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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 September 30, 1999
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission file number: 01-13407
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HUSSMANN INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 43-1791715
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
12999 St. Charles Rock Road, Bridgeton, Missouri 63044-2483
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(314) 291-2000
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(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 September 30, 1999: 50,909,000 shares.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
HUSSMANN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; dollars in millions, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
1999 1998 1999 1998
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 362.5 $ 333.2 $ 957.5 $ 872.0
Cost of goods sold 280.1 257.9 758.2 692.3
----------- ------------ ------------ ------------
Gross profit 82.4 75.3 199.3 179.7
Selling, general and administrative
expenses 40.2 33.7 112.5 97.1
----------- ------------ ------------ ------------
Operating income 42.2 41.6 86.8 82.6
Whitman charges - - - 1.5
Interest expense:
Whitman - - - 1.0
Other 6.2 5.9 16.2 14.2
----------- ------------ ------------ ------------
Total interest expense 6.2 5.9 16.2 15.2
Foreign exchange loss on purchase
price hedge - - (10.3) -
Other income (expense), net 0.1 (2.7) 1.1 (2.4)
----------- ------------ ------------ ------------
Income before income tax expense and
minority interests 36.1 33.0 61.4 63.5
Income tax expense 13.0 13.0 22.1 24.3
----------- ------------ ------------ ------------
Net income before minority interests 23.1 20.0 39.3 39.2
Minority interests (0.5) 0.2 (0.2) 0.9
----------- ------------ ------------ ------------
Net income $ 22.6 $ 20.2 $ 39.1 $ 40.1
=========== ============ ============ ============
Weighted average shares - Basic 50,875,000 50,867,000 50,838,000 50,870,000
Basic earnings per share $ 0.44 $ 0.40 $ 0.77 $ 0.79
=========== ============ ============ ============
Weighted average shares - Diluted 52,121,000 52,051,000 51,893,000 52,156,000
Diluted earnings per share $ 0.43 $ 0.39 $ 0.75 $ 0.77
=========== ============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
2
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<TABLE>
HUSSMANN INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share data)
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 43.4 $ 26.1
Receivables, net 308.0 285.3
Inventories 148.6 106.9
Other current assets 14.3 11.5
------ ------
Total current assets 514.3 429.8
Property and equipment, net 199.6 168.4
Goodwill, net 81.2 29.4
Other assets 50.6 26.1
------ ------
Total assets $845.7 $653.7
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current
maturities long-term debt $ 25.7 $ 16.9
Accounts payable 149.8 137.5
Income taxes payable - 9.1
Accrued expenses 63.1 72.7
------ ------
Total current liabilities 238.6 236.2
Long-term debt 342.6 200.7
Other liabilities 47.4 31.3
------ ------
Total liabilities 628.6 468.2
------ ------
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, 51,156,500 and
51,006,000 shares issued, 50,909,000 and
50,763,000 shares outstanding, respectively 0.1 0.1
Additional paid-in capital 92.0 90.6
Retained earnings 196.9 161.0
Cumulative translation adjustment (64.8) (59.3)
Minimum pension liability adjustment, net (2.9) (2.9)
Treasury stock, at cost, 256,500 and 243,000
shares, respectively (4.2) (4.0)
------ ------
Total shareholders' equity 217.1 185.5
------ ------
Total liabilities and shareholders'
equity $845.7 $653.7
====== ======
See accompanying notes to consolidated financial statements
</TABLE>
3
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<TABLE>
HUSSMANN INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; dollars in millions)
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 39.1 $ 40.1
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 21.9 17.4
Changes in assets and liabilities,
exclusive of acquisitions:
(Increase) decrease in receivables, net 13.9 (78.5)
(Increase) decrease in inventories (15.3) 47.1
Increase (decrease) in accounts payable (8.2) 1.0
Decrease in income taxes payable (14.2) (4.3)
Decrease in accrued expenses (10.7) (5.3)
Net change in other assets and liabilities 8.3 2.8
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Net cash provided by operating activities 34.8 20.3
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Cash flows from investing activities:
Capital investments (32.1) (22.2)
Companies acquired, net of cash (131.1) (3.4)
Other 10.8 0.5
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Net cash used in investing activities (152.4) (25.1)
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Cash flows from financing activities:
Net increase (decrease) in short-term debt (10.3) 7.3
Settlement of Whitman obligations, net - (221.7)
Net borrowings under revolving credit facility
and lines-of-credit 102.0 108.9
Proceeds from issuance of long-term debt 46.0 124.1
Principal payments on long-term debt (0.4) -
Dividends paid (2.0) (2.0)
Acquisition of treasury stock (0.2) (4.0)
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Net cash provided by financing activities 135.1 12.6
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Effects of exchange rate changes on cash and
cash equivalents (0.2) (2.0)
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Net change in cash and cash equivalents 17.3 5.8
Cash and cash equivalents, beginning of period 26.1 38.4
------- -------
Cash and cash equivalents, end of period $ 43.4 $ 44.2
======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
4
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HUSSMANN INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited; dollars in millions, except share data)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements present the
operations of Hussmann International, Inc. and subsidiaries ("Hussmann"
or the "Company") for the three month and nine month periods ended
September 30, 1999 and 1998. On January 30, 1998, Whitman Corporation
("Whitman") distributed to its shareholders, all of the outstanding
stock of Hussmann (the "Distribution"). Prior to the Distribution, all
of Hussmann's subsidiaries, including Hussmann Corporation, and its
wholly-owned subsidiaries and other Hussmann companies owned by Whitman
but directly managed by Hussmann were subsidiaries of Whitman. Hussmann
became an independent, publicly traded company on January 30, 1998.
Prior to the Distribution, the historical financial statements were
combined for financial reporting purposes. The 1998 financial
statements, presented herein will be referred to as consolidated
financial statements.
In the opinion of Management, the accompanying unaudited consolidated
financial statements 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. The interim results are not necessarily
indicative of the results that may be expected for a full year. Certain
prior year amounts have been reclassified to conform to current year
presentation.
2. EARNINGS PER SHARE
Although the Distribution did not occur until January 30, 1998, for
purposes of 1998's presentation, Hussmann has calculated earnings per
share on a pro forma basis assuming the Distribution occurred on January
1, 1998, for both basic and diluted earnings per share.
The number of shares of Hussmann Common Stock used in the calculation of
earnings per share for the three months and nine months ended September
30, is as follows (in thousands):
<TABLE>
<CAPTION>
Quarter Nine Months
Ended Ended
------- -----------
<S> <C> <C>
1999
- ----
Weighted shares outstanding - basic 50,875 50,838
Dilutive effect of stock options 1,246 1,055
------ ------
Weighted shares outstanding - diluted 52,121 51,893
====== ======
<CAPTION>
Quarter Nine Months
Ended Ended
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<S> <C> <C>
1998
- ----
Weighted shares outstanding - basic 50,867 50,870
Dilutive effect of stock options 1,184 1,286
------ ------
Weighted shares outstanding - diluted 52,051 52,156
====== ======
</TABLE>
5
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<PAGE>
Options to purchase 500,000 shares of Hussmann Common Stock at prices
ranging from $16.66 to $17.94 per share were outstanding during the
three months and nine months ended September 30, 1999, but were not
included in the computation of diluted earnings per share due to the
exercise price of these options being greater than the average market
price of Hussmann Common Stock. These options begin to expire in 2008.
Options to purchase 519,000 shares of Hussmann Common Stock at $17.94
per share were outstanding during the three months and nine months ended
September 30, 1998, but were not included in the computation of diluted
earnings per share due to the exercise price of these options being
greater than the average market price of Hussmann Common Stock. These
options expire in 2008.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Raw materials and work in process $101.9 $ 81.2
Finished goods 46.7 25.7
------ ------
Total $148.6 $106.9
====== ======
</TABLE>
4. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Land $ 12.3 $ 5.3
Building and improvements 85.0 81.8
Machinery and equipment 249.9 212.3
------- -------
Total property and equipment 347.2 299.4
Less: accumulated depreciation (164.2) (157.6)
Construction in progress 16.6 26.6
------- -------
$ 199.6 $ 168.4
======= =======
</TABLE>
6
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5. BUSINESS SEGMENT INFORMATION
As the products and services sold by Hussmann are similar throughout the
world, 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 for the periods presented:
<TABLE>
<CAPTION>
Quarter Ended September 30,
---------------------------------------------------
Operating
Revenues Income
--------------------- --------------------
1999 1998 1999 1998
------ ------ ----- -----
<S> <C> <C> <C> <C>
U.S. and Canada $269.8 $251.1 $49.5 $42.7
Europe 43.4 34.6 1.7 0.5
Other International 49.3 47.5 0.8 6.4
------ ------ ----- -----
Total $362.5 $333.2 52.0 49.6
====== ======
Corporate admin. expenses (9.8) (8.0)
----- -----
Total operating income $42.2 $41.6
===== =====
<CAPTION>
Nine Months Ended September 30,
---------------------------------------------------
Operating
Revenues Income
--------------------- ---------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
U.S. and Canada $698.6 $662.6 $111.3 $ 94.7
Europe 138.6 93.2 2.4 (1.6)
Other International 120.3 116.2 (2.9) 12.4
------ ------ ------ ------
Total $957.5 $872.0 110.8 105.5
====== ======
Corporate admin. expenses (24.0) (22.9)
------ ------
Total operating income $ 86.8 $ 82.6
====== ======
<CAPTION>
Total Assets as of:
----------------------------
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
U.S. and Canada $398.8 $358.3
Europe 238.0 79.4
Other International 140.3 160.9
Corporate 68.6 55.1
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$845.7 $653.7
====== ======
</TABLE>
The Company's European segment includes the results of operations and
the financial position of Koxka C.E., S.A. ("Koxka"), which was acquired
on March 23, 1999. Koxka's results of operations have been included in
the Company's results of operations from March 23, 1999 through
September 30, 1999.
7
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6. COMPREHENSIVE INCOME
Comprehensive income consists of the following:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net income $22.6 $20.2 $39.1 $40.1
Foreign currency translation adjustment 1.3 (0.2) (5.5) (3.9)
----- ----- ----- -----
Comprehensive income $23.9 $20.0 $33.6 $36.2
===== ===== ===== =====
</TABLE>
7. BUSINESS COMBINATION
As previously stated, on March 23, 1999, Hussmann completed its
acquisition of Koxka. Hussmann acquired virtually 100% of the
outstanding stock of Koxka through a cash tender offer. Koxka
manufactures a complete line of commercial and industrial refrigeration
products at five manufacturing facilities located throughout Spain.
Hussmann paid approximately $135.0 in cash for the acquisition. This
excludes the $10.3 loss related to the purchase price hedge used by the
Company to lock-in the U.S. Dollar purchase price of $145.0. The
purchase price was principally funded with proceeds available under
Hussmann's 5-year unsecured revolving credit facility (the "Credit
Facility"). The acquisition of Koxka was accounted for using the
purchase method of accounting, and accordingly, the purchase price was
allocated to the assets acquired and the liabilities assumed based upon
their estimated fair market values. Goodwill and the trademark
associated with this acquisition of approximately $51.5 and $33.3,
respectively, are being amortized over the period to be benefited, 40
years. The purchase price allocation process is still preliminary,
although Management does not expect amounts to differ materially.
The unaudited pro forma consolidated results, as if Koxka had been
acquired on January 1, 1999 and 1998, respectively, and as if McAlpine
Investments Limited ("MIL") had been acquired on January 1, 1998, are
estimated to be:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1999 1998
------ --------
<S> <C> <C>
Revenues $987.1 $1,005.4
Net income 39.3 41.1
Net income per share:
Basic $ 0.77 $ 0.81
Diluted $ 0.76 $ 0.79
</TABLE>
8
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Hussmann manufactures, sells, installs and services merchandising and
refrigeration systems for the world's commercial food industry. Products
include refrigerated and non-refrigerated display merchandisers,
refrigeration systems and controls, beverage coolers, air handlers,
evaporative condensers, heat exchange coils and walk-in storage coolers
and freezers. Hussmann operates in three geographic segments: U.S. and
Canada, Europe and Other International, which includes Mexico, Latin
America and Asia Pacific.
RESULTS OF OPERATIONS - QUARTER ENDED SEPTEMBER 30, 1999, COMPARED WITH
QUARTER ENDED SEPTEMBER 30, 1998
REVENUES
Revenues of $362.5 for the three months ended September 30, 1999, were
$29.3 or 9% over the same period 1998 revenues of $333.2. Revenues in
all of the Company's geographic segments increased over the comparable
1998 period. The following is a summarized analysis:
<TABLE>
<CAPTION>
1999 $ Change % Increase
Revenues 1998 (decrease)
- -----------------------------------------------------------------------
<S> <C> <C> <C>
U.S. and Canada $269.8 $18.7 7%
Europe 43.4 8.8 25
Other International 49.3 1.8 4
- -----------------------------------------------------------------------
Total $362.5 $29.3 9%
- -----------------------------------------------------------------------
</TABLE>
The 7% increase in revenues in the U.S. and Canada was the result of
continued strong U.S. supermarket and specialty case demand. Revenues in
Europe increased 25% due to the acquisition of Koxka, which was
purchased on March 23, 1999. The increase in revenues from Koxka was
partially offset by lower than expected supermarket equipment sales in
the U.K. Revenues in Other International increased 4%, principally due
to the acquisition of MIL (a distribution company) and strong sales
growth in China. Excluding MIL, revenues in this segment would have
decreased nearly 36%. This decrease was due to the previously disclosed
loss of sales volume on beverage coolers in Latin America. In addition,
despite volume growth, revenues in Brazil were reduced by the
substantial devaluation of the Brazilian Real during the first quarter
of 1999.
GROSS PROFIT
Gross profit increased mainly due to the 9% increase in revenue. Gross
profit as a percent of revenue increased 0.1 points compared to 1998,
mainly driven by improvements in the U.S. and Canada and the acquisition
of Koxka, offset by the lower volume in Mexico and lower margin mix of
revenue in the U.K. and MIL.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Total selling, general and administrative ("SG&A") expenses increased
19% to $40.2 in 1999 from $33.7 in 1998. The increase in SG&A expenses
relates to the acquisitions of Koxka and MIL, and costs associated with
the Company's implementation of an integrated company-wide information system
("ERP").
9
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OPERATING INCOME
Operating income of $42.2 for the three months ended September 30, 1999,
was 1% or $0.6 greater than that reported for the comparable period in
1998. This increase was attributable to the 16% increase in operating
income in the U.S. and Canada and the acquisition of Koxka. The
following table summarizes the fluctuations in operating income by
segment:
<TABLE>
<CAPTION>
1999 % Increase
Operating $ Change (decrease)
income 1998 1998
- -----------------------------------------------------------------------
<S> <C> <C> <C>
U.S. and Canada $ 49.5 $ 6.8 16%
Europe 1.7 1.2 Fav
Other International 0.8 (5.6) Unfav
- -----------------------------------------------------------------------
52.0 2.4 5
Corporate admin. expenses (9.8) (1.8) (23)
- -----------------------------------------------------------------------
Total operating income $ 42.2 $ 0.6 1%
- -----------------------------------------------------------------------
</TABLE>
The increase in the U.S. and Canada was due to increased volume,
productivity and efficiency improvements, continued favorable markets
for material prices, and enhancements in materials management. The
improvement in Europe is due to the acquisition of Koxka. Operating
income for Other International decreased from a record setting 1998
performance of $6.4 to $0.8 in 1999. This decrease is mainly
attributable to significantly lower beverage cooler sales volume in
Mexico.
INTEREST EXPENSE
Interest expense of $6.2 increased $0.3 or 5% from 1998 to 1999, principally
as a result of financing the Koxka acquisition. Excluding the Koxka
related interest, interest expense would have decreased approximately
30% due to strong cash flows from operations and better management of
international debt.
EFFECTIVE INCOME TAX RATE
Hussmann's effective income tax rate was 36.0% for the three months
ended September 30, 1999, or 3.3 points lower than the 1998 pro forma
effective rate of 39.3%. This lower effective tax rate is principally
due to a lower statutory rate in Spain than in the U.S., implemented tax
strategies relating to both domestic and international operations and
the unfavorable impact of hyper-inflationary accounting in Mexico during
1998.
10
<PAGE>
<PAGE>
RESULTS OF OPERATIONS -- NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED
WITH PRO FORMA NINE MONTHS ENDED SEPTEMBER 30, 1998
As previously stated, on January 30, 1998, Hussmann was spun off from
Whitman and became an independent, publicly traded company. The
following table provides a summary of what Management believes the 1998
operating results would have been if Hussmann had been an independent,
publicly traded company, excluding the impact of the Whitman
intercompany charges, and including the impact of borrowings under the
Credit Facility. Management believes the unaudited pro forma
consolidated operating results for 1998 provide a more meaningful
presentation for purposes of analyzing the Company's financial
performance.
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
--------------------------------------
Pro Forma
Actual Adjustments Pro Forma
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $872.0 - $872.0
Operating income 82.6 - 82.6
Whitman charges 1.5 (1.5) -
Total interest expense 15.2 0.1 15.3
Pretax income 63.5 1.4 64.9
Income tax expense 24.3 0.5 24.8
Net income 40.1 0.9 41.0
- -----------------------------------------------------------------------
Diluted earnings per share $ 0.77 $0.02 $ 0.79
- -----------------------------------------------------------------------
</TABLE>
REVENUES
Revenues for the nine months ended September 30, 1999, of $957.5 were
$85.5 or 10% over the same period 1998 revenues of $872.0. Revenues
increased in all of the geographic segments. The following is a
summarized analysis:
<TABLE>
<CAPTION>
1999 $ Change % Increase
Revenues 1998 (decrease)
- -----------------------------------------------------------------------
<S> <C> <C> <C>
U.S. and Canada $698.6 $36.0 5%
Europe 138.6 45.4 49
Other International 120.3 4.1 4
- -----------------------------------------------------------------------
Total $957.5 $85.5 10%
- -----------------------------------------------------------------------
</TABLE>
The 5% increase in revenues in the U.S. and Canada was principally
driven by continued strong U.S. supermarket and specialty case demand.
The increase of 49% in revenues in Europe was due to the acquisition of
Koxka. This increase was partially offset by lower equipment sales to
major U.K. food retailers. The 4% increase in revenues in Other
International was principally due to the third quarter 1998 acquisition
of MIL and strong sales in China. These increases were offset by
significantly lower revenues in Mexico, following 1998's record
performance, and lower revenues in Brazil. The decrease in Mexico
relates to the significantly lower demand for beverage coolers in Latin
America. In addition, despite volume increases, revenues in Brazil were
reduced by the substantial devaluation of the Brazilian Real during the first
quarter of 1999.
11
<PAGE>
<PAGE>
GROSS PROFIT
Gross profit increased mainly due to the 10% increase in revenue. Gross
profit as a percent of revenue was up slightly to 20.8%. Improvements in
the U.S. and Canada and the addition of higher margin sales from Koxka
were offset by a lower margin mix of revenue in the U.K. and at MIL.
Gross profit in Mexico was also down from a record setting performance in
1998, mainly due to the severe drop in demand for beverage cooler products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Total selling, general and administrative ("SG&A") expenses increased
16% to $112.5 in 1999, from $97.1 in 1998. The increase in SG&A expenses
relates to the acquisitions of Koxka and MIL and costs associated with
the Company's implementation of ERP.
OPERATING INCOME
Operating income in 1999 of $86.8 was 5% or $4.2 greater than that
reported for the comparable period in 1998. This increase was mainly
attributable to the 18% increase in operating income in the U.S. and
Canada, and the favorable increase in Europe related to the Koxka
acquisition. The following table summarizes the fluctuations in
operating income by segment:
<TABLE>
<CAPTION>
1999
Operating $ Change % Increase
Income 1998 (decrease)
- -----------------------------------------------------------------------
<S> <C> <C> <C>
U.S. and Canada $ 111.3 $ 16.6 18%
Europe 2.4 4.0 Fav
Other International (2.9) (15.3) Unfav
- -----------------------------------------------------------------------
110.8 5.3 5
Corporate admin. expenses (24.0) (1.1) 5
- -----------------------------------------------------------------------
Total operating income $ 86.8 $ 4.2 5%
- -----------------------------------------------------------------------
</TABLE>
The increase in the U.S. and Canada was due to increased volume,
productivity and efficiency improvements, continued favorable markets
for material prices, and enhancements in materials management. The
significant improvement in Europe is due to the acquisition of Koxka,
offset by lower margin revenues in the U.K. Operating income for Other
International decreased $15.3 from the $12.4 operating income recorded
during the first nine months of 1998, to an operating loss of $2.9
reported in 1999. This decrease is mainly due to lower 1999 volume in
Mexico, caused by lower demand for beverage coolers and a difficult
comparison to a record setting 1998 performance.
INTEREST EXPENSE
Interest expense of $16.2 increased $0.9 or 6% from pro forma 1998 to
1999, principally as a result of financing the Koxka acquisition. Excluding
the interest associated with the acquisition of Koxka, interest expense for
the nine-month comparable period would have decreased approximately 20%
primarily due to positive cash flows from operations and better
management of international debt. For 1998's pro forma financial
statement presentation, it was assumed that $240.0 in borrowings were
outstanding for the period January 1, 1998, through January 31, 1998,
the Distribution.
12
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<PAGE>
OTHER INCOME/OTHER EXPENSE
The Company recognized a one-time $10.3 pretax loss associated with the
hedge of the Koxka purchase price. Since Koxka was a publicly traded
company, the purchase price was denominated in Spanish Pesetas. In order
to avoid foreign currency exposure over the extended period involved in
completing the acquisition, Management hedged the Company's Peseta
exposure. The realized loss of $10.3 from settling the financial
instruments used to hedge the Koxka purchase price (the "Koxka Charge")
has been reflected in the consolidated statement of operations as
foreign exchange loss on purchase price hedge.
EFFECTIVE INCOME TAX RATE
Hussmann's effective income tax rate was 36.0% for the nine months ended
September 30, 1999, or 2.2 points lower than the 1998 pro forma
effective rate of 38.2%. This lower effective rate is principally due to
a lower statutory rate in Spain than in the U.S., implemented tax
strategies relating to both domestic and international operations and
the unfavorable impact of hyper-inflationary accounting in Mexico during
1998.
NET INCOME AND EARNINGS PER SHARE
Net income, excluding the aforementioned Koxka Charge, increased 11% to
$45.4 from $41.0 for the same period of 1998, reported on a pro forma
basis. Earnings per diluted share also increased 11% to 88 cents from 79
cents per diluted share for the same period of 1998. The after-tax
impact of the Koxka Charge was approximately $6.3, or 13 cents per
diluted share.
LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATIONS
As anticipated, Hussmann collected accounts receivable associated with
the late fourth quarter sales during the first quarter of 1999, which
drove the improvement in cash flows from operations when compared with
the same period of 1998. Through the first nine months of 1999, the
Company provided cash from operations of $34.8 compared to $20.3 for the
same period of 1998. This improvement in cash flow was driven by the
$20.8 improvement in working capital.
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash used in investing activities was $152.4 and $25.1 for the nine
months ended September 30, 1999 and 1998, respectively. The main
component in 1999's negative cash flow from investing activities is the
purchase of Koxka. The increase in capital investments relates to the
timing of spending on Hussmann's ERP project and productivity and
efficiency programs in the U.S. and Canada. Included in other cash flows
from investing activities, are the cash proceeds from the sale of the
Company's interest in an airplane and the sale of the two manufacturing
facilities located in Glasgow, Scotland, and in Santiago, Chile. These
facilities were part of the respective restructuring programs in those
countries.
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash provided by financing activities was $135.1 and $12.6 for the
nine months ended September 30, 1999 and 1998, respectively. The
significant increase in 1999's reported balance represents proceeds from
long-term debt and borrowings under Hussmann's Credit Facility to
finance the acquisition of Koxka. For 1998, proceeds from long-term debt
of $124.1 and net borrowings under the Credit Facility were primarily
used to settle the Company's obligations to Whitman and to fund working
capital. In January 1998, Hussmann paid Whitman $240.0 to extinguish its
intercompany notes and to pay a cash dividend to Whitman of
approximately $80.0.
13
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In January 1998, Hussmann entered into the Credit Facility with a
syndicate of commercial banks and financial institutions, which enables
Hussmann to borrow funds at variable interest rates on a revolving
credit basis up to an aggregate principal amount of $350.0. The Company
borrowed $270.0 under the Credit Facility in January 1998, the majority
of which was used to settle the Company's obligations with Whitman.
On June 2, 1998, Hussmann issued $125.0 of its $250.0 shelf registration
of 6.75% senior notes due 2008 (the "Shelf Registration"). The net
proceeds from the issuance were used to pay down amounts previously
borrowed under the Credit Facility.
On March 22, 1999, Hussmann borrowed approximately $145.0 under the
Credit Facility to fund the acquisition of Koxka and to pay related
expenses. At September 30, 1999, $129.0 was outstanding under the Credit
Facility. In addition, at September 30, 1999, Hussmann had $86.2 and
$48.5 of uncommitted, domestic lines-of-credit available and
outstanding, respectively.
On June 2, 1999, the Company borrowed $46.0 in the form of a seven-year
amortizing note. The interest rate is established semi-annually based on
LIBOR. The current interest rate is approximately 6.2%. The Company
used the proceeds of the note to pay down amounts borrowed under the
Credit Facility.
Management believes cash flows from operations, unused amounts available
under the Credit Facility and the Shelf Registration, and access to
capital markets will be sufficient to satisfy Hussmann's future working
capital, capital investment, acquisitions and other financing
requirements for the foreseeable future. Management also believes
Hussmann will be able to access capital markets on satisfactory terms,
although there can be no assurance this will be the case.
NON-U.S. OPERATIONS
The most significant non-U.S. operations are located in Canada, Mexico,
Spain and the U.K., with smaller operations located in, among other
countries, Brazil, New Zealand, Australia, and China. Because the
majority of Hussmann's non-U.S. entities conduct business in their
respective local currencies, Hussmann is subject to foreign currency
risks when translating its non-U.S. entity financial statements into
U.S. Dollars for financial reporting purposes. The Company has begun to
use foreign currency risk management instruments to manage its exposures
to changes in foreign currency exchange rates with respect to certain of
its non-U.S. operations. Management continually monitors its use of
foreign currency risk management instruments in order to mitigate the
Company's exposures.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. In June 1999,
SFAS 133 was amended whereby the effective date was deferred one year,
to fiscal years beginning after June 15, 2000. Management is assessing
the effects of this statement on the Company's consolidated financial
statements and notes thereto. Management does not believe SFAS 133
will have a significant impact on Hussmann's consolidated results of
operations, financial condition or its cash flows.
14
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YEAR 2000
The Company has assessed the Year 2000 ("Y2K") issue as it relates to
its global information technology ("IT") and determined it must
modify or upgrade certain portions of the hardware and software in its
information systems. The Company is utilizing both internal and
external resources to complete the reprogramming, upgrades and testing
necessary to complete this modification and replacement process. The
Company's Y2K efforts are being carried out by the Company's Y2K Team
which has created a plan to complete Y2K reprogramming and testing of
the Company's information systems ("the Plan"). During the second
quarter 1999, the Company made the decision to accelerate the planned
upgrade of its hardware system at its main IT facility, which was not
part of the original Y2K plan. This upgrade was accelerated to support
the additional capacity requirements from increased transactional
volume. This upgrade requires additional Y2K testing in order to ensure
the Company's applications, which have been Y2K tested, work in the
new hardware environment. It is anticipated this additional testing will
be completed in November 1999. Given the results of the application
testing to date, Management does not anticipate any significant issues
related to this hardware upgrade. Progress against the Plan is monitored
and reported to Management and to the Audit and Compliance Committee of
the Board of Directors on a regular basis. The Y2K Team believes it
remains on schedule, according to the Plan. As of September 30, 1999,
the Company has incurred approximately $3.5 related to Y2K work and does
not anticipate the cost of its remaining Y2K work (which will be incurred
over the next 3 to 9 months) to exceed $1.5.
The Company is continuing to address its non-IT Y2K issues to determine
what exposure, if any, the Company has in this area. The Y2K Team has
completed its assessment of equipment embedded with microprocessors,
products sold and service contracts. Based on this assessment,
Management does not believe that any costs associated with such non-IT
Y2K issues will be material.
As part of its non-IT Y2K Plan, the Company is also assessing the Y2K
compliance status of third parties with which it does business. The
Company has contacted its key suppliers and customers to evaluate their
Y2K readiness. Contingency plans to help protect the Company's business
from Y2K related interruptions have been developed and include, for
example, identifying, to the extent possible, alternative critical
suppliers, having service technicians available for the Company's
customers and other backup procedures. The Company will reassess its
contingency plans as it completes its review of third party readiness.
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 are derived from numerous assumptions about future
events, including the availability of certain resources, third-party
modification plans, and other factors. The Company believes the worst-
case scenario is that a short-term disruption may occur with a few
suppliers or customers. Given the seasonality of the Company's
business, any such disruption would occur during the Company's
historically lower period of demand. The effect, if any, on the Company
if the Company, its suppliers or customers, or the public sector are not
fully Y2K compliant, however, cannot be reasonably estimated. There can
be no guarantee the Company's estimates will be achieved and actual
results could differ materially. Specific factors that might cause
material differences include, but are not limited to, the continued
availability and cost of personnel trained in this area and the ability
of the Company to identify and correct all relevant computer codes.
Certain of the non-IT Y2K issues have far-reaching implications, some of
which cannot be anticipated or predicted with any degree of certainty.
There can be no assurances the systems or products of third parties on
which the Company relies will be timely converted or that a failure by a
third party, or a conversion incompatible with the Company's systems,
would not have a material adverse effect on the Company.
15
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<PAGE>
OTHER
Due to initial construction problems encountered in Mexico and a
reassessment of its Mexican operations, in view of the significant
decrease in demand for beverage coolers in Latin America, Hussmann
has postponed the construction of a new facility in Toluca, Mexico,
until beverage cooler demand strengthens.
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.
SAFE HARBOR STATEMENT
In addition to the historical information presented in this quarterly
report, the Company has made and will make certain forward-looking
statements in this report, other reports filed by the Company with the
SEC, 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. Statements
relating to the foregoing or that predict or indicate future events and
trends, and which do not relate solely to historical matters are
forward-looking statements. Forward-looking statements are made pursuant
to the safe harbor provisions of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934 and are
based on Management's beliefs as well as assumptions made using
information currently available to Management. 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: 1) the failure by Hussmann
to produce anticipated cost savings, improve productivity, or create
efficiencies; 2) the timing and magnitude of capital investments; 3)
economic and market conditions in the U.S. and worldwide; 4) currency
exchange rates; 5) changes in customer spending levels and demand for
new products; 6) cost and availability of raw materials; 7) the
continuation of growth in significant developing markets such as in
Mexico, South America and Asia Pacific; 8) overall competitive
activities; 9) failure of the Company, its suppliers or vendors to
achieve Y2K compliance in a timely manner; 10) the ability of Hussmann
to successfully integrate the Koxka operations into its business; and
11) other risks associated with the Company's operations and the
economic environment in which it operates. Although the Company believes
its forward-looking statements are based on reasonable assumptions,
there can be no assurance that actual results, performance or
achievements will not differ materially from any future results,
performance or achievements projected, expressed or implied by such
forward-looking statements. Readers are cautioned not to place undue
reliance on forward-looking statements.
16
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<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
Hussmann's non-U.S. entities conduct the majority of their business in
their respective local currencies. Therefore, Hussmann is subject to
foreign currency risks when translating its non-U.S. entity financial
statements into U.S. Dollars for financial reporting purposes. The
Company has begun to use foreign currency risk management instruments to
manage its exposures to changes in foreign currency exchange rates with
respect to certain of its non-U.S. operations. Management continually
monitors its use of foreign currency risk management instruments in
order to mitigate the Company's exposures.
As previously announced, Hussmann hedged the purchase price established
in the agreement to purchase Koxka, which was denominated in Spanish
Pesetas. Hussmann hedged the Peseta exposure to lock-in a U.S. Dollar
purchase price of $145.0 using forward currency exchange contracts. The
realized loss of $10.3 from settling these forward contracts is
reflected in the consolidated statements of operations as foreign
exchange loss on purchase price hedge.
INTEREST RATE RISK
As of September 30, 1999, Hussmann had $342.6 in long-term debt
outstanding, $125.0 of which represented senior note obligations with a
fixed rate of 6.75%. The majority of the remaining balance represents
amounts outstanding on the Company's Credit Facility and other lines-of-
credit with floating interest rates. Given the current mix of the
Company's outstanding indebtedness, Management does not believe its
exposure to short-term interest rate changes would be material.
COMMODITY RISK
Hussmann's products use copper wiring and tubing. As a result, Hussmann's
results are subject to fluctuations in the price of copper. Hussmann
uses hedging instruments to mitigate a portion of these risks. Overall,
this hedging activity is not considered to be material to Hussmann's
consolidated results of operations, financial position or cash flows.
17
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27 Financial Data Schedule for the nine months
ended September 30, 1999
(b) Reports on Form 8-K:
Hussmann filed no Current Reports on Form 8-K during the
quarter ended September 30, 1999, and through the filing
date of this Form 10-Q.
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/ Thomas G. Korte
--------------------------------------------
Vice President and Corporate Controller
(as duly authorized officer and chief
accounting officer of the registrant)
Dated: November 8, 1999.
EXHIBIT INDEX
Exhibit Number
- --------------
27 Financial Data Schedule for the nine months ended
September 30, 1999
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION
EXTRACTED FROM HUSSMANN INTERNATIONAL'S CONSOLIDATED FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 43
<SECURITIES> 0
<RECEIVABLES> 314
<ALLOWANCES> 6
<INVENTORY> 149
<CURRENT-ASSETS> 514
<PP&E> 364
<DEPRECIATION> 164
<TOTAL-ASSETS> 846
<CURRENT-LIABILITIES> 239
<BONDS> 343
0
0
<COMMON> 0
<OTHER-SE> 217
<TOTAL-LIABILITY-AND-EQUITY> 846
<SALES> 958
<TOTAL-REVENUES> 958
<CGS> 758
<TOTAL-COSTS> 758
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> 61
<INCOME-TAX> 22
<INCOME-CONTINUING> 39
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39
<EPS-BASIC> 0.77<F1>
<EPS-DILUTED> 0.75
<FN>
<F1>For purposes of this exhibit, primary means basic.
</TABLE>
