SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
[x] THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] 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: 033-78954
SCOTSMAN HOLDINGS, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 52-1862719
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8211 Town Center Drive 21236
Baltimore, Maryland (Zip Code)
(Address of principal executive offices)
(410) 931-6000
(Registrant's telephone number, including area code)
None
(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 X No __
As of November 14, 2002, 6,194,799 shares of common stock ("Common Stock")
of the Registrant were outstanding.
SCOTSMAN HOLDINGS, INC.
INDEX
FORM 10-Q
PART I - FINANCIAL INFORMATION Page
----
Safe Harbor Statement 1
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 2002 2
and December 31, 2001
Consolidated Statements of Operations for the three 3
and nine months ended September 30, 2002 and 2001
Consolidated Statements of Cash Flows for the nine 4
months ended September 30, 2002 and 2001
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
Item 4. Controls and Procedures 15
CERTIFICATIONS 17
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
SAFE HARBOR STATEMENT - CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Form 10-Q for the quarter ended September
30, 2002 constitute "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
These forward-looking statements involve known and unknown risks, uncertainties
and other factors, which may cause actual results to differ materially from
future results expressed or implied by these forward-looking statements. These
factors include, among others, the following: substantial leverage and our
ability to service debt; changing market trends in the mobile office industry;
general economic and business conditions including a prolonged or substantial
recession; our ability to finance fleet and branch expansion and to locate and
finance acquisitions; our ability to implement our business and growth strategy
and maintain and enhance our competitive strengths; our ability to obtain
financing for general corporate purposes; intense industry competition;
availability of key personnel; industry over-capacity; and changes in, or the
failure to comply with, government regulations. No assurance can be given as to
future results and neither we nor any other person assumes responsibility for
the accuracy and completeness of these forward-looking statements. Consequently,
you should not place undue reliance on these forward-looking statements, which
speak only as of the date hereof. We undertake no obligation to publicly release
the result of any revision to these forward-looking statements that may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
September 30,
2002 December 31,
(Unaudited) 2001
----------- -----------
Assets (In thousands)
Cash $ 452 $ 586
Trade accounts receivable, net of allowance for
doubtful accounts of $1,317 in 2002 and $1,298 in 2001 68,957 74,336
Prepaid expenses and other current assets 25,358 25,628
Rental equipment, net of accumulated depreciation of
$200,360 in 2002 and $178,046 in 2001 859,389 866,867
Property and equipment, net 74,146 73,782
Deferred financing costs, net 25,055 10,696
Goodwill 168,956 168,378
Other intangible assets, net 3,433 3,679
Other assets 21,910 21,034
----------- -----------
$ 1,247,656 $ 1,244,986
=========== ===========
Liabilities and stockholders' equity (deficit)
Accounts payable and accrued expenses $ 42,458 $ 45,516
Accrued interest 22,269 4,781
Rents billed in advance 19,013 25,796
Long-term debt 995,427 1,022,972
Deferred income taxes 156,152 147,200
----------- -----------
Total liabilities 1,235,319 1,246,265
----------- -----------
Stockholders' equity (deficit):
Common stock, $.01 par value. Authorized 10,000,000
shares; issued 9,507,407 shares in 2002 and 2001 95 95
Additional paid-in capital 233,926 233,926
Cumulative foreign currency translation adjustment (1,408) (1,505)
Retained earnings 75,662 62,065
----------- ----------
308,275 294,581
Less treasury stock, - 3,312,608 common shares in 2002 and
3,310,808 common shares in 2001, at cost (295,938) (295,860)
----------- ----------
Total stockholders' equity (deficit) 12,337 (1,279)
----------- ----------
$ 1,247,656 $ 1,244,986
=========== ==========
See accompanying notes to consolidated financial statements.
2
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Three and nine months ended September 30, 2002 and 2001
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------- ---------------------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands except share and per share amounts)
Revenues
Leasing $ 56,075 $ 60,236 $171,718 $178,003
Sales:
New units 31,902 33,375 73,167 69,670
Rental equipment 8,391 5,566 18,570 15,829
Delivery and installation 28,538 30,209 77,642 71,230
Other 12,376 11,505 32,149 31,422
-------- -------- -------- --------
Total revenues 137,282 140,891 373,246 366,154
-------- -------- -------- --------
Costs of sales and services
Leasing:
Depreciation and amortization 11,700 10,398 33,396 31,163
Other direct leasing costs 12,209 11,986 35,750 31,931
Sales:
New units 26,934 27,918 61,305 57,414
Rental equipment 6,341 4,074 14,279 11,947
Delivery and installation 23,829 24,321 64,009 56,337
Other 3,142 2,636 7,166 5,925
-------- -------- -------- --------
Total costs of sales and services 84,155 81,333 215,905 194,717
-------- -------- -------- --------
Gross profit 53,127 59,558 157,341 171,437
-------- -------- -------- --------
Selling, general and administrative expenses 19,233 20,588 60,601 62,858
Other depreciation and amortization 3,311 4,386 9,961 13,689
Interest, including amortization of deferred
financing costs 21,582 20,918 64,114 66,056
Non-cash charge for casualty loss - - - 1,500
-------- -------- -------- --------
Total operating expenses 44,126 45,892 134,676 144,103
-------- -------- -------- --------
Income before income taxes 9,001 13,666 22,665 27,334
Income tax expense 3,601 6,151 9,068 12,346
-------- -------- -------- --------
Net Income $ 5,400 $ 7,515 $ 13,597 $ 14,988
======== ====== ======== ========
Earnings per common share $ .87 $ 1.21 $ 2.19 $ 2.42
======== ======== ======== ========
Earnings per common share, assuming dilution $ .83 $ 1.15 $ 2.08 $ 2.30
======== ======== ======== ========
Weighted average shares outstanding 6,194,799 6,196,599 6,195,313 6,196,631
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
3
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Nine months ended September 30, 2002 and 2001
(Unaudited)
2002 2001
---- ----
(In thousands)
Cash flows from operating activities:
Net income $ 13,597 $ 14,988
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 49,264 48,762
Provision for bad debts 2,403 2,573
Deferred income tax expense 8,952 12,305
Non-cash option compensation expense - 374
Gain on sale of rental equipment (4,291) (3,882)
Decrease (increase) in trade accounts receivable 2,976 (35,112)
Increase in accounts payable and
accrued expenses, including reserve for casualty
loss in 2001 14,210 11,210
Other (6,893) (7,432)
------- -------
Net cash provided by operating activities 80,218 43,786
------- -------
Cash flows from investing activities:
Rental equipment additions (38,387) (93,150)
Proceeds from sales of rental equipment 18,570 15,829
Purchases of property and equipment, net (5,474) (14,025)
Net assets of business acquired (7,173) (26,114)
------- -------
Net cash used in investing activities (32,464) (117,460)
------- -------
4
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (continued)
Nine months ended September 30, 2002 and 2001
(Unaudited)
2002 2001
---- ----
(In thousands)
Cash flows from financing activities:
Proceeds from debt 1,007,417 418,251
Repayment of debt (1,035,199) (346,192)
Amortization of bond discount 238 -
Increase in deferred financing costs (20,266) (544)
Payments to acquire treasury stock (78) (4)
---------- ----------
Net cash (used in) provided by financing activities (47,888) 71,511
---------- ----------
Net decrease in cash (134) (2,163)
Cash at beginning of period 586 2,549
---------- ----------
Cash at end of period $ 452 $ 386
========== ==========
Supplemental cash flow information:
Cash paid for income taxes $ 487 $ 346
========== ==========
Cash paid for interest $ 43,367 $ 61,020
========== ==========
See accompanying notes to consolidated financial statements.
5
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in thousands, except share amounts)
(1) ORGANIZATION AND BASIS OF PRESENTATION
Scotsman Holdings, Inc. (Holdings or the Company) was organized in
November, 1993 for the purpose of acquiring Williams Scotsman, Inc.
(Scotsman). The Company conducts business solely as a holding company, the
only significant asset of which is the capital stock of Scotsman.
Therefore, any cash dividends to be paid on the Company's common stock,
or cash interest to be paid on notes of the Company are dependent upon the
cash flow of Scotsman.
(2) FINANCIAL STATEMENTS
The financial information referred to above has not been audited. In the
opinion of management, the unaudited financial statements contain all
adjustments (consisting only of normal, recurring adjustments) necessary to
present fairly the Company's financial position as of September 30, 2002,
the consolidated statement of operations for the nine and three months ended
September 30, 2002 and 2001, and the consolidated statement of cash flows
for the nine months ended September 30, 2002 and 2001. The results of
operations for the periods ended September 30, 2002 are not necessarily
indicative of the operating results expected for the full year.
The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. Certain information and
footnote disclosure normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted.
It is suggested that these financial statements be read in conjunction
with the financial statements and notes thereto included in the Company's
latest Form 10-K. Certain prior year amounts have been reclassified to
conform to current year presentation.
(3) NEW ACCOUNTING PRONOUNCEMENT
In May 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,
effective for fiscal years beginning after May 15, 2002. With the rescission
of SFAS No. 4, gains and losses from the extinguishment of debt should be
classified as extraordinary items only if they meet the criteria in APB
Opinion No. 30.
The Company has adopted SFAS No. 145 effective January 1, 2002. As a result,
the $1.6 million of deferred financing costs relating to the Company's
former credit agreement that was expensed during the nine months ended
September 30, 2002 is included in interest expense.
6
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(4) GOODWILL AND OTHER INTANGIBLE ASSETS
The Company has adopted SFAS No. 142 effective January 1, 2002. Under SFAS
No. 142 goodwill and certain identified intangibles with indefinite lives
are no longer amortized, rather they are subject to annual impairment tests.
The Company performed the first of these required tests during the first
quarter of 2002 and determined that goodwill is not impaired. Prior to the
adoption of this standard, goodwill was amortized on a straight line basis
over 20 to 40 years. Amortization expense for the nine months ended
September 30, 2002 was $.6 million, which represents the amortization
related to the identified intangible assets still required to be amortized
under SFAS No. 142. These include covenants not to compete and customer
base, which are being amortized on a straight line basis over periods of 24
to 228 months. Amortization expense relating to these identified
intangibles for each of the next five years is as follows:
2002 $758
2003 713
2004 559
2005 548
2006 215
Under SFAS No. 142 assembled workforce is not considered to be an intangible
asset. The Company has reclassified this asset to goodwill. The effect of
the adoption of SFAS No. 142 as of September 30, 2002 and December 31, 2001
is summarized in the following tables:
----------- September 30, 2002 --------- ------------ December 31, 2001-----------
Gross Net Gross Net
Carrying Accumulated Book Carrying Accumulated Book
Amount Amortization Value Amount Amortization Value
-------- ------------ ------- ---------- ------------ --------
Goodwill $183,742 $15,215 $168,527 $183,164 $15,215 $167,949
Intangible
assets with
indefinite
lives as of
January 1,
2002
---------------------
Assembled
workforce $ 801 $ 372 $ 429 $ 801 $ 372 $ 429
7
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(4) GOODWILL AND OTHER INTANGIBLE ASSETS (continued)
---------- September 30, 2002 ---------- ----------- December 31, 2001-----------
Gross Net Gross Net
Carrying Accumulated Book Carrying Accumulated Book
Amount Amortization Value Amount Amortization Value
-------- ------------ ------- -------- ------------ -------
Intangible
Assets with
Finite lives
as of
January 1, 2002
---------------------
Non-
compete
agreements $3,445 $1,626 $1,819 $3,128 $1,142 $1,986
Customer
base 2,000 386 1,614 2,000 307 1,693
------ ------ ------ ------ ------ -------
$5,445 $2,012 $3,433 $5,128 $1,449 $3,679
====== ====== ====== ====== ====== ======
As required by SFAS No. 142, the results for the prior year's quarters have
not been restated. A reconciliation of net income as if SFAS No. 142 had
been adopted as of January 1, 2001 is presented below for the nine and three
months ended September 30, 2001.
Nine Months Three Months
Ended Ended
September 30, 2001 September 30, 2001
(In thousands) (In thousands)
------------ ------------
Reported net income $14,988 $ 7,515
Add back:
Goodwill amortization (net of tax) 3,444 1,148
------ ------
Adjusted net income $18,432 $ 8,663
====== ======
Earnings per share:
Reported net income $ 2.42 $ 1.21
===== =====
Adjusted net income $ 2.97 $ 1.40
===== =====
Earnings per share, assuming dilution:
Reported net income $ 2.30 $ 1.15
===== =====
Adjusted net income $ 2.82 $ 1.33
===== =====
8
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(5) EARNINGS PER SHARE
Earnings per common share is computed by dividing net earnings by the
weighted average number of common shares outstanding during the periods.
The following table sets forth the components of the weighted-average shares
outstanding for the basic and diluted earnings per share computations:
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Weighted-average shares - basic earnings
per share 6,194,799 6,196,599 6,195,313 6,196,631
Effect of employee stock options 348,483 332,213 347,853 332,490
--------- --------- --------- ---------
Weighted-average shares - diluted earnings
per share 6,543,282 6,527,812 6,543,166 6,529,121
========= ========= ========= =========
(6) COMPREHENSIVE INCOME
Total comprehensive income was $13,694 and $14,219 for the nine months ended
September 30, 2002 and 2001, respectively. Total comprehensive income was
$4,002 and $6,659 for the three months ended September 30, 2002 and 2001,
respectively, which consists of net income and the change in the foreign
currency translation adjustment.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward Looking Statements
The following discussion and analysis should be read in conjunction with
the unaudited condensed consolidated financial statements included elsewhere in
this report. The terms "company," "we," "our," and "us" refer to Scotsman
Holdings Inc. and its subsidiary. The following discussion and analysis contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those contained in our
Annual Report on Form 10-K for the year ended December 31, 2001 under the
headings "Business", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in that report. See the Safe
Harbor Statement at the beginning of this report.
Critical Accounting Policies and Estimates
General. This discussion and analysis of our financial condition and
results of operations is based upon our unaudited consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent liabilities. On an on-going basis, we evaluate estimates, including
those related to depreciation of rental equipment, bad debts, contingencies and
litigation, intangible assets, and income taxes. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
In December 2001, the Securities and Exchange Commission issued a statement
regarding the selection and disclosure by public companies of critical
accounting policies and practices. The Commission indicated that a critical
accounting policy is one which is both important to the portrayal of a company's
financial condition and results, and requires management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain. We believe the
following critical accounting policies reflect our more significant judgments
and estimates used in the preparation of the consolidated financial statements.
Depreciation of rental equipment. We depreciate rental equipment over its
estimated useful life, after giving effect to an estimated salvage value. The
useful life of our rental equipment is determined based on our estimate of the
period over which the asset will generate revenue, and the residual value is
determined based on our estimate of the minimum value we could realize from the
asset after this period. The lives and residual values are subject to periodic
evaluation and may be affected by, among other factors, changes in building
codes, legislation, regulations, local permitting and internal factors which may
include, but are not limited to, changes in equipment specifications or
maintenance policies. If these estimates change in the future, we may be
required to recognize increased or decreased depreciation expense for these
assets.
Allowance for doubtful accounts. We are required to estimate the
collectibility of our trade receivables. Accordingly, allowances for doubtful
accounts are maintained for estimated losses resulting from the inability of our
customers to make required payments. We evaluate a variety of factors in
10
assessing the ultimate realization of these receivables including the current
credit-worthiness of customers. The allowance for doubtful accounts is
determined based on historical collection results in addition to an ongoing
review of specific customers. If the financial condition of our customers were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required, resulting in decreased net income.
Contingencies. We are subject to proceedings, lawsuits, and other claims
related to environmental, product and other matters, and are required to assess
the likelihood of any adverse judgments or outcomes to these matters as well as
potential ranges of probable losses. A determination of the amount of reserves
required, if any, for these contingencies is made after analysis of each
individual matter. The required reserves may change in the future due to new
developments in each matter or changes in approach such as a change in
settlement strategy in dealing with these matters.
Goodwill and Intangible Impairment. We have significant intangible assets
related to goodwill and other acquired intangibles. The determination of related
estimated useful lives and whether or not these assets are impaired involves
significant judgments. Changes in strategy and/or market conditions could
significantly impact these judgments and require adjustments to recorded asset
balances.
Income Taxes. As part of the process of preparing our consolidated
financial statements, we are required to estimate income taxes in each of the
jurisdictions in which we operate. The process involves estimating actual
current tax expense along with assessing temporary differences resulting from
differing treatment of items for book and tax purposes. These timing differences
result in deferred tax assets and liabilities, which are included in our
consolidated balance sheet. We record a valuation allowance to reduce our
deferred tax assets to the amount that is more likely than not to be realized.
We have considered future taxable income and ongoing tax planning strategies in
assessing the need for the valuation allowance.
Results of Operations
Three Months Ended September 30, 2002 Compared with Three Months Ended
September 30, 2001.
Revenues in the quarter ended September 30, 2002 were $137.3 million, a
$3.6 million or 2.6% decrease from revenues of $140.9 million in the same period
of 2001. The decrease primarily resulted from a $4.2 million or 6.9% decrease in
leasing revenue, a $1.7 million or 5.5% decrease in delivery and installation
revenues, and a $1.5 million, or 4.4% decrease in sales of new units. These
decreases were partially offset by a $2.8 million or 50.8% increase in sales of
rental equipment and a $.9 million, or 7.6% increase in other revenue. The
decrease in leasing revenue is the result of a 4% decrease in the average fleet
utilization to 78%. The decrease in average fleet utilization, delivery and
installation revenue, and new sales revenue is attributable to the continued
soft economy and related business conditions. The increases in sales of rental
equipment and other revenue are attributable to several large school projects.
Gross profit for the quarter ended September 30, 2002 was $53.1 million, a
$6.4 million or 10.8% decrease from the third quarter 2001 gross profit of $59.6
million. This decrease is primarily a result of a 15.0% decrease in leasing
gross profit of $5.7 million, and a 20.0% or $1.2 million decrease in delivery
and installation gross profit, partially offset by a $.6 million or 37.4%
increase in sale of rental equipment gross profit and a $.4 million, or 4.1%
increase in other gross profit. The decrease in leasing gross profit is a result
of the decrease in revenue described above. Additionally, leasing margins
decreased from 62.8% in the quarter ended September 30, 2001 to 57.4% in the
same period of 2002. Excluding depreciation and amortization, leasing margins
11
decreased 1.9% from 80.1% in the quarter ended September 30, 2001 to 78.2% in
the same period in 2002. This margin suppression was attributable to a decline
in lease revenue caused by the drop in average fleet utilization, combined with
fleet quality improvement initiatives and increased turnover of used equipment.
The decrease in the delivery and installation gross profit is the result of
competitive pressures, a greater mix of lower margin, modular building projects
over the same period in 2001, and additional redeployment costs incurred to move
fleet within neighboring markets in lieu of purchasing new rental equipment. The
increases in sales of rental equipment, and other gross profit are a result of
the increases in revenue described above.
Selling, general and administrative (SG&A) expenses for the quarter ended
September 30, 2002 were $19.2 million, a $1.4 million or 6.6% decrease from the
third quarter of 2001 SG&A expenses of $20.6 million. The overall decreases in
SG&A expense are due to our continued cost control initiatives that commenced in
the second half of 2001, partially offset by increased insurance and property
costs.
Interest expense increased by approximately $.7 million or 3.2% to $21.6
million for the three months ended September 30, 2002 from $20.9 million in the
same period in 2001. This net increase is the result of (a) interest expense
incurred on the additional $150 million of senior notes and (b) the additional
amortization of deferred financing fees, relating to the additional $150 million
of senior notes and our new credit facility, partially offset by a decrease of
approximately 60 basis points in effective interest rates on our variable rate
debt for the three months, and a $167.3 million or 26.7% decrease in the average
credit facility debt over the same period of 2002.
The decrease in the effective income tax rate was primarily due to
goodwill, which was not deductible for tax purposes, no longer being amortized.
The impact of the non-amortization increased net income by $1.1 million for the
three months ended September 30, 2002. See Note 4 Goodwill and Other Intangible
Assets.
Nine Months Ended September 30, 2002 Compared with Nine Months Ended
September 30, 2001.
Revenues in the nine months ended September 30, 2002 were $373.2 million, a
$7.1 million or 1.9% increase from revenues of $366.2 million in the same period
of 2001. The increase primarily resulted from a $6.4 million or 9.0% increase in
delivery and installation revenue, a $3.5 million or 5.0% increase in sales of
new units, a $2.7 million or 17.3% increase in sales of rental equipment, and a
$.7 million or 2.3% increase in other revenue, substantially offset by a $6.3
million or 3.5% decrease in leasing revenue. The decrease in leasing revenue is
the result of a 4% decrease in the average fleet utilization to 78%. The
decrease in average fleet utilization is attributable to the continued soft
economy and related business conditions. The increases in delivery and
installation revenue, sales of new units and rental equipment, and other revenue
are primarily attributable to several large school projects.
Gross profit for the nine months ended September 30, 2002 was $157.3
million, a $14.1 million or 8.2% decrease from the same period of 2001 of $171.4
million. This decrease is primarily a result of a 10.7% decrease in leasing
gross profit of $12.3 million, and an 8.5% or $1.3 million decrease in delivery
and installation gross profit. The decrease in leasing gross profit is a result
of the decrease in leasing revenue described above and a decrease in leasing
margins from 64.6% in the nine months ended September 30, 2001 to 59.7% in the
same period in 2002. Excluding depreciation and amortization, leasing margins
decreased 2.9% from 82.1% in the nine months ended September 30, 2001 to 79.2%
in the same period in 2002. This margin suppression was attributable to a
decline in lease revenue caused by the drop in average fleet utilization,
combined with fleet quality improvement initiatives and increased turnover of
used equipment. The decrease in the delivery and installation gross profit is
the result of competitive pressures, a greater mix of lower margin, modular
12
building projects over the same period in 2001, and additional redeployment
costs incurred to move fleet within neighboring markets in lieu of purchasing
new rental equipment.
SG&A expenses for the nine months ended September 30, 2002 were $60.6
million, a $2.3 million or 3.6% decrease from SG&A expenses of $62.9 million for
the nine months ended September 30, 2001. The overall decrease in SG&A expense
is due to our continued cost control initiatives that commenced in the second
half of 2001, partially offset by increased insurance and property costs.
Interest expense decreased by $2.0 million or 2.9% to $64.1 million for the
nine months ended September 30, 2002 from $66.1 million in the same period in
2001. This net decrease is the result of a decrease of approximately 200 basis
points in effective interest rates on our variable rate debt for the nine
months, and a $110.0 million or 18.3% decrease in the average credit facility
debt over the same period of 2002, partially offset by (a) interest expense on
the additional $150 million of senior notes and (b) the additional amortization
of deferred financing fees, resulting from the additional $150 million of senior
notes and the refinancing of our credit facility.
The decrease in the effective income tax rate was primarily due to
goodwill, which was not deductible for tax purposes, no longer being amortized.
The impact of the non-amortization increased net income by $3.4 million for the
nine months ended September 30, 2002. See Note 4 Goodwill and Other Intangible
Assets.
Liquidity and Capital Resources
During the nine months ended September 30, 2002 and 2001, our principal
source of funds consisted of cash flow from operating activities of $80.2
million and $43.8 million, respectively. These were largely generated by the
rental of units from our lease fleet. In addition, financing activities were a
major source of funds for the nine months ended September 30, 2001.
We believe that EBITDA provides the best indication of our financial
performance and provides the best measure of our ability to meet historical debt
service requirements. We define EBITDA as earnings before deducting interest,
income taxes, depreciation, and amortization. In 2001, EBITDA is adjusted to
exclude a $1.5 million noncash charge related to a casualty loss. We utilize
EBITDA when interpreting operating trends and results of operations of our core
business operations. Accordingly, we believe that EBITDA provides additional
information with respect to our overall operating performance and our ability to
incur and service debt, make capital expenditures and meet working capital
requirements. However, EBITDA should not be considered in isolation or as a
substitute to cash flow from operations, net income, or other measures of
performance prepared in accordance with generally accepted accounting principles
or as a measure of a company's profitability or liquidity. Our EBITDA decreased
by $10.0 million or 7.1% to $130.1 million for the nine months ended September
30, 2002 compared to $140.1 million for the same period of 2001. This decrease
in EBITDA is a result of the decrease in gross profit described above.
Cash flow used in investing activities was $32.5 million and $117.5 million
for the nine months ended September 30, 2002 and 2001, respectively. Our primary
capital expenditures are for the discretionary purchase of new units for the
lease fleet and units purchased through acquisitions. We seek to maintain our
lease fleet in good condition at all times and generally increase the size of
our lease fleet only in those local or regional markets experiencing economic
growth and established unit demand. The decline in cash flow used in investing
activities between the nine months ended September 30, 2002 and September 30,
13
2001 is primarily attributable to a $54.8 million reduction in discretionary
purchases of new lease fleet units in response to the continued soft economy and
related business conditions, combined with a reduction in acquisition activity
of $18.9 million.
Cash used in financing activities of $47.9 million for the nine months
ended September 30, 2002 was largely for deferred financing fees incurred
relating to the issuance of additional notes and our new credit facility and the
repayment of debt. Cash provided by financing activities of $71.5 million during
the nine months ended September 30, 2001 was primarily from borrowings under our
then existing revolving credit facility.
In February 2002, we issued $150.0 million of additional 9.875% senior
notes due 2007 under our existing indenture. Net proceeds from the issuance were
used to repay borrowings under our former revolving credit facility. On March
26, 2002, we entered into a new loan agreement that provides for a $460 million
revolving credit facility, a $210 million term loan, both maturing on December
31, 2006, and up to an additional $30 million in term or revolver commitments.
In May 2002, we borrowed an additional $30 million under term loans, the
proceeds from which were used to pay down revolver borrowings.
Availability under the Credit Agreement was $189.8 million at September 30,
2002. We believe we will have sufficient liquidity under our new revolving line
of credit and from cash generated from operations to fund our operations for the
next 12 months.
14
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our Chief Executive Officer, who presently is also the acting Chief
Financial Officer, has concluded, based on his evaluation as of a
date within 90 days prior to the date of filing of this quarterly
report, that our disclosure controls and procedures are (1) effective
to ensure that material information required to be disclosed by us in
reports filed or submitted by us under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and
(2) designed to ensure that material information required to be
disclosed by us in such reports is accumulated and communicated to
our management, including our Chief Executive Officer and acting
Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
(b) Changes in Internal Controls.
There were no significant changes in our internal controls or in
other factors that could significantly affect these controls
subsequent to the date of his evaluation, nor were there any
significant deficiencies or material weaknesses in our internal
controls. Accordingly, no corrective actions were required or
undertaken.
15
SIGNATURES
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.
SCOTSMAN HOLDINGS, INC.
By: /s/ Gerard E. Holthaus
----------------------------------
Gerard E. Holthaus
Chief Executive Officer
and acting Chief Financial Officer
Dated: November 14, 2002
16
CERTIFICATIONS
I, Gerard E. Holthaus, Chief Executive Officer, certify, that:
(1) I have reviewed this quarterly report on Form 10-Q
of Scotsman Holdings, Inc.;
(2) Based on my knowledge, this quarterly report does
not contain any untrue statement of a material fact
or omit to state a material fact necessary to make
the statements made, in light of the circumstances
under which such statements were made, not
misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and
other financial information included in this
quarterly report, fairly present in all material
respects the financial condition, results of
operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly
report;
(4) The registrant's other certifying officers and I are
responsible for establishing and maintaining
disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and
procedures to ensure that material
information relating to the registrant,
including its consolidated subsidiaries, is
made known to us by others within those
entities, particularly during the period in
which this quarterly report is being
prepared;
b) evaluated the effectiveness of the
registrant's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this quarterly report
(the "Evaluation Date"); and
c) presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I
have disclosed, based on our most recent
evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could
adversely affect the registrant's ability to
record, process, summarize and report
financial data and have identified for the
registrant's auditors any material weaknesses
in internal controls; and
17
b) any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officers and I
have indicated in this quarterly report whether or
not there were significant changes in internal
controls or in other factors that could
significantly affect internal controls subsequent to
the date of our most recent evaluation, including
any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Gerard E. Holthaus
Gerard E. Holthaus
Chief Executive Officer
November 14, 2002
18
CERTIFICATIONS
I, Gerard E. Holthaus, acting Chief Financial Officer, certify, that:
(1) I have reviewed this quarterly report on Form 10-Q
of Scotsman Holdings, Inc.;
(2) Based on my knowledge, this quarterly report does
not contain any untrue statement of a material fact
or omit to state a material fact necessary to make
the statements made, in light of the circumstances
under which such statements were made, not
misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and
other financial information included in this
quarterly report, fairly present in all material
respects the financial condition, results of
operations and cash flows of th e registrant as of,
and for, the periods presented in this quarterly
report;
(4) The registrant's other certifying officers and I are
responsible for establishing and maintaining
disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and
procedures to ensure that material
information relating to the registrant,
including its consolidated subsidiaries, is
made known to us by others within those
entities, particularly during the period in
which this quarterly report is being
prepared;
b) evaluated the effectiveness of the
registrant's disclosure controls and
procedures as of a date within 90 days prior
to the filing date of this quarterly report
(the "Evaluation Date"); and
c) presented in this quarterly report our
conclusions about the effectiveness of the
disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I
have disclosed, based on our most recent evaluation,
to the registrant's auditors and the audit committee
of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could
adversely affect the registrant's ability to
record, process, summarize and report
financial data and have identified for the
registrant's auditors any material weaknesses
in internal controls; and
19
b) any fraud, whether or not material, that
involves management or other employees who
have a significant role in the registrant's
internal controls; and
(6) The registrant's other certifying officers and I
have indicated in this quarterly report whether or
not there were significant changes in internal
controls or in other factors that could
significantly affect internal controls subsequent to
the date of our most recent evaluation, including
any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Gerard E. Holthaus
Gerard E. Holthaus
Acting Chief Financial Officer
November 14, 2002
20
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for
Gerard E. Holthaus, Chief Executive Officer of the Company
99.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for
Gerard E. Holthaus, acting Chief Financial Officer of the Company
(b) Reports on Form 8-K
In a report dated October 11, 2002, the Company announced the
resignation of its Chief Financial Officer (CFO), Gerard E. Keefe.
Gerard E. Holthaus, Chief Executive Officer of the Company will
assume the additional duties of CFO until a replacement is named.
21
Exhibit Number
99.1-- Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 for Gerard E. Holthaus,
Chief Executive Officer of the Company
In connection with the Quarterly Report of Scotsman Holdings, Inc.
(the "Company") on Form 10-Q for the period ending September 30, 2002
as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Gerard E. Holthaus, Chief Executive Officer of the
Company certify to my knowledge, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of section 13 (a)
or 15 (d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
/s/ Gerard E. Holthaus
Gerard E. Holthaus
Chief Executive Officer
November 14, 2002
22
Exhibit Number
99.2-- Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 for Gerard E. Holthaus,
acting Chief Financial Officer of the Company
In connection with the Quarterly Report of Scotsman Holdings, Inc.
(the "Company") on Form 10-Q for the period ending September 30, 2002
as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), I, Gerard E. Holthaus, acting Chief Financial Officer
of the Company certify to my knowledge, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13 (a)
or 15 (d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
/s/ Gerard E. Holthaus
Gerard E. Holthaus
Acting Chief Financial Officer
November 14, 2002
23