SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
----------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number #1-4252
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UNITED INDUSTRIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-2081809
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Identification No.)
incorporation or Organization)
570 Lexington Avenue, New York, NY 10022
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Not Applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 12,286,063 shares of common
stock as of November 1, 1998.
<PAGE>
UNITED INDUSTRIAL CORPORATION
INDEX
Page #
Part I - Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets - Unaudited
September 30, 1998 and December 31, 1997 1
Consolidated Condensed Statements of Operations -
Three Months and Nine Months Ended
September 30, 1998 and 1997 2
Consolidated Condensed Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 3
Notes to Consolidated Condensed Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 4
PART II - Other Information 10
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
1998 1997
---- ----
ASSETS (Unaudited)
- ------
<S> <C> <C>
Current Assets
Cash & cash equivalents $ 31,246 $ 23,098
Marketable securities 5,471 6,102
Trade receivables 33,063 27,819
Inventories
Finished goods & work-in-process 22,759 28,551
Materials & supplies 3,664 3,239
-------- --------
26,423 31,790
Assets held for sale - 12,516
Deferred income taxes 4,942 4,982
Prepaid expenses & other current assets 16,211 11,282
-------- --------
Total Current Assets 117,356 117,589
Other assets 40,848 40,126
Property & equipment - less allowances
for depreciation (1998-$81,671; 1997-$77,307) 28,967 25,576
-------- --------
$187,171 $183,291
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities
Accounts payable $ 6,947 $ 7,604
Accrued employee compensation & taxes 8,384 7,777
Customer advances 5,332 3,542
Federal income taxes (484) 630
Current portion of long-term debt - 1,250
Other liabilities 19,750 13,134
Provision for contract losses 5,023 5,776
-------- --------
Total Current Liabilities 44,952 39,713
Long-term liabilities (less current maturities) 4,175 9,508
Deferred income taxes 9,620 9,690
Postretirement benefits other than pensions 22,806 22,356
Shareholders' Equity
Common stock $1.00 par value
Authorized - 30,000,000 shares; outstanding
12,347,863 shares and 12,249,309 shares -
1998 and 1997 (net of shares in treasury) 14,374 14,374
Additional capital 89,589 89,929
Retained earnings 17,449 14,165
Treasury stock, at cost, 2,026,285 shares at
1998 and 2,124,839 shares at 1997 (15,794) (16,444)
-------- --------
105,618 102,024
-------- --------
$187,171 $183,291
======== ========
</TABLE>
See accompanying notes
1
<PAGE>
UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------
(Unaudited)
1998 1997* 1998 1997*
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 49,979 $ 52,089 $147,146 $166,182
Operating costs & expenses
Cost of sales 38,345 38,646 109,931 125,768
Selling & administrative 8,623 9,753 28,227 31,113
Other expense 1,269 356 956 368
Interest expense - 238 119 829
Interest income (1,369) (341) (2,814) (819)
Gain on sale of assets (575) (13,323) (575) (13,323)
-------- -------- -------- --------
46,293 35,329 135,844 143,936
-------- -------- -------- --------
Income before income taxes 3,686 16,760 11,302 22,246
Income taxes 1,325 10,082 4,320 12,135
-------- -------- -------- --------
Net income $ 2,361 $ 6,678 $ 6,982 $ 10,111
======== ======== ======== ========
Net earnings per share
Basic $ .19 $ .55 $ .57 $ .83
===== ===== ===== -----
Diluted $ .19 $ .54 $ .55 $ .82
===== ===== ===== =====
</TABLE>
See accompanying notes
*Reclassified to conform with 1998 classifications
2
<PAGE>
UNITED INDUSTRIAL CORPORATION & SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
(Unaudited)
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,982 $ 10,111
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 6,411 7,293
(Decrease) increase in federal income tax (1,114) 3,151
Deferred income taxes (30) (134)
Gain on sale of assets (575) (13,323)
Decrease in contract loss provision (753) (4,284)
Changes in operating assets and liabilities (2,215) 15,075
-------- --------
Net Cash Provided by
Operating Activities 8,706 17,889
INVESTING ACTIVITIES
Proceeds from sale of assets 19,617 696
Purchase of property and equipment - net (8,788) (3,964)
Increase in other assets - net (1,868) (3,976)
-------- --------
Net Cash Used In Investing Activities 8,961 (7,244)
FINANCING ACTIVITIES
(Decrease) increase in long-term liabilities (404) 2,375
Proceeds from borrowings - 6,250
Payments on long-term debt & borrowings (5,729) (13,958)
Dividends (3,698) (2,557)
Proceeds from exercise of stock options 798 406
Purchase of treasury stock (486) -
-------- --------
Net Cash Used in Financing Activities (9,519) (7,484)
-------- --------
Increase in cash and cash equivalents 8,148 3,161
Cash and cash equivalents at beginning
of period 23,098 13,427
-------- --------
Cash and cash equivalents at end
of period $ 31,246 $ 16,588
======== ========
</TABLE>
See accompanying notes
3
<PAGE>
UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
September 30, 1998
Note A - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended September 30,
1998 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998. 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, 1997.
Note B - Dividends
A quarterly dividend of $.10 per share is payable November 30, 1998.
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward Looking Information
Except for the historical information contained herein, information set forth in
this quarterly report may contain forward looking statements 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. Such
forward looking statements, including, but not limited to, projections of
revenues, earnings, segment performance, cash flows and contract awards, are
based on management's expectations, estimates, projections and assumptions. For
additional information about the Company and its various risk factors, reference
is made to the Company's most recent Annual Report on Form 10-K as filed with
the Securities and Exchange Commission.
4
<PAGE>
Results of Operations
Consolidated net sales during the third quarter of 1998 decreased $2,110,000 or
4% to $49,979,000 from $52,089,000 in the third quarter of 1997. However, the
Company's Weather Systems and Plastics businesses (together the "Disposed
Businesses") which were sold in the third quarter of 1997 accounted for sales of
$8,454,000 during the 1997 third quarter. Excluding the 1997 sales related to
the Disposed Businesses, net sales increased $6,344,000 or 15%. The Defense
segment (excluding $7,170,000 of third quarter 1997 sales from the Disposed
Weather business) accounted for an increase of $7,543,000 which was partially
offset by a $1,199,000 decrease in sales in the Company's Energy segment. The
increase in the Defense segment was attributable to a general increase in
volume. In the Energy segment, a reduction in renewal parts orders primarily
caused that decrease.
For the nine months ended September 30, 1998 net sales totaled $147,146,000
which was $19,036,000 or 11% less than the $166,182,000 recorded during the like
period in 1997. However, the Disposed Businesses accounted for $29,838,000 in
net sales during the first nine months of 1997. Excluding the 1997 sales related
to the Disposed Businesses, net sales increased $10,802,000 or 8%. The Defense
segment (excluding $25,233,000 of first nine months of 1997 sales from the
Disposed Weather business) accounted for an increase of $12,628,000 which was
offset by a $1,826,000 decrease in sales in the Company's Energy segment. The
increase in the Defense segment was attributable to a general increase in
volume, but was partially offset by the timing of work effort on certain
contracts during the first quarter of 1998. During that period, the commencement
of work on new contracts did not coincide with the completion of other programs.
In the Energy segment, a reduction in renewal parts orders primarily caused that
decrease.
The backlog at September 30, 1998 was $198,000,000, a decrease of $10,000,000 or
5% from the September 30, 1997 backlog of $208,000,000. The major reduction was
due to the substantial completion of a large stoker contract by the Energy
segment.
The gross margin percentage for the three months ended September 30, 1998
decreased by 2.5% to 23.3% from 25.8% for the same period in 1997. Excluding the
Disposed Businesses, the gross margin would have decreased 3.4%. The Energy
segment experienced a 1.8% decline in gross margin percent due to reduced
volume. The remaining decrease was due to increased costs on certain contracts
in the Defense segment which includes the transportation business.
The gross margin percentage during the first nine months of 1998 increased 1.0%
to 25.3% from 24.3% during the first nine months of 1997. Excluding the Disposed
Businesses, the 1997 gross margin percentage would have been the same as the
corresponding period in 1998. The Energy segment experienced a decline in gross
margin percentage of 0.8% to 36.3% due to reduced volume.
5
<PAGE>
Selling and administrative expenses for the three months ended September 30,
1998 decreased $1,130,000 or 12% to $8,623,000 from $9,753,000 during the same
period in 1997. The Disposed Businesses accounted for $778,000 of the 1997
expenses. Excluding the Disposed Businesses, the decrease was primarily in the
Defense segment.
During the first nine months of 1998 selling and administrative expenses
decreased $2,886,000 or 9% to $28,227,000 from $31,113,000 during the like
period in 1997. The Disposed Businesses accounted for $3,194,000 of the 1997
expenses. The increase of $308,000 is generally attributable to an overall
increase in expenses.
Other expense was $956,000 in the first nine months of 1998 and $368,000 in the
same period in 1997. The increase of $588,000 was primarily due to an increase
in losses in a joint venture, expenses for the contingent payout on an
acquisition and partially offset by the recognition of profits on assets
previously sold.
For the first nine months of 1998 compared to the same period in 1997, interest
expense decreased by $710,000 due to reduced borrowings, partially offset by
interest payments on prior years' taxes. Interest income increased by $1,995,000
due to increased investments.
Net income decreased by 64.7% to $2,361,000 or $.19 per diluted share, in the
third quarter of 1998, compared to net income of $6,678,000, or $.54 per diluted
share, in the same period of 1997. The decrease was primarily attributable to
the gain on sale of assets of $8,549,000 in 1997 partially offset by a tax
provision for prior years' taxes of $4,000,000. Net income in the third quarter
of 1998 includes a $2,400,000, net of taxes, loss in the transportation
business.
Net income decreased by 30.9% to $6,982,000 or $.55 per diluted share, in the
nine month period ended September 30, 1998, compared to net income of
$10,111,000, or $.82 per diluted share, in the same period in 1997. The decrease
was primarily attributable to the gain on sale of assets in 1997, of $8,549,000
and net income from operations of the Disposed Businesses of $1,624,000,
partially offset by a tax provision for prior years taxes of $4,000,000. A
$2,800,000 loss, net of taxes, in the transportation business was charged
against the nine month 1998 results. To improve profits in this business the
Company hired an experienced transportation veteran and is targeting specific
segments of the transportation industry for growth potential, particularly the
vehicle overhaul business. The management team has been realigned and other
changes are being implemented to maximize productivity and lower costs.
6
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents increased by $8,148,000. The increase in cash during
the nine months ended September 30, 1998 of $8,148,000 was primarily due to the
receipt of proceeds from the sale of assets of $19,617,000, offset by the
payment of debt of $5,729,000, dividends of $3,698,000 and changes in operating
assets and liabilities of $2,215,000. The Company currently has no significant
fixed commitment for capital expenditures or for investments. The Company
expects that available cash and existing lines of credit will be sufficient to
meet its cash requirements for the remainder of the calendar year. Its cash
requirements consist primarily of its obligations to fund obligations.
Year 2000
The Year 2000 issue exists because many currently installed computer systems and
software programs were designed to use only a two-digit date field. These date
fields will need to accept four digits to distinguish 21st century dates from
20th century dates. Until the date fields are revised, the systems and programs
could fail or give erroneous results when referencing dates subsequent to
December 31, 1999. Such failures or errors could occur prior to the actual
change in century.
The Company is currently implementing a six phase plan to address this problem:
Awareness, Assessment, Remediation, Validation/Test, Implementation, and
Contingency Planning. The Awareness phase is a communication phase to inform
employees, suppliers and customers of the Year 2000 issue. The Assessment phase
is an inventory and analysis of those systems which may have a problem. The
Remediation phase is the correction phase for the problem. The Validation/Test
Phase is used to verify that corrections have been made properly and completely.
The Implementation phase is to actually put the changed systems into production
use. The Contingency Phase is the development of a plan to detail our reactions
to possible future scenarios concerning the Year 2000 issue.
These plans are being implemented on both the Information Technology (IT) areas
and the non-IT areas for the transition to the 21st century. IT areas include
all computer system hardware and software. Non-IT areas include systems that
have embedded computer chips or microprocessors.
The Awareness and Assessment phases are complete for the IT and non-IT systems.
The IT systems are estimated to be 80% complete in the Remediation phase and are
expected to be completed through the Implementation Phase by March 1999. Non-IT
systems are estimated to be 85% complete in the Remediation phase and are
expected to be completed through the Implementation phase by March 1999.
Many of our products do not require computer systems or do not perform any
7
<PAGE>
date processing. These products are currently compliant. Other products have
been remediated and are currently compliant. Still other products cannot be
remediated because they are based on obsolete computer systems. The company is
working on a case by case basis with our customers to alleviate Year 2000 issues
with these products. Although the Company's products continue to undergo normal
quality testing procedures, there can be no assurance that these products will
contain all necessary date code changes. Any system malfunctions due to the
onset of the Year 2000 and any disputes with customers relating to Year 2000
compliance could have a material adverse effect on the Company's business,
financial condition or results of operations.
The Company has contacted its IT suppliers asking for Year 2000 compliance
statements and status. Each vendor has responded with information necessary to
ensure their products compliance. The Company is in the process of completing
the steps necessary to make these hardware and software systems compliant by
March 1999.
Significant non-IT suppliers to the Company will be contacted to determine their
compliance during the fourth quarter 1998. This is necessary to ensure that our
products are not delayed due to lack of parts or services. Also, embedded chips
in process control equipment, lighting controls, and security systems are being
inspected to assure that they will operate properly in the Year 2000.
While the Company has not fully identified all the impacts of the Year 2000
issue or whether all related problems can be resolved without disrupting its
business and incurring significant expense, the Company's current estimate is
that the costs associated with the Year 2000 issue, and the consequences of
incomplete or untimely resolution of the Year 2000 issue, will not have a
material adverse effect on the Company's business, operating results or
financial condition. The current estimate of the costs of remediating Year 2000
issues is $700,000. These costs are being budgeted through the normal operating
budgets of the Company and should not have a major impact on other IT project or
systems.
The Company is currently in the process of identifying potential consequences to
the Company if its IT and non-IT systems do not function properly on account of
the Year 2000 issue (i.e., most reasonably likely worst case scenarios).
Management expects to complete this process by early 1999. If the Company
determines that such consequences could have a material adverse effect on the
business, operating results or financial condition, it intends to establish a
contingency plan to address the most reasonably likely worst case scenarios.
However, in cases beyond the control of the Company there could be some adverse
effects. This would be particularly true if major infrastructure systems such as
electric distribution grids or major telephone switching centers are disrupted
by the Year 2000 issue. Every reasonable effort will be made to minimize these
effects.
8
<PAGE>
The costs of the Company's 2000 project and dates on which the Company believes
it will complete such efforts are based on management's current best estimates,
which were derived using numerous assumptions regarding future events. There can
be no assurances that these estimates will prove to be accurate, and therefore
actual results could differ materially from those anticipated. Specific factors
that could cause material differences with actual results include, but are not
limited to the results of testing and the timeliness and effectiveness of
remediation efforts of third parties.
Contingent Matters
Reference is made to Item 3. Legal Proceedings, in the Annual Report on Form
10-K for the year ended December 31, 1997, which is incorporated herein by
reference.
9
<PAGE>
PART II - OTHER INFORMATION
UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
11 - Computation of Earnings per share
27 - Financial Data Schedule
(b) The Registrant did not file any reports on Form 8-K
during the quarter ended September 30, 1998.
10
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UNITED INDUSTRIAL CORPORATION
Date: November 16, 1998 By: /s/ James H. Perry
---------------------------
James H. Perry
Chief Financial Officer
Vice President and
Treasurer
11
<PAGE>
UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES
INDEX OF EXHIBITS FILED HEREWITH
Exhibit No. Page
- ----------- ----
11 Computation of Earnings Per Share 13
27 Financial Data Schedule 14
12
EXHIBIT 11 - Computation of Earnings Per Share
Item 6(a)
Exhibit 11
Computation of Earnings per Share
United Industrial Corporation and Subsidiaries
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $2,361,000 $6,678,000 $6,982,000 $10,111,000
========== ========== ========== ===========
Basic earnings per share:
Weighted average shares 12,369,381 12,181,843 12,316,425 12,177,743
========== ========== ========== ==========
Effect of dilutive securities:
Employee and non-employee
director stock options 295,832 263,271 326,404 263,271
======= ======= ======= =======
Diluted earnings per share:
Adjusted weighted-average
and assumed conversions 12,665,213 12,445,114 12,642,829 12,366,374
========== ========== ========== ==========
Basic earnings per share $ .19 $ .55 $ .57 $ .83
====== ====== ====== ======
Diluted earnings per share $ .19 $ .54 $ .55 $ .82
====== ====== ====== ======
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS INCLUDED IN THE ACCOMPANYING FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 31,246
<SECURITIES> 5,471
<RECEIVABLES> 33,063
<ALLOWANCES> 0
<INVENTORY> 26,423
<CURRENT-ASSETS> 117,356
<PP&E> 110,638
<DEPRECIATION> 81,671
<TOTAL-ASSETS> 187,171
<CURRENT-LIABILITIES> 44,952
<BONDS> 4,175
0
0
<COMMON> 14,374
<OTHER-SE> 91,244
<TOTAL-LIABILITY-AND-EQUITY> 187,171
<SALES> 147,146
<TOTAL-REVENUES> 150,535
<CGS> 109,931
<TOTAL-COSTS> 138,158
<OTHER-EXPENSES> 956
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 119
<INCOME-PRETAX> 11,302
<INCOME-TAX> 4,320
<INCOME-CONTINUING> 6,982
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,982
<EPS-PRIMARY> .57
<EPS-DILUTED> .55
</TABLE>
