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 March 31, 2004
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 May 14, 2004, 6,194,799 shares of common stock ("Common Stock") of
the Registrant were outstanding.
SCOTSMAN HOLDINGS, INC.
INDEX
FORM 10-Q
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at March 31, 2004 1
and December 31, 2003
Consolidated Statements of Operations for the three 2
months ended March 31, 2004 and 2003
Consolidated Statements of Cash Flows for the
three months ended March 31, 2004 and 2003 3
Notes to Consolidated Financial Statements 4-6
Item 2. Management's Discussion and Analysis of 7-12
Financial Condition and Results of Operations
Item 3. Qualitative and Quantitative Disclosures
about Market Risk 13
Item 4. Controls and Procedures 13
PART II - OTHER INFORMATION
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
SAFE HARBOR STATEMENT - CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements in this Form 10-Q for the quarter ended March 31,
2004 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. Financial Statements.
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(dollars in thousands)
March 31, December 31,
2004 2003
---- ----
Assets (Unaudited)
Cash $ 984 $ 387
Trade accounts receivable, net of allowance for doubtful
accounts of $821 in 2004 and $862 in 2003 55,387 55,841
Prepaid expenses and other current assets 33,720 33,741
Rental equipment, net of accumulated depreciation of
$233,473 in 2004 and $224,794 in 2003 866,481 828,078
Property and equipment, net of accumulated depreciation of
$47,006 in 2004 and $45,141 in 2003 80,535 80,750
Deferred financing costs, net 21,207 22,868
Goodwill, net 169,898 169,913
Other intangible assets, net of accumulated amortization of
$2,271 in 2004 and $2,127 in 2003 3,177 2,575
Other assets 11,561 10,958
--------- ---------
$1,242,950 $1,205,111
========= =========
Liabilities and stockholder's equity
Accounts payable $ 29,440 $ 29,505
Accrued expenses 17,048 17,923
Accrued interest 21,501 11,454
Rents billed in advance 18,466 18,295
Revolving credit facility 86,874 54,940
Long-term debt, net 907,416 907,238
Deferred income taxes 146,288 147,392
--------- ---------
Total liabilities 1,227,033 1,186,747
--------- ---------
Stockholder's equity
Common stock, $.01 par value. Authorized 10,000,000
shares; issued 9,507,407 shares in 2004 and 2003 95 95
Additional paid-in capital 240,120 240,005
Cumulative foreign currency translation adjustment 7,924 8,621
Retained earnings 63,716 65,581
--------- ---------
311,855 314,302
Less treasury stock, - 3,312,608 common shares in 2004
and 2003, at cost (295,938) (295,938)
--------- ---------
Net stockholder's equity 15,917 18,364
--------- ---------
$1,242,950 $1,205,111
========= =========
See accompanying notes to consolidated financial statements.
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
(In thousands except share and per share amounts)
(Unaudited)
Three months ended March 31,
---------------------------
2004 2003
---- ----
Revenues
Leasing $ 52,827 $ 53,474
Sales:
New units 19,091 14,650
Rental equipment 5,212 4,417
Delivery and installation 20,414 18,928
Other 9,367 8,779
------- -------
Total revenues 106,911 100,248
------- -------
Cost of sales and services
Leasing:
Depreciation and amortization 11,780 12,323
Other direct leasing costs 11,088 9,971
Sales:
New units 15,516 11,922
Rental equipment 4,097 3,553
Delivery and installation 18,384 16,799
Other 2,230 1,722
------ ------
Total costs of sales and services 63,095 56,290
------ ------
Gross profit 43,816 43,958
------ ------
Selling, general and administrative expenses 20,782 19,816
Other depreciation and amortization 3,414 3,385
Interest, including amortization of deferred
financing costs 22,627 20,647
------ ------
Total operating expenses 46,823 43,848
------ ------
(Loss) income before income taxes (3,007) 110
Income tax (benefit) expense (1,142) 45
----- ------
Net (loss) income $ (1,865) $ 65
===== ===
(Loss) earnings per common share $ (0.30) $ 0.01
==== ====
(Loss) earnings per common share, assuming
dilution $ (0.30) $ 0.01
==== ====
See accompanying notes to consolidated financial statements.
2
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three months ended
March 31,
---------------------
2004 2003
---- ----
Cash flows from operating activities
Net (loss) income $ (1,865) $ 65
Adjustments to reconcile net (loss) income
to net cash provided by operating activities:
Depreciation and amortization 16,905 17,172
Bond discount amortization 89 89
Provision for bad debts 560 562
Deferred income tax (benefit) expense (1,103) 45
Non-cash stock option compensation expense 115 211
Gain on sale of rental equipment (1,114) (864)
Gain on sale of fixed assets (7) (9)
(Increase) decrease in trade accounts receivable (161) 9,939
Increase in accounts payable and accrued expenses 9,135 5,303
Other (1,628) (5,325)
------ ------
Net cash provided by operating activities 20,926 27,188
------ ------
Cash flows from investing activities
Rental equipment additions (12,170) (9,813)
Proceeds from sales of rental equipment 5,212 4,417
Purchases of property and equipment, net (1,797) (2,398)
Fleet asset acquisitions (43,471) --
------ -----
Net cash used in investing activities (52,226) (7,794)
------ -----
Cash flows from financing activities
Proceeds from debt 141,335 87,979
Repayment of debt (109,314) (106,498)
Increase in deferred financing costs (50) (713)
------- -------
Net cash provided by (used in)
financing activities 31,971 (19,232)
Net effect of change in exchange rates (74) 35
------- -------
Net increase in cash 597 197
Cash at beginning of period 387 429
--- ---
Cash at end of period $ 984 $ 626
=== ===
Supplemental cash flow information:
Cash paid for income taxes $ 335 $ 462
=== ===
Cash paid for interest $10,930 $ 5,780
====== =====
See accompanying notes to consolidated financial statements.
3
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" when including
Williams Scotsman, Inc.) was organized in November, 1993 for the purpose of
acquiring Williams Scotsman, Inc. (Scotsman). Holdings 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
Holdings' common stock, or cash interest to be paid on the debt of the
Company are dependent upon the cash flow of Scotsman.
The operations of the Company consist primarily of the leasing and sale of
mobile offices, modular buildings and storage products (equipment) and
their delivery and installation throughout the United States and Canada.
(2) FINANCIAL STATEMENTS
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 March
31, 2004, the consolidated statements of operations for the three months
ended March 31, 2004 and 2003, and the consolidated statements of cash
flows for the three months ended March 31, 2004 and 2003. The results of
operations for the periods ended March 31, 2004 and 2003 are not
necessarily indicative of the operating results expected for the full year.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. 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.
4
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(3) ACCOUNTING CHANGE
During the fourth quarter of 2003, the Company adopted the fair value
recognition provisions of SFAS 123, Accounting for Stock-Based
Compensation, retroactively effective January 1, 2003, using the modified
prospective method described in SFAS 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. Under the fair value recognition
provisions of SFAS 123, stock-based compensation cost is measured at the
grant date based on the fair value of the award and is recognized as
expense over the vesting period. The impact of this change resulted in a
$120 decrease to net income and a decrease of $0.02 to both earnings per
share-basic and earnings per share-diluted for the three month period ended
March 31, 2003.
(4) PURCHASE OF CALIFORNIA CLASSROOM UNITS
On March 26, 2004, the Company acquired nearly 3,800 relocatable DSA
classroom units located in the state of California from Transport
International Pool, Inc. (d/b/a GE Modular Space) for approximately $43.5
million. The assets were acquired using available funds under the Company's
revolving credit facility.
The acquisition included the purchase of units, equipment associated with
these classroom units as well as rights under all outstanding leases
related to these classroom units and certain other assets. The Company did
not acquire employees, physical facilities, sales force, or other business
related items. In addition, the customer base, which is primarily related
to public and private educational institutions in the State of California,
is similar to, and in many cases duplicative of, the Company's existing
customer base. As a result, the Company considers the purchase of these
assets an asset purchase rather than an acquisition of a business.
(5) REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
Debt consists of the following:
March 31, December 31,
2004 2003
----------------------
Borrowings under revolving credit facility $ 86,874 $ 54,940
Term loan 207,898 208,428
Capital lease obligations 619 --
9.875% senior notes, net of unamortized
discount of $1,100 in 2004 and $1,189 in 2003 548,899 548,810
10.0% senior secured notes 150,000 150,000
------- -------
$994,290 $962,178
======= =======
5
SCOTSMAN HOLDINGS, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(6) COMPREHENSIVE (LOSS) INCOME
Total comprehensive (loss) income was $(2,561) and $3,200 for the three
months ended March 31, 2004 and 2003, respectively, which includes net
(loss) income and the change in the foreign currency translation
adjustment. A summary of the components of comprehensive (loss) income for
the three months ended March 31, 2004 and 2003 is presented below.
Three Months Ended
------------------
March 31,
---------
2004 2003
---- ----
Net (loss) income $(1,865) $ 65
Change in currency translation (696) 3,135
----- -----
Comprehensive (loss) income $(2,561) $3,200
===== =====
(7) 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
-------------------
March 31,
--------
2004 2003
---- ----
Weighted-average shares - basic earnings
per share 6,194,799 6,194,799
Effect of employee stock options -- 347,547
--------- ---------
Weighted-average shares - diluted earnings
per share 6,194,799 6,542,346
========= =========
Common stock equivalents of approximately 331,000 were excluded from the
weighted average shares-diluted total for the quarter ended March 31, 2004
due to their anti-dilutive nature, which resulted from the Company's net
loss for such period.
6
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, 2003 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, stock-based compensation, foreign currency
translation, 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 unaudited
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 expected 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
assessing the ultimate realization of these receivables including the current
7
credit-worthiness of customers. The allowance for doubtful accounts is
determined based on historical collection results, days sales outstanding
trends, and 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 Other Intangible Impairment. We have significant intangible
assets related to goodwill and other acquired intangibles. We periodically
evaluate our long lived assets and intangible assets for potential impairment
indicators. The determination of whether or not these assets are impaired
involves significant judgments regarding estimated future cash flows, market
conditions, operational performance, and/or legal factors. Goodwill, in
particular, is evaluated on an annual basis on October 1st. Based on the most
recent valuation of goodwill completed during the fourth quarter of 2003, we
determined that goodwill was not 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 balance sheet 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.
Stock-based Compensation. Prior to 2003, we accounted for our issuance of
stock options and any modifications thereof using variable plan accounting and
the intrinsic value method under Accounting Principles Board Opinion No. 25 -
Accounting for Stock Issued to Employees (APB No. 25) and related
interpretations. Effective January 1, 2003, we adopted the fair value
recognition provisions of SFAS No. 123 - Accounting for Stock-Based
Compensation. We selected the modified prospective method of adoption described
in SFAS No. 148 - Accounting for Stock-Based Compensation - Transition and
Disclosure (SFAS No. 148). Under SFAS No. 148 stock compensation expense related
to the fair value of our outstanding options must be recognized using estimates
of the risk free interest rate, estimated option life, volatility, dividend
yield, and the exercise price. No significant changes have been made in the
first quarter 2004 regarding these input variables that were presented in our
annual report for the year ended December 31, 2003.
Income Taxes. 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. If our estimates
of future taxable income were to change, we may be also required to increase the
deferred tax asset valuation allowance, thereby increasing our reported income
tax expense.
8
Overview
In the first quarter of 2004, revenues were $106.9 million, a 6.6% increase
above the first quarter of 2003, primarily driven by increased new unit sales
and related delivery and installation activity. This increase was offset by the
impact of lower gross profit margins on leased units and delivery and
installation services, resulting in gross profit for the first quarter 2004 of
$43.8 million, virtually unchanged as compared to the same period 2003. Net loss
for the first quarter 2004 was $1.9 million as compared to net income of $0.1
million for the first quarter of 2003.
Purchase of California Classroom Units
On March 26, 2004, we acquired nearly 3,800 relocatable DSA classroom units
located in the state of California from Transport International Pool, Inc.
(d/b/a GE Modular Space) (the Seller) for approximately $43.5 million. The
assets were acquired using available funds under our revolving credit facility.
The acquisition included the purchase of units, equipment associated with these
classroom units as well as rights under all outstanding leases related to these
classroom units and certain other assets. We did not acquire employees, physical
facilities, sales force, or other business related items. In addition, the
customer base, which is primarily related to public and private educational
institutions in the State of California, is similar to, and in many cases
duplicative of, our existing customer base. As a result, we consider the
purchase of these assets an asset purchase rather than an acquisition of a
business.
Based on the current information available to us and current market
conditions, we estimate the resulting transaction would result in annual
increases to revenues, income before income taxes, and operating cash flows of
approximately $10.2 million, $4.4 million and $4.5 million, respectively. The
estimated income before income taxes would be after interest and depreciation
expenses of $2.0 million and $1.7 million, respectively. The average age of the
units acquired is approximately 6 years while the remaining depreciable lives
range from 2 to 19 years with an average remaining life of approximately 14
years. Operating leases assumed in the transaction have an average contractual
life of less than two years, however, we expect a significant number of these
units to either continue on a month-to-month basis or be re-leased.
Results of Operations
Three Months Ended March 31, 2004 Compared with Three Months Ended March 31,
2003.
Revenues in the quarter ended March 31, 2004 were $106.9 million; a $6.7
million or 6.6% increase from revenues of $100.2 million in the same period of
2003. The increase resulted primarily from a $4.4 million or 30.3% increase in
sales of new units, a $1.5 million or 7.9% increase in delivery and installation
revenues, a $0.8 million or 18.0% increase in sales of rental equipment, and a
$0.6 million or 6.7% increase in other revenue from the same period in 2003.
These increases are largely due to strength in the education industry we serve,
particularly in the West and Southeast regions of the country, as well as a
higher volume of rental equipment sales as compared to the same period in 2003.
Our financial results reflect a $0.6 million or 1.2% decrease in leasing
revenue, which resulted primarily from competitive pricing pressures, partially
offset by a slight increase in average units on rent from 71,100 for the three
months ended March 31, 2003 to 71,400 for the three months ended March 31, 2004.
The average monthly rental rate decreased approximately 2.4% to $249 for the
quarter ended March 31, 2004 as compared to $255 for the same period in 2003.
9
Gross profit for the quarter ended March 31, 2004 was $43.8 million, a $0.1
million or 0.3% decrease from the first quarter 2003 gross profit. This decrease
is primarily a result of a 3.9% decrease in leasing gross profit of $1.2
million, partially offset by increases in gross profit dollars from sales of new
units and rental equipment. The decrease in leasing gross profit was primarily
the result of decreases in revenues described above as well as the unfavorable
impact of increased refurbishment and maintenance costs related to off-rented
units as compared to the same period in 2003. These factors resulted in a
decrease in gross profit margin percentage of 160 basis points for the first
quarter of 2004 as compared to the same period in 2003. Gross profit from sales
of new units and rental equipment increased by 31.0% or $0.8 million and 29.1%
or $0.3 million, respectively, primarily as a result of the increased revenues
previously mentioned. Gross profit margin percentage from the sales of new units
and rental equipment increased by 10 basis points and 180 basis points,
respectively.
Selling, general and administrative expenses for the quarter ended March
31, 2004 increased by approximately $1.0 million or 4.9% to $20.8 million from
$19.8 million in the same period 2003. This increase is primarily associated
with increased employee related, business insurance and professional fee
expenses.
Interest expense increased by 9.6% to $22.6 million in the first quarter
2004 from $20.6 million in the same period 2003, resulting primarily from the
incremental interest expense incurred on the additional $150.0 million of 10.0%
senior secured notes. The net proceeds of the notes were used to pay off
portions of the term loan and revolving credit facility debt in August 2003.
This incremental interest expense was partially offset by the impact of a $165.3
million or 38.3% decrease in the average credit facility debt over the first
quarter 2003.
Income before income taxes decreased $3.1 million for the quarter ended
March 31, 2004 to a loss of $3.0 million compared to income before income taxes
of $0.1 million for the quarter ended March 31, 2003. The effective tax rates
for the quarters ended March 31, 2004 and 2003 were 38.0% and 40.9%,
respectively.
Contractual Obligations and Commercial Commitments
During the three months ended March 31, 2004, there was no material change
in our contractual obligations and commercial commitments outside of the
ordinary course of business.
Liquidity and Capital Resources
During the three months ended March 31, 2004, our principal source of funds
consisted of cash flow provided by financing activities of $32.0 million. In
addition, for the three months ended March 31, 2004 and 2003, cash flow from
operating activities were $20.9 million and $27.2 million, respectively. These
funds were largely generated by the rental of units from our lease fleet and
sales of new mobile office units.
We generated $20.9 million of net cash from operating activities for the
three months ended March 31, 2004 compared to $27.2 million for the three months
ended March 31, 2003. The decrease of $6.3 million resulted primarily from
declines in net income as well as a significant decrease in the change in
accounts receivable, partially offset by decreases in the change in other assets
and increases in the change in accounts payable and accrued expenses. The change
in accounts receivable resulted primarily from our significant collection
efforts during 2003 to reduce outstanding receivable balances to current levels.
The changes in other resulted primarily from declines related to cost in excess
of billings on long-term construction type sales contracts balances. The
10
fluctuations in the change in accounts payable and accrued expenses resulted
primarily from the timing of payments of accounts payable.
Cash used in investing activities was $52.2 million and $7.8 million for
the three months ended March 31, 2004 and 2003, respectively. In March, 2004, we
acquired nearly 3,800 relocatable classrooms located in the state of California
from the Seller for approximately $43.5 million. See Note 4 to the Consolidated
Financial Statements for further discussion of the California Fleet purchase. In
addition to the acquisition, 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.
Our fleet acquisition strategy includes increasing our fleet size in accordance
with customer demand.
Net cash provided by financing activities of $32.0 million for the three
month period ended March 31, 2004 consisted of $32.0 million in additional
borrowings under our revolving credit facility, which were used to supplement
cash flow from operating activities in the funding of capital expenditures for
the quarter, as well as the $43.5 million California fleet purchase as described
above. Net cash used in financing activities of $19.2 million for the three
month period ended March 31, 2003 consisted primarily of net repayments of debt
under our revolving credit facility.
The credit agreement contains restrictions on the amount of dividends
Scotsman can pay to Holdings and requires compliance with certain financial
covenants including capital expenditures, an interest coverage ratio, a leverage
ratio and fleet utilization levels. The failure to maintain the required ratios
would result in us not being able to borrow under the credit agreement and, if
not cured within the grace periods, would result in a default under the credit
agreement. We are currently in compliance with all financial covenants.
Our total credit facility (including the term loan and revolver commitment)
was $550.0 million at March 31, 2004. Borrowing base (collateral) availability
calculated in accordance with the credit agreement under this facility was
$228.0 million at March 31, 2004. Consolidated Leverage Ratio covenant
restrictions further limited our borrowing availability at March 31, 2004 to
$63.4 million. In order to meet our future cash requirements, we intend to use
internally generated funds and to borrow under our credit facility. We believe
we will have sufficient liquidity under our revolving line of credit and from
cash generated from operations to fund our operations for at least the next 12
months. Our credit facility expires December 2006 and our 9.875% and 10.0%
senior notes expire in 2007 and 2008, respectively. It is expected that we will
refinance outstanding obligations under these agreements prior to their
maturities. Until such time, we expect that funds from operations will be
sufficient to satisfy debt service requirements related to these obligations.
For the period ended March 31, 2004, our actual Consolidated Leverage Ratio
was 6.35 as compared to the maximum covenant requirement of 6.75 and our actual
Consolidated Interest Coverage Ratio was 1.86 as compared to the minimum
covenant requirement of 1.70. The Consolidated Interest Coverage Ratio was
calculated by dividing Consolidated EBITDA (as defined in our credit agreement)
of $148,989 for the twelve month period ended March 31, 2004 by cash interest
expense of $80,118 as defined in the credit agreement. The Consolidated Leverage
Ratio was calculated by dividing the March 31, 2004 consolidated debt balance of
$994,290 by Consolidated EBITDA for the twelve month period ended March 31,
2004. For Consolidated Leverage Ratio calculation purposes Consolidated EBITDA
for the twelve months ended March 31, 2004 was $156,698, which in accordance
with the credit agreement, was adjusted to include $7,710 relating to
acquisitions made during the calculation period.
11
Consolidated EBITDA as defined in our credit agreement represents the
trailing 12 months consolidated Scotsman Holdings Inc.'s net income plus
consolidated interest, tax, depreciation and amortization expenses, and excludes
gains and losses on sales of fixed assets and any other non-cash items. It is
used in determining our compliance with the financial ratios required by our
agreement. Consolidated EBITDA should not be considered in isolation or as a
substitute to cash flow from operating activities, 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.
Although not required by our credit agreement, if the Company's cash flow
from operating activities for the twelve months ended March 31, 2004, the most
directly comparable GAAP measure to Consolidated EBITDA, were used in these
calculations instead of Consolidated EBITDA, our leverage ratio and interest
coverage ratio would have been 14.63 and .85, respectively.
The table below reconciles Consolidated EBITDA, calculated pursuant to the
credit agreement, to cash flow from operating activities for the twelve months
ended March 31, 2004, the most directly comparable GAAP measure (in thousands).
Twelve Months Ended
March 31, 2004
-------------------
Consolidated EBITDA $ 156,698
Increase in net receivables (934)
Increase in accounts payable and
accrued expenses 9,926
Interest paid (79,758)
Increase in other assets (5,423)
Decrease in other liabilities (222)
Gain on sale of rental equipment (4,623)
Pro forma EBITDA impact of acquisitions (7,710)
------
Cash flow from operating activities $ 67,954
======
12
Item 3.Quantitative and Qualitative Disclosures about Market Risk
For quantitative and qualitative disclosures about market risk, see Item
7A, "Quantitative and Qualitative Disclosures About Market Risk," of our annual
report on Form 10-K for the year ended December 31, 2003. Our exposures to
market risk have not changed materially since December 31, 2003.
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 (as defined in the Securities Exchange Act of
1934 Rules 13a - 15(e) and 15d - 15(e)) 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 Control Over Financial Reporting.
There has been no change in the Company's internal control
over financial reporting (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(f) and 15d-15(f)) that
occurred during the Company's most recent fiscal quarter
that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over
financial reporting.
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.
13
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 Form 10-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) Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 for Gerard E. Holthaus, Chief Executive
Officer of the Company.
(31.2) Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 for John C. Cantlin, Chief Financial Officer
of the Company.
(b) Reports on Form 8-K.
None.
14
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: May 14, 2004
By: /s/ John C. Cantlin
------------------------
John C. Cantlin
Chief Financial Officer
Dated: May 14, 2004
15
Exhibit (31.1)
CERTIFICATION
I, Gerard E. Holthaus, Chief Executive Officer, certify, that:
(1) I have reviewed this report on Form 10-Q of Scotsman Holdings,
Inc.;
(2) Based on my knowledge, this 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 report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this 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 report;
(4) The registrant's other certifying officer 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
subsidiary, is made known to us by others within those
entities, particularly during the period in which this
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 report based on such evaluation; and
c) Disclosed in this 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;
16
(5) The registrant's other certifying officer 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 control over financial reporting.
/s/ Gerard E. Holthaus
----------------------
Gerard E. Holthaus
Chief Executive Officer
May 14, 2004
17
Exhibit (31.2)
CERTIFICATION
I, John C. Cantlin, Chief Financial Officer, certify, that:
(1) I have reviewed this report on Form 10-Q of Scotsman Holdings,
Inc.;
(2) Based on my knowledge, this 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 report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this 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 report;
(4) The registrant's other certifying officer 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
subsidiary, is made known to us by others within those
entities, particularly during the period in which this
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 report based on such evaluation; and
c) Disclosed in this 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;
18
(5) The registrant's other certifying officer 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 control over financial reporting.
/s/ John C. Cantlin
------------------------
John C. Cantlin
Chief Financial Officer
May 14, 2004
19