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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 June 30, 2003
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 __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes__ No X
As of August 13, 2003, 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. Unaudited Financial Statements
Consolidated Balance Sheets at June 30, 2003 2
and December 31, 2002
Consolidated Statements of Operations for the three 3
and six months ended June 30, 2003 and 2002
Consolidated Statements of Cash Flows for the 4
six months ended June 30, 2003 and 2002
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operation
Item 4. Controls and Procedures 14
PART II - OTHER INFORMATION
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SAFE HARBOR STATEMENT - CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Form 10-Q for the quarter ended June 30,
2003 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.
PART I - FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements.
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Unaudited)
June 30,
2003 December 31,
(Unaudited) 2002
--------- -----------
Assets (In thousands)
Cash $ 1,530 $ 429
Trade accounts receivable, net of allowance for doubtful
accounts of $1,050 in 2003 and $1,071 in 2002 55,412 63,965
Prepaid expenses and other current assets 26,925 24,883
Rental equipment, net of accumulated depreciation of
$225,612 in 2003 and $207,538 in 2002 851,117 850,087
Property and equipment, net 80,721 80,249
Deferred financing costs, net 21,446 23,616
Goodwill, net 169,700 168,931
Other intangible assets, net 2,892 3,238
Other assets 9,046 14,369
--------- ---------
$1,218,789 $1,229,767
Liabilities and stockholder's equity
Accounts payable $ 35,699 $ 23,257
Accrued expenses 26,053 29,160
Rents billed in advance 19,407 18,773
Revolving credit facility 167,021 197,691
Long-term debt 785,632 786,654
Deferred income taxes 155,521 154,959
--------- ---------
Total liabilities 1,189,333 1,210,494
Stockholder's equity:
Common stock, $.01 par value. Authorized 10,000,000
shares; issued 9,507,407 shares in 2003 and 2002 95 95
Additional paid-in capital 240,944 239,239
Cumulative foreign currency translation adjustment 6,215 (1,386)
Retained earnings 78,140 77,263
------- -------
325,394 315,211
Less treasury stock, - 3,312,608 common shares in 2003
and 2002, at cost (295,938) (295,938)
------- -------
Net stockholder's equity 29,456 19,273
--------- ---------
$1,218,789 $1,229,767
========= =========
See accompanying notes to consolidated financial statements.
2
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
Three and six months ended June 30, 2003 and 2002
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------- ------------------
2003 2002 2003 2002
---- ---- ---- ----
(In thousands except share and per share amounts)
Revenues
Leasing $ 53,560 $ 57,447 $107,034 $115,643
Sales:
New units 18,027 20,582 32,677 41,265
Rental equipment 5,236 5,518 9,653 10,179
Delivery and installation 21,374 22,495 40,302 49,104
Other 9,631 10,055 18,868 19,773
------- ------- ------- -------
Total revenues 107,828 116,097 208,534 235,964
Costs of sales and services
Leasing:
Depreciation and amortization 12,667 10,973 24,990 21,696
Other direct leasing costs 11,432 12,053 21,861 23,541
Sales:
New units 15,274 17,295 27,196 34,371
Rental equipment 4,223 4,213 7,776 7,938
Delivery and installation 18,024 18,174 34,823 40,180
Other 1,852 1,963 3,574 4,024
------ ------ ------- -------
Total costs of sales and services 63,472 64,671 120,220 131,750
------ ------ ------- -------
Gross profit 44,356 51,426 88,314 104,214
------ ------ ------ -------
Selling, general and administrative expenses 19,370 22,457 38,986 43,978
Other depreciation and amortization 3,574 3,316 6,959 6,650
Interest, including amortization of deferred
financing costs 20,259 21,361 40,906 42,532
------ ------ ------ ------
Total operating expenses 43,203 47,134 86,851 93,160
------ ------ ------ ------
Income before income taxes 1,153 4,292 1,463 11,054
Income tax expense 461 1,405 586 4,449
----- ----- ----- -----
Net Income $ 692 $ 2,887 $ 877 $ 6,605
===== ===== ==== =====
Earnings per common share $ 0.11 $ 0.47 $ 0.14 $ 1.07
==== ==== ==== ====
Earnings per common share, assuming dilution $ 0.11 $ 0.44 $ 0.13 $ 1.01
==== ==== ==== ====
Weighted average shares outstanding 6,194,799 6,194,799 6,194,799 6,195,575
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
3
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Six months ended June 30, 2003 and 2002
(Unaudited)
2003 2002
---- ----
(In thousands)
Cash flows from operating activities
Net income $ 877 $ 6,605
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 34,896 33,227
Provision for bad debts 1,060 1,819
Deferred income tax expense 491 4,333
Non-cash stock option compensation expense 1,705 2,610
Gain on sale of rental equipment (1,877) (2,241)
Decrease in trade accounts receivable 8,246 3,468
Increase (decrease) in accounts payable
and accrued expenses 9,138 (1,033)
Other 1,827 (3,293)
------ ------
Net cash provided by operating activities 56,363 45,495
Cash flows from investing activities
Rental equipment additions (24,974) (24,077)
Proceeds from sales of rental equipment 9,653 10,179
Purchases of property and equipment, net (4,417) (6,890)
Increase in goodwill (538) --
Net assets of business acquired (2,681) --
------ ------
Net cash used in investing activities (22,957) (20,788)
Cash flows from financing activities
Proceeds from debt 189,218 874,949
Repayment of debt (221,088) (878,753)
Increase in deferred financing costs (777) (21,080)
Amortization of bond discount 178 149
Payment to acquire treasury stock -- (78)
------ ------
Net cash used in financing activities (32,469) (24,813)
Net effect of change in exchange rates 164 80
--- --
Net increase (decrease) in cash 1,101 (26)
Cash at beginning of period 429 586
--- ---
Cash at end of period $ 1,530 $ 560
===== ===
Supplemental cash flow information:
Cash paid for income taxes $ 577 $ 465
=== ===
Cash paid for interest $ 38,005 $ 37,559
====== ======
See accompanying notes to consolidated financial statements.
4
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Unaudited)
(Dollars in thousands, except share and per 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 the debt 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 June 30, 2003 , the
consolidated statements of operations for the six and three months ended
June 30, 2003 and 2002, and the consolidated statements of cash flows for
the six months ended June 30, 2003 and 2002. The results of operations for
the periods ended June 30, 2003 and 2002 are not necessarily indicative of
the operating results expected for the full year.
The balance sheet at December 31, 2002 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) SALE OF FINANCE LEASES
On June 27, 2003, the Company completed the sale of a portion of its
finance lease portfolio at approximately book value. The total purchase
price was $4.6 million and the net proceeds from sale were used to pay down
borrowings under the Company's revolving credit facility. The leases sold,
which were deemed not to be a part of the Company's core business, will
continue to be serviced by the Company on behalf of the buyer.
(4) CHANGE IN ACCOUNTING ESTIMATE
In October 2002, the Company changed its estimated residual value from 50%
of capitalized costs to $1 for certain classroom units. Additionally, the
remaining estimated useful life for a portion of these units was reduced to
45 months. The effect of this change in estimate is an increase in
depreciation expense of approximately $600 and $1,200 and a decrease in net
income of $350 or $.06 per basic share and $.05 per diluted share, and $705
or $.11 per share for both basic and diluted share, for the three and six
month periods ended June 30, 2003, respectively.
5
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(5) STOCK BASED COMPENSATION EXPENSE
Pro forma information required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," as amended by Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure," has
been determined as if the Company had accounted for its employee stock options under the
minimum value method of that Statement. The minimum value for these options was estimated at
the date of grant by calculating the excess of the fair value of the stoc k at the date of
grant over the present value of both the exercise price and the expected dividend payments,
each discounted at the risk free rate, over the expected exercise life of the option.
The following weighted average assumptions were used: risk-free interest rate of 2.3% and 3.8%
for 2003 and 2002, respectively, weighted average expected life of the options of 5 years; and
no dividends. In addition to the pro forma expense on options granted, certain options were
modified during the three and six month periods ended June 30, 2003. In determining the pro
forma expense related to these modified options, the Company used the following assumptions:
risk free interest rates of 2.3%, expected life of options of 3 to 5 years, and no dividends.
For purposes of pro forma disclosures, the estimated minimum value of the options is amortized
to expense over the options' vesting period. Note that the effects of applying SFAS 123 for pro
forma disclosure in the current period are not necessarily representative of the effects on
pro forma net income for future periods. The Company's pro forma information follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
---- ---- ---- ----
As Reported:
-----------
Noncash stock option
compensation expense, gross $ 1,694 $ 2,610 $1,705 $ 2,610
Net Income 692 2,887 877 6,605
Earnings Per Share-basic $ 0.11 $ 0.47 $ 0.14 $ 1.07
Earnings Per Share-diluted $ 0.11 $ 0.44 $ 0.13 $ 1.01
Pro forma Results:
-----------------
Noncash stock option
compensation expense, gross $ 68 $ 127 $ 104 $ 156
Net income 1,666 4,408 1,836 8,108
Pro forma earnings per share-basic $ 0.27 $ 0.71 $ 0.30 $ 1.31
Pro forma earnings per share-diluted $ 0.25 $ 0.67 $ 0.28 $ 1.24
6
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(6) GOODWILL AND OTHER INTANGIBLE ASSETS
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 required annual test during the fourth quarter
of 2002 and determined that goodwill was not impaired. Amortization expense for
the six months ended June 30, 2003 was $.4 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:
2003 $713
2004 559
2005 548
2006 215
2007 142
The following schedules detail the total amount of goodwill and other intangible
assets for the periods ended June 30, 2003 and December 31, 2002.
------- June 30, 2003 ------ ------ December 31, 2002 ------
Gross Net Gross Net
Carrying Accumulated Book Carrying Accumulated Book
Amount Amortization Value Amount Amortization Value
------- ------------ ----- ------- ------------ -----
Goodwill $185,287 $15,587 $169,700 $184,518 $15,587 $168,931
Intangible
assets with
finite lives
------------
Non-
compete
agreements $ 3,492 $ 2,135 $ 1,357 $3,445 $ 1,795 $ 1,650
Customer
base 2,000 465 1,535 2,000 412 1,588
----- ---- ----- ----- ----- -----
$ 5,492 $ 2,600 $ 2,892 $5,445 $2,207 $ 3,238
===== ===== ===== ===== ===== =====
7
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(7) COMPREHENSIVE INCOME
Total comprehensive income was $8,478 and $8,100 for the six months ended June
30, 2003 and 2002, respectively, and $5,158 and $4,464 for the three months
ended June 30, 2003 and 2002, respectively, which includes net income and the
change in the foreign currency translation adjustment. The change in foreign
currency translation is determined by the volatility of the current exchange
rate at the time of reporting. (For further discussion of foreign currency
translation, see Critical Accounting Policies and Estimates.) A summary of the
components of comprehensive income for the three and six months ended June 30,
2003 and 2002 is presented below.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -----------------
2003 2002 2003 2002
---- ---- ---- ----
Net Income $ 692 $2,887 $ 877 $6,605
Change in currency
translation 4,466 1,577 7,601 1,495
----- ----- ----- -----
Comprehensive income $5,158 $4,464 $8,478 $8,100
===== ===== ===== =====
(8) EARNINGS AND DIVIDENDS PER SHARE
Earnings per common share is computed by dividing net income 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 Six months ended
June 30, June 30,
--------------------- --------------------
2003 2002 2003 2002
---- ---- ---- ----
Weighted-average shares
- basic earnings per share 6,194,799 6,194,799 6,194,799 6,195,575
Effect of employee
stock options 347,400 347,510 347,474 347,538
--------- --------- --------- ---------
Weighted-average shares
- - diluted earnings per share 6,542,199 6,542,309 6,542,273 6,543,113
========= ========= ========= =========
8
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 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, 2002 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.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of the consolidated
financial statements. 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.
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 (generally 20 years), and the
residual value (typically 50% of original cost) 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. See Note 4 for a description
of a change in accounting estimate associated with certain classroom units.
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
9
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. After adopting SFAS 142 in 2002, goodwill was determined
not to be impaired. Future changes in strategy and/or market conditions could
significantly impact these judgments and require adjustments to recorded asset
balances.
Foreign Currency Translation. We use the exchange rate effective at the
close of business on the reporting date to translate our foreign subsidiary's
balance sheet and an average rate for the reporting period to translate the
results of operations. The cumulative effect of changes in exchange rates is
recognized in a separate line in the equity section of the balance sheet.
Income Taxes. As part of the process of preparing our unaudited
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 unaudited 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 June 30, 2003 Compared with Three Months Ended June 30,
2002.
Revenues in the quarter ended June 30, 2003 were $107.8 million; an $8.3
million or 7.1% decrease from revenues of $116.1 million in the same period of
2002. The decrease resulted from a $3.9 million or 6.8% decrease in leasing
revenue, a $2.6 million or 12.4% decrease in new units sales, and an $1.1
million or 5.0% decrease in delivery and installation revenue from the same
period in 2002. The decrease in leasing revenue is attributable to the continued
soft economic conditions, which impacted fleet utilization, as well as
competitive pricing pressures. Average fleet utilization decreased 2% to 76%,
and the average monthly rental rate decreased approximately 5% from $264 to $251
from the same period in 2002. Decreases in delivery and installation and new
unit sales revenue were primarily due to the continued soft economic conditions.
In addition, the impact of severe weather, particularly in the mid-Atlantic and
northeastern parts of the United States, and the growing effect of state budget
10
issues in certain parts of the country have produced some delays of projects and
initiatives that affected the Company's operating results for the second
quarter.
Gross profit for the quarter ended June 30, 2003 was $44.4 million, a $7.1
million or 13.7% decrease from the second quarter 2002 gross profit of $51.4
million. This decrease is primarily a result of a 14.4% decrease in leasing
gross profit of $5.0 million, a 22.5% or $1.0 million decrease in delivery and
installation gross profit, and a 16.2% or $.5 million decrease in new unit sales
gross profit. The leasing gross profit decrease was partially offset by cost
control initiatives implemented during 2003, which resulted in a $.6 million
improvement in cost of leasing as compared to the second quarter of 2002.
Excluding depreciation and amortization, leasing margins remained relatively
flat at approximately 79%. The decrease in new unit sales and delivery and
installation gross profit dollars is the result of the decrease in revenues
described above. Delivery and installation gross profit was also impacted by
redeployment costs incurred during the quarter.
Selling, general and administrative (SG&A) expenses for the quarter ended
June 30, 2003 decreased by $3.1 million or 13.7% to $19.4 million from $22.5
million in the same period 2002. This was achieved by continuing our cost
control initiatives, primarily reductions in personnel related costs, as well as
a $.9 million reduction in stock option compensation expense for the quarter.
Interest expense decreased by $1.1 million or 5.2% to $20.3 million in 2003
from the same period in 2002. This net decrease is the result of a $54.1 million
or 11.6% decrease in the average credit facility debt over the same period of
2002, and a decrease of 26 basis points in effective interest rates on
Scotsman's variable rate debt for the quarter.
Six Months Ended June 30, 2003 Compared with Six Months Ended June 30, 2002.
Revenues in the six months ended June 30, 2003 were $208.5 million, a $27.4
million or 11.6% decrease from revenues of $236.0 million in the same period of
2002. The decrease resulted from an $8.8 million or 17.9% decrease in delivery
and installation revenue, an $8.6 million or 20.8% decrease in sales of new
units, and an $8.6 million or 7.4% decrease in leasing revenue. The decrease in
leasing revenue is attributable to the continued soft economic conditions, which
impacted fleet utilization, as well as competitive pricing pressures. Average
fleet utilization decreased 2% to 76%, and the average monthly rental rate
decreased approximately 4% from $264 to $253 from the same period in 2002. The
decreases in delivery and installation and new unit sales revenues were
primarily due to a large school project in 2002, which accounted for 44% of the
decrease in these revenues over the same period in 2002. In addition, the impact
of severe weather, particularly in the mid-Atlantic and northeastern parts of
the United States, and the growing effect of state budget issues in certain
parts of the country have produced some delays of projects and initiatives that
affected the Company's operating results for the first half of 2003.
Gross profit for the six months ended June 30, 2003 was $88.3 million, a
$15.9 million or 15.3% decrease from the same period of 2002 of $104.2 million.
This decrease is primarily a result of a 14.5% decrease in leasing gross profit
of $10.2 million, a 38.6% or $3.4 million decrease in delivery and installation
gross profit, and a 20.5% or $1.4 million decrease in sales of new units. The
decrease in leasing gross profit is a result of the decrease in leasing revenue
described above, partially offset by cost control initiatives implemented in
2003, which resulted in an $1.7 million improvement in cost of leasing as
compared to the same period for 2002. Consequently, leasing margins, excluding
depreciation and amortization, remained flat for the same periods in 2003 and
2002. The decrease in new unit sales and delivery and installation gross profit
dollars is the result of the non-recurrence of major classroom projects in the
Northeast as well as weather related delays, redeployment costs and continued
soft economic conditions.
11
SG&A expenses for the six months ended June 30, 2003 were $39.0 million, an
approximate $5.0 million or 11.4% decrease from SG&A expenses of $44.0 million
for the first six months of 2002. This was achieved by continuing our cost
control initiatives, primarily reductions in personnel related costs, as well as
a $.9 million reduction in stock option compensation expense for the first half
of 2003.
Interest expense decreased by $1.6 million or 3.8% to $40.9 million for the
six months ended June 30, 2003 from $42.5 million in the same period in 2002.
This decrease is the result of (a) $1.6 million of deferred financing costs
related to Scotsman's former credit facility that was expensed in accordance
with SFAS 145 in 2002, and (b) an $87.1 million or 17.1% decrease in the average
credit facility debt over the six month period ended June 30, 2003 as compared
to the same period of 2002, partially offset by an increase of approximately 23
basis points in effective interest rates on Scotsman's variable rate debt for
the six months ended June 30, 2003 and interest expense on the additional $150
million of senior notes issued in February 2002.
Liquidity and Capital Resources
During the six months ended June 30, 2003 and 2002, our principal source of
funds consisted of cash flow from operating activities of $56.4 million and
$45.5 million, respectively. These were largely generated by the rental of units
from our lease fleet and sales of new mobile office units. The majority of the
cash generated from operations was used to reduce existing debt.
Our Adjusted EBITDA for the six months ended June 30, 2003 decreased by
$8.5 million or 10.1% to $76.0 million in 2003 compared to $84.5 million for the
same period in 2002. This decrease in Adjusted EBITDA is primarily the result of
decreased leasing and delivery and installation gross profits described above,
partially offset by decreased SG&A expenses. We believe that Adjusted EBITDA
provides the best measure of our ability to meet historical debt service
requirements. It is also used in determining our compliance with certain
financial ratios required by our credit agreement. Adjusted EBITDA is defined as
earnings before deducting interest, income taxes, depreciation, amortization,
and noncash charges. Noncash charges for the first six months of 2003 and 2002
consist of noncash stock option compensation expense of approximately $1.7
million and $2.6 million, respectively. We utilize Adjusted EBITDA when
interpreting operating trends and results of operations of our core business
operations. Accordingly, we believe that Adjusted 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, Adjusted 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.
12
The table below reconciles Adjusted EBITDA to cash flow from operating activities, the most directly comparable
GAAP measure (in thousands).
Six Months Ended Six Months Ended Twelve Months
June 30, 2003 June 30, 2002 Ended June 30, 2003
---------------- ---------------- -------------------
Adjusted EBITDA $ 76,023 $ 84,542 $164,704
Decrease in net receivables 9,306 5,287 14,453
Increase (decrease) in accounts
payable and accrued expenses 9,184 (950) 11,605
Interest paid (38,005) (37,559) (77,190)
Decrease in other assets 2,461 2,499 3,393
Increase in other liabilities (729) (6,083) (1,669)
Gain on sale of rental equipment (1,877) (2,241) (5,462)
------ ------ -------
Cash flow from operating activities $ 56,363 $ 45,495 $109,834
====== ====== =======
Cash flow used in investing activities was $23.0 million and $20.8 million for the six months ended June 30, 2003
and 2002, 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.
Cash used in financing activities of $32.5 million for the six months ended June 30, 2003 was used primarily for net
repayments of debt under our revolving credit facility. Cash used in financing activities of $24.8 million for the six
months ended June 30, 2002 was used primarily for deferred financing fees incurred relating to the issuance of
additional 9.875% senior notes and the new credit facility established in the first quarter of that year.
In light of continued economic challenges we have implemented a series of initiatives, including staff reductions,
deferral of salary increases, elimination of our matching of employee contributions to their 401(k) accounts, general
cost reductions, and intensified management of working capital. During the quarter, we also sold $4.6 million of finance
leases. (See Note 3 Sale of Finance Leases.) These steps are geared toward improving the company's underlying
liquidity, profitability, and performance.
Availability under our credit agreement depends upon our continued compliance with certain covenants, including,
leverage, interest coverage, and utilization ratios. We are currently in compliance with all financial covenants. For the
twelve month period ended June 30, 2003, our actual leverage and interest coverage ratios were 5.75, and 2.12,
respectively, as compared to covenant requirements of 5.80 and 2.0, respectively. The leverage ratio was calculated
using Adjusted EBITDA of $165,735, which includes $1,031 relating to entities we acquired during the calculation period
(as is required in computing the leverage ratio under the credit agreement), for the twelve month period ended June 30,
2003 and the consolidated debt balance of $952,653. The interest coverage ratio was calculated using Adjusted EBITDA of
$164,704 for the twelve month period ended June 30, 2003 and interest expense of $77,747, which excludes deferred
financing cost amortization of $5,837. We have requested amendments to the leverage, interest coverage, and utilization
ratio requirements to improve our liquidity under the credit agreement. We anticipate that our banks will approve our
request for amendment in the third quarter. Additionally, we are exploring refinancing options to reduce the
outstanding borrowings and/or commitments under our credit facility. We expect this refinancing, if successful,
to be completed during the third quarter.
13
As a result of the amendments to our financial covenants and the changes to our
debt structure, we believe that we will have sufficient liquidity under our
revolving line of credit and from cash generated from operations to fund our
operations for the next 12 months.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation, as of the end of the period covered by this
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, organized and communicated to our management, including our
Chief Executive Officer and 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 their evaluation, nor were there any significant deficiencies or
material weaknesses in our internal controls. Accordingly, no corrective
actions were required or undertaken.
It should be noted that any system of controls, however well designed and
operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system will be met. In addition, the design of any
control system is based in part upon certain assumptions about the
likelihood of future events. Because of these and other inherent
limitations of control systems, there is only reasonable assurance that our
controls will succeed in achieving their stated goals under all potential
future conditions.
14
PART II - OTHER INFORMATION
Item 5. Other Information.
The Company is not required to file reports with the Securities and
Exchange Commission pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, but is filing this
Quarterly Report on Form10-Q on a voluntary basis. Accordingly, it is
not an "issuer" as defined in Section 2(a)(7) of the Sarbanes-Oxley
Act of 2002.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
(31.1) The Certification of Gerard E. Holthaus, required by Rule 13a-
14(a) (17 CFR 240.13a-14(a)) or Rule 15d-14(a) (17 CFR
240.15d-14(a)).
(31.2) The Certification of John C. Cantlin, required by Rule 13a-14
(a) (17 CFR 240.13a-14(a)) or Rule 15d-14(a) (17 CFR
240.15d-14(a)).
(b) Reports on Form 8-K.
On May 1, 2003, the Company furnished a Form 8-K relating to the press
release announcing its results of operations for the three months
ended March 31, 2003.
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
Dated: August 13, 2003
By: /s/ John C. Cantlin
---------------
John C. Cantlin
Chief Financial Officer
Dated: August 13, 2003
16
Exhibit (31.1)
CERTIFICATION
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-15(e) and 15d-15(e) for
the registrant and have:
a) Designed such disclosure controls and
procedures or caused such disclosure
controls and procedures to be designed
under our supervision, 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 and presented in this report
our conclusions about the effectiveness
of the disclosure controls and
procedures, as of the end of the period
covered by this quarterly report based
on such evaluation; and
c) Disclosed in this quarterly report any
change in the registrant's internal
control over financial reporting that
occurred during the registrant's most
recent fiscal quarter that has
materially affected, or is reasonably
likely to materially affect, the
registrant's internal control over
financial reporting;
17
(5) The registrant's other certifying officers and I
have disclosed, based on our most recent
evaluation of internal control over financial
reporting, 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 and
material weaknesses in the design or
operation of internal control over
financial reporting which are reasonably
likely to adversely affect the
registrant's ability to record, process,
summarize and report financial
information; and
b) Any fraud, whether or not material, that
involves management or other employees
who have a significant role in the
registrant's internal controls over
financial reporting.
/s/ Gerard E. Holthaus
Gerard E. Holthaus
Chief Executive Officer
August 13, 2003
18
Exhibit (31.2)
CERTIFICATION
I, John C. Cantlin, 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 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-15(e) and 15d-15(e)) for
the registrant and have:
a) Designed such disclosure controls and
procedures or caused such disclosure
controls and procedures to be designed
under our supervision, 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 and presented in this report
our conclusions about the effectiveness
of the disclosure controls and
procedures, as of the end of the period
covered by this quarterly report based
on such evaluation; and
c) Disclosed in this quarterly report any
change in the registrant's internal
control over financial reporting that
occurred during the registrant's most
recent fiscal quarter that has
materially affected, or is reasonably
likely to materially affect, the
registrant's internal control over
financial reporting;
19
(5) The registrant's other certifying officers and I
have disclosed, based on our most recent
evaluation of internal control over financial
reporting, 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 and
material weaknesses in the design or
operation of internal control over
financial reporting which are reasonably
likely to adversely affect the
registrant's ability to record, process,
summarize and report financial
information; and
b) Any fraud, whether or not material, that
involves management or other employees
who have a significant role in the
registrant's internal controls over
financial reporting.
/s/ John C. Cantlin
John C. Cantlin
Chief Financial Officer
August 13, 2003
20