These are tough times for AAI Corp., the Cockeysville defense contractor that state officials once touted as "a super company of the future" because of its rapid growth.
AAI prospered during the Reagan administration's defense buildup, feeding on Pentagon orders for products such as a flight simulator to train F-15 pilots and turrets for the Sergeant York anti-aircraft gun. From 1979 to 1987, its work force grew from 1,500 to 3,500.
But since then, AAI has eliminated nearly 2,000 jobs at its York Road complex. Two weeks ago, Thomas V. Murphy resigned under pressure after a three-year stint as president and chief executive. Friday, the company reported a first-quarter loss of $16.5 million. And morale is low as workers await word on layoffs this week that could affect as many as 225 employees.
"It's constant fear," said one middle manager who asked not be identified for fear of retribution by the company. "It's like you're living on a bubble; everyone feels their job is on the block."
The new layoffs could portend even greater change at AAI. There are strong signals from corporate parent United Industrial Corp. -- whose stock price has dropped more than 50 percent since the Reagan era -- that New York-based senior management is unhappy with its major subsidiary.
And as United Industrial stockholders prepare to meet tomorrow in New York, stock analysts say that the company -- and AAI, which accounts for about 80 percent of its revenue -- could be put up for sale.
Like other suppliers of military equipment, AAI has seen its major market shrink as the Cold War ended. Ironically, one of the company's major diversification moves -- the $15.9 million acquisition of Microflite Simulation International Corp. in 1991 -- soured for similar reasons.
"That was a disaster," Bernard Fein, president and chairman of United Industrial, said of the Microflite deal.
The purchase of the Binghamton, N.Y., company, which makes flight simulators used to train commercial pilots, was designed to lessen AAI's dependence on military contracts. Enthusiastic executives were predicting that Microflite could boost AAI's commercial sales from about 2 percent of revenues to 40 percent within a few years.
That never happened. The airline industry, plagued by overcapacity, has been shrinking and carriers have been laying off pilots. Microflite also was hurt by a $50 million lawsuit filed by CAE-Link Corp. alleging that Microflite violated patent rights related to building the simulators.
"Nobody was giving us any business because of the CAE lawsuit," Mr. Fein said. "CAE would call our customers and say, 'Don't do business with them, you might not be able to use the equipment.' "
The result: Microflite posted a loss of $5.8 million last year and United Industrial is trying to unload it.
Mr. Fein says the company is negotiating with a couple of potential buyers of Microflite and a sister plant in Orlando, Fla., that manufactures flight simulators for military planes.
Asked if the company might recover its investment, he laughed and said: "No, no. . . . We want to walk away from it and take our losses."
Mr. Fein calls the Microflite acquisition an honest mistake, one that he can understand. But he's not so understanding of other problems at AAI.
In a telephone interview last week, he lashed out at the subsidiary's management, accusing them of "trying to hide the fact that certain contracts were operating at a loss."
"I'm 85 and I used to be very active in the company," he said, "but now they think they can just bypass me."
Without directing his criticism at any one in particular, he added, "They took the approach of 'What . . . are you doing here? You belong in an old folks home.' "
He pointed to two other troubled AAI programs, a firefighting training system and an anti-submarine helicopter flight simulator, claiming that management was not forthright in disclosing financial details.
On the firefighting system, a commercial spinoff of a Navy contract to train crewmen to fight ship fires, Mr. Fein said AAI sought to conceal several things it had overlooked, including the high cost of insurance.
On the helicopter program, he said AAI completed construction of the equipment and still had to perform other services estimated to cost $5 million. "The whole contract was only $5 million," he added. "They tried to hide that loss from us."
He exclaimed, "I intend to have somebody there . . . a president who will communicate with us."
As an indication of his distance from AAI's operations, Mr. Fein seemed surprised to hear the subsidiary -- by its own count -- has cut employment from 3,500 workers in 1987 to about 1,530 today. "That's wrong," he said. "I don't believe that."
When asked about Mr. Murphy's sudden departure, Mr. Fein responded: "There were lots of reasons. He was not fired; he resigned. He probably knew what was coming because of the questions we were asking. He realized he made a boo-boo in the way he ran the company."
Mr. Murphy did not return a phone call to his home. And AAI executives, who initially agreed to be interviewed for this article, later canceled the session, saying they wanted to wait until a corporate reorganization is put into place this week.
Still, Mr. Fein says, "AAI is going to be a sound operation again. I can assure you."
The situation at AAI might not be as bad as it appears, says analyst Robert Henderson of David L. Babson & Co., a Cambridge, Mass., money management company that holds about 6 percent of United Industrial's stock.
"For a defense contractor," he said, "I don't think they are doing that bad. Take away the Microflite, and my guess is that they are breaking even."
As for the departure of AAI's chief executive, Mr. Henderson said, "You can look at it as a negative and say things were out of control, or you could say it was a positive -- it looks like the JTC company is trying to get things under control."
United Industrial last Friday reported a first-quarter loss of $16.5 million, compared to a profit of $2.2 million in the same period last year. Howard M. Bloch, United Industrial's secretary and treasurer, attributed the loss to a previously reported $23 million restructuring charge at AAI, the deficit operations at Microflite and losses on other AAI contracts.
United Industrial was profitable in 1992, although sales fell from $315 million in 1988 to $251 million last year. Earnings fell from $16.9 million to $6.4 million over the same period.
Today, AAI estimates that about 30 percent of its business comes from commercial markets. One seemingly successful diversification under Mr. Murphy was the contract received in 1991 to produce and install automated surface observation systems at airports throughout the United States.
ASOS, as the program is called by AAI workers, uses electronic equipment to measure airport weather conditions and pass them on to pilots preparing to land. At the end of 1992, the company had 164 systems in operation. It is expected to deliver 2,000 systems to the National Weather Service by mid-1996.
Meanwhile, United Industrial says that its defense segment -- primarily AAI -- accounted for more than $215 million in sales last year and posted operating income of $9.4 million. This was no small accomplishment considering the current state of the defense industry, Mr. Henderson says.
United Industrial's two other operating units -- Detroit Stoker Co., a manufacturer of industrial boiler equipment, and Neo Products Co., a maker of plastic parts for a broad range of industries -- are consider ably smaller. They account for about 20 percent of United Industrial's total business.
Both Mr. Henderson and Dennis Moran, who follows United Industrial for St. Louis-based A. G. Edwards & Sons, say Mr. Fein runs the company as a one-man show. They expect that it will eventually be sold.
"Look at the age of the board and its makeup; there's no operations member on the board," Mr. Moran said. "You have to come to the conclusion that [United Industrial] will be sold."
The average age of the five-member board is near 70, and this is reduced considerably by Rick S. Bierman, a 43-year-old attorney.
Mr. Fein didn't respond to a question about prospects for a sale. He said he'd have more freedom to discuss the company's future after tomorrow's shareholder meeting.