United Industrial shares slip

Decline in third-quarter profit from cost overruns hurts trading

November 08, 2006|By Allison Connolly | Allison Connolly,Sun reporter

Shares of United Industrial Corp. tumbled yesterday after the Hunt Valley defense contractor reported that third-quarter profit fell by more than a third because of cost overruns.

The company, whose subsidiary AAI Corp. manufactures drones for the Army, reported net income declined 34 percent to $6.2 million, or 48 cents per diluted share, from $9.4 million, or 69 cents per diluted share, for the corresponding period a year ago. Net income from continuing operations dropped to $7.4 million, or 56 cents per diluted share, from $9.3 million, or 68 cents per diluted share, a year ago.

The results were below the 77 cents per diluted share estimated by analysts polled by Thomson Financial First Call, and Wall Street punished the stock, sending it down 8.65 percent, or $4, to close at $42.25 a share.

The company said it incurred cost overruns of $2.2 million on four fixed-price defense contracts. Two were related to it its drone business: It was asked to speed up production of a small ducted-fan system for a micro air vehicle for Honeywell, and costs crept up in upgrading its Pioneer drone. The other two contracts were for weapons training systems.

Chief Executive Officer Frederick M. Strader said the cost overruns coupled with higher pension costs and expenses related to stock-based compensation contributed to the disappointing quarter.

"Although our results for the quarter did not meet expectations, we don't anticipate a repeat of the issues that impacted the business, and we remain optimistic about our future," Strader told analysts yesterday during a conference call.

Overall, sales were up 12 percent to $141.6 million, led by new Army contracts for its unmanned aerial vehicles, or UAVs as they are known.

"You don't expect overruns on four contracts during a single quarter," said analyst Michael French of New York City-based Kaufman Bros., who doesn't own any shares in United Industrial but does make a market in it. Because the company doesn't provide earnings guidance, French said it is difficult to tell what the fourth quarter and next year will look like. "One quarter is really a snapshot," he said. "One quarter doesn't reflect the value of a company" one way or the other.

Also during the quarter, the company's logistics support business related to its Shadow 200 Tactical Unmanned Aircraft Systems slowed because the Army was re-evaluating inventory levels. Strader said fourth-quarter orders should return to "more normal levels" seen earlier in the year.

"The Army, again, is driving all vendors to find ways to continue to reduce their costs," Strader said.

United Industrial also announced yesterday that AAI would pay $31 million in cash for Corpus Christi, Texas-based McTurbine Inc., which overhauls helicopter engines for the Army.

The acquisition of McTurbine, a wholly owned subsidiary of McLean, Va.-based M International Inc., is an expansion of the company's relationship with the Army, Strader said. McTurbine, which overhauls engines for Huey, Cobra and Chinook helicopters, had revenue of $24 million over the 12 months ended June 30, he said.

However, French said he can't determine how valuable the acquisition is because Strader declined to disclose historical operating margins and other financial details before the deal closes.

allison.connolly@baltsun.com

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