<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1998
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: 01-13407
HUSSMANN INTERNATIONAL, INC.
----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 43-1791715
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12999 ST. CHARLES ROCK ROAD, BRIDGETON, MISSOURI 63044-2483
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(314) 291-2000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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 [ ]
COMMON STOCK OUTSTANDING AT JUNE 30, 1998: 50,966,336 SHARES
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HUSSMANN INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; Dollars in millions, except per share data)
<TABLE>
<CAPTION>
Three-Months Ended Six-Months Ended
June 30, June 30,
------------------------------------- ------------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Sales and revenues $ 292.9 $ 250.8 $ 538.8 $ 449.4
Cost of goods sold 229.3 202.4 434.4 366.1
-------------- -------------- -------------- --------------
Gross profit 63.6 48.4 104.4 83.3
Selling, general and admin. expenses 33.5 26.7 62.8 51.6
Amortization expense 0.3 0.4 0.5 0.8
-------------- -------------- -------------- --------------
Operating income 29.8 21.3 41.1 30.9
Whitman charges -- 7.1 1.5 14.2
Interest expense:
Whitman -- 4.7 1.0 8.9
Other 4.9 0.2 8.4 0.6
-------------- -------------- -------------- --------------
Total interest expense 4.9 4.9 9.4 9.5
Other income (expense), net (0.6) 0.5 0.3 0.9
-------------- -------------- -------------- --------------
Income before income tax expense
and minority interests 24.3 9.8 30.5 8.1
Income tax expense 9.0 3.9 11.3 3.1
-------------- -------------- -------------- --------------
Net income before minority interests 15.3 5.9 19.2 5.0
Minority interests 0.4 (0.2) 0.6 --
-------------- -------------- -------------- --------------
Net income $ 15.7 $ 5.7 $ 19.8 $ 5.0
============== ============== ============== ==============
Weighted average shares - Basic 50,895,000 -- 50,872,000 --
Basic earnings per share $ 0.31 -- $ 0.39 --
Weighted average shares - Diluted 52,477,000 -- 52,147,000 --
Diluted earnings per share $ 0.30 -- $ 0.38 --
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
HUSSMANN INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1998 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 26.6 $ 38.4
Receivables, net 254.8 208.8
Inventories 111.8 146.7
Other current assets 7.0 7.4
------- -------
Total current assets 400.2 401.3
Property and equipment, net 163.6 159.9
Goodwill, net 23.9 25.1
Other assets 30.1 27.7
------- -------
Total assets $ 617.8 $ 614.0
======= =======
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt and
current portion long-term debt $ 19.1 $ 6.2
Accounts payable 102.9 126.8
Income taxes payable 2.3 14.2
Accrued expenses 64.3 74.6
------- -------
Total current liabilities 188.6 221.8
Loans and advances - Whitman -- 173.8
Long-term debt 244.8 3.2
Other liabilities 28.8 28.6
------- -------
Total liabilities 462.2 427.4
------- -------
Shareholders' equity:
Preferred stock, $.001 par value,
20,000,000 shares authorized, none
issued or outstanding -- --
Common stock, $.001 par value, 150,000,000
shares authorized, 50,966,336
issued and outstanding 0.1 --
Additional paid-in capital 89.3 52.3
Retained earnings 124.8 188.1
Cumulative translation adjustment (57.5) (53.8)
Treasury stock, at cost: 59,716 shares (1.1) --
------- -------
Total shareholders' equity 155.6 186.6
------- -------
Total liabilities and shareholders' equity $ 617.8 $ 614.0
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
HUSSMANN INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in millions)
<TABLE>
<CAPTION>
Six-Months Ended
June 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 19.8 $ 5.0
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 12.1 11.1
Changes in assets and liabilities,
exclusive of acquisitions:
(Increase) decrease in receivables (46.1) 35.1
(Increase) decrease in inventories 34.9 (9.8)
Decrease in accounts payable (24.9) (10.4)
Decrease in income taxes payable (11.9) (9.6)
Decrease in accrued expenses (10.3) (7.7)
Other (0.4) (4.8)
-------- --------
Net cash (used in) provided by operating activities (26.8) 8.9
-------- --------
Cash flows from investing activities:
Capital investments (15.4) (16.4)
Companies acquired, net of cash -- (12.4)
Other 0.4 0.3
-------- --------
Net cash used in investing activities (15.0) (28.5)
-------- --------
Cash flows from financing activities:
Net increase in short-term debt 12.9 1.8
Settlement of Whitman obligations, net (221.7) --
Net increase in loans and advances - Whitman -- 13.5
Proceeds from issuance of long-term debt 396.7 --
Principal payments on long-term debt (155.1) (0.2)
Dividends paid (1.0) (2.2)
Acquisition of treasury stock (1.1) --
-------- --------
Net cash provided by financing activities 30.7 12.9
-------- --------
Effects of exchange rate changes on cash and cash equivalents (0.7) (0.5)
-------- --------
Net change in cash and cash equivalents (11.8) (7.2)
Cash and cash equivalents as of beginning of period 38.4 47.1
-------- --------
Cash and cash equivalents as of end of period $ 26.6 $ 39.9
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
HUSSMANN INTERNATIONAL, INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED; DOLLARS IN MILLIONS)
1. BASIS OF PRESENTATION
On January 30, 1998, Whitman Corporation ("Whitman") distributed (the
"Distribution") 50.7 million shares of common stock of Hussmann ("Hussmann
Common Stock") to Whitman's shareholders. As a result of the spin-off (the
"Spin-off"), Hussmann became an independent, publicly held company. As required
by the context, "Hussmann" or the "Company" refers to Hussmann International,
Inc. or to the group of companies that became wholly-owned subsidiaries of
Hussmann International, Inc. in January 1998.
Except for the three-month period ended June 30, 1998, the accompanying
unaudited financial statements present the operations of Hussmann, which was
composed of wholly-owned subsidiaries of Whitman, including Hussmann Corporation
and its wholly-owned subsidiaries and other Hussmann companies owned by Whitman
but directly managed by Hussmann. In January 1998, the companies included in
these financial statements became wholly-owned subsidiaries of Hussmann. Prior
to the formation of Hussmann, the historical financial statements were combined
for financial reporting purposes. For all periods presented herein, the
financial statements will be referred to as consolidated financial statements.
The accompanying unaudited consolidated financial statements, in the opinion
of management, include all adjustments (consisting of normal, recurring items)
necessary to present fairly Hussmann's consolidated financial position and
results of its operations and cash flows for the periods presented. The
unaudited consolidated financial statements are presented in accordance with
requirements of Regulation S-X and consequently do not include all disclosures
required by generally accepted accounting principles. Results of operations for
the three-month and six-month periods ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998.
Certain prior year amounts presented in the accompanying consolidated
financial statements have been reclassified to conform to current year
presentation.
2. EARNINGS PER SHARE
Hussmann adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share" ("Statement No. 128"), during the
first quarter of 1998. In accordance with Statement No. 128, basic earnings per
share is calculated using the weighted average number of Hussmann Common Stock
outstanding during the period. Diluted earnings per share is calculated using
the weighted average number of Hussmann Common Stock outstanding during the
period plus shares issuable upon the assumed exercise of dilutive common stock
options by using the treasury stock method. Although the Spin-off did not occur
until January 30, 1998, for purposes of presentation, Hussmann has calculated
earnings per share on a pro forma basis assuming the Spin-off occurred at
January 1, 1998 for both basic and diluted earnings per share.
The numbers of shares of Hussmann Common Stock used in the calculations of
earnings per share for the three-month and six-month periods ended June 30, 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
Three-Months Six-Months
Ended Ended
------ ------
<S> <C> <C>
Weighted average shares outstanding - basic 50,895 50,872
Dilutive effect of stock options 1,582 1,275
------ ------
Weighted average shares outstanding - diluted 52,477 52,147
====== ======
</TABLE>
5
<PAGE> 6
As of June 30, 1998 all outstanding Hussmann stock options were included in
the computation of diluted earnings per share, as the exercise price was less
than the average fair market value of Hussmann Common Stock for the period it
was traded.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- --------
<S> <C> <C>
Raw materials and supplies $ 62.5 $ 66.9
Work in process 18.8 52.0
Finished goods 30.5 27.8
-------- --------
Total inventories $ 111.8 $ 146.7
======== ========
</TABLE>
4. BUSINESS SEGMENT INFORMATION
Hussmann manages its business with separate senior management teams
responsible for geographic regions. The following segments correspond to these
geographic regions.
The following tables present financial information for each of these
business segments as of and for the six-months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
SALES AND REVENUES OPERATING INCOME
------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
U.S. and Canada $ 437.6 $ 388.9 $ 52.0 $ 42.2
Europe 59.0 46.7 (2.1) (6.3)
Other International 74.4 41.9 6.0 2.9
Eliminations (32.2) (28.1) -- --
-------- -------- -------- --------
Total $ 538.8 $ 449.4 55.9 38.8
======== ========
Corporate administrative expenses (14.8) (7.9)
-------- --------
Total operating income $ 41.1 $ 30.9
======== ========
</TABLE>
5. COMPREHENSIVE INCOME
During the first quarter of 1998, Hussmann adopted SFAS No. 130, "Reporting
Comprehensive Income" ("Statement No. 130"). Statement No. 130 requires the
separate reporting of components of comprehensive income, as defined. This
statement requires Hussmann to separately report the translation adjustments of
SFAS No. 52, "Foreign Currency Translation" as a component of comprehensive
income. Management has chosen, on an interim basis, to disclose the requirements
of this statement within the notes to the consolidated financial statements. The
foreign currency translation adjustment accounted for as a separate component of
shareholders' equity was a loss of $2.2 million and $0.1 million for the
three-month periods ended June 30, 1998 and 1997, respectively, and a loss of
$3.7 million and $2.6 million for the six-months ended June 30, 1998 and 1997,
respectively.
6
<PAGE> 7
HUSSMANN INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
In January 1998, the companies included in the accompanying consolidated
financial statements became wholly-owned subsidiaries of Hussmann. On January
30, 1998, Hussmann was spun-off from Whitman and became an independent, publicly
held company. The results for the three-month and six-month periods ended June
30, 1997 and for the six-month period ended June 30, 1998, are impacted by
certain non-recurring items. The following tables provide a reconciliation of
what management believes the operating results for such periods would have been
if Hussmann had been an independent, publicly held company, excluding the impact
of certain non-recurring items and including the impact of the borrowing under
the five-year unsecured revolving credit facility entered into by the Company
and Hussmann Corporation in January 1998 (the "Credit Facility"). Management
believes the pro forma consolidated statements of operations provide a more
meaningful presentation for purposes of analyzing the Company's operating
results.
HUSSMANN INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE-MONTHS ENDED JUNE 30, 1997
(UNAUDITED; DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and revenues $ 250.8 $ (0.2)d $ 250.6
Cost of goods sold 202.4 (0.6)d 201.8
- ---------------------------------------------------------------------------------------------------------------
Gross profit 48.4 0.4 48.8
Total selling, general, administrative and amortization
expenses 27.1 1.2 28.3
- ---------------------------------------------------------------------------------------------------------------
Operating income 21.3 (0.8) 20.5
Whitman charges 7.1 (7.1)a --
Total interest expense 4.9 (1.1)a,b 3.8
Other income, net 0.5 -- 0.5
- ---------------------------------------------------------------------------------------------------------------
Income before income tax expense and
minority interests 9.8 7.4 17.2
Income tax expense 3.9 2.2 c 6.1
- ---------------------------------------------------------------------------------------------------------------
Net income before minority interests 5.9 5.2 11.1
Minority interests (0.2) -- (0.2)
- ---------------------------------------------------------------------------------------------------------------
Net income $ 5.7 $ 5.2 $ 10.9
===============================================================================================================
Pro forma shares outstanding - basic -- -- 50,731
Pro forma basic earnings per share -- -- $ 0.22
Pro forma shares outstanding - diluted -- -- 51,159
Pro forma diluted earnings per share -- -- $ 0.21
===============================================================================================================
</TABLE>
(a) To eliminate the Whitman charges and interest paid to Whitman.
(b) To record interest expense on the funds borrowed under the Credit Facility.
For pro forma purposes it was assumed that $240 million was borrowed at an
interest rate of approximately 6.0%.
(c) To record the income tax effect of adjustments (a), (b) and (d).
(d) As part of Whitman, Hussmann accounted for its results for each period as of
the fifteenth day of the month (e.g. Second quarter cut-off being June 15).
As a separate, stand-alone company, Hussmann accounts for its results using
the last day of each month. The sales
7
<PAGE> 8
and revenues and cost of goods sold pro forma adjustments reflect the
adjustments necessary to present the results of operations through June 30,
1997.
Pro forma basic earnings per share for the three-months and six-months ended
June 30, 1997 were computed using the original shares issued upon the Spin-off
of 50.7 million. Pro forma diluted earnings per share was computed using the
aforementioned shares adjusted for the respective replacement options issued by
Hussmann to supplement those granted by Whitman. The market price used was the
initial trading price of Hussmann Common Stock on January 30, 1998 of $13.56.
<TABLE>
<CAPTION>
Periods
Ended
June 30, 1997
-------------
<S> <C>
Weighted average shares outstanding - basic 50,731
Dilutive effect of stock options 428
------
Weighted average shares outstanding - diluted 51,159
======
</TABLE>
RESULTS OF OPERATIONS - THREE-MONTHS ENDED JUNE 30, 1998 COMPARED WITH PRO FORMA
THREE-MONTHS ENDED JUNE 30, 1997
Sales and Revenues. Sales and revenues for the three-months ended June 30,
1998 of $292.9 million were $42.3 million or 16.9% over the same period 1997
sales and revenues of $250.6 million. Sales and revenue increases in the United
States, U.K., and Mexico drove the overall improvement. The following is a
summarized analysis of the increase in sales and revenues (in millions).
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998 SALES % INCREASE
AND $ CHANGE (DECREASE)
REVENUES FROM 1997 FROM 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. and Canada $ 228.1 $ 13.4 6.2%
Europe 36.3 11.4 45.8%
Other International 45.1 19.8 78.1%
Eliminations (16.6) (2.3) (15.6)%
- --------------------------------------------------------------------------------
Total $ 292.9 $ 42.3 16.9%
- --------------------------------------------------------------------------------
</TABLE>
The 6.2% increase in sales and revenues in the U.S. and Canada was
principally driven by continued strong U.S. supermarket case demand and the
market reception of the IMPACT product line. The increase in sales and revenues
in Europe of 45.8% was due to market demand and timing of orders with major
customers in the U.K. The increase in sales and revenues of 78.1% or $19.8
million in Other International was principally due to increased sales in Mexico,
which were $22.3 million above comparable 1997 results. Included in Mexico's
results are the results of Industrias Gilvert (Gilvert), a fourth quarter 1997
acquisition which contributed $4.0 million in sales and revenues during the
quarter ended June 30, 1998. Excluding Gilvert's results, Mexico's sales and
revenues were favorably impacted by strong supermarket and export sales coupled
with easy comparisons to a weak 1997 second quarter.
Gross Profit. As a percent of sales and revenues, June 30, 1998 gross profit
was 21.7% compared to 19.5% in 1997. Improved manufacturing efficiencies from
higher production volume in nearly all operations contributed to the
improvement. Mexico's favorable results were driven by strong sales in higher
margin display case sales, bottle cooler exports, and a reduction in overall
costs.
SG&A Expenses. Selling, general, administrative and amortization ("SG&A")
expenses increased 19.5% to $33.8 million during the three-months
8
<PAGE> 9
ended June 30, 1998. The increase in SG&A expenses is primarily due to costs
associated with compensation expense to settle a Whitman stock incentive plan
related to the Spin-off, a workers compensation credit received in the prior
year, the impact of the Gilvert acquisition and the anticipated increase in the
costs associated with the conversion to an integrated Company-wide information
system.
Operating Income. Operating income for the three-months ended June 30, 1998
of $29.8 million was 45.5% or $9.3 million greater than the same period in 1997.
This increase was driven by increases in the U.S. and improved operations in the
U.K. and Mexico. The increase in Europe was favorably impacted by the extensive
restructuring of U.K. operations and the consolidation of sales and service
branches in the second half of fiscal year 1997. Operating income for Other
International operations of $4.5 million increased 95.5% over the 1997 operating
income of $2.3 million. This increase is mainly attributable to the acquisition
of Gilvert and strong volume sales in Mexico when compared to a weak second
quarter 1997.
Interest Expense. Interest expense of $4.9 million in the second quarter of
1998 increased $1.1 million or 29.3% from the same three-month period in 1997.
This increase was primarily due to increased international borrowings to fund
working capital requirements. For pro forma financial statement presentation it
was assumed the amounts due to Whitman were replaced with $240.0 million in
borrowings, which were outstanding for the period January 1, 1997 through the
Spin-off (January 30, 1998). Pro forma interest expense was calculated using an
assumed rate of approximately 6%.
Income Tax Expense. Hussmann's effective income tax rate was 37.1% in the
second quarter of 1998, or 1.5 points higher than the 1997 effective rate of
35.6%. The 1998 effective tax rate increased due to the increased level of
earnings from U.S. operations in 1998, which typically have a higher effective
tax rate than Hussmann's other operations, and the unfavorable impact of the
hyper-inflationary accounting in Mexico.
9
<PAGE> 10
RESULTS OF OPERATIONS - PRO FORMA SIX-MONTHS ENDED JUNE 30, 1998 COMPARED WITH
PRO FORMA SIX-MONTHS ENDED JUNE 30, 1997
HUSSMANN INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX-MONTHS ENDED JUNE 30, 1998
(UNAUDITED; DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and revenues $ 538.8 $ -- $ 538.8
Cost of goods sold 434.4 -- 434.4
- -----------------------------------------------------------------------------------------------------------
Gross profit 104.4 -- 104.4
Total selling, general, administrative and amortization
expenses 63.3 -- 63.3
- -----------------------------------------------------------------------------------------------------------
Operating income 41.1 -- 41.1
Whitman charges 1.5 (1.5)a --
Total interest expense 9.4 0.1 a,b 9.5
Other income, net 0.3 -- 0.3
- -----------------------------------------------------------------------------------------------------------
Income before income tax expense and minority
interests 30.5 1.4 31.9
Income tax expense 11.3 0.5 c 11.8
- -----------------------------------------------------------------------------------------------------------
Net income before minority interests 19.2 0.9 20.1
Minority interests 0.6 -- 0.6
- -----------------------------------------------------------------------------------------------------------
Net income $ 19.8 $ 0.9 $ 20.7
- -----------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - basic 50,872 50,872
Basic earnings per share $ 0.39 $ 0.41
Weighted average shares outstanding - diluted 52,147 52,147
Diluted earnings per share $ 0.38 $ 0.40
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(a) To eliminate the Whitman charges and interest paid to Whitman.
(b) For pro forma purposes it was assumed that $240 million was borrowed at an
interest rate of approximately 6.0% for the period January 1, 1998 through
the date of the Spin-off (January 30, 1998).
(c) To record the income tax effect of adjustments (a) and (b).
HUSSMANN INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX-MONTHS ENDED JUNE 30, 1997
(UNAUDITED; DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and revenues $ 449.4 $ 25.2 $ 474.6
Cost of goods sold 366.1 23.0 389.1
- --------------------------------------------------------------------------------------------------------------
Gross profit 83.3 2.2 85.5
Total selling, general, administrative and amortization
expenses 52.4 2.8 55.2
- --------------------------------------------------------------------------------------------------------------
Operating income 30.9 (0.6) 30.3
Whitman charges 14.2 (14.2)a --
Total interest expense 9.5 (1.8)a,b 7.7
Other income, net 0.9 -- 0.9
- --------------------------------------------------------------------------------------------------------------
Income before income tax expense and
minority interests 8.1 15.4 23.5
Income tax expense 3.1 5.2 c 8.3
- --------------------------------------------------------------------------------------------------------------
Net income before minority interests 5.0 10.2 15.2
Minority interests -- -- --
- --------------------------------------------------------------------------------------------------------------
Net income $ 5.0 $ 10.2 $ 15.2
- --------------------------------------------------------------------------------------------------------------
Pro forma shares outstanding - basic -- -- 50,731
Pro forma basic earnings per share -- -- $ 0.30
Pro forma shares outstanding - diluted -- -- 51,159
Pro forma diluted earnings per share -- -- $ 0.29
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The 1997 pro forma adjustments include the items discussed above and
adjustments to reflect the results of operations through June 30, 1997.
10
<PAGE> 11
Sales and Revenues. Sales and revenues for the six-months ended June
30, 1998 were $538.8 million or 13.5% over the comparable period of 1997.
Improvements in the U.S., the U.K. and Mexico led the overall increase. The
following is a summarized analysis of the increase in sales and revenues (in
millions):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
1998 SALES % INCREASE
AND $ CHANGE (DECREASE)
REVENUES FROM 1997 FROM 1997
- ------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. and Canada $ 437.6 $ 24.5 5.9%
Europe 59.0 12.3 26.3
Other International 74.4 32.5 77.5
Eliminations (32.2) (5.1) NM
- ------------------------------------------------------------------------
Total $ 538.8 $ 64.2 13.5%
- ------------------------------------------------------------------------
</TABLE>
For the six-months ended June 30, 1998, U.S. and Canada sales and
revenues increased 5.9% principally due to a continued strong U.S. market and
the reception of the IMPACT product line. Europe's sales and revenues increased
26.3% primarily as a result of market demand and timing of orders with major
customers in the U.K. and the comparison to a weak first half 1997
attributed to start-up delays at the Milton Keynes, U.K. plant.
Other International sales and revenues increased 77.5% over the
comparable 1997 period. The majority of this increase was derived from
Hussmann's Mexican operations where sales and revenues increased 116.5% or $31.1
million. Mexico's increased sales and revenues resulted from strong market
demand from supermarket customers and export sales. Mexico's sales and revenues
also benefited from the fourth quarter 1997 acquisition of Gilvert. The
acquisition of Gilvert increased 1998 revenues by approximately $7.0 million.
Mexico's significant increase over the prior year also relates to relatively
weak sales in the first half of 1997 caused by lower capital spending by
domestic supermarket customers.
Gross Profit. As a percentage of sales and revenues, year-to-date gross
profit in 1998 increased 1.4 points to 19.4%. The gross profit increases were
achieved in the U. S. and Canada and in Other International. The increase in
U.S. and Canada is mainly derived from the increased volume and other
manufacturing efficiencies in the Bridgeton, Missouri facility, caused by
continued strong supermarket demand. The increase in Other International is
mainly driven by Mexico's results for the six-month period ended June 30, 1998.
An acquisition, stronger export and domestic supermarket sales, and cost
reductions accounted for Mexico's 1998 improvement.
SG&A Expenses. Total SG&A expenses of $63.3 million for the six-months
ended June 30, 1998 were 14.7% higher than the comparable period in 1997. The
increase in SG&A over 1997 results was mainly attributable to the recognition of
compensation expense for a Whitman incentive plan related to the Spin-off, a
workers compensation credit received in the prior year, the impact of the
Gilvert acquisition, and the anticipated increase in costs associated with the
implementation of a Company-wide information system.
Operating Income. Operating income of $41.1 million increased 35.7%
from the $30.3 million recorded during the six-months ended June 1997. U.S. and
Canada operating income of $52.0 million was $8.1 million or 18.3% more than
1997 operating income of $44.0 million. This increase was primarily the result
of strong volume growth, gross profit improvements and leverage over SG&A costs.
The Company's 1998 results were favorably impacted by the improvements in the
U.K., which still showed an operating loss of $2.1 million. Operating income in
the U.K. improved due to the extensive restructuring of its operations and the
consolidation of sales and service branches which took place in the second half
of fiscal year 1997. The increase in operating income for Other International
operations was primarily due to Mexico's $7.0 million increase in operating
income over the six-months ended June 30, 1997.
Interest Expense. Interest expense of $9.5 million increased $1.8
million or 24.0% from pro forma 1997 amounts primarily due to additional
international borrowings, mainly to fund working capital increases, and higher
interest rates during 1998 compared to the rate used in the 1997 pro forma
consolidated statement of operations.
Income Tax Expense. Hussmann's effective income tax rate was 37.1% in
1998, or 1.7 points higher than the 1997 effective rate of 35.4%, principally
due to the increased level of earnings in the Company's U.S. operations, which
typically have a higher effective tax rate than other Company operations, the
impact of the hyper-inflationary accounting in Mexico, and the impact of the tax
basis adjustment of certain depreciable assets in Mexico during 1997.
11
<PAGE> 12
LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES - ACTUAL
SIX-MONTHS ENDED JUNE 30, 1998 VS. ACTUAL SIX-MONTHS ENDED 1997 RESULTS
Cash Flows from Operations. Historically, Hussmann's cash flows from
operations have been substantially affected by the allocations from Whitman of
its expenses to its operating subsidiaries. These charges were $1.5 and $14.2
million for the six-months ended June 30, 1998 and 1997, respectively.
Hussmann used net cash from operations of $26.8 million in 1998
compared to its operations providing cash of $8.9 million in 1997. The use of
cash was principally caused by the increase in working capital demands (increase
in receivables and decreases in payables), mainly internationally. The increase
in accounts receivable and decrease in inventory from December 15, 1997 was due
to the significant level of sales volume in the last two weeks of June 1998, in
the U.S.
Cash Flows from Investing Activities. Net cash used in investing
activities was $15.0 million and $28.5 million during the six-months ended June
30, 1998 and 1997, respectively. Capital investments of $15.4 million were the
main component of the investing activity during 1998. During the six-months
ended June 30, 1997 the Company made $16.4 million in capital investments and
acquired Fast Frio in Brazil, with a net cash outlay of $12.4 million.
Cash Flows from Financing Activities. Net cash provided by financing
activities was $30.7 million during the six-months ended June 30, 1998 compared
to $12.9 million for the same period in 1997. For 1998, the proceeds from the
Credit Facility were used to settle the Company's obligations to Whitman. In
January 1998, Hussmann paid approximately $221.7 million to settle its
obligations with Whitman which included a dividend of approximately $81.0
million. Additionally, in June 1998, Hussmann issued $125.0 million of 6.75%
senior notes due 2008. The net proceeds from the issue were used to pay down
the Credit Facility. By comparison, in 1997, Hussmann generated cash from
financing activities of $12.9 million due to improved cash flows resulting from
higher sales volumes and improved working capital management.
In January 1998, Hussmann and Hussmann Corporation entered into the Credit
Facility with a syndicate of commercial banks and financial institutions that
enables Hussmann and Hussmann Corporation to borrow funds at variable interest
rates on a revolving credit basis up to an aggregate principal amount of $350.0
million. Hussmann Corporation borrowed $270.0 million under the Credit Facility
in January 1998, of which approximately $240.0 million was paid to Whitman,
which includes the payments discussed above. At June 30, 1998, $116.0 million
was outstanding under the Credit Facility.
On May 19, 1998, Hussmann filed with the Securities and Exchange Commission
a registration statement on Form S-3 to register $250.0 million principal amount
of debt securities. On June 2, 1998, Hussmann issued $125.0 million of its 6.75%
senior notes due 2008. The net proceeds from the sale were used to pay down
amounts borrowed under the Credit Facility.
Hussmann management believes cash flows from operations, unused amounts
available under its Credit Facility and the debt registration, and its access to
capital markets, if needed, will be sufficient to satisfy Hussmann's future
working capital, capital investment, acquisition and other financing
requirements for the foreseeable future. Management believes Hussmann will be
able to access capital markets on terms satisfactory to Hussmann, although there
can be no assurance that will be the case.
Non-U.S. Operations. The most significant non-U.S. operations are located in
Canada, Mexico and the U.K., with smaller operations located in, among other
countries, Brazil, Chile, China and Singapore. Because the majority of
Hussmann's non-U.S. entities conduct business in their respective local
currencies, Hussmann is subject to foreign currency risks
12
<PAGE> 13
when translating its non-U.S. entity financial statements into U.S. dollars for
financial reporting purposes. In addition to foreign currency translation risks
faced by Hussmann, other risks associated with non-U.S. operations include the
potential for restrictive actions taken by host country governments, risks
relating to non-U.S. economic and political conditions, and risks relating to
limits on the transfer of funds from non-U.S. entities to Hussmann. Hussmann
does not currently use foreign currency risk management instruments to manage
its exposure to changes in currency exchange rates.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued its Statement
No. 133, "Accounting for Derivatives and Similar Financial Instruments and for
Hedging Activities" ("Statement No. 133"). Statement No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Statement No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Management is currently assessing the effects of this
statement on the Company's consolidated financial statements and notes thereto.
However, given the Company's current policy regarding foreign currency risk
management instruments and other hedging activities, management does not believe
Statement No. 133 will have a significant impact on Hussmann's consolidated
results of operations, financial condition or on its cash flows.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". This SOP requires certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. It
also requires other costs to be expensed. The SOP is effective for financial
statements issued for fiscal years beginning after December 15, 1998. As
previously stated, Hussmann is currently in the process of converting certain
computer systems to a fully integrated Company-wide information system, and
believes the costs being incurred on this project are being accounted for in
accordance with this SOP.
OTHER
The reconfiguration of the Bridgeton plant and the plant consolidation of the
production of refrigeration systems, discussed in previous filings with the
Securities and Exchange Commission, remain on schedule. The Atlanta plant is
scheduled to open during the third quarter of 1998, Bridgeton refrigeration
production is scheduled to close during the fourth quarter of 1998 and the new
Bridgeton case line is scheduled to begin production during the second or third
quarter of 1999. Due to construction problems encountered in Mexico, Hussmann
anticipates the construction of the leased facility in Toluca, Mexico to be
completed and production to begin in the second quarter of 1999.
Hussmann may continue to repurchase Hussmann Common Stock from time-to-time to
offset dilution resulting from the exercise of stock options in accordance with
the common stock repurchase plan approved by the Board of Directors.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
The following information is reported pursuant to Item 701(f) of Regulation
S-K:
The Company filed a shelf registration statement on Form S-3 which became
effective on May 29, 1998 (Registration No. 333-52987) for the offering of
$250.0 million principal amount of debt securities of the Company ("Debt
13
<PAGE> 14
Securities"). On June 2, 1998, the Company issued $125.0 million principal
amount of the Company's 6.75% senior notes due 2008 ("Notes"). The price of the
Notes to the public was $124.9 million.
The Company paid fees, expenses and underwriting discounts of approximately
$1.2 million in connection with the issuance of the Notes. None of the payments
made was a direct or indirect payment to a director, officer, general partner or
person owning more than 10% of Hussmann Common Stock. The net offering proceeds
to the Company after total expenses were $123.7 million. All of the net proceeds
were used to repay borrowings incurred under the Credit Facility.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
The Year 2000 ("Y2K") issue refers to the inability of a computer program to
recognize a two-digit date sensitive field as the year 2000, and thus could
result in system failure or miscalculations causing disruptions to operations,
including manufacturing, a temporary inability to process transactions, send
invoices, or engage in other normal business activities.
The Company has assessed its Y2K issue as it relates to information
technology ("IT") and has determined it may be required to modify or upgrade
certain portions of its software so that its computer systems will be able to
function properly beyond December 31, 1999. The Company plans to use both
internal and external resources to complete Y2K reprogramming, software upgrades
and testing. The plan anticipates completion of the Y2K reprogramming and
testing by June 30, 1999. To date, the Company has incurred approximately $1.0
million related to the Y2K remedial work and does not anticipate the remaining
Y2K remedial work, to be incurred over the next 12 months, to have a material
adverse effect on Hussmann's results of operations, financial condition or cash
flow.
The Company is in the midst of addressing its non-IT Y2K issues, including
contingencies to address unforeseen problems. Management is reviewing products
sold and service contracts entered into to determine what exposure, if any, the
Company has in this area. Based upon results of reviews performed to date,
management does not believe its exposure to non-IT Y2K issues to be material.
The expected costs of the projects and the date on which Hussmann plans to
complete all of the Y2K work are based on management's best estimates, which
were derived from numerous assumptions about future events, including the
availability of certain resources, third-party modification plans, and other
factors. However, there can be no guarantee these estimates will be achieved and
actual results could differ materially from those plans. Certain of these non-IT
Y2K issues have far reaching implications, some of which cannot be anticipated
or predicted with any degree of certainty. Specific factors that might cause
material differences include, but are not limited to, the availability and cost
of personnel trained in this area and the ability to identify and correct all
relevant computer codes.
SAFE HARBOR STATEMENT
Hussmann has made and will make certain forward-looking statements in its
reports filed with the Securities and Exchange Commission, reports to
shareholders and in certain other contexts relating to future revenues, costs,
expenses, production schedules, profitability, financial resources, and the Y2K
issue, among others. These statements are forward-looking
14
<PAGE> 15
statements made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are based on
management's beliefs and assumptions using information currently available.
Accordingly, Hussmann's actual results may differ materially from those
projected, expressed or implied in such forward-looking statements due to known
and unknown risks and uncertainties that exist in Hussmann's operations and
business environment, including, among other factors: the failure by Hussmann to
produce anticipated cost savings or improve productivity, the timing and
magnitude of capital investments, economic and market conditions in the U.S. and
worldwide; currency exchange rates; changes in customer spending levels and
demand for new products; cost and availability of raw materials; the
continuation of growth in significant developing markets such as Mexico, China
and South America; overall competitive activities, failure of the Company, its
suppliers or vendors to achieve Y2K compliance in a timely manner and other
risks described in the Company's filings with the Securities and Exchange
Commission, including the report on Form 10-K for the year ended December 31,
1997 and the report on Form 10-Q for the quarter ended March 31, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
- ------ -------
<S> <C>
27 Financial Data Schedule
(filed electronically with the SEC only)
</TABLE>
b) Reports on Form 8-K
On May 27, 1998, Hussmann filed a current report on Form 8-K dated May 15,
1998 relating to amendment of the Credit Agreement dated as of January 23, 1998
among Hussmann, Hussmann Corporation and various financial institutions (the
"Credit Facility"). The Form 8-K reported the following items:
Item 5 (Other Events) to report the amendment and incorporate the amended
Credit Facility attached as an Exhibit to the Form 8-K.
Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits)
to furnish as an exhibit the Credit Facility and the First Amendment thereto
dated as of May 29, 1998.
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.
HUSSMANN INTERNATIONAL, INC.
/s/ Michael D. Newman
-----------------------------------
Michael D. Newman
Senior Vice President
and Chief Financial Officer
(as duly authorized officer
and principal financial
Dated: August 14, 1998 officer of the registrant)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED (JUNE 30, 1998) AND COMBINED (JUNE
30, 1997) FINANCIAL INFORMATION EXTRACTED FROM HUSSMANN INTERNATIONAL'S
CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS AND NOTES
THERETO.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 27 40
<SECURITIES> 0 0
<RECEIVABLES> 258 171
<ALLOWANCES> 3 2
<INVENTORY> 112 166
<CURRENT-ASSETS> 400 380
<PP&E> 315 292
<DEPRECIATION> 151 143
<TOTAL-ASSETS> 618 603
<CURRENT-LIABILITIES> 189 148
<BONDS> 245 225<F2>
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 156 193
<TOTAL-LIABILITY-AND-EQUITY> 618 603
<SALES> 539 449
<TOTAL-REVENUES> 539 449
<CGS> 434 366
<TOTAL-COSTS> 434 366
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 9<F3> 10<F3>
<INCOME-PRETAX> 31 8
<INCOME-TAX> 11 3
<INCOME-CONTINUING> 20 5
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 20 5
<EPS-PRIMARY> 0.39<F1> 0<F1>
<EPS-DILUTED> 0.38 0
<FN>
<F1> FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
<F2> During the period ended June 30, 1997, Hussmann's former parent managed
all cash not considered necessary for operating requirements. The amounts
shown here represent amounts due to Whitman at June 30, 1997.
<F3> Interest expense includes $1.0 million and $4.2 million of interest paid to
Whitman, for the periods ended June 30, 1998 and 1997, respectively.
</FN>
</TABLE>
