10-Q 1 d10q.txt UNITED DEFENSE INDUSTRIES, INC. ================================================================================ -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended: June 30, 2001 Commission File No. 333-43619 UNITED DEFENSE INDUSTRIES, INC. (Exact name of registrant as specified in its charter) ---------------------- Delaware 52-2059782 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) CO-REGISTRANTS AND GUARANTORS IRON HORSE INVESTORS, L.L.C. DELAWARE 52-2059783 UDLP HOLDINGS CORP. DELAWARE 52-2059780 UNITED DEFENSE, L.P. DELAWARE 54-1693796 ---------------------- 1525 Wilson Boulevard, Suite 700 Arlington, Virginia, 22209-2411 (703)312-6100 (Address and telephone number of principal executive offices of Registrant and each Co-Registrant) ---------------------- 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, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Common Stock outstanding as of July 31, 2001. No. of shares Par Value ------------- --------- United Defense Industries, Inc. .............. 18,106,467 $0.01 Iron Horse Investors, L.L.C. ................. -NONE- UDLP Holdings Corp. .......................... 1,000 $0.01 United Defense, L.P. ......................... -NONE- -------------------------------------------------------------------------------- ================================================================================ IRON HORSE INVESTORS, L.L.C. UNITED DEFENSE INDUSTRIES, INC. INDEX -----

IRON HORSE INVESTORS, L.L.C. UNITED DEFENSE INDUSTRIES, INC. INDEX -----

Iron Horse Investors, L.L.C. Consolidated Balance Sheets (In thousands)

See accompanying notes. Iron Horse Investors, L.L.C. Unaudited Consolidated Statements of Operations (In thousands)

See accompanying notes. Iron Horse Investors, L.L.C. Unaudited Consolidated Statement of Members' Capital (In thousands) Amount -------------- Balance, December 31, 2000 $ 42,365 Net foreign currency translation adjustment (2,492) Cumulative effect of change in accounting principle- foreign currency hedges (951) Change in fair value of foreign currency hedges (1,112) Net income for the six months ended June 30, 2001 24,555 -------------- Total comprehensive income 20,000 -------------- Balance, June 30, 2001 $ 62,365 ============== See accompanying notes. Iron Horse Investors, L.L.C. Consolidated Statements of Cash Flows (In thousands)

See accompanying notes. Iron Horse Investors, L.L.C. Notes to Unaudited Consolidated Financial Statements June 30, 2001 1. Basis of Presentation The financial information presented as of any other date than December 31 has been prepared from the books and records without audit. Financial information as of December 31 has been derived from the audited financial statements of Iron Horse Investors, L.L.C. (the "Company"), but does not include all the disclosures required by generally accepted accounting principles. In the opinion of management, the accompanying unaudited financial statements contain all adjustments, consisting of only normal recurring adjustments necessary to present fairly the Company's financial position as of June 30, 2001, and the results of its operations and cash flows for the periods ended June 30, 2001 and 2000. The results of operations are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. These unaudited consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 2. Changes in Accounting Principle Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. The statement requires that an entity recognize all derivatives as either assets or liabilities. At December 31, 2000, the Company had foreign exchange contracts which were designated as cash flow hedges. The fair value of the contracts was a liability of $0.95 million at December 31, 2000. The transition adjustment to implement this new standard on January 1, 2001, which is presented as a cumulative effect of change in accounting principle, was charged to members' capital. In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets", (the "Statements") effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the non-amortization provisions of the Statements is expected to result in an increase in net income of approximately $4 million per year. During 2002, the Company will perform the first of the required impairment tests of goodwill as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. United Defense Industries, Inc. Unaudited Consolidated Balance Sheets (In thousands)

See accompanying notes. United Defense Industries, Inc. Unaudited Consolidated Statements of Operations (In thousands)

See accompanying notes. United Defense Industries, Inc. Unaudited Consolidated Statement of Stockholders' Equity (In thousands)

See accompanying notes. United Defense Industries, Inc. Unaudited Consolidated Statement of Cash Flow (In thousands)

See accompanying notes. United Defense Industries, Inc. Notes to Unaudited Consolidated Financial Statements June 30, 2001 1. Basis of Presentation The financial information presented as of any other date than December 31 has been prepared from the books and records without audit. Financial information as of December 31 has been derived from the audited financial statements of United Defense Industries, Inc. (the "Company"), but does not include all the disclosures required by generally accepted accounting principles. In the opinion of management, the accompanying unaudited financial statements contain all adjustments, consisting of only normal recurring adjustments necessary to present fairly the Company's financial position as of June 30, 2001, and the results of its operations and cash flows for the periods ended June 30, 2001 and 2000. The results of operations are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. These unaudited consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. 2. Financial Information for Subsidiary Guarantors and non-Guarantors The outstanding loans under the senior credit facility and senior subordinated notes are general obligations of the Company and are jointly and severally guaranteed by the wholly owned subsidiary guarantors of the Company. Bofors Defence AB ("Bofors') is the only non-guarantor subsidiary of the Company. The following information presents an unaudited consolidating Balance Sheet, Statement of Operations and Statement of Cash Flows for the Six Months 2001. United Defense Industries, Inc. Unaudited Consolidating Balance Sheet As of June 30, 2001 (In millions)

United Defense Industries, Inc. Unaudited Consolidating Statement of Operations For the Six months ended June 30, 2001 (In millions)

United Defense Industries, Inc. Unaudited Consolidating Condensed Statement of Cash Flows June 30, 2001 (In millions)

3. Changes in Accounting Principle. Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. The statement requires that an entity recognize all derivatives as either assets or liabilities. At December 31, 2000, the Company had foreign exchange contracts which were designated as cash flow hedges. The fair value of the contracts was a liability of $0.95 million at December 31, 2000. The transition adjustment to implement this new standard on January 1, 2001, which is presented as a cumulative effect of change in accounting principle, was charged to accumulated other comprehensive loss within stockholders' equity. In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets", (the "Statements") effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. Application of the non-amortization provisions of the Statements is expected to result in an increase in net income of approximately $4 million per year. During 2002, the Company will perform the first of the required impairment tests of goodwill as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. IRON HORSE INVESTORS, L.L.C. UNITED DEFENSE INDUSTRIES, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION ---------------------------------------------------- June 30, 2001 ------------- Forward-Looking Statements Management's Discussion and Analysis of the Results of Operations and Financial Condition contains forward-looking statements that are based on management's expectations, estimates, projections and assumptions. Words such as "expects," "anticipates," "plans," "believes," "estimates," variations of these words, and similar expressions are intended to identify forward-looking statements which include but are not limited to projections of revenues, earnings, performance, cash flows and contract awards. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks and uncertainties which are difficult to predict. Therefore, actual future results and trends may differ materially from those made in or suggested by any forward-looking statements due to a variety of factors, including: the ability of United Defense Industries, Inc. (the "Company") to design and implement key technological improvements (such as, for example in the Crusader program) and to execute its internal performance plans; performance issues with key suppliers and subcontractors; developments with respect to contingencies such as legal proceedings and environmental matters; labor negotiations; changing priorities or reductions in the U.S. government defense budget; the performance of, and political and other risks associated with, the Company's international operations and joint ventures; and the termination of government contracts due to unilateral government action. For additional information, see "Risk Factors" in the Company's Registration Statement on Form S-4, SEC File Number 333-43619. The following discussion and analysis should be read in conjunction with the financial statements and related notes and the other financial information, included elsewhere in this report, and with the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Introduction In October 1997, the Company's direct parent, Iron Horse Investors, L.L.C. ("Iron Horse"), was funded from several partnerships controlled by The Carlyle Group. The equity was invested in the Company. On October 6, 1997, the Company acquired (the "Acquisition") directly or through its wholly owned subsidiary, UDLP Holdings Corp., 100% of the partnership interests in United Defense L.P. ("UDLP"). United Defense Industries, Inc. is the only asset of Iron Horse. Accordingly, Management's Discussion and Analysis of the Results of Operations and Financial Condition is the same for both Iron Horse and United Defense Industries, Inc. The Company's subsidiary guarantors, UDLP Holdings Corp., UDLP and Barnes & Reinecke, Inc. ("BRI"), are directly or indirectly wholly owned by the Company and all such subsidiary guarantors have guaranteed the Company's 8 3/4% Senior Subordinated Notes on a full, unconditional, and joint and several basis. Accordingly, separate financial statements of those subsidiaries are not considered material or provided herein. Bofors, a Swedish company acquired by the Company in September 2000, is a non-guarantor subsidiary. Note 2 to the consolidated financial statements of United Defense Industries, Inc. sets forth condensed consolidating Balance Sheets, Statement of Operations and Statement of Cash Flows for guarantor and non-guarantor subsidiaries as of June 30, 2001 and for the six months then ended. Overview The Company is a supplier of tracked, armored combat vehicles and weapons delivery systems to the U.S. Department of Defense ("DoD") and a number of allied military forces worldwide. The Company's products include critical elements of the U.S. military's tactical force structure. The Company had a firm funded backlog of approximately $2.1 billion as of June 30, 2001, a substantial majority of which is derived from sole-source, prime contracts. Approximately 75% of the Company's sales for the first six months of 2001 were to the U.S. government, primarily to agencies of the DoD (excluding Foreign Military Sales), or through subcontracts with other government contractors. Interim Armored Vehicles. As discussed in the Company's Report on Form 10-K for the year ended December 31, 2000, the Company competed for participation in the U.S. Army's Interim Armored Vehicle (IAV) Program. The Army awarded the IAV program vehicles to another competitor, and the Company filed a protest with the General Accounting Office (GAO) regarding the award. On April 9, 2001 the GAO denied the Company's protest, and the Company subsequently determined not to further contest the IAV award. Accordingly, the Company does not expect to participate in the IAV program. Apart from the opportunity for revenues and profits thereby lost, the Company believes that the primary business result of the IAV loss is that unless Congress increases overall spending allocated to Army, the anticipated funding requirements for the IAV program (approximately $6.4 billion spanning DoD Fiscal Years 2001 through 2006) may reduce the funds available for the Company's other U.S. Army programs, such as the Crusader artillery system and the Bradley Fighting Vehicle. Administration Defense Review. The eventual outcome of the Bush Administration's review of the Defense Department's principal missions, priorities, and programs is unknown. Press reports indicate that some participants in the review have recommended the cancellation or deferral of various DoD weapons programs, including certain programs in which the Company participates: the Crusader artillery system, the DD21 destroyer, and further upgrades to the Bradley Fighting Vehicle fleet. By contrast, the Administration's recent FY02 DoD budget submitted to Congress included substantial proposed appropriations for all of the foregoing programs. The Company is uncertain whether (i) the Administration's defense budgetary and legislative proposals may be further revised to reduce funds for any of the Company's programs, and (ii) any ensuing Congressional action would adopt, reject, or otherwise vary the Administration's proposals. If the final outcome of the foregoing process were to include any significant reduction, deferral, or cancellation of one or more substantial programs in which the Company participates, the Company's revenues and profits would be commensurately reduced, to the extent not offset by favorable developments elsewhere in the Company's business. The only material change to the Company's major programs from those described in the Company's Form 10-K report, other than normal additional funding as new contracts are negotiated and awarded, was the signing of a multi- year contract to upgrade Bradley Fighting Vehicles for approximately $700 million over a three-year period. For a more detailed description of the Company's business and principal operating programs, see the Form 10-K report for the year ended December 31, 2000. Results of Operations Three Months Ended June 30, 2001 ("Three Months 2001") Compared with Three Months Ended June 30, 2000 ("Three Months 2000").

Revenue. The increase in revenue of $49.5 million during the Three Months 2001 was due to the sales generated by Bofors, which was acquired in September 2000, increased Crusader volume and higher deliveries of amphibious vehicles to Korea. These favorable variances were partially offset by lower international sales due to completion of contracts with Spain for delivery of amphibious vehicles and Greece for shipment of multiple launcher rocket systems, and lower sales of co-production recovery vehicles in Egypt. Gross Profit. Driven by the improvement in revenue as discussed in the previous paragraph, gross profit for the Three Months 2001 was better by $9.4 million. Selling, general and administrative expenses. Selling, general and administrative expenses were $9.6 million less in the Three Months 2001 due to lower amortization of intangible assets established in conjunction with the Acquisition and reduced proposal costs in the Three Months 2001 (the Interim Armored Vehicle program required substantial proposal costs in the Three Months 2000), partially offset by spending at Bofors. Interest expense. Net interest expense was lower by $1.3 million in the Three Months 2001 due to the decline in interest expense resulting from lower debt levels and interest rates. The senior debt was fully repaid as of June 30, 2001. Provision for income taxes. The moderate increase in the provision for income taxes for the Three Months 2001 of $0.2 million was a result of taxes provided for Bofors partially offset by reduction due to the application of the new "FSC Repeal Extraterritorial Income Exclusion Act of 2000" to foreign sales in replacement of the former Foreign Sales Corporation tax regulation. Net (loss)income. As a result of the foregoing, there was net income of $16.8 million in the Three Months 2001 compared with a net loss of $3.1 million in the Three Months 2000. Six Months Ended June 30, 2001 ("Six Months 2001") Compared with Six Months Ended June 30, 2000 ("Six Months 2000").

Revenue. The revenue during the Six Months 2001 improved by $74.7 million over the Six Months 2000 of which eighty percent was attributed to sales generated by Bofors. The remainder was mostly due to higher billings for Crusader, advance gun systems, self-propelled howitzers and amphibious assault vehicles, offset mainly by lower shipments of Bradley vehicles and co-production recovery vehicles in Egypt. Gross Profit. The increase in gross profit by $18.4 million or 17.2% from the Six Months 2000 was largely contributed by Bofors and the other increased revenue described above. The modest increase in gross profit rate in the Six Months 2001 was the result of contract profit adjustments. Selling, general and administrative expenses. Selling, general and administrative expenses were $8.2 million less in the Six Months 2001 due to lower amortization of intangibles related to the acquisition and reduced proposal costs, partially offset by spending at Bofors. Earnings from foreign affiliates. Earnings from foreign affiliates in the Six Months 2001 were $4.7 million more from the Six Months 2000. The increase was due to an end of contract adjustment at the Company's joint venture in Saudi Arabia. Interest expense. Net interest expense was lower by $3.9 million in the Six Months 2001 due to the decline in interest expense resulting from lower debt levels and interest rates. The senior debt was fully repaid as of June 30, 2001. Provision for income taxes. The provision for income taxes for the Six Months 2001 was $4.9 million higher than the Six Months 2000 mainly due to increased taxes for the state of Pennsylvania and provision for Bofors, partially offset by the reduction in foreign sales taxes due to the application the new "FSC Repeal Extraterritorial Income Exclusion Act of 2000" to foreign sales. Net (loss)income. As a result of the foregoing, there was net income of $25.6 million in the Six Months 2001 compared with a net loss of $3.8 million in the Six Months 2000. Liquidity

Operating activities provided net cash of $43.3 million and $8.0 million in the Six Months 2001 and 2000, respectively. The substantial increase of $35.3 million resulted primarily from growth in net earnings as discussed in the above "Results of Operations". Other contributing factors are highly improved collections of receivables partly offset by the settling of accrued liabilities to a greater extent than the prior year and a deterioration in the relationship between inventory build up net of advanced payments. Investing activities were moderately higher in the Six Months 2000 mainly due to the purchase of BRI. Cash used for financing activities was applied to fully pay down the senior debt of $86.8 million in 2001compared with a payment of $47.5 million in 2000. The Company is in the process of refinancing its debt. Existing debt arrangements, consisting of the October 6, 1997 senior debt credit facility (under which, as indicated above, no loan amount is currently outstanding) and the 8 3/4% Senior Subordinated Notes Due 2007 (the "Notes"), $182.8 million of which are currently outstanding, will be replaced. The new financing arrangement, for which the Company expects to conclude a definitive agreement within the next few days, will provide to the Company a revolving credit facility of $200 million, and also a loan of $600 million at an interest rate largely derived from the London Inter-Bank Offered Rate ("Libor"). The Company initially expects to use such loan proceeds to repurchase the Notes, and to pay a dividend to holders of its common stock in the amount of approximately $300 million. On July 27, 2001 the Company commenced a tender offer and consent solicitation for the Notes. The total fees and expenses associated with the refinancing, including an early tender premium offered by the Company for the Notes, is estimated to be as much as $45 million, and will reduce the Company's net income for the third quarter and full year 2001 by approximately $17 million. Upon completion of the refinancing, the repurchase of the Notes, and the dividend payment, the Company anticipates that approximately $100 million in proceeds from the refinancing loan will remain available for future corporate uses. Also, upon completion of such transactions, the Company's outstanding debt will have increased from $182.8 million to approximately $600 million. The new financing agreement is expected to require mandatory principal repayments by the Company of $5.7 million in 2001, $32.6 million in 2002, and comparable amounts in future years. Such payments will reduce cash available for other corporate purposes. Additionally, interest charges under the new financing are expected to amount to approximately $15 million in 2001. As interest charges in future years will depend upon periodic fluctuations in Libor, the Company cannot precisely predict the anticipated interest expense for 2002 and future years, but the Company expects that such charges will substantially exceed interest expenses incurred in 2000 and 2001, and will materially reduce the Company's net income in such future periods. IRON HORSE INVESTORS, L.L.C. UNITED DEFENSE INDUSTRIES, INC. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT ---------------------------------------------- MARKET RISK ----------- June 30, 2001 ------------- Forward Exchange Contracts. Bofors uses forward exchange contracts to reduce the effect of fluctuating currencies on short-term foreign currency- denominated transactions. The following table summarizes by major currency the contractual amounts of Bofors' forward exchange contracts and their termination market values.

As a result of adopting SFAS No. 133, the net liability for the difference between the contractual amount and the termination market value is recorded as a current liability in the balance sheet. PART II ------- OTHER INFORMATION ----------------- June 30, 2001 ITEM 1. Legal Proceedings ----------------- The Company is subject to claims and lawsuits arising in the ordinary course of business. Management believes that the outcome of any such proceedings to which the Company is a party will not have a material adverse effect on the Company. ITEM 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits None. (b) Reports on Form 8-K None. SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. By: /s/ Francis Raborn ------------------- Francis Raborn Principal Financial and Accounting Officer and Authorized Signatory Dated: August 6, 2001

UNITED DEFENSE LP 10-Q