SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number #1-4252
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UNITED INDUSTRIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 95-2081809
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(State or other jurisdiction of (I.R.S. Identification No.)
incorporation or organization)
570 Lexington Avenue, New York, NY 10022
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(Address of principal executive offices)
Not Applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1)has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 13,064,818 shares of common
stock as of August 2, 2002.
UNITED INDUSTRIAL CORPORATION
INDEX
Page #
------
Part I - Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets - Unaudited
June 30, 2002 and December 31, 2001 1
Consolidated Condensed Statements of Operations -
Three Months and Six Months Ended
June 30, 2002 and 2001 2
Consolidated Condensed Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001 3
Notes to Consolidated Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Qualitative and Quantitative Disclosures
about Market Risk 13
PART II - Other Information 14
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
JUNE 30 DECEMBER 31
2002 2001 *
------------ -----------
ASSETS (Unaudited)
- ------
Current Assets
Cash and cash equivalents $ 2,631 $ 5,496
Trade receivables 34,091 37,775
Inventories
Finished goods & work-in-process 25,663 14,616
Materials & supplies 1,433 1,572
-------- --------
27,096 16,188
Federal income taxes receivable 4,636 -
Deferred income taxes 5,436 5,436
Prepaid expenses & other current assets 1,678 1,755
Assets of discontinued operations 124,473 108,684
-------- --------
Total Current Assets 200,041 175,334
Other assets53,068 54,505
Property & equipment - less allowances
for depreciation (2002-$85,375; 2001-$88,560) 19,127 24,514
-------- --------
$272,236 $254,353
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable $ 2,100 $ -
Accounts payable 16,202 11,401
Accrued employee compensation & taxes 8,514 7,724
Customer advances 6,083 7,042
Federal income taxes payable - 3,003
Provision for contract losses 1,921 2,398
Other current liabilities 7,170 5,038
Liabilities of discontinued operations 93,974 59,355
-------- --------
Total Current Liabilities 135,964 95,961
Other long-term liabilities 3,353 3,467
Deferred income taxes 11,220 11,642
Postretirement benefits other than pensions 22,889 22,939
Shareholders' Equity
- --------------------
Common stock $1.00 par value
Authorized - 30,000,000 shares; outstanding 13,057,718 shares and
12,871,868 shares - June 30, 2002 and December 31, 2001 (net of
shares in treasury) 14,374 14,374
Additional capital 91,369 91,094
Retained earnings 3,460 26,735
Treasury stock, at cost, 1,316,430 shares at
June 30, 2002 and 1,502,280 shares at
December 31, 2001 (10,393) (11,859)
-------- --------
98,810 120,344
-------- --------
$272,236 $254,353
======== ========
See accompanying notes
* Reclassified to conform to 2002 presentation
1
UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30 June 30
------------------- -------------------
2002 2001* 2002 2001*
------- ------- ------- --------
(Unaudited)
Net sales $65,328 $56,112 $122,195 $109,547
Cost of sales 53,710 43,992 99,772 85,390
------- ------- -------- --------
Gross profit 11,618 12,120 22,423 24,157
Selling & administrative expenses 9,730 7,968 18,275 16,912
Other operating (income) expense - net (6) 26 422 53
------- ------- -------- --------
Total operating income 1,894 4,126 3,726 7,192
------- ------- -------- --------
Non-operating income and (expense)
Interest income 28 165 44 436
Other income 803 363 901 1,726
Interest expense (120) - (421) 16
Equity in net income of joint ventures (1) 35 57 71
Other expenses (91) (102) (206) (209)
------- ------- -------- --------
619 461 375 2,040
------- ------- -------- --------
Income from continuing operations
before income taxes 2,513 4,587 4,101 9,232
Income taxes 830 999 1,387 2,663
------- ------- -------- --------
Income from continuing operations 1,683 3,588 2,714 6,569
Loss from discontinued operations - net of income
tax credit $6,691 and $1,008 for the three months
and $13,289 and $1,257 for the six months ended
June 30,2002 and 2001,
respectively (12,430) (1,694) (24,690) (2,114)
-------- ------- -------- --------
Net (loss) income $(10,747) $ 1,894 $(21,976) $ 4,455
======== ======= ======== ========
Basic earnings per share:
Income from continuing operations $ .13 $ .28 $ .21 $ .52
====== ====== ====== ======
Loss from discontinued operations $ (.96) $ (.13) $(1.90) $ (.17)
====== ====== ====== ======
Net loss $ (.83) $ .15 $(1.69) $ .35
====== ====== ====== ======
Diluted earnings per share:
Income from continuing operations $ .12 $ .27 $ .20 $ .50
====== ====== ====== =====
Loss from discontinued operations $ (.90) $ (.13) $(1.80) $(.16)
====== ====== ====== =====
Net (loss) income $ (.78) $ .14 $(1.60) $ .34
====== ====== ====== =====
See accompanying notes
* Reclassified to conform to 2002 presentation
2
UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
SIX MONTHS ENDED JUNE 30
2002 2001 *
-------- --------
OPERATING ACTIVITIES (Unaudited)
- --------------------
Net (loss) income $(21,976) $ 4,455
Adjustments to reconcile net (loss) income
to net cash (used for) provided by
operating activities:
Loss from discontinued operations,
net of income taxes 24,690 2,114
Depreciation and amortization 6,020 3,093
Deferred income taxes (422) 54
Decrease in provision for contract losses (477) (26)
Changes in operating assets and liabilities (383) 13,050
Decrease (increase) in other assets - net 896 (4,075)
Decrease in long-term liabilities (164) (1,006)
(Decrease)increase in federal income
taxes payable (7,639) 2,014
Equity in income of investee company (57) (26)
Restructuring charge 421 -
------- -------
NET CASH PROVIDED BY CONTINUING OPERATIONS 909 19,647
NET CASH USED FOR DISCONTINUED OPERATIONS (5,824) (21,459)
------- -------
NET CASH USED FOR OPERATING ACTIVITIES (4,915) (1,812)
INVESTING ACTIVITIES
Purchase of property and equipment (518) (1,302)
Capital expenditures for discontinued operations (67) (1,790)
Advances to investee of discontinued operations (1,655) (1,502)
Repayment of advances by investee of discontinued
operations 1,686 2,008
Repayment of advances by investee 255 2,301
Advances to investee (194) -
------- -------
NET CASH USED FOR INVESTING ACTIVITIES (493) (285)
FINANCING ACTIVITIES
Restricted cash for letter of credit - (224)
Proceeds from exercise of stock options 1,741 2,274
Dividends (1,298) (2,505)
Proceeds from borrowings 2,100 -
------- -------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES 2,543 (455)
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (2,865) (2,552)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,496 11,385
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,631 $ 8,833
======= =======
See accompanying notes
* Reclassified to conform to 2002 presentation
3
UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
June 30, 2002
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six month period ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 2001.
NOTE B - SEGMENT INFORMATION - CONTINUING OPERATIONS
Reconci-
(dollars in thousands) Defense Energy Other liations Totals
------- ------ ----- -------- ------
Three months ended June 30, 2002
Revenues from external customers $57,788 $ 7,540 $ - $ - $65,328
Equity profit in ventures (1) - - - (1)
Segment profit (loss) 2,777 87 (351) - 2,513
Income before income taxes $ 2,513
=======
Six months ended June 30, 2002
Revenues from external customers $107,029 $ 15,166 $ - $ - $122,195
Equity profit in ventures 57 - - - 57
Segment profit (loss) 6,407 (1,793) (513) - 4,101
Income before income taxes $ 4,101
========
Three months ended June 30, 2001
Revenues from external customers $47,116 $ 8,996 $ - $ - $ 56,112
Equity profit in ventures 35 - - - 35
Segment profit (loss) 3,520 1,114 (47) - 4,587
Income before income taxes $ 4,587
========
Six months ended June 30, 2001
Revenues from external customers $94,394 $15,153 $ - $ - $109,547
Equity profit in ventures 71 - - - 71
Segment profit 7,203 1,417 612 - 9,232
Income before income taxes $ 9,232
========
4
NOTE C - DIVIDENDS
A dividend of 10(cent) per share is payable on August 26, 2002.
NOTE D - WEIGHTED AVERAGE SHARES
Three Months Ended Six Months Ended
June 30 June 30
------------------------ -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Weighted average shares 13,025,018 12,691,618 12,998,060 12,566,995
Dilutive effect of stock options 805,011 637,680 727,550 568,292
---------- ---------- ---------- ----------
Diluted weighted average shares 13,830,029 13,329,298 13,725,610 13,135,287
========== ========== ========== ==========
NOTE E - OTHER OPERATING EXPENSES, OTHER INCOME, NET, OTHER EXPENSES
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
2002 2001 2002 2001
------- ------- ------- -------
(Dollars in Thousands)
OTHER OPERATING EXPENSES, NET
Reduction of deferred
compensation liability $ (114) $ (53) $ (114) $ (106)
Amortization of intangibles 56 79 115 159
Expenses related to closing
Of subsidiary 52 - 421 -
------- ------- ------ ------
Total other operating expenses, net $ (6) $ 26 $ 422 $ 53
======= ======= ====== ======
OTHER INCOME
Pension income $ 743 $ 444 $ 842 $ 888
Settlement of lawsuits - 842
Other 60 (81) 59 (4)
------- ------- ------ ------
Total other income $ 803 $ 363 $ 901 $1,726
======= ======= ====== ======
OTHER EXPENSES
Miscellaneous items, none of
which are material 91 102 206 209
------- ------- ------ ------
Total other expenses $ 91 $ 102 $ 206 $ 209
======= ======= ====== ======
NOTE F - RECENT 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
5
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. The Company adopted FAS 144 during the fourth quarter of
2001 and accordingly, the assets, liabilities and results of operations of the
Transportation segment have been reclassified to discontinued operations in the
accompanying consolidated condensed financial statements.
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 will no longer be 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 No. 142 did not affect the Company's results of operations or
financial position.
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 Statement is not expected to have a material impact
on the Company's financial statements.
NOTE G - DISCONTINUED OPERATIONS
Assets and liabilities of the discontinued operations reclassified as current
were as follows:
Dollars in thousands June 30 December 31
2002 2001
---- ----
Assets
Current Assets
Trade receivables $ 27,487 $ 20,895
Inventories 79,820 73,236
Prepaid expenses and other current assets 295 51
Deferred taxes 6,460 6,460
-------- --------
Total Current Assets 114,062 100,642
Non Current Assets
Deferred taxes 4,037 1,037
Receivable from investee 1,174 1,205
Property and equipment 5,200 5,800
-------- --------
Total Assets $124,473 $108,684
======== ========
6
Liabilities
Current Liabilities
Accounts payable $ 12,468 $ 7,118
Accrued employee compensation and taxes 1,645 1,393
Customer advances 31,867 35,983
Reserve for contract losses 15,562 12,861
Investment and equity losses in investee 10,701 1,828
Reserve for loss on sale of contracts 21,500 -
Other 231 172
-------- --------
Total Liabilities $ 93,974 $ 59,355
======== ========
Summary results of the transportation segment which have been classified
separately, were as follows:
Three Months Ended Six Months Ended
June 30 June 30
------------------ -------------------
2002 2001 2002 2001
------- ------- ------- -------
Revenue $ 10,688 $13,822 $23,073 $17,338
======== ======= ======== =======
Loss before income taxes $(19,121) $(2,702) $(37,979) $(3,371)
Credit for income taxes (6,691) (1,008) (13,289) (1,257)
-------- ------- -------- -------
Net Loss from discontinued
operations $(12,430) $(1,694) $(24,690) $(2,114)
======== ======= ======== =======
Six Months Ended
June 30
2002 2001
------- -------
Net Cash (Used for) Provided by
Discontinued Operations
Net Loss $(24,690) $ (2,114)
Changes in operating assets and liabilities (11,690) (14,701)
Increase (decrease) in provision
for impairment and contract losses 2,701 (5,030)
Provision for loss on sale of contracts 21,500 -
Other 6,355 386
-------- --------
Net Cash Used for Discontinued Operations $ (5,824) $(21,459)
======== ========
7
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Information
This report contains "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward looking
statements are based on management's expectations, estimates, projections and
assumptions. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "estimates," and variations of such words and similar expressions
are intended to identify such forward looking statements which include, but are
not limited to, projections of revenues, earnings, segment performance, cash
flows and contract awards. These forward looking statements are subject to risks
and uncertainties which could cause the Company's actual results or performance
to differ materially from those expressed or implied in such statements. These
risks and uncertainties include, but are not limited to, the following: the
Company's successful execution of internal performance plans; performance issues
with key suppliers, subcontractors and business partners; legal proceedings;
outcome of current and future litigation; 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 statement.
Results of Operations
The following information primarily relates to the continuing operations of
United Industrial Corporation and consolidated subsidiaries. The Transportation
segment is reflected as a discontinued operation in the Company's consolidated
condensed financial statements as of and for the three month and six month
periods ended June 30, 2002. In addition all prior periods have been restated to
conform to the June 30, 2002 discontinued operations presentation.
Three and six months ended June 30, 2002 compared to three and six months ended
June 30, 2001.
Consolidated net sales from continuing operations increased by $9,216,000 or
16.4% to $65,328,000 in the second quarter of 2002 from $56,112,000 during the
same period in 2001. The Defense segment increased sales by $10,672,000 or 22.7%
to $57,788,000 in the second quarter of 2002 from $47,116,000 during the same
period in 2001. The increase was generally in all product
categories. The Energy segment sales decreased $1,456,000 or 16.2% to $7,540,000
during the first quarter of 2002 from $8,996,000 during the same period in 2001.
Consolidated net sales from continuing operations increased by $12,648,000 or
11.6% to $122,195,000 in the first six months of 2002 from $109,547,000 during
the same period in 2001. The Defense segment increased sales by $12,635,000 or
13.4% to $107,029,000 in the first six months of 2002 from $94,394,000 during
the same period in 2001. The increase was generally in all product categories.
The Energy segment sales increased $13,000 to $15,166,000 in the first six
months of 2002 from $15,153,000 during the same period in 2001.
Gross margin percentage for continuing operations decreased to 17.8% in the
second quarter of 2002 from 21.6% during the same period in 2001. The Defense
segment gross margin percentage was 17.2% in the second quarter of 2002 and
19.7% in the second quarter of 2001. The decrease was attributable to lower
8
pension plan performance and the costs associated with the negotiated settlement
to conclude a particular government program. Pension expense included in cost of
sales in the Defense segment for the second quarter of 2002 of $1,325,000
compared to pension income of $350,000 included in the cost of sales in the
second quarter of 2001. Eliminating the pension plan performance from both
periods, the gross margin percentage would be an increase of .6% in 2002. The
increase in pension expense was due primarily to the downward trend in the
securities markets. The costs associated with the negotiated settlement to
conclude a particular government program reduced the gross margin by
approximately $1,000,000. The Energy segment cost of sales for second quarter of
2002 included a charge of $1,120,000 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 charge, the gross margin in the Energy segment
during the second quarter of 2002 was 36.8% or 5.1% greater than the second
quarter in 2001. This increase was generally due to product mix and the lower
cost of castings resulting from the restructuring. (See "Restructuring Charge,"
below.)
Gross margin percentage for continuing operations decreased to 18.4% in the
first six months of 2002 from 22.1% during the same period in 2001. The Defense
segment gross margin percentage was 19.1% in the first six months of 2002 and
20.5% during the same period in 2001. The decrease was attributable to lower
pension plan performance and the costs associated with the negotiated settlement
to conclude a particular government program. The pension expense included in
cost of sales in the Defense segment for the first six months of 2002 was
$1,200,000 compared to pension income of $700,000 included in the cost of sales
in the same period of 2001. Eliminating the pension plan performance from both
periods, the gross margin percentage would be an increase of .4% in 2002. The
decrease in pension income was due primarily to the downward trend in the
securities markets. The costs associated with the negotiated settlement to
conclude a particular government program reduced the gross margin by
approximately $1,000,000.
The Energy segment cost of sales for the first six months of 2002 included 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 charge, the gross margin in the Energy segment during the first six months
of 2002 was 36.0% or 4.5% greater than the first six months in 2001. This
increase was generally due to product mix and the lower cost of castings
resulting from the restructuring. (See "Restructuring Charge," below.)
Selling and administrative expenses for continuing operations for the second
quarter of 2002 increased $1,762,000 or 22.1% to $9,730,000 from $7,968,000 in
the second quarter of 2001. The increase was in all segments. Selling and
administrative expenses in the Defense segment increased $1,398,000 or 24.3% to
$7,163,000 in the second quarter of 2002 from $5,765,000 in the second quarter
of 2001 primarily due to the allocation formula of corporate expenses which
resulted in an increase in the Defense segment and a decrease in the
discontinued Transportation operations due to a reduced allocation base. Selling
and administrative expenses in the Energy segment increased $71,000 to
$2,278,000 in the second quarter of 2002 from $2,207,000 in the second quarter
of 2001. Selling and administrative expenses in the Other segment increased
$294,000 due to a general increase in expenses.
Selling and administrative expenses from continuing operations in the first six
months of 2002 increased $1,363,000 or 8.1% to $18,275,000 from $16,912,000 in
the first six months of 2001. The increase was in the Defense and Other
segments. Selling and administrative expenses in the Defense segment increased
$1,087,000 or 8.7% to $13,641,000 in the first six months from $12,554,000 in
the first six months of 2001 primarily due to the allocation formula of
corporate expenses which resulted in an increase in the Defense segment and a
decrease in the discontinued Transportation operations due to a reduced
allocation base. Selling and administrative expenses in the Energy segment
decreased $44,000 to $4,313,000 in the first six months of 2002 from $4,357,000
in the first six months of 2001. Selling and administrative expenses increased
$321,000 in the Other segment due to a general increase in expenses.
9
Other operating expenses of continuing operations in the second quarter of 2002
decreased by $32,000 from the second quarter of 2001.
Other operating expenses of continuing operations in the first six months of
2002 increased by $369,000 from the first six months of 2001 primarily due to
the expenses of $421,000 associated with the Midwest Metallurgical Laboratory
foundry closing.
Other income from continuing operations in the second quarter of 2002 increased
$440,000 from the same period in 2001 primarily due to an increase of pension
income in the Energy segment of $299,000 resulting from a revised estimate of
pension income for the year.
Other income from continuing operations in the first six months of 2002
decreased $825,000 from the same period in 2001 primarily due to the income from
the settlement of lawsuits in the same period in 2001 of $842,000.
Income before income taxes for continuing operations decreased $2,074,000 or
45.2% to $2,513,000 in the second quarter of 2002 from $4,587,000 for the same
period in 2001. The decrease was primarily due to a charge of $1,172,000 for the
accelerated depreciation of assets and expenses related to the closing of the
Energy segment's Midwest Metallurgical Laboratory, Inc. foundry, which ceased
operations effective May 17, 2002. In addition, the second quarter of 2002
included pension plan expense of $582,000 compared to the second quarter pension
plan income of $794,000 in 2001. Further, during 2002 the Company expensed
approximately $1,000,000 associated with the negotiated settlement to conclude a
particular government program.
Income before income taxes for continuing operations decreased $5,131,000 or
55.6% to $4,101,000 in the first six months of 2002 from $9,232,000 for the same
period in 2001. The decrease was primarily due to a charge of $3,841,000 for the
accelerated depreciation of assets and expenses related to the closing of the
Energy segment's Midwest Metallurgical Laboratory, Inc. foundry, which ceased
operations effective May 17, 2002. In addition the first six months of 2001
included pension plan income of $1,588,000 compared to pension plan expense of
$358,000 in the first six months of 2002. Further, during 2002 the Company
expensed approximately $1,000,000 associated with the negotiated settlement to
conclude a particular government program.
The effective income tax rates are below the statutory rates. The six months
ended June 30, 2002 includes losses for subsidiaries with high state and local
rates thus the tax credits reduce the overall rate. The six months ended June
30, 2001 includes a reduction of $1,000,000 of taxes due to the favorable
negotiation of certain tax issues.
Since December 31, 2001, the backlog related to continuing operations increased
$54,744,000 or 26.4%. The Defense segment backlog was $254,600,000 at June 30,
2002 compared to $201,221,000 at December 31, 2001. The Energy segment backlog
was $7,487,000 at June 30, 2002 compared to $6,122,000 at December 31, 2001.
Sales in the discontinued transportation operations decreased $3,134,000 or
22.7% in the second quarter of 2002 to $10,688,000 from $13,822,000 during the
same period in 2001. This was due to a reduction in production on existing
contracts.
Sales in the discontinued transportation operations increased $5,735,000 or
33.1% in the first half of 2002 to $23,073,000 from $17,338,000 during the same
period in 2001. This was due to the planned increase in production on existing
contracts.
The loss, before taxes, during the three months ended June 30, 2002 in the
discontinued transportation operations was $19,121,000. Included in this loss
was a $12,800,000 provision related to the previously announced sale of
10
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 (see
"Subsequent Events"). The provision reflects a negotiated reduction of the
purchase price of approximately $10,500,000 as well as approximately $2,300,000
of higher expenses to close the transaction. Also included in the second quarter
2002 loss was an increase of approximately $1,200,000 in estimated costs to
complete remaining contracts, $800,000 of general and administrative expenses,
and $2,100,000 of other costs related to the disposal of the conveyed contracts.
Further, the Company recorded a provision of approximately $2,200,000 related to
estimated losses by Electric Transit, Inc. (ETI), the Company's joint venture
with Skoda, a Czech Republic firm. This provision represents 100% of the
additional estimated losses ETI will incur primarily in executing its electric
trolley bus programs since it is unlikely that Skoda will have the financial
capability to fund its 65% share of such losses.
The loss, before taxes, during the six months ended June 30, 2002 in the
discontinued transportation operations was $37,979,000. Included in this loss
was a $21,500,000 provision related to the previously announced 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 (see
"Subsequent Events"). Also included in the first six months of 2002 loss was an
increase of approximately $2,400,000 in estimated costs to complete remaining
contracts, $1,600,000 of general and administrative expenses, and $3,600,000 of
other disposition costs related to the conveyed contracts. Further, the Company
recorded a provision of approximately $8,900,000 related estimated losses by
ETI. This provision represents 100% of the additional estimated losses ETI will
incur primarily in executing its electric trolley bus programs since it is
unlikely that Skoda will have the financial capability to fund its 65% share of
such losses.
After the sale of the two overhaul contracts, the Company expects that the
amount of overhead to be absorbed by the remaining contract work 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 $2,500,000 to $3,000,000. In addition, upon cessation of transportation's
production operations in the first quarter of 2003, the Company contemplates a
charge associated with the idle facility, primarily future operating lease
costs, in the range of $2,700,000 to $3,200,000. Subleasing the facility space
may mitigate these costs.
Liquidity and Capital Resources
Cash and cash equivalents decreased $2,865,000 to $2,631,000 at June 30, 2002
from $5,496,000 at December 31, 2001. Net cash used for operating activities of
discontinued operations was $5,824,000 in the first six months of 2002. Net cash
provided by operating activities by the continuing operations was $909,000 in
the six months of 2002. Changes in operating assets and liabilities generated a
negative cash flow of $383,000 primarily caused by an increase in inventory of
$10,908,000, offset by a decrease in receivables of $3,684,000, an increase in
accounts payable of $4,801,000 and other current liabilities of $2,132,000. The
net cash used by operating activities from continuing operations in the second
quarter of 2002 was $19,000.
On July 26, 2002, the Company completed the previously announced sale of its two
transportation overhaul contracts and related assets and liabilities, and
received proceeds of approximately $19,200,000 in cash in respect thereof.
(See "Subsequent Events," below.)
On June 28, 2001, the Company and certain of its subsidiaries entered into a
Loan and Security Agreement (the "Agreement") with Fleet Capital 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
11
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. On June 28, 2002, a Second Amendment and Consent Agreement
was entered into whereby the cash collateral requirement was waived by the
lender through September 30, 2002 (since the sale of the transportation overhaul
contracts was consummated on or before July 31, 2002). This amendment also
increased the sublimit for cash borrowings to $12,000,000 until the earlier of
July 31, 2002 and the sale of the transportation overhaul contracts, which
occurred on July 26, 2002. At June 30, 2002 there were cash borrowings of
$1,100,000 under the Agreement. The letter of credit obligations outstanding at
June 30, 2002 were $20,423,000.
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
renewed the previous agreement until April 18, 2003. At June 30, 2002, the
subsidiary had $1,000,000 of cash borrowings and $102,000 of letters of credit
outstanding. The Company currently has no significant fixed commitment for
capital expenditures. The Company expects that available cash, existing lines of
credit and the proceeds from the sale of the transportation contracts will be
sufficient to meet its cash requirements for the next twelve months.
Restructuring Charge
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., effective May 17, 2002.
Detroit Stoker will purchase its castings from lower cost sources. It is
anticipated that this action will significantly improve operating margins.
The Company estimates that during 2002 Detroit Stoker will incur severance and
other cash charges totaling approximately $1,000,000. In addition, the Company
has accelerated depreciation of its foundry facility during the foundry's
operating period in 2002. Depreciation of this facility was $2,300,000 during
the first quarter of 2002 and $1,120,000 during the second quarter. Other
related closing expenses in the first quarter were $368,700 and $52,000 in the
second quarter.
Contingent Matters
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 June 30, 2002. The Company has assumed
joint and several liability on progress payment bonds relating to ETI, totaling
approximately $47,000,000 as of June 30, 2002. These bonds are expected to be
eliminated when the customer accepts certain deliveries during 2002. Further,
the Company is obligated to indemnify certain sureties under various performance
bonds in the event of non- performance on the ETI contracts up to approximately
$33,000,000. The Company expects to perform under each of these contracts. The
sale of the two transportation overhaul contracts, which occurred on July 26,
2002, involved the release of the Company on the approximately $156,000,000 of
performance bonds related to those divested programs. (See "Subsequent Events,"
below.)
The Company is involved in various lawsuits and claims, certain of which relate
to asbestos and other environmental matters. Management believes that the
ultimate amount of liability, if any, under the pending litigation will not have
12
a materially adverse effect on the Company's financial position, results of
operations or cash flows. There have been no material changes in this litigation
from December 31, 2001. (See Item 3 - Form 10-K for December 31, 2001.)
Subsequent Events
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
$19,200,000 in cash, subject to post-closing adjustment for the net cash used on
the two contracts between July 21, 2002 and July 26, 2002. The purchase price
reflected a $10,500,000 negotiated reduction from the purchase price agreed to
in the sale agreement originally executed on March 27, 2002. 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.
ITEM 3 - 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 foreign exchange
contracts. There has been no material change in the firmly committed sales
exposures and related derivative contracts from December 31, 2001. (See Item 7A
- - Form 10-K for December 31, 2001.)
13
UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES
PART II - Other Information
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Second Amendment and Consent Agreement dated as of June 28,
2002 among the Company and certain of its subsidiaries, as
Borrowers, and Fleet Capital Corporation, as Lender.
99.1 Certification of the Chief Executive Officer of the
Company pursuant to 18 U.S.C.ss.1350, as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer of the
Company pursuant to 18 U.S.C.ss.1350, as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the
quarter ended June 30, 2002.
14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNITED INDUSTRIAL CORPORATION
Date August 12, 2002 By: /s/ James H. Perry
--------------- ------------------------------
James H. Perry
Chief Financial Officer,
Vice President and
Treasurer
15
UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES
INDEX OF EXHIBITS FILED HEREWITH
Exhibit No.
-----------
10.1 Second Amendment and Consent Agreement dated as of June 28,
2002 among the Company and certain of its subsidiaries, as
Borrowers, and Fleet Capital Corporation, as Lender.
99.1 Certification of the Chief Executive Officer of the
Company pursuant to 18 U.S.C.ss.1350, as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer of the
Company pursuant to 18 U.S.C.ss.1350, as adopted by
Section 906 of the Sarbanes-Oxley Act of 2002.
16