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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-Q

(Mark One)

þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 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.

(Exact name of Registrant as Specified in its charter)
     
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

(Registrant’s telephone number, including area code)

(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 October 29, 2004 there were 50,720,247 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 September 30, 2004 (unaudited)     2  
    Unaudited Consolidated Statements of Operations for the three months and nine months ended September 30, 2003 and 2004     3  
    Unaudited Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2004     4  
    Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 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     15  
Item 3.
  Quantitative and Qualitative Disclosures about Market Risk     20  
Item 4.
  Controls and Procedures     21  
PART II — OTHER INFORMATION
Item 2.
  Repurchase of Common Stock by the Issuer     22  
Item 6.
  Exhibits and Reports on Form 8-K     22  
Signature     23  

1

 

UNITED DEFENSE INDUSTRIES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)
                     
December 31, 2003 September 30, 2004
ASSETS
Current assets:
               
   
Cash and cash equivalents
  $ 286,730     $ 319,617  
   
Trade receivables, net
    168,625       172,234  
   
Long-term contract inventories
    392,850       320,452  
   
Other current assets
    20,127       18,539  
     
     
 
 
Total current assets
    868,332       830,842  
Property, plant and equipment, net
    181,283       194,626  
Goodwill, net
    342,843       362,479  
Intangible assets, net
    14,222       11,728  
Prepaid pension and postretirement benefit cost
    128,997       122,836  
Restricted cash
    12,244       12,053  
Other assets
    49,587       30,156  
     
     
 
Total assets
  $ 1,597,508     $ 1,564,720  
     
     
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
 
Current portion of long-term debt
  $ 52,043     $ 52,043  
   
Accounts payable, trade and other
    124,502       97,561  
   
Advanced payments
    462,304       379,580  
   
Current tax liability
    —       13,394  
   
Deferred tax liability
    16,280       21,034  
   
Accrued and other liabilities
    140,307       143,254  
     
     
 
 
Total current liabilities
    795,436       706,866  
Long-term liabilities:
               
   
Long-term debt, net of current portion
    524,946       485,915  
   
Accrued pension and postretirement benefit cost
    51,538       46,364  
   
Deferred tax liability
    17,695       23,664  
   
Other liabilities
    80,812       77,362  
     
     
 
 
Total liabilities
    1,470,427       1,340,171  
Commitments and contingencies
               
Stockholders’ equity:
               
   
Common stock $.01 par value, 150,000,000 shares authorized; 52,220,189 issued and outstanding at December 31, 2003; 53,021,452 and 51,391,952, issued and outstanding, respectively, at September 30, 2004
    522       514  
 
Additional paid-in-capital
    183,337       199,015  
 
Deferred compensation
    (197 )     (3,824 )
 
Retained (deficit) earnings
    (54,304 )     28,037  
 
Accumulated other comprehensive (loss) gain
    (2,277 )     807  
     
     
 
 
Total stockholders’ equity
    127,081       224,549  
     
     
 
Total liabilities and stockholders’ equity
  $ 1,597,508     $ 1,564,720  
     
     
 

See accompanying notes.

2

 

UNITED DEFENSE INDUSTRIES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except shares and per share data)
                                     
Three months ended Nine months ended
September 30, September 30,
2003 2004 2003 2004
Revenue:
                               
 
Sales
  $ 507,915     $ 573,399     $ 1,527,891     $ 1,696,782  
Costs and expenses:
                               
 
Cost of sales
    400,298       436,658       1,210,061       1,326,961  
 
Selling, general and administrative expenses
    38,065       38,393       117,003       115,524  
 
Research and development
    10,717       8,030       16,752       23,808  
     
     
     
     
 
   
Total expenses
    449,080       483,081       1,343,816       1,466,293  
     
     
     
     
 
Income from operations
    58,835       90,318       184,075       230,489  
 
Earnings related to investments in foreign affiliates
    5,003       —       16,658       6,376  
 
Interest income
    1,012       1,328       2,909       3,234  
 
Interest expense
    (7,100 )     (6,722 )     (21,801 )     (19,624 )
     
     
     
     
 
Total other expense
    (1,085 )     (5,394 )     (2,234 )     (10,014 )
     
     
     
     
 
Income before income taxes
    57,750       84,924       181,841       220,475  
Provision for income taxes
    20,360       32,679       69,996       85,544  
     
     
     
     
 
Net income
  $ 37,390     $ 52,245     $ 111,845     $ 134,931  
     
     
     
     
 
Earnings per common share-basic
  $ 0.72     $ 1.01     $ 2.16     $ 2.58  
     
     
     
     
 
 
Weighted average common shares outstanding
    52,029,410       51,882,247       51,883,593       52,240,432  
Earnings per common share-diluted
  $ 0.71     $ 0.99     $ 2.12     $ 2.54  
     
     
     
     
 
 
Weighted average common shares outstanding
    52,994,910       52,819,743       52,802,260       53,185,819  

See accompanying notes.

3

 

UNITED DEFENSE INDUSTRIES, INC.

CONSOLIDATED STATEMENTS

OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
                                                 
Accumulated
Additional Retained Other
Common Paid-In Deferred (Deficit) Comprehensive
Stock Capital Compensation Earnings (Loss)/Gain Total
Balance, December 31, 2003
   $ 522     $ 183,337     $ (197 )   $ (54,304 )   $ (2,277 )   $ 127,081  
Issuance of restricted stock awards
            4,783       (4,783 )                     —  
Amortization of deferred stock compensation
                    1,156                       1,156  
Exercise of stock options
    8       11,220                               11,228  
Tax benefit from stock options
            5,362                               5,362  
Stock repurchased
    (16 )     (5,687 )             (52,590 )             (58,293 )
Net foreign currency translation
                                    104       104  
Change in fair value of foreign currency and interest rate hedges, net of tax
                                    2,980       2,980  
Net income for period ended September 30, 2004
                            134,931               134,931  
                                             
 
Total comprehensive income
                                            138,015  
     
     
     
     
     
     
 
Balance, September 30, 2004
   $ 514     $ 199,015     $ (3,824 )   $ 28,037     $ 807     $ 224,549  
     
     
     
     
     
     
 

See accompanying notes.

4

 

UNITED DEFENSE INDUSTRIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
                   
Nine months ended
September 30,
2003 2004
Operating activities
                
Net income
  $ 111,845     $ 134,931  
Adjustments to reconcile net income to cash provided by operating activities:
               
 
Depreciation
    20,170       22,886  
 
Amortization of software
    3,585       3,538  
 
Amortization of other intangibles
    11,261       7,470  
 
Amortization of financing costs
    2,524       2,293  
 
Deferred tax provision
    33,314       10,743  
Changes in operating assets and liabilities:
               
 
Trade receivables
    (6,733 )     1,009  
 
Inventories
    71,006       79,169  
 
Other assets
    (7,719 )     21,723  
 
Prepaid pension and postretirement benefit cost
    (3,452 )     6,161  
 
Accounts payable, trade and other
    (24,626 )     (27,694 )
 
Advanced payments
    (37,572 )     (83,318 )
 
Current tax liability
    —       13,956  
 
Accrued and other liabilities
    (6,635 )     2,273  
 
Accrued pension and postretirement benefit cost
    5,252       (5,018 )
     
     
 
Cash provided by operating activities
    172,220       190,122  
     
     
 
Investing activities
                
 
Capital expenditures
    (32,247 )     (26,511 )
 
Purchase of Kaiser Compositek, Cercom and Hawaii Shipyards
    —       (44,570 )
     
     
 
Cash used in investing activities
    (32,247 )     (71,081 )
     
     
 
Financing activities
                
 
Payments on long-term debt
    (13,011 )     (39,032 )
 
Proceeds from sale of common stock
    2,291       11,228  
 
Common stock repurchased
    —       (58,293 )
     
     
 
Cash used in financing activities
    (10,720 )     (86,097 )
     
     
 
Effect of exchange rate changes on cash
    5,059       (57 )
     
     
 
Increase in cash and cash equivalents
    134,312       32,887  
Cash and cash equivalents, beginning of year
    106,802       286,730  
     
     
 
Cash and cash equivalents, end of period
  $ 241,114     $ 319,617  
     
     
 

See accompanying notes.

5

 

UNITED DEFENSE INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004
 
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 annual disclosures required by generally accepted accounting principles. Certain amounts in prior period financial statements have been reclassified to conform to the current period presentation. 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 September 30, 2004 and the results of operations for the three months and nine months ended September 30, 2003 and 2004 and cash flows for the nine months ended September 30, 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 and our Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30, 2004.

 
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 production contracts with foreign customers, 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 quarterly 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 base fees in the proportion that costs incurred to date bear to total estimated costs. Award fees are recorded as revenue when contracts are modified to incorporate the earned award fees. We charge any anticipated losses on a contract to operations as soon as those losses are determined.

 
Stock-Based Compensation

      At September 30, 2004, we had a stock-based employee compensation plan, which is described more fully in our Form 10-K for the year ended December 31, 2003. On April 13, 2004 our stockholders approved an amendment and restatement of our stock-based plan, renamed the Incentive Award Plan, in order to (i) reserve an additional 2,000,000 shares for use under the plan, (ii) qualify the plan for certain awards pertaining to Sec. 162(m) of the Internal Revenue Code, and (iii) add the ability to make grants of other equity-based compensation. 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. Accordingly,

6

 

UNITED DEFENSE INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 c