INDUSTRIAL CORPORATION AR02
Consolidated Balance Sheets
December 31
(Dollars in thousands) 2002 2001
- --------------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 3,635 $ 5,496
Trade receivables
U.S. Government 23,923 21,542
Other 13,765 16,233
- --------------------------------------------------------------------------------------
37,688 37,775
Federal income tax receivable 15,509 --
Inventories 20,951 16,188
Prepaid expenses and other current assets 1,351 1,755
Deferred income taxes 4,528 5,436
Assets of discontinued operations 14,042 108,684
- --------------------------------------------------------------------------------------
Total Current Assets 97,704 175,334
- --------------------------------------------------------------------------------------
Deferred income taxes 11,531 --
Other Assets 7,421 52,677
Insurance receivable -- asbestos litigation 20,343 --
Property and Equipment
Land 459 501
Buildings and improvements 35,244 36,166
Machinery and equipment 67,002 71,298
Furniture and fixtures 4,891 5,109
- --------------------------------------------------------------------------------------
107,596 113,074
Less allowances for depreciation and amortization 86,400 88,560
- --------------------------------------------------------------------------------------
21,196 24,514
- --------------------------------------------------------------------------------------
$158,195 $252,525
- --------------------------------------------------------------------------------------
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UNITED INDUSTRIAL CORPORATION AR02
December 31
(Dollars in thousands) 2002 2001
- --------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $11,711 $ 11,401
Accrued employee compensation and taxes 12,043 9,282
Customer advances 6,211 7,042
Reserve for contract losses 2,050 2,398
Federal income taxes -- 3,003
Other liabilities 3,682 3,480
Liabilities of discontinued operations 11,513 59,355
- --------------------------------------------------------------------------------------
Total Current Liabilities 47,210 95,961
- --------------------------------------------------------------------------------------
Minimum Pension Liability 8,276 --
Postretirement Benefits Other Than Pensions 22,361 22,939
Reserve for Asbestos Litigation 31,852 --
Other Liabilities 865 1,639
Deferred Income Taxes -- 11,642
Shareholders' Equity
Common stock -- par value $1.00 per share
Authorized shares -- 30,000,000
Outstanding shares:
2002 -- 13,067,918; 2001 -- 12,871,868 14,374 14,374
Additional capital 92,085 91,094
Retained (deficit) earnings (16,254) 26,735
Cost of shares in treasury:
2002 -- 1,306,230 shares; 2001 -- 1,502,280 shares (10,312) (11,859)
Accumulated other comprehensive loss (32,262) --
- --------------------------------------------------------------------------------------
Total Shareholders' Equity 47,631 120,344
- --------------------------------------------------------------------------------------
$158,195 $252,525
- --------------------------------------------------------------------------------------
See notes to financial statements
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UNITED INDUSTRIAL CORPORATION AR02
Consolidated Statement of Operations
Year Ended December 31
(Dollars in thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------- --------------------------
Net sales $258,767 $238,495 $236,283
Cost of sales 202,650 184,530 175,394
- -------------------------------------------------------------------------------------------------------------
Gross Profit 56,227 53,965 60,889
Selling and administrative expenses 40,163 34,699 39,963
Other operating expenses--net 419 106 669
Asbestos litigation provision--net 11,509 -- --
- -------------------------------------------------------------------------------------------------------------
Total Operating Income 4,026 19,160 20,257
- -------------------------------------------------------------------------------------------------------------
Non-operating Income and (Expenses)
Interest income 127 618 1,497
Gains on sale of assets -- net -- -- 5,511
Pension income 1,631 1,819 2,126
Equity in net income of joint venture 99 86 472
Other income -- net 64 1,085 3,727
Interest expense (843) (17) (28)
Other expenses (666) (740) (701)
- -------------------------------------------------------------------------------------------------------------
412 2,851 12,604
- -------------------------------------------------------------------------------------------------------------
Income From Continuing Operations Before Income Taxes 4,438 22,011 32,861
Provision (credit) for income taxes
Federal
Current 5,432 8,145 10,308
Deferred (4,933) (152) 82
State 75 (610) 1,285
- -------------------------------------------------------------------------------------------------------------
Income Taxes 574 7,383 11,675
- -------------------------------------------------------------------------------------------------------------
Income From Continuing Operations 3,864 14,628 21,186
Loss from discontinued operations net of income tax credit
of $23,112, $5,621 and $7,976 for 2002, 2001 and 2000, respectively (42,941) (9,265) (13,407)
- -------------------------------------------------------------------------------------------------------------
Net (Loss) Income $(39,077) $ 5,363 $ 7,779
- -------------------------------------------------------------------------------------------------------------
Earnings Per Common Share
Net (Loss) Income
Basic $(3.00) $ .42 $ .63
Diluted (2.85) .40 .62
Income From Continuing Operations
Basic .30 1.15 1.71
Diluted .28 1.10 1.68
- -------------------------------------------------------------------------------------------------------------
See notes to financial statements
25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59
^
UNITED INDUSTRIAL CORPORATION AR02
Consolidated Statements of Cash Flows
Year Ended December 31
(Dollars in thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net (loss) income $(39,077) $5,363 $ 7,779
Adjustments to reconcile net income to net cash (used for) provided by
continuing operating activities:
Loss from discontinued operations, net of income taxes 42,941 9,265 13,407
Net asbestos litigation expense 11,509 -- --
Pension expense (income) 1,321 (2,385) (5,277)
Depreciation and amortization 8,763 6,413 8,086
Noncash compensation charge -- 346 --
Deferred income taxes (4,933) 152 1,088
Gains on sale of assets -- -- (5,511)
Equity in income of investee company (99) (86) (472)
Changes in operating assets and liabilities-- net
Increase in income taxes 4,129 8,383 6,271
Decrease (increase) in trade receivables 87 12,443 (5,882)
(Increase) decrease in inventories (4,763) 11,792 474
Decrease in prepaid expenses and other current assets 404 1,223 246
(Decrease) increase in customer advances (831) (2,329) 7,185
Decrease (increase) in accounts payable, accruals, and other current liabilities 2,925 (2,718) 4,836
Other -- net 490 (4,692) 3,559
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By Continuing Operations 22,866 43,170 35,789
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash (Used For) Discontinued Operations (37,806) (45,459) (40,145)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash (Used For) Operating Activities (14,940) (2,289) (4,356)
Investing Activities
- ---------------------------------------------------------------------------------------------------------------------------
Proceeds from sale of assets of discontinued operations 20,756 -- --
Net proceeds from sale of assets -- -- 5,277
Advances to investee by discontinued operations (3,648) (2,986) (4,544)
Repayment of advances by investee to discontinued operations 1,917 2,730 12,978
Repayment of advances and dividend received by investee 1,360 2,300 --
Purchase of property and equipment (5,219) (2,028) (4,921)
Capital expenditures of discontinued operations -- (2,610) (2,187)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used For) Investing Activities 15,166 (2,594) 6,603
Financing Activities
- ---------------------------------------------------------------------------------------------------------------------------
Payments on long-term debt and borrowings -- (6,300) (2,300)
Proceeds from borrowings -- 6,300 2,300
Dividends (3,912) (5,069) (4,954)
Proceeds from exercise of stock options 1,825 4,063 1,000
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Used for Financing Activities (2,087) (1,006) (3,954)
- ---------------------------------------------------------------------------------------------------------------------------
Decrease in Cash and Cash Equivalents (1,861) (5,889) (1,707)
Cash and Cash Equivalents at Beginning of Year 5,496 11,385 13,092
- ---------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $3,635 $ 5,496 $11,385
- ---------------------------------------------------------------------------------------------------------------------------
See notes to financial statements
26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60
^
UNITED INDUSTRIAL CORPORATION AR02
Notes to Financial Statements
NOTE 1 | Nature of Operations
United Industrial Corporation is a high technology company applying its
resources to the research, development, and production of military electronics
and aerospace systems and components under defense contracts. Resources are also
applied to energy systems for industry and utilities.
The principal business segments are defense and related products, and
energy generating systems. Ground transportation systems business is included as
a discontinued operation. See Notes 2 and 16.
NOTE 2 | Summary of Significant Accounting Policies
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
Discontinued Operations
On July 26, 2002, the Company sold two transportation overhaul contracts and
related assets. The Company recorded a loss of $21,500,000 associated with this
transaction. The proceeds of this sale were approximately $20,756,000. In
addition, the agreement provided for the Company to be released under all
performance bonds and obligations under the conveyed contracts. Further, the
Company received a cost plus fee contract to perform work on the conveyed
contracts for the purchaser during a transition period not to exceed six months.
Following the sale, the Company's transportation operations primarily include
one remaining program to deliver 273 electric trolley buses to the San Francisco
Municipal Railway. This program, which is well into its production phase and is
expected to be completed during 2003, is being performed by Electric Transit,
Inc. (ETI), a joint venture between the Company's AAI subsidiary (AAI) and the
Czech Republic firm, Skoda a.s. (Skoda), under which AAI has a major
subcontract. The divested overhaul contracts, along with efforts required to
complete the one remaining contract, are accounted for as discontinued
operations.
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,
which generally mature within one year, consist primarily of short-term
investment funds.
Inventories
Inventories are stated at the lower of cost or market. At December 31, 2002 and
2001, approximately 21% and 15%, respectively, of total inventory were priced by
the last-in, first-out (LIFO) method with the remainder priced at actual or
average cost. If the first-in, first-out (FIFO) method of inventory pricing had
been used, inventories would have been approximately $2,984,000 higher than
reported on December 31, 2002 and $3,285,000 higher than reported on December
31, 2001.
Revenue and Gross Profit Recognition
The Company generally follows the percentage-of-completion method of accounting
for its long-term contracts. Sales and gross profit are principally recognized
as work is performed based on the relationship between actual costs incurred and
total estimated costs, including warranties, 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. Amounts representing contract change orders,
claims or other items are included in sales only when they can be reliably
estimated and realization is probable. Incentives or penalties, estimated
warranty costs and awards applicable to performance
25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59
^
UNITED INDUSTRIAL CORPORATION AR02
on contracts are considered in estimating sales and profit rates, and are
recorded when there is sufficient information to assess anticipated contract
performance. When adjustments in contract value or estimated costs are
determined, any changes from prior estimates are reflected in earnings in the
current period. Anticipated losses on contracts or programs in progress are
charged to earnings when identified.
Noncontract revenue is recorded when the product is shipped or when the
services are provided. See Note 4.
Property and Equipment
Property and equipment is stated at cost. The policy of the Company is to
provide for depreciation on the straight-line 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
Basic earnings per share is based on the weighted average number of common
shares outstanding. Diluted earnings per share gives effect to the assumed
exercise of dilutive options, using, where appropriate, the treasury stock
method. See Note 17.
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 7.
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 awards during 2002, 2001, and 2000 under the
plans, income per common share from continuing operations would have decreased
to the pro forma amounts indicated below:
December 31
(Dollars in thousands, except per share data) 2002 2001 2000
- -------------------------------------------------------------------------------------
Income from continuing operations:
As reported $3,864 $14,628 $21,186
Total employee stock
compensation expense
determined under fair
value method, net of tax (785) (746) (756)
----- ----- -----
Pro forma 3,079 13,882 20,430
Income per common share
from continuing operations:
As reported:
Basic .30 1.15 1.71
Diluted .28 1.10 1.68
Pro forma:
Basic .24 1.09 1.65
Diluted .23 1.04 1.62
- ---------------------------------------------------------------------------------------
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 2002, 2001 and 2000, respectively: dividend
yields of 2.0%, 3.0% and 4.7%; expected volatility of 44%, 29% and 46%;
risk-free interest rates of 4.6%, 5.2% and 6.4%; and expected lives of ten years
in 2002 and 2001 and eight years in 2000. The weighted-average fair value of an
option granted was $8.95, $4.09 and $2.97 for the years ended December 31, 2002,
2001 and 2000, respectively.
26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60
^
UNITED INDUSTRIAL CORPORATION AR02
Reclassification
Certain financial statement amounts in the prior years have been reclassified to
conform to current year's presentation.
Foreign Currency Contracts
At times, the Company enters into forward exchange contracts to manage its
exposure against foreign currency fluctuations on sales transactions denominated
in foreign currencies. The contract obligates the Company to exchange
predetermined amounts of the foreign currency at certain dates, or to make an
equivalent U.S. dollar payment equal to the value of such exchanges. The purpose
of the Company's foreign exchange currency activities is to protect the Company
from the risk that the eventual U.S. dollar cash flows resulting from the sale
of products to international customers will be adversely affected by changes in
exchange rates. Gains and losses for effective hedging activities are included
in Other Comprehensive Income and recognized in earnings when the future sales
occur. Gains and losses for ineffective hedges are recorded in income. At
December 31, 2002 the Company has a foreign currency forward contract with a
large financial institution for Australian dollars having maturities of three
years to hedge contract payments scheduled to be received within three years.
The aggregate notional value of this contract was $1,500,000, with an aggregate
gain of $167,000 based on fair market value has been recorded in earnings.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on foreign exchange contracts. The amount of such exposure is
generally the unrealized gain or loss on such contracts. The Company does not
hold or issue financial instruments for trading purposes.
Legal Matters
The Company recognizes a liability for legal indemnification and defense costs
when it believes it is probable a liability has been incurred and the amount can
be reasonably estimated. The liabilities are developed based on currently
available information. The accruals are recorded at undiscounted amounts if the
Company cannot reliably determine the timing of the cash payments, and the
amounts are classified as liabilities on the accompanying consolidated balance
sheets. The Company also has insurance that covers losses on certain claims and
legal matters and records a receivable to the extent that the realization of the
insurance is deemed probable. This receivable is recorded at undiscounted
amounts and is classified as a noncurrent receivable in the accompanying
consolidated balance sheets.
New Accounting Pronouncements
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations, for a disposal of a
segment of a business. FAS 144 is effective for fiscal years beginning after
December 15, 2001, with earlier application encouraged. The Company adopted FAS
144 during the fourth quarter of 2001. The impact on the Company's financial
position and results of operations is reported in "Discontinued Operations." See
Note 16.
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite useful lives are no longer amortized but will be subject to
annual impairment tests in accordance with the State ments. Other intangible
assets will continue to be amortized over their useful lives. The adoption of
Statement 142 did not have a material effect on the Company's financial position
or results of operations.
In June 2001, the Financial Accounting Standards Board issued Statement No.
143, Accounting for Asset Retirement Obligations (FAS 143). The Statement
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The Company will adopt the provisions of FAS 143 effective January 1,
2003. The adoption of this new statement is not expected to have a material
impact on the Company's financial statements.
In December 2002, the Financial Accounting Standards Board issued FASB
Statement No. 148, Accounting for Stock-Based Compensation --Transition and
Disclosure. Statement 148 amends FASB Statement No. 123, Accounting for
25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59
^
UNITED INDUSTRIAL CORPORATION AR02
Stock-Based Compensation, to provide alternative methods of transition to
Statement 123's fair value method of accounting for stock-based employee
compensation. Statement 148 also amends the disclosure provisions of Statement
123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
While the Statement does not amend Statement 123 to require companies to account
for employee stock options using the fair value method, the disclosure
provisions of Statement 148 are applicable to all companies with stock-based
employee compensation, regardless of whether they account for that compensation
using the fair value method of Statement 123 or the intrinsic value method of
Opinion 25. The adoption of Statement 148 did not have a material effect on the
Company's financial statements or results of operations.
NOTE 3 | Trade Receivables
December 31,
(Dollars in thousands) 2002 2001
- -----------------------------------------------------------------------------
Amounts billed $15,189 $12,645
Unbilled recoverable costs and earned fees 8,049 4,668
Retainage per contract provisions 685 4,229
- -----------------------------------------------------------------------------
$23,923 $21,542
- -----------------------------------------------------------------------------
Amounts due from the U.S. Government primarily related to long-term contracts of
the Company's defense segment were as follows:
Billed and unbilled amounts include $2,617,000 and $5,016,000 at December
31, 2002 and 2001, 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.
NOTE 4 | Inventories
December 31,
(Dollars in thousands) 2002 2001
- -----------------------------------------------------------------------------
Finished goods and work in progress $6,151 $ 2,660
- -----------------------------------------------------------------------------
Costs and earnings relating
to long-term contracts 65,031 47,166
Deduct progress payments related
to long-term contracts (51,667) (35,210
- -----------------------------------------------------------------------------
Costs and earnings in excess of billings 13,364 11,956
- -----------------------------------------------------------------------------
Total finished goods and work in progress 19,515 14,616
Materials and supplies 1,436 1,572
- -----------------------------------------------------------------------------
$20,951 $ 16,188
- -----------------------------------------------------------------------------
The inventoried costs associated with long-term contracts include costs
and earnings of $13,364,000 in 2002 and $11,956,000 in 2001 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 $4,610,000 ($3,043,000 net of tax
benefit) and $2,081,000 ($1,305,000 net of tax benefit) during 2002 and 2001,
respectively, resulting primarily from revision of cost estimates on certain
major long-term contracts.
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.
26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60
^
UNITED INDUSTRIAL CORPORATION AR02
Notes to Financial Statements Continued
NOTE 5 | Other Assets
December 31,
(Dollars in thousands) 2002 2001
- -----------------------------------------------------------------------------
Intangible pension asset $4,268 $ --
Net pension asset -- 46,901
Patents and other intangible assets, net 940 1,166
Other 2,213 4,610
- -----------------------------------------------------------------------------
$7,421 $52,677
- -----------------------------------------------------------------------------
Patents and other intangible assets represent assets acquired in connection
with the purchase of ACL Technologies Inc., an indirect wholly owned subsidiary
of the Company, and are being amortized primarily on a straight-line basis over
5 to 10 years. Amortization expense amounted to $226,000 in 2002, $318,000 in
2001 and $715,000 in 2000. Accumulated amortization amounted to $4,666,000 and
$4,440,000 at December 31, 2002 and 2001, respectively. Other includes the
investment in Pioneer UAV, Inc. of $1,462,000 which increased during 2002 by
$99,000, the Company's share of profits, and decreased by a dividend of
$1,000,000 and repayment of an advance of $360,000. See Note 10 for information
concerning pension benefits.
NOTE 6 | Long-Term Debt and Credit Arrangements
On June 28, 2001, the Company and certain of its subsidiaries (the Borrowers)
entered into a Loan and Security Agreement (the Agreement) with Fleet Capital
Corporation, which replaced the Company's loan agreement with First Union
Commercial Corporation. The Agreement has a term of three years and provides for
letters of credit and cash borrowings of up to $25,000,000, with a sublimit of
$10,000,000 for cash borrowings, subject to a borrowing base. Credit advances
may increase to $32,000,000, provided that amounts in excess of $25,000,000 are
cash-collateralized. The Agreement contains certain restrictive covenants, among
which are a minimum fixed charge coverage ratio and a maximum balance sheet
leverage ratio. All assets of the Borrowers are pledged as collateral under the
Agreement. The stock of the Borrowers (other than the Company) and AAI's Hunt
Valley property are also pledged as collateral pursuant to a pledge agreement
and a deed of trust. In March 2003, the Company and the lender entered into a
waiver and amendment agreement pursuant to which the financial covenant
violations as of December 31, 2002 were waived and the covenants were amended.
At December 31, 2002 there were no cash borrowings under the Agreement. The
letter of credit obligations outstanding at December 31, 2002 were $8,736,000.
A subsidiary of the Company also has a $2,000,000 line of credit with a
bank which may be used for cash borrowings or letters of credit. This agreement
expires April 18, 2003. At December 31, 2002, the subsidiary had no cash
borrowings and $342,000 letters of credit outstanding.
The Company expects that available cash and existing lines of credit will
be sufficient to meet its cash requirements for the next twelve months. The cash
requirements consist primarily of obligations to fund operations.
Interest expense was $843,000 in 2002, $17,000 in 2001 and $28,000 in 2000.
Interest paid was $456,000 in 2002, $36,000 in 2001 and $64,000 in 2000.
NOTE 7 | 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, May 1998 to
1,800,000 and May 1999 to 2,400,000) 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 at the time of grant. 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 generally vest
one-third each year after a one-year waiting period.
25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59
^
UNITED INDUSTRIAL CORPORATION AR02
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 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.
Upon the termination of certain individuals the Board of Directors
accelerated the vesting of certain of their grants and extended certain exercise
periods. These modifications resulted in a noncash compensation charge to
continuing operations of $14,000 and $346,000 in 2002 and 2001, respectively.
A summary of stock option activity under all plans is as follows:
- --------------------------------------------------------------------------------
Number of Weighted Average
(Shares in thousands) shares Exercise Price
- --------------------------------------------------------------------------------
Balance at January 1, 2000 1,673 $9.20
Granted 320 8.56
Exercised (139) 7.17
Canceled (90) 10.65
- --------------------------------------------------------------------------------
Balance at December 31, 2000 1,764 9.17
- --------------------------------------------------------------------------------
Granted 349 13.37
Exercised (436) 9.31
Canceled (128) 8.88
- --------------------------------------------------------------------------------
Balance at December 31, 2001 1,549 10.10
- --------------------------------------------------------------------------------
Granted 170 19.25
Exercised (195) 9.36
Canceled (1) 8.71
- --------------------------------------------------------------------------------
Balance at December 31, 2002 1,523 $11.22
- --------------------------------------------------------------------------------
December 31
(Shares in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Exercisable 1,070 977 1,125
Available for future grants 105 274 496
- --------------------------------------------------------------------------------
The weighted average remaining life for options outstanding as of December
31, 2002, is six years.
The following table summarizes information about stock options outstanding
at December 31, 2002:
Shares
(Shares in thousands) ------------------------
Range of Exercise Prices Exercisable Outstanding
- --------------------------------------------------------------------------------
$4.50 to $7.00 189 189
$7.50 to $9.81 473 552
$10.25 to $13.00 348 507
$13.99 to $20.12 60 275
- --------------------------------------------------------------------------------
1,070 1,523
- --------------------------------------------------------------------------------
NOTE 8 | Leases
Total rental expense for all operating leases amounted to $3,699,000 in 2002,
$3,566,000 in 2001 and $3,612,000 in 2000. Contingent rental payments were not
significant.
The future minimum rental commitments as of December 31, 2002, for all
noncancellable leases are $3,970,000 in 2003; $2,183,000 in 2004; $1,620,000 in
2005; $1,286,000 in 2006; $1,015,000 in 2007; and $1,154,000 thereafter.
26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60
^
UNITED INDUSTRIAL CORPORATION AR02
NOTE 9 | Changes in Shareholders' Equity
Accumulated
Other
Retained Comprehen- Share-
Common Shares Common Additional Earnings Treasury sive holders'
(In thousands) Outstanding Stock Capital (Deficit) Stock (Loss) Equity
- -------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2000 12,294 $14,374 $89,483 $23,616 $(16,418) $ -- $111,055
Net income -- -- 7,779 -- -- 7,779
Cash dividends declared
($.40 per share) -- -- (4,954) -- -- (4,954)
Stock options exercised 139 -- (100) -- 1,100 -- 1,000
Employee awards 2 -- 1 -- 12 -- 13
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 12,435 14,374 89,384 26,441 (15,306) -- 114,893
Net income -- -- 5,363 -- -- 5,363
Cash dividends
declared ($.40 per share) -- -- (5,069) -- -- (5,069)
Stock options exercised 436 -- 624 -- 3,439 -- 4,063
Noncash compensation -- 638 -- -- -- 638
Tax benefit arising from
early dispositions
of--stock issued
upon exercise of
stock options -- 448 -- -- -- 448
Employee awards 1 -- -- -- 8 -- 8
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 12,872 14,374 91,094 26,735 (11,859) -- 120,344
Net loss -- -- (39,077) -- -- (39,077)
Minimum pension liability--
net of tax -- -- -- -- (32,262) (32,262)
Total comprehensive loss -- -- -- -- -- (71,339)
Cash dividends declared
($.30 per share) -- -- (3,912) -- -- (3,912)
Stock options exercised 195 -- 287 -- 1,538 -- 1,825
Stock options--tax benefit -- 692 -- -- -- 692
Employee awards 1 -- 12 -- 9 -- 21
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 13,068 $14,374 $92,085 $(16,254) $(10,312) $(32,262) $47,631
- -------------------------------------------------------------------------------------------------------------------------------
The exercise of stock options which have been granted under the Company's
various stock option plans give rise to compensation which is includable in the
taxable income of the applicable employees and deductible by the Company for
federal and state income tax purposes. Such compensation results from increases
in the fair market value of the Company's common stock subsequent to the date of
grant of the applicable exercised stock options and, accordingly, in accordance
with Accounting Principles Board Opinion No. 25, such compensation is not
recognized as an expense for financial accounting purposes and the related tax
benefits are recorded directly in Additional Capital.
25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59
^
UNITED INDUSTRIAL CORPORATION AR02
NOTE 10 | Pensions and Other Postretirement Benefits
The Company sponsors several qualified and non-qualified pension plans and other
postretirement benefit plans for its employees. The following table provides a
reconciliation of the changes in the plans' benefit obligations and fair value
of assets during each of the years in the two-year period ending December 31,
2002, and a statement of the funded status as of December 31 of both years.
Pension Benefits Other Postretirement Benefits
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation
Benefit obligation at beginning of year $148,864 $144,024 $23,555 $26,095
Service cost 2,579 1,981 320 360
Interest cost 10,521 10,361 1,647 1,651
Amendments 19 250 (437) --
Curtailments -- -- (216) (2,621)
Actuarial loss 5,611 4,770 1,035 213
Administrative expenses (95) (2) -- --
Benefits paid (11,746) (12,520) (2,268) (2,143)
- ----------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 155,753 148,864 23,636 23,555
- ----------------------------------------------------------------------------------------------------------------------------
Change in Plan Assets
Fair value of plan assets at
beginning of year 161,268 177,147
Actual return on plan assets (10,408) (3,357)
Administrative expenses (95) (2)
Benefits paid (11,746) (12,520)
- ----------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 139,019 161,268
- ----------------------------------------------------------------------------------------------------------------------------
(Underfunded) funded status of the plans (16,734) 12,404 (23,636) (23,555)
Unrecognized net transition obligation asset 2,163 748 -- --
Unrecognized net actuarial loss 55,890 29,317 1,637 544
Unrecognized prior service cost 4,268 4,432 (362) 83
- ----------------------------------------------------------------------------------------------------------------------------
Prepaid benefit (accrued cost) $ 45,587 $ 46,901 $(22,361) $(22,928)
- ----------------------------------------------------------------------------------------------------------------------------
Weighted-average Assumptions
Discount rate 6.75% 7.25% 6.75% 7.5%
Expected return on plan assets 8.5% 8.5%
Rate of compensation increase 4% 4%
- ----------------------------------------------------------------------------------------------------------------------------
26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60
^
UNITED INDUSTRIAL CORPORATION AR02
Notes to Financial Statements Continued
The following table provides the amounts recognized in the statements of
financial position as of December 31, 2002 and 2001.
Pension Benefits Other Postretirement Benefits
----------------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
Prepaid benefit cost $45,587 $46,901 $ -- $ --
Accrued benefit liability -- -- (22,361) (22,928)
Unrecognized prior service cost (4,268) -- -- --
Excess adjustment for minimum pension liability (49,595) -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ (8,276) $46,901 $(22,361) $(22,928)
- -------------------------------------------------------------------------------------------------------------------------------
The accumulated benefit obligation of the defined benefit pension plans was
$147,397,000 and $141,909,000 at December 31, 2002 and 2001, respectively. As
required by Statement of Financial Accounting Standards No. 87, "Employers'
Accounting for Pensions," the Company recorded an additional pension liability
of $49,595,000 at December 31, 2002, to reflect the excess of the accumulated
benefit obligation over the fair value of plan assets of its defined benefit
pension plans. A reduction in shareholders' equity ($32,262,000, net of related
income tax benefit) has been separately reported at December 31, 2002.
For the purpose of measuring the other postretirement benefit obligations,
a 7.5 percent annual rate of increase in the per capita cost of covered health
care benefits was assumed for 2002. The rate was assumed to decrease to 5
percent in 2008 and remain at that level thereafter.
Pension Benefits Other Postretirement Benefits
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Components of Net Periodic Benefit Cost
Service cost $ 2,579 $ 1,981 $ 1,229 $320 $360 $550
Interest cost 10,521 10,361 9,988 1,647 1,651 1,915
Expected return on plan assets (13,498) (14,835) (16,029) -- -- --
Amortization of prior service cost 183 196 (357) 12 18 76
Amortization of unrecognized transition assets (88) (88) (88) -- -- --
Amortization of net loss (gain) 1,616 -- -- (2) -- --
Settlement-- curtailment -- -- -- -- (1,933) --
Recognized net actuarial loss 8 -- (31) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Benefit cost (income) $ 1,321 $ (2,385) $ (5,288) $1,977 $96 $2,541
- ----------------------------------------------------------------------------------------------------------------------------------
25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59
^
UNITED INDUSTRIAL CORPORATION AR02
Net periodic benefit costs for the defense segment are considered contract
costs and are included in cost of sales in the Statements of Operations. Net
periodic benefit costs for other segments are classified separately in the
consolidated statements of operations.
Two subsidiaries of the Company sponsor non-funded defined benefit health
care plans. Both plans are non-contributory for retirees and one is contributory
for spouses whose contributions increase periodically so that the entire cost
for spouses is covered by January 2003. One of these plans was amended effective
December 31, 2001. Eligibility for benefits was increased from age 55 with 10
years of service to age 62 with 10 years of service. In one subsidiary the life
insurance benefit for union participants was increased from $3,000 to $4,000 and
prescription drug co-pay for non-union participants was increased from $3 to $10
generic and $20 for brand name. This change had no impact on the current year
costs. One plan was amended effective January 1, 2001 so that employees hired
after December 31, 2000 will not be eligible for retiree medical benefits.
Employees on December 31, 2000, who do not meet the grandfathered requirements,
may purchase retiree medical benefits if they meet certain other requirements.
The effect of these changes was a decrease in the 2001 net periodic benefit cost
of $531,000 and an additional curtailment gain of $1,933,000.
The assumed health care cost trend rate has a significant effect on the
amounts reported. A one-percentage-point change in the assumed health care cost
trend rate would have the following effects:
1-Percentage Point 1-Percentage Point
(Dollars in thousands) Increase Decrease
- --------------------------------------------------------------------------------
Effect on total of service and interest
cost components in 2002 $ 56 $ (55)
Effect on postretirement benefit
obligation as of December 31, 2002 $615 $(610)
- --------------------------------------------------------------------------------
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 $3,728,000 in 2002, $3,488,000 in 2001 and $1,377,000 in 2000.
NOTE 11 | Industry Segment Data
The Company has two reportable segments: defense and energy systems. Other
includes the corporate office and dormant corporations. The defense segment's
products include unmanned aerial vehicles, training and simulation systems,
automated aircraft test and maintenance equipment, and combat vehicles and
ordnance systems. The defense segment also included specialized firefighting
training installations until the sale of Symtron Systems, Inc. in September
2000. The energy segment manufactures combustion equipment for biomass and
refuse fuels. The transportation business is reflected as a discontinued
operation in the Company's consolidated financial statements. See Note 16.
The Company evaluates performance and allocates resources based on profit
or loss from operations before income taxes. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies.
The Company's reportable segments are business units that offer different
products. The reportable segments are each managed separately because they
manufacture and distribute products with different production processes.
Sales to agencies of the United States Government, primarily by the defense
segment, were $161,569,000 in 2002, $149,047,000 in 2001 and $132,975,000 in
2000. No single customer, other than the United States Government, accounted for
ten percent or more of net sales in any year. Export sales were $66,366,000 in
2002, $54,670,000 in 2001 and $57,110,000 in 2000.
26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60
^
UNITED INDUSTRIAL CORPORATION AR02
Notes to Financial Statements Continued
(Dollars in thousands) Defense Energy Other Reconciliations Totals
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2002
- --------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $229,215 $29,552 $ -- $ -- $258,767
Equity profit in joint venture 99 -- -- -- 99
Interest income 1,124 25 234 (1,256) 127
Interest expense 776 27 1,296 (1,256) 843
Depreciation and amortization expense 4,730 3,967 66 -- 8,763
Segment profit (loss) 17,113 (10,108) (2,567) -- 4,438
Segment assets 134,426 39,290 109,958 (125,479) 158,195
Capital expenditures 4,963 256 -- -- 5,219
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2001
- --------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $208,575 $29,920 $ -- $ -- $238,495
Equity profit in ventures 86 -- -- -- 86
Interest income 1,223 107 265 (977) 618
Interest expense 232 -- 762 (977) 17
Depreciation and amortization expense 5,589 755 69 -- 6,413
Segment profit 18,422 3,042 547 -- 22,011
Segment assets 120,735 32,379 128,878 (29,467) 252,525
Capital expenditures 1,601 426 1 -- 2,028
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2000
- --------------------------------------------------------------------------------------------------------------------------------
Revenues from external customers $200,743 $35,540 $ -- $ -- $236,283
Equity profit in ventures 472 -- -- -- 472
Interest income 2,445 354 193 (1,495) 1,497
Interest expense 458 11 1,054 (1,495) 28
Depreciation and amortization expense 7,270 746 70 -- 8,086
Gain (loss) on sale of assets -- (28) 5,539 -- 5,511
Segment profit 20,569 4,718 7,574 -- 32,861
Segment assets 144,083 36,247 136,286 (68,231) 248,385
Capital expenditures 4,237 673 11 -- 4,921
- --------------------------------------------------------------------------------------------------------------------------------
25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59
^
UNITED INDUSTRIAL CORPORATION AR02
(Dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Assets
Total assets for reportable
segments $283,674 $281,992 $316,616
Elimination of intercompany
tax receivable (21,719) -- --
Reclassification of
receivables from ETI -- (1,828) (1,648)
Assets of discontinued operations 14,042 108,684 74,326
Elimination of investment
in consolidated subsidiaries (98,157) (126,413) (127,822)
Reclassification of deferred
tax liabilities (19,645) (9,910) (13,087)
- --------------------------------------------------------------------------------
Total Consolidated Assets $158,195 $252,525 $248,385
- --------------------------------------------------------------------------------
Other Significant Items
Elimination of intercompany
interest $1,256 $977 $ 1,495
- --------------------------------------------------------------------------------
Segment profit (loss) includes research and development costs amounting to
$4,588,000 in 2002, $5,520,000 in 2001 and $4,001,000 in 2000, principally in
the defense segment.
NOTE 12 | 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.
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 for the years ended December 31:
- --------------------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Federal income taxes
at statutory rate $1,508 $ 7,884 $11,193
State and local income taxes,
net of federal income
tax benefit (including a
reduction of $651 in 2001
of a $1,000 tax reserve
established in 1997) 50 (519) 850
Non-taxable income (772) -- (576)
Other -- net (212) 18 208
- --------------------------------------------------------------------------------
Income Taxes --
Continuing Operations $ 574 $ 7,383 $11,675
- --------------------------------------------------------------------------------
The Company recorded income tax benefits for its discontinued
operations during 2002, 2001 and 2000. Current income taxes receivable
associated with these benefits are classified as income taxes receivable in the
accompanying consolidated balance sheets.
No income tax payments were made in 2002 and 2001 based on the Company's
tax estimate offset by an overpayment of $1,810,000 in 2000. Income tax payments
were $4,000,000 in 2000.
26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60
^
UNITED INDUSTRIAL CORPORATION AR02
Notes to Financial Statements Continued
Deferred income tax balances:
December 31
(Dollars in thousands) 2002 2001
- --------------------------------------------------------------------------------
Deferred Tax Assets
Asbestos litigation reserve $ 4,179 $ --
Minimum pension liability 17,333 --
Losses on long-term contracts
not currently deductible 2,298 2,631
Postretirement benefits and other
employee benefits other than pensions 7,683 8,716
Product warranty and other provisions 1,097 962
Vacation pay accruals 1,007 879
Other 249 120
- --------------------------------------------------------------------------------
Total Deferred Tax Assets 33,846 13,308
- --------------------------------------------------------------------------------
Deferred Tax Liability
Pension plans (16,673) (17,220)
Excess tax depreciation (435) (1,823)
Other (679) (471)
- --------------------------------------------------------------------------------
Total Deferred Tax Liability (17,787) (19,514)
- --------------------------------------------------------------------------------
Net Deferred Tax Asset (Liability) $16,059 $ (6,206)
- --------------------------------------------------------------------------------
The net deferred tax asset (liability)
is classified as follows:
Net current deferred income tax assets $ 4,528 $ 5,436
- --------------------------------------------------------------------------------
Net noncurrent deferred income
tax asset (liability) $11,531 $(11,642)
- --------------------------------------------------------------------------------
NOTE 13 | Other Operating Expenses, Net, Other Income,
Net, and Other Expenses
Year ended December 31
(Dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Other Operating Expenses, Net
Reduction of deferred
compensation liability $(232) $ (212) $ (208)
Amortization of intangibles 226 318 715
Write-off of receivable -- -- 162
Expenses related to the closing
of an indirect subsidiary 425 -- --
- --------------------------------------------------------------------------------
Total other operating expenses, net $ 419 $ 106 $ 669
- --------------------------------------------------------------------------------
Other Income, Net
Insurance recovery -- net $ -- 842 3,183
Royalties and commissions 13 127 408
Other 51 116 136
- --------------------------------------------------------------------------------
Total other income, net $ 64 $1,085 $3,727
- --------------------------------------------------------------------------------
Other Expenses
Exchange rate fluctuations $ -- $ 182 $ --
Write-off of proposed
acquisition costs -- 159 --
Professional fees --
environmental remediation 309 -- --
potential disposition -- -- 271
Miscellaneous items 357 399 430
- --------------------------------------------------------------------------------
Total other expense $ 666 $ 740 $ 701
- --------------------------------------------------------------------------------
25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59
^
UNITED INDUSTRIAL CORPORATION AR02
NOTE 14 | Selected Quarterly Data (Unaudited)
(Dollars in thousands,
except per share data 2002 2001
and stock prices) Fourth Third Second First Fourth Third Second First
- -------------------------------------------------------------------------------------------------------------------------------
Net sales from
continuing operations $69,463 $67,109 $65,328 $56,867 $62,052 $66,103 $56,457 $53,883
Gross profit from
continuing operations 18,288 15,406 11,618 10,805 15,752 13,806 12,370 12,037
(Loss) income from
continuing operations (3,312) 4,462 1,683 1,031 4,489 3,571 3,588 2,980
Loss from discontinued operations (16,409) (1,844) (12,430) (12,260) (5,607) (1,545) (1,694) (419)
Net (loss) income (19,719) 2,618 (10,747) (11,229) (1,118) 2,026 1,894 2,561
- -------------------------------------------------------------------------------------------------------------------------------
Basic (loss) earnings per share
Continuing Operations $ (.25) $ .34 $ .13 $ .08 $ .35 $ .28 $ .28 $ .24
Discontinued Operations (1.26) (.14) (.96) (.95) (.44) (.12) (.13) (.03)
Net (loss) Income (1.51) .20 (.83) (.87) (.09) .16 .15 .21
Diluted (loss) earnings per share
Continuing Operations (.25) .32 .12 .08 .33 .27 .27 .23
Discontinued Operations (1.26) (.13) (.90) (.90) (.41) (.12) (.13) (.03)
Net (loss) Income (1.51) .19 (.78) (.82) (.08) .15 .14 .20
- -------------------------------------------------------------------------------------------------------------------------------
Dividends declared per share .10 .10 -- .10 .10 .10 .10 .10
- -------------------------------------------------------------------------------------------------------------------------------
Stock prices:
High $ 21.00 $ 23.90 $ 26.05 $ 22.96 $ 19.90 $ 16.73 $ 17.77 $ 14.00
Low $ 12.02 $ 16.60 $ 21.30 $ 15.04 $ 14.85 $ 12.95 $ 12.40 $ 11.00
- -------------------------------------------------------------------------------------------------------------------------------
The Company's common stock is listed on the New York Stock Exchange. The
approximate num ber of shareholders of record as of February 5, 2003 was 1,900.
NOTE 15 | Commitments and Contingencies
Detroit Stoker Company (Detroit Stoker), a wholly owned subsidiary of the
Company, was notified in March 1992 by the Michigan Department of Natural
Resources (MDNR) that it is a potentially responsible party in connection with
the cleanup of a former industrial landfill located in Port of Monroe, Michigan.
MDNR is treating the Port of Monroe landfill site as a contaminated facility
within the meaning of the Michigan Environmental Response Act (MERA). 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.
UIC and its Detroit Stoker subsidiary have been named as defen dants in
asbestos-related personal injury litigation. Neither UIC nor Detroit Stoker
26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60
^
UNITED INDUSTRIAL CORPORATION AR02
Notes to Financial Statements Continued
fabricated, milled, mined, manufactured or marketed asbestos. The Com pany
stopped the use of asbestos-containing materials in connection with its products
in 1981.
The litigation is pending in Michigan, Mississippi, New York and North
Dakota. During 2002 UIC and Detroit Stoker experienced a significant increase in
the volume of asbestos bodily-injury claims and as of December 31, 2002, the
Company is a named defendant in 422 active cases involving approximately 15,105
claimants. Most of these lawsuits do not include specific dollar claims for
damages, and many include a number of plaintiffs and multiple defendants. Based
on historical data and the large increase in claimants over and above the
projected incidence of disease relative to the Company's products, management
believes the claimants in the vast majority of these cases will not be able to
demonstrate that they have been exposed to the Company's asbestos-containing
products or suffered any compensable loss as a result of such exposure. The
direct asbestos-related expenses of the Company for defense and indemnity for
the past five years was not material.
The Company engaged a consulting firm (Asbestos Consultant) with expertise
in evaluating asbestos bodily-injury claims to work with the Company to project
the amount that the Company would pay for its asbestos-related liabilities and
defense costs. The methodology employed by the Consultant to project the
Company's asbestos-related liabilities and defense costs is primarily based on
(1) estimates of the labor force exposed to asbestos in the Company's products,
(2) epidemiological modeling of asbestos-related disease manifestation, and (3)
estimates of claim filings and settlement and defense costs that may occur in
the future. The Company's limited claims history was not a significant variable
in developing the estimates because such history was not significant as compared
to the number of claims filed in 2002.
The Company also retained another consultant (Insurance Consultant) to work
with the Company to project its insurance coverage, including a non-binding
sharing agreement with certain of its primary insurance carriers that has been
in effect for approximately five years. The Insurance Consultant has prepared a
report evaluating the Company's potential insurance coverage for defense costs
and indemnification for asbestos bodily-injury claims. The Insurance
Consultant's conclusion was primarily based on a review of the Company's
coverage history, application of reasonable assumptions on the allocation of
coverage consistent with industry standards, an assessment of the
creditworthiness of the insurance carriers, experience and a review of the
report of the Asbestos Consultant.
Based on these assumptions, other variables, and the reports of both the
Asbestos and Insurance Consultants, the Company has recorded a reserve for its
bodily injury liabilities for asbestos-related matters through 2012 in the
amount of $31,852,000 as of December 31, 2002, including damages and defense
costs. The Company has also recorded an estimated insurance recovery as of
December 31, 2002 of $20,343,000 reflecting the estimate determined to be
probable of being available to mitigate the Company's potential asbestos
liability through 2012. These figures represent a net pretax charge of
$11,509,000 for the year ended December 31, 2002.
Management has concluded that consideration of asbestos-related activity
through 2012 represents a period for which a reasonable and reliable forecast of
liability and insurance recoveries can be projected. That conclusion is based
upon a number of factors, including 1) the uncertainties inherent in estimating
asbestos claims, payments and insurance recoveries, 2) knowledge that prior to
2002 the number of claims filed against the Company and the related average
settlement costs were not significant, and 3) consultations with the Asbestos
and Insurance Consultants. Accordingly, the net provision does not take into
account either asbestos liabilities or insurance recoveries for any period past
2012.
The Company believes that its ultimate net asbestos-related contingent
liability (i.e., its indemnity or other claim disposition costs plus related
legal fees less insurance recoveries) cannot be estimated with certainty.
Projecting future events, such as the number of new claims expected to be filed
each year, the average cost of resolving each claim, coverage issues among
layers of insurers and the continuing solvency of various insurance companies is
subject to many uncertainties which could cause the actual liabilities and
insurance recoveries to be higher or lower than those recorded or projected,
25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59
^
UNITED INDUSTRIAL CORPORATION AR02
and such differences could be material. Moreover, were Federal tort reform
legislation to be enacted, the assumptions used in determining the potential
liability could be materially impacted.
After considering the efforts of both consultants and based upon the facts
as now known, including the reasonable possibility that claims will be received
and paid over the next 50 year period, the Company's management believes that
although asbestos claims could have a material adverse effect on the Company's
financial condition or result of operations in a particular reporting period,
asbestos claims should not have a material adverse effect on the Company's long
term financial condition, liquidity or results of operations. No assurance can
be given, however, as to the actual amount of the Com pany's liability for such
present and future claims or insurance recov-eries, and the differences from
estimated amounts could be material.
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 lia bility, if
any, under pending litigation, including claims described above, will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
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. If the Company is unable to meet these
performance obligations, the performance guarantees could have a material
adverse effect on product margins and the Company's results of operations,
liquidity or financial position. 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, 2002.
In connection with the discontinued transportation operations,
AAI Corporation (AAI), a wholly owned subsidiary of the Company, has guaranteed
certain performance criteria associated with the contractual obligations of ETI,
a company owned 35% by AAI and 65% by Skoda, a.s. (Skoda), a Czech Republic
company. The ability of ETI to perform under these contracts may, in part, be
dependent on the performance of other parties, including AAI, Skoda and other
subcontractors. Thus, the ability to timely deliver such equipment may be
outside AAI's control. In addition, while its operating affiliates performed
under their contracts during the year, during 2001 Skoda declared bankruptcy.
During 2002, the transportation segment recorded 100% of the ETI loss because of
Skoda's inability to meet its financial obligations under ETI's shareholder
agreement. The additional losses recorded by the Company for Skoda's 65% share
of ETI totaled $17,264,000 during 2002. If Skoda is required to provide ETI with
additional funding beyond the amounts already provided for by AAI on Skoda's
behalf and it fails to do so, or if ETI is unable to meet its performance
obligations, the performance guarantees by AAI could have a material adverse
effect on the Company's results of operations, liquidity or financial condition.
AAI monitors the progress of Skoda and ETI's other subcontractors.
In February 2000, the Czech Export Bank (CEB) approved credit facilities to
ETI and two Skoda subsidiaries in order to finance the design and manufacture of
electric trolley buses for the city and county of San Francisco (MUNI). These
credit facilities which were repaid during 2002 were partially guaranteed by the
Czech Govern ment's Export Guarantee
and Insurance Corporation (EGAP). In addition, the Company previously
agreed to assume joint and several liability on a progress payment bond totaling
approximately $22,000,000 at December 31, 2002. In January 2003, this bond was
reduced to $9,100,000. This progress payment bond is expected to be eliminated
when the MUNI customer accepts certain deliveries during 2003. Although the
Company has accepted full responsibility under the progress payment bond, Skoda
retains its 65% obligation that is partially guaranteed by EGAP. In addition,
previously existing bonds that guarantee performance under the MUNI contract
obligate the Company to indemnify the surety, if necessary, for up to approx
imately $33,000,000. These bonds are expected to be released upon ETI's issuance
of a warranty bond. It is expected that there will be sufficient working capital
to complete the MUNI program. The Dayton electric trolley buses contract
required a performance bond of about $16,000,000 that was outstanding at Decem
ber 31, 2002. The Company was
26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60
^
UNITED INDUSTRIAL CORPORATION AR02
Notes to Financial Statements Continued
jointly and severally liable. In February 2003,
the Company was released from this $16,000,000 bond.
On July 26, 2002, the Company sold two transportation overhaul contracts
and related assets. See Note 16.
NOTE 16 | Disposed Business
On September 29, 2000, the Company sold all its capital stock of Symtron
Systems, Inc. (Symtron). The sale resulted in a pretax gain of $5,539,000. The
Consolidated Statements of Operations include Symtron's net sales of $7,663,000
in 2000. Symtron had a net loss of $950,000 in 2000.
On July 26, 2002, the Company sold two transportation overhaul contracts
with the New Jersey Transit Authority and Maryland Mass Trans portation
Authority and related assets. The proceeds of this sale were approximately
$20,756,000. The Company recorded a loss of $21,500,000 associated with this
transaction. The agreement of sale released the Company under all performance
bonds and obligations under the conveyed contracts. The agreement of sale also
included a cost plus a fee contract to perform work on the conveyed contracts
for the buyer during a transition period not to exceed six months. Following the
sale, the Company's transportation operations include primarily one ongoing
program to deliver 273 electric trolley buses to the San Francisco Municipal
Railway. This program, which is well into its production phase, is being
performed by ETI under which AAI has a major subcontract. The divested overhaul
contracts, along with efforts to complete the one remaining transportation
contract, are accounted for as discontinued operations.
Summary results of the transportation segment which have been classified
separately, were as follows:
Year ended December 31
(Dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Revenue $ 27,447 $ 47,439 $ 20,075
Loss before income taxes $(66,053) $(14,886) $(21,383)
Credit for income taxes (23,112) (5,621) (7,976)
- --------------------------------------------------------------------------------
Net Loss from discontinued
operations $(42,941) $ (9,265) $(13,407)
- --------------------------------------------------------------------------------
Year ended December 31
(Dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Net Cash (Used for) Provided by
Discontinued Operations
Net loss $(42,941) $ (9,265) $(13,407)
Loss on sale of assets 21,500 -- --
Decrease (increase) in
Trade receivable 16,473 (9,772) (7,064)
(Increase) in Inventories (5,104) (21,974) (37,529)
(Decrease) increase in Customer
advances (4,556) 491 11,883
(Decrease) in income taxes (22,641) (5,380) (6,907)
(Decrease) increase in
Accounts payable & other
current liabilities (5,785) 14 12,706
Increase (decrease) other 5,248 427 173
- --------------------------------------------------------------------------------
Net Cash (Used for)
discontinued operations $(37,806) $(45,459) $(40,145)
- --------------------------------------------------------------------------------
25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59
^
UNITED INDUSTRIAL CORPORATION AR02
Assets and liabilities of the discontinued operations reclassified as
current were as follows:
Year ended December 31
(Dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Assets
Current Assets
Trade receivables $ 908 $ 20,895 $11,123
Inventories 9,013 73,236 51,262
Prepaid expenses and other
current assets 51 51 52
Deferred taxes 3,034 6,460 5,487
- --------------------------------------------------------------------------------
Total Current Assets 13,006 100,642 67,924
Non-current Assets
Deferred taxes 1,036 1,037 972
Other assets -- 1,205 1,010
Property and equipment -- 5,800 4,420
- --------------------------------------------------------------------------------
Total Assets $14,042 $108,684 $74,326
- --------------------------------------------------------------------------------
Liabilities
Current Liabilities
Accounts payable $1,674 $ 7,118 $ 4,181
Accrued employee
compensation and taxes 1,052 1,393 1,489
Customer advances 1,087 35,983 35,402
Provision for contract losses 7,300 12,861 15,604
Other 400 2,000 2,000
- --------------------------------------------------------------------------------
Total Liabilities $11,513 $ 59,355 $58,676
- --------------------------------------------------------------------------------
NOTE 17 | Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Year ended December 31
(Dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Basic earnings per share--
weighted average shares 13,021,000 12,697,000 12,384,000
Effect of dilutive securities:
employee and non-employee
director stock options 677,000 592,000 225,000
- --------------------------------------------------------------------------------
Diluted earnings per share--
adjusted weighted average
and assumed conversions 13,698,000 13,289,000 12,609,000
- --------------------------------------------------------------------------------
Basic earnings (loss) per share:
Income from Continuing
Operations $ .30 $ 1.15 $ 1.71
Loss from Discontinued
Operations (3.30) (.73) (1.08)
- --------------------------------------------------------------------------------
Net (loss) Income (3.00) .42 .63
- --------------------------------------------------------------------------------
Diluted earnings (loss)
per share:
Income from Continuing
Operations .28 1.10 1.68
Loss from Discontinued
Operations (3.13) (.70) (1.06)
- --------------------------------------------------------------------------------
Net (loss) Income $ (2.85) $ .40 $ .62
- --------------------------------------------------------------------------------
26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60
^
UNITED INDUSTRIAL CORPORATION AR02
Notes to Financial Statements Continued
NOTE 18 | Investment in Unconsolidated Investees
In 1993, AAI organized a new subsidiary, Electric Transit, Inc., to manufacture
electric trolley buses for the U.S. market. In 1994 and again in 1995, ETI
conveyed equity interests (in ETI) to Skoda, a Czech Republic firm. ETI is owned
35% by AAI, and 65% by Skoda. ETI has won contracts in both Dayton, Ohio for the
Miami Valley Regional Transit Authority and the city and county of San
Francisco, California (MUNI). Under these contracts, which are valued at
$32,444,000 and $192,000,000, respectively, the transportation segment received
subcontracts of $9,350,000 and $65,800,000, respectively. See Note 16.
Although ETI is owned 35% by AAI, a wholly owned subsidiary of the Company,
and 65% by Skoda, during 2002 the transportation segment recorded 100% of the
ETI loss because of Skoda's inability to meet its financial obligations under
ETI's shareholder agreement.
During the years ended December 31, 2002, 2001 and 2000, the sales, cost of
sales and gross loss recognized by the transportation seg ment on subcontracts
with ETI are as follows:
- --------------------------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Sales $13,614 $29,975 $2,360
Cost of sales 20,175 31,351 4,082
- --------------------------------------------------------------------------------
Gross loss $(6,561) $(1,376) $(1,722)
- --------------------------------------------------------------------------------
During 2000 ETI repaid to AAI $3,605,000 that was previously advanced to
ETI by AAI on behalf of Skoda. The transportation segment recorded a loss of
$180,000 and $335,000 in 2001 and 2000, respectively, related to its equity
interest in the net loss of ETI. In 2002 the transportation segment recorded a
loss of $26,560,000 (net of a $1,828,000 reserve previously recorded by the
Company) related to its equity interest in the net loss of ETI and the estimated
losses through completion of the remaining contract. This loss included a
provision of $9,296,000 related to its 35% equity share of esti mated losses by
ETI, and a $17,264,000 provision related to the 65% equity share of Skoda, since
it is unlikely that Skoda will have the financial capability to fund its share
of such losses.
Summary financial information of the Electric Transit, Inc. entity is as
follows:
(Dollars in thousands) 2002 2001 2000
- --------------------------------------------------------------------------------
Current assets $ 99,042 $131,794 $43,008
Plant, property and equipment
and other assets 1,482 3,058 8,118
Current liabilities 146,127 152,070 68,015
Net sales 64,766 14,580 4,673
Gross loss (28,388) (698) (637)
Net loss $(28,388) $ (514) $ (956)
- --------------------------------------------------------------------------------
The Company also has a 50% interest in Pioneer UAV, Inc. The Company's
investment was $1,462,000 and $2,724,000 in 2002 and 2001, respectively. The
Company had no advances to the investee at December 31, 2002 and December 31,
2001. The Company's share of the venture's profits were $99,000, $86,000 and
$472,000 in 2002, 2001 and 2000, respectively.
NOTE 19 | Restructuring Charge
Detroit Stoker ceased the foundry operation conducted by its wholly owned
subsidiary, Midwest Metallurgical Laboratory, Inc. (Midwest), effective May 17,
2002. In conjunction with the ceased operations the Company has written off the
value of all Midwest's assets.
During 2002 Detroit Stoker incurred severance and other cash charges
totaling approximately $1,287,000 related to the restructuring including
operating losses of Midwest. In addition, the Company accelerated depreciation
of its foundry facility during the foundry's operating period in 2002.
Depreciation of this facility was $3,420,000 during 2002.
25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 57 59
^
UNITED INDUSTRIAL CORPORATION AR02
Report of Independent Auditors
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, 2002 and 2001, and
the related consolidated statements of operations and cash flows for each of the
three years in the period ended December 31, 2002. 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 auditing standards generally
accepted in the United States. 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, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States.
New York, New York
March 10, 2003
26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60
^
UNITED INDUSTRIAL CORPORATION AR02
Five-Year Financial Data
Year ended December 31
(Dollars in thousands, except per share data) 2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Operating Data
Continuing Operations
Net Sales $ 258,767 $ 238,495 $ 236,283 $207,683 $187,655
Operating costs 254,741 219,335 216,026 189,503 176,968
Interest expense (income)-- net 716 (601) (1,469) (1,903) (3,762)
Income before income taxes 4,438 22,011 32,861 22,210 21,687
Income taxes 574 7,383 11,675 7,712 5,134
Income from continuing operations 3,864 14,628 21,186 14,498 16,553
Loss from discontinued operations (42,941) (9,265) (13,407) (8,221) (3,542)
Net (loss) income (39,077) 5,363 7,779 6,277 13,011
Basic Earnings (Loss) per Share
Income from continuing operations .30 1.15 1.71 1.18 1.35
Loss from discontinued operations (3.30) (.73) (1.08) (.67) (.29)
Net (loss) income (3.00) .42 .63 .51 1.06
Diluted Earnings (Loss) per Share
Income from continuing operations .28 1.10 1.68 1.16 1.31
Loss from discontinued operations (3.13) (.70) (1.06) (.66) (.28)
Net (loss) income (2.85) .40 .62 .50 1.03
Cash dividends paid on common stock 3,912 5,069 4,954 4,910 4,927
Cash dividends declared per common share $ .30 $ .40 $ .40 $ .40 $ .40
Shares outstanding as of year end (in thousands) 13,068 12,872 12,435 12,294 12,250
Financial Position
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 158,195 $ 252,525 $ 248,385 $ 201,792 $ 180,521
Property and equipment-- continuing operations 21,196 24,514 28,581 32,329 28,115
Shareholders' equity 47,631 120,344 114,893 111,055 109,441
Shareholders' equity per share 3.64 9.35 9.24 9.03 8.93
Financial Ratios
- ----------------------------------------------------------------------------------------------------------------------------------
Return on shareholders' equity (net income) --% 4.5% 6.8% 5.7% 11.9%
Income from continuing operations as a percentage of sales 1.5 6.1 9.0 7.0 8.8
Statistical Data -- continuing operations
- ----------------------------------------------------------------------------------------------------------------------------------
Sales backlog as of year end $ 301,000 $ 207,000 $ 195,000 $ 158,000 $ 156,000
Capital expenditures 5,219 2,028 4,921 10,563 13,534
Depreciation and amortization 8,763 6,413 8,086 6,780 7,318
Number of employees 1,600 1,500 1,400 1,500 1,600
- ----------------------------------------------------------------------------------------------------------------------------------
CORPORATE ORGANIZATION
Board of Directors
Harold S. Gelb
Chairman of the Board
Richard R. Erkeneff
President and Chief Executive Officer
of the Company and
Chief Executive Officer of
AAI Corporation
Paul J. "Page" Hoeper
Business Consultant and
Former Assistant Secretary
of the Army
Glen M. Kassan
Executive Vice President
Steel Partners, Ltd.
Warren G. Lichtenstein
Managing Partner
Steel Partners, Ltd.
Joseph S. Schneider
President
JSA Partners, Inc.
Corporate Officers
Richard R. Erkeneff
President and
Chief Executive Officer
James H. Perry
Vice President,
Chief Financial Officer
and Treasurer
Robert W. Worthing
Vice President and
General Counsel
Susan Fein Zawel
Vice President Corporate
Communications,
Associate General Counsel
and Secretary
Edward A. Smolinski
Assistant Treasurer and
Assistant Secretary
Senior Management
AAI Corporation
Richard R. Erkeneff
Chief Executive Officer
Frederick M. Strader
President and
Chief Operating Officer
James H. Perry
Vice President,
Chief Financial Officer
and Treasurer
Robert W. Worthing
Vice President,
General Counsel and Secretary
Francis X. Reinhardt
Vice President and
Corporate Controller
Joseph G. Thomas
Vice President and
General Manager,
AAI/UAV Systems
Thomas E. Wurzel
President,
AAI/ACL Technologies, Inc.
Michael A. Boden
Vice President and
General Manager,
Engineering Support, Inc.
Detroit Stoker Company
Mark A. Eleniewski
President and
Chief Executive Officer
Gary K. Ludwig
Vice President, Finance
and Treasurer
CORPORATE AND SHAREHOLDER INFORMATION
Corporate Headquarters
570 Lexington Avenue
New York, New York 10022
212.752.8787
Subsidiaries
AAI Corporation
P.O. Box 126
Hunt Valley, Maryland 21030
410.666.1400
www.aaicorp.com
Detroit Stoker Company
1510 East First Street
Monroe, Michigan 48161
734.241.9500
www.detroitstoker.com
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
www.amstock.com
For information about the
Company's Dividend
Reinvestment and Share Purchase
Plan, contact:
American Stock Transfer
and Trust Company
800.278.4353
www.amstock.com
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
Five Times Square
New York, New York 10036
Annual Meeting
The Annual Meeting of
Shareholders will be held at
10:00 a.m. on Wednesday,
October 8, 2003, at:
The Park Lane Hotel
36 Central Park South
New York, New York 10019
Corporate Counsel
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Available Information
United Industrial Corporation's
Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K,
proxy statements and
amendments to those reports,
are available free of charge
on our internet website at
http://www.unitedindustrial.com
as soon as reasonably practicable
after such reports are
electronically filed with the
Securities and Exchange
Commission.
Stock Listing
United Industrial Corporation
common stock is traded on the
New York Stock Exchange
(Ticker Symbol: UIC)
Internet Address
www.unitedindustrial.com
Designed and produced by Taylor & Ives., NYC
[LOGO] UNITED INDUSTRIAL
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United Industrial Corporation
570 Lexington Ave., New York, NY 10022
212.752.8787
www.unitedindustrial.com