UNITED INDUSTRIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts or unless otherwise noted)
Note ABasis of Presentation and Nature of Operations
United Industrial Corporation ("United Industrial") designs, produces and supports aerospace and defense systems through its wholly owned subsidiary, AAI
Corporation, and AAI Corporation's direct and indirect wholly owned subsidiaries, AAI Services Corporation, Aerosonde Pty Ltd, Aerosonde North America Incorporated (together with Aerosonde
Pty Ltd, "Aerosonde"), ESL Defence Limited ("ESL"), McTurbine Inc. ("McTurbine") and Symtx, Inc. ("Symtx") (collectively with AAI Corporation, "AAI"). The company's
high-technology products and services include unmanned aircraft systems, training and simulation systems, automated aerospace test and maintenance equipment, armament systems, aviation
ground support equipment, logistical and engineering services, and maintenance, repair and overhaul activities.
The
company's transportation operation and former energy operation are accounted for as discontinued operations. United Industrial divested its energy segment (operated through Detroit
Stoker Company) on December 29, 2006 as part of its ongoing strategy to focus the company on its core aerospace and defense business. The historical results of operations of the discontinued
energy operation have been reported in the accompanying consolidated statements of operations and cash flows for the three and nine months ended September 30, 2006. (See Notes K and L for
additional information.)
The
accompanying Consolidated Condensed Financial Statements of the company have been prepared in accordance with accounting principles generally accepted in the United States of America
("GAAP") 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 notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary
for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2007 are not necessarily indicative of the results that may be expected
for the year
ending December 31, 2007. These unaudited Consolidated Condensed Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included
in the company's Annual Report on Form 10-K for the year ended December 31, 2006.
On
November 28, 2006, AAI Corporation acquired Symtx. On November 14, 2006, AAI Services Corporation acquired McTurbine. On June 19, 2006, AAI Corporation acquired
Aerosonde. The operating results of these entities have been included in the consolidated financial statements of the company since their respective acquisition dates.
The
company had two reportable segments, Defense and Energy, prior to the divestiture of Detroit Stoker Company on December 29, 2006. The company's President and Chief Executive
Officer, the chief operating decision maker, views the company's aerospace and defense business as a single business segment that addresses a single customer base through the same distribution system.
The President and Chief Executive Officer evaluates both consolidated and disaggregated financial information, primarily product line orders, revenues and the operating performance of individual
long-term contracts across all product lines, in deciding how to allocate resources and assess performance. The company's product lines have similar long-term economic
characteristics and are similar in relation to the nature of their products and customers. These product lines generally share a single production and distribution process. In addition, the budgeting
process is primarily based on the entire company, except for orders and revenue that are budgeted separately for each product line.
7
Accordingly,
as of December 31, 2006, the company operates as a single integrated business and has one reportable operating segment.
The
financial results reported for the three and nine months ended September 30, 2007 include an adjustment for immaterial accounting errors solely related to the conversion to
(and implementation of) AAI's Enterprise Resource Planning (ERP) system, which went live on January 1, 2006. The duplication of certain procurement transactions, commencing in the fourth
quarter of 2005, resulted in immaterial increased earnings in previously reported periods totaling $251 of net income and related interest expense of $188. This cumulative correction resulted in a
$438 reduction ($696 pre tax) in net income for the three months ending September 30, 2007.
Management
evaluated the impact of such revised accounting for all quarterly and annual periods since inception of the new ERP system. Based upon this analysis, management concluded that
the impact was immaterial to our reported results and financial trends for all periods. The Company recorded the $438 reduction in net income in the three month period ending September 30, 2007
to correct the cumulative impact of these immaterial accounting errors. In light of these immaterial errors, management has re-evaluated the internal control systems surrounding its
current ERP system and believes that the design of those controls is appropriate in the circumstances, and that such controls are currently operating effectively.
The
following table summarizes the company's sales by product line for the three and nine months ended September 30, 2007 and 2006:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Unmanned Systems
|
|
$
|
97,734
|
|
$
|
82,899
|
|
$
|
301,723
|
|
$
|
266,502
|
Services and Logistics
|
|
|
44,084
|
|
|
28,669
|
|
|
126,231
|
|
|
74,052
|
Test Systems
|
|
|
17,300
|
|
|
9,919
|
|
|
59,030
|
|
|
29,040
|
Training Systems
|
|
|
2,862
|
|
|
3,857
|
|
|
6,527
|
|
|
11,569
|
Advanced Programs
|
|
|
4,295
|
|
|
5,503
|
|
|
12,939
|
|
|
14,656
|
Other
|
|
|
593
|
|
|
503
|
|
|
4,434
|
|
|
1,632
|
|
|
|
|
|
|
|
|
|
|
|
$
|
166,868
|
|
$
|
131,350
|
|
$
|
510,884
|
|
$
|
397,451
|
|
|
|
|
|
|
|
|
|
The
preparation of financial statements in conformity with GAAP 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 the financial statements, as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ
from these estimates and those differences could be material. Certain prior year amounts have been reclassified to conform to the current year presentation.
Agreement to be Acquired by Textron Inc.
On October 7, 2007, Textron Inc., a Delaware corporation ("Textron"), Marco Acquisition Sub Inc., a Delaware corporation and an indirect
wholly owned subsidiary of Textron ("Purchaser"), and United Industrial Corporation ("United Industrial"), entered into an Agreement and Plan of Merger (the "Merger Agreement").
Subject
to the terms and conditions of the Merger Agreement, on October 16, 2007, Purchaser commenced a tender offer (the "Offer") to purchase all of the outstanding shares of
United Industrial's common stock, par value $1.00 per share ("Common Stock"), at a price of $81.00 per share net to the seller in cash, without interest and subject to any applicable withholding taxes
(the "Offer Price"). As soon as practicable following the consummation of the Offer, Purchaser will be merged (the "Merger")
8
with
and into United Industrial, with each outstanding share of Common Stock (other than, among other things, (a) shares held by United Industrial as treasury stock or by Textron or by any
subsidiary of United Industrial or Textron and (b) shares held by holders who have properly demanded appraisal for such shares under Delaware law) being converted into the right to receive the
Offer Price. United Industrial will survive the Merger as an indirect wholly owned subsidiary of Textron. The Offer is not conditioned upon Purchaser's receipt of financing.
Under
the Merger Agreement, any outstanding United Industrial stock options that are not then vested and exercisable will vest on an accelerated basis immediately prior to the effective
time of the Merger (the "Effective Time"). At the Effective Time, any vested, exercisable and outstanding United Industrial stock options will be exchanged for a cash payment for each underlying share
equal to the difference between the Offer Price and the exercise price per share.
United
Industrial has made various representations and warranties and has agreed to specified covenants in the Merger Agreement, including covenants relating to United Industrial's
conduct of its business between the date of the Merger Agreement and the Effective Time, restrictions on solicitation of proposals with respect to alternative transactions, governmental filings and
approvals, public disclosures and other matters. The Merger Agreement also restricts the payment of dividends and purchase of shares of United Industrial's Common Stock by United Industrial.
The
consummation of the Offer and the completion of the Merger are subject to certain conditions, including the tender of a majority of the outstanding Common Stock (determined on a
fully-diluted basis); the expiration or termination of any waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act") and
approvals under applicable antitrust laws of Germany and Austria; and the absence of a Material Adverse Effect (as defined in the Merger Agreement) on the company. The Merger Agreement also contains
certain termination rights of Textron and United Industrial and provides that, upon the termination of the Merger Agreement under specified circumstances, United Industrial will be required to pay
Textron a termination fee of $33,000.
On
October 25, 2007, the waiting period under the HSR Act applicable to the purchase of shares of Common Stock pursuant to the Offer expired. Accordingly, the condition to the
Offer relating to the expiration or termination of the HSR Act waiting period has been satisfied. On October 23, 2007, Textron received antitrust regulatory clearance from the Federal Cartel
office under the Act against Restraints of Competition in Germany and, accordingly, the condition relating to the expiration or termination of the antitrust waiting period in Germany has been
satisfied.
Under
the terms of the Merger Agreement, United Industrial has agreed to elect to pay in cash any applicable make-whole premiums payable to holders of the 3.75% Convertible
Senior Notes due September 15, 2024 (the "3.75% Convertible Senior Notes") that become due in connection with the Merger Agreement and the transactions contemplated thereby. United Industrial
has further agreed to timely deliver all notices and take all actions required to be taken under the Indenture in respect of the Offer, the Merger and the other transactions contemplated thereby.
United Industrial has also agreed to provide Textron and Purchaser with certain rights with respect to such notices, elections under the Indenture and communications and material discussions or
meetings with any holder of the 3.75% Convertible Senior Notes, the trustee under the Indenture or any depository. United Industrial has also agreed, at Textron's request, to elect to satisfy in cash
all or a portion of any 3.75% Convertible Senior Notes surrendered for conversion after the first acceptance of Common Stock pursuant to the Offer. If Textron makes such request, Textron shall lend or
cause to be lent to United Industrial funds sufficient to pay the conversion obligations at an interest rate equal to or less than the interest rate payable under, and on substantially comparable
terms to, United Industrial's existing credit facility.
9
Note BNew Accounting Pronouncement
On February 15, 2007, Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an Amendment of FASB Statement No. 155 ("SFAS No. 159"), was issued. SFAS 159 is effective as of the beginning of the first fiscal year that
begins after November 15, 2007. SFAS No. 159 permits an entity to choose to measure many financial assets and liabilities and certain other items at fair value. The company is currently
evaluating whether to elect the option provided for in this standard.
Note CEarnings Per Share
Basic earnings per share for all periods presented was computed by dividing net earnings for the respective period by the weighted average number of shares of the
company's Common Stock, outstanding during the period. Diluted earnings per share was computed by dividing net earnings during the period, adjusted to add back the after-tax interest and
other charges related to the company's $120,000 aggregate principal amount of 3.75% Convertible Senior Notes by the weighted average number of shares of Common Stock outstanding during the period,
adjusted to add the weighted average number of potential dilutive shares of Common Stock that would have been outstanding upon the assumed exercise of stock options using the treasury stock method and
conversion of the 3.75% Convertible Senior Notes into Common Stock.
Options
to purchase 52,097 shares of the company's Common Stock for the nine months ended September 30, 2007, and options to purchase 131,500 shares of the company's Common Stock
for the three and nine months ended September 30, 2006, respectively, were not included in the computation of diluted earnings per share because their impact would be anti-dilutive.
Basic
and diluted earnings per share amounts were computed as follows:
|
|
Three Months Ended September 30,
|
|
|
2007
|
|
2006
|
|
|
Earnings
|
|
Shares
|
|
Per
Share
|
|
Earnings
|
|
Shares
|
|
Per
Share
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
9,253
|
|
9,921,923
|
|
$
|
0.93
|
|
$
|
5,721
|
|
11,420,539
|
|
$
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
440,918
|
|
|
|
|
|
|
|
356,646
|
|
|
|
|
3.75% Convertible Senior Notes
|
|
|
1,071
|
|
3,058,356
|
|
|
|
|
|
911
|
|
3,058,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
10,324
|
|
13,421,197
|
|
$
|
0.77
|
|
$
|
6,632
|
|
14,835,541
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2007
|
|
2006
|
|
|
Earnings
|
|
Shares
|
|
Per
Share
|
|
Earnings
|
|
Shares
|
|
Per
Share
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
29,693
|
|
10,426,762
|
|
$
|
2.85
|
|
$
|
21,725
|
|
11,370,735
|
|
$
|
1.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
407,474
|
|
|
|
|
|
|
|
396,376
|
|
|
|
|
3.75% Convertible Senior Notes
|
|
|
2,811
|
|
3,058,356
|
|
|
|
|
|
2,713
|
|
3,058,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
32,504
|
|
13,892,592
|
|
$
|
2.34
|
|
$
|
24,438
|
|
14,825,467
|
|
$
|
1.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Note DStock-Based Compensation
Stock-based compensation expense of $857 and $674 for the three months ended September 30, 2007 and 2006, respectively, and $2,491 and $1,817 for the nine
months ended September 30, 2007 and 2006, respectively, was recorded in operating costs and expenses included in operating income. Additional compensation expense will be recognized as new
options are awarded and outstanding options continue to vest. As of September 30, 2007, there was $4,373 of total unrecognized compensation expense related to unvested share-based compensation
arrangements granted under the company's equity compensation plan. That expense is expected to be recognized over a three-year period.
A
summary of stock option activity during the nine months ended September 30, 2007 under the company's equity compensation plan is as follows:
|
|
Number
of Shares
|
|
|
|
(in thousands)
|
|
Number of shares under option:
|
|
|
|
|
Outstanding at January 1, 2007
|
|
1,020
|
|
|
Granted
|
|
161
|
|
|
Exercised
|
|
(55
|
)
|
|
Cancelled
|
|
(8
|
)
|
|
|
|
|
|
Outstanding at September 30, 2007
|
|
1,118
|
|
|
|
|
|
|
Exercisable at September 30, 2007
|
|
759
|
|
|
Unexercisable at September 30, 2007
|
|
359
|
|
Available for future grants
|
|
609
|
|
Note EMarketable Equity Securities
The company's investment in marketable equity securities consists of the common stock of one company in the Aerospace and Defense industry. In June 2007,
the company sold 369,287 shares for $6,651, at an average price of $18.01, resulting in a realized gain of $37. The company's remaining cost basis is $5,988 and the carrying value (fair market value)
was $4,989 at September 30, 2007.
Unrealized
holding gains and losses deemed temporary on available-for-sale securities are excluded from earnings and are reported as a separate component of other
comprehensive loss until realized. If an unrealized holding loss is deemed to be other-than-temporary, such unrealized loss is charged to earnings when identified.
In
June 2006, the investee company disclosed the indictment of the investee company and its chairman and suspension of certain of its plants from receiving U.S. Government
contracts, and the possible delisting of its common stock. In October 2006, the investee company announced that the suspension of certain of its plants from receiving U.S. Government contracts
had been lifted. On June 27, 2007, the investee company announced that two of its eight manufacturing facilities had been suspended from receiving new U.S. Government contract awards pending
completion of a full investigation of certain deliveries by the investee company. The suspension was lifted effective August 15, 2007 upon completion of the investigation. Management continues
to evaluate the financial stability of the investee company in relation to the severity and duration of the unrealized loss. Based on that evaluation and the company's ability and intent to hold the
investment for a reasonable period of time sufficient for a forecasted recovery of fair value, the company does not consider this investment to be other-than-temporarily
impaired at September 30, 2007. At September 30, 2007, the cumulative net unrealized loss recorded in accumulated other comprehensive loss was $999.
11
Note FSupplemental Balance Sheet and Cash Flow Information
Inventories consisted of the following components for the periods specified:
|
|
September 30,
2007
|
|
December 31,
2006
|
Work-in-process
|
|
$
|
71,730
|
|
$
|
60,194
|
Materials and supplies
|
|
|
16,458
|
|
|
13,506
|
|
|
|
|
|
Total inventories
|
|
$
|
88,188
|
|
$
|
73,700
|
|
|
|
|
|
Cash
paid for Federal income taxes during the nine months ended September 30, 2007 and 2006 was $18,300 and $14,690, respectively. Cash paid for interest during the nine months
ended September 30, 2007 and 2006 was $5,032 and $4,776, respectively.
Note GGoodwill and Intangibles
On November 14, 2006, AAI Services Corporation acquired McTurbine. On November 28, 2006, AAI Corporation acquired Symtx. The purchase price for each
acquisition was allocated to the estimated fair value of net tangible and intangible assets acquired, with any excess recorded to goodwill. The company has completed its valuation of McTurbine's and
Symtx's assets as of their respective acquisition dates and as a result has increased intangible assets and decreased goodwill by the same amount. The valuation of the customer relationships that
represents the intangible assets of McTurbine increased by $1,086 and decreased goodwill by the same amount. The valuation of the customer relationships that represents the intangible assets of Symtx
increased by $4,494 and decreased goodwill by $2,921, net of a deferred tax liability. The increase in intangible assets and decrease in goodwill has been recorded in the unaudited Consolidated
Balance Sheet as of September 30, 2007.
Note HPension and Other Post-Retirement Benefits
On December 29, 2006, United Industrial completed the sale of its wholly owned subsidiary, Detroit Stoker Company ("Detroit Stoker"). Detroit Stoker
maintained its own tax-qualified defined benefit plan for union employees and unfunded post-retirement benefit plans for eligible employees. The assets and liabilities of these
plans were transferred with Detroit Stoker to the new owner as part of the sale transaction. In addition, the company agreed to transfer the portion of the assets and liabilities in the company's
tax-qualified defined benefit plan attributable to the frozen accrued pension benefits of active Detroit Stoker non-union employees, determined as of the closing date of the
merger, to the new pension plan established by Detroit Stoker. The assets of $2,199 were transferred on April 30, 2007. All amounts in the tables below for the three and nine months ended
September 30, 2006 have been adjusted to reflect the transfer of these assets and liabilities of the Detroit Stoker plans with the exception of the transferred portion attributable to the
frozen accrued pension benefits of active Detroit Stoker non-union employees. Pension expense related to Detroit Stoker has been reported in income from discontinued operations for the
three and nine months ended September 30, 2006.
12
The
following table provides the components of net periodic pension benefit cost for the three and nine months ended September 30, 2007 and 2006:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Service cost
|
|
$
|
1,227
|
|
$
|
896
|
|
$
|
3,681
|
|
$
|
3,246
|
|
Interest cost
|
|
|
2,812
|
|
|
2,582
|
|
|
8,437
|
|
|
7,582
|
|
Expected return on plan assets
|
|
|
(3,217
|
)
|
|
(3,016
|
)
|
|
(9,652
|
)
|
|
(9,216
|
)
|
Amortization of prior service cost
|
|
|
167
|
|
|
150
|
|
|
500
|
|
|
500
|
|
Amortization of actuarial loss
|
|
|
1,139
|
|
|
1,403
|
|
|
3,417
|
|
|
3,853
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension benefit cost
|
|
$
|
2,128
|
|
$
|
2,015
|
|
$
|
6,383
|
|
$
|
5,965
|
|
|
|
|
|
|
|
|
|
|
|
The
following table provides the components of post-retirement benefit obligation cost other than pension benefit for the three and nine months ended September 30,
2007 and 2006:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Service cost
|
|
$
|
18
|
|
$
|
23
|
|
$
|
52
|
|
$
|
70
|
Interest cost
|
|
|
223
|
|
|
226
|
|
|
669
|
|
|
677
|
Amortization of prior service cost
|
|
|
3
|
|
|
3
|
|
|
9
|
|
|
9
|
Amortization of actuarial loss
|
|
|
36
|
|
|
33
|
|
|
110
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
Net periodic other post-retirement benefit cost
|
|
$
|
280
|
|
$
|
285
|
|
$
|
840
|
|
$
|
855
|
|
|
|
|
|
|
|
|
|
The
following table provides the company's contributions to and benefits paid under pension and post-retirement benefit plans other than pension benefit for the nine months
ended September 30, 2007 and 2006:
|
|
Pension Benefits
Nine Months Ended
September 30,
|
|
Post-retirement Benefit
Obligation Other Than
Pension Benefit
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Expected fiscal year contributions reported at the end of the prior year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer
|
|
$
|
5,200
|
|
|
|
$
|
2,118
|
|
$
|
2,236
|
|
|
Employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expected contributions at end of prior year
|
|
|
5,200
|
|
|
|
|
2,118
|
|
|
2,236
|
|
|
|
|
|
|
|
|
|
|
|
Actual contributions made in the current year
|
|
|
2,858
|
|
|
|
|
1,563
|
|
|
1,848
|
|
Remaining contributions expected to be made in the current year
|
|
|
1,452
|
|
1,170
|
|
|
265
|
|
|
274
|
|
|
|
|
|
|
|
|
|
|
|
Total expected current year contributions
|
|
|
4,310
|
|
1,170
|
|
|
1,828
|
|
|
2,122
|
|
|
|
|
|
|
|
|
|
|
|
|
Difference from expectations at end of the prior year
|
|
$
|
(890
|
)
|
1,170
|
|
$
|
(290
|
)
|
$
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
|
13
Note IComprehensive Income
The following table sets forth the components of other comprehensive income and total comprehensive income for the periods specified:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Net income
|
|
$
|
8,951
|
|
$
|
6,246
|
|
$
|
28,279
|
|
$
|
25,073
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition of prior service cost and actuarial loss, net of income taxes
|
|
|
873
|
|
|
|
|
|
2,623
|
|
|
|
|
|
Adjustment for sale of marketable securities
|
|
|
|
|
|
|
|
|
845
|
|
|
|
|
|
Unrealized (loss) gain on marketable securities, net of income taxes
|
|
|
(484
|
)
|
|
824
|
|
|
(634
|
)
|
|
(3,251
|
)
|
|
Gain on foreign currency translation
|
|
|
499
|
|
|
380
|
|
|
1,291
|
|
|
874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
9,839
|
|
$
|
7,450
|
|
$
|
32,404
|
|
$
|
22,696
|
|
|
|
|
|
|
|
|
|
|
|
Note JIncome Tax
On July 13, 2006, Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"), an
interpretation of FASB Statement No. 109 ("SFAS 109"), was issued. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS 109, Accounting for Income Taxes. It also prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
The
company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the company recognized no material adjustment in the liability for
unrecognized income tax benefits. At the adoption date of January 1, 2007, the company had $5,902 of unrecognized tax benefits, of which $4,829 would favorably impact the company's effective
tax rate, if recognized. At September 30, 2007, the company had $7,234 of unrecognized tax benefits.
The
company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2007, the company had approximately $4,115 of accrued
interest related to uncertain tax positions.
In
connection with the Internal Revenue Service ("IRS") examination of the company's 2002 and 2003 Federal income tax returns, the IRS has proposed certain adjustments related to
deductions taken for losses arising from the company's discontinued transportation operation. The company has appealed
those proposed adjustments. The company does not anticipate that any resulting adjustments would materially impact its financial position.
Note KDiscontinued Operations
Discontinued Energy Operation
Sale of Energy Segment
United Industrial divested its energy segment (operated through Detroit Stoker Company) on December 29, 2006. For additional information, see
Note 19 to the audited Consolidated Financial
14
Statements
included in Part II, Item 8 of the company's Annual Report on Form 10-K for the year ended December 31, 2006.
The
results of operations of the discontinued energy operation have been reported in the accompanying consolidated statement of operations for the three and nine months ended
September 30, 2006 and cash flows for the nine months ended September 30, 2006.
Summary
results of the discontinued energy operation, which have been reported separately as income from discontinued operations in the accompanying Consolidated Statements of
Operations, were as follows:
|
|
Three Months Ended
September 30, 2006
|
|
Nine Months Ended
September 30, 2006
|
|
Net sales
|
|
$
|
10,249
|
|
$
|
30,982
|
|
Operating costs and expenses
|
|
|
7,973
|
|
|
23,714
|
|
|
|
|
|
|
|
Operating income
|
|
|
2,276
|
|
|
7,268
|
|
Other income, net
|
|
|
308
|
|
|
686
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
2,584
|
|
|
7,954
|
|
Provision for income taxes
|
|
|
(934
|
)
|
|
(2,880
|
)
|
|
|
|
|
|
|
Net income
|
|
$
|
1,650
|
|
$
|
5,074
|
|
|
|
|
|
|
|
The
following table provides the sources and uses of net cash flows for the discontinued energy operation, which are aggregated and reported separately as net cash used in operating
activities from discontinued operations in the accompanying Consolidated Statements of Cash Flows:
|
|
Nine Months Ended
September 30, 2006
|
|
Net income
|
|
$
|
5,074
|
|
Changes in operating assets and liabilities
|
|
|
424
|
|
|
|
|
|
Net cash provided by operating activities from discontinued energy operation
|
|
|
5,498
|
|
Net cash used in investing activities from discontinued energy operation, purchase of property and equipment
|
|
|
(42
|
)
|
|
|
|
|
Net increase in cash and cash equivalents from discontinued energy operation
|
|
$
|
5,456
|
|
|
|
|
|
There
were no cash flows from financing activities from the discontinued energy operation for the nine months ended September 30, 2006.
Discontinued Transportation Operation
In December 2001, United Industrial's Board of Directors decided to discontinue the transportation business. The company ceased to accept new
transportation business at that time and decided to sell all or part of the transportation business and "runoff" the operations for any remaining contractual obligations. As of September 30,
2007, the company's discontinued transportation operation consists primarily of its investment in Electric Transit, Inc. ("ETI"). ETI is owned 35% by AAI Corporation and 65% by Skoda, a Czech
company. AAI Corporation's last commitment to ETI expired in April 2006. (See Note L for additional information.)
The
company has determined that ETI is a variable interest entity, for which the company is the primary beneficiary, in accordance with the FASB issued Interpretation No. 46
(revised December 2003), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51 ("FIN 46R"), which became effective for years beginning
after December 31, 2002. The financial statements for ETI have been consolidated for all periods presented. The company accounts for its remaining transportation operation as a discontinued
operation, including the consolidation of ETI as a variable interest entity.
15
Summary results of the discontinued transportation operation, which have been reported separately as loss from discontinued operations in the accompanying Consolidated Statements of
Operations, were as follows:
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Sales
|
|
$
|
354
|
|
$
|
354
|
|
$
|
996
|
|
$
|
1,193
|
|
Cost of sales
|
|
|
(223
|
)
|
|
(144
|
)
|
|
(723
|
)
|
|
(290
|
)
|
General and administrative expenses
|
|
|
(576
|
)
|
|
(1,930
|
)
|
|
(2,389
|
)
|
|
(3,514
|
)
|
Other expense
|
|
|
(20
|
)
|
|
(12
|
)
|
|
(60
|
)
|
|
(45
|
)
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(465
|
)
|
|
(1,732
|
)
|
|
(2,176
|
)
|
|
(2,656
|
)
|
Benefit from income taxes
|
|
|
163
|
|
|
607
|
|
|
762
|
|
|
930
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued transportation operation, net of income tax benefit
|
|
$
|
(302
|
)
|
$
|
(1,125
|
)
|
$
|
(1,414
|
)
|
$
|
(1,726
|
)
|
|
|
|
|
|
|
|
|
|
|
The
following table provides the sources and uses of net cash flows for the discontinued transportation operation, which are aggregated and reported separately as net cash used in
discontinued operations in the accompanying Consolidated Statements of Cash Flows:
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
2006
|
|
Net loss
|
|
$
|
(1,414
|
)
|
$
|
(1,726
|
)
|
Changes in operating assets and liabilities
|
|
|
|
|
|
(484
|
)
|
Deferred income taxes
|
|
|
491
|
|
|
369
|
|
|
|
|
|
|
|
Net cash used in operating activities from discontinued transportation operation
|
|
$
|
(923
|
)
|
$
|
(1,841
|
)
|
|
|
|
|
|
|
There
were no cash flows from financing or investing activities from the discontinued transportation operation for the nine months ended September 30, 2007 or 2006.
16
Assets
and liabilities of the discontinued transportation operation, which have been reported and summarized in the accompanying Consolidated Balance Sheets as Assets and Liabilities of
discontinued operations, respectively, were as follows:
|
|
September 30,
2007
|
|
December 31,
2006
|
Current Assets:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
221
|
|
$
|
387
|
|
Accounts receivable
|
|
|
278
|
|
|
206
|
|
Prepaid expenses and other current assets
|
|
|
88
|
|
|
98
|
|
Deferred income taxes
|
|
|
11,305
|
|
|
11,305
|
|
|
|
|
|
|
|
$
|
11,892
|
|
$
|
11,996
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
444
|
|
$
|
61
|
|
Accrued employee compensation and taxes
|
|
|
192
|
|
|
150
|
|
Other current liabilities
|
|
|
11,816
|
|
|
11,779
|
|
Accrual for contract losses
|
|
|
48
|
|
|
123
|
|
|
|
|
|
|
|
$
|
12,500
|
|
$
|
12,113
|
|
|
|
|
|
Note LCommitments and Contingencies
In the normal course of its continuing and discontinued operations, various lawsuits, claims and legal proceedings have been or may be instituted or asserted
against or by the company. Based on currently available facts, the company believes, except as otherwise set forth below, that the disposition of matters pending or asserted against the company will
not have a material adverse effect on the company's financial position, results of operations or liquidity.
ASBESTOS
United
Industrial and Detroit Stoker (which was acquired by a newly formed corporation affiliated with a private investment group ("Merger Parent") on December 29, 2006 by way of
a merger of Bram Acquisition Corp. ("Merger Sub") with and into Detroit Stoker, with Detroit Stoker being the surviving corporation ("the Merger")) have been, and may in the future be, named as
defendants in asbestos-related personal injury litigation arising out of commercial stoker products manufactured by United Industrial and Detroit Stoker, some of the parts and components of which used
asbestos-containing material fabricated and provided by third parties. The use of asbestos-containing materials ceased in approximately 1981. The insurance coverage potentially available to United
Industrial is substantial.
Pursuant
to the merger agreement, Merger Parent and the surviving corporation agreed to indemnify United Industrial for any asbestos-related litigation liabilities, including, without
limitation, any asbestos liabilities arising from Detroit Stoker's operation as a division of United Industrial and United Industrial's own operations. To secure these indemnity obligations, Merger
Parent established an escrow account for the sole benefit of United Industrial.
If
Merger Parent and the surviving corporation do not honor their indemnity obligations to United Industrial, and the available escrow funds and insurance are insufficient to satisfy
United Industrial's asbestos-related litigation liabilities (if any), successful claims against United Industrial could have a material adverse effect on United Industrial's financial condition,
results of operations and liquidity. In addition, if the surviving corporation or Merger Parent were to file for bankruptcy, creditors could, among other things, seek to have the indemnity and the
escrow agreement declared unenforceable and seek to recover amounts paid to United Industrial by Merger Parent or the surviving corporation.
17
STATE OF ARIZONA DEPARTMENT OF ENVIRONMENTAL QUALITY V. UIC, ET AL.
On
May 19, 1993, United Industrial was named as one of three defendants in a civil action brought pursuant to the Comprehensive Environmental Response Compensation and Liability
Act ("CERCLA") by the Arizona Department of Environmental Quality ("ADEQ") in the United States District Court for the District of Arizona. ADEQ sought remediation of a manufacturing site in the State
of Arizona operated by U.S. Semiconductor Products, Inc. ("U.S. Semiconductor"), a manufacturer of semiconductors formerly owned by United Industrial. ADEQ alleged that from 1959 until United
Industrial sold U.S. Semiconductor in 1961, U.S. Semiconductor disposed of tricholoroethylene, a "hazardous substance," and other hazardous substances under CERCLA, onto the ground and into various
pits and drains located on the site.
In
1996, United Industrial entered into a consent decree with ADEQ. Pursuant to the consent decree, United Industrial is required to complete a Remedial Investigation/Feasibility Study
("RI/FS"), pay $125 for past response costs, pay quarterly Arizona oversight costs (averaging less than $13 annually) and pay $125 for future response costs plus a graduated percentage of the cleanup
costs for the site if those costs are in excess of $10,000 but less than $40,000. United Industrial's liability for future response costs under the consent decree is capped at $1,780 in addition to
the $125 that United Industrial has already paid. In connection with the RI/FS, United Industrial has retained and is paying for an environmental consultant. The Remedial Investigation was submitted
to ADEQ for approval on March 31, 2004 and was approved by ADEQ on August 9, 2004. In March 2005, ADEQ issued its Proposed Remedial Objectives Report for public comment. ADEQ
received no substantive comments regarding the report, and in May 2005, ADEQ issued its final Remedial Objectives Report. United Industrial is required to submit to ADEQ Feasibility Studies and
Proposed Remedies to meet ADEQ's May 2005 Remedial Objectives. Management believes it can reach closure with ADEQ on all RI/FS issues on an acceptable basis to United Industrial following
approval of the Feasibility Studies. No assurances can be given, however, as to the timing of the approval of Feasibility Studies or the actual extent to which United Industrial may be determined to
have further liability, if at all. Management believes it has appropriately accrued for this matter.
OTHER LEGAL MATTERS
Departments
and agencies of the U.S. Government have the authority at many levels to investigate transactions and operations of the company, and the results of such investigations may
lead to administrative, civil or criminal proceedings, the ultimate outcome of which could be fines, penalties, repayments or compensatory or treble damages. Agencies that oversee contract performance
include: the Defense Contract Audit Agency, the Department of Defense Inspector General, the General Accounting Office, the Department of Justice, the Department of State and Congressional committees.
U.S. Government regulations provide that certain findings against a contractor may lead to suspension or debarment from future U.S. Government contracts or the loss of export privileges for a company
or an operating division or subdivision.
The
company has in place international and domestic compliance policies and procedures, including training of employees. From time to time, the company receives allegations of improper
conduct relating to its operations, including operations subject to the U.S. Foreign Corrupt Practices Act, export control and licensing regulations and other U.S. domestic and international laws.
When the company receives any such allegations, it conducts internal (and if necessary, external) investigations to determine whether there is support for any such allegations, and takes corrective
action when warranted. An investigation is ongoing in response to allegations provided to company management of improper payments to foreign government officials and improper invoicing. External
counsel has been retained by the Audit Committee of United Industrial's Board of Directors to determine if there is support for any such allegations, and to review the company's compliance policies
and procedures, and the company is cooperating fully with counsel. In addition, appropriate government agencies have been
18
advised
of this investigation. The company is cooperating with their requests for information. The investigation by external counsel, which is continuing, has thus far not revealed any prior
involvement or knowledge regarding the allegations by any officer or director of United Industrial. At the current stage of this investigation, any ultimate liability is not presently determinable.
PERFORMANCE GUARANTIES
In
connection with certain contracts, United Industrial's operating subsidiaries have committed to certain performance guaranties existing at September 30, 2007. Some of these
performance guaranties are supported by surety bonds, which totaled $7,184 at September 30, 2007. The ability to perform under these guaranties may, in part, be dependent on the performance of
other parties, including partners and subcontractors. If United Industrial's operating subsidiaries are unable to meet these performance obligations, the performance guaranties could have a material
adverse effect on profit margins and the company's results of operations, liquidity or financial position. United Industrial's operating subsidiaries monitor the progress of their partners and
subcontractors, and United Industrial
and its operating subsidiaries do not believe that the performance of these partners and subcontractors will adversely affect these contracts. No assurances can be given, however, as to the liability
of United Industrial's operating subsidiaries if partners or subcontractors are unable to perform their obligations.
LABOR AND MATERIALS BOND CLAIM
AAI
Corporation's discontinued transportation operation consists of a 35% interest in ETI held by AAI Corporation. Skoda, a Czech company, owns the remaining 65% of ETI. One of ETI's
contracts involved the design and manufacture of 273 electric trolley buses for the San Francisco Municipal Railway ("MUNI"). In executing its contract with MUNI, ETI entered into subcontracts with
AAI Corporation, certain Skoda operating affiliates and others. All remaining ETI and AAI Corporation contractual performance obligations to MUNI concluded on April 22, 2007.
As
originally required by MUNI, ETI obtained a surety bond to guaranty payment to all those providing labor and materials to ETI in furtherance of its performance under the MUNI
contract. AAI Corporation agreed to indemnify the surety, if necessary, for up to $14,800 on this labor and materials bond, representing 35% of the original face value of the bond (in proportion to
AAI Corporation's equity interest in ETI). On November 18, 2003, AAI Corporation made a claim against the labor and materials bond for unpaid receivables in connection with AAI Corporation's
MUNI subcontract from ETI, totaling in excess of $47,000, the maximum penal sum of the labor and materials bond. AAI Corporation's payment rights under the labor and materials bond (among other
claims) are currently at issue in a case before the United States District Court for the Northern District of California. Prior to final adjudication of this case, there can be no assurances as to the
amount or timing of a recovery by AAI Corporation, if any, on its claim on the labor and materials bond. To date, no amount of recovery has been recorded.
19
Note MDividends
During each quarter of the nine months ended September 30, 2007 and 2006, United Industrial's Board of Directors declared and paid a dividend of $0.10 per
share on its Common Stock.
Quarter ended
|
|
Total amount
dividends paid
|
|
Date dividends
were paid
|
March 31, 2007
|
|
$
|
1,100
|
|
March 26, 2007
|
June 30, 2007
|
|
$
|
1,030
|
|
May 30, 2007
|
September 30, 2007
|
|
$
|
986
|
|
August 27, 2007
|
March 31, 2006
|
|
$
|
1,131
|
|
March 27, 2006
|
June 30, 2006
|
|
$
|
1,139
|
|
May 25, 2006
|
September 30, 2006
|
|
$
|
1,139
|
|
August 18, 2005
|
Note NTreasury Stock
On May 11, 2007, United Industrial's Board of Directors authorized a stock purchase plan for up to $50,000. The Board also authorized an additional $50,000
of stock purchases for a total of $100,000, contingent on the company executing an amended or new credit facility of at least $200,000 in capacity. An amendment and restatement of the existing credit
facility was completed on May 31, 2007, increasing the capacity of the facility to $200,000. During the nine months ended September 30, 2007, United Industrial purchased 648,960 shares
of Common Stock at an average market price of $59.32. At September 30, 2007, $61,507 remained available under the stock purchase plan.
On
November 17, 2006, United Industrial's Board of Directors authorized a stock purchase plan for up to $50,000. As of March 31, 2007, United Industrial purchased 933,174
shares at an average market price of $53.58, utilizing all remaining funds available under that plan.
Note OLong Term Debt and Credit Arrangements
On May 31, 2007, United Industrial and its wholly owned subsidiary, AAI Corporation, (the "Borrowers") entered into an Amended and Restated Revolving
Credit Agreement (the "Credit Agreement"), with a syndicate of nine financial institutions, consisting of SunTrust Bank as administrative agent, Citibank N.A. and JPMorgan Chase Bank as
co-syndication agents, Key Bank and PNC Bank as co-documentation agents, and M&T Bank, General Electric Capital Corporation, BB&T Bank, and Wachovia Bank. The Credit Agreement
supersedes the revolving credit agreement established in July 2005. The Credit Agreement provides for a revolving credit facility (inclusive of a swingline subfacility and a letter of credit
subfacility) in an aggregate committed amount of $200,000. The proceeds of the senior secured, revolving credit facility will be used to provide working capital to finance capital expenditures,
potential acquisitions, letters of credit, share repurchases, and for other general corporate purposes. The revolving credit facility expires on May 31, 2012.
Revolving
loans under the Credit Agreement will bear interest at a margin rate of 0.00% to 0.25% above a certain base rate, or 0.75% to 1.25% above the London Interbank Offering Rate
("LIBOR"), subject to United Industrial's leverage ratio. Swingline loans under the Credit Agreement will bear interest at the rate as offered by the swingline lender and accepted by United
Industrial.
The
Credit Agreement contains affirmative, negative and financial covenants customary for facilities of this type, including, among other requirements, maintenance of certain leverage
and fixed charge coverage ratios. The company was in compliance with all of the covenants in the Credit Agreement at September 30, 2007.
Each
of the direct and indirect domestic material subsidiaries of the Borrowers (other than AAI) (the "Subsidiary Loan Parties") has, on a joint and several basis, unconditionally
guaranteed all obligations of the Borrowers under the Credit Agreement and the related credit documents.
20
Each
of the credit facilities is secured by (i) substantially all the personal property of the Borrowers and the Subsidiary Loan Parties, and (ii) a pledge of all equity
interests of the domestic subsidiaries and non-voting equity interests of the foreign subsidiaries, and not more than 65% of the voting equity interests of any foreign subsidiary of the
Borrowers or the Subsidiary Loan Parties.
As
of September 30, 2007, the company had $10,000 outstanding under the revolving credit facility incurring interest at an annualized rate of 6.82%, $6,021 outstanding under the
swingline subfacility incurring interest at an annualized rate of 6.67%, and $1,820 outstanding under the letter of credit subfacility. At September 30, 2007, $182,159 was available under the
revolving credit facility.
The
3.75% Convertible Senior Notes are convertible into shares of the company's Common Stock prior to stated maturity at an initial conversion rate, subject to adjustment, of 25.4863
shares per $1 principal amount of the 3.75% Convertible Senior Notes (equal to an initial conversion price of approximately $39.24 per share) under certain circumstances. The holders of the 3.75%
Convertible Senior Notes can convert their Senior Notes into shares of Common Stock during the calendar quarter from October 1, 2007 through December 31, 2007. This event was triggered
by United Industrial's stock price remaining above $47.09 (120% of the initial conversion price) for at least 20 consecutive trading days during the last 30 trading days of the quarter ended
September 30, 2007. See Note A to the unaudited Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q for further information
regarding the 3.75% Convertible Senior Notes with respect to the Merger Agreement.
Note PDerivative Instruments
In June 2007, the company entered into forward contracts with a notional value totaling $10,384 in order to hedge British pound exposures related to the
purchase of certain inventory. These contracts expire from November 2007 through January 2009. The company marks these forward contracts to market value each period and records the gain
or loss in operating income in the Consolidated Statement of Operations. The gains and losses on these instruments offset losses and gains on the underlying purchase commitments. The company
recognized a gain of $229 and $325 for the three and nine months ended September 30, 2007, respectively, as a result of the change in fair value of the forward contracts.
Note QSupplemental Guarantor Information
In September 2004, United Industrial issued and sold $120,000 aggregate principal amount of 3.75% Convertible Senior Notes, which are fully and
unconditionally guaranteed by AAI. The following condensed consolidating financial information sets forth supplemental information for United Industrial, the parent company, AAI, the guarantor
subsidiary, and Detroit Stoker, the non-guarantor subsidiary (prior to its sale), as of September 30, 2007 and December 31, 2006, and for the three and nine months ended
September 30, 2007 and 2006.
21
CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Condensed Consolidating Balance Sheets
As of September 30, 2007
(Unaudited)
|
|
United
Industrial
Corporation
(Parent)
|
|
AAI
Corporation
and
Subsidiaries
(Guarantor)
|
|
Eliminations
|
|
United
Industrial
Corporation
and
Subsidiaries
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
236
|
|
$
|
4,055
|
|
$
|
|
|
$
|
4,291
|
|
Accounts receivable, net
|
|
|
679
|
|
|
63,939
|
|
|
|
|
|
64,618
|
|
Note receivable
|
|
|
833
|
|
|
|
|
|
|
|
|
833
|
|
Inventories
|
|
|
|
|
|
88,188
|
|
|
|
|
|
88,188
|
|
Other current assets
|
|
|
5,592
|
|
|
7,583
|
|
|
(584
|
)
|
|
12,591
|
|
Assets of discontinued operations
|
|
|
|
|
|
11,892
|
|
|
|
|
|
11,892
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
7,340
|
|
|
175,657
|
|
|
(584
|
)
|
|
182,413
|
Property and equipment, net
|
|
|
|
|
|
47,234
|
|
|
|
|
|
47,234
|
Other assets
|
|
|
11,318
|
|
|
106,282
|
|
|
(22,235
|
)
|
|
95,365
|
Investment in consolidated subsidiaries
|
|
|
185,464
|
|
|
|
|
|
(185,464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
204,122
|
|
$
|
329,173
|
|
$
|
(208,283
|
)
|
$
|
325,012
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
|
|
$
|
17
|
|
$
|
|
|
$
|
17
|
Other current liabilities
|
|
|
9,514
|
|
|
175,560
|
|
|
(59,860
|
)
|
|
125,214
|
Liabilities of discontinued operations
|
|
|
|
|
|
12,500
|
|
|
|
|
|
12,500
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
9,514
|
|
|
188,077
|
|
|
(59,860
|
)
|
|
137,731
|
Long-term debt
|
|
|
120,000
|
|
|
18
|
|
|
|
|
|
120,018
|
Other long-term liabilities
|
|
|
7,783
|
|
|
68,546
|
|
|
(22,817
|
)
|
|
53,512
|
Intercompany payables (receivables)
|
|
|
53,074
|
|
|
(112,932
|
)
|
|
59,858
|
|
|
|
Shareholders' (deficit) equity
|
|
|
13,751
|
|
|
185,464
|
|
|
(185,464
|
)
|
|
13,751
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
204,122
|
|
$
|
329,173
|
|
$
|
(208,283
|
)
|
$
|
325,012
|
|
|
|
|
|
|
|
|
|
22
CONDENSED CONSOLIDATING FINANCIAL INFORMATIONCONTINUED
Condensed Consolidating Balance Sheets
As of December 31, 2006
|
|
United
Industrial
Corporation
(Parent)
|
|
AAI
Corporation
and
Subsidiaries
(Guarantor)
|
|
Eliminations
|
|
United
Industrial
Corporation
and
Subsidiaries
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
40,068
|
|
$
|
(910
|
)
|
$
|
|
|
$
|
39,158
|
|
Accounts receivable, net
|
|
|
1,715
|
|
|
69,706
|
|
|
82
|
|
|
71,503
|
|
Note receivable
|
|
|
833
|
|
|
|
|
|
|
|
|
833
|
|
Inventories
|
|
|
|
|
|
73,700
|
|
|
|
|
|
73,700
|
|
Other current assets
|
|
|
4,479
|
|
|
5,623
|
|
|
|
|
|
10,102
|
|
Assets of discontinued operations
|
|
|
|
|
|
11,996
|
|
|
|
|
|
11,996
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
47,095
|
|
|
160,115
|
|
|
82
|
|
|
207,292
|
Property and equipment, net
|
|
|
|
|
|
47,042
|
|
|
|
|
|
47,042
|
Other assets
|
|
|
19,893
|
|
|
107,502
|
|
|
(23,089
|
)
|
|
104,306
|
Investment in consolidated subsidiaries
|
|
|
148,459
|
|
|
|
|
|
(148,459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
215,447
|
|
$
|
314,659
|
|
$
|
(171,466
|
)
|
$
|
358,640
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
|
|
$
|
2,896
|
|
$
|
|
|
$
|
2,896
|
|
Other current liabilities
|
|
|
9,884
|
|
|
135,739
|
|
|
(40,040
|
)
|
|
105,583
|
|
Liabilities of discontinued operations
|
|
|
|
|
|
12,113
|
|
|
|
|
|
12,113
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
9,884
|
|
|
150,748
|
|
|
(40,040
|
)
|
|
120,592
|
Long-term debt
|
|
|
120,000
|
|
|
30
|
|
|
|
|
|
120,030
|
Other long-term liabilities
|
|
|
7,855
|
|
|
69,953
|
|
|
(23,089
|
)
|
|
54,719
|
Intercompany payables (receivables)
|
|
|
14,409
|
|
|
(54,531
|
)
|
|
40,122
|
|
|
|
Shareholders' equity
|
|
|
63,299
|
|
|
148,459
|
|
|
(148,459
|
)
|
|
63,299
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
215,447
|
|
$
|
314,659
|
|
$
|
(171,466
|
)
|
$
|
358,640
|
|
|
|
|
|
|
|
|
|
23
CONDENSED CONSOLIDATING FINANCIAL INFORMATIONCONTINUED
Condensed Consolidating Statements of Operations
Three Months Ended September 30, 2007
(Unaudited)
|
|
United
Industrial
Corporation
(Parent)
|
|
AAI
Corporation
and
Subsidiaries
(Guarantor)
|
|
Eliminations
|
|
United
Industrial
Corporation
and
Subsidiaries
|
|
Net sales
|
|
$
|
|
|
$
|
166,868
|
|
$
|
|
|
$
|
166,868
|
|
Operating costs and expenses
|
|
|
(887
|
)
|
|
(149,833
|
)
|
|
|
|
|
(150,720
|
)
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(887
|
)
|
|
17,035
|
|
|
|
|
|
16,148
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income and (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
121
|
|
|
12
|
|
|
|
|
|
133
|
|
|
Interest expense
|
|
|
(1,371
|
)
|
|
(701
|
)
|
|
|
|
|
(2,072
|
)
|
|
Other (loss) income, net
|
|
|
(277
|
)
|
|
589
|
|
|
|
|
|
312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,527
|
)
|
|
(100
|
)
|
|
|
|
|
(1,627
|
)
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
|
(2,414
|
)
|
|
16,935
|
|
|
|
|
|
14,521
|
|
Benefit from (provision for) income taxes
|
|
|
660
|
|
|
(5,928
|
)
|
|
|
|
|
(5,268
|
)
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(1,754
|
)
|
|
11,007
|
|
|
|
|
|
9,253
|
|
Loss from discontinued operations, net of income tax benefit
|
|
|
|
|
|
(302
|
)
|
|
|
|
|
(302
|
)
|
Income from investment in subsidiaries
|
|
|
10,705
|
|
|
|
|
|
(10,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,951
|
|
$
|
10,705
|
|
$
|
(10,705
|
)
|
$
|
8,951
|
|
|
|
|
|
|
|
|
|
|
|
24
CONDENSED CONSOLIDATING FINANCIAL INFORMATIONCONTINUED
Condensed Consolidating Statements of Operations
Three Months Ended September 30, 2006
(Unaudited)
|
|
United
Industrial
Corporation
(Parent)
|
|
AAI
Corporation
and
Subsidiaries
(Guarantor)
|
|
Detroit
Stoker
Company
(Non-
Guarantor)
|
|
Eliminations
|
|
United
Industrial
Corporation
and
Subsidiaries
|
|
Net sales
|
|
$
|
|
|
$
|
131,350
|
|
$
|
|
|
$
|
|
|
$
|
131,350
|
|
Operating costs and expenses
|
|
|
(524
|
)
|
|
(121,308
|
)
|
|
|
|
|
|
|
|
(121,832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(524
|
)
|
|
10,042
|
|
|
|
|
|
|
|
|
9,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income and (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
930
|
|
|
245
|
|
|
|
|
|
|
|
|
1,175
|
|
|
Interest expense
|
|
|
(1,371
|
)
|
|
(207
|
)
|
|
|
|
|
|
|
|
(1,578
|
)
|
|
Intercompany interest income
|
|
|
11
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
Other (loss) income, net
|
|
|
(32
|
)
|
|
127
|
|
|
|
|
|
|
|
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(462
|
)
|
|
165
|
|
|
|
|
|
(11
|
)
|
|
(308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
|
(986
|
)
|
|
10,207
|
|
|
|
|
|
(11
|
)
|
|
9,210
|
|
Benefit from (provision for) income taxes
|
|
|
161
|
|
|
(3,650
|
)
|
|
|
|
|
|
|
|
(3,489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(825
|
)
|
|
6,557
|
|
|
|
|
|
(11
|
)
|
|
5,721
|
|
(Loss) income from discontinued operations, net of income tax benefit (provision)
|
|
|
|
|
|
(1,125
|
)
|
|
1,639
|
|
|
11
|
|
|
525
|
|
Income from investment in subsidiaries
|
|
|
7,071
|
|
|
|
|
|
|
|
|
(7,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,246
|
|
$
|
5,432
|
|
$
|
1,639
|
|
$
|
(7,071
|
)
|
$
|
6,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
CONDENSED CONSOLIDATING FINANCIAL INFORMATIONCONTINUED
Condensed Consolidating Statements of Operations
Nine Months Ended September 30, 2007
(Unaudited)
|
|
United
Industrial
Corporation
(Parent)
|
|
AAI
Corporation
and
Subsidiaries
(Guarantor)
|
|
Eliminations
|
|
United
Industrial
Corporation
and
Subsidiaries
|
|
Net sales
|
|
$
|
|
|
$
|
510,884
|
|
$
|
|
|
$
|
510,884
|
|
Operating costs and expenses
|
|
|
(2,478
|
)
|
|
(457,869
|
)
|
|
|
|
|
(460,347
|
)
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(2,478
|
)
|
|
53,015
|
|
|
|
|
|
50,537
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income and (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
554
|
|
|
364
|
|
|
|
|
|
918
|
|
|
Interest expense
|
|
|
(4,114
|
)
|
|
(1,047
|
)
|
|
|
|
|
(5,161
|
)
|
|
Other (loss) income, net
|
|
|
(227
|
)
|
|
907
|
|
|
|
|
|
680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,787
|
)
|
|
224
|
|
|
|
|
|
(3,563
|
)
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
|
(6,265
|
)
|
|
53,239
|
|
|
|
|
|
46,974
|
|
Benefit from (provision for) income taxes
|
|
|
1,382
|
|
|
(18,663
|
)
|
|
|
|
|
(17,281
|
)
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(4,883
|
)
|
|
34,576
|
|
|
|
|
|
29,693
|
|
(Loss) from discontinued operations, net of income tax benefit
|
|
|
|
|
|
(1,414
|
)
|
|
|
|
|
(1,414
|
)
|
Income from investment in subsidiaries
|
|
|
33,162
|
|
|
|
|
|
(33,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
28,279
|
|
$
|
33,162
|
|
$
|
(33,162
|
)
|
$
|
28,279
|
|
|
|
|
|
|
|
|
|
|
|
26
CONDENSED CONSOLIDATING FINANCIAL INFORMATIONCONTINUED
Condensed Consolidating Statements of Operations
Nine Months Ended September 30, 2006
(Unaudited)
|
|
United
Industrial
Corporation
(Parent)
|
|
AAI
Corporation
and
Subsidiaries
(Guarantor)
|
|
Detroit
Stoker
Company
(Non-
Guarantor)
|
|
Eliminations
|
|
United
Industrial
Corporation
and
Subsidiaries
|
|
Net sales
|
|
$
|
|
|
$
|
397,451
|
|
$
|
|
|
$
|
|
|
$
|
397,451
|
|
Operating costs and expenses
|
|
|
(1,221
|
)
|
|
(360,267
|
)
|
|
|
|
|
|
|
|
(361,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(1,221
|
)
|
|
37,184
|
|
|
|
|
|
|
|
|
35,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating income and (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
2,186
|
|
|
822
|
|
|
|
|
|
|
|
|
3,008
|
|
|
Interest expense
|
|
|
(4,111
|
)
|
|
(292
|
)
|
|
|
|
|
|
|
|
(4,403
|
)
|
|
Intercompany interest income (expense)
|
|
|
36
|
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
Other (expense) income, net
|
|
|
(62
|
)
|
|
325
|
|
|
|
|
|
|
|
|
263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,951
|
)
|
|
855
|
|
|
|
|
|
(36
|
)
|
|
(1,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income taxes
|
|
|
(3,172
|
)
|
|
38,039
|
|
|
|
|
|
(36
|
)
|
|
34,831
|
|
Benefit from (provision for) income taxes
|
|
|
501
|
|
|
(13,607
|
)
|
|
|
|
|
|
|
|
(13,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(2,671
|
)
|
|
24,432
|
|
|
|
|
|
(36
|
)
|
|
21,725
|
|
(Loss) income from discontinued operations, net of income tax (provision) benefit
|
|
|
|
|
|
(1,726
|
)
|
|
5,038
|
|
|
36
|
|
|
3,348
|
|
Income from investment in subsidiaries
|
|
|
27,744
|
|
|
|
|
|
|
|
|
(27,744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
25,073
|
|
$
|
22,706
|
|
$
|
5,038
|
|
$
|
(27,744
|
)
|
$
|
25,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
CONDENSED CONSOLIDATING FINANCIAL INFORMATIONCONTINUED
Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2007
(Unaudited)
|
|
United
Industrial
Corporation
(Parent)
|
|
AAI
Corporation
and
Subsidiaries
(Guarantor)
|
|
Eliminations
|
|
United
Industrial
Corporation
and
Subsidiaries
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) continuing operations
|
|
$
|
37,184
|
|
$
|
2,190
|
|
$
|
|
|
$
|
39,374
|
|
Cash flows used in operating activities from discontinued operations
|
|
|
|
|
|
(923
|
)
|
|
|
|
|
(923
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
37,184
|
|
|
1,267
|
|
|
|
|
|
38,451
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
|
|
|
(8,193
|
)
|
|
|
|
|
(8,193
|
)
|
Proceeds from sale of marketable equity securities
|
|
|
6,651
|
|
|
|
|
|
|
|
|
6,651
|
|
Business acquisitions purchase price adjustment
|
|
|
|
|
|
(1,239
|
)
|
|
|
|
|
(1,239
|
)
|
Repayment of note receivable
|
|
|
900
|
|
|
|
|
|
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
7,551
|
|
|
(9,432
|
)
|
|
|
|
|
(1,881
|
)
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under revolving credit facility
|
|
|
|
|
|
16,021
|
|
|
|
|
|
16,021
|
|
Repayment of long-term debt
|
|
|
|
|
|
(2,891
|
)
|
|
|
|
|
(2,891
|
)
|
Proceeds from exercise of stock options
|
|
|
1,389
|
|
|
|
|
|
|
|
|
1,389
|
|
Excess tax benefit from stock-based compensation
|
|
|
327
|
|
|
|
|
|
|
|
|
327
|
|
Dividends paid
|
|
|
(3,116
|
)
|
|
|
|
|
|
|
|
(3,116
|
)
|
Purchases of treasury shares
|
|
|
(83,167
|
)
|
|
|
|
|
|
|
|
(83,167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(84,567
|
)
|
|
13,130
|
|
|
|
|
|
(71,437
|
)
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(39,832
|
)
|
|
4,965
|
|
|
|
|
|
(34,867
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
40,068
|
|
|
(910
|
)
|
|
|
|
|
39,158
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
236
|
|
$
|
4,055
|
|
$
|
|
|
$
|
4,291
|
|
|
|
|
|
|
|
|
|
|
|
28
CONDENSED CONSOLIDATING FINANCIAL INFORMATIONCONTINUED
Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2006
(Unaudited)
|
|
United
Industrial
Corporation
(Parent)
|
|
AAI
Corporation
and
Subsidiaries
(Guarantor)
|
|
Detroit
Stoker
Company
(Non-
Guarantor)
|
|
Eliminations
|
|
United
Industrial
Corporation
and
Subsidiaries
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by continuing operations
|
|
$
|
41,449
|
|
$
|
23,065
|
|
$
|
|
|
$
|
|
|
$
|
64,514
|
|
Cash flows (used in) provided by operating activities from discontinued operations
|
|
|
|
|
|
(1,841
|
)
|
|
5,498
|
|
|
|
|
|
3,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
41,449
|
|
|
21,224
|
|
|
5,498
|
|
|
|
|
|
68,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
|
|
|
(5,110
|
)
|
|
|
|
|
|
|
|
(5,110
|
)
|
Business acquisition, net of cash received
|
|
|
|
|
|
(6,701
|
)
|
|
|
|
|
|
|
|
(6,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities from continuing operations
|
|
|
|
|
|
(11,811
|
)
|
|
|
|
|
|
|
|
(11,811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities from discontinued operations
|
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
|
|
(11,811
|
)
|
|
(42
|
)
|
|
|
|
|
(11,853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
|
|
|
(966
|
)
|
|
|
|
|
|
|
|
(966
|
)
|
Decrease in deposits and restricted cash
|
|
|
|
|
|
4,810
|
|
|
|
|
|
|
|
|
4,810
|
|
Proceeds from exercise of stock options
|
|
|
2,414
|
|
|
|
|
|
|
|
|
|
|
|
2,414
|
|
Excess tax benefit from stock-based compensation
|
|
|
1,059
|
|
|
|
|
|
|
|
|
|
|
|
1,059
|
|
Dividends paid
|
|
|
(3,409
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,409
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
64
|
|
|
3,844
|
|
|
|
|
|
|
|
|
3,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
41,513
|
|
|
13,257
|
|
|
5,456
|
|
|
|
|
|
60,226
|
|
Cash and cash equivalents at beginning of year
|
|
|
54,365
|
|
|
8,768
|
|
|
14,363
|
(1)
|
|
|
|
|
77,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
95,878
|
|
$
|
22,025
|
|
$
|
19,819
|
(2)
|
$
|
|
|
$
|
137,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Reported
in assets held for sale at January 1, 2006.
-
(2)
-
Reported
in assets held for sale at September 30, 2006.
29