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Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Good day and welcome to United Industrial Corporation's second quarter 2006 earnings results teleconference. Today's call is being recorded. At this time I would like to turn the call over to Mr. Fred Strader, President and Chief Executive Officer. Please go ahead, sir.
FRED STRADER, PRESIDENT, CEO, UNITED INDUSTRIAL CORPORATION: Good morning. I am Fred Strader, President and CEO of United Industrial Corporation. Welcome to our review of United Industrial's second quarter 2006 results. Our General Counsel, Jonathan Greenberg, and our Chief Financial Officer, Jim Perry, is joining me today. Before we begin, I will ask Jonathan to provide a cautionary statement.
JONATHAN GREENBERG, GENERAL COUNSEL, UNITED INDUSTRIAL CORPORATION: Information discussed during today's call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause the Company's actual results or performance to differ materially from those expressed or implied in such statements. These risk factors are explained in detail in the Company's filings with the SEC, which are also available on the Company's website. The Company does not undertake to update any forward-looking statement or to disclose new facts, events or circumstances that may affect the accuracy of any forward-looking statement.
In addition to discussing the Company's financial results that are determined in accordance with GAAP on today's call, we may discuss certain non-GAAP financial measures, such as income from continuing operations before special items, EBITDA and free cash flow. Such measurements are not recognized in accordance with GAAP and the Company does not intend for this information to be considered in isolation or as a substitute for GAAP measures. In addition, they're not necessarily comparable to operating earnings performance measures that may be presented by other companies.
Additional information concerning the Company's use of non-GAAP measures, including certain reconciliations from non-GAAP reported measures to GAAP reported results, is contained in the Company's earnings release which is available on the Company's website at www.unitedindustrial.com. And now back to our CEO, Fred Strader.
FRED STRADER: I will start by recapping the financial results for the second quarter and of first half of 2006. Then I will review key developments and highlights from the quarter. After that we will open it up for questions.
Before I begin, I would like remind you that results from continuing operations include the results of the Company's Defense and Energy segments only. Results from the Company's remaining transportation operations are reported as discontinued operations.
For the second quarter ending June 30, 2006 net sales from continuing operations increased more than 24% to $149 million compared to revenues of nearly $120 million dollars for the same quarter last year. Net income from continuing operations was $10.6 million or $0.74 per diluted share. This compares to $8.3 million or $0.60 per diluted share for the same quarter last year.
This year's second quarter results included the effect of the new accounting standard requiring expensing of stock option compensation. The impact on this period was $500,000 net of tax, or $0.03 per diluted share. As most of you know, the new accounting standard only became effective for UIC January 1 of this year, and therefore did not impact 2005.
Including the results of our discontinued transportation operation, net income for the second quarter of 2006 increased 21% to $10.3 million or $0.72 per diluted share. This compares to net income of $8.4 million or $0.61 per diluted share in the second quarter of last year.
Defense segment sales increased 23% to more than $137 million from $112 million during the same period in 2005. The sales growth was due to an increase in Shadow 200 Tactical Unmanned Aircraft Systems production volumes, an increase in logistical support for the growing number at fielded Shadow systems, and an increase in unmanned systems engineering activity. These improvements were partially offset by a decrease in JSECST test equipment sales due to the completion of our last major production order for JSECST last year.
Operating income from the Defense segment increased 15% to $13.5 million from $11.7 million during the same period of 2005. The Defense segment operating margin declined from 10.5% of sales to 9.8% of sales due to an increase in pension expense of $700,000, and the mix impact of an increase in lower risk, lower margin cost plus work primarily for logistical support of Shadow systems.
Energy segment sales increased 42% to $12 million from $8 million in the second quarter of 2005. The net sales increase was primarily driven by higher demand for stokers, as well as spares for its existing installed base. Operating income more than doubled as a result of the higher volume and improved margins.
For the first half of the year United Industrial's revenues were up 26% to nearly $287 million compared to $227 million in the first half of 2005. Net income from continuing operations decreased 7% to $19.4 million or $1.43 per diluted share compared to $20.9 million or $1.44 per diluted share in the first half of last year.
2006 first half results included the effect of expensing stock option compensation of $700,000 net of tax or $0.05 per diluted share. Last year's first half results included a gain on sale of undeveloped property of $4.6 million net of tax or $0.30 per diluted share.
Including the results of our discontinued transportation operation, net income for the first half of 2006 was $18.8 million or $1.39 per diluted share. This compares to net income of $21.1 million or $1.45 per share for the same period last year.
Net sales for the Defense segment for the first six months of year increased 26% to $266 million from $212 million during the same period in 2005. Operating income for the Defense segment increased 14% to $27.1 million from $23.8 million during the first half of 2005.
Sales for the Energy segment for the first of the year increased 32% to nearly $21 million from nearly $16 million in the same period of 2005. Operating income increased sharply to $5 million from $1 million during the first half of 2005. Bookings were a record $260 million for the second quarter of 2006, and a record 443 million for the first six months of the year.
Funded backlog for the Company's continuing operations was more than $653 million at June 30, 2006 comprised of 401 million for our unmanned aircraft systems business, 176 million for services, 48 million for test and training, 17 million for advanced programs, and 11 million for Detroit Stoker. By comparison, the Company's funded backlog was $483 million at June 30, 2005, comprised of 335 million for unmanned systems, 88 million for services, 37 million for test and training, 13 million for advanced programs, and 10 million for Detroit Stoker.
Let me now provide some operating highlights for the quarter. Our unmanned aircraft systems business continues to lead overall performance. Early in the second quarter we received $87.2 million for the production of 9 additional Shadow 200 Tactical Unmanned Aircraft Systems, bringing to 65 the total number of Shadow systems ordered by the U.S. Army. Today 49 Shadow systems of that total have been delivered.
The Shadow system surpassed 100,000 flight hours …