UNITED STATES
FORM 10-Q
(Mark One)
For the quarterly period ended March 31, 2004
o 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: 001-16821
UNITED DEFENSE INDUSTRIES, INC.
|
Delaware
|
52-2059782 | |
| (State or other jurisdiction of incorporation) | (IRS Employer Identification No.) | |
|
1525 Wilson Boulevard, Suite 700
Arlington, Virginia |
22209 | |
| (Address of Principal Executive Offices) | (Zip Code) | |
(703) 312-6100
(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 Exchange 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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
At April 23, 2004 there were 52,557,889 shares outstanding of the Registrant’s common stock, par value $.01 per share.
UNITED DEFENSE INDUSTRIES, INC.
INDEX
| Page | ||||||
| PART I — FINANCIAL INFORMATION | ||||||
|
Item 1.
|
Consolidated Financial Statements — United Defense Industries, Inc. | |||||
| Consolidated Balance Sheets as of December 31, 2003 and March 31, 2004 (unaudited) | 2 | |||||
| Unaudited Consolidated Statements of Operations for the three months ended March 31, 2003 and 2004 | 3 | |||||
| Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2004 | 4 | |||||
| Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2004 | 5 | |||||
| Notes to Unaudited Consolidated Financial Statements | 6 | |||||
|
Item 2.
|
Management’s Discussion and Analysis of the Results of Operations and Financial Condition | 13 | ||||
|
Item 3.
|
Quantitative and Qualitative Disclosures about Market Risk | 17 | ||||
|
Item 4.
|
Controls and Procedures | 17 | ||||
| PART II — OTHER INFORMATION | ||||||
|
Item 6.
|
Exhibits and Reports on Form 8-K | 19 | ||||
| Signature | 20 | |||||
1
UNITED DEFENSE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
| December 31, 2003 | March 31, 2004 | |||||||||
| (Unaudited) | ||||||||||
| ASSETS | ||||||||||
|
Current assets:
|
||||||||||
|
Cash and cash equivalents
|
$ | 286,730 | $ | 256,409 | ||||||
|
Trade receivables, net
|
168,625 | 227,794 | ||||||||
|
Long-term contract inventories
|
389,394 | 364,177 | ||||||||
|
Other current assets
|
20,127 | 19,101 | ||||||||
|
Total current assets
|
864,876 | 867,481 | ||||||||
|
Property, plant and equipment, net
|
181,283 | 189,970 | ||||||||
|
Goodwill
|
342,843 | 363,161 | ||||||||
|
Intangible assets, net
|
14,222 | 16,502 | ||||||||
|
Prepaid pension and postretirement benefit cost
|
128,997 | 127,436 | ||||||||
|
Restricted cash
|
12,244 | 11,631 | ||||||||
|
Other assets
|
46,699 | 28,413 | ||||||||
|
Total assets
|
$ | 1,591,164 | $ | 1,604,594 | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||||
|
Current liabilities:
|
||||||||||
|
Current portion of long-term debt
|
$ | 52,043 | $ | 52,043 | ||||||
|
Accounts payable, trade and other
|
124,502 | 97,708 | ||||||||
|
Advanced payments
|
462,304 | 463,513 | ||||||||
|
Deferred tax liability
|
16,280 | 17,064 | ||||||||
|
Accrued and other liabilities
|
133,963 | 141,623 | ||||||||
|
Total current liabilities
|
789,092 | 771,951 | ||||||||
|
Long-term liabilities:
|
||||||||||
|
Long-term debt, net of current portion
|
524,946 | 511,936 | ||||||||
|
Accrued pension and postretirement benefit cost
|
51,538 | 47,117 | ||||||||
|
Deferred tax liability
|
17,695 | 19,162 | ||||||||
|
Other liabilities
|
80,812 | 80,440 | ||||||||
|
Total liabilities
|
1,464,083 | 1,430,606 | ||||||||
|
Commitments and contingencies
|
||||||||||
|
Stockholders’ equity:
|
||||||||||
|
Common stock $.01 par value, 150,000,000 shares
authorized; 52,220,189 and 52,524,019 issued and outstanding at
December 31, 2003 and March 31, 2004, respectively
|
522 | 525 | ||||||||
|
Additional paid-in-capital
|
183,337 | 193,021 | ||||||||
|
Deferred compensation
|
(197 | ) | (4,440 | ) | ||||||
|
Retained deficit
|
(54,304 | ) | (12,421 | ) | ||||||
|
Accumulated other comprehensive loss
|
(2,277 | ) | (2,697 | ) | ||||||
|
Total stockholders’ equity
|
127,081 | 173,988 | ||||||||
|
Total liabilities and stockholders’ equity
|
$ | 1,591,164 | $ | 1,604,594 | ||||||
See accompanying notes.
2
UNITED DEFENSE INDUSTRIES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
| Three months ended March 31, | ||||||||||
| 2003 | 2004 | |||||||||
|
Revenue:
|
||||||||||
|
Sales
|
$ | 466,523 | $ | 547,077 | ||||||
|
Costs and expenses:
|
||||||||||
|
Cost of sales
|
362,583 | 435,087 | ||||||||
|
Selling, general and administrative expenses
|
37,070 | 38,759 | ||||||||
|
Research and development
|
1,880 | 6,553 | ||||||||
|
Total expenses
|
401,533 | 480,399 | ||||||||
|
Income from operations
|
64,990 | 66,678 | ||||||||
|
Earnings related to investments in foreign
affiliates
|
5,549 | 5,816 | ||||||||
|
Interest income
|
914 | 973 | ||||||||
|
Interest expense
|
(7,488 | ) | (6,454 | ) | ||||||
|
Total other (expense) income
|
(1,025 | ) | 335 | |||||||
|
Income before income taxes
|
63,965 | 67,013 | ||||||||
|
Provision for income taxes
|
25,586 | 25,130 | ||||||||
|
Net income
|
$ | 38,379 | $ | 41,883 | ||||||
|
Earnings per common share-basic
|
$ | 0.74 | $ | 0.80 | ||||||
|
Weighted average common shares outstanding
|
51,730,313 | 52,399,717 | ||||||||
|
Earnings per common share-diluted
|
$ | 0.73 | $ | 0.78 | ||||||
|
Weighted average common shares outstanding
|
52,652,524 | 53,367,770 | ||||||||
See accompanying notes.
3
UNITED DEFENSE INDUSTRIES, INC.
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Common | Paid-In | Deferred | Retained | Comprehensive | ||||||||||||||||||||
| Stock | Capital | Compensation | Deficit | (Loss)/Gain | Total | |||||||||||||||||||
|
Balance, December 31, 2003
|
$ | 522 | $ | 183,337 | $ | (197 | ) | $ | (54,304 | ) | $ | (2,277 | ) | $ | 127,081 | |||||||||
|
Amortization of deferred stock compensation
|
271 | 271 | ||||||||||||||||||||||
|
Issuance of restricted stock awards
|
4,514 | (4,514 | ) | — | ||||||||||||||||||||
|
Exercise of stock options
|
3 | 3,287 | 3,290 | |||||||||||||||||||||
|
Tax benefit from stock options
|
1,883 | 1,883 | ||||||||||||||||||||||
|
Net foreign currency translation
|
(1,474 | ) | (1,474 | ) | ||||||||||||||||||||
|
Change in fair value of foreign currency and
interest rate hedges, net of tax
|
1,054 | 1,054 | ||||||||||||||||||||||
|
Net income for quarter ended March 31, 2004
|
41,883 | 41,883 | ||||||||||||||||||||||
|
Total comprehensive income
|
41,463 | |||||||||||||||||||||||
|
Balance, March 31, 2004
|
$ | 525 | $ | 193,021 | $ | (4,440 | ) | $ | (12,421 | ) | $ | (2,697 | ) | $ | 173,988 | |||||||||
See accompanying notes.
4
UNITED DEFENSE INDUSTRIES, INC.
| Three months ended | |||||||||
| March 31, | |||||||||
| 2003 | 2004 | ||||||||
|
Operating activities
|
|||||||||
|
Net income
|
$ | 38,379 | $ | 41,883 | |||||
|
Adjustments to reconcile net income to cash
provided by operating activities:
|
|||||||||
|
Depreciation
|
6,472 | 6,754 | |||||||
|
Amortization of software
|
1,200 | 1,221 | |||||||
|
Amortization of other intangible assets
|
3,295 | 1,720 | |||||||
|
Amortization of financing costs
|
775 | 759 | |||||||
|
Deferred tax provision
|
23,710 | 2,336 | |||||||
|
Changes in assets and liabilities:
|
|||||||||
|
Trade receivables, net
|
25,316 | (54,399 | ) | ||||||
|
Inventories
|
673 | 30,288 | |||||||
|
Other assets
|
13,038 | 19,940 | |||||||
|
Prepaid pension and postretirement benefit cost
|
(857 | ) | 1,561 | ||||||
|
Accounts payable, trade and other
|
(17,255 | ) | (24,615 | ) | |||||
|
Advanced payments
|
870 | 1,861 | |||||||
|
Accrued and other liabilities
|
(47,350 | ) | 7,286 | ||||||
|
Accrued pension and postretirement benefit cost
|
2,312 | (3,686 | ) | ||||||
|
Cash provided by operating activities
|
50,578 | 32,909 | |||||||
|
Investing activities
|
|||||||||
|
Capital expenditures
|
(3,401 | ) | (5,056 | ) | |||||
|
Purchase of Kaiser Compositek, Cercom and Hawaii
Shipyards
|
— | (45,766 | ) | ||||||
|
Cash used in investing activities
|
(3,401 | ) | (50,822 | ) | |||||
|
Financing activities
|
|||||||||
|
Payments on long-term debt
|
— | (13,010 | ) | ||||||
|
Proceeds from exercise of stock options
|
479 | 3,290 | |||||||
|
Cash provided by (used in) financing activities
|
479 | (9,720 | ) | ||||||
|
Effect of exchange rate changes on cash
|
1,302 | (2,688 | ) | ||||||
|
Increase (decrease) in cash and cash
equivalents
|
48,958 | (30,321 | ) | ||||||
|
Cash and cash equivalents, beginning of year
|
106,802 | 286,730 | |||||||
|
Cash and cash equivalents, end of period
|
$ | 155,760 | $ | 256,409 | |||||
See accompanying notes.
5
UNITED DEFENSE INDUSTRIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The financial information presented as of any date other than December 31 has been prepared from the books and records without audit. Financial information as of December 31, 2003 presented in this quarterly report has been derived from the audited financial statements of United Defense Industries, Inc., but does not include all the associated disclosures required by generally accepted accounting principles. In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments (consisting of normal, recurring adjustments) necessary to present fairly our financial position as of March 31, 2004 and the results of operations and cash flows for the three months ended March 31, 2003 and 2004. The results of operations are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These unaudited consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2003.
2. Summary of Significant Accounting Principles
| Revenue and Profit Recognition for Contracts-in-Progress |
We use different techniques for estimating and recording revenues depending on the type and characteristics of the contract. Sales are recognized on most fixed-price production contracts when the risks and rewards of ownership have been transferred to the customer. For our DoD production contracts, those criteria are typically met when the manufacture of the product is completed and the customer has certified it as meeting the contract specifications and as having passed quality control tests. For our foreign production contracts, sales are generally recorded upon shipment of products to the customer, which corresponds to when the risks and rewards of ownership transfer. Gross margin on each unit delivered or accepted is recognized, based on an estimate of the margin that will be realized over the life of the related contract. We evaluate estimates of gross margin on production contracts and recognize changes in estimates of gross margins during the period in which those changes are determined. Sales under fixed-price ship repair and maintenance contracts are recognized as work is performed. Under this method, contract costs are expensed as incurred and sales are recognized simultaneously based on the ratio of direct labor inputs and other costs incurred to date compared to estimated total direct labor inputs and total costs. Sales under cost reimbursement contracts for research, engineering, prototypes, ship repair and maintenance and certain other contracts are recorded as costs are incurred and include estimated fees in the proportion that costs incurred to date bear to total estimated costs. Award fees are recorded as revenue when the award is earned. We charge any anticipated losses on a contract to operations as soon as those losses are determined.
| Stock-Based Compensation |
At March 31, 2004, we had a stock-based employee compensation plan, which is described more fully in our Form 10K for the year ended December 31, 2003. We account for the plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. On January 20, 2004, the Board of Directors authorized issuance of 141,000 shares of restricted stock and new stock options to purchase 500,000 common shares at an exercise price of $31.80. Accordingly, we record compensation expense over the vesting period in our consolidated statements of operations if the option price is less than fair value of the common stock at the date an option is granted. The compensation recorded in the financial statements reflects the amortization based on vesting of stock options. The following table illustrates the effect on net income and earnings per share if we had elected to apply the
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.
| Three months ended | |||||||||
| March 31, | |||||||||
| 2003 | 2004 | ||||||||
| (In thousands, except | |||||||||
| per share data) | |||||||||
|
Reported net income
|
$ | 38,379 | $ | 41,883 | |||||
|
Add back: Compensation expense recorded, net of
related tax effects
|
12 | 163 | |||||||
|
Deduct: Total stock-based employee compensation
expense determined under fair value based method for all awards,
net of related tax effects
|
(1,049 | ) | (1,447 | ) | |||||
|
Pro forma net income
|
$ | 37,342 | $ | 40,599 | |||||
|
Earnings per share:
|
|||||||||
|
Basic — as reported
|
$ | 0.74 | $ | 0.80 | |||||
|
Basic — pro forma
|
$ | 0.72 | $ | 0.77 | |||||
|
Diluted — as reported
|
$ | 0.73 | $ | 0.78 | |||||
|
Diluted — pro forma
|
$ | 0.71 | $ | 0.76 | |||||
| New Accounting Pronouncements |
On January 17, 2003 the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” FIN 46 becomes effective in the first quarter of 2004 and requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights, or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. The adoption of the Interpretation had no significant impact on our financial statements.
In December 2003, the FASB issued SFAS No. 132R, “Employers’ Disclosure about Pensions and Other Postretirement Benefits.” SFAS No. 132R requires additional disclosures about defined benefit pension plans and other post retirement benefit plans. The standard requires, among other things, additional disclosures about the assets held in employer sponsored pension plans, disclosures relating to plan asset investment policy and practices, disclosure of expected contributions to be made to the plans and expected benefit payments to be made by the plans. Annual disclosures applicable to our U.S. pension and post retirement plans were required to be made in our financial statements for the year ended December 31, 2003. Annual disclosures relating to our non-U.S. plans will be required for the year ending December 31, 2004. We have adopted this pronouncement as of December 31, 2003 for all of our U.S. plans. Disclosure of estimated future benefit payments is effective for fiscal years ending after June 15, 2004.
3. Investments in Affiliated Companies
Our investment in our 51% owned foreign joint venture in Turkey, FNSS Savunma Sistemleri A.S. (“FNSS”), is accounted for using the equity method because we do not control it due to our partner’s veto rights over certain decisions, although we do have the ability to exercise influence over its operating and financial policies. Our share of the earnings from our investment in Turkey was $5.5 million and $5.8 million for the three months ended March 31, 2003 and 2004, respectively.
7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table reports financial results from our joint venture in Turkey.
| Three months ended | ||||||||
| March 31, | ||||||||
| 2003 | 2004 | |||||||
| (In thousands) | ||||||||
|
Sales
|
$ | 41,853 | $ | 51,607 | ||||
|
Cost of sales
|
20,380 | |||||||